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Do public private partnerships have a future?

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The recent Australian Financial Review National Infrastructure Summit highlighted the fact governments and the private sector are constrained when it comes to financing and delivering the infrastructure the public needs. So, do public-private partnerships have a future, or will we see a reversion to reliance on the public purse?

Public-private partnerships (PPPs) are long-term contracts between private parties and government entities for providing public assets or services. This contractual structure is commonly used for large-scale infrastructure projects such as the delivery of roads, bridges or hospitals with recent Australian examples including the Sydney Light Rail, the new Royal Adelaide Hospital and the Melbourne Metro Tunnel project.

PPPs are often regarded as being more financially feasible, and better at delivering large infrastructure to a desired timeframe, than traditionally tendered projects. Research shows this to be particularly the case with transport projects, where projects often experience time delays and cost overruns.

From a financial point of view, governments are attracted to PPPs because they can offer value for money, and they can also obviate the need to borrow to finance infrastructure projects. PPPs can also have macro-economic benefits, with studies showing they can boost a country’s economic growth.

But although there may be advantages, PPPs also come with a fair share of risk. Common problems include: additional costs for the bidding of and deployment of contractors, financial risks associated with unforeseen construction problems, and opportunistic behaviours by private entities towards the public – to name just a few.

In fact, you’d be hard pressed to find a recent PPP project in Australia that hasn’t had some issue or another. The Sydney Light Rail project is a case in point, whereby a legal dispute arose when the private partner Acciona made a claim against the NSW State Government, alleging misleading and deceptive claims regarding the handling of Ausgrid utilities.

When these issues arise in large economies, history shows they can have a substantial impact on the whole country. A good example of this is the London Underground project, where in 2018 a PPP involving contractor Metronet and the construction firm Carillion led to taxpayer bills totalling hundreds of millions of pounds.

Growing awareness about the problems with PPPs has started a worldwide paradigm shift by governments back to safer and more traditional forms of infrastructure agreements – such as public-public partnerships (PuPs) which focus on the government D&C (design and construct) procurement pathway.

For example, a report from the Transnational Institute titled Reclaiming Public Services, shows that since 2000, there have been at least 835 examples of re-municipalisation of public services worldwide.

So, are Australia’s State and Federal governments likely to abandon PPPs for public-public partnerships (PuPs) for all infrastructure projects? They may for some projects, but it’s unlikely they will abandon PPPs altogether. It’s more likely we’ll just see an evolution of PPPs to a new, safer forms where risk is transferred to the partner less likely to cause serious damage to the project.

We’re already starting to see this in some Australian jurisdictions that are taking a more balanced approach to PPP contracts as a way of mitigating some of the risks.

One way they’re doing this is by implementing an augmentation process in PPP project deeds, allowing any financing and delivery enhancements and extensions to be made without having to re-offer the projects to market. This can greatly prevent cost blowouts and allow tweaks to be made as problems arise.

Another new and popular way Australian jurisdictions are mitigating risk is by adopting new PPP models that veer away from the more closed-box model of PPPs, where much of the risk is taken on by the government entity (and the public).

One example of this shift away from closed-box models is the NSW Government’s Western Harbour Tunnel project. With this project, the government is leading procurement and delivery through a state-led process, but with development partners. This alternative arrangement allows it to deliver much-needed Sydney infrastructure but reduces governmental risk during the crucial construction phase of the project.

In another example that shakes up the traditional PPP model, several Australian states have implemented public-housing projects in which the hard assets (such as the land itself) remain the property of the private contractor through the life of the project, with most of the risk therefore also falling on the private contractor.

It remains to be seen if these new models will prove more effective than traditional PPPs. If they do prove more effective, we’ll likely be seeing a lot more of them in years to come.

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