Unaccountable PPPs offer uneasy money

John Roskam, November 3, 2006

It's not surprising that last month the Bracks Government wanted to bury the report into public-private partnerships by an all-party committee of the Victorian Parliament. If PPPs were living up to the hype then the Public Accounts and Estimates Committee would have had no trouble in endorsing them. This didn't happen.

Instead the committee provided a long list of problems to do with the management of PPPs. Issues were raised in relation to nearly every aspect of PPPs, including the reliability of the financial modelling used in projects, the lack of transparency, to the fact that insufficient competition from potential bidders meant that it was impossible to ensure that the Government "got a good deal".

The final finding was perhaps the ultimate form of non-finding. "In the absence of public documentation, the committee cannot conclusively state whether the PPP policy is delivering value for money over the life of the projects, compared with traditional procurement methods used by government". This is strong stuff - especially as the committee comprised Labor and Liberal MPs. And it's astounding that this is the best that can be said for a PPP program worth $4.5 billion.

Given this, one of two conclusions can be drawn.

The first is that because of various confidentiality provisions in PPP contracts, the committee didn't have sufficient evidence to reach a finding. Such secrecy makes a mockery of any notion of parliamentary oversight over the activities of government. Even if it can be demonstrated that PPPs are financially worthwhile, the question has to be asked whether their supposed financial benefits are worth the loss of democratic accountability. Labor came to power on a promise of open and transparent government but in this regard it has proved no different from its predecessor. For instance, as recently as yesterday the Government was rejecting calls for the release of the contract details for the Melbourne Convention Centre.

In the past few days it has now emerged that 30 pages providing details of specific PPP projects were deleted from the committee's final report. The reasons could be innocuous, but the public is entitled to an explanation. An alternative conclusion from the committee's report might simply be that PPPs don't provide the sorts of benefits claimed by their promoters. Maybe the committee couldn't report on the benefits of PPPs because, on balance, there aren't any.

If we're going to utilise the benefits of PPPs we have to understand the factors driving the PPP craze.

State governments, burned by the financial disasters of the 1980s, are now so reluctant to carry any debt whatsoever that they rush into any available scheme that promises debt-free infrastructure. Such thinking totally ignores the fact that not all debt is bad. Borrowing to pay for recurrent expenditure is bad debt. Borrowing to pay for long-term infrastructure that benefits more than one generation is good debt. The Victorian Government by refusing to countenance the use of responsible debt is asking current taxpayers to bear the cost of assets that will be enjoyed at no cost by future generations.

The growth of a national economy has meant a corresponding decline in the ability of state governments to influence the economic performance of their own state. State budgets still count for something, but they are nowhere as important as they were 20 years ago. State government officials carrying economic functions now have less to do. PPPs have filled the void. Meanwhile financial and legal advisers have, not unreasonably, grasped the opportunity provided by PPPs. Multibillion-dollar projects generate millions in fees.

This is not to claim that there are no advantages to PPPs, because the Australian and international experience has demonstrated that there are. The private sector is more likely than the Government to build things on time and on budget. Financial incentives, rather than vague claims upon the "public good", are also more likely to drive the cost-effective maintenance of assets.

We must be careful not to go from one public policy extreme to the other. Whereas once everything had to be owned and operated by government, we have now embraced a doctrine that dictates the opposite. Perhaps the most positive thing about PPPs is not at the practical level, but at the philosophical level.

PPPs have broken the nexus between the idea that just because the Government ensures a service is provided, it does not automatically follow that therefore the Government must provide that service itself. None of this, however, justifies the assumption that a PPP is the solution to every infrastructure problem.

John Roskam is the executive director of the Institute for Public Affairs.