The problems of PPPs: measuring the performance of infrastructure

By David Donaldson

July 21, 2014

The high-profile failures of public-private partnerships on infrastructure delivery are mounting. But PPPs remain a vital economic model in tackling Australia’s $300-700 billion “infrastructure deficit”.

The focus for governments now should be on strategic planning, integrating new projects into infrastructural networks, and ensuring better value for money, says Cassandra Wilkinson, a former director of rail and freight policy in the NSW Ministry of Transport.

To help improve value for money, Australia should learn from New Zealand’s pioneering of building KPIs into prison contracts, Wilkinson told The Mandarin: “The private sector is now sophisticated enough at asset building and maintenance, and the real challenge for public value is to get social performance or policy performance outcomes on top of that capital performance.

“The market can give you an affordable, well-run prison. The question is which provider can run the sorts of programs that can get people out of prison and back into work. Australian governments haven’t contracted for those kinds of services here.

“We pay top dollar to get some of our most straightforward problems to be solved, while we pay not much for some of the complicated problems. What we need to be doing now is incentivising a competitive market to solve some of our most complicated problems.” Wilkinson, now at The Centre for Independent Studies, nominates recidivism or hospital readmissions. Victoria is reportedly considering incorporating recidivism KPIs into future prison contracts.

When it comes to transport, developing effective PPPs comes from creating a strategic plan that considers transport needs from a whole-of-network perspective, rather than building on an ad hoc basis. This gives government and private bodies a clearer idea of what to expect, and leads to better decisions. Infrastructure Australia’s 2013 report to the Council of Australian Governments argued that:

“A single assessment and prioritisation framework … will ensure all major projects are informed decisions, supported by a sound economic case … It will also ensure Australia moves away from a project-by-project view of infrastructure development and focuses on big-picture national priorities.”

A more flexible approach to pricing would also lead to more efficient usage of infrastructure, said the report:

“Pricing reform can improve infrastructure use more widely across transport networks to produce sustainable network outcomes, manage existing infrastructure better and delay the need for costly new investment.”

A lack of strategic planning in Sydney has hindered changes to other parts of the transport network by requiring the agreement of concessionaires to any changes to tolling arrangements. A Clayton Utz report recommended that in future:

“Governments should avoid making contractual promises that fetter the ability of future governments to implement their policies.”

Strategic network planning ensures better outcomes, according to Wilkinson: “Transport investment is all network, if you separate one component and it is subject to PPP, you need to give the investors a clear view about what you’re doing with the other parts of the network. You don’t want to pay too much, any more than you need to, for instance if freight volumes on roads are affected by rail.”

Demi Chung from the University of NSW emphasises the need to build strong trust relationships between contracting parties, which helps ingrain flexibility and encourages good management. Such contracts are often in place for a long time, so parties need to be prepared for changes in circumstances. In particular, with the M4 contract recently reaching its end, parties have begun realising that “how the contract will be managed over the concession term and hand-back matters needed be carefully considered during the procurement phase”.

There is also a need to “accommodate community interest”, Chung argues.

“The parties need to realise it’s not a contract just between the government agency and private sector financiers, it’s essentially a contract between the two partners and the public,” he told The Mandarin. This means putting more effort into community consultation, and improving processes to assess the suitability of the project for future need through better use of demographic data.

Governments also need to run stronger due diligence tests on whether private interests have the ability to uphold their end of the contract, given problems in previous deals arising from contractors overestimating service demand or underestimating the costs of meeting service obligations. Too much risk has been pushed onto the private sector in the past, Chung believes. Governments need to “move from a risk-transfer to a risk-sharing model” to enhance the durability of public-private arrangements.

As Chung points out, “any ramifications for the government will be on users”.

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