Appendix 6: Experience in Australia

Achieving public sector outcomes with private sector partners.

Background

Public private partnerships (PPPs) have become an important form of procurement in Australia, although mainly state governments have adopted their use. The term PPP is used in Australia mainly to describe projects that involve private investment or financing, and the provision of public infrastructure and related services.

The total value of Australia’s PPP market is currently about A$20,000 million. Prominent examples of PPPs include the Sydney Harbour Tunnel, Melbourne City Link (an A$2,000 million, privately funded toll road), and the introduction of privately owned and operated prisons.

PPPs61 first emerged in the State of Victoria during the late 1980s and early 1990s. At the time, the main reason was to achieve “off-balance sheet” financing. The PPPs entered into principally involved the use of private investment to provide and maintain infrastructure, with limited involvement of the private sector in service delivery. There was little transfer of risk from public to private sector partners, with the State Government providing indemnities and guarantees to private parties, so that they had an assured rate of return. This led to a key objective of the State Government of bringing forward the provision of infrastructure being achieved, though there are examples of a number of projects failing, resulting in a significant cost to taxpayers.

From 1993 to 1999, with the introduction of the Infrastructure Investment Policy for Victoria (formally issued in 1994), the scope of PPPs in the State of Victoria was expanded to encompass design, construction, ownership, operation, and service delivery. PPPs were characterised by:

  • a high level of risk transfer;
  • private sector partners being responsible for full service provision – including custodial services in prisons and clinical services in hospitals;
  • private sector partners receiving payments from public sector partners only on the start of services; and
  • public sector partners not guaranteeing returns.

Examples of projects where this approach was adopted include Melbourne City Link, the Latrobe and Mildura Hospitals, public transport franchises, prisons, and water and wastewater treatment plants.

Although there are examples of successful projects during this period, there were also some notable failures. External audit identified a number of concerns, including:

  • the quest for maximum risk transfer and challenging service delivery outputs from the private sector led to some contracts being unsustainable;
  • benchmarking performance levels involved only limited comparisons;
  • an economic evaluation was not undertaken as part of the decision to enter into a PPP arrangement in some cases, and was not comprehensive in others; and
  • unnecessary secrecy surrounded some of the major contracts.

Current position

In the State of Victoria, PPPs currently make up about 10% of the capital spending on infrastructure. The Victorian state government has established Partnerships Victoria to provide guidance and support in using PPPs to government agencies. The current Victorian government policy on PPPs is outlined in the Partnerships Victoria policy (June 2000) and accompanying guidance. The Policy is based on the premise that governments should not presume that either the public or private sectors can deliver projects more efficiently or effectively than the other, and it applies to projects where the present value of payments to be made by the government or users of services will exceed A$10 million during the period of the partnership.

The principal objective stated in the policy for entering into PPPs is to achieve value for money, including meeting public interest requirements. A rigorous public interest test is applied that examines the potential impact of adopting a PPP approach on effectiveness in meeting the government’s objectives, accountability and transparency, affected individuals and communities, equity, public access, consumer rights, security, and privacy.

The government now retains direct responsibility for the delivery of “core” public services – including, for example, teaching in government schools, clinical services in public hospitals, and correctional services in prisons. PPPs are mainly set up to provide public infrastructure and related ancillary services. Projects where a PPP approach has been adopted cover a range of industry sectors, from built-for-purpose buildings and specialised treatment plants to information technology.

The main focus is on whole-life costing and optimal rather than maximum risk transfer to the private sector.

The New South Wales and Queensland state governments have also established PPPs. These have been modelled on the Partnerships Victoria policy and guidance, although the New South Wales policy for privately financed projects specifies that projects should normally have a total contract value of A$20 million or more. There is a desire by state governments to create a consistent Australia-wide approach to PPPs, which it is believed will enable potential private sector participants to see Australia as one PPP market.

A National PPP Forum was established in 2004, which includes ministers and government officials. The main aims of the Forum are to:

  • increase awareness and understanding of PPPs;
  • promote common PPP practices and procedures;
  • facilitate greater information sharing across jurisdictions;
  • set up a national database for a “project pipeline” (that is, future projects planned by government agencies); and
  • facilitate greater interaction between government, key industry groups, and other players.

Reasons for choosing this procurement approach

The State of Victoria originally adopted PPPs as a means to achieve off-balance sheet financing that would not be caught within the borrowing limits set by the Australian Loan Council. However, this objective has now been replaced by the principle of achieving value for money in the public interest.

The set of infrastructure projects put forward in the State of Victoria’s investment programme does not depend on the choice between public and private financing. Rather, the programme is determined and the possibility of private financing of particular projects is then evaluated against a public sector comparator, to establish whether value for money would be achieved. Projects included as part of this programme proceed regardless of whether private financing is approved following this evaluation.

Partnerships Victoria policy, June 2000 (extract)

The Government will develop partnerships under this policy framework with the following objectives in mind:

  • to maximise the level of infrastructure spending through a responsible use of the resources of both the public and private sectors;
  • to ensure that infrastructure and related ancillary services are provided in accordance with best practice, and where appropriate, to relevant international standards;
  • to promote growth and employment opportunities for the whole of Victoria;
  • to deliver significantly improved services to the community;
  • to encourage innovation in the provision of infrastructure and related ancillary services;
  • to maximise the social and economic returns from Government expenditure;
  • to pass through the benefits of Partnerships Victoria to customers, businesses and the Victorian community; and
  • to clearly articulate accountabilities for outcomes.

In undertaking partnership projects, regard will be had also to industry development, investment, recruitment, and skill development and transfer.

61: This account of PPPs in Australia is mainly based on an article by Glenn Maguire and Arseni Malinovitch, ‘Forum: Public-Private Partnerships, Development of PPPs in Victoria’, Australian Accounting Review, Vol. 14, No. 2, 2004.

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