Rationale of the Study
Public Private Partnerships (PPPs) have become an increasingly favourable public procurement policy in the domain of physical infrastructure-based service delivery. They represent a contractual arrangement between the public and private sector and integrate the collaborative effort of both sectors in delivering services to the public. In Australia, it is well known that the use of private provision in public infrastructure is primarily driven by financial motives. Seemingly, such motives could stem from the budget restraints which confronted various Australian state governments in the 1980s. This seems to conflict with the reluctance of governments to use state funds to finance public infrastructure during consecutive years of budget surplus.
This study proposes that PPPs are a powerful procurement device used to legitimise the social existence of the state. From the perspective of the social dynamic framework of interests (Broadbent & Laughlin, 2002), conservation of public funds is considered by international capital markets to be the prudent approach to fiscal management – an exerted effort by the Treasury to facilitate capital accumulation. However, this approach is not without repercussions, as evidenced by the two PPP cases in the Australian state of New South Wales (NSW). These two cases are the Port Macquarie Base Hospital (PMBH) and the Cross-City Tunnel (CCT). The Port Macquarie Base Hospital represents the first PPP hospital in NSW. The lesson of the PMBH demonstrates that the effort to entice greater private provision in public hospital services has ceded public funds to the concessionaire for the financing of profitable services. The Cross-City Tunnel is the most recent toll road project in the history of Australian PPPs to be seen as a failure by many pundits. The experience of the toll road illustrates that compromising the community’s interest to shelter the public sector from cost exposure has rendered the unlikeness of future public acceptance of the policy.
Case Studies
Port Macquarie Base Hospital is the first public hospital to be delivered under the PPP model in NSW. In 1992, a 20-year concession contract was entered into by the then Liberal state government and Mayne Nickless Limited (Mayne) who assumed the role of private operator of the hospital. Under the contract, Mayne was responsible for constructing the hospital asset and providing public health services to local residents in the Port Macquarie region.
This public-private hospital was indeed a highly profitable investment to the private operator. It returned Mayne a tax-free and risk-free real rate of return of 13%. In addition, the PMBH cost 30% more to run compared with its peer public hospitals. At that time, the State government was determined to build a private-public hospital as the model for subsequent expansions of private participation in the health sector. The NSW Treasury was also urging the deal, arguing that the private sector would bring greater competition and cost-efficient services to the health industry. Despite the high cost, the Treasury insisted that the PMBH be modelled to achieve the role separation for the government by allowing the private sector to assume the funding role while the public sector remained the provider of core services. In October 2003, Mayne proposed selling its entire Australian hospital business, including the PMBH, to another private consortium. In April 2004, the State government commenced legal proceedings against Mayne in relation to the renovation of the PMBH contract. On 31st January 2005, after paying unitary charges for 10 years, the now Labour state government bought back the hospital for $35 million (price as of 2006).
If the determination of the government to entice private provision of public service delivery is to blame for the poorly executed PMBH, it is the government’s aggressive chase of its cost-saving strategy to fund public infrastructure which causes the CCT to fail.
One of the unique features of the CCT is the ‘unprecedented’[1] concept of the Business Consideration Fee (BCF) auctioned by the Roads and Traffic Authority of NSW (RTA). The Business Consideration Fee of $46.1 million, which was the price auctioned for the right to operate the tunnel and charge tunnel users, was contained in the upfront payment of $96.8 million offered by the winning consortium, the Cross-City Motorway (CCM). The remaining $54 million was to reimburse the RTA for the costs incurred for the project. The CCT’s project tendering documents explained this dual-fee structure and invited bids for both components (evidence given by Danny Graham, NSW Treasury; in JSCCCT, 2006: 73). This payment increased the cost to the concessionaire and was expected to be recouped by imposing higher tolls on tunnel users. The CCM bid was selected because it offered the highest upfront payment.[2] When CCM offered the bid price, it modelled unusually optimistic traffic forecasts that exceeded the ceiling capacities of the estimates of both its competitors and the RTA (NSWAGO, 2006: 5) in order to demonstrate its capacity to earn greater revenue sooner and to offer the BCF (JSCCCT, 2006: 81). Clearly, the BCF was the overriding determinant influencing the RTA’s decision to accept CCM’s proposal. The unprecedented BCF, a price auctioned for the license to collect a monopoly toll, was disparaged as the worst expedient of public finance (Quiggin, 2005: 26).
Another unparalleled concept of the CCT promoted by the RTA was its ‘no net cost to government’. In the absence of both thorough public interest evaluation (JSCCCT, 2006: 35) and representations from tunnel users in the negotiations (NSWAGO, 2006: 47), this meant no net cost to the RTA alone and that all cost increases would be passed on to motorists through toll increases. To avoid $110 million in capital spending arising from changes that would maximise revenue to the operator (JSCCCT, 2006: 75), the RTA negotiated two separate deals with CCM to recover subsequent cost increases. The first deal changed the toll escalation formula (originally toll variation was linked to Consumer Price Index increases), which would result in the toll being 35% greater than originally planned by 2018. The other deal was to allow CCM to raise the base toll by 15 cents (30 cents for heavy vehicles). The combined effect of these two deals resulted in an increase of up to 51 cents in the toll on the tunnel’s opening in 2005 (NSWAGO, 2006: 6). The RTA’s insistence on cost savings has dictated its decision to procure the CCT through the PPP model. This background consideration has reduced the possibility of public control over this major infrastructure (JSCCCT, 2006: 42). Due to poor patronage, the tunnel was placed into receivership in December 2006, only one year after its opening. In 2007, the Cross-City Tunnel was sold to another private consortium, ABN Amro and Leightons, for $700 million. By that time, the patronage of the tunnel was under a third of the original CCM estimates (Clegg & Poljak, 2007).
Conclusion
Within the social dynamic framework of interests, Public Private Partnerships are a powerful device to balance the state’s two roles as both the legitimiser of global capital accumulation processes and as the ensurer of the adequate supply of public services. PPPs alleviate the dearth of funds required for public service deliveries without lifting the fiscal gauge beyond the ‘prudent’ level. The lessons of the PMBH and the CCT demonstrate that the rhetoric of debt containment has not only distorted the PPPs policy but also imperilled the legitimacy of the state. It is timely for policy makers to reconsider their roles in the democratic legitimation and to whom they are accountable. One way to strengthen this position is to segregate the oversight function of the PPP scheme, a function that gives the Treasury the power to approve or reject PPP projects that are not designated as being in the public interest. Currently, there is a clear conflict of interests in the Treasury being both the endorser of the policy and the oversight authority.
Demi Chung is Associate Lecturer in the Faculty of Economics and Business, University of Sydney.
References
Broadbent, J. & Laughlin, R., 2002, "Accounting Choices: Technical and political trade-offs and the UK's private finance initiative", Accounting, Auditing & Accountability Journal, vol. 15, no. 5, pp. 622-654.
Clegg, B. & Poljak, V., 2007, "Sold: $700m Cross-City Tunnel", Australian Financial Review, (Wednesday, 20 June 2007), Sydney, pp. 1, 52.
Forward, P., 2006, "Public Private Partnership or Conflict: Is it time for a new approach? [Paper in: Forum: Public Private Partnerships.]", University of New South Wales Law Journal, vol. 29, no. 3, pp. 263-269.
JSCCCT (Joint Select Committee on the Cross-City Tunnel), 2006, Cross-City Tunnel: First Report, Parliament of New South Wales, Sydney.
NSWAGO (New South Wales Auditor-General's Office), 2006, Performance Audit: The Cross-City Tunnel Project, The Audit Office of New South Wales, Sydney.
Quiggin, J., 2005, Improving Public Infrastructure Contracts with the Private Sector: Lessons from the Cross-City Tunnel, Submission to NSW Parliament's Joint Select Committee on the Cross-City Tunnel, Sydney.
