Paying for private profit

Needed: A robust policy framework
Greg Combet

The Australian community has a rightful expectation that in a developed and modern economy like ours, governments both state and federal, will provide the quality services and infrastructure necessary to underpin a prosperous and decent society.

Traditionally many of these needs have been provided to the community directly by government.

More recently some governments have sought to utilise partnerships between the public and private sectors as a means of bringing more private capital into the provision of community infrastructure and services.

These arrangements are commonly known as public private partnerships or PPPs and there have been over 170 of them initiated in Australia over the past 20 years. In fact Australia leads the world in the number and complexity of these arrangements.

Ideally PPPs can work in certain circumstances. Given a robust policy framework community interests can be protected and vital infrastructure can be delivered.

But increasingly some of these arrangements are being recognised as potentially expensive, inefficient, inflexible and not necessarily in the best interest of the wider community.

A vibrant industry has developed in the private and public sectors to promote the use of PPPs, but what has not yet been developed is an adequate regime of contestability, accountability and transparency standards in the identification, tendering, assessment and evaluation of PPP projects.

It also needs to be recognised that even where PPPs are appropriately applied they do not substitute the overall key role of government in directly providing the infrastructure and services required for a dynamic, forward looking and fair Australian society.

To reach its full economic and human potential Australia needs governments that are willing to show strong leadership in the provision of community infrastructure and services.

This timely report makes an important contribution to the debate about the type of community we want Australia to be and how it can be funded.

It raises important questions about the roles and responsibilities that governments and the private sector have in protecting and advancing Australia's community and national interests.

The myths of PPPs

By Graham Larcombe and Paul Fitzgerald

A large body of government and private sector reports has been generated by the emergence of PPPs. Little of it is objective and it depends on the vested interest of the particular group. Many myths about PPPs need to be challenged.

Myth 1

By reducing the call on public funds the amount of funds available for other essential services is increased.

A reason often stated for the adoption of PPP arrangements is that it frees up public funds that could be used in other essential services. This argument would have some validity if in practice these 'savings' were applied in this way. There is little evidence of this actually happening. Funds saved in this way have mostly been allocated to consolidated revenue to be used to retire debt and not used in the provision of better community services and infrastructure.

A number of commentators point to the higher cost of financing infrastructure through PPPs compared to traditional public sector debt financing. According to economics writer Ken Davidson, the private sector requires a rate of return of around nine per cent per year compared to 6 per cent per year for the public sector.1 Davidson suggests that, using these rates, a project costing $4 billion through conventional public sector financing would cost $5.6 billion if financed through a PPP. The $1.6 billion difference could have been used to finance new schools or health services.

This impacts on government finance and the government's capacity to maintain and expand existing services.

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