PFI/PPP is not suitable for all projects and should not be seen as a magic wand that can miraculously double or treble the amount of money available for infrastructure projects. As the CPPP notes: “The spurious argument is that using private finance to pay for capital investment allows government to undertake more projects than would otherwise be the case. All PFI projects are publicly funded and incur future liabilities for the exchequer.”¹⁶

However, an important consideration for all governments in involving the private sector in infrastructure provision is the opportunity to reduce the public sector borrowing requirement, an important benefit which in the era of small government and low interest rates should not be discounted.

Twenty years ago the Ryrie rules emphasised cost effectiveness and a reduction in capital works expenditure. By 1994 the Conservative Government had moved from having to test private sector projects against public sector alternatives to requiring any public sector capital works project to be tested against private sector alternatives.         

Now the emphasis – correctly, in my view - is on value-for-money or best value. PFIs must be outcomes as well as fiscally based.  The challenge for the Coalition, as it is for all governments, is to sell the benefits of  private sector involvement to the electorate. Most voters will no longer buy the cost savings argument, especially when they are paying for a service they see a private company making money from. But they may identify with service improvement.

If a PFI project is genuinely to create value for the community the contract must be right. That means the public sector must bring to the negotiating table the same level of expertise as the private sector. Many mistakes have been made in the past in Britain and, according to the CPPP,  the civil service “suffers from a severe shortage of skills, finds it hard to learn from past mistakes, and is poor at picking quality partners.¹⁷”  There is no evidence the situation is any better in New South Wales, where public sector agencies have had even less experience in negotiating PFIs.

The Docklands Light Rail is a classic example of  a deal which provides for continuous service improvement as well as opportunities for the private sector (in this case, Serco) to generate increasing levels of profitability. The contract is flexible, outcomes based, with customer satisfaction a key determinant of  Serco Docklands’ profitability. The CPPP identifies all three of these factors as being pivotal in drafting any PFI contract, as is risk management. The more risk that can be transferred to the private sector, the more advantageous the deal is to the taxpayer. However, government  negotiators must be careful not to frighten off too many of the bidders, particularly if this means reducing competition by going to the preferred bidder stage too early.

All PFI contracts should also contain clauses relating to refinancing. Refinancing provides opportunities for the operator to improve its profitability, but government should also be able to share in the benefits.

Lack of transparency and accountability is a key issue for many critics of the PFI process. It may be in a government’s short term interests to reject requests for information about a project’s operating results as being ‘commercial in confidence’, but continued use of this excuse long-term only serves to reinforce public suspicions about the PFI process. The community should be involved in developing PPP projects and, where those projects impinge directly on their daily lives (eg schools and hospitals) in selecting service providers. The private sector must accept that a higher degree of transparency is required in the public sector than in private sector projects. Consideration should be given to amending FOI legislation to take account of this principle.

These changes will help remove the distinction between the private and public sector and put the ‘partnership’ into PPP. They are essential if the electorate is to accept PFI/PPP as the new paradigm for the delivery of public services in the 21st Century.

References

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