John Brumby, former premier of Victoria and current chair of MTAA Super, recently published his memoirs, which contain the lessons he learnt on leadership over 30 years in politics. The book, The Long Haul, also offers insights into the challenges and opportunities Australia currently faces and in this extract, he gives his thoughts on how investors can work with federal and state governments on public–private partnerships (PPPs).
As treasurer and Premier of Victoria, I oversaw $12 billion worth of PPPs in areas such as health and education infrastructure, transport, tourism and more. It is inconceivable that we could have built as much as we did if we had refused to work in partnership. However, we were not ideological about it: value for taxpayers’ money was the goal, and PPPs were sometimes, but not always, the means.
According to Infrastructure Australia, our nation currently has an “infrastructure deficit” of around $300 billion. Governments have four choices: they can ignore it – which will lead to inefficiencies in the economy, a slowing of growth and a declining quality of life; they can finance infrastructure through debt, which will increase r isk and may compromise budgets (although long-term interest rates are currently at record low levels); they can privatise infrastructure, but that means relinquishing control over large swathes of our economic and social landscape; or they can choose public–private partnerships.
Benefits of PPPs
A well-designed PPP allocates risk to the party best placed to manage it. Big infrastructure projects carry three main risks: cost, industrial problems and delay. PPPs help to shift each of these risks away from government, and therefore from the taxpayer. The cost of a PPP to government is determined before a shovel hits the ground. Industrial matters can be agreed in advance: any problems arising later become the responsibility of the private-sector partner. And the threat to a company’s return on investment is a powerful incentive to avoid delays. A 2007 study by Allen Consulting and the University of Melbourne showed that PPPs were, on average, 25 per cent cheaper than traditional procurement methods, and were completed 20 per cent faster.
But there are also other benefits of PPPs. Competitive tender processes tend to price projects more effectively, incentivising efficiency from bidders at each stage. Private companies can attract high-quality staff for a reasonable price, while governments, wary of criticism for hiring more public servants, are often tempted to turn instead to more expensive external consultants. Finally, private companies, formed in the competitive marketplace, are forced to be innovative and creative in order to survive. The competitive tender process presents governments with a range of options that may not have emerged through traditional procurement methods.
The award-winning new Victorian County Court building, for example, was delivered early in our period of government, on time and under budget, with two extra floors included by the winning bidder. Southern Cross Station ran into serious construction difficulties, but the cost of these was borne by the firm, not the taxpayer, and the station is now a recognised feature of Melbourne. Our government invested $370 million in the new Melbourne Convention and Exhibition Centre, and this leveraged an additional $1 billion from private sources. It now injects $200 million per year into the Victorian economy.
Another advantage of PPPs is that whole-of-life management can be built in from the start. If a government builds, for example, a new freeway, its ability to maintain the road from year to year will depend on the strength of the budget and competing demands. A well-designed PPP can secure a funding stream in advance, which means that when the contract comes to an end, the road is handed back to the government in good working order.
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Not always the best option
It is important, however, not to overstate the case. PPPs are not always the best option, particularly if a project does not require much innovation or carry much risk. In my experience, PPPs work best when projects are one-off investments rather than ongoing works; when they are of considerable size and complexity; and when they involve technical challenges calling for innovative solutions. The main criterion, again, is value for money. Our PPP process – which has been adopted, almost in its entirety, Australia-wide – featured a public-sector comparator against which private-sector bids were assessed, as well as a strict public interest test.
It is worth remembering that there is one kind of risk remaining largely untouched by a PPP, and that is political risk. As previous chapters have shown in relation to public transport, blame for service or project failure, when it occurs in the public eye, is invariably laid at the feet of the government of the day.
In addition to this, I believe the federal and state governments need to give renewed consideration to mechanisms that would enable superannuation funds to invest in new greenfield projects, particularly large urban public transport projects. One mechanism that needs to come back onto the table is the “infrastructure bond”. Treasury is understandably reluctant to re-enter this area, given some problems that arose with bonds for the Citylink project in Victoria in the early 1990s, but I believe that these concerns can be addressed and a stable, secure, long-term instrument developed. Bonds would be attractive, not just to industry funds, but also to the growing pool of self-managed funds. Government simply needs to design the right product, with the right safeguards, to provide security for both investors and the tax office.
This is an edited extract from The Long Haul: Lessons from Public Life by John Brumby, published October 2015 by Melbourne University Press (https://www.mup.com.au/items/161575)