tag:theconversation.com,2011:/africa/topics/ppp-2279/articlesPPP – The Conversation2022-11-29T13:58:13Ztag:theconversation.com,2011:article/1954002022-11-29T13:58:13Z2022-11-29T13:58:13ZPFI at 30: it’s hard to say anything positive about this deeply flawed financing model<p>It was Norman Lamont who first announced a new way of paying for public buildings and infrastructure in November 1992. In a <a href="https://api.parliament.uk/historic-hansard/commons/1992/nov/12/autumn-statement">speech to the House of Commons</a>, the then chancellor of the exchequer said he was looking to encourage more private financing for such projects. </p>
<p>Speaking only a few weeks after the government had been rocked by <a href="https://theconversation.com/why-black-wednesday-still-matters-it-was-the-start-of-markets-telling-politicians-what-to-do-190471">Black Wednesday</a>, he reassured the house he would “ensure that sensible investment decisions are taken whenever the opportunity arises”.</p>
<p>So began the era of private finance initiatives (PFIs), which saw more than 700 contracts signed off in the UK until the <a href="https://commonslibrary.parliament.uk/goodbye-pfi/">government stopped</a> doing them in 2018. They <a href="https://www.gov.uk/government/publications/private-finance-initiative-and-private-finance-2-projects-018-summary-data">produced projects</a> with assets worth approximately £60 billion, which are costing the taxpayer £170 billion – that’s a gap of £110 billion between what the assets are worth and what the taxpayer is paying for them. </p>
<p>So now that PFI has reached its 30th anniversary, how should it be remembered?</p>
<h2>What they are</h2>
<p>PFIs have paid for everything from roads to bridges to schools to hospitals, not to mention military training facilities, water and waste projects, sports facilities and prisons. Transport projects came first, such as the <a href="https://nation.cymru/news/a-u-turn-on-tolls-the-severn-bridge-pledge/">Severn River crossings</a> and the <a href="https://clok.uclan.ac.uk/22711/7/22711%20AAM.pdf">M6 Toll Road</a>. A refurbishment of some <a href="https://www.nao.org.uk/reports/innovation-in-pfi-financing-the-treasury-building-project/">HM Treasury buildings</a> was another early project, and was often cited by Conservative ministers as evidence of the Treasury’s belief in these schemes. </p>
<p>Generally PFIs – or public-private partnerships (PPPs), as they are sometimes known – involve a consortium of private companies financing, building, maintaining and operating assets for 25 to 30 years. Once operational, the public body effectively makes leasing payments to the lead contractor – subject to the assets being available and meeting key performance indicators. </p>
<p>The Treasury persistently claimed, at least initially, that this link between payments and performance would ensure the private sector bore most of the risks. By putting these experts in charge, it was argued that project management would improve. This was going to lead to more and better infrastructure, delivering value for money for taxpayers. </p>
<h2>Rhetoric vs reality</h2>
<p>PFI has certainly seen many infrastructure projects completed and facilities modernised which would not have been possible under traditional public procurement. But as far as the supposed benefits are concerned, the evidence suggests a disconnect between political rhetoric and reality. </p>
<p>Borrowing costs are one unavoidable problem, since contractors will most likely have a lower credit rating than the government. These costs get passed on to the taxpayer, which has constrained what authorities <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/j.1468-0408.2010.00508.x?casa_token=67XC3f19J0IAAAAA%3A52iVpXX-HAZygSfwWE7LXdHdKHFkEMXnMYgBi3wNMpahaeMetcMgSgKCreHZN_anN355yLgs7w-slxtI">such as the NHS</a> can spend on essential services, forcing them to reduce budgets accordingly. It also created <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/1467-923X.12990?casa_token=X17PTYGqWeUAAAAA%3AqMfhidbEmqwkcgTRc3sNCFDlZy4eiitOzQodVVPur-cM9hY4bFrd3N4Wt1naWqAFwE3xc9h0DiPl8hY4">pressure to reduce</a> project costs, leading to poorer infrastructure. </p>
<p>There’s evidence from PFIs in <a href="https://www.researchgate.net/profile/Jane-Broadbent/publication/238789662_Nature_Emergence_and_the_Role_of_Management_Accounting_in_Decision_Making_and_Post-Decision_Project_Evaluation/links/00b49528dcb0c11e93000000/Nature-Emergence-and-the-Role-of-Management-Accounting-in-Decision-Making-and-Post-Decision-Project-Evaluation.pdf">health</a> and <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/padm.12401?casa_token=tBI96iHYGo0AAAAA%3APAeIf5nkMMUdLgpKmnarEQQHgEJPesRcpEPccK86i0o0K-aOhrlQOd8Ju_2v5ux6f5gFSmDWCE29_2QH">roads</a> that performance-based payments don’t incentivise contractors. The financial incentives are often inadequate, since they form only a small portion of leasing payments, and it’s difficult to develop key performance indicators for long projects anyway. </p>
<p>There are also endless issues around asset risks. With schools, for example, <a href="https://www.sciencedirect.com/science/article/pii/S0890838914000031?casa_token=Uw2ZBlOFgD0AAAAA:WJG1mGN9MhTWZSToEfuhX66bzc3BG7TWjV9x6CXiBRPbFDlKs6aesAeg4vongNYgflyY3OFsfTU">empirical studies</a> highlight inherent complexities and subjectivity in how risks were allocated. According to this research, public authorities and their financial advisers could “manipulate” accounting numbers to make it look as though more risk was being transferred than was necessarily the case.</p>
<p>High returns earned by private investors also suggest departments were overpaying for transferring project risks. For example, equity returns in the M25 motorway project <a href="https://publications.parliament.uk/pa/cm201719/cmselect/cmpubacc/894/89405.htm">were approximately 30%</a> – mkore than double the expected annual returns in PFIs.</p>
<p>Another issue is the difficulty in foreseeing and estimating all risks over a project’s lifetime. For example, the mid-1990s PFI contract for modernising the National Insurance Recording System (NIRS-2) experienced multiple delays and renegotiations during the pre-contract stage on account of uncertainties around future IT requirements. The Inland Revenue <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/1468-0408.00139?casa_token=ApoSFT6hNYsAAAAA:hiYpSdNpN8zS4PE8eG0HjmaqCCYARWjOvMlIzwgZ-ZvIKSngxf9ryNvAfX5E21PQizv0U-EkXStxik4">reportedly received</a> only limited compensation from the contractors for these delays, yet did not take further action to avoid prejudicing “the partnership relationship”. </p>
<p>Sometimes failures to estimate risks helped to push contractors into bankruptcy. The classic example is <a href="https://eprints.keele.ac.uk/4909/1/I%20Demirag%20-%20Sourcing%20public%20services.pdf">Carillion in 2018</a>, whose collapse was partly due to problems with <a href="https://www.theguardian.com/business/2020/jan/15/carillion-collapse-two-years-on-government-has-learned-nothing">PFI hospital contracts</a> in Birmingham and Liverpool. Similarly with the <a href="https://www.nao.org.uk/wp-content/uploads/2009/06/0809512es.pdf">London Underground</a> modernisation in the early 2000s, poorly foreseen costs caused contractor collapses. The incomplete project reverted to the government, costing taxpayers <a href="https://www.centreforpublicimpact.org/case-study/london-undergrounds-failed-ppp">billions of pounds</a>.</p>
<h2>Future concerns</h2>
<p>These difficulties help show why the UK government ultimately scrapped PFI. It had also found it more difficult to make austerity savings in the 2010s because of PFI payments, while unfinished projects such as the <a href="https://www.cityam.com/carillion-two-years-on-misery-as-major-hospitals-in-liverpool-and-birmingham-still-unfinished/">Birmingham and Liverpool</a> hospitals involved in the Carillion collapse produced waves of negative publicity. </p>
<p>Meanwhile, existing contracts remain a concern. Leaving aside leasing costs, <a href="https://www.nao.org.uk/report/managing-pfi-assets-and-services-as-contracts-end/">one critical issue</a> is contracts expiring at the end of their lifetimes. PFI holding companies aren’t required by law to to disclose much financial information, so there are unknowns around the state of <a href="https://committees.parliament.uk/publications/5144/documents/50775/default/">many assets</a>. Some could be passed on to the public in poor condition, and services could be disrupted as a result. </p>
<p>A <a href="https://committees.parliament.uk/work/921/managing-the-expiry-of-pfi-contracts">recent parliamentary review</a> pointed to uncertainties around funding to help better manage the expiry of contracts. The review also found an absence of clear guidelines for contract expiry in some of the oldest contracts (meaning the ones due to expire soonest), and limited trust between procuring authorities and their contractors. </p>
<p>The government’s Infrastructure and Projects Authority <a href="https://www.gov.uk/government/publications/preparing-for-pfi-contract-expiry">recently published guidance</a> for procuring authorities around contract expiries, but said nothing about making available technical, commercial, financial or legal expertise. Authorities will need to organise this in-house, raising the prospect of hiring expensive private consultants with taxpayers’ money. </p>
<p>Three decades after PFI launched as a “sensible” form of infrastructure investment, it’s <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/752173/PF2_web_.pdf">now seen</a> by the government’s Office for Budget Responsibility as a fiscal risk. This is both because PFIs have been allowed to remain off the government’s balance sheet and because the risks often revert to the government if a contract fails. </p>
<p>PFI may have seemed sensible on paper, but successive governments <a href="https://link.springer.com/chapter/10.1007/978-3-030-72128-2_11">appear to have</a> implemented it to make projects happen faster, often to score political points. To make the best of a bad situation, changing the rules around the financial reporting of PFI holding companies and making sufficient resources available to manage asset handovers to public authorities would be a step in the right direction</p><img src="https://counter.theconversation.com/content/195400/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Yes it got many things built, but the legacy is fairly disastrous.Salman Ahmad, Lecturer in Accounting, Aston UniversityCiaran Connolly, Professsor of Accounting, Queen's University Belfastistemi demirag, Professor of Accounting, Tallinn University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1374492020-05-12T12:34:49Z2020-05-12T12:34:49ZCan a business still be small with 500 employees?<figure><img src="https://images.theconversation.com/files/332531/original/file-20200504-83725-1gjvtqm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Trump addresses the Paycheck Protection Program at a meeting.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Virus-Outbreak-Trump/b91b37f8ca8f4c7180d34529585d9a8b/40/0">AP Photo/Evan Vucci</a></span></figcaption></figure><figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=227&fit=crop&dpr=1 600w, https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=227&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=227&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=285&fit=crop&dpr=1 754w, https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=285&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=285&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p><em><a href="https://theconversation.com/us/search?utf8=%E2%9C%93&q=significant+figures">Significant Figures</a> is a series from The Conversation in which scholars explain an important number in the news.</em></p>
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<img alt="" src="https://images.theconversation.com/files/333750/original/file-20200508-49558-801o97.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/333750/original/file-20200508-49558-801o97.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=300&fit=crop&dpr=1 600w, https://images.theconversation.com/files/333750/original/file-20200508-49558-801o97.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=300&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/333750/original/file-20200508-49558-801o97.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=300&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/333750/original/file-20200508-49558-801o97.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=377&fit=crop&dpr=1 754w, https://images.theconversation.com/files/333750/original/file-20200508-49558-801o97.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=377&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/333750/original/file-20200508-49558-801o97.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=377&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>The distribution of <a href="https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program">Paycheck Protection Program</a> loans for small businesses hasn’t been smooth, from <a href="https://www.usatoday.com/story/money/usaandmain/2020/04/13/coronavirus-small-businesses-scramble-secure-federal-ppp-loans/5133984002/">unclear guidelines</a> to <a href="https://www.nbcnews.com/business/business-news/extremely-disappointing-entirely-predictable-slowdowns-lockouts-plague-second-round-ppp-n1193421">technical problems</a>.</p>
<p>A most disconcerting issue has been <a href="https://www.cnbc.com/2020/04/24/billionaires-company-got-4-million-from-coronavirus-sba-fund.html">large and wealthy</a> businesses being able to obtain the loan, while much smaller businesses have not.</p>
<p>While some attribute it to pressure being put on <a href="https://www.nytimes.com/2020/04/16/business/coronavirus-sba-loans-out-of-money.html">government and banks to release loans as quickly as possible</a>, as <a href="https://socialwork.rutgers.edu/faculty-staff/charles-chear">a scholar of microbusinesses and the informal economy</a>, I believe much of the public’s frustration with how the PPP was paid out is related to how the federal government defines small business.</p>
<h2>What is a small business?</h2>
<p>When most of us think of <a href="https://www.sba.gov/sites/default/files/advocacy/United_States.pdf">small businesses</a>, we imagine a local business such as our favorite pizzeria <a href="https://www.mainstreetalliance.org/">on Main Street</a>, the <a href="https://ny.eater.com/2020/4/10/21214971/nyc-bodegas-coronavirus-survival-grocery">bodegas</a> and <a href="http://streetvendor.org/">street vendors</a> in New York City or even our local plumber.</p>
<p>My <a href="https://socialwork.rutgers.edu/faculty-staff/charles-chear">own research</a> focuses on the social welfare of immigrant families that run such businesses. Often with just a handful of employees – and in many cases, just one – these businesses are nowhere close to the limit of 500 employees the government used to limit qualification for the PPP loan.</p>
<p>Businesses with fewer than 10 employees are known as a <a href="https://aeoworks.org/">microbusiness</a> to researchers. They are the <a href="https://www.sba.gov/sites/default/files/Microbusinesses_in_the_Economy.pdf">most common type</a> of business in the United States.</p>
<p>Yet were we to ask microbusiness owners if they have heard of the term microbusiness, most would likely say no.</p>
<p>In fact, researchers and policymakers define small business in a number of ways, some of which make more sense than others.</p>
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<img alt="" src="https://images.theconversation.com/files/332532/original/file-20200504-83725-2bmy2m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/332532/original/file-20200504-83725-2bmy2m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=433&fit=crop&dpr=1 600w, https://images.theconversation.com/files/332532/original/file-20200504-83725-2bmy2m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=433&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/332532/original/file-20200504-83725-2bmy2m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=433&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/332532/original/file-20200504-83725-2bmy2m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=544&fit=crop&dpr=1 754w, https://images.theconversation.com/files/332532/original/file-20200504-83725-2bmy2m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=544&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/332532/original/file-20200504-83725-2bmy2m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=544&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Many bodegas are actually considered microbusinesses, not just small businesses.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Virus-Outbreak-24-Hours-Bodega-Owner/3505a007a8034116b82be7c9accd7dfe/1/0">AP Photo/Bebeto Matthews</a></span>
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<h2>The federal definitions</h2>
<p>The Small Business Administration, the department overseeing the PPP loan, uses a <a href="https://www.sba.gov/document/support--table-size-standards">size standard</a> to determine what qualifies as a small business for SBA and federal contracting programs.</p>
<p>The standard is measured by number of employees or <a href="https://www.law.cornell.edu/cfr/text/13/121.104">average annual receipts</a> and <a href="https://www.sba.gov/sites/default/files/2019-08/SBA%20Table%20of%20Size%20Standards_Effective%20Aug%2019%2C%202019_Rev.pdf">varies by industry</a>, with 500 employees as the most common standard.</p>
<p>The PPP loan program <a href="https://www.sgrlaw.com/client-alerts/forgivable-coronavirus-payroll-loans-for-employers-with-fewer-than-500-employees/">waives rules</a> found in general SBA loans to include businesses, such as nonprofits, that are usually not supported. And while a 500-employee limit may seem too generous since it allowed organizations like the <a href="https://www.npr.org/sections/coronavirus-live-updates/2020/04/27/846024717/even-the-la-lakers-got-a-ppp-small-business-loan">LA Lakers</a> to qualify for the PPP loan, it is actually an attempt to narrow down a standard for SBA loans that <a href="https://www.natlawreview.com/article/many-companies-more-500-employees-could-qualify-stimulus-loans">typically includes</a> businesses with as many as 1,500 employees.</p>
<p>Additionally, a <a href="https://gwipp.gwu.edu/federal-sources-entrepreneurship-data-compendium">compendium of federal data</a> from the Bureau of Labor Statistics, Internal Revenue Service and other departments suggests that there is no consistent standard defining small business among federal agencies.</p>
<p>A broad, federal definition for small business explains why even some <a href="https://www.forbes.com/sites/sarahhansen/2020/04/29/potbelly-shake-shack-axios-here-are-all-the-companies-returning-ppp-money-after-public-backlash/#1f0813787ea0">multinational corporations</a> like Singapore-based biotech firm Wave Life Sciences were initially able to obtain PPP loans that they later decided to return. This along with upcoming <a href="https://www.vox.com/2020/5/6/21249161/kamala-harris-ayanna-pressley-small-businesses-plan">legislative</a> <a href="https://www.startusupnow.org/wp-content/uploads/sites/12/2020/04/Americas-New-Business-Plan-Rebuilding-Better.pdf">proposals</a> may give the smallest businesses a better shot.</p>
<p><em>The Conversation has received funds from the Paycheck Protection Program.</em></p>
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<p class="fine-print"><em><span>Charles Chear does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The government wants to help small businesses during the COVID-19 pandemic, but the definition of “small” is still pretty big.Charles Chear, Lecturer and Ph.D. student, Rutgers UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/576022016-04-12T14:39:19Z2016-04-12T14:39:19ZScottish schools shutdown: problems with PFI buildings could hit the rest of UK<p>Pupils and parents in Edinburgh are still digesting the <a href="http://www.edinburgh.gov.uk/schoolclosures">news that</a> 17 schools have not reopened after the Easter break. It affects more than <a href="http://www.theguardian.com/uk-news/2016/apr/11/call-safety-review-all-edinburgh-schools-after-closures-pfi-scotland">7,000 pupils</a>, many of whom were getting ready for national exams at the five secondary schools affected. It may cast a light on the Private Finance Initiative (PFI), a policy widely used around the UK in recent decades for constructing public buildings with private money. </p>
<p>The closures date back to Storm Gertrude earlier in the year, which <a href="http://www.edinburghnews.scotsman.com/news/education/oxgangs-primary-still-closed-due-to-storm-gertrude-damage-1-4017477">toppled</a> part of a wall at Oxgangs Primary in the city. During repair work at that one and another primary, contractors found serious defects. When Edinburgh Schools Partnership, the consortium that oversees the PFI schools, told the city council it could not guarantee the safety of any of the schools that were built around a decade ago as part of the same contract, the council decided to temporarily close them all. </p>
<p>City of Edinburgh Council is particularly sensitive to the safety of school buildings. A 12-year-old pupil <a href="http://www.bbc.co.uk/news/uk-scotland-edinburgh-east-fife-26834110">died</a> two years ago when a wall in a school changing room collapsed at the city’s Liberton High School (this was not one of the schools affected by the latest announcement). There are <a href="http://www.dailyrecord.co.uk/news/scottish-news/calls-safety-review-scottish-pfi-7730631#QVp6qzmb6TmWbcUK.97">gathering calls</a> for a safety review of other PFI schemes in Scotland, and policymakers further south are no doubt watching anxiously. The question is how big these problems could become. Can we expect more closures across the country – PFI was used not only for schools but for hospitals, prisons, roads, bridges and much more. </p>
<h2>The UK picture</h2>
<p>The UK has been a major player in PFI since it was introduced in its current form in the 1990s by the Conservative government, before being renamed Public Private Partnerships (PPP) by the Labour government later that decade. Usually the model is that a local council contracts with a private company to design, build and finance a building and then maintain it for 25 years. The council pays an annual fee to cover these costs and is also responsible for all the teaching staff and teaching; and at the end of the contract it usually has ownership of the building.</p>
<p>By 2014 there were 671 operational PFIs in the UK. Their total capital value <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/387228/pfi_projects_2014_summary_data_final_15122014.pdf">was £56.6 billion</a> – that’s the aggregate financing costs in all the projects plus any public-sector capital contributions. These cost the public purse £10.3 billion in the year 2014-15 in services charges and debt payments. (I should add that <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/387227/projects_in_procurement_as_at_31_March_2014.xlsx">while PFI continues</a> [pdf] in England, in Scotland the SNP government replaced it a few years ago with <a href="http://www.theguardian.com/public-leaders-network/2011/jun/07/scotland-privately-fund-public-projects">Non-Profit Distributing (NPD) contracts</a> – NPD uses a similar model but caps the profits that contractors are allowed to make.)</p>
<p>Although PFIs and NPDs should be more expensive than public financing, since government borrowing is usually cheaper than private, these schemes came with certain advantages. They used to mainly be “off balance sheet” – in other words, the cost of building the project was <a href="http://www.publications.parliament.uk/pa/ld200910/ldselect/ldeconaf/63/63i.pdf">not added</a> to the public sector accounts. This meant a council could fund a new school without appearing to borrow much, a great way of making public accounts look healthier, particularly given the huge backlog of poorly maintained public infrastructure and schools in the 1990s to 2000s. </p>
<p>This benefit <a href="http://www.ifrs.org/current-projects/ifric-projects/ifric-12-service-concession-arrangements/Pages/ifric-12-service-concession-arrangements.aspx">was severely constrained</a> by new international accounting standards a few years ago, but there are arguably others. <a href="https://www2.unece.org/wiki/download/attachments/23758291/Treasury%20-%20PFI%20Strenghtening%20long%20term%20partnerships.pdf?api=v2">According to</a> the Treasury, PFIs can make it possible <a href="http://www.tandfonline.com/doi/abs/10.1080/09540960903492331#.VwukzbzSc0o">to provide</a> public services more efficiently and effectively. [You get](https://books.google.co.uk/books?id=CvSoCgAAQBAJ&pg=PT470&lpg=PT470&dq=McQuaid,+R.+(2010)+‘Theory+of+Organisational+Partnerships+–+partnership+advantages,+disadvantages+and+success+factors’,+in:+S.P.+Osborne+(ed.)+The+New+Public+Governance:+Emerging+perspectives+on+the+theory+and+practice+of+public+governance&source=bl&ots=QT676MsSGR&sig=qZBeZw0y8lnGYrtECmfsdPj_iAU&hl=en&sa=X&ved=0ahUKEwj9l5jlpIbMAhWBxRQKHbsIAvsQ6AEILTAC#v=onepage&q=McQuaid%2C%20R.%20(2010)%20‘Theory%20of%20Organisational%20Partnerships%20–%20partnership%20advantages%2C%20disadvantages%20and%20success%20factors’%2C%20in%3A%20S.P.%20Osborne%20(ed.)%20The%20New%20Public%20Governance%3A%20Emerging%20perspectives%20on%20the%20theory%20and%20practice%20of%20public%20governance&f=false) access to the innovations that have been developed in the private sector; you develop more effective incentives for each party; and you spread risk more appropriately than in traditional public financing. This can in theory mean better value for money for the public sector despite the high premiums. </p>
<h2>Short-termism</h2>
<p>No doubt many PFIs provide good premises for important public services, but we have sometimes ended up with poorly executed schemes motivated more by short-term financial imperatives and not long-term quality or value for money. This <a href="http://www.allysonpollock.com/wp-content/uploads/2013/09/AP_2013_Pollock_PFILewisham.pdf">appears to include</a> many early schemes <a href="https://www.nao.org.uk/wp-content/uploads/2007/03/0607149es.pdf">such as</a> the <a href="https://www.researchgate.net/publication/301200720_%27The_Bridge_to_Skye_Scotland_-_PFI%27?ev=prf_pub">Skye bridge</a>, train leasing and many hospitals. </p>
<p>Lack of transparency is another <a href="http://www.theguardian.com/commentisfree/2010/nov/22/pfi-private-finance-refuse-debt">common criticism</a>, with schemes using grounds of commercial confidentiality to keep details hidden. And there have been PFI contracts where buildings may be structurally designed to last at least <a href="http://www.gov.scot/resource/doc/217736/0091011.pdf">50 years</a>, but the contractor has only used fittings that would last for the duration of the 25-year contract. This can reduce the quality and mean major expenses for the authority after the contract has ended. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/118188/original/image-20160411-21956-1dpkpso.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/118188/original/image-20160411-21956-1dpkpso.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/118188/original/image-20160411-21956-1dpkpso.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=353&fit=crop&dpr=1 600w, https://images.theconversation.com/files/118188/original/image-20160411-21956-1dpkpso.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=353&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/118188/original/image-20160411-21956-1dpkpso.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=353&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/118188/original/image-20160411-21956-1dpkpso.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=444&fit=crop&dpr=1 754w, https://images.theconversation.com/files/118188/original/image-20160411-21956-1dpkpso.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=444&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/118188/original/image-20160411-21956-1dpkpso.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=444&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Skye bridge was an early PFI contract.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/16993804@N08/2212953607/in/photolist-4nxY1x-ePofZj-ePohMW-9jUniC-bwtxaQ-9RPdPR-9RPetB-8DA2He-7Td7Ls-8DDhxE-rpWWmw-7Td7Lw-a2iWRV-divvur-wVVWUB-hz4PSY-6HVViS-hz6px8-a72wJk-5k5aBk-iRAPTn-xLjU2W-rFBsyo-zJnPic-poYvbK-pkSz71-pFaKWn-CEtja-3hPnuN-9XGWFe-4AyUFM-5nSTiV-7Y2yF7-7XY6m8-9wVC1c-fbbPpB-4Zyc7h-4MevC-nKBeo6-nssfrZ-eRZrmn-nHfEvH-4Z5bZZ-7y6K3f-rt5bp-58iZ3A-fStQ7g-bWsemt-4T15eQ-b3EpEv">Design Ag</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>So what of Edinburgh? Surveys are being carried out on all 17 schools and everyone is waiting to hear the outcome – several more of the schools <a href="http://www.theguardian.com/education/2016/apr/11/serious-defects-two-more-edinburgh-schools-built-using-pfi">are showing</a> serious defects while others <a href="http://www.bbc.co.uk/news/uk-scotland-edinburgh-east-fife-36017531">are expected</a> to reopen in the coming days. Edinburgh Schools Partnership <a href="http://www.edinburghnews.scotsman.com/news/edinburgh-school-crisis-consortium-facing-million-pound-penalty-1-4096273">has called</a> the standard of construction “completely unacceptable”. <a href="https://www.holyrood.com/articles/news/edinburgh-pfi-schools-crisis-%E2%80%93-private-consortium-will-foot-bill">It is</a> footing the bill for investigating and resolving the issues, while Galliford Try, whose Miller Construction subsidiary was the original building contractor, <a href="http://www.edinburghnews.scotsman.com/news/edinburgh-school-crisis-consortium-facing-million-pound-penalty-1-4096273">said</a> it supports the closures ahead of more information becoming available. </p>
<p>There is much that remains unclear – not least whether the problem is poor workmanship or choice of construction materials or inadequate building control standards. A key question may be whether the buildings were designed adequately and for the level of wind that caused the structural problems at Oxgangs. </p>
<p>The council and the PFI consortium do seem to have taken the right short-term decisions to be open about the issue and about who is responsible, and to focus on providing alternatives for the pupils. What still needs to be considered will be the long-term implications for both construction standards and PFIs – both in Edinburgh and across the UK. Perhaps the inevitable inquiry will also help lead to a rethink on whether short-term cost savings are really a sensible way to build for the future.</p><img src="https://counter.theconversation.com/content/57602/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ronald McQuaid is currently writing a paper on PFI for the Asian Development Bank Institute. The views expressed in this piece are entirely his own. </span></em></p>The Private Finance Initiative was meant to be the solution to 21st century public buildings. Edinburgh’s school problems are far from unique, however.Ronald McQuaid, Professor of Work and Employment , University of StirlingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/280922014-06-18T06:54:40Z2014-06-18T06:54:40ZNew federalism promise recedes on falling wave of state asset sales<figure><img src="https://images.theconversation.com/files/51512/original/t6qkys2t-1403071573.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The NSW Baird government is relying on asset sales to fund infrastructure, but all state governments have a revenue problem.</span> <span class="attribution"><span class="source">AAP/Dan Himbrechts</span></span></figcaption></figure><p>The fiscal relationship between the Commonwealth and the states in Australia’s federal system is unsustainable in the long term. That statement has been difficult to deny ever since the 1940s, when Canberra took over income tax from the states in order to pay for the war, and then refused to hand it back.</p>
<p>Since then all the states have muddled on, year after year, without effective control over their finances, and depending on the generosity of the Commonwealth in order to survive. The latest NSW budget, handed down by the Baird government so soon after the Abbott version, is just one illustration.</p>
<p>In principle the states have a revenue problem. Money comes in from a share of the GST, from extra grants for specific purposes from Canberra, and from various taxes and charges such as land taxes, stamp duty, car registration and public transport charges. Most states can keep things ticking over with this regime by constantly looking to trim expenditure and cut services. However, anything that needs a large chunk of capital, such as new infrastructure, needs the help of Canberra. </p>
<p>More significantly, the maintenance of old infrastructure, such as the existing railway system, or modernising old hospitals and schools, needs constant injections of capital, but tends to be a low priority for governments at both levels. </p>
<p>That is just postponing a problem till the crisis hits. The Abbott federal budget signalled the states will need to become more self reliant. Quite simply, they can’t. Well, at least not without the loss of services that citizens have come to expect – and vote for.</p>
<h2>Selling the family silver</h2>
<p>Where to get more capital? Of course the states can always borrow, but, although our levels of government debt are low by international standards, they are high enough to cause some anxiety about servicing the interest payments, and besides, any borrowing needs the permission of the Loans Council where the voice of the Commonwealth is very strong. </p>
<p>In recent years state governments have been attracted to Public-Private Partnerships (PPPs) where they invite private enterprise to, for example, to put in the capital to build new roads or tunnels, and collect tolls from users. </p>
<p>Unfortunately, this means that governments lose control of the projects, and there have been a number of unfortunate PPP failures, prompting caution. Another recent solution at all levels has been to sell off government-owned enterprises to private enterprise. This promises an instant sugar hit of capital that can be used to pay for high ticket budget items. </p>
<p>The Baird government wants to sell off the remaining electricity power generation resources to pay for significant infrastructure spending. However, this means foregoing the income from those enterprises in the future, so is eroding the revenue base in the long term. </p>
<p>One advantage that is often suggested is that private enterprise operates in a competitive environment, so there is likely to be some advantage to consumers in lower prices. Maybe, but we are nearing the time when the only resources left to sell off will be public schools and hospitals. Who would want to buy them? And if someone did buy them, consumers will pay more for their services.</p>
<h2>The receding promise of “new federalism”</h2>
<p>Most Commonwealth governments over the last half century have come to office with some promise of a “new federalism”. This has usually meant that states will be encouraged to give up some competencies in exchange for greater security in those that remain.</p>
<p>Robert Menzies took over the costs of university systems with the general agreement of the states; Tony Abbott wants to get rid of that burden, which is now completely beyond the power of the states. The Whitlam government introduced a comprehensive system of medical and hospital insurance, which successive governments have eroded, even though the states do not want to take up the slack. </p>
<p>The John Howard government wanted the states to abandon their power over industrial relations, while it introduced the GST, promising that a fair share would be returned to the states. The Rudd-Gillard governments tried to reinvigorate education funding with the Gonski education reforms, while the Abbott government wants to hand any such programs back to the states. </p>
<p>There are suggestions that Abbott will accommodate an increase in the rate of the GST, but only if the states will take the “blame” for it. As long as any “new federalism” is merely part of the short term policy of the incumbent Canberra government (of whatever colour) there is no future for this way of proceeding. Buck passing remains the dominant paradigm. Responsible government? Contemporary federalism means that governments at all levels are fundamentally irresponsible.</p>
<h2>Reviving a healthy relationship</h2>
<p>What can be done to revive a healthy federal relationship? Some people would like to abolish the States, but, as attractive as that idea may be in some respects, it is not going to happen short of a revolution. This is not a battle between Labor and the Coalition; <strong>any</strong> government in Canberra is reluctant to give further autonomy to the states and territories. </p>
<p>At some stage state premiers and treasurers are going to have to put aside party allegiances and differences to demand that Canberra recognise the problem and provide long term guarantees about which level of government has responsibility (and the money) for what. After all, that is no more than their predecessors in the 1890s thought that they were doing when they were writing the Australian Constitution. </p><img src="https://counter.theconversation.com/content/28092/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Hogan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The fiscal relationship between the Commonwealth and the states in Australia’s federal system is unsustainable in the long term. That statement has been difficult to deny ever since the 1940s, when Canberra…Michael Hogan, Associate Professor and Honorary Associate, Department of Government and International Relations, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/188692013-10-06T19:27:32Z2013-10-06T19:27:32ZFunding the future after the demise of PPPs<figure><img src="https://images.theconversation.com/files/32484/original/vjm9ndg6-1380868919.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Languishing: the Newleaf housing project in south west Sydney shows the pitfalls of the NSW government's love affair with public private partnerships.</span> <span class="attribution"><span class="source">Author</span></span></figcaption></figure><p>With the Coalition government abolishing the <a href="http://www.news.com.au/national-news/commonwealth-agencies-to-be-cut-by-abbott-government/story-fncynjr2-1226724733088">Major Cities Unit</a> and the NSW planning system in <a href="http://www.smh.com.au/comment/smh-letters/sloppy-and-flawed-planning-laws-disgrace-nsw-government-20130813-2ruik.html">disarray</a>, last week’s International Society of City and Regional Planners congress, ‘Frontiers of Planning: Evolving and declining models of planning practice’, seemed timely. Looking back, perhaps one of the greatest urban, economic and social planning failures of the last decade in NSW were large public–private partnerships (PPP).</p>
<p><a href="https://db.tt/xnvGPOkw">Research launched</a> at the congress shows that PPPs are dying a slow death in Australia. No matter how hard they try, governments of varying political persuasions just can’t seem to get the government intervention to free market economics relationship right. And nothing illustrates this better than the Bonnyrigg Living Communities Project (BLCP), in Sydney’s south-west.</p>
<h2>The failure of PPPs</h2>
<p>PPPs are used to provide large-scale infrastructure (roads, tunnels) and social services (hospitals, prisons) formerly considered the remit of government. They exemplify the withdrawal of the welfare state and the rollout of neoliberalism. </p>
<p>Between 1988 and 2006, 133 PPPs were in various stages of development in Australia, with the majority of these - 101 - occurring between 2003 and 2006. They have been taken up with particular enthusiasm by NSW (59) and Victoria (34). But the fate of NSW’s large PPPs is now clear.</p>
<p>The developer managing Sydney’s Cross City Tunnel was in <a href="http://www.smh.com.au/nsw/nsw-government-to-shoulder-risk-of-10b-westconnex-motorway-20130618-2of2f.html">receivership</a> by 2006. The failure of this project sparked a parliamentary inquiry focused on the outstanding debt (reported to be $560 million) and questioned the role of government in the collapse of the company and a possible bailout. In 2010 the developer managing Sydney’s Lane Cove Tunnel was in receivership (with an outstanding debt reported to be $1.14 billion).</p>
<p>In February 2013, property group Becton, the developer for Sydney’s Bonnyrigg Living Communities Project (BLCP) entered into limited receivership, amid question marks around the completion of the public-private housing project.</p>
<h2>The Bonnyrigg experiment</h2>
<p>Bonnyrigg, in Sydney’s south west, is the site of $733 million redevelopment of an 81-hectare state government-owned public housing estate, called Newleaf Communities. It is an interesting case because it involves the private-sector managing infrastructure and social welfare objectives. The BLCP was NSW’s first public housing estate redevelopment by PPP. </p>
<p>The residential suburbs surrounding the estate experienced significant median house prices increases between 1998 and the announcement of the PPP in 2004. Bonnyrigg Town Centre, adjacent to the estate, is well connected to two important growth cities, Liverpool (7 km from Bonnyrigg) and Parramatta (17 km from Bonnyrigg). Parramatta and Liverpool are set to become major transport hubs and employment cities over the next 25 years under the <a href="http://strategies.planning.nsw.gov.au/Portals/0/Documents/1_Draft_Metro_Intro.pdf">Sydney Metropolitan Strategy</a>.</p>
<p>The PPP, made up of Becton, Westpac Banking Corporation Limited, St George Community Housing Association and the Spotless Group would replace 833 existing public housing dwellings with 2330 new homes and included the design and construction of social housing and private dwellings. The public dwellings were poorly maintained by the state government in the years proceeding the PPP. The private dwellings were to be sold by the developer on the open housing market. The management of public housing tenancies was transferred from Housing NSW to St George Community Housing Association under contract to the developer.</p>
<p>The social objectives included building community, reducing social exclusion and addressing unemployment. These social objectives were clearly outside the scope of other Australian PPPs. There is no implicit commercial imperative to drive developers to address social exclusion or unemployment. Commercial (market) incentives to address these social objectives must be created by governments.</p>
<p>As an incentive, the NSW government focused on the possible sale of the new private dwellings on the open housing market as a way of contracting the developer to meet these social objectives. The ratio of public to privately owned housing stock on the site was to be reduced from the 2004 ratio of about 90% public and 10% private to about 30% public and 70% private. Some of the private housing stock is now occupied, while other dwellings have been sold off the plan.</p>
<p>But by February, it appeared that Becton was in danger of becoming the victim of a large exposure to the financial fallout of 2008 which had forced it to refinance. By then the tide had already turned on PPPs, with NSW Treasurer <a href="http://www.smh.com.au/nsw/nsw-government-to-shoulder-risk-of-10b-westconnex-motorway-20130618-2of2f.html">Mike Baird</a> arguing that the global financial crisis had significantly changed financial markets and the viability of PPPs in NSW. </p>
<p>“We have seen a marked reduction in both the amount of private capital available and the level of risk the private sector is prepared to take,” Baird said, while announcing it would solely fund the first leg of the $10 billion Westconnex. Prime Minister Tony Abbott, <a href="https://theconversation.com/tony-abbott-the-situational-keynesian-17918?utm_medium=email&utm_campaign=Social+Impact+Metrics+Report+from+The+Conversation+September+2013&utm_content=Social+Impact+Metrics+Report+from+The+Conversation+September+2013+CID_8f03b20822e31656e01c5389ff42baae&utm_source=campaign_monitor&utm_term=Tony%20Abbott%20the%20situational%20Keynesian">the situational Keynesian rather than Hayekian economic rationalist</a>, has since also assured federal funding for the motorway.</p>
<h2>Government as the lender of last resort</h2>
<p>The circular nature of property markets means that the government intervention to free market economics relationship is always provisional. Property markets will boom and crash, homeowners will secure and default on home loans, banks will rise and fail and property developers will make millions and then go bust.</p>
<p>But it is governments, not businesses, that will pick up the pieces when developers and banks fail. In the BLCP, the downfall of the developer means that the state government will have to intervene. There are reports the state government and partner is attempting to <a href="http://www.theaustralian.com.au/business/property/receivers-vex-becton-privatisation-plan/story-fn9656lz-1226633405136">sign up a new developer</a> to complete 15 of the 18-stage project.</p>
<p>In the meantime, public tenants’ lives have been seriously disrupted, new private homeowners are living in a half completed housing project and those who have bought houses off-the-plan are in a state of limbo.</p>
<p>The <a href="https://db.tt/xnvGPOkw">lessons of the BLCP</a> for social, urban and economic planning include the need to seriously consider the short-termist and often utopian contractual relationships between the government and the private sector. </p>
<p>The dystopian reality of many Sydney-based PPPs provides a poignant reminder about the dynamics and dilemmas between government intervention to free market economics.</p><img src="https://counter.theconversation.com/content/18869/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dallas Rogers receives funding from the Australian Housing and Urban Research Institute (AHURI).</span></em></p>With the Coalition government abolishing the Major Cities Unit and the NSW planning system in disarray, last week’s International Society of City and Regional Planners congress, ‘Frontiers of Planning…Dallas Rogers, Research Fellow - Urban Research Centre, Western Sydney UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/117642013-02-05T02:51:42Z2013-02-05T02:51:42ZAll in the delivery: is there really a problem with how Victorians pay for infrastructure?<figure><img src="https://images.theconversation.com/files/19774/original/s96fcxbb-1359676185.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Criticisms of secrecy around infrastructure tendering fail to properly acknowledge the realities of costing and managing major projects.</span> </figcaption></figure><p>One of the initiatives in the Victorian government’s economic statement released late last year was a decision to change the arrangements for announcing the cost of major infrastructure projects.</p>
<p>Until now the practice by successive governments has been to announce the estimated cost of a project <em>before</em> it goes to the market. The government’s intention is to now announce the cost <em>after</em> a tender has been finalised.</p>
<p>This sensible suggestion was criticised by <a href="http://www.theage.com.au/victoria/baillieu-hides-project-costs-20130114-2cpsw.html">Fairfax Media’s Josh Gordon</a>, followed by an editorial, as an attempt to keep secret the cost of infrastructure projects and a process lacking transparency.</p>
<p>These criticisms fail properly to acknowledge the realities of costing and managing major projects. </p>
<p>The issue of the costs of public infrastructure is undeniably of significant public interest. When projects costs blow out they are legitimately the focus of media interest and criticism by the Opposition of the day.</p>
<p>Policymakers have several objectives to meet in designing a process for the costing and delivery of major projects. Critically they need to balance achieving best value for money for taxpayers through negotiations with private sector builders and contractors with ensuring transparency so the public can judge if the project achieved its objectives.</p>
<p>The new process is in the public interest because the announced cost of a project will now be one which has been actually tested in the market-place not one which has been estimated by government departments at a particular point in time.</p>
<p>Two examples illustrate the different aspects of the points I am making. In the mid 1990’s, after a design competition the former Kennett government announced that the Federation Square Project would cost in the order of $110 million.</p>
<p>By 1999, in part due to scope changes, the “cost” had increased around $290 million. This increase was criticised by the then Opposition and media as a cost blow-out. On assuming Office the Bracks Government undertook a review of the project costs and eventually determined a worst-case scenario of $410 million. In the event it came in at around $470 million.</p>
<p>Bracks was criticised on the same grounds that he had applied to Kennett. Even though the project did go over budget, the criticisms were a somewhat disingenuous given that Bracks was faced with the immensely difficult problem of managing the delivery of a project which was well underway and had not been properly costed in the first place. </p>
<p>Similar issues arose with the so-called Rectangular Stadium in the Olympic Park precinct. In 2004 prior to determining the scope of the project, the Bracks Government announced that the Stadium would cost $100 million. In 2006 after some design work had been done the cost was revised to $190 million. It was revised again in 2008 to $267.5 million when capacity was increased from 20,000 to 30,000 people. The then Opposition and the media characterised the project as a cost blow-out.</p>
<p>Had the Bracks government not announced the cost of the project until after the successful builder had been determined and made periodic reports on scope changes materially affect costs, the Stadium would have been seen to be delivered substantially on budget.</p>
<p>This issue is more than just the jockeying between Governments and Oppositions both being encouraged by often sensationalist media reporting. At its heart lies the need to provide reliable information to the public which has neither the time nor inclination to follow the details of changes in the costs of a project and no basis to understand the reasons for such changes.</p>
<p>Taken at face value the new process is more transparent than the one it is replacing.</p>
<p>It makes sense that the public should be made aware of both the scope and cost of a project <em>after</em> a builder has been selected rather than <em>before</em>. It would also be in the public interest for governments to report on any changes in project scope and associated costs involved. This could be done as part of the normal budget process or through announcements by the responsible Minister.</p>
<p>Combined with a rigorous assessment of departmental business cases through what is called the “Gateway process” (introduced by the Bracks government and refined by the Baillieu government), this decision should improve the robustness of decision-making regarding major infrastructure projects.</p>
<p>Given that the Auditor-General has the power to get access to any documents held by Departments including Cabinet submissions, a process where actual rather than estimated costs are used as the starting point for determining whether a project is on or over budget seems self-evidently reasonable. It could hardly be seen as lacking transparency.</p>
<p>One reason the Government has provided for this new approach is the expectation that it will lead to a more competitive bidding process. Whether this happens remains to be seen. However it is evident that, under the previous arrangements, bidders have generally ignored the costs specified in the press releases associated with initial announcements other than to see them as a “floor” price.</p>
<p>There are numerous areas where the public servants need to improve the skills required to manage of the delivery of infrastructure projects. Many of them have been identified in various reports by the Auditor-General. These include; the need to improve project specification, contract management, and stakeholder and community consultation processes to name just a few.</p>
<p>Announcing the cost of a project once it has been market-tested and hopefully providing updates on material changes as projects proceed should provide the basis of a framework for proper accountability for the delivery of infrastructure projects and should be welcomed. In any event it’s hard to see how this could be construed either as “hiding” the cost of projects or making the process “less transparent”.</p><img src="https://counter.theconversation.com/content/11764/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Yehudi Blacher is the Chair of the Port of Hastings Development Authority. The views expressed in this article are the author's alone and not those of the Authority. </span></em></p>One of the initiatives in the Victorian government’s economic statement released late last year was a decision to change the arrangements for announcing the cost of major infrastructure projects. Until…Yehudi Blacher, Professorial Fellow, Centre for Public Policy, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/108052012-11-16T04:09:00Z2012-11-16T04:09:00ZSpotlight back on PPPs as BrisConnections falters<figure><img src="https://images.theconversation.com/files/17736/original/hhjmqstp-1353037946.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The troubled BrisConnections again brings the role of PPPs into the spotlight.</span> </figcaption></figure><p>News that BrisConnections, which operate Brisbane’s Airport Link M7, has <a href="http://www.smh.com.au/business/brisconn-admits-to-significant-uncertainty-20121112-297e5.html">suspended trade on the ASX</a> as it continues to talk with its debtors is likely to again lead to a debate about the role of Public-Private-Partnerships - or PPPs - in providing government infrastructure. </p>
<p>PPPs have been criticised in the wake of several high profile failures including Sydney’s cross-city tunnel, Brisbane’s <a href="http://www.brisbanetimes.com.au/queensland/clem7-struggles-may-take-toll-on-airport-link-20120716-226ks.html">Clem 7 tunnel</a> and the consortium building the <a href="http://www.theage.com.au/victoria/ararat-prison-plan-revived-20120803-23jvf.html">Ararat prison</a> in Victoria, as well as the high cost to the public of PPPs undertaken in the 1980s and 1990s. </p>
<p>Supporters will argue that the PPP model works because ratepayers will be protected if the company that built and operated the tunnel fails.</p>
<p>Both sides are mistaken. Economic research suggests that PPPs can deliver better outcomes than traditional procurement but often governments choose PPPs for the wrong reasons and fail to take key steps to ensure their success.</p>
<p>Under public procurement, the government finances the construction phase of the infrastructure, tendering the construction to private parties. The operation and maintenance of the infrastructure also may be contracted to private parties. </p>
<p>Under a PPP, a government tenders a “bundle” consisting of financing, construction and operation to private parties. The contract is usually for a fixed period at the end of which the asset reverts back to the government.</p>
<p>An important advantage of PPPs is the potential efficiency gains from bundling the construction and operations/maintenance. </p>
<p>When bundling occurs, the winning firm minimises the total of construction and maintenance/operating costs. So design and construction are undertaken in a way to minimise the total cost of the project over its lifetime. </p>
<p>Another potential advantage from the involvement of private financing under a PPP is in avoiding the construction of politically motivated white elephants. Private parties will find it difficult to obtain financing for a project that is not commercially sound. Arguably, the PPP failures reported above could be related to the particular structure of those PPPs rather than the underlying economics of the projects.</p>
<p>There are also, however, wrong reasons for selecting PPPs over traditional procurement. For example, governments may favour PPPs over public tendering to alleviate its budget constraints. This argument is clearly wrong when PPPs involve direct government transfers, such as minimum income guarantees or other types of payments. It is also wrong to the extent that the PPP project is financed by user fees — a revenue stream which the government gives for the duration of the PPP contract.</p>
<p>Governments can be also attracted to PPPs because they perceive this model shifts the demand risk from the government to the private parties. This argument for choosing PPPs is erroneous for several reasons. Firstly, the private parties bearing demand risk do so in exchange for a risk premium. To the extent that they cannot influence demand, the government may be the best party to hold the risk. Secondly, the upshot of the financial difficulties with projects such as the M7 Airportlink is that it will be very difficult to find investors willing to finance similar ventures in the future.</p>
<p>Third, in a number of cases in Australia and overseas, governments have bailed out failed projects, for example, by renegotiating payments or taking equity stakes. In such cases governments ended up bearing at least some of the demand risk.</p>
<p>There are ways in which PPP tenders can be modified to allocate risk appropriately. For example, research developed over the past decade suggests a tender process that allocates risks appropriately. The key idea is to run a least-present value of revenue tender. The winner of the tender is the firm that has submitted the lowest required revenue (expressed in present value terms). The innovation of this process is that the duration of the concession is variable. </p>
<p>The contract only expires when the winner of the tender recovers the amount of revenue bid. This type of tender allocates the demand risk to the government, reducing financing costs and ensuring that the benefits of PPPs over public tender are realised. This approach has been successfully tested in Chile.</p>
<p>In the past decade, we have learned a lot about what works and what does not in PPPs. To avoid previous mistakes with PPPs, governments need to ensure that there is a robust process for evaluating PPPs. Moreover, closer attention needs to be paid in the design of PPP tenders and contracts, as suggested by both economic theory and international practice.</p>
<p><em>A longer version of this article is at <a href="http://apo.org.au/commentary/public-private-partnerships">Australian Policy Online</a>.</em></p><img src="https://counter.theconversation.com/content/10805/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Flavio Menezes does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>News that BrisConnections, which operate Brisbane’s Airport Link M7, has suspended trade on the ASX as it continues to talk with its debtors is likely to again lead to a debate about the role of Public-Private-Partnerships…Flavio Menezes, Professor of Economics, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/88232012-08-14T20:42:25Z2012-08-14T20:42:25ZLift the veil of corporate secrecy on public projects and save the taxpayer<figure><img src="https://images.theconversation.com/files/14229/original/v6q724nc-1344913448.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">NBN Co's $1.4 billion over-run is the latest public infrastructure project blow-out - we need to scrutinise government tendering and contracting processes much more carefully.</span> </figcaption></figure><p>The $1.4 billion cost blowout reported by the NBN Co last week has focused attention once again on the seemingly regular occurrence of large government infrastructure projects being delivered late and over budget. </p>
<p>Whether we look at the much touted Public Private Partnerships (PPP) frameworks championed by state and federal governments of all persuasions, or in the NBN Co. case, a government monopoly engaging with the private sector, the cost to the taxpayer invariably appears to be greater than first estimated. </p>
<p>Why might that be? Is it that we are systematically poor (in one direction) at estimating future costs? Or do political realities and parameters change? That there is a lot of risk and uncertainty in the world around us is certainly true, but why must it always be the case that the taxpayer is left with the “bill”? </p>
<p>Surely there must be something wrong with our government’s existing tendering and contracting processes that leads to this repeated occurrence. And there is. An alarmingly lack of both good governance and contract design, principles that we expect of the corporate sector, are only cursorily considered in the public sector.</p>
<p>Let’s deconstruct the problem a bit further. The most efficacious delivery of large infrastructure (and other government projects) will almost always involve some private sector engagement. The challenge is to garner that engagement on terms that create societal value. </p>
<p>The tendering guidelines that most public sector entities adopt recognise the value in harnessing competition. Recourse to elementary microeconomics suggests that competition amongst potential bidders “for the market” (that is, to win the right to have some monopoly power) will result in the same efficiency outcomes as competition “in the market”. The problem, in almost all real world contexts however, is what economists refer to as an “asymmetry of information”. If one side of the market - in this case the bidders (or worse yet, only some bidders, so we don’t even get the real positive effects of competition) - have information about the likely outcomes (costs/benefits etc) and the other side (the government) doesn’t, then we would expect the informed party to appropriate more of the rents.</p>
<p>Which is exactly what we observe when cost blowouts occur.</p>
<p>So, how can we resolve this inherent and systemic problem? Firstly, competition for the market (that is the terms on which government tenders are constructed) needs to be much more transparent. </p>
<p>Potential bidders need to be able to have equal access to information and the “commercial in confidence” veil needs to be tempered for the public good. Simply having many bidders involved in a tender, if they are not privy to the requisite commercial information, will not yield competitive outcomes.</p>
<p>Too often, government tenders satisfy a very rudimentary definition of competition, without significant thought in the design of the tender to ensure real competition takes place. Efficient, well designed government tenders are about good governance. </p>
<p>Secondly, and more importantly, we need to be much better at contract design where there is a large deal of uncertainty about future outcomes. The way much of the government contracting currently takes place, despite the political rhetoric to the contrary, is that the residual or contingent risk always sits with the state. </p>
<p>This need not necessarily be the case. Getting the right balance of incentives that mitigate any cost over-runs, and ensure a viable commercial return to the private sector requires much more detailed tender and contract design than currently takes place. Payments for outcomes that capture risk and uncertainty are a staple of financial markets and business to business interactions. </p>
<p>Yet, government to business interactions seem to be devoid of the same detailed considerations. Not surprising, then, that time and time again, our political masters tell us that they have negotiated a great deal with the private sector, only to find that the realised costs are often way more!</p>
<p>The risky uncertain world in which governments attempt to deliver infrastructure and other social projects with private sector involvement necessitates a complete revamp of our tendering and contracting methods. </p>
<p>We need to design systems that harness competition by mitigating the risks of asymmetries of information, and contracts that allow for risk and uncertainty to be shared.</p>
<p>Unfortunately, to date, political expediency has trumped sound economic analysis and design. There is unlikely to be too much consternation from the private sector as a result of the latest cost blowout in a government tendering process, but an informed citizenry ought to be demanding much better from its political masters. </p>
<p>Because if we don’t we will continue to be left with the bill. And it will always be more than we were initially told it would be.</p><img src="https://counter.theconversation.com/content/8823/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Vivek Chaudhri does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The $1.4 billion cost blowout reported by the NBN Co last week has focused attention once again on the seemingly regular occurrence of large government infrastructure projects being delivered late and…Vivek Chaudhri, Associate Professor, Department of Management, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/52952012-02-13T03:23:26Z2012-02-13T03:23:26ZMind your PPPs: how to avoid the pitfalls of the public-private partnership model<figure><img src="https://images.theconversation.com/files/7522/original/spphdkdc-1328827339.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Sydney's Cross City Tunnel is on the brink of bankruptcy for the second time.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Public-private partnerships (PPPs) have been in the spotlight recently, but seemingly, for all the wrong reasons. The NSW government, which has a particularly chequered history with PPPs, announced this week that it would bail out the <a href="http://www.reliancerail.com.au/Page/Home.aspx">Reliance Rail consortium</a> (a joint partner in the troubled <a href="http://www.railcorp.info/about_railcorp/rollingstock_public_private_partnership/contract_summary">Waratah project</a> to the tune of $175m in return for 100% of its equity. Days later, that same government flagged that the <a href="http://www.crosscity.com.au/">Cross City Tunnel</a> could <a href="http://www.smh.com.au/nsw/no-light-at-the-end-of-the-cross-city-tunnel-20120207-1r2mq.html">enter receivership for the second time,</a> due to a dispute over a $60 million stamp duty bill. </p>
<p>Former NSW Premier and Infrastructure NSW chairman Nick Greiner has called on the government to <a href="http://afr.com/p/national/greiner_urges_ppp_rethink_Gg9Qr718tXu1y9lzecis4K">overhaul its approach to PPPs</a>, and warned against the perils of using a “one size fits all” approach to the model. Professor Graeme Hodge, director of the Monash Centre for Regulatory Studies, argues that PPPs present challenges for both the private and public sectors. </p>
<hr>
<h2>Let’s focus on the PPP infrastructure model that tends to exist in Australia. Under what conditions is this model viable?</h2>
<p>Public-private partnership is in many ways, a brandname. Australian governments use the label PPP to describe a situation where they have a policy to privately fund large pieces of infrastructure through bundled contracts with a consortium. Having said that, there are different approaches in different states. In fact, there are as many different versions of PPP as there are governments and projects in Australia. It’s really difficult to say the conditions in which they work best, because there are so many different contract types for different projects. In the case of big projects, risky projects - some work well, some don’t. </p>
<h2>So, with regards to the failed PPP between Reliance Rail and the NSW state government, would you say that has a lot to do with poor political governance and management of the project?</h2>
<p>Yes. If we go back to the NSW case, certainly I think NSW governance arrangements were less mature then they should have been. The political maturity that was shown when the project was signed up was low, in my opinion. I think they’re learning as they’re going through and, quite rightly, it’s being seen as a political failure. </p>
<h2>Obviously, there are challenges for both sectors in the PPP model. </h2>
<p>Yes - there are challenges for both sectors. Both the public and private sectors probably need to get used to the fact that these things require a higher degree of transparency than either might like. The partnership needs to include citizens, not just be a two way deal. Governments make decisions on behalf of citizens and the private sector, if it wins a bid, needs to get used to the fact that their information, their wins, their commercial secrets, are going to be challenged as being important to know in the public interest. Both have to get used to transparency.</p>
<p>There’s also the continual management challenge for both sectors, because with any large project, a large part of the success that’s achieved is dependent on how competent the difficult management and coordination arrangements are.</p>
<p>Governments, too, need to meet the challenge of being more creative in how they structure and how they experiment with the PPP idea. The idea of governments cooperating with the private sector is of course not a new idea at all. And moving forward, the idea of governments continuing to collaborate with business is very sensible. But governments need to be far more creative in how it might use its own public funds with sensible, legal and institutional arrangements, to get infrastructure built. At the moment, each government has a very particular idea to what is best. What I’m suggesting is that there are many, many ways for governments to sensibly build infrastructure. There are many options ahead; it just depends on how creative governments want to be to solve the problem. </p>
<h2>Do you think it also comes down to the government providing better incentives for private firms to perform and deliver projects in an efficient fashion?</h2>
<p>No. It’s tricky to get the right balance between paying incentives to get things delivered on time and on budget. It’s also tricky to get the right balance in getting governments to provide PPP information transparently. It’s all part of this larger experiment, however. There are clearly cases in Australia and certainly, cases internationally, where private investors have made a killing and governments have virtually outsourced their brains and behaved in a silly way. </p>
<p>Having said that, however, if you look at the various projects that have failed around Australia, private investors have taken a haircut. They’ve made silly decisions and governments may well end up getting large pieces of infrastructure built at very reasonable prices. These have been cases where, before the global financial crisis, private investors reckoned that PPPs were a license to print money. They now realise that these project investments take on risks. And, if they’ve badly misjudged those risks, they are the ones who take on the loss - not the government.</p><img src="https://counter.theconversation.com/content/5295/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Graeme Hodge does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Public-private partnerships (PPPs) have been in the spotlight recently, but seemingly, for all the wrong reasons. The NSW government, which has a particularly chequered history with PPPs, announced this…Graeme Hodge, Professor of Law, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.