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Big ticket infrastructure projects may woo voters, but it’s value-for-money that matters

Value-for-money is a concept that surprisingly isn’t at the forefront of infrastructure planning. Image sourced from www.shutterstock.com

Big ticket infrastructure projects may woo voters, but it’s value-for-money that matters

Value-for-money is a concept that surprisingly isn’t at the forefront of infrastructure planning. Image sourced from www.shutterstock.com

It is hotly tipped the federal government will announce new funding for infrastructure projects in next week’s Federal Budget, while in Victoria, the Daniel Andrews-led Labor government has promised major transport initiatives that include funding a $10.9 billion Melbourne Metro rail project.

It is almost certain that there are valuable lessons that can be learned on the best way government can pay for these infrastructure promises and how these long-term assets should be managed by our bureaucrats.

Across the globe, poorly managed Public Private Partnerships (PPPs) are resulting in governments paying private partners hundreds of millions of dollars - and even billions - for services that don’t fully address intended social needs, and from failing to manage under-performing public services.

Effective operational oversight of PPP contracts is paramount in delivering intended value-for-money outcomes.

However, the extent to which contracts are being effectively managed during the concession period (when public services are actually being delivered) is largely unknown beyond tiny cabals of government insiders. There has been wide-ranging criticism of transparency in PPP decision-making for decades now, which has hampered constructive public debate about this procurement model, championed by successive federal and state governments.

If genuine value-for-money outcomes are to be achieved, suitable resources must be allocated to PPPs to which governments are already committed, in order to increase the likelihood that services will be delivered as intended, and that expectations, as set out in those business cases, are met. Doing so will likely raise public confidence in the ability of Australian governments to deliver effective outcomes.

At present, we can only really rely on findings from auditors-general and media scrutiny as a yardstick, and this reveals only part of the bigger picture.

When governments take decisions to deliver infrastructure through PPPs, policy-makers and other influential stakeholders often direct public attention towards the assets – such as hospitals, schools, prisons - that will be created to deliver services. The design of these buildings, particularly those that result in innovative practices to reduce costs, or improve efficiency or user experiences, are often central themes for selling PPPs as value-for-money investments.

The significance of these benefits are not easily disputed – there are many examples of stylish and fit-for-purpose buildings procured through PPPs. High profile Australian projects such as the Victorian Comprehensive Cancer Centre, New South Wales New Schools Privately Financed Project, Melbourne’s Southern Cross Station and the Victorian Desalination Plant are just a few.

But assets are simply that: assets. Value-for-money is not realised once construction is completed. Value-for-money trickles into communities over long periods of time, typically 25 years or more, depending on the length of individual concession agreements. Within this context, PPPs and attainment of value-for-money should be recognised as a long game, where the real return on investment will be known only at projects-end. Such “realisation” is not easily quantifiable at the outset despite arguments to the contrary.

The extent to which value-for-money outcomes are obtained across all PPPs will inevitably be variable. Some projects will deliver more value than others. To a large extent, achieving value-for-money is contingent upon circumstances, and the ability and willingness of governments and their private sector counterparts to work together to achieve stated business case objectives.

For example, delays, cost overruns and contractual disputes reportedly amounting to tens of millions of dollars impacted on the Southern Cross Station redevelopment and ultimately affected the parallel delivery of commuter services.

It’s important for governments to consider enforcement of contractual clauses or to take a more collaborative approach to decision-making.

In PPPs, such decision-making can have far reaching consequences and there will be many risks and challenges that governments face during service delivery – frequently and over a long period of time – not least because services are delivered non-competitively for the duration of the concession period.

Power dynamics between public and private partners can change - the bargaining power of a private partner may increase due to the knowledge that even if services are performed at a sub-optimal level, the public partner may decide not to enforce abatement. Using the Southern Cross Station redevelopment again to illustrate, the Southern Cross Station Authority (the public entity responsible for managing contractual performance on behalf of the State), enforced only one service payment abatement during the first year of operations even though the private partner failed to meet its performance targets in three out of four financial quarters.

The Authority held the view that it was preferable that the private partner be given an opportunity to resolve operational lapses, as it was expected that such decision-making would help to build a “positive ongoing working relationship” between the partners.

These decisions may be also taken by the public partner due to the expected cost of litigation outweighing the value of an abatement (even if under-performance regularly occurs). Alternatively, the public partner may accept contract variation proposals from a private partner without first establishing a clear business case need for doing so or failing to undertake an appropriate level of due-diligence.

The New South Wales New Schools Privately Financed Project provides an example of the latter, where parents raised concerns with the Department of Education over the quality of the private partner’s services soon after operations started. After investigating the complaints, the Department terminated the out-of-school-hours’ care services (triggering a costly variation to the concession agreement).

Although these issues may not typically be the norm in the vast majority of PPP projects, there are other material risks more commonly associated with failure to extract intended value-for-money outcomes, both here in Australia and abroad.

This includes risks from inexperienced government contract management teams that are employed by senior public sector officials to oversee contractual performance on behalf of the communities they represent (as reported by the Organisation for Economic Co-operation and Development). Inexperience may manifest in failure to detect under-performance or apply the correct remedies.

Other associated risks can arise from inadequate governance structures and reporting mechanisms which may lead to poor decision-making.

I researched this topic as part of my doctorate, interviewing senior practitioners from the United Kingdom and Australian governments as well as the private sector, to develop a customisable governance model for operational PPPs.

In order to achieve value-for-money, it is therefore crucial that decisions taken by public officials maximise the potential for the best possible returns for taxpayers and other intended stakeholders – as articulated in business cases.

By providing demonstrable progress in delivering intended outcomes, and by admitting past mistakes (including subsequent implementation of well-considered plans to address performance shortfalls), governments are more likely to receive wider community support and increase their capacity to take the public with them on the “infrastructure journey” - using private finance - that we often hear so much about.