Barr to use PPPs to shovel debt off the balance sheet

By 19 December, 2013 13

Andrew Barr has announced he’s going to use Public Private Partnerships to fund his grand plans:

The Government has released a new procurement framework to help engage the private sector to help deliver major infrastructure projects. These performance driven contracts will help ensure major projects are completed on time and on budget.

PPPs typically include a capital component and an ongoing service delivery component. They generally involve high levels of risk transfer to the private sector and high levels of integrated delivery including design, construction, maintenance, operations, and private sector financing.

It is anticipated that this approach will help stimulate the local economy and encourage jobs growth by facilitating the delivery of large scale projects across the Territory.

Attorney General Simon Corbell and I are pleased to announce that the redevelopment of the Supreme Court will be the first major infrastructure project delivered under the new PPP framework. Other projects being considered include Capital Metro, the ‘City to the Lake’ project, and the University of Canberra Public Hospital.

Estimated cost savings of 11.4%, on average, can be made under a PPP compared to traditional procurementmethods.

Using the PPP model also helps ensure facilities are well maintained and efficiently operated under long-term commitments between the government and private sector.

It’s those “long-term commitments” that are going to bring the corporations the returns they want.

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13 Responses to Barr to use PPPs to shovel debt off the balance sheet
#1
HiddenDragon12:35 pm, 19 Dec 13

“They generally involve high levels of risk transfer to the private sector ….” – and I believe in Santa (and everything I read in my undergraduate textbooks), too – weally, twooly, I do.

#2
johnboy12:47 pm, 19 Dec 13

If there is a risk transfer it comes at a high price.

#3
magiccar912:56 pm, 19 Dec 13

These performance driven contracts will help ensure major projects are completed on time and on budget.

Is he subtly admitting that sole Government projects are regularly over due, and over budget? Sounds like it to me….

The private sector shouldn’t be relied upon because out Public Service friends can’t organise their sh*t and keep things under control.

#4
rosscoact1:31 pm, 19 Dec 13

Private sector will invariably do things at a lower cost than the government.

If all things are equal then that’s of benefit to the community. It’s where things are not equal e.g. where market failure exists that government must step in.

Great result for infrastructure, poor result for social services.

Risk premiums cost, no matter who accepts the risk.

#5
Deref1:37 pm, 19 Dec 13

johnboy said :

If there is a risk transfer it comes at a high price.

The private sector is not stupid, whatever else they may be. The risk is well and truly factored into the cost, which is why these corrupt “partnerships” cost so much more. It’s simply the age-old process of privatising the profits and socialising the losses.

#6
Skidbladnir2:10 pm, 19 Dec 13

rosscoact said :

Private sector will invariably do things at a lower cost than the government.

Fallacy.
Private industry has the advantage of externalising certain unknown-at-the-time, or undisclosed costs back onto government by stealth or inaction, which aren’t revealed until long after the contract period.
(Ie: cost savings of using/removing asbestos…)

#7
housebound6:52 pm, 19 Dec 13

Skidbladnir said :

rosscoact said :

Private sector will invariably do things at a lower cost than the government.

Fallacy.
Private industry has the advantage of externalising certain unknown-at-the-time, or undisclosed costs back onto government by stealth or inaction, which aren’t revealed until long after the contract period.
(Ie: cost savings of using/removing asbestos…)

Yep – just look at the success of the harbour tunnel and other PPP projects around Australia. Someone always loses.

By the way, perhaps Mr Barr MLA would like to release his source for the alleged 11.4% saving.

#8
HiddenDragon11:05 pm, 19 Dec 13

johnboy said :

If there is a risk transfer it comes at a high price.

Precisely – they won’t be doing it out of the goodness of their hearts (why on earth would they if they want to keep their jobs), and the government negotiators would need to get up very early in the morning to outsmart them.

#9
CraigT6:41 am, 20 Dec 13

rosscoact said :

Private sector will invariably do things at a lower cost than the government.

You then go on to contradict yourself by talking about “market failure”.

Maybe you don’t know what “invariably” means? UC graduate, perhaps?

The US Healthcare system is a prime example of right-wing privatisation gone mad: healthcare is essentially twice the cost of ours in the US, thanks to privatisation:
http://finance.yahoo.com/news/america-health-system-stacks-against-091500353.html

http://www.mckinsey.com/~/media/McKinsey/dotcom/Insights%20and%20pubs/MGI/Research/Health%20Care/Accounting%20for%20the%20Cost%20of%20US%20Health%20Care%20-%20Why%20Americans%20spend%20more/MGI_Accounting_for_cost_of_US_health_care_full_report.ashx

Incidentally, everytime they increase the private health insurance rebate or spend public money on schemes designed to force more people to get involved with unnecessary and wasteful private insurance, they are trying to get us closer to the US system.

#10
dtc9:58 am, 20 Dec 13

PPPs basically mean that instead of the govt having to come up with the money and suffer the bad publicity of budget deficits, the private sector comes up with the money and recoups the money from the public over time.

Notwithstanding that invariably the public sector can borrow money far cheaper than the priviate sector, and the public sector doesnt have to make a profit.

No major infrastructure projects are done ‘by’ the public sector. Its all built by the private sector, so any arguments about who is more efficient are out of date because its all the private sector anyway. Its purely a matter of funding.

#11
maxblues10:38 am, 20 Dec 13

dtc said :

PPPs basically mean that instead of the govt having to come up with the money and suffer the bad publicity of budget deficits, the private sector comes up with the money and recoups the money from the public over time.

Notwithstanding that invariably the public sector can borrow money far cheaper than the priviate sector, and the public sector doesnt have to make a profit.

No major infrastructure projects are done ‘by’ the public sector. Its all built by the private sector, so any arguments about who is more efficient are out of date because its all the private sector anyway. Its purely a matter of funding.

Check out the fiasco of the Edinburgh Tram… Private enterprise can’t always deliver the quixotic dreams of a few politicians. Only half the project delivered at three times the budget (over a £billion, much of it interest).

#12
AndrewB2:00 pm, 20 Dec 13

A bit of a misunderstanding of the point of PPP’s here….

Whilst PPP’s can attract off-balance sheet treatment, that isn’t really the point of them, and shouldn’t be the reason to do (or not do) one. Credit rating agencies will ‘look through’ the project deed (to which the private sector financing is tied) and factor the PPP debt number into their thinking around overall government gearing.

For the same reason, arguments that ‘the government always has a lower cost of borrowing than the private sector so they’re a bad idea’ also misses the point a bit – financing cost is but one aspect.

What you are really buying is a turnkey solution to build, operate, and – critically- maintain an asset through-life. This means that the condition of the asset at hand-back will be much better than it would be if Government borrowed in the bond market to build and own, and then left the asset to start deteriorating from Day 1 because there was no money in a deficit Budget for ongoing maintenance capex.

As to risk and profit – well yes, of course. Private sector investors want an appropriate risk-return on their capital. Profit makes the world go around. Profit is actually a good thing, not some evil to be feared- if there is no return you’ll either get no investment in the first place or a substandard product at the end.

Deref in particular -are you kidding? Privatise the profits and socialise the losses? You need to get out of Canberra more. What do you think happended on the various toll road PPP’s that have failed? Equity and debt providers took a bath and the taxpayers will end up with a fantastic asset for a song.

That by the way is why a PPP for the light rail will only ever be looked at by the private sector on an ‘availability’ basis rather than a ‘patronage’ basis – the private sector has been burned too many times by overly optimistic projections (not that these were all the fault of Government of course.) Like everything else in business (and in life) it’s just about getting the risk-return balance right.

#13
HiddenDragon2:58 pm, 20 Dec 13

AndrewB #12 said (inter alia) “and then left the asset to start deteriorating from Day 1 because there was no money in a deficit Budget for ongoing maintenance capex.” – so if the asset is owned and managed by the Government, maintenance funding might be squeezed due to Budget pressures, but if it’s managed under a PPP, the money for the annual fee(?) to the private operator will have to be found because that’s a contractual obligation – and the private operator won’t be tempted to cut corners to increase profit, knowing that the asset will evenutally be handed back to the Government? And there’s no risk that the Government resources devoted to managing and monitoring the contract with the private operator will be squeezed by the same Budget pressures?

I don’t have any problems with the basic idea that the private sector can sometimes do these sorts of things more efficiently and effectively than Government, but I think there might be just a little bit of gilding the lily going on here.

Given the time of year, I am choosing to take encouragement from the comment about light rail.

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