March 2004

Pros and cons of Public Private Partnerships

Increasingly governments are using Public Private Partnerships (PPPs) to finance public infrastructure projects. ANF Federal Industrial Officer Nick Blake looks at the pitfalls and possibilities of PPPs.

In December 2003, the Australian Nursing Federation joined the Community and Public Sector Union, the Australian Education Union and the Rail, Tram and Bus Union to commission a report on the impact of PPPs in Australia.
Prepared by Strategic Economics, the report highlighted many of the potential pitfalls with PPPs and concluded they were often costly for governments and led to reduced public services.

What are PPPs?
PPPs may be broadly defined as financial arrangements between governments and the private sector, where the private sector provides financial and other forms of capital to fund the construction and maintenance of government services including schools, hospitals, water supplies and road and rail networks.

Traditionally, governments drew on government revenue (including taxation and government bonds) to pay for these types of infrastructure and services.
However, over the past twenty years, governments have sought to utilise partnerships between the public and private sector as a means of bringing more private money into the provision of public infrastructure and services.
State governments in particular have embraced PPPs as an important mechanism for financing infrastructure and services without having to increase taxation or run budget deficits which would be politically unacceptable.

PPPs can be distinguished from privatisation because in the case of PPPs, the government retains a level of control over the service and often assumes full control at a time agreed between the parties.

Possibilities
Typically, governments support PPPs because they potentially offer the following:

• The ability to provide a community service much earlier than would be the case if the service were to be fully paid for by government;
• Reduced upfront financial costs for the service;
• Improved focus on service delivery, by reducing the time and effort that a government agency spends on property related matters;
• A requirement only to pay for services when they are delivered;
• Access to the best technical and management skills from both the public and private sectors; and
• Improved outcomes by using competitive forces to stimulate creativity, pricing and delivery.

Pitfalls
Critics of PPPs argue that:

• The raising of capital through PPPs may actually be more expensive than government directly borrowing the necessary capital;
• When investing in government infrastructure, the private sector demand higher profits which in turn results in higher costs to the government and the community;
• PPPs are sometimes inappropriately applied and poorly understood; and
• PPPs can hide behind commercial-in-confidence clauses that reduce the community's capacity for scrutiny.

Critics also dispute the argument that the private sector is more innovative and efficient than the public or government sectors. Recent large-scale corporate failures such as Ansett, HIH and AMP clearly illustrate that good management practices are sometimes lacking in the private sector.

PPPs and public health
PPPs in public health have had a chequered history and have been characterised by significant cost blowouts, a decline in services, and the loss of community support and involvement.

Projects include the construction and management of the Port Macquarie Base Hospital in NSW, the refurbishment and management of the Latrobe Valley Base Hospital and the construction and maintenance of the Berwick Community Hospital in Victoria (expected to be completed in mid 2004).

In the case of the Latrobe Valley Hospital, the private operator chose to walk away from the arrangement claiming it was not profitable.

The involvement of the private sector has also accelerated the contracting out of ancillary services in an attempt to reduce labour costs.

In such instances, managements have also sought to change the culture of the service to reflect practices more consistent with the private sector. This has often led to increased industrial disputations.

The experience in public health suggests that after the triumphant announcement that the PPP would improve services and reduce costs while maintaining existing staffing numbers and skills mix, the reality is somewhat different.

Often the PPP proved to be expensive, inefficient, inflexible and unresponsive to the needs of the wider community.

There is little doubt that infrastructure demands are growing, particularly for better health and education facilities and environmentally friendly transport systems.

PPPs appropriately applied have the potential to meet some of these community demands, but it is incumbent on governments to ensure that the interests of taxpayers, the community and public sector workers are protected.

The rationale for PPPs must always be the delivery of transparent and efficient services that benefit the community.

Copies of the report Paying for Private Profit may be purchased for $10.00 from the ANF Federal Office in Melbourne. Phone: (03) 9639 5211