Professor John Quiggin, in an article first printed in the AFR on Thursday, 14th January (and subsequently on his blog), raises a number of salient points in regards to the proliferation of public private partnerships (PPPs) for the delivery of infrastructure throughout Australia. http://johnquiggin.com/index.php/archives/2010/01/19/column-and-bookplug/
In particular, the importance of ‘the need for the costs savings of parties outperforming the lower cost of government bond financing’. This is a factor that needs to constantly be revisited as public sector agencies dip their toes into investment and development of sustainable utility infrastructure. In the short-term many such projects struggle to compete with legacy systems due to a number of reasons outlined by my colleague Kaitlyn Scannell (http://pracsys.com.au/sustainability-a-high-stakes-game/). A perceived public-sector solution has been to outsource this short-term risk to the private sector, in the hope that the market will perceive future benefits in the medium-long term. In doing this, financial analysis can show a more competitive business case, justifying a project which is often in alignment with an agency’s sustainability objectives.
There are two main risks associated with this approach which are outlined below:
- Many of the benefits of sustainable infrastructure investment are not currently valued in-full by the end user, making it a less attractive value proposition to the private sector. More favourable terms may then need to be offered by government agencies to attract potential partners
- As Quiggin points out, the efficient markets hypothesis that enterprises always accurately price goods or services is flawed, meaning that there is a risk that the private partner defaults due to optimistic pricing leading to service delivery either failing or falling back to the public realm, ultimately costing the tax-payer more.
The motivation for a PPP in these circumstances may be misplaced, with project-life cost-savings between parties not being the prime motivator, rather the development of a business model that shows competitive outcomes compared to legacy systems in the short term. Whilst many sustainable infrastructure projects are worthy, investment by the public sector in such projects needs to accept that there are significant costs that often make investments compare financially less attractive with established infrastructure in the short-term. Decision-makers need to balance long-term strategic considerations with this short-term financial pain when deciding upon the appropriateness of investment. Attempting to paint a rosy picture through ambitious risk management is not the optimal or sustainable solution that should be being sought.
