Private funding still a better way forward for public contracts
Private funding still a better way forward for public projects
Gary Sturgess
Sydney Morning Herald - October 2005
An edited version of this article was published in the Syney Morning Herald.
In a famous passage in 'Richard II', John of Gaunt attacks the king's mismanagement of the kingdom and his role in mortgaging the nation's future revenues:
'This happy breed of men, this little world, this precious stone set in a silver sea. . . is now leas'd out - I die pronouncing it - like a tenement or pelting farm. England, bound in with the triumphant sea, . . . is now bound in with shame, with inky blots and rotten parchment bonds. . .'
As journalists have pored over inky blots and parchment bonds this past week, the question has often been asked why the government has leased us out. Why have the private sector deliver public infrastructure when the government can borrow funds more cheaply?
The answer lies not in shifting spending off balance sheet. The majority of PPPs in this country - prisons, hospitals, schools and social housing - remain on the government's balance sheet. PPPs are being pursued by governments as a way of improving the procurement of public infrastructure.
Given the current controversy over the Cross City Tunnel, this seems improbable. But when one considers the success of PPPs in delivering projects on-time and on-budget, and the role they have played in stimulating innovation in the design, construction and operation of infrastructure services, then their attractiveness to Treasury makes sense.
What gets measured (and rewarded) gets done. Contracts are a powerful tool for motivating the private sector to perform, but this means that design is fundamental to success. A poorly designed performance regime is powerful incentive to deliver perverse outcomes.
PPPs demand that government has a clear understanding of what it wants at the outset. They focus government's attention on the consequences of choices. Few would disagree that this is a desirable outcome: redesigning a project partway through construction is enormously expensive.
Individual roads, hospitals and prisons are also part of a wider system of public services, and when writing their contracts, governments must ensure that they make sense as part of the broader network.
Then there is the design of the procurement itself. Aggressive price-based auctions in situations where there is an imperfect understanding in the market about government's requirement, result in what economists call the winner's curse - the winner pays a price that is commercially unsustainable.
In poorly-design competitions, governments are capable of generating bid fever, pushing bidders to take on risks that are unmanageable. This looks clever in the short term, but it causes projects to fall over and it encourages irresponsible bidders to treat the contract as nothing more than an option to negotiate.
The controversy of the past fortnight reminds us that governments need to acquire and retain high-level commissioning and contract management skills. Given the size of the market in the Australian states, this argues the case for a small team of highly-paid professionals at the centre of government, rather than expecting each department to develop these skills on its own.
But regardless of their competence, we should expect that these contract specialists will make mistakes. PPPs are a new way of procuring public infrastructure services, and governments right around the world are on a steep learning curve.
Australia was one of the world leaders in the development of these contracting instruments, but surrendered the leadership to the United Kingdom in the mid-1990s. The UK now has the experience of more than 600 projects to draw on.
Governments right around the world are now experimenting with PPPs - from France and Germany to Japan and Singapore to Canada and Mexico. This is one of the new frontiers of public management. Some of these governments will pursue PPPs for the wrong reasons and some will make serious mistakes. But some will also make significant breakthroughs. And it would be foolish of the Australian governments not to benefit from this discovery process.
But perhaps more importantly, we have the opportunity to innovate ourselves and provide Australian companies with an entrée into the international marketplace. There is a first mover advantage in this market. Macquarie Bank has become a global corporation, partly because NSW led the world in the new generation of tollroad contracts. Ingeus, a Brisbane-based business founded by Therese Rein, now has welfare-to-work contracts in the UK and France largely because Australia led the world with its Job Network reforms.
The solution to doing PPPs well lies not in pulling back and doing less, but in building a deeper market and ensuring that it is a quality market.
As Shakespeare reminds us, public service contracting has been around for a long time. The motto of the first public railway in the world - the Stockton and Darlington, a private railway - was 'private risk, public service'.
In fact, privately-managed tollroads have a long history in Australia. In Sydney, Parramatta Road and Oxford Streets were once tollroads, built by convicts in Lachlan Macquarie's time, but operated by private contractors.
Over the years competition and contracting have been done badly and they have been done well. What matters is that private risk is made to serve the public interest.
In a famous passage in 'Richard II', John of Gaunt attacks the king's mismanagement of the kingdom and his role in mortgaging the nation's future revenues:
'This happy breed of men, this little world, this precious stone set in a silver sea. . . is now leas'd out - I die pronouncing it - like a tenement or pelting farm. England, bound in with the triumphant sea, . . . is now bound in with shame, with inky blots and rotten parchment bonds. . .'
As journalists have pored over inky blots and parchment bonds this past week, the question has often been asked why the government has leased us out. Why have the private sector deliver public infrastructure when the government can borrow funds more cheaply?
The answer lies not in shifting spending off balance sheet. The majority of PPPs in this country - prisons, hospitals, schools and social housing - remain on the government's balance sheet. PPPs are being pursued by governments as a way of improving the procurement of public infrastructure.
Given the current controversy over the Cross City Tunnel, this seems improbable. But when one considers the success of PPPs in delivering projects on-time and on-budget, and the role they have played in stimulating innovation in the design, construction and operation of infrastructure services, then their attractiveness to Treasury makes sense.
What gets measured (and rewarded) gets done. Contracts are a powerful tool for motivating the private sector to perform, but this means that design is fundamental to success. A poorly designed performance regime is powerful incentive to deliver perverse outcomes.
PPPs demand that government has a clear understanding of what it wants at the outset. They focus government's attention on the consequences of choices. Few would disagree that this is a desirable outcome: redesigning a project partway through construction is enormously expensive.
Individual roads, hospitals and prisons are also part of a wider system of public services, and when writing their contracts, governments must ensure that they make sense as part of the broader network.
Then there is the design of the procurement itself. Aggressive price-based auctions in situations where there is an imperfect understanding in the market about government's requirement, result in what economists call the winner's curse - the winner pays a price that is commercially unsustainable.
In poorly-design competitions, governments are capable of generating bid fever, pushing bidders to take on risks that are unmanageable. This looks clever in the short term, but it causes projects to fall over and it encourages irresponsible bidders to treat the contract as nothing more than an option to negotiate.
The controversy of the past fortnight reminds us that governments need to acquire and retain high-level commissioning and contract management skills. Given the size of the market in the Australian states, this argues the case for a small team of highly-paid professionals at the centre of government, rather than expecting each department to develop these skills on its own.
But regardless of their competence, we should expect that these contract specialists will make mistakes. PPPs are a new way of procuring public infrastructure services, and governments right around the world are on a steep learning curve.
Australia was one of the world leaders in the development of these contracting instruments, but surrendered the leadership to the United Kingdom in the mid-1990s. The UK now has the experience of more than 600 projects to draw on.
Governments right around the world are now experimenting with PPPs - from France and Germany to Japan and Singapore to Canada and Mexico. This is one of the new frontiers of public management. Some of these governments will pursue PPPs for the wrong reasons and some will make serious mistakes. But some will also make significant breakthroughs. And it would be foolish of the Australian governments not to benefit from this discovery process.
But perhaps more importantly, we have the opportunity to innovate ourselves and provide Australian companies with an entrée into the international marketplace. There is a first mover advantage in this market. Macquarie Bank has become a global corporation, partly because NSW led the world in the new generation of tollroad contracts. Ingeus, a Brisbane-based business founded by Therese Rein, now has welfare-to-work contracts in the UK and France largely because Australia led the world with its Job Network reforms.
The solution to doing PPPs well lies not in pulling back and doing less, but in building a deeper market and ensuring that it is a quality market.
As Shakespeare reminds us, public service contracting has been around for a long time. The motto of the first public railway in the world - the Stockton and Darlington, a private railway - was 'private risk, public service'.
In fact, privately-managed tollroads have a long history in Australia. In Sydney, Parramatta Road and Oxford Streets were once tollroads, built by convicts in Lachlan Macquarie's time, but operated by private contractors.
Over the years competition and contracting have been done badly and they have been done well. What matters is that private risk is made to serve the public interest.
In a famous passage in 'Richard II', John of Gaunt attacks the king's mismanagement of the kingdom and his role in mortgaging the nation's future revenues:
'This happy breed of men, this little world, this precious stone set in a silver sea. . . is now leas'd out - I die pronouncing it - like a tenement or pelting farm. England, bound in with the triumphant sea, . . . is now bound in with shame, with inky blots and rotten parchment bonds. . .'
As journalists have pored over inky blots and parchment bonds this past week, the question has often been asked why the government has leased us out. Why have the private sector deliver public infrastructure when the government can borrow funds more cheaply?
The answer lies not in shifting spending off balance sheet. The majority of PPPs in this country - prisons, hospitals, schools and social housing - remain on the government's balance sheet. PPPs are being pursued by governments as a way of improving the procurement of public infrastructure.
Given the current controversy over the Cross City Tunnel, this seems improbable. But when one considers the success of PPPs in delivering projects on-time and on-budget, and the role they have played in stimulating innovation in the design, construction and operation of infrastructure services, then their attractiveness to Treasury makes sense.
What gets measured (and rewarded) gets done. Contracts are a powerful tool for motivating the private sector to perform, but this means that design is fundamental to success. A poorly designed performance regime is powerful incentive to deliver perverse outcomes.
PPPs demand that government has a clear understanding of what it wants at the outset. They focus government's attention on the consequences of choices. Few would disagree that this is a desirable outcome: redesigning a project partway through construction is enormously expensive.
Individual roads, hospitals and prisons are also part of a wider system of public services, and when writing their contracts, governments must ensure that they make sense as part of the broader network.
Then there is the design of the procurement itself. Aggressive price-based auctions in situations where there is an imperfect understanding in the market about government's requirement, result in what economists call the winner's curse - the winner pays a price that is commercially unsustainable.
In poorly-design competitions, governments are capable of generating bid fever, pushing bidders to take on risks that are unmanageable. This looks clever in the short term, but it causes projects to fall over and it encourages irresponsible bidders to treat the contract as nothing more than an option to negotiate.
The controversy of the past fortnight reminds us that governments need to acquire and retain high-level commissioning and contract management skills. Given the size of the market in the Australian states, this argues the case for a small team of highly-paid professionals at the centre of government, rather than expecting each department to develop these skills on its own.
But regardless of their competence, we should expect that these contract specialists will make mistakes. PPPs are a new way of procuring public infrastructure services, and governments right around the world are on a steep learning curve.
Australia was one of the world leaders in the development of these contracting instruments, but surrendered the leadership to the United Kingdom in the mid-1990s. The UK now has the experience of more than 600 projects to draw on.
Governments right around the world are now experimenting with PPPs - from France and Germany to Japan and Singapore to Canada and Mexico. This is one of the new frontiers of public management. Some of these governments will pursue PPPs for the wrong reasons and some will make serious mistakes. But some will also make significant breakthroughs. And it would be foolish of the Australian governments not to benefit from this discovery process.
But perhaps more importantly, we have the opportunity to innovate ourselves and provide Australian companies with an entrée into the international marketplace. There is a first mover advantage in this market. Macquarie Bank has become a global corporation, partly because NSW led the world in the new generation of tollroad contracts. Ingeus, a Brisbane-based business founded by Therese Rein, now has welfare-to-work contracts in the UK and France largely because Australia led the world with its Job Network reforms.
The solution to doing PPPs well lies not in pulling back and doing less, but in building a deeper market and ensuring that it is a quality market.
As Shakespeare reminds us, public service contracting has been around for a long time. The motto of the first public railway in the world - the Stockton and Darlington, a private railway - was 'private risk, public service'.
In fact, privately-managed tollroads have a long history in Australia. In Sydney, Parramatta Road and Oxford Streets were once tollroads, built by convicts in Lachlan Macquarie's time, but operated by private contractors.
Over the years competition and contracting have been done badly and they have been done well. What matters is that private risk is made to serve the public interest.