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UK and Australia world leaders in use of PPPs


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Contact: Vessa Playfair
Deloitte
Director of Communications
+61 2 9322 7576

Contact: Amanda Kennedy
Deloitte
Media Relations
+61 [0] 418 806 477

Contact: Roger Black
Deloitte
Corporate Finance Partner
+ (0) 7 3308 7092

Australia is a leading practitioner in the use of Public-Private partnerships (PPPs), a global Deloitte study entitled ‘Closing the Infrastructure Gap: The Role of Public-Private Partnerships’ has found.

As more and more governments around the world are teaming with the private sector to design, build, finance and operate everything from roads and ports to hospitals and prisons, Australia and the UK have been identified as an example from which other countries can learn.

Deloitte Head of Infrastructure and PPP Practice Leader, Roger Black, said Australia is cited in the report as a leading PPP practitioner in the fields of transport, water/waste, education, hospitals, defence and prisons but is still a long way behind the UK.

“Australia is well ahead of the game, particularly when you talk about economic infrastructure such as toll roads and pipelines,” Mr Black said.

Private vs public funding

“PPPs have emerged as a crucial tool for governments around the world to tackle critical infrastructure needs,” Mr Black said.

“An independent analysis undertaken by UK firm Mott McDonald for the UK Treasury found that, over the past 20 years, non-PFI (Private Finance Initiative) government projects overran by 47 per cent on cost and 17 per cent on time.

“While the public sector can borrow money at cheaper rates than the private sector, this does not automatically translate to the cheaper delivery of projects.

“Savings from access to cheaper capital are frequently eroded by increased costs relating to late delivery and budget overruns.

“The private sector is better equipped to manage risk and hence highly incentivised to deliver projects on time and on budget.

“The bureaucracy has a notoriously bad track record of delivering projects late and over budget which is not a uniquely Australian characteristic, it is characteristic of bureaucracy worldwide.”

PPPs in Australia

Mr Black said the development of PPPs in Australia has boomed in recent years with the roll-out of a number of large scale infrastructure projects.

“As more governments expand their use of the PPP procurement and financing option, there is an increasing level of transaction experience, and increased level of deal flow and improved competitive tension is created in the market which is good for everyone.”

According to the report:

  • as of October 2005, approximately 25 per cent of all contracted PPP projects within Australia were related to the transport sector
  • a report by Standard & Poor showed increasing investor interest in education PPPs in Australia, with projects valued at $3.7 billion in the pipeline
  • Australia has the highest proportion of prisoners in private prisons with 28 per cent in contract managed facilities.

“We expect the use of PPPs in Australia to continue to increase, despite problems with some projects in recent times.

“The Sydney Cross City Tunnel, for example, has been a fairly sobering experience and provided a large dose of reality for anyone working in a related field. It reminded us all that these large-scale projects are not without significant risk.”

PPPs around the world

Mr Black said that while PPPs were once limited to a handful of countries, they have recently become one of the most important models governments can use to close the infrastructure gap in both developed and emerging economies.

The PPP report showed that the UK, Ireland and Canada also lead the way in their use of PPPs:

  • the UK pioneered the trend over a decade ago and today, partnership models account for between 10 and 13 percent of all UK investment in public infrastructure
  • Ireland has a projected need of €100 billion for investment in infrastructure of which a significant portion will be delivered through public-private partnerships
  • in Canada, 20 percent of all new infrastructure is now designed, built and operated by the private sector.


PPPs – transferring risk

“One of the most appealing aspects of a well-designed PPP is the ability for the government to transfer certain construction and maintenance risks to the private partner.”

According to the report, well structured PPPs are able to allocate risks to the party best placed to manage them. The risks that can typically be assumed by the private partner include:

  • design
  • meeting required standards of delivery
  • cost overrun
  • late completion
  • underlying costs to the service delivery operator, and the future costs associated with the asset
  • industrial action against or physical damage to the asset
  • certain market risks associated with the project.

“Asking private partners to deliver the infrastructure associated with government services creates a different responsibility for public servants.

Skills shortage and the public sector

“It requires a different set of skills: public sector managers skilled in negotiation, contract management and risk analysis, who are able to tackle problems innovatively and who focus on results rather than defending bureaucratic turf.

“It can be difficult, with the current skills shortage, to keep good talent in the bureaucracy. The money and lure of the private sector often means that experienced public servants end up working on the other side of the fence for the companies bidding for work.

“While this move from the public sector to the private sector is not a new phenomenon and already happens in many industry groups, it is particularly relevant when the PPP market is still developing.

“The relatively small pool of talent available means that talent is often bought to Australia from overseas.”

Deloitte member firms are home to a growing network of more than 200 professionals with deep expertise in public-private partnerships. In a recent study, the UK’s Warwick Business School rated Deloitte member firms’ public-private partnership “community of practice” among the top professional communities surveyed.

 

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