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Legislative Assembly for the ACT: 2004 Week 08 Hansard (Wednesday, 4 August 2004) . . Page.. 3406 ..

The essence of PPPs is risk sharing. The private sector, usually a consortium of financier, builder-developer, facility manager and subcontractors, arranges project financing for the development and accepts the financial risk. The contractor also accepts the construction and industrial relations risk. Russell Walker, Victorian Assistant Auditor-General, gave this warning about risk sharing:

The essence of a PPP is risk sharing … the fundamental aim is to arrive at a risk sharing arrangement that assigns risks to the party best able to manage the risk at the lowest cost.

It is now generally accepted that the transfer of risk to the private sector is really only cost effective where the private sector is better able to manage these risks.

Seeking to transfer inappropriate forms of risk onto the private sector merely adds unnecessary cost to PPP agreements and will also undermine the value for money obtained from the deal. This is because it will result in the private sector entities trying to price that risk into payments they seek to obtain from government, or they simply fail to manage the risks assigned to them.

Public sector involvement is usually limited to providing guidance on risk allocation expectations and residual arrangements on the development. In simple terms, PPPs involve joint decision-making relationships with both parties being involved early on in developing effective joint outputs rather than having a principal-agent relationship where the government alone arranges its own approach to financing, organises the design and building of a project and then manages the completed project.

Over the past 10 years Victoria has initiated around 40 public-private partnership style projects for the delivery of major social infrastructure, which includes schools, hospitals, prisons, toll roads, and major infrastructure like the docklands project, or elements of it. Victoria has quite an extensive commitment to PPP arrangements. The first generation of PPPs involved the allocation of substantially less risk to the private sector than do current arrangements. That was reflected in the government providing substantial guarantees and indemnities to the private sector, which effectively placed the financial risks back on the state.

It is important to draw a distinction between that infrastructure and the more recent extension of PPP delivery to social infrastructure such as schools, hospitals and prison services. I refer to some of the arguments in favour of PPPs. They will reduce pressure on government budgets through the maximisation of equity to non-government income streams and ancillary income streams, thus reducing the costs to government. Risk allocation is the most important feature of PPP arrangements as the identification, quantification and allocation of risks are directed to the parties best able to manage them. The message in that statement is that it has to happen. In the past risks were allocated or directed to parties who were not able to manage them, or governments paid through the nose to get someone else to manage them.

Another argument in favour of PPPs is specialised service delivery. Specialist private sector firms can provide some specified services at an improved price over public sector service delivery. Innovation is achieved through commercial, physical design and service innovation, and synergies between those elements of the PPP arrangement. The final

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