10.

The PPP phenomenon:

performance and governance insights
Graeme Hodge and Carsten Greve

Introduction
Public–private partnerships (PPPs) have now attracted wide interest around the
world. Few people, however, agree on what a PPP really is. While they are hailed
as a new collaborative way to get the best of both sectors, the definition of PPPs
remains cloudy, and performance assessments are hotly disputed. This chapter
presents an academic examination of this form of collaboration and looks at the
global evidence of performance. It articulates just what is new in Australia’s
PPPs and suggests governance reforms are needed in order to overcome the
legitimacy concerns of citizens and parliaments.
The public–private debate has been an important thread in history, and there
has always been some degree of public-sector and private-sector cooperation
(Wettenhall 2003, 2005). The fact that 82 per cent of the 197 vessels in Sir Francis
Drake’s fleet, which successfully conquered the Spanish Armada in 1588, were
private contractors to the Admiralty,1 Australia’s long history of using private
contractors for construction in huge infrastructure projects such as the Snowy
Mountains Hydro-Electric Scheme, and the century-long partnership between
the commercial company Falck (at one stage a part of the global company Group
4 Securicor) and the Danish public sector to deliver emergency services all attest
to this. Other public–private cooperative ventures have included the successful
Sydney Olympic Games and the construction of Europe’s Channel Tunnel.
Viewing these arrangements as cooperative forms of partnership, however,
brings with it good and bad news. On the one hand, it is true, for example, that
privateer shipping underpinned the growth and dominance of the British global
economic empire, and that private contracting saw the dream of the Channel
Tunnel achieved. On the other hand, privateer shipping was a ‘feeble and corrupt
system’ in which leading officials promoted partnership ventures intent on
plunder, while the fragile financial position of the Channel Tunnel has now left
citizens, governments and private investors with huge uncertainties. Little
wonder, then, that arguments about efficiency, service quality and accountability
in the two sectors have been well rehearsed.

The PPP pedigree

Scholars now view PPPs as a tool of governance, or else a ‘language game’
(Teisman and Klijn 2001, 2002). Turning first to partnerships as ‘governance’,

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two dimensions appear to be relevant: first, the financial arrangements between

public and private actors; and second, the tightness of organisational linkages
between the two actors (Hodge and Greve 2007). Formally, the Dutch
public-management scholars van Ham and Koppenjan (2001:598) define a PPP
through an institutional lens as ‘co-operation of some sort of durability between
public and private actors in which they jointly develop products and services
and share risks, costs and resources which are connected with these products’.
This definition emphasises durable cooperation and an equal sharing of risks
and rewards in producing something jointly. This emphasis differs from the PPP
notion regarding infrastructure projects, including build–own–transfer (BOT),
build–own–operate–transfer (BOOT), as well as so-called sale-and-lease-back
arrangements in which local governments sell their buildings and then rent them
back from a financial organisation on a 20 or 30-year contract. Many other
interpretations of PPPs as financial and organisational arrangements are also
possible, involving at least five families of arrangements:2
• institutional cooperation for joint production and risk sharing—for example,
the Netherlands Port Authority (van Ham and Koppenjan 2001, 2002; Klijn
and Teisman 2005)
• long-term infrastructure contracts, which emphasise tight specification of
outputs in long-term legal contracts—as exemplified in the United Kingdom
(Osborne 2001b; Savas 2000; Berg et al. 2002; Perrot and Chatelus 2000;
Ghobadian et al. 2004; Grimsey and Lewis 2004)
• public-policy networks, in which loose stakeholder relationships are
emphasised (Vaillancourt Rosenau 2000)
• civil-society and community development, in which the partnership
symbolism is adopted for cultural change, as in Hungary and Europe (Osborne
2001a)
• urban renewal and downtown economic development—where, in the United
States, a portfolio of local economic development and urban regrowth
measures is pursued (Osborne 2001a; Bovaird 2004).
These PPP families cover a wide array of different governance types and are
clearly more than just the private finance initiative (PFI) experience of the United
Kingdom or the current infrastructure-contracting practices of Australia.
The alternative view of PPPs is as a language game. Linder (1999) noted the
‘multiple grammars’ of PPPs, with governments avoiding the terms ‘privatisation’
or ‘contracting out’ in favour of speaking about ‘partnerships’. This word
presents a warmer and friendlier proposition than previous, more pejorative
terms. It has also provided public managers with an opportunity to adopt a new
buzz word or even reframe existing policies under a catchier name.
The language question is an issue of some significance, as it frames our local
understanding of partnerships. Of course, language games are at the heart of all
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public-policy debates. Such language games in the PPP arena can, however, lead
to the amusing situation in which two governments on opposite sides of the
globe see PFI-type PPPs in opposite ways. Look, for example, at the long-term
infrastructure-contract family of PPPs. In Victoria, Australia, such PPPs are
argued as being nothing to do with privatisation and are vigorously separated
from this policy. In the United Kingdom, however, the Department of Treasury
and Finance sees the two as inherently connected and speaks of PPPs as being
directly equivalent to privatisation (HM Treasury 2003). In other words, the
same PPP phenomenon is being framed in two opposite ways for local political
gain.
Another example of this language game is the very label ‘partnership’ for large
private finance contracts. This is nonsense. Infrastructure finance deals are no
more partnerships than the contract made when citizens take out a house
mortgage with their local bank. Public-policy language games are again being
used to suit local political objectives and obscure meanings rather than to clarify
and sharpen our understanding of the partnership phenomenon.
So PPPs are a broad church of many families, and it is not a simple matter to
judge whether they are the next chapter in the privatisation story, another
promise in our continuing attempts to better define and measure public-sector
service performance,3 a renewed support scheme for boosting business in
difficult times, or a language game camouflaging the next frontier of conquering
transaction merchants, legal advisors and bankers pursuing fat commissions.

Evaluating PPP performance

Several Australian states have followed the United Kingdom and, led by Victoria,
have proceeded down the road of defining PPPs in terms of the PFI—that is, as
a business relationship, underpinned by a long-term contract, often with private
financing, for the delivery of maintenance and the operation of infrastructure
and services,4 involving large cash flows, the capacity to shift risks and rewards
and potential for joint decision making.
How might we evaluate this PPP family member? There have been no
meta-analyses or statistical reviews of PPP performance to date. The complexity
of evaluating infrastructure arrangements is compounded by the observation
that there is a wide variety of contractual and institutional options, the adoption
of either public or private up-front finance and potential application across many
policy areas such as transport, water, prisons, education, social and emergency
services. Also critical here is the observation that we all come to such an
evaluation with our own individual criteria for assessment.5 Those involved
directly in the financial transactions, not surprisingly, often speak highly of
them. Of more relevance here, however, is our evaluation of PPPs against the
stated objectives of PPP delivery by governments and broader policy promises

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being made to citizens. So, should we look at policy rhetoric, the legal contract
or historical outcomes to discern partnership success (Hodge 2004b)? These
outcomes vary from the weakest evidence of success at the policy rhetoric end
to the strongest at the historical outcomes end.
There has been much rhetorical assessment, including colourful salesmanship
and praise on the one hand, and stinging criticism on the other. PPPs are thus
characterised in terms of ‘yet again screwing the taxpayer’, with private sponsors
as ‘evil bandits running away with all the loot’ and as ‘Problem, Problem,
Problem’ (Hodge and Greve 2007). The other side of the rhetoric has seen PPPs
as a ‘marriage made in heaven’ with continued loud advocacy. Little, however,
is resolved. While some analyses of contract arrangements are now available,
the jury is still out given the long-term nature of these contracts.6 How, then,
have PFI-type PPPs performed according to the historical evidence of outcomes?
We ought to base our analysis on the underlying objectives of PPPs. Under John
Major’s government in the United Kingdom, the initial rationale was to get
around formal public-sector debt levels. Private financing promised a way to
provide infrastructure without increasing the public-sector borrowing ratio
(PSBR). This was followed by the promise that PPPs would reduce pressure on
public-sector budgets. Neither the availability of off-budget financing nor
avoiding accountability for capital funding are, however, particularly valid
criteria on which to evaluate PPPs. A mechanism though which governments
can turn a large, one-off capital expenditure into a series of smaller, annualised
expenditures has simply been provided. Like any domestic credit card or
mortgage arrangement, however, this does not reduce pressure on the family
budget, because all debts must be repaid in the end.7
The third promise of PPPs—and one with more bite to it—is that this delivery
mechanism provides better value for money for taxpayers. This is a policy
promise worthy of examination. Added to these promises was the implicit ethos
of better accountability, improved business confidence, better on-time and
on-budget delivery, as well as greater innovation. What is evident, then, is that
there have been eight separate justifications for PPPs, which have altered over
time and even today remain somewhat slippery.
What does the more serious evidence of the veracity of these claims say? There
is a wide canvas, so we will focus only on a small number of representative
evaluation findings. Looking now at the third of these eight promises—the claim
of better value for money—how does the international evidence stack up?

Evidence of value for money

Early prominent estimates of efficiencies to be gained through PPPs included
cost-savings figures of 17 per cent from Arthur Anderson and LSE Enterprise
in their analysis of 29 business cases, 10–20 per cent based on seven empirical

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cases from the National Audit Office (2000) and 10–30 per cent (Shepherd 2000).
Savings in these business cases were due mainly to the calculus of risk transfers
assumed from the public to the private sector. The later analysis of Pollitt (2002)
also summarised the findings of the National Audit Office and showed that in a
sample of 10 major PFI case evaluations undertaken, the best deal was probably
obtained in every case, and good value for money was probably achieved in
eight of the 10 cases.
At the other extreme, the early evidence on (PFI) PPP effectiveness is not as
pretty. From the United Kingdom, authors such as Pollock et al. (2002) and
Shaoul (2004) have been highly critical of PFI arrangements across a wide range
of services, including roads, hospitals and rail-transport infrastructure. Likewise,
Monbiot (2002) launched a very public attack through the Guardian newspaper,
labelling PPPs as ‘public fraud and false accounting…commissioned and directed
by the Treasury’. US commentators such as Bloomfield et al. (1998) found a
Massachusetts correctional facility was 7.4 per cent more expensive through
lease purchase financing than with conventional financing, with the real costs
and risks camouflaged from the public. In Europe, Greve (2003) characterised
the Farum PPP as ‘the most spectacular scandal in the history of Danish Public
Administration’, resulting in raised taxes for the citizens of Farum, higher debt
for its local government and a former mayor on trial in the courts. Australian
PPP analyses such as Walker and Con Walker (2000) saw off-balance-sheet PPP
infrastructure financing deals as ‘misleading accounting trickery’, which eroded
accountability to parliament and to the public. In support, they cited private
project consortium real rates of return, which were 10 times those expected for
the public for the proposed metropolitan Sydney and Mascot Airport and
Sydney’s M2 Motorway (Walker and Con Walker 2000:204).8
Evidence continues to be mixed. At the positive end, Pollitt (2005) has shown
not only the popularity of PFI—with the UK Government typically raising some
15–20 per cent of its capital budget each year through this mechanism9 —but,
through five case studies, its empirical success, notwithstanding the lengthy
and costly bidding process among a small number of bidders and high-profile
problems with individual PFI projects. He argues that compared with what might
have happened under conventional public procurement, projects under PFI are
now ‘delivered on time and to budget a significantly higher percentage of the
time’, with construction risks ‘generally transferred successfully’ and with
‘considerable design innovation’. Importantly, while Pollitt acknowledges that
it is possible that many of the assumed benefits of PFI projects are hypothetically
available through conventional procurement, the reality is that these would not
be achieved without the learning and leverage provided through the PFI
initiative.

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Likewise, Mott Macdonald (2002) and the National Audit Office (2003) report
PPPs as being delivered on time far more often than traditional infrastructure
provision arrangements.10 They found, impressively, that whereas traditional
‘public’ infrastructure provision arrangements were on time and on budget 30
per cent and 27 per cent of the time, PFI-type partnerships were on time and on
budget 76 per cent and 78 per cent of the time, respectively. In Australia
meanwhile, the Audit Office of New South Wales found ‘persuasive’ the business
case for two PFI contracts to build 19 schools, at between 7 to 23 per cent cheaper
than the traditional alternative (Auditor-General of New South Wales 2006). The
Allen Consulting Group (2007), in a project funded by Australia’s infrastructure
suppliers, reported PPPs as being an 11 per cent cheaper alternative to traditional
projects based on a sample of 54 projects.
In striking contrast is Shaoul’s evidence from the United Kingdom. Countering
the government’s rationale, itself described as an ‘ideological morass’, she
presents a litany of failed PFI project examples and reveals a value-for-money
appraisal methodology biased in favour of policy expansion, a pitiful availability
of information needed for project evaluation and scrutiny and projects in which
the value-for-money case rested almost entirely on risk transfer but for which,
strangely, the amount of risk transferred was almost exactly what was needed
to tip the balance in favour of undertaking the PFI mechanism. Added to this
apparent manipulation of the public sector comparator (PSC) process were the
observations that in hospitals and schools ‘the PFI tail wags the planning dog’
with projects changed to make them ‘more PFI-able’, highly profitable
investments being engineered for private companies with ‘a post tax return on
shareholders’ funds of 86 per cent’, several refinancing scandals and
conspicuously unsuccessful IT projects and risk-transfer arrangements that in
reality meant that risks had not been transferred to the private sector at all but
had been borne by the public. Not surprisingly, Shaoul (2005) concludes that
at best, PFI has turned out to be very expensive with, moreover, a lack of
accountability leading to difficulty in learning from past experiences.
Partnerships, in her view, are ‘policies that enrich the few at the expense of the
majority and for which no democratic mandate can be secured’.
Added to this criticism is the first peer review of the impressive on-time and
on-budget figures reported by Mott Macdonald (2002). The review of Pollock
et al. (2007) was unequivocal in its judgment of these figures, stating ‘there is
no evidence to support the Treasury cost and time overrun claims of improved
efficiency in PFI’. The estimates being quoted were ‘not evidence based but
biased to favor PFI’ and ‘only one study compares PFI procurement performance,
and all claims based on [this] are misleading’.
Other evidence lies between these extremes. Boardman et al. (2005), for instance,
noted the difficulty of capturing transaction costs in any comparison of

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partnership and traditional project delivery and catalogued 76 major North

American PPP projects. They noted that less than half included a significant
private financing role. They presented five transport, water provision and waste
projects, showcasing a series of ‘imperfect’ partnership projects with high
complexity, high asset specificity, a lack of public-sector contract management
skills and a tendency for governments to be unwilling to ‘pull the pin’ on projects
once under way. They point particularly to private entities being ‘adept at
making sure, one way or another, that they are fully compensated for risk-taking’,
and to strategic behaviour such as declaring bankruptcy (or threatening to) in
order to avoid large losses. There are clear tensions for governments here, having
to hold their nerve and watch commercial failures materialise when risks are
borne by the private sector, despite their yearning to be viewed as successfully
governing a growing and vibrant market.
Similarly, English (2005) documents the failure of the Latrobe Regional Hospital
case in Victoria and provides a reminder of the importance and the difficulty of
value-for-money estimates. A 20-year BOO project, this arrangement failed only
two years into the contract due to a commercial failure to understand the case-mix
funding model as well as because of ineligibility for additional top-up funding.
Importantly, English also notes that amid the appearance of full disclosure by
the state government, crucial documentation in terms of PSC calculation and
financial arrangements underpinning the PPPs was withheld from citizens, even
after freedom-of-information requests. Imperfect PPP arrangements, indeed. The
Auditor-General’s line in reviewing this situation was also
interesting—apparently seeing this case not only as a financial failure of the
private hospital, but as a governance failure by government. English shows that
the government had not behaved as an intelligent and informed buyer. It had
accepted an unsustainable price bid in the first place, had not undertaken any
comparative analysis to benchmark public provision and had not recognised
that the government was unable, in reality, to transfer the social responsibility
of hospital provision.11
Hodge (2005) listed 48 Australasian projects and observed that while commercial
risks could have been largely well managed, the same success could not be
claimed for the governance dimension. Of real importance here was evidence
from eight PPP case studies in Victoria examined by Fitzgerald (2004). Two
crucial observations were made.
First, the superiority of the economic-partnership mode over traditional delivery
mechanisms was dependent on the discount rate adopted in the analysis. Indeed,
opposite conclusions were reached when using an 8.65 per cent discount rate
at one extreme (leading to the conclusion that the PPP mechanism was 9 per cent
cheaper than traditional delivery) compared with an evaluation adopting a 5.7

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per cent discount rate (where the PPP mechanism was apparently 6 per cent
more expensive).
Second, Hodge (2005) also made the point that government had clearly moved
from its traditional stewardship role to a louder policy-advocacy role. As a
consequence of this, we might reflect that government now finds itself in the
middle of multiple conflicts of interest, acting in the roles of policy advocate,
economic developer, steward for public funds, elected representative for decision
making, regulator of the contract life, commercial signatory to the contract and
planner. Far more debate is now needed to discuss the optimum ways in which
long-term public interests can best be protected and nurtured in the light of
experience, particularly noting citizen concerns about low PPP transparency
and high deal complexity as well as criticism of lack of competition in these
deals.12 In other words, in addition to scepticism about the value for money
provided by PPPs, their governance seems to have been a weakness to date.
Boardman et al. (2005) from North America and Hodge (2005) from Australia
conclude independently that ‘caveat emptor’ is the most appropriate philosophy
for governments to take as we move forward with infrastructure PPPs. Learning
from the global empirical experience counters the notion that ‘all the evidence
that I have ever read on PPPs has been positive’, as recently argued by one
Australasian state government minister advocating billions of more dollars in
partnership investments.
Overall, it would be fair to observe that citizens have been somewhat sceptical
of the political promises made for PFI-type PPPs.13 This is hardly surprising.
History provides us with plenty of examples of governments ideologically bent
on applying the latest fashionable policy prescription when neither was the
patient ill, nor the policy at all effective. Moreover, a range of examples, from
supplying electricity in Manila14 and the London Underground rail-transport
debacle15 to a similar recent partnership farce with Sydney’s Cross-City Tunnel
(Davies and Moore 2005), shows that government reforms undertaken in the
name of ‘partnership’ can easily go wrong for a host of reasons.
As well as this evidence for and against PPPs, the question of the counterfactual
is also crucial here. On the one hand, the question of the exact ‘alternative’
against which private finance schemes are assessed is often left cloudy. We are
left uncertain about whether the alternative is the old public works department
with its in-house team is assumed, or the use of competitive tendering
arrangements for private contactors (already in regular use in many jurisdictions),
or some other public, private or mixed arrangement. The precise details of
financing are also usually unclear. On the other hand, historical empirical
experience also reminds us that the London Underground (under public
ownership) has had a history of completing investment projects over budget
and late with, for instance, line upgrades for the Jubilee Line six years late and

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30 per cent over budget, and an analysis of some 250 projects by London
Underground between 1997 and 2000 revealing cost overruns averaging 20 per
cent.
What might we make of all this? It seems, overall, that the economic and financial
benefits of PPPs are still subject to debate and, hence, considerable uncertainty.
We noted earlier that our evaluation should include an assessment of PPP
governance. There is much that might be discussed here, but before we
contemplate this arena, we ought first to articulate just what is, if anything, new
with Australia’s trend towards PFI-type PPP arrangements.

What is new with Australia’s PPPs?

In terms of providing essential public infrastructure or services through history,
there is much in today’s debates that is not new. Governments have always made
sensitive decisions resulting in the provision of essential large-scale public
infrastructure. Such decisions have often had huge, long-term financial
implications. Likewise, governments have for many years employed private
contractors to undertake works and services, and competitive bidding for
construction contracts by private companies has been around now for decades.
The PPP phenomenon ought not therefore be misconstrued as a public versus
private debate or a debate about the merits of infrastructure provision. We have
centuries of experience accumulated in both of these arenas, although too often
this point goes unacknowledged.
There do, however, appear to be three elements that are new in Australia’s PFI
model of partnership:
• the preferential use of private finance arrangements
• the highly complex contractualisation of ‘bundled’ infrastructure
arrangements
• altered governance and accountability assumptions.
Importantly, the first two new aspects of infrastructure provision—those of
private finance and increased contractual complexity—have major implications
for the third: governance and accountability arrangements. How well, then, do
PPPs perform on these dimensions?

Governance evidence
The availability of private finance for major infrastructure projects has essentially
given governments a new capacity to use a ‘mega credit card’ with which to
sign up to infrastructure deals. These deals can be consummated through the
development of large legal contracts in which projects are purchased, as if ‘off
the shelf’. The political incentives for government have been high: quicker
promised delivery of infrastructure and more positive relationships with finance

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and construction businesses. These incentives have also been closely aligned
with incentives for the finance industry in terms of continued business
transactions, new financial deals and perhaps even policy influence and project
selection priority. Each of these three dimensions deserves careful deliberation
in terms of governance. For each, we also should ask what the implications are
in terms of democratic legitimacy.

Preference for private finance

While in concept PPPs are not strictly dependent on the provision of private
finance, the reality in Australia is that in leading jurisdictions such as Victoria,
PPP activities rely almost completely on the provision of initial private finance.
As we noted extensively above, however, private finance arrangements appear
to come at a premium for the life of the project, and the veracity of the claim
that PPPs lead to better value for money for citizens is, at best, highly contestable.
In addition to the international evidence of value for money, Victoria’s Fitzgerald
Review estimated that Victoria’s citizens had probably already paid about $A350
million more than needed for the eight Victorian projects (totalling $2.7 billion)
it reviewed. Limited transparency and complex adjustment formulae for
partnership financial arrangements do not give citizens confidence in the
arrangements when, despite the rhetoric of risk sharing with private financing,
a significant financial role for government is nevertheless often the reality.
To concerns about value for money and risks can be added the criticism that in
the United Kingdom the PSC has been manipulated and planning processes have
been reshaped to ensure that projects were ‘more PFI-able’ to access capital
funds. The implications for democratic legitimacy of such matters are profound.

Complexity
The second important characteristic of Australia’s PPPs has been the complexity
of partnership contract deals. Of course, greater complexity was introduced
through more adventurous project-management mechanisms through the 1990s
before PPPs. The need for extensive legal and other contractual documentation
for all financial flows and relationships between multiple parties alone is,
however, a direct characteristic of the partnership phenomenon (Evans and
Bowman 2005).
Complexity, however, is not simply a matter of narrow legal project concerns.
It has been rare to find members of parliamentary committees who have
themselves personally understood the deals being done. In states such as Victoria,
there are not even any parliamentary committees overseeing such infrastructure
deals. Worryingly, ministers appear to have been supporting these deals on
trust. Citizens also cannot get a clear picture of their worth underneath either
the veil of complexity or the cloak of ‘commercial in confidence’. To date, few
independent parliamentary-level reviews have been able to break through this
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veil. A further factor here is the need for the State to have the administrative
and the intellectual capacity to understand these deals, to monitor them as they
operate and to manage them as they evolve with time.
Perhaps the real issue in terms of democratic legitimacy is not the matter of
complexity itself, but how complexity is handled through political and
democratic processes. Public-policy decision making in government by its nature
deals with multiple complex issues ranging from stem-cell research and IT privacy
to intricate matters of national economic and financial importance. The real
question here is whether complexity is addressed by ensuring that improved
accessibility mechanisms for citizens are created or, alternatively, whether what
is created is a shield behind which governments can shelter and avoid
accountability. Media reports that the Victorian Government delayed numerous
requests for information on PPPs that could have damaged its re-election
prospects certainly do not sit well with claims that PPP arrangements are
sufficiently transparent to assure legitimacy (Dowling 2006; Tomazin 2006).

Accountability and governance arrangements

PPPs encompass different accountability and governance arrangements compared
with traditional procurement—indeed, these arrangements are one of the claimed
advantages of this provision method. Interlinked financial incentives across a
consortium of players, the sharing of risks through carefully contractualised
legal relationships and more flexible decision-making processes between
executive government and service providers all feature as improvements on
traditional procurement arrangements. Moreover, the progressive
contractualisation of the State’s services and activities has been accompanied by
the general assumption of increased accountability in all its forms, although this
has rarely been tested. While contractualisation could have increased managerial
accountability, it could have been at the expense of reduced public accountability
in its various forms.
Also, while we have instituted a ‘regulatory state’ of independent regulators,
ombudsmen and audit review bodies in order to disperse power away from
political quarters after the privatisation of state businesses, this has not yet
occurred with PPP deals. They have continued to be essentially two-way
government–business deals rather than also involving the community or any
other independent accountability body to protect the public’s interests. They
have also been handled on a case-by-case basis, by the government itself, in the
face of multiple conflicts of interest. The potential for the interests of the
advocating government and business partners to dominate the public interest
is palpable here. Indeed, early drafts of Victoria’s PPP guideline materials did
not even mention the ‘public interest’ notion and treated government solely as
if it were a contractual partner in a commercial deal. This is reminiscent of past
centuries.16
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Clearly, communities need far more discussion and debate about how we might
better ensure that the public interest is met through PPP deals, as well as meeting
the needs of the contracting parties. To the extent that new infrastructure
contract-delivery arrangements have reduced existing accountability
arrangements and altered longstanding governance assumptions without
democratic debate, new partnership arrangements lack legitimacy (Hodge 2006).
Are such concerns just an academic obsession with an imperfect world? Three
recent Australian parliamentary inquiries suggest that such concerns about PPP
governance are justified and have profound implications.

Parliamentary inquiry findings

The findings of two recent high-level PPP reviews in New South Wales and
Victoria17 are striking. First, some 35 of the 46 recommendations of these two
reports relate to these three governance concerns—that is, private finance
preference, financial complexity, and accountability and governance matters.
In other words, some 76 per cent of the changes recommended by our recent
parliamentary committees have concerned these issues of governance. Second,
the largest two categories of these recommendations dealt with PPP accountability
and governance, and the implications of the private finance preference. Third,
there is a remarkable consistency between the tone of recommendations made
by the committees and the concerns expressed in this chapter. Examples of
inquiry recommendations illustrating this point include recommendations for
three-page summaries of contract deals and value-for-money reports, better
post-implementation evaluations and audits, stronger parliamentary oversight,
more precise definition of the traditional options considered and improved
knowledge of discount rates.
Crucially, the very existence of these parliamentary inquiries (as well as the
additional parliamentary inquiry into Sydney’s Cross-City Tunnel project) is a
testament to the degree to which the current legitimacy of Australian PPPs is
questionable. Discussions about the legitimacy of PPPs have also moved from
the cabinet table and banking boardrooms into the supermarkets and the homes
of citizens through the daily media. In terms of taxpayers’ interests, Tomazin
(2006), for instance, stated that ‘State Government secrecy surrounding billions
of dollars’ worth of projects done in partnership with the private sector means
Victorians have no idea whether they provide value for money’. Moreover,
Tomazin was concerned with ‘the lock-in effect of long-term contracts [which]
might have an effect on the decision making capacity of future governments’.
Furthermore, traditional ministerial accountability mechanisms failed palpably
when the premier and ministers of the NSW Government refused to attend the
Cross City Tunnel Parliamentary Committee to explain their perspectives.18 The
illegitimacy of one government being happy to sign up the next dozen
governments to multi-billion-dollar contract payments with subsequent elected
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representatives then not participating in a fundamental public-accountability

mechanism to explain decisions marks an all-time low in our traditional
democratic polity. Indeed, the fact that a significant amount of performance
material was omitted from the final inquiry document in Victoria (if we believe
leaks reported in the daily newspaper at the time; Tomazin 2006) suggests that
there continues to be much need for legitimacy-based reforms to be instituted.
The omitted information on the specific performance of PPPs in Victoria appears
to have been most embarrassing for the Kennett–Stockdale state government
and its ministers and the subsequent Bracks–Brumby state government. It could
even be that a coalition of political interests and business interests has existed
against the interests of truthful revelations to citizens.
Such sinister logic aside, there nonetheless continues to be an obvious broader
confluence of interests between political interests—enjoying better party funding
for elections, potentially earlier delivery of big infrastructure projects and other
parties to use as scapegoats should anything go awry—and the private interests
of financiers, consulting firms, advisors and infrastructure companies. This
suggests that PPPs could well continue for some time yet. Having said this, the
future legitimacy of PPPs will depend on the ways in which the partnership
phenomenon can be reformed and these current value-for-money and governance
deficits overcome.

Conclusions
The partnership ideal has a long historical pedigree. Since partnerships have
always come with good and bad news, care is, however, needed in their
evaluation. All assessments need to be reported, not just those results supporting
one’s own views. There is a huge diversity in PPP approaches around the globe
today. The contemporary phenomenon of private finance-dominated partnership
arrangements in Australia is one important family group.
Multiple goals have been claimed for long-term infrastructure contract-type
PPPs. Looking simply at the question of value for money, there is a wide range
of mixed evidence. This has gone largely unacknowledged to date. In other
words, there is little doubt in terms of successes and failures that some of the
glowing policy promises of PPPs have been delivered. Equally, however,
evaluations of such arrangements have provided contradictory evidence of
value-for-money effectiveness. A further concern surrounds PPPs in terms of
governance failures. Contracts can shield governments from accountability rather
than enhancing it. Also, treasuries of advocating governments act with multiple
conflicts of interest and are free of any independent regulator charged with
protecting the public’s interest. As a consequence, Australian PPPs currently
lack legitimacy.

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These findings are important in the midst of ideological blind spots being
experienced by many PPP advocates, such as central treasury departments, who
seem more intent on policy advocacy than on questions of stewardship.
Governments ought operate more often with a philosophy of caveat emptor, and
need now to address the significant governance shortfalls identified. PPPs promise
much. Careful evaluation of who gets the biggest rewards from these schemes
is, however, now needed to ensure that governments maintain their intelligence
on policy effectiveness.

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ENDNOTES
1 See Wettenhall (2003), who comments that cooperative public-sector activities go back centuries and
that ‘there is nothing new about the mixing of public–private endeavours…whatever the new enthusiasts
may think’.
2 See Hodge and Greve (2007) for the details of these family members.
3 The recent history of the public sector internationally has been replete with schemes aiming to better
define public-sector services and measure performance. Examples of such schemes have included but
are not limited to: performance indicators and targets, management by objectives, total quality
management, benchmarking, contracting and outsourcing, systems analysis, zero-based budgeting,
performance budgeting, output-based budgeting, results budgeting, program budgeting, program
planning and budgeting systems, competitive tendering and best value in local government. While
benefits have no doubt been delivered through many of these initiatives, most have also fallen well
short of the promises made.
4 Also crucial is the observation that no reviews to date have covered the political science/public
policy/public administration literature (for example, Hodge and Greve 2007) and the
economics/engineering literature (for example, Grimsey and Lewis 2004).
5 One project leader explained recently that because these new PPP arrangements enabled $1 billion
to be spent on infrastructure in the coming year compared with only $130 million in the previous 12
months, the new arrangements were therefore some eight times better than the old. This personal
criterion is understandable and might be mirrored by others involved in these transactions, including
financiers, engineers, consultants and lawyers, but it has limited relevance for the broader community.
6 See Hodge (2004) for one such analysis.
7 The one important exception to this is the case in which a government enters an infrastructure deal
requiring users or citizens to pay directly, such as tolls on a new road. Here, such an arrangement does
reduce pressure on public-sector budgets, because government has essentially purchased the
infrastructure through the commitment of funds from future (private) road users rather than using its
own resources.
8 These authors nevertheless concede that ‘there can be situations where BOOT schemes are good deals
for both government and private sector’.
9 The proportion of total infrastructure investments provided by private finance arrangements is unclear
in developed countries, but estimates include Pollitt’s figure above of 15–20 per cent of the UK capital
budget, an earlier figure of about 10–13 per cent (HM Treasury 2003:128) and Pollitt’s remark that this
proportion is as high as 50 per cent in sectors such as transport.

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10 National Audit Office (2003) surveys also reported positive feedback from 81 per cent of organisational
personnel who saw PFI projects as ‘excellent’ (6 per cent), ‘good’ (46 per cent) or ‘okay’ (29 per cent).
11 Note that we also ought to keep our analysis of the commercial outcomes for government separate
from our assessment of the policy-delivery mechanism here. The terms on which this hospital was
transferred back to government after the ‘political failure’ would presumably need to be known before
we assessed the relative overall success of the subsequent commercial transaction to the taxpayer.
12 A recent example of this concern was the bidding for the Melbourne ‘EastLink’ project. This 39km
motorway was cited as being a $2.5 billion project, and the 39-year concession was awarded after bids
were made by two consortia, both of whom were owned by the same parent company.
13 Such scepticism of policy promises seems broadly consistent with the evaluation evidence presented
here. Much of the above value-for-money evaluation evidence has, as well, unfortunately been based
on business case projections rather than real measurements of cash flows.
14 See, for example, Hodge (2004b:241), who notes that after independent power producers were
contracted to build greater capacity, an increase of more than 200 per cent occurred in the ‘purchased
power adjustment’—an additional charge remitted to private power producers for unused power.
Moreover, while overall electricity bills had almost doubled, power prices were double those in
neighbouring countries such as Thailand and Malaysia. This situation understandably led to outrage
in the Philippines.
15 See, for instance, The Economist (2002).
16 Feedback to this effect resulted in the development of a ‘public interest test’ within the department’s
guidance material, which—if the boxes are ticked—guarantees (at least in terms of advocating
bureaucrats) that the public interest has been ‘defined’ and met.
17 Public Accounts and Estimates Committee 2006, Seventy-First Report to the Parliament, Report on
Private Investment in Public Infrastructure; and Public Accounts Committee 2006, Inquiry into Public
Private Partnerships.
18 See Joint Select Committee on the Cross City Tunnel, First Report, XI, NSW Parliament.

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