Tag Archives: public private partnership

Q&A With David Baxter, PPP Navigator and Infrastructure Specialist

ppp-infrastructureI chatted recently with David Baxter, an infrastructure specialist with significant experience in public-private partnerships. He shared some of his insights with me.

He gave me some meaningful comments regarding challenges facing governments in providing public infrastructure and how commercial interest can be created, risks shared and benefits for communities achieved.

So how would you characterise recent PPP activity in the Pacific?

Much of the activity seems to be focused on small island nations or be tied into China’s Belt and Road Initiative. Although there is great merit in building up these island nation trade capabilities through the improvement of port and airport facilities, the following questions need to be asked:

  • Are these facilities being constructed in the interest of the host nations or are they being built for geopolitical leverage?
  • Can these small island nations and even bigger nations afford these projects?
  • Are adequate feasibility studies being done on the financial and commercial viability of the projects?
  • Are full and competitive procurements being pursued?
  • Is the long-term sustainability and resilience of PPP projects being considered?

Many countries have PPP policies in place and a PPP unit located in their Treasury or Finance departments. What are some of the biggest mistakes you have seen in implementing PPP policy?

The following are the most common that I see:

  • In many instances, the PPP Units are the initiators of PPP projects when they are imposed upon unwilling line ministries which have not always been consulted on the viability or desirability of projects.
  • Often the laws and best practices that are introduced, get ahead of institutional ability to implement the laws accordingly and so delays occur as everyone tries to meet requirements imposed by regulators.
  • In some instances, the PPP Units try to be autonomous of the Treasury or the Finance Ministry (for political reasons) and this then leads to conflict between the institutions that is not healthy in the long run.
  • Often the PPP Units do not have well define mandates and this leads to confusion on whether they should provide technical support to government institutions or whether they should be the initiator of PPPs. It is important that they realize that their activates should subject to national procurement laws and they are not a law unto themselves.

What characteristics do you think differentiate infrastructure PPPs from other types of PPPs?

Primarily the greater level of due diligence that needs to be completed on private sector partners due to the long-term commitments that are required and their ability to manage risk for 30 + years. Most typical contracts rely on the design-build element. PPPs require financing and O&M on top of this which requires that the public sector must monitor the performance of its long-term partner and the performance-based parameters.

What are the most significant conditions necessary to ensure an infrastructure PPPs is successful?

Appropriate allocation of risk during the feasibility, procurement, and contract award stages and monitoring and immediate mitigation of risk when it occurs.

PPPs are often seen as a panacea for difficult national budget circumstances. What are the risks around developing PPPs with this as the prime consideration?

In many instances, PPPs should not be implemented because they do not pass the litmus tests required such as Value for Money, commercial and financial feasibility, etc. They cannot be seen as an automatic panacea, it needs to be proven that proposed projects are viable and feasible as well as sustainable to be a panacea.

What governance arrangements are more effective for infrastructure PPPs?

Governments need to be fully engaged in the management of PPP contracts. They cannot step away and only engage the private sector partner when the close-out phase is reached. Many government employees do not understand the level of commitment required from their side and the need to have a technical understanding of PPPs to ensure that they are implemented correctly.

Is a rigorous public sector comparator really that important for an infrastructure PPP?

Most certainly in countries that are still developing or which are launching their first PPP projects. As PPP national markets mature, the private sector can become a more competent partner and this leads to a more trusting and professional collaboration.

PPPs often address a particular infrastructure service or need. How effective are they in addressing asset maintenance and preservation of benefit streams from existing infrastructure?

Brownfield PPP projects can be a minefield due to many unknowns. However, experience gleaned from existing projects and infrastructure can be beneficial – so it depends. However, I believe that every PPP project is unique and thus a certain amount of innovation is necessary to improve asset preservation and to do it better than it was done in the past. The goal should always be simple – do it better each time.

PPPs are inherently commercial in nature, as risk along with return is transferred to the private sector. How can social benefits and returns be properly incorporated in the development of PPPs?

I believe that this has to do with a mature and well-defined understanding of Value for Money: adherence to people first PPPs is an option as well as incorporating the SDGs into project goals and objectives. This can help project proponents determine the non-commercial elements of risk transfer in socially beneficial projects and the possible subsidies that might need to be introduced to offset non-commercial vitality pertaining to certain risks.

If every PPP had to contain one mandated element, what would that be?

By answering the following questions –

  • Why are we doing this as a PPPs?
  • Are we confident that this should be a PPP?

Good answers require completion of due diligence, gaining political support, full stakeholder engagement and full disclosure of all information to all private sector parties equally, so that they all understand the merits of the project.

If these answers cannot be motivated and supported fully – do not do it as a PPP.

David, thanks so much for making the time available to talk with us and share these insights.

 

Value Uplift and Capture

money_bridgeValue capture and uplift associated with infrastructure projects are often discussed but not well understood. This is because the issue sits at the crossroads of competing public and private interests, as well as institutional imperatives of project proponents.

From an economic perspective, it is a method of generating funds from economic rents – unearned private benefits from public investments – to deliver infrastructure projects. In the Australian context it is increasingly heralded as a potential new source of investment funds. However aspects of this approach have been used in both the US and the UK.

While there are over one hundred studies on value uplift around transport modes, impacts of other infrastructure types remain less well understood.

The Bureau of Transport, Infrastructure and Regional Economics has identified a range of factors assessing land value uplift challenging:

  • separating factors driving uplift to identify the infrastructure impact;
  • sampling errors in the estimation of land prices;
  • determining the catchment for beneficiaries / the project area of influence; and
  • isolating value uplift from network effects.

In essence, value uplift is where value flows from an infrastructure network are capitalised into land values. This is often observed regarding transport networks.

For the reasons outlined above, identifying value uplift is difficult in terms of identifying both who benefits and at what value. It is also why it has not been widely used to fund public infrastructure. However, there are two factors driving consideration of value capture funding:

  • economic rents accrue to landholders benefiting from economic infrastructure – in effect private, unearned returns from public investment in public assets – these are above and beyond use benefits and raises a critical equity issue; and
  • use revenues, particularly from public transport investments, are insufficient to fund infrastructure expenditures and are often complemented with significant subsidies from the public purse – value capture is seen as an alternative to increasing the general level of taxation revenue.

Overseas experience provides some guide to the types of value capture approaches, and each approach has its own pros and cons:

  • tax inventive funding – hypothecated value uplift based on an expected increase in property tax revenue. Commonly, a government issues a bond, effectively guaranteeing a return that matches the expected value uplift increment. The value at risk, however, remains with the government issuer.  This is one of the reasons most government treasuries oppose issuing these bonds – there is no transfer of financial risk associated with the value uplift increment.
  • betterment taxes – land owners thought to be direct beneficiaries of an infrastructure development – but not necessarily users themselves – pay a levy. The levey is typivally on the unimproved capital value of the land. A key challenge with this approach is achieving a correct attribution of the increase in land value from the provision of the infrastructure and related services.
  • transaction taxes – typically levied on property transfers. In this case, some of the property value increase attributed to the provision of publicly funded infrastructure will be collected by these taxes. However, this attribution is again difficult to to assess.
  • joint development – usually where a licence or concession is given to a private agency to develop surrounding land in exchange for delivering economic infrastructure and services. This is a significant model for railway development, and is currently in use for heavy rail in Asian countries.

While a range of estimation problems have been identified above, network architecture remains the most significant factor. Hierarchy, connections and density influence this. While the literature on network architecture largely focuses on transport infrastructure, specifically road and rail assets, further analysis is needed of other linear infrastructure (i.e. water, electricity and gas).

Two broad solutions emerge: either a more to a more general land tax; or further detailed investigation of each specific infrastructure project. The important point is to adopt an approach that minimises market distortions and promotes economic efficiency.

NSW Northern Beaches Hospital Deal

One of the largest public health projects in NSW has been slowly releasing more and more information about the total cost of the project. Like some other public private partnership arrangements this project is a combination of capital investment and operating service payments.

The Northern Beaches Hospital project was belatedly revealed to the public to cost $2.14 billion cost, up from “over $1 billion” in December 2014. See: http://www.brisbanetimes.com.au/nsw/revealed-the-real-2-billion-cost-of-privatised-northern-beaches-hospital-20150501-1mxgqd.html

A lot of information was shrouded in commercial secrecy and the Health Minister has indicated she did not get involved in the financing.

So let’s have a look at what the good taxpayers of NSW may be getting.

From public information, the hospital development itself will cost $600 million. The NSW government plans to chip in some $400 million in adjacent transport improvements. A big assumption is that this is actually delivered on schedule and budget.

That basically handles the capital investment side of the equation and may leave $1.14 billion for the hospital services NSW is purchasing up to 2038 from the consortium.

Let’s say the hospital is operational in 2018, so there is a 20 year service period. According to some reports, 488 public beds will be provided.

This means the average daily cost per bed – occupied or not – is around $320 over this period.

Across the NSW health system the average cost per occupied bed was around $1,400 per night in 2012-13, based on information given to the NSW Auditor General.

See: http://www.audit.nsw.gov.au/ArticleDocuments/358/10_Managing_Length_of_Stay_Hospital_Readmission_Appendix_Three.pdf.aspx?Embed=Y

So this looks like it might actually be a good deal even at low occupancy rates. But since we do not know the basis of the service payments we simply cannot be sure.  The consortium get to make some extra cash on the side by selling private services through the site.

At about this point I can hear a lot of health economists scream.

So let’s recognise there is a lot of detailed, good work being done by the Independent Hospital Pricing Authority (see: http://www.ihpa.gov.au/internet/ihpa/publishing.nsf) that is putting evidence-based price signals into the hospital funding system, allowing funding arrangements to move from block grants to activity-based funding payments.

Over time this should help improve the efficiency of our hospital systems.