The failure of PPPs

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Cross-posted from The Conversation.

With the Coalition government abolishing the Major Cities Unit and the NSW planning system in disarray, last week’s International Society of City and Regional Planners congress, ‘Frontiers of Planning: Evolving and declining models of planning practice’, seemed timely. Looking back, perhaps one of the greatest urban, economic and social planning failures of the last decade in NSW were large public–private partnerships (PPP).

Research launched at the congress shows that PPPs are dying a slow death in Australia. No matter how hard they try, governments of varying political persuasions just can’t seem to get the government intervention to free market economics relationship right. And nothing illustrates this better than the Bonnyrigg Living Communities Project (BLCP), in Sydney’s south-west.

The failure of PPPs

PPPs are used to provide large-scale infrastructure (roads, tunnels) and social services (hospitals, prisons) formerly considered the remit of government. They exemplify the withdrawal of the welfare state and the rollout of neoliberalism.

Between 1988 and 2006, 133 PPPs were in various stages of development in Australia, with the majority of these – 101 – occurring between 2003 and 2006. They have been taken up with particular enthusiasm by NSW (59) and Victoria (34). But the fate of NSW’s large PPPs is now clear.

The developer managing Sydney’s Cross City Tunnel was inreceivership by 2006. The failure of this project sparked a parliamentary inquiry focused on the outstanding debt (reported to be $560 million) and questioned the role of government in the collapse of the company and a pos­sible bailout. In 2010 the developer managing Sydney’s Lane Cove Tunnel was in receivership (with an outstanding debt reported to be $1.14 billion).

In February 2013, property group Becton, the developer for Sydney’s Bonnyrigg Living Communities Project (BLCP) entered into limited receivership, amid question marks around the completion of the public-private housing project.

The Bonnyrigg experiment

Bonnyrigg, in Sydney’s south west, is the site of $733 million redevelopment of an 81-hectare state government-owned public housing estate, called Newleaf Communities. It is an interesting case because it involves the private-sector managing infrastructure and social welfare objectives. The BLCP was NSW’s first public housing estate redevelopment by PPP.

The residential suburbs surrounding the estate experienced significant median house prices increases between 1998 and the announcement of the PPP in 2004. Bonnyrigg Town Centre, adjacent to the estate, is well connected to two important growth cities, Liverpool (7 km from Bonnyrigg) and Parramatta (17 km from Bonnyrigg). Parramatta and Liverpool are set to become major transport hubs and employment cities over the next 25 years under the Sydney Metropolitan Strategy.

The PPP, made up of Becton, Westpac Banking Corporation Limited, St George Community Housing Association and the Spotless Group would replace 833 existing public housing dwellings with 2330 new homes and included the design and construction of social housing and private dwellings. The public dwellings were poorly maintained by the state government in the years proceeding the PPP. The private dwellings were to be sold by the developer on the open housing market. The management of public housing tenancies was transferred from Housing NSW to St George Community Housing Association under contract to the developer.

The social objectives included building community, reducing social exclusion and addressing unemployment. These social objectives were clearly outside the scope of other Australian PPPs. There is no implicit commercial imperative to drive developers to address social exclusion or unemployment. Commercial (market) incentives to address these social objectives must be created by governments.

As an incentive, the NSW government focused on the possible sale of the new private dwellings on the open housing market as a way of contracting the developer to meet these social objectives. The ratio of public to privately owned housing stock on the site was to be re­duced from the 2004 ratio of about 90% public and 10% private to about 30% public and 70% private. Some of the private housing stock is now occupied, while other dwellings have been sold off the plan.

But by February, it appeared that Becton was in danger of becoming the victim of a large exposure to the financial fallout of 2008 which had forced it to refinance. By then the tide had already turned on PPPs, with NSW Treasurer Mike Bairdarguing that the global financial crisis had significantly changed financial markets and the viability of PPPs in NSW.

“We have seen a marked reduction in both the amount of private capital available and the level of risk the private sector is prepared to take,” Baird said, while announcing it would solely fund the first leg of the $10 billion Westconnex. Prime Minister Tony Abbott, the situational Keynesian rather than Hayekian economic rationalist, has since also assured federal funding for the motorway.

Government as the lender of last resort

The circular nature of property markets means that the government intervention to free market economics relationship is always provisional. Property markets will boom and crash, homeowners will secure and default on home loans, banks will rise and fail and property developers will make millions and then go bust.

But it is governments, not businesses, that will pick up the pieces when developers and banks fail. In the BLCP, the downfall of the developer means that the state government will have to intervene. There are reports the state government and partner is attempting to sign up a new developer to complete 15 of the 18-stage project.

In the meantime, public tenants’ lives have been seriously disrupted, new private homeowners are living in a half completed housing project and those who have bought houses off-the-plan are in a state of limbo.

The lessons of the BLCP for social, urban and economic planning include the need to seriously consider the short-termist and often utopian contractual relationships between the government and the private sector.

The dystopian reality of many Sydney-based PPPs provides a poignant reminder about the dynamics and dilemmas between government intervention to free market economics.

Dallas Rogers is Research Fellow at the Urban Research Centre of UWS.

Comments

  1. How does the public evaluate a PPP for success?

    Were the tunnels that went into receivership a success for the taxpayer and public as the project was subsidised by the private sector’s loss of it’s equity?

    If public assets (including intangibles like TV, mobile phone and radio spectrum) are sold too cheap and the private sector makes a killing, doesn’t that mean the project was a failure from the public’s point of view?

    Would some kind of rent renegotiated say every 5 years be a better mechanism for the public in providing spectrum for TV, mobile phones etc?

    Are most PPP’s for fixed tangible assets merely tax or balance sheet driven financing arrangements? (Certainly leveraged leasing of rail carriages for state governments was obtaining a federal tax subsidy through private ownership of depreciable assets.)

  2. General Disarray

    An irritating aspect of those PPP tunnel builds is they almost always involve restricting perfectly good roads to “encourage” more people into the tunnels. When an infrastructure project is designed to be profitable in its own right the thinking tends to be too short-sighted.

    • Soak the car drivers to pay for the new infrastructure by closing competing public owned lanes, then (assuming the project is BOOT (Build own operate transfer)) reopen the closed lanes once the ownership reverts to increase capacity for “free”.

  3. I would post a comment on this but the commenting system keeps rejecting it. Perhaps it is too long.

    • thomickersMEMBER

      look to Dumpling for guidance on commenting

      His trilogy of comments are divided into “episodes”…All pass the moderation test as well as breaking box office records back-to-back 😛

  4. Some have worked, some haven’t and perhaps its better to get someone (Productivity Commission) to do an independent study rather than rely on reasoning by(selective) example. However, its going to be a hard case to justify that having the public sector decide everything about how much, what and when is spent on non social infratructure is going to be better than having some private sector involvement eg the PC has quantified that private sector hospitals are built cheaper and operate cheaper than public sector hospitals(selective example)

  5. While concession arrangements for toll roads and other infrastructure assets have existed since time immemorial, they were ‘rediscovered’ and renamed PPPs in the late 1980s and have since become a primary means of financing mega-projects, with applications ranging from tunnels and desalination plants to hospitals and prisons. The change in branding from concessions to PPPs is hardly innocent. A concession by a government to a private party of the right to undertake and charge for a monopoly asset has a clear negative connotation: taxpayers are giving up something which would otherwise rightly be theirs. Who, on the other hand, could object to a partnership, with all the sense of shared obligation that word implies? As with nation building, here words are being used not to assist understanding but to mislead. For whether the contracts are indeed a partnership, and one which delivers net benefits to the community, is a question of fact, not of form. The crucial issues are whether the projects are worth doing and whether the concession contract provides the project outcomes at least cost to the community.

    Regardless of the final result, and its real utility, everyone’s a winner. The firms undertaking the projects cash the rents. Governments gain more ribbon-cutting opportunities, vocal support from PPP firms, lucrative jobs for their ‘mates’ and welcome donations to campaign coffers. Only taxpayers and users suffer, but then again, ignorance is bliss. Little wonder that PPPs have proved increasingly popular with incompetent state governments.

    http://www.independentaustralia.net/2012/business/sub-tropical-fascism-part-5-corruption-and-corporate-rule/