The Use of Private Sector Consultants in Public Private Partnerships

The paper looks into the case of the Victorian Desalination project in the light of the implementation of the PPPs. It introduces the PPP model and the application of the PSC models. The paper then undertakes an in-depth analysis of the Victorian Desalination Plant with a view of understanding its purpose and the underlying structures. It summarises the key features of the project, the reason for its execution, and its importance. The paper considers the implementation of the PPP model in the Victorian Desalination Plant by looking into the factors that made the project to be reluctant in the implementation of the model. It examines the application of the model and checks on its success. After this, the paper focuses on the transfer of risks between the state and the private sector. Finally, the paper critically examines the importance of the PSCs in PPPs.

Public-Private Partnerships are contracts based on services where the private sector makes an investment in its capital in operating, financing, designing, building, and maintaining a facility (Colverson, 2012). The Australian government mainly supports PPPs because it leads to the establishment of infrastructure without necessarily appearing as an increase in government borrowing in the public sector. However, the Australian PPP projects have in the recent past been experiencing several problems such as excessive tariffs complaints, cases of bankruptcy, claims of poor service delivery, disputes in compliance to contracts, and instances of early or opportunistic renegotiation of contracts. The costs for bidding of the PPP projects rose leading to a spotlight in their efficacy and efficiency. The complexity of the process of tendering in Australia and the lack of timeliness of the process also calls for attention. The government, therefore, uses PSC to exert control over the PPPs. Public Sector Comparator (PSC) is a government tool used for the determination of provision of proper services by a project in the public sector. According to World Bank (2018), Public Sector Comparator is useful to the government in measuring the value for money of a private investment proposal by comparing with the most efficient public procurement forms. In the Victorian Desalination Project, the tool was not effective leading to lack of support for the PPP model due to several disadvantages it exposed the project to and the failure in an effective transfer of risks.

The Victorian Desalination Project: Overview

            Victorian Desalination Project is a water desolation project located in Dalyston, in the southern Victoria, Australia. It is among the largest water systems in Melbourne as well as PPP project that was effective since 2009 despite the several problems associated with running the project because of the application of the PPP. The plant supplies about a third of the total water demand in Melbourne since the commencement of its operation in 2011. The private sector and the state governs the development and the delivery of services thus boosting the project. The components of the project included a 150 GL desalination plant, an 85km pipeline for the transportation of the of treated from the plant to the Melbourne Water network, tunnels for the discharge of concentrated seawater and providing seawater to the plant, and an 88km underground high voltage alternating current transmission line. The project experienced several challenges in its construction leading to a delay in its delivery.

The Victorian Desalination Project and the PPPs

            Though Victorian Desalination Project later used Public-Private Partnership in its management, it did not support the practice. The project was opposed to the use of PPPs due to the several problems that had been associated with the practice of the PPPs in the wake of the 1990s. However, the government pushed for PPPs without adequate consultation of the stakeholders in the project.  

There are several reasons why the project did not support the practice of the PPPs. Paul Grout pointed out that the government would, in the long run, assume any systematic risk that the project would transfer to the private investors as it was the public investor. Paul Grout strongly believed that the government would later either pay for the services in the contract if it was to obtain private ownership of the asset or finance the funding of the incurred debt if it was to be a public owner of the project. This threatened the welfare of the project as the government would exercise excessive control over the project which does not come in good light to the project.

While the use of PPP was meant to filter white elephants, the project turned out to be white elephant. In this sense, it failed to serve its purpose of eliminating political attention or interest. During the 2010 elections the issue of the water facility became a controversial topic as the Brumby government met several accusations from the Baillieu camp over claims of overspending following the poor weather patterns that characterised the project. The floods increased the levels from the normal the normal 25.6% to 54.1%. The costs of the project extremely high making the Baillieu camp to term it a white elephant and made attempts of closing the contract.   Brumby government had earlier refused to release all the documents with statistics of the costs. However, the Brumby government defended themselves from the claims stating that there was equivalence between the normal A$24 billion figure and the publicly disclosed A$5.7 billion. The market observers also questioned the state for using a more expensive option for the construction of the desalination project. They made claims against the 86 km that was required for pumping the water to reach Melbourne requiring 92MW energy. With a rise in the costs of fuel, the project was doubly expensive. They claimed that if the water was recycled a smaller distance from the city, then it would be very cheap. In 2011, the Australian Productivity Commission further criticized the project quoting that almost every decision regarding it was “political” with the socio-economic factors not considered. The commission criticized the lack of transparency and clarity in the project in the decisions regarding water supplies.  It stated that the over-investment was as a result of poor institutional arrangements. From the report, it was clear that the government was the major cause of the failure as it hid a lot of information regarding the failure of the project.

The stakeholders did not support the PPP model also due to the possible delays and the escalating prices. Bad weather coupled with industrial action staggered the progress of the project as floods frequently damaged parts of the construction project. When AquaSure made claims to the government that it would want compensation due to the floods, it meant that the taxpayers would have to spend more. The PSC thus cost the taxpayer more than otherwise making it a wrong choice.

Several tensions and conflicts in the project between the workers and the project management had adverse effects on the project reducing the feasibility of PPPs. The managers exercised tough monitoring of the project and were thus accused of spying within the workspace. The implication of this was the widespread strikes which led to delays in the construction process.

In conclusion, it was clear that the PPP model was not the best option in the case of the Victoria Desalination Plant. The private sector was highly insufficient. The government also hired tech team which inadequate experience regarding the construction and operation of the project. The numerous problems experienced in the project was a clear show of low experience tech workers with little expertise. The ineffectiveness led to no shielding of the client from the financial cost overrun. Essentially, the project was mothballed with the SPV not shouldering all the financial risk.

Transfer of Risks

            Though there was transfer of risks, there was an improper calculation of the risk levls leading to huge overrun in costs. There was no proper reflection of the transfer of risks in the discount rate that the public sector comparator (PSC) used. The underlying reason for this was the difference in the cash outlay patterns in the PPP and the PSC. In PSC, a significant proportion of the cost is paid up at the start of the project while in PPPs there is spread to the later stages because of the assumption by the private investor and the payments done by the government (Tan-Kantor, Jubb, & Abbott, 2017). The high discount rates which make the public bids seem more expensive compared than the private bids attribute to the differences. Essentially, in the earlier stages, the government avoided the major costs but incurred much expenditure in the course of the project (Ben-David, 2013). This would enable the private sectors to effectively recover the costs they incurred in the investment.

            The basis of the methodology of transfer of risk was the principle that almost every project incurred systematic risk (Australia, 2008). Either the government or the private sector was to bear the risk. They could also share the risk. The diversifiable or project specific risks were not considered. In cases where the government managed to transfer the systematic risk to the private sector, it failed to use a common rate to discount PPP and the PSC bids.

            The government used the Capital Assets Pricing Model in the determination of the project’s systematic risk. Under this model, the owners were compensated for risks that could not be done away with through diversification from the rate of return from the assets. Investors received a higher return for high risks projects than assets with lower risks. This meant no adequate transfer of risks by the SPV.

            In cases where there was no transfer of systematic risks to the private sector, the discount rate used in the calculation of the net present cost (NPC) within the private sector would be free of risks while PSC discount rate would be bearing all the risks (Victorian Government Supplementary Submission, 2014). The systematic premium which is the amount the project exceeded the risk-free rate was divided among the parties in cases where there was sharing of the systematic risk between the private sector and the government. Transfer of more systemic risks to the private sector resulted in higher rates of discount.

The Use of PSC in PPPs

            PPP projects necessitate cautious design, groundwork, assessment, procurement, contracting and attentive oversight depending on their complexities with a target of yielding net benefits to the society (Hodge, 2004). Therefore, PSC helps PPPs in preparation and management of projects with institutionalized programs. PSC plays a significant role in justifying PPP projects as they benefit in countering the influences of faultfinders who are resilient to the impression of private sector participation in the projects as most people assume that PPP projects. The practice of PPP's and PSC's 9 benefits the private sector interests at the interest of taxpayers or service users. PSC can be used at diverse periods of the project preparation course (Shugart, 2008).

PSC is instrumental in the determination of the proper service provider for public sector projects and is widely used by the government (Kerali, 2006). It thus brings out the estimates of the costs that the government would pay in delivering service. The PSC is involved in decision making by looking at the mode in which a private investment suggestion gives value for money while at the same time compares it with the most effective form of public procurement. Therefore, the government, through PSC, is allowed to figure out whether PPPs would be cost effective. It hence makes approximations on the hypothetical risk accustomed cost for a project that wants to be funded, maintained or executed by the government (Morallos and Amekudzi, 2008).

 The PSC allows risk-adjusted financial manner of a project of hypothetical public sector whereby it approximates the total costs to the administration of attaining the projected yields, supposing that the project is controlled in a standard approach with sensible, predictable effectiveness progresses. On the other hand, PSC ensures that the PPP project's risks are handled for example by having the government bailout a project contractor rather than let a project collapse. Most countries lack for structure projects therefore emerging and using PSC in any significant technique is usually not possible (Bing et al., 20050). Rendering to Hodge and Greve (2007), there is a large economic benefit of countries that use PSC in PPP projects. It also allows an economically rational choice between PPP designs, and old-style procurement hence demands the project organizer to emphasize the production description as well as risk allocation for the project. This will enable the stimulation of different risk allocations (Watts et al., 2000).

Consequently, PSC is important to PPP projects as it deals with allowing cash flows for a pre-determined period, integrating the efficiency improvements raising from the management and reserved risks as well as it takes responsibility of dealing with the risks. PSC addresses revenues whether direct or indirect as it provides a means for decision making procedure in times of risk management and project development. It also assesses business models that are suitable for projects, the type of contract the projects require and employ and optimal risk sharing agreement. With this, there is potential for gain and exposure to project development and risk management hence saves on time and money leading to a successful project (Quiggin, 2004).

            PSC determines the proper service provider for public sector projects and is widely used by the government. It brings out, in this manner, the estimates of the costs that the government would pay in delivering service (Kerali, 2006). The PSC is involved in decision making by looking at the mode in which a private investment suggestion gives value for money while at the same time compares it with the most effective form of public procurement. Therefore, the government, through PSC, is allowed to figure out whether PPP’s would be cost effective. It hence makes approximations on the hypothetical risk accustomed cost for a project that wants to be funded, maintained or executed by the government (Morallos and Amekudzi, 2008).

Conclusion

Though the Victorian Desalination plant faced several challenges in the implementation of the PPP due to the great opposition due to the several weaknesses, the model achieved some success in the project. The PSC has been lately used in Australia as a strategy of mitigating the several weaknesses of PPP projects.

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