Emergency Brake

An initial pipeline of five hospitals in New South Wales has been whittled down to just one. Should the industry be concerned and is this the symptom of a wider trend in Australia, asks Paul Jarvis

“The parallels with the death of PPP in the UK and other markets are all too obvious,” warns John Poulsen, partner at law firm Squire Patton Boggs, ominously.

He’s talking in the wake of the New South Wales government’s decision to scrap the use of PPP to deliver four out of five hospital projects across the state. In September last year, then-health minister Jillian Skinner launched tenders for the five hospitals, to be delivered as PPPs.

However, the following month the government decided not to use the model to deliver the Goulburn Base Hospital. Then, over the course of a week in July 2017, the new health minister, Brad Hazzard, cancelled PPPs for the Bowral, Wyong and Maitland hospitals.

Hazzard insisted that the deals were scrapped on value for money grounds. Indeed, some in the industry have simply shrugged their shoulders. “I just think it’s a reflection of the increasing sophistication of government here continuing the evolution of their thinking as to whether PPPs are value for money for the taxpayer, based on the unique characteristics of the deal, sector and market appetite,” says one adviser.

And some investors suggest that, far from being a sign of the lack of interest in the PPP model among the NSW government, the move could result in better structured projects coming forward in the future.

“The NSW government came out with an innovative structure, which wanted the private sector to take a lot of risk,” explains Giles Frost, director at investor INPP. “That was logical on one level, but the level of risk was unfamiliar for many in the market.”

Poulsen agrees, but suggests that an arrangement could have been reached to let all schemes go ahead under the PPP model. “There is an abundance of expertise in the private sector, and we should be able to combine this with a more nuanced approach to risk sharing between public and private sectors.”

Sources suggest that the level of private sector interest in the four PPPs that were cancelled was not particularly high, resulting in a decision to take forward the final scheme – Shellharbour – as something of a pioneer.

“Sometimes governments – not just in Australia but around the world – take forward things that sound interesting but when you get into the detail as an investor, you perhaps don’t want to do it,” says Frost. “So you have to be selective.”

So far, then, the investor community is remaining relatively sanguine about the situation. The danger, though, is that the fallout from the NSW hospital deals could cause damage elsewhere in the industry. A petition against the use of PPP in the Shellharbour scheme, for example, has gained over 12,000 signatures, as campaigners ask why their hospital is being “privatised” while the other four have had their plans changed.

“Opponents to the use of PPPs for delivering public services will likely use these outcomes to challenge future PPP proposals,” admits Christopher Healy, partner at law firm Hogan Lovells. “Politically, this is inevitable as opposition parties will as a matter of course seek to challenge government policy, and the NSW government’s climb-down on these hospital projects will provide further justification for this.”

And politics no doubt played its part in the original decisions. “The state opposition Labor Party has argued that the privatisation of hospitals using a PPP model could lead to the creation of a two-tier health system in NSW,” adds Healy. As a result, the government required the projects to offer additional benefits if they were to proceed as PPPs.

“The ministry has also cited insufficient private sector interest in the projects to give the government confidence that better outcomes would be achieved,” Healy continues. “That said, for the remaining project, several expressions of interest have been received.”

“The planned use of PPP in NSW is a campaign issue for local politicians,” adds Poulsen. With council elections held across the state in early September, it may have been that cancelling deals was a better approach to winning votes than trying to explain the intricacies of a new PPP model on the doorstep.

Poulsen has some sympathy here. “Hospitals can be tricky in that creating well-defined, measurable performance targets is perhaps more challenging than in other project types,” he says.

However, he and others worry that a failure to properly explain the benefits of privately financed projects could be repeating the mistakes seen in the UK, resulting in a slippery slide towards widespread public opposition to PPP deals.

“The perception of PPP in NSW is that the model is toxic,” says Poulsen. “But government should be able to rise above the noise and consider an evidence based approach to project funding, delivery and operation. The evidence suggests that done well, PPPs provide lower lifecycle costs and better services for taxpayers.”

And it is not just an issue in NSW. “It’s one step forward and two back in Australia at the moment,” says Poulsen’s colleague, Jody Fitchet. “In the last federal Budget there was talk of major infrastructure projects, but we have not really seen that come through.”

As one of the most mature PPP markets in the world, Australia has often been viewed as a leader in the market. And while a look at the current list of infrastructure projects being delivered across much of the country would get investors excited, Fitchet and others are worried more about what comes after the current pipeline.

With politics playing a bigger part in PPP discussions, and the model increasingly being used by different parties at federal, state, and local levels to criticise opponents, Fitchet suggests there is a lack of progress on what comes next.

“The nexus of federal, state and local government is butting up against each other at the moment,” he says. “Although there is a stack of projects currently going on, the secondary pipeline of projects that should follow on after the asset release programme is not there. It’s difficult to see governments funding what needs to be done, but it’s also difficult to see the commitment to letting private investment into it.”

Frost, though, is more sanguine. “Like in the UK, the Australian market waxes and wanes, but there are things around,” he says.

Healy, too, acknowledges that there will be times when PPP is more appropriate than others. “Not every project is going to achieve better outcomes under a PPP model and understanding and measuring these outcomes is perhaps one of the most important aspects of the project development phase.

“Each of the projects would need to be reviewed on their respective merits to understand the basis on which they were determined not to deliver better outcomes.”

Everyone operating in the PPP world knows that the procurement method cannot be fully divorced from politics, and it may just be that social infrastructure in Australia is less politically attractive than it once was.

“Australia has done well to depoliticise infrastructure decisions to a degree,” says Fitchet. “[But] education and health are areas where voters are going to be riled. Transport and correctional facilities are in a lower bracket of political controversy.”

That certainly seems to be the message given out by the NSW government, which launched a tender for new rolling stock to be delivered under a PPP model in August, suggesting that this is one area where it still believes there is both public acceptance and private sector appetite for such investment.

Poulsen argues that economic reality demands PPP as part of the overall investment mix. “Are states able to throw off the fiscal constraints that limit the funds they can divert to capital projects?” he asks. “Have we seen a marked reduction in the private capital available and the level of risk the private sector is prepared to take in such projects? I don’t think so.”