Wednesday, October 19, 2005

"Governments should avoid public-private infrastructure deals led by investment banks"

Public-private funding pitfall

October 19, 2005

Glenda Korporaal and Ean Higgins
The Australian
Copyright 2005

GOVERNMENTS should avoid public-private infrastructure deals led by investment banks because they are motivated by profit over community benefits, a former top NSW public servant, Gary Sturgess, warned yesterday.

Mr Sturgess, now head of London-based think tank the Serco Institute, said there was a danger that such deals were primarily driven by financial engineering, not delivering the best outcome for the community.

He is to make his points this morning before a special meeting of the NSW Public Accounts Committee convened to hear his evidence during his trip to Australia.

"There seems to me to be a difference between companies who see these projects as essentially an operational contract and those for whom it is simply a financing deal," he said.

"Having a (public sector) project led by an investment bank does suggest that the value in the project lies in the financial engineering, not in value-adding infrastructure or public service."

Mr Sturgess, the director of the cabinet office in the Greiner government, said there was nothing intrinsically wrong with public-private sector infrastructure deals, providing the government negotiated a proper contract upfront and did not just do deals with operators who cared only about the financial aspects.

Investment banks had a significant contribution to make in putting together the financing for public-private sector deals but the financial aspects should not be allowed to dominate deals to provide projects for the public sector. There was "something wrong with the market' for such projects when it came to be dominated by investment banks", Mr Sturgess said.

Deals between state governments and the private sector have come under fire in the past fortnight, after it was revealed that the NSW Government signed contracts for a cross-city tunnel and another tunnel in Sydney's north that provided for the diversion of traffic from public roads into the privately operated tunnels.

Mr Sturgess said public-private infrastructure deals could have value if they produced more innovation in the construction or the operational of projects such as toll roads and tunnels. But the deals should not be dominated by financial engineering. "If you have a system where investment banks are habitually and frequently leading on public-private sector partnership deals, it suggests something is not quite right with the design of the market."

The onus was on a government to ensure it was doing deals with operators that had a long-term interest in the project and were not just wanting a quick profit.

Mr Sturgess said the British experience with PPP deals had shown the private sector could be involved where the operators delivered on their promises and did not just approach the projects in crass commercial terms.

The NSW Opposition yesterday broadened its attack on the Government over the handling of its public-private partnerships, raising questions in parliament about the $2billion desalination plant planned for Sydney.

Opposition Leader Peter Debnam asked Utilities Minister Carl Scully, previously roads minister, responsible for the private toll tunnels: "Given that even your own colleagues acknowledge you made mistakes and unnecessary compromises on your last major infrastructure projects, what compromises in community interests are you now negotiating away as part of Labor's $2 billion desalination plant?"

Mr Scully replied: "Yes, when you negotiate you make compromises. Yes - big deal." He said the Government was negotiating with a short list of three tenderers for the desalination plant.

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