Preventing Public Private Partnerships provoking political problems
7 April 2019● News and media
Public Private Partnerships (PPPs) have been used by governments to obtain extra funds for infrastructure and shift the risks of cost overruns on to the private sector. What has proved more difficult is shifting the political risks of major infrastructure projects.
The latest addition to ANZSOG’s Case Library, by Carnegie Mellon University Australia’s Professor Tim O’Loughlin, outlines the issues around the PPP construction of the new Royal Adelaide Hospital by the South Australian government. It examines how choosing the PPP method of financing added to the political controversies around the decision to merge existing health facilities into the new hospital.
The investment in a newly-built public hospital servicing Central Adelaide was to be the flagship project for the State’s social infrastructure investment program. It was sorely needed as the main existing hospital, the Royal Adelaide, was 150 years old and showing its age. Wards had been designed in a different era for a different model of health care, one more focused on the needs of staff rather than patients. Upgrading the hospital would be significantly more expensive, and take longer, than building a state-of-the-art facility from scratch.
SA Premier Mike Rann announced the project in June 2007 with an initial projected cost of AUD$1.6 billion. His Treasurer Kevin Foley had always been open about his preference for using PPP for the hospital project:
“What I like about a PPP is that you get a degree of fiscal rigour. You get a degree of transference of risk so that the price of risk is transferred to the private sector. The issue of cost overruns and error, in terms of estimating and delivering a project, that risk is transferred to the private sector.”
The government had no recent experience of managing a hospital project on this scale, and Foley was attracted to the procurement method which he saw as offering allocation of construction risks, particularly that of overspend, to the private sector, albeit at a price.
Evidence from Australia and the UK seemed to support his preference. Both countries had experienced some spectacular PPP failures. However, the overall case for using PPPs was becoming more compelling as its use matured in both jurisdictions. In the UK, the National Audit Office had reported a greater percentage of Private Finance Initiative (PFI) projects – the UK equivalent of PPPs – coming in on time and on budget.
However, it would be impossible to even begin calculating cost savings until 2017, when the hospital was due to open.
The SA Government’s immediate problem was that political pressure over the idea of a new hospital showed no signs of abating. The use of the PPP procurement method became a sub-issue allowing the project’s opponents to attack it.
The SA Government had made a series of changes to the way health services were funded, and the closure of the Royal Adelaide hospital became one focus of resistance to change. As the project developed, it became more apparent that not everyone agreed a new hospital was the answer and dissent flared.
With a state election fast approaching in March 2010, the political risk to the government intensified. The New Royal Adelaide Hospital threatened to become a vote loser for the Labor party in a tight 2010 election contest.
“The hospital itself had become a net negative for the 2010 election campaign … we couldn’t believe it’,” Foley explained.
Despite the controversy, the Government scraped home to win, albeit with a swing against it of more than 8% and pushed ahead with the construction of the hospital.
The opening was sixteen months later than the first official opening date and followed months of often bitter dispute between the public and private partners. It will take years of operating experience before a proper assessment of value for money can be made. Even then, a final conclusion would be impossible as no-one could ever know with certainty what the project would have cost if it had been delivered via conventional procurement.
Later, Foley reflected on the unusual mix of issues created by the decision to build a new hospital using a PPP to deliver it: “It felt like we were bouncing between global financing issues and the most local of political issues. I guess the overall conclusion is that procurement matters, not just for the normal reasons of cost and efficiency. The process has a political impact which has to be managed.”