The term public-private partnership (PPP) covers a multitude of deal structures where a government service is funded or operated, or both, through a partnership between the public sector and private business. It is widely used but still controversial in some settings.
The collapse of Sydney’s AU$680m Cross-City Tunnel scheme is held up by critics as a classic example of why the PPP Private Finance Initiative (PFI) does not work. In PFI deals the company often expects a return on its capital investment through service charges. In the case of the Sydney toll tunnel, which opened in August 2005, the revenue structure relied on assumed traffic volumes that proved unrealistic. The operators anticipated initial through put of 35,000 vehicles per day, rising to 90,000 over the first year. But actual usage hovered around the 30,000-per-day mark and the Cross City Motorway company went into receivership with debts of more than AU$560m in December 2006.
Reality is too complex for PFI, say critics. “The private sector wants boundaries wrapped around the infrastructure for the duration of the deal, but in reality things change,” says Dr David Dombkins, national president of the Australian Institute of Project Management. Attempts to force vehicles through the Sydney tunnel by changing street-level traffic systems worsened both congestion and public support. “PFI is financial engineering focused on getting the deal done rather than serving the community,” says Dr Dombkins.
Despite problems, PPP is still popular with governments. Australia’s Partnerships Victoria scheme, for example, covers 16 projects worth AU$4.5bn. And the UK government PFI program is currently worth around £40bn. In Washington DC, a different model of PPP is gaining ground. The city’s US$102m metro station at New York Avenue used private funding as the crucial lever to get the plan off the ground. The scheme to regenerate alight industrial area by improving transport links was first raised in the city mayor’s economic development plan. But the scheme only went from the “wish list” to the “to do” list when local landowners agreed to pitch in US$25m to get it started, according to John Thomas, acting director of construction for the Washington Metropolitan Area Transit Authority. “Local landowners knew the station would make their property more valuable and that it was an investment that would reward them handsomely,” he says.
The New York Avenue deal included US$25m of cash funding and another US$10m-worth of real estate donated for the site. The US$25m was provided up-front by the city, to be paid back through adjusted business property tax rates over the next 30 years. And as real estate values rise thanks to the area’s improved transport links, so too will the rate of payback. The model has proved so successful it is now being used for the scheme to extend a rail link to Dulles airport. And the costs involved to expand the metro entrance serving a newly-built baseball stadium are to be shared between the city authorities and a local property developer building a new office block on the site.
