Revitalisation of Central Station – time for a PPP that’s more like a partnership?

The term “Public Private Partnership” is a bit of a misnomer.  Under Australian law, a partnership arises when two or more people agree to carry on a business in common, with a view to profit. Each partner shares in the risks and rewards of the business, is entitled to a share of the net profits of the business, and is jointly and severally liable for the liabilities and obligations of the business. 

Australian PPPs don’t actually embody any of these key features of a true partnership. Rather, the legal arrangement is one of principal and contractor – the government (as principal) engages a private sector entity (the contractor) to deliver specified infrastructure works and services under a fixed price contract. 

For PPPs involving infrastructure that can generate significant revenue by charging users (e.g toll roads and public transport services), or by developing and selling surrounding property (e.g railway stations and transport interchanges), governments have traditionally been reluctant to share in the risks and rewards associated with the conduct of these businesses. Rather, government’s preference has been to allocate the risks (including demand risk) and rewards to either itself or the private sector.  

For PPPs involving infrastructure that can’t generate significant user charges (prisons, schools, public hospitals), there is no business being conducted with a view to profit, and so no opportunity for a true partnership.

At best, well-structured PPPs will align the contractor’s entitlement to earn money from the project with the outcomes that government is seeking to achieve. But this falls far short of the sharing of success and failure in a true partnership. For those projects that that offer significant upside from the conduct of a business with a view to profit, this can represent a lost opportunity for taxpayers.

Upcoming opportunities for true partnerships

The NSW Government is presently considering a number of projects that include opportunities to carry on a business with a view to profit. One example is the revitalisation of Sydney’s Central Railway Station which will include retail business opportunities and property development opportunities. Similar business opportunities also exist in connection with other proposed railway stations and station upgrades. Perhaps these projects represent opportunities for the NSW Government to develop PPP structures that incorporate true partnerships between the Government and the private sector. That is, partnerships that would enable the Government to not only harness the expertise of the private sector in the development of these business opportunities, but to also share in the rewards associated with them.

Some challenges to be considered

The private sector won’t be interested in an arrangement under which the Government is entitled to a significant share of any rewards unless the Government is also willing to bear a commensurate share of the risks. So, a PPP that resembles a real partnership will only be possible if the Government has an appetite to share in the risks associated with the operation of the business.  Some people may question whether it is even appropriate for the Government to expose itself to these sorts of risks, or to engage its resources in these sorts of activities.

But if it is considered appropriate, will private sector parties be willing to ‘get into bed’ with a government partner? When parties share the risk and rewards of a business, they generally want to be involved in decisions concerning the conduct of the business. Parties can be expected to have regard to their own interests and objectives when making decisions. The interests of the private sector parties will boil down to maximising profit. The interests of government are broader, including reputation, providing good services to the public, proper process and the politics of getting re-elected. Not surprisingly, the various interests are not always aligned and the private sector may be concerned about the government ‘partner’ making decisions that put government interests ahead of profits. Most property developers will say property development is risky enough, without exposing yourself to political risk!

But these challenges are not insurmountable. Whilst a partnership in the pure legal sense might not be sensible, there is no reason why an innovative PPP structure couldn’t be devised that allows government to share in the rewards of the business opportunities associated with these projects, on a basis doesn’t expose government or the private sector to unacceptable risks. 

Ultimately the development of such a PPP will require those involved to have a sound understanding of each side’s appetite for risk, and a capacity to be innovative and think outside the box.

Thanks to Tureia Sample and Hannah Stewart-Weeks for their input on this article.