Due to integrity questions facing its temporarily sidelined chief conductor, Deputy Premier-Treasurer Jackie Trad, Brisbane’s Cross-River Rail (CRR) Public-Private Partnership (PPP) has been steamed in the press recently. The mega-project has attracted a large amount of controversy over the years, but supporters would argue the CRR is a creatively financed, innovative solution to Brisbane’s growing population strains. The Queensland Government is progressing a $6.9 billion project while only committing $5.4 billion to its financing, with the remaining $1.5 billion supplied by the private sector. Whichever side of the debate you may be on, to fully understand Brisbane’s CRR, you need to know a little bit about PPPs.
A PPP involves a contractual agreement between a government and private partner(s) whereby the government specifies the quantity and quality of services required and the private partner agrees to fulfil the established criteria if reasonably compensated by some form of revenue stream.
Types of PPPs
In Australia, there are two main types of PPPs: economic infrastructure PPPs and social infrastructure PPPs. The former describes a situation where the private sector’s revenue stream is constituted by user-based charges, such as tolls. A social infrastructure PPP is an arrangement where the private sector’s revenue stream is composed of availability payments, or per service payments, from the government. The key difference between the two models is that economic infrastructure PPPs are used for income-producing infrastructure projects and are financed by users of the infrastructure, whereas social infrastructure PPPs are typically used for non-income producing infrastructure projects and are funded directly by the government.
Colin Duffield, Director of the Australian Centre for Public Infrastructure, argues that the Australian PPP industry can be grouped in terms of first and second-generation projects. The first generation PPPs were principally user-charge arrangements and delivered infrastructure projects such as the Sydney Harbour Tunnel (commenced 1988). Around the turn of the century, service-payment arrangements proliferated in NSW, Victoria and Queensland, and the so-called second-generation PPPs have remained prominent ever since.
Pros and cons of PPPs
In the case of user-charge PPPs, the funding available for public investment increases as the private sector and users of the facility shoulder the brunt of payments. In the case of service-payment PPPs, governments are able to free up funds for other projects – when compared to more traditional procurement methods – by spreading payment obligations over a longer timeframe.
PPP advocates typically argue that by harnessing competition between private firms, such arrangements can realise innovative solutions to meet public needs, generate productive efficiencies (timeliness), encourage private sector engagement and minimise public expenditure. Additionally, the allocation of a given project to a private partner is thought to significantly transfer risk from the government to the private sector.
PPP critics often point out how politicians use PPPs to avoid adding debt to state balance sheets instead of having efficiency and cost-effectiveness in mind. In 2006, John Quiggin argued that, in practice, “PPPs have been influenced, to a large extent, by presentational and accounting considerations unrelated to the principle of optimal allocation”. By “accounting considerations”, Quiggin was referring to the way operating leases, which PPP arrangements typically fall under, were not classified as debt. However, the new AASB 16 lease accounting standard appears to have rectified this issue. Lessees, as of 1 Jan 2019, are required “to recognise assets and liabilities for all leases with a term of more than 12 months”. The PwC’s Reimagining Public-Private Partnerships report reiterates this point, asserting, “balance sheet treatment is no longer a driver of Australian PPPs” because all PPP models are now represented in terms of liability payments on balance sheets.
How is Cross River Rail being delivered?
Brisbane’s Cross-River Rail is a $6.9 billion project that has been divided into three main sub-projects: the rail integration and systems (RIS), the tunnel, stations and development (TSD), and the European Train Control System (ETCS). The procurement process of each sub-project can be seen in the table below. It is important to note that alliance contracting is different from PPP contracting. In PPP arrangements, goals are formulated by the government and agreed upon by the partners who “retain their independence and may individually suffer or gain from the relationship”, whereas alliances can be characterised by a more horizontal relationship wherein “parties form a cohesive entity that jointly shares all risks and rewards”.
|Procurement process||Alliance contracting||Availability PPP||Traditional procurement|
|Partner(s)||Unity Alliance: UGL Engineering, Jacobs Group and AECOM||CIMI-led PULSE consortium: Pacific Partnerships providing 49 per cent equity, and DIF, Bam and Ghell contributing the remaining 51 per cent||Hitachi Rail STS|
In the 2016-17 budget, the Queensland Government put down an $800 million in-principle commitment, $50 million toward scoping work and the founding of the Cross-River Rail Delivery Authority (CRRDA), and a further injection of $129 million to the CRRDA in FY2017-18. In the 2017-18 budget, the Queensland Government allocated $1.95 billion towards the CRR over the forward estimates (three years) and in the 2018-19 budget, a further $914 million was accounted for in the FY2021-22 forward estimate. In total, this amounts to $3.73 billion.
Of the remaining $1.7 billion in CRR construction costs that are expected to be incurred until 2024, the year-by-year costs of the CRR PPP beyond FY2020-21 have not been specified. Furthermore, where cost figures have been provided, they have been convoluted by numerous other projects categorised within “leases and other similar arrangements”. For example, in the 2019-20 budget papers, the $2.6 billion “leases and similar arrangements” have been reportedly made up of four main projects: 1 William Street ($700 million), the CRR (liability unspecified) the New Generation Rollingstock contract (liability unspecified), and the Toowoomba Second Range Crossing (liability unspecified). CRR construction costs are expected to end in 2024 and from then on the various CRR partners will incur maintenance costs of around $100 million/year based on the business case.
In addition to integrity issues, the CRR project has already been subject to significant delay. In February 2018, authorities expected to start tunnelling by the “second quarter of 2019”, but Premier Annastacia Palaszczuk recently extended this deadline to late 2020.
Only time will tell whether or not the CRR is delivered on schedule, within budget and in a way that addresses Brisbane’s growing inner-city congestion strains.
This article was prepared by Ben Scott, Research Assistant, and Gene Tunny, Director, of Adept Economics. Please get in touch with any questions or comments to email@example.com.