Critical Times

The Pinnacle Education Consortium has been selected by the Government of SA as its preferred bidder for the six PPP “Super Schools”. Two other consortia have been rejected.

The Public Private Partnerships process involves a radical departure from traditional methods of Government infrastructure procurement. To a greater or lesser extent, various forms of PPPs involve the private sector in providing finance for the project, or being the builders and developers, or the managers and operators of public infrastructure for a period of time (30 years is about average).

In whatever capacity the private sector replaces the government and its service departments, there is an ongoing financial cost to the public for the period of the “partnership”. The bottom line for private investors in the PPP project will always be a profitable return on their outlay.

Progressive Educators as a group is opposed to the development and operation of public infrastructure through PPP processes.

In addition to all the obvious reasons, the current financial crisis adds another: the implosion of the credit bubble means that it is now very difficult for builders to borrow from banks, just as it is very difficult now for banks to borrow from each other or from other financial institutions.

This means that there is now great uncertainty about the financial viability of PPP projects.

In Victoria, for example, the proposed $3.1m PPP desalination plant “appears to be in trouble as major project finance dries up around the world” (The Age, March 9, 2009).

Pinnacle even had trouble staying in the race for our Super Schools because its original financier, Babcock and Brown, went to the wall and had to be replaced at the last moment by Commonwealth Bank Investments Ltd.

Rumours circulate that the Commonwealth Bank, now that it is part of the winning consortium, is reassessing its commitment to the project, much to the pleasure of the rival bidders Axiom Education SA and Plenary Education.

Kevin Foley is presumably aware of this uncertainty as he has been less than his jolly self in making announcements about the bidding process. On Remembrance Day last year he told State Parliament that bankers for the three consortia were in strife. “These three consortia are backed by debt and equity vehicles Babcock & Brown, Deutsche Bank and ABN AMRO, the market values of which have declined 97 per cent, 72 per cent and 48 per cent respectively since 30 June 2007.”

“Before we award those contracts we will want confirmation that capital is available,” he added.

He had reason to hedge his bets. The State Auditor-General had warned in his Report for the Year Ended 30 June 2008, that “Most importantly, the nature of these transactions is they involve private sector financing. The credit market crunch experienced in 2007-08 and continuing at the time of this Report, raise the credit and financing risk for the PPPs. In such extraordinary circumstances, progress of these transactions should be done with high degree of caution and may indeed need review of assumptions and information used to date. This may be a significant risk to the fundamental premise of whether a PPP provides a net benefit to the public compared to conventional public sector procurement” (our emphasis).

So, at this stage, although Pinnacle has been identified as the preferred bidder, it still does not have the contract for the Super Schools. In his press release of March 24, 2009, announcing Pinnacle as the “preferred school building partner”, Foley cautiously added “We will now enter into exclusive negotiations with Pinnacle Education in regard to a number of financial and technical issues.”

In other words, “Now we have to find out whether they can get access to the capital required to build the super schools”.

All this delay and costly waiting around for a bidding process to untangle itself is a joke. The joke is on us, however, because as taxpayers, we will pay more in the long run to have private consortia building our public infrastructure just so that the ALP can be seen by big business to be creating investment opportunities.

Foley admits (Hansard 24/3/09) that “there is no problem in the state government raising capital.” In other words, work could have started on these schools already. And more cheaply, since governments can borrow money at cheaper rates than private companies.

“Public-private partnerships are a longer process than direct builds for obvious reasons,” bleated Foley in Parliament the same day.

Interesting, considering that the usual rationale for the adoption of PPPs is that infrastructure is built and delivered more quickly this way.

Anyway, don’t expect to see the Super Schools opening their doors for business on the first day of the 2010 school year. Even if “Which Bank?” stays the distance, there’s still a long and costly way to go.