Crime and punishment

Australia’s Ararat prison in the state of Victoria is the latest in a growing line of failed PPPs that raises serious questions about risk assessment and award procedure at state government departments.

News that main contractor St Hilliers was unable to pay its subbies brought flashbacks of billion dollar investor losses on the Clem 7 tunnel and $800m on the Sydney Airport Link from as recently as last year. Yet as part of a fixed price contract, the state is insisting there will be no bailout and sponsors Bilfinger Berger and the Commonwealth Bank must stand behind the project. St Hilliers has sought voluntary administration and the New South Wales government has kicked the firm off all its social housing projects.

Despite calls for workers to be reimbursed by the government, State Corrections Minister Andrew McIntosh stressed that the private partner holds an "obligation to pay workers and subcontractors and to continue the project".

So is this a government disaster or a genuine example of risk transfer?

Perhaps it is worth looking at how the state selected the bidder in the first place. But unfortunately, we can’t do that. Although the approach to evaluating counter-parties is documented in the National PPP Guidelines, the Victorian government does not reveal the financial status of its private counterparties. Equally there is also little in the way of studies to assess public sector funding comparisons, if finance had been raised on the bond market for example. 

What we do know was that Plenary Group – one of the state’s most successful bidders – came a close second in the final bidding. There were also rumours in the market that the project has been stressed since the summer of last year.

It’s clear now that there was some underestimation of the complexity of the project. Ararat wasn’t a housing scheme or a student accommodation project and shouldn’t have been bid as such.

Given the good track record for prison PPPs in the state of Victoria – a new scheme for Ravenhill was announced only weeks previously – no-one is questioning the credibility of the model. Nevertheless it is likely that attention will now focus on risk assessment in the market.

As far back as 2010, Infrastructure Australia found that bid costs were up to 45% higher than in Canada and new bidders were being discouraged by the small number of projects in the market. The level of pipeline may have changed since then but there are still questions to be asked over the number of international bidders in the market.

It is well-known that Australia is keen to open up its PPP market to more European sponsors but many would argue that if this is at the sake of investor confidence in an established sector for PPP, then perhaps it’s not a risk worth taking.