Fresh infrastructure model

One of the most significant challenges facing the state government is its capacity to provide economic and social infrastructure that is able to keep pace with Western Australia’s rapid growth.

The Gallop government has committed to a record capital works budget over the next four years that involves the expansion and upgrade of the state’s infrastructure, particularly in areas such as power, water, health and education.

As is the case with many private sector companies, the government has been hit by sharply rising costs.

The cost of several major projects, such as the $387 million desalination plant, the Mandurah railway and the planned Mandurah bypass, have risen substantially and the government is budgeting for further cost increases.

The government is also battling hard to keep up with the infrastructure needs of the fast-growing mining sector.

A small but telling indication of the pressure facing the government was last week’s announcement by Midwest Corporation, which said it would be forced to truck its iron ore by road to Geraldton because the rail links in the area did not provide a viable option.

Against this backdrop, the government has explored a range of contracting options in recent years to try and achieve more efficient outcomes.

This includes working with the private sector in several cases, though in practice the government has been tentative – and in some cases inept – in pursuing alternative and innovative contracting solutions.

In light of this, it is worth looking at the experience in other jurisdictions, such as NSW and Victoria, to get some insight into options that could be utilised in WA in future.

The scale of Western Australia’s infrastructure demands was outlined by Chamber of Commerce and Industry WA chief executive John Langoulant at a recent Committee for the Economic Development of Australia function.

Mr Langoulant said WA had significantly larger infrastructure demands than other states for three reasons: above average economic growth, driven by the investment intensive resources sector; above average population growth; and the harsh environment, large geographical area and low population density.

Mr Langoulant believes there is more opportunity for the private sector to get involved in infrastructure provision, including through selective privatisation.

“Where the private sector is better at responding to market signals, it should be utilised,” he said.

He sees Western Power’s generation division, which next April will become an independent business, as an obvious candidate for privatisation.

“The government at the moment just has a philosophical objection to it,” Mr Langoulant said.

He also believes there is more scope for public private partnerships, rarely used in WA but which have become popular in Victoria and NSW.

The main example in WA is the $195 million district court project currently under way in the city.

The Western Liberty consortium, led by banking group ABN Amro and construction firm Multiplex, is responsible for funding, designing, building and running the complex for the next 25 years.

Advocates of PPPs believe that, by integrating these elements into one contract, the private consortium is able to achieve a more efficient outcome.

Mr Langoulant said PPPs had mostly worked well where risks had been properly apportioned between the private sector and government.

Some projects have been fraught with problems, such as Sydney’s Cross City tunnel, an unpopular and controversial new toll road.

Despite these setbacks, the Labor governments in NSW and Victoria remain supportive.

In NSW, the government has used PPPs to provide nine new public schools and this month it announced that a private consortium would design, build and manage another nine schools.

Banking groups Babcock & Brown and ABN Amro will fund the $149 million project, while construction firms St Hilliers and Hansen Yuncken will build the schools and Spotless Group will manage them.

NSW Education Minister Carmel Tebbutt said the consortium must meet strict contractual standards and, at the end of the 30-year contract, the schools will be handed back to the government in guaranteed good condition.

She said the PPP approach would produce savings of more than 10 per cent compared with the traditional approach to building and maintaining schools.

Ms Tebbutt said another advantage was having a single point of responsibility for managing all support services, with day-to-day interaction “facilitated by a 24-hour help desk”.

The private sector is being used increasingly in NSW and Victoria for the provision of new hospitals.

There have been three major developments in the past month.

In Victoria, Premier Steve Bracks announced that the $850 million development of a new children’s hospital would be a PPP.

The new hospital will be constructed under the Partnerships Victoria model, with a private sector consortium building and maintaining it for 25 years, while the government owns and operates it.

In NSW, Multiplex and Babcock & Brown were named as preferred bidders to design, construct and manage two hospitals at Sydney’s Long Bay prison.

The $130 million project involves the provision of two new hospitals with 220 beds and numerous support buildings.

The preferred consortium includes Honeywell and Compass Group, which will be responsible for operating the facilities for 28 years.

For observers in WA, the most interesting development was the recently finalised contract for the $132 million redevelopment of Newcastle’s Mater hospital.

Under the contract, the Novacare consortium, led by construction firm Abigroup and Westpac bank, will fund, design and construct the facility and then operate non-clinical services for about 25 years.

The government will continue to be responsible for the management and provision of all clinical and associated services.

“The public private partnership model means we are able to deliver an upgrade to vital health services under one contract, at better value than a standard public sector arrangement,” NSW Finance Minister Michael Costa said.

The project initially ran into political opposition because unions covering hospital workers did not want them transferred to the private sector.

An innovative compromise was developed to address this concern.

“All staff, clinical and non-clinical, will remain employees of Mater and Hunter New England Health,” Mr Costa said. “Non-clinical staff who provide catering, cleaning, security, building management, ground maintenance, waste management and stores management services will, however, work under the day-to-day management of Novacare.”

Mr Costa said Novacare would be required to manage staff under the same framework of legislation, awards and policies that would apply to any government health employee.

This contracting model could present an appealing option for the Gallop government, which plans to spend $3.6 billion on new and upgra-ded hospitals over the coming decade.

The private sector has been eyeing these hospitals, particularly the $742 million Fiona Stanley Hospital in Perth’s southern suburbs, as prime candidates for public private partnerships.

The key person in this process will be Jim McGinty.

In his capacity as attorney-general he backed the District Court project as a PPP, but wearing his health minister hat is wary about further PPPs.

He told WA Business News earlier this year that he did want the private sector to be involved in provision of services in hospitals.

Union leaders and Labor Party figures in NSW held the same concern, but in the Newcastle project they found an acceptable compromise solution.

Of course, a fully fledged PPP is just one way of getting the public sector and the private sector working together constructively.

Mr Langoulant said some government agencies in WA had achieved a lot of success by engaging with the private sector in tendering.

He cited Main Roads, which has used a number of innovative contracting methods, including alliance contracts with private sector firms.

The Water Corporation has also used alliance contracts for some of its big projects and, since the mid 1990s, has outsourced most of its maintenance work to private companies like United Group.

The NSW government has shown how much further this kind of engagement with the private sector can be taken.

NSW Police Minister Carl Scully announced this month that three companies had been short-listed to supply property management services for the state’s police service.

CBRE Multiplex, United Group and Transfield Services have been asked to provide detailed bids for the $120 million per year contract, which involves managing about 1,200 police properties.

“The winning bidder will be responsible for complete management of the NSW Police property portfolio for five years,” Mr Scully said.

WA has a patchy record over the past decade when dealing with the private sector.

A notable recent example was the Gallop government’s flawed attempt to subsidise private sector development of a new multi-purpose indoor stadium.

The government had offered $50 million to assist the private sector in developing a viable stadium.

Mirvac Fini dropped out of the process before finalising a proposal while Multiplex said it would need more than $100 million in government assistance.

In light of this, the government decided in September that it would build, fund and own the stadium itself, at an estimated cost of $160 million.

“The proposals put forward by the private sector failed to meet all of the design and financial criteria,” Premier Geoff Gallop said.

Mr Langoulant was critical of the government’s handling of the stadium proposal, which he said was an ill-conceived concept from the outset.

The Gallop government is pursuing two further high-profile projects that involve a mix of public sector and private sector participation.

To support the development of the Old Treasury Buildings and the 140 William Street site  in the city, the government  said it would commit to lease a proportion of both projects.

The refurbishment of the Old Treasury Buildings and the construction of a new office building will be funded and maintained by a private developer under a leasehold arrangement.

Ultimately the redevelopment will revert to the state.