The use of Public-Private Partnerships, modelled on the British Private Finance Initiative has been all the rage in Australia lately, with Victoria leading the way. As Ken Davidson reports, a review undertaken by the Victorian Government has issued a draft report which, if it is accepted, will confine PPPs to a very minor role. You can get the report (PDF file) from the Partnerships Victoria website.

The crucial point in the report is that it recommends using the governments actual cost of capital (the real bond rate) and explicitly adjusting it for project risks rather than a notional private discount rate derived from the Capital Asset Pricing Model. The result will be to recognise the cost advantage in financing infrastructure assets using public debt rather than private equity. As a result, PPP projects are likely to show up as beneficial only for innovative, high-risk projects and not for routine public procurement of things like schools and hospitals. This has been the big growth area in the UK despite a string of negative reports.

The Victorian draft report quotes a lot of UK evidence, raising the possibility that there will be some flow of ideas back to the UK leading, perhaps, to a scaling down of the PFI there. This would mark a big step for the Blair government away from “The Third Way” and towards a modernised social democracy.

Coincidentally, I’ll be speaking at a conference on PPPs in Sydney next week. I believe Peter Fitzgerald, the report’s author will also be attending. It should be interesting.