Executive summary

 

 

 

The NSW Government is increasingly turning to the private sector to help provide public infrastructure using public-private sector partnership (PPP) type contracts.

 

In recent years the NSW Department of Education and Training (DET) has let two major contracts of this kind to provide NSW Government schools in new urban release areas.

 

There are many forms of PPP. Each needs to be assessed on its merits. The New Schools Privately Financed Project is a form of public-private partnership known as a privately financed project (PFP).

 

We examined this new approach to see whether the processes for awarding the first privately financed schools contracts were adequate to maximise the potential for value for money.

 

 

 

Audit opinion

 

In our view the contracts in the New Schools Privately Financed Project were established and let in a way that greatly assists their potential for delivering value for money.

 

We found that DET developed:

§         a clearly defined business case with the objectives of a faster supply of schools, possible cost savings, innovation and simplified services management

§         good tender lists with competitive tension maintained throughout the tender processes

§         a sound performance monitoring and reporting system, with provision for it to intervene in the case of poor contractor performance.

 

The contracts in the New Schools Privately Financed Project are at an early stage of their 30 year lives and the savings and other benefits are not guaranteed. The contracts will need to be carefully managed over the 30 year period to ensure that benefits are realised and that costs do not escalate beyond expectations.

 

 

Recommendations

 

 

 

We recommend that DET and Treasury adopt a number of measures to further improve the potential of the New Schools Privately Financed Project to offer value for money:

 

 

 

§         DET should consider applying elements of the PFP approach (including risk allocation, effective project management and an enhanced focus on quality of service) to its other projects - such as the refurbishment of existing schools - particularly where major new works are envisaged (section 2.3)

§         DET’s school planning processes should be improved to provide a greater certainty of requirements when entering a PFP contract (section 2.6)

§         Treasury and DET need to disclose more complete contract documents relating to the New Schools Privately Financed Project, as is the practice in Victoria and as recommended by the Richmond report (section 3.2)

§         DET needs to use the information and method of the public sector comparator, appropriately updated or modified, to assist in accurately comparing the costs, benefits and risks of different approaches (section 3.5)

§         DET needs to expedite completion of the Contract Administration Manual. The Manual also needs to be regularly reviewed and updated during the 30 year life of the New Schools Privately Financed Project (section 4.6)

§         DET and Treasury need to ensure that the cross-agency Project Management Steering Committee can oversight and report on whether the New Schools Privately Financed Project continues to offer value for money (section 4.6)

§         DET needs to work with Treasury to design an appropriate evaluation process to review whether the project continues to provide value for money (section 4.6)

§         Treasury needs to update and expand its Guidelines for Privately Financed Project in order to continue to ensure a consistent, transparent and accountable approach to PFPs in NSW (section 4.6).

 

 

 

Key audit findings

 

Chapter 1: Introduction

The New Schools Privately Financed Project is known as a privately financed project (PFP). It is a form of public-private partnership. The NSW Department of Education (DET) and NSW Treasury are among the first in NSW to use this new approach for infrastructure needs.

Government policy is to maximise private investment in infrastructure to the extent that this results in better and more efficient delivery of existing public services.

Government policy also supports a total asset management approach to acquiring, maintaining and upgrading physical assets to provide services to the community.

PFPs are attractive to private investors, contractors and governments for different but related reasons.  Briefly:

§         income tax assessment legislation permits deductions to investors for early year losses, interest, fees and depreciation claims for private infrastructure projects

§         contractors can secure large ongoing contracts over a longer term than is possible with conventional tender work; they also have more scope to develop better designs

§         governments can achieve a number of objectives, such as simplifying management processes, lowering procurement costs and ensuring that assets are maintained.

 

 

Chapter 2: Was the business case clearly defined?

We looked for a clearly defined business case, to explain how DET had chosen the PFP approach. It is important for the successful delivery of any project that an organisation states its requirements clearly from the start. Otherwise there is the risk that it will end up with a project that does not meet its real needs. Also, prior to going out to tender, a procuring organisation needs to demonstrate that the proposed project is likely to provide more value for money than other projects.

We found that DET:

§         clearly defined its requirements from the outset. Its objectives included a faster supply of schools, possible cost savings, innovation and simplified services management

§         presented a persuasive case that the proposed project was likely to provide value for money when compared to other options, although this was not supported by comprehensive financial and economic analysis of all the alternatives

§         established that the project was likely to be affordable, but new schools were only advanced one or two years earlier than would otherwise have been expected

§         identified that allocation of risks between the public and private sectors most likely to deliver better value for money

§         scoped the project to maximise its prospects of achieving value for money. But we also found that the process involved a number of changes made to the lists of schools as detailed planning and negotiation progressed.

 

Chapter 3:  Was the process sufficiently competitive?

We looked to see whether there had been genuine competition between bidders.

We found that DET:

§         managed to create good tender lists and maintain competitive tension throughout the tender processes. These processes were, for the most part, sufficiently transparent to ensure that the market was well informed

§         retained qualified external advisors, identified the key contractual issues likely to arise and developed a considered approach to the evaluation process

§         set its current school buildings specifications as the minimum requirement, which provided greater certainty in relation to the final product but may have limited further innovative design

§         evaluated all aspects of the bids received and then chose as preferred bidder the one that offered it best value

§         employed the public sector comparator for added competitive tension, particularly in the final stages of negotiation with the successful proponents

§         assumed that the public sector comparator could not achieve efficiencies from bundling new schools, as this would have exceeded the level of funding available using traditional means.

 

The cost of the public sector comparator exceeded the net present cost of the private sector bid. The ‘saving’ was achieved with the help of risks transferred to the private sector.

 

The public sector comparator is very sensitive to the assumptions made. We found that, whilst on the whole they seemed reasonable, some of the assumptions could reasonably be questioned.

 

 

Chapter 4:  Are performance standards adequately established and monitored?

We looked for adequate performance monitoring and incentives. The Government needs to be in a position to confirm that the private party is performing according to the output specifications in the contract. Savings and other benefits do not automatically flow from a PFP. Whatever the estimated value for money of such a contract when it is first signed, any subsequent poor management can result in higher costs, wasted resources, impaired performance and public concern.

We found that:

§         the incentives for performance are clearly designed to encourage good performance by the contractor, with appropriate benchmarks

§         the reporting and monitoring system has been thoroughly prescribed and is considered appropriate for the task. However, as it is largely reliant on self-monitoring by the contractor, DET will need to carefully oversight and regularly audit the effectiveness of the system

§         there are adequate contract mechanisms that DET can use to make changes to school facilities, or to intervene as necessary – such as in the case of poor contractor performance

§         DET had not as yet completed work on a Contract Administration Manual to identify what needs to be done by whom and when

§         there needs to be an appropriate process of review, removed from the day-to-day function of contract administration.

 

 

Response from the Department of Education and Training

 

 

 

I refer to your letter dated 15 February 2006, concerning the Performance Audit conducted on the New Schools Public Private Partnership Project.

 

 

 

The Department of Education and Training recognises the value of the audit in reviewing the management of the project and its processes.

 

 

 

A number of recommendations in the report that arise from the first new schools project have already been implemented in the second new schools project:

 

§            Improved planning processes that allow both certainty of requirements yet allowing flexibility to substitute projects in an efficient and cost effective manner to take into account changes in growth rates and patterns over the capital delivery period;

§            Clear review in business cases of the capacity of surrounding schools and demographic demand;

§            Ensuring that the bidders had a clear understanding of DET requirements during the bidding phase;

§            Simplified and improved abatement systems.

 

 

 

The Department proposes to implement and/or explore other issues raised by the report, including the finalisation of a contract administration manual for the two projects and the establishment of a Contract Steering Committee.

 

 

 

I am pleased that the review confirms our opinion on the success of the delivery model for new schools in terms of clearly defined business cases, capital cost savings, faster delivery of schools than under traditional procurement and simplified and effective services management. Please convey my appreciation for the conduct of the review to the relevant officers involved.

 

 

 

(signed)

 

Andrew Cappie-Wood

Director-General of Education and Training

Managing Director of TAFE NSW

 

Dated:  1 March 2006

 

 

 

 

 

Response from NSW Treasury

 

 

 

Thank you for providing me with a copy of the final draft of the Performance Audit New Schools Privately Financed Project and inviting me to comment on the report.

 

 

 

I note that your findings are very positive and recognise the rigorous processes that have been established for privately financed projects in the areas of project development, tendering and performance monitoring of the contractor. These processes have maximised the potential for these new schools, and other privately financed projects, to provide value for money for the public.

 

 

 

The recommendations you make are generally consistent with our own findings from the New Schools Privately Financed Project Post Implementation Review and the Premier’s Department recent Review of Future Provision of Motorways in NSW. As such Treasury has already implemented or is in the process of implementing changes to address these recommendations.

 

 

 

In particular, your recommendation that Treasury publicly disclose more complete contract documents for privately financed projects is being implemented by revising Ministerial Memorandum 2000-11 Disclosure on Information on Government Contracts with the Private Sector. Consistent with this forthcoming Memorandum, the full contract deed (excluding confidential information) for the recently signed Newcastle Mater Hospital Redevelopment Privately Financed Project has been posted on the NSW Government Tenders website.

 

 

 

Also, consistent with your recommendations, Treasury will be updating and revising the Working With Government Guidelines for Privately Financed Projects to take into account the findings of all recent reviews of privately financed projects. This will be undertaken after the Public Accounts Committee has released their findings for their Inquiry into Public Private Partnerships, expected by April 2006.

 

 

 

Treasury and the Department of Education and Training have also agreed to form a cross-agency Project Management Steering Committee to oversight the ongoing management of the contract.

 

 

 

I would also like to take the opportunity to clarify and elaborate on a few areas that you mentioned in your report.

 

 

 

There are a number of reasons why governments privately finance social infrastructure. These include: to lower infrastructure costs, transfer appropriate risks to the private sector, incentivise adequate contractor performance, single point of contract for a range of services, focus on whole-of-life costs and ensuring Government assets are adequately maintained. The Government does not privately finance social infrastructure to smooth out lumpy capital payments to spreading payments over the long-term (refer Section 2.2) or to achieve off-balance sheet financing. In fact, these transactions are usually on-balance sheet.

 

 

 

In the case of the New Schools Privately Financed Project, the Government repayments of the capital cost of the facility are deemed to be a finance lease. In addition, the Government is deemed to be the owner of the schools because the Government primarily retains demand and residual value risk. Therefore a liability offset by an asset of equivalent value is recorded on the Government’s Statement of Financial Position, once the facilities are operational. The fees for maintenance and other services are expensed. Therefore, the accounting treatment for a social infrastructure project is similar irrespective of whether it is privately financed or financed using Government debt.

 

 

 

Your report indicates (Section 3.5) that unless the public sector comparator (PSC) assumes that schools can be bundled under traditional procurement, the PSC is unlikely to ever be less than the private sector’s bid. The PSC is based on the most efficient, likely and currently available method of providing the defined infrastructure and services.

 

 

 

The PSC reasonably assumes that bundling was not likely in the case of traditionally procuring schools given DET had never previously bundled schools. In addition, there is evidence to suggest that, even after the first Privately Financed New Schools Project, DET would not have bundled schools if traditional procurement had been pursued. Furthermore, given DET has never bundled schools, it is unlikely that the efficiencies achieved under PFP procurement would be fully realised if they were bundled under traditional procurement.

 

 

 

In this context, it should also be noted that the PSC assumes that DET would meet the service specifications and standards and adequately fund the life-cycle maintenance program. These assumptions are necessary to ensure the PSC is comparable with private sector bids but they are untested in practice and hence may be favourable to public sector procurement.

 

 

 

Finally, I would like to thank you and your staff for the co-operative approach taken during the course of the audit and the opportunity to comment on the report.

 

 

 

(signed)

 

J Pierce

Secretary

 

Dated:  1 March 2006