Sydney Light Rail’s troubles call PPPs into question

A New South Wales parliamentary committee has recommended that the state’s Auditor-General review the use of public-private partnerships on large infrastructure projects following contractual disputes arising during construction of the Sydney Light Rail project.

The NSW Parliament’s Public Accountability Committee published its report, Impact of the CBD and South East Light Rail Project, late last week, with 20 recommendations for the state government.

The first of those recommends: “That the NSW Government formally request the Auditor-General to undertake a review into the effectiveness of PPP contracts for significant state infrastructure projects, in light of contractual issues that have arisen in relation to the CBD and South East Light Rail project.”

The project, more commonly known as Sydney Light Rail, will see 12 kilometres of light rail track built from Circular Quay in the city’s centre to two terminals in the Eastern Suburbs, with 19 stops on the route. The government’s private partner on the scheme is ALTRAC Light Rail, the equity investors in which are First State Super, John Laing and Acciona – the latter is also the project’s contractor.

The scheme has been beset by cost overruns and delays, which the PAC was investigating, with a large focus on the legal dispute between Acciona and Ausgrid over the moving of utilities. Completion is now scheduled for May 2020 and the budget has increased from an initial A$1.6 billion ($1.2 billion; €1.0 billion) to more than A$2 billion.

The recommendation was prompted by evidence to the committee from Bede Noonan, managing director of Acciona Infrastructure Australia, who questioned whether a PPP contract was the right structure for a scheme such as Sydney Light Rail.

“The utilities risk on this project was vastly misunderstood by the government, and we as contractors were forbidden by process, as well as practicality, from knowing anything except what the government told us,” he said. “This utilities risk, as well as all the third-party agreements being not concluded, cannot be properly managed under a PPP form of contract. It is possible to manage utilities such as what we have encountered on Sydney Light Rail. However, it can only be done under a collaborative form of contract where government accepts that contractors have no direct ability to direct or control utility owners.”

Acciona has taken the client, Transport for NSW, to court by claiming that it was misled into entering into a contract with ALTRAC, seeking to recover costs and arguing that Ausgrid guidelines changed after the contract was signed, increasing the time and cost associated with moving underground cables and other utilities. Ausgrid is responsible for building, operating and maintaining the electricity network assets along the route.

Transport for NSW, the client for the project, is disputing Acciona’s claims.

The PAC’s recommendation of a review into PPPs raises the prospect of changes to the PPP regime in Australia, which is managed at the state government level.

A ‘long track record’ of successful PPPs

One infrastructure financier told Infrastructure Investor: “There’s a long track record of very successful PPP projects in Australia that have finished on time and on budget, so in some ways it’s unfortunate that the one that has gone wrong is one that’s in the middle of Sydney, a high-profile contract.

“It’s not a bad thing to take the chance to have a review, but it is a potentially worrying sign.”

Adrian Dwyer, CEO of policy think tank Infrastructure Partnerships Australia, said that undertaking review of existing practice was “always useful in helping to understand how we can do things better” but said that PPPs have “consistently delivered better outcomes for users and taxpayers”.

He added that current high levels of infrastructure spending will become the “new normal”. “The challenge for governments will be using the right model, on the right project, to deliver the right outcomes,” he said.

Mark Hector, portfolio manager – infrastructure at First State Super, which holds a 62.5 percent stake in the PPP, told Infrastructure Investor last year that equity “has to play a role” in resolving disputes like the one between Acciona and Transport for NSW and the project was “heading in the right direction”.