Kevin Rudd with then premier John Brumby at Southern Cross Station.

Kevin Rudd with then premier John Brumby at Southern Cross Station. Photo: Jason South

Victoria's financial watchdog will investigate revelations that more than $1 billion of taxpayers' money was used to finance major projects spruiked by the former Labor government as privately funded, including the Royal Children's Hospital, Southern Cross Station and the Royal Women's Hospital.

The probe by the Auditor-General follows a report in The Age on Wednesday showing the former Brumby government lent money to the ongoing Royal Children's Hospital redevelopment, despite telling the public that the project was privately funded.

In November 2007, the government-owned Victorian Funds Management Corporation purchased $1.2 billion of bonds issued by the hospital's project syndicate, Children's Health Partnership.

Ratings agency Standard & Poor's has downgraded $58 million worth of the bonds bought by VFMC to "junk" status, warning that rents at the hospital are under pressure.

The VFMC deal had the effect of keeping the investment, and the risks associated with it, out of the state budget.

It was approved by the VFMC board, which at the time included federal Opposition Leader Bill Shorten, at a meeting in June 2007.

A spokeswoman for Mr Shorten said he "does not recall having an active role in any decision in relation to this matter".

VFMC chairman John Fraser said there was "no evidence of any pressure whatsoever from the Department of Treasury and Finance, nor from the government, and nor from any members of the board".

He said that in addition to directly investing in the hospital project, the organisation in 2008 took "small interests" in debt issued by two other Victorian public-private partnerships, the Royal Women's Hospital and Southern Cross Station.

In the VFMC's latest annual report, it said the the Royal Women's Hospital investment was worth $44 million and the Southern Cross Station stake was worth $3.2 million.

Mr Fraser said the organisation had made no additional public-private partnership investments since he took the job in July 2009 and was unlikely to do so.

"I just think there are perception issues no matter what the merits of the investment proposal may or may not be," he said.

The Napthine government has used the saga to embarrass the opposition at the start of a heated election year.

Treasurer Michael O’Brien has asked the Treasury to investigate whether other major projects that were billed as privately funded were taxpayer financed. 

He said the Labor Party’s claims that the Royal Children’s Hospital project was privately financed were ‘‘a complete sham’’.

He called on Opposition Leader Daniel Andrews to ‘‘admit whether he deliberately misled Victorians about the financing of the RCH, or was he ignorant and out of his depth’’.

Mr O’Brien promised similar funding arrangements would not be used to pay for the $6 billion to $8 billion east-west link, which will also be delivered by a public-private partnership. 

‘‘We will make sure there will be no inappropriate use of public funds to fund the east-west link and we have been very transparent.’’

Former treasurer John Lenders said the PPP regulations and guidelines in place during the Royal Children’s Hospital project were established by former Liberal treasurer Alan Stockdale.

‘‘If Michael O’Brien wants to change these guidelines, he is breaking with long-held standards that Treasury and VFMC follow.’’

A spokesman for Victorian Auditor-General John Doyle said the watchdog would investigate the issues and relationship between the VFMC and the Royal Children’s Hospital, as well as the PPPs including Southern Cross Station and the Royal Women’s Hospital. 

‘We will be looking at all those issues and all those public-private partnerships and investigating them with a view of deciding if a more extensive audit is warranted.’’

It comes as the Auditor-General pushes for ‘‘follow the dollar’’ powers to let it scrutinise an increasing number of taxpayer-funded services and projects delivered by the private sector.

It is understood the government is drafting legislation to grant such powers.