PPPs are a value for money weapon in the infrastructure fight |
The Independent editorial last week (“Minding your PPPs make sense”, 22 January) noted that the new Government is in the process of making an unprecedented commitment to developing New Zealand’s infrastructure. We now have a Minister for Infrastructure who also happens to be the Minister of Finance – that’s a pretty clear demonstration of the high priority the Government places on the issue.
A helpful working definition of infrastructure is to see it as the physical works and assets used for transport, water and wastewater, education, health, public housing, defence and prisons. It is expensive to build, operate and maintain. It is essentially non-productive and regarded as difficult to operate as a profit-making business. (In the case of prisons, its role is to curb some of the more undesirable areas of entrepreneurial flair!)
Adequate infrastructure is vital to a properly functioning economy. A workforce needs to be educated and have access to adequate healthcare, and businesses need to be able to transport their goods to market. Without sound infrastructure, it becomes nigh on impossible to conduct the economic activity upon which our country’s wealth is built.
Traditionally infrastructure has been paid for by Governments from public funds as they are available. Governments contract with the private sector to build, and often operate or maintain, a physical asset. In many countries, including New Zealand, active private markets have developed to provide alternatives to public services for those willing to pay. For example, in education and health there is a legacy of private provision and active markets continue today.
The provision of publicly provided “free” services to users in these areas (and others) is a relatively recent development but has become an important foundation of society in virtually all developed economies. However, this presents Governments with a problem: when services are free, demand is likely to be very high. Does the State spend huge sums to maintain service availability and quality? Or spend less and allow standards to fall? Governments generally end up with the latter by default, leading to overcrowded prisons, run-down defence facilities, dysfunctional schools and long hospital waiting lists.
These problems are not new, nor are they unique to New Zealand. Other Governments have asked: “How can we get better services or facilities at the same or lower cost?” One sure-fire way of not improving value for money is to carry on with the status quo – and sadly that was the approach under the previous Government.
Governments in other countries have added the public private partnership (PPP) weapon to their procurement armoury with considerable success and our new Government is now looking to do the same. This has sparked often ill-informed debate as concerted campaigns set out to prove that PPPs are either “good” or “bad”. They are neither: PPPs are simply another way to buy assets and services which are already being purchased from the private sector in a different way. The key difference is that the private sector provides the physical assets and also the financing.
The private sector stands accused of the seemingly heinous crime of seeking to make a profit from PPP ventures. However, construction companies and banks already make a profit from providing infrastructure and funding to Government. The key difference is that at the moment they carry no risk for the subsequent performance of the asset they have built or funded. This transfer of “risk burden” is critical to understanding how partnerships with the private sector can provide better value for money than traditional procurement. The private sector provider doesn’t get paid unless the project continues to deliver services to the standard specified by the Government customer throughout the life of the service contract. The asset is essentially built with a 20 or 30-year performance warranty and the Government only coughs up if it performs. This creates a very simple way of providing strong incentives for the private sector partner to innovate, contain costs and maintain service levels.
Yes, some projects have failed and Governments have chosen to step in to ensure the assets are completed. Arguably these projects were unsuitable to be undertaken as PPPs in the first place. Regardless, a few projects in other countries that have been unsuccessful should not see the entire PPP model consigned to the scrapheap. If this was the case, a long history of imperfection would have seen traditional procurement abandoned long ago.
We have emerged from almost a decade under an administration whose attitude to private sector participation in infrastructure varied from ambivalence to outward hostility. Our new Government is now finally looking at how the private sector can help. New Zealand’s infrastructure is little different to other developed economies, either in the scale of the investment needed or the importance to our economic wellbeing. There is much we can learn from the rest of the world in how to get better value from our spend, but these are lessons we have spent a decade doing our best to ignore. It is a relief that we finally have a Minister for Infrastructure and a Government which is at least willing to look.
Paul Callow is a partner at Deloitte with infrastructure expertise. He has worked on various PPP projects in Asia and the UK.
This article was originally published in The Independent on 22 January 2009 under the headline "P is for Private, for Profit, for Public Good".
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