PPPs? No, please

Written By: - Date published: 12:15 pm, November 26th, 2008 - 24 comments
Categories: economy, national/act government, transport - Tags:

I’ve never seen the sense in Public-Private Partnerships. How is it ever going to be cheaper to get a private profit-making company to come on-board and take the risk for developing a piece of public infrastructure? The Government has to give them a good deal so they can make a profit, and the Government has to step in when things do go wrong because you can’t have major pieces of infrastructure vital to your economy going offline every time some company collapses. It’s not cheaper to use PPPs, it’s more expensive, more complicated, and more risky. PPPs have never been more than a tool for getting spending off the books by hiding the immediate capital costs of construction in the long-term payments to the private contractor.

But it turns out they’re not only a bad deal for the taxpayer, businesses are increasingly hesitant about PPPs. Fletcher Construction says that, while it will bid for PPPs if National/ACT puts them up it would prefer to contract in the traditional way, which leads to quicker construction anyway:

If the aim was to bring projects to fruition quickly, making them PPPs would be a retrograde step, as so much time is involved in setting up the legal framework between participants in the project, [Mark Burns CEO of Fletcher’s] said. He also questioned whether private sector funding would be viable in the current credit environment without Government guarantees, which nullified the transfer of risk to the private sector.

Some of Fletcher’s biggest roading projects this decade have been building the $300 million Northern Busway and upgrading Grafton Gully and the Central Motorway Junction.

The submission said New Zealand was too small to make the formula work other than in a handful of projects.

“Fletcher Construction formed the view years ago that there were few roading projects in New Zealand that would have the traffic volumes to justify the full transfer of risk to the private sector,” the builder said.

Sometimes benefits of transferring the risk of PPP projects to the private sector were illusory, it said, citing the British Government’s bailout of Metronet, the private operator of the London Underground.

Binns suggested that if the transfer of risk was not complete, the true benefits of PPPs came down to an analysis of the funding costs, and there was a strong argument that the Government would be better off just raising debt, potentially through infrastructure bonds, to do the project using other traditional methods of contracting.

The builder also cited major “upfront paperwork and contractual costs” on PPPs, saying the time and cost involved in this phase was significant and tended to counter any savings in the design and delivery phase.

24 comments on “PPPs? No, please ”

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  1. Mr Magoo 1
    26 November 2008 at 1:13 pm

    So let me get this straight. One of the major players in the road building industry thinks PPPs are not a good idea?

    Not sure how to take this?

    It is a bad idea and this is more evidence. (because of the inefficiency in the relationship caused by conflicting motivations between public/private sectors.)

    It is a good idea because this guy seems to think he will make less money this way and ergo it will be cheaper for us?

    Or perhaps “the thrid way” (pun intended) is that it is simultaneously going to make him less money, cost more and simply be a complete budgetary disaster all round?

    National are usually pretty good at these so I can’t wait to see how this pans out…

  2. burt 2
    26 November 2008 at 1:21 pm

    Mr Magoo

    You need to understand the picture that SP is trying to paint.

    If a major construction company says PPP are not the best way then they are not, because construction companies know what works – right?

    If a major construction company says PPP are the best way then they are not, because obviously the contruction company has a vested interest – right?

    Forget about Helen Clark and the Labour govt passing legislation which made it easier for Govt to enagage in PPP relationships, forget that Helen Clark’s wanted a tunnel built under her electorate using PPP funding arrangements. This is now – The things the Labour party wanted to do were good and the things the National party now want to do are bad. Don’t for one moment take any notice that we are talking about the same things because that is not relevant. The only relevant thing is who is talking about doing them.

    It’s easy to understand – take all logic and put it in the bin, put your partisan hat on and start typing….

  3. Steve Pierson 3
    26 November 2008 at 1:23 pm

    It seems like private partners in PPPs usually low-ball their costs to undercut each other (and, of course, the price has to be low enough that the public doesn’t say, what the hell are we doing?’) – it’s still more expensive than a normal government construction protect but not enough for the private contractor to keep in the game if anything goes wrong, or if they have miscalculated their costs (later in the article Burns says smaller companies are incapable of working out their costs over a PPP’s timeframe)

    When things do go wrong, the private partner goes bust and the Government has to step in at significant cost. Everyone loses.

  4. burt 4
    26 November 2008 at 1:29 pm

    Steve P.

    Irrespective of the contractual arrangements being used when things go wrong on a major piece of public infrastructure the govt picks up the tab.
    [deleted. don’t try to threadjack. take it to kiwiblog. SP]

  5. Santi 5
    26 November 2008 at 2:11 pm

    PPPs. Yes, please.

    [lprent: Ummm you got banned yesterday. But SP let it through so I’ll let the conversation continue.]

  6. Steve Pierson 6
    26 November 2008 at 2:13 pm

    burt. rather than attack me, show why Fletcher challenge is wrong.

    If the risk is always borne by the taxpayer in the end, why pay someone else a profit for taking that risk?

  8. Mr Magoo 8
    26 November 2008 at 2:30 pm

    Burt: The confusion was not with what SP was trying to paint, but with what my conclusions should be when a pretty major private player is poo pooing PPPs. (like the number of Ps I got in there? Try saying it quickly)

    The standard wisdom on both the left and right suggests that PPPs would be a gain for the private sector overall. The argument is usually around what it means for the public.

    And now we have this guy saying it would end up worse for him? Not a pretty picture. A conspiracy theorist might suggest this is “reverse spin”. 🙂

    Starting to smell like something beaurocrats would come up with over a few too many wines to me. A bit like demanding waiting times are reduced while cutting spending.

    Speaking of beaurocrats, here is a joke for you:

    “How many beaurocrats does it take to organise a PPP?”

    “Far more than Labour ever used….”

  9. Idiot/Savant 9
    26 November 2008 at 2:33 pm

    If the risk is always borne by the taxpayer in the end, why pay someone else a profit for taking that risk?

    That’s the key question – and its one the right can’t answer. But then, PPP’s are more about transferring wealth and hiding debt than getting a good deal for the public anyway.

  10. burt 10
    26 November 2008 at 2:37 pm

    Steve P.

    If the risk is always borne by the taxpayer in the end, why pay someone else a profit for taking that risk?

    Of course you are correct (I say this so I you don’t delete my post). I think you have hit the nail on the head. The public service should train and retain construction workers. We could call it the ‘Ministry of works’ and they could be the sole ‘contractor’ engaged on all public works. That model has never failed before has it…

    Are you very young and can’t remember any of the things that have been tried and failed in the past or do you not even go as far as to consider why things are like they are today?

    Again – You have tied yourself in a knot Steve, you think private companies are only motivated by profit so when they say they are not keen on PPP arrangements have you considered that it might be a less profitable arrangement for them – IE: A better deal for the tax payers?

    If Fletchers said PPP’s were good you would say they are bad – you can’t have it both ways… Well you can and you do – but that won’t stop me pointing out that you are a partisan hack who cares not what is being talked about but only who is doing the talking.

    IrishBill: I’m certainly not young. In fact I’m too old to have to suffer boorish fools. Take a week off.

  11. burt 11
    26 November 2008 at 2:46 pm

    IrishBill

    You are a complete wanker – if you want an echo chamber then so be it, otherwise get over yourself and explain what justified that banning.

    (calling you a complete wanker justifes the ban – but before that, was it that I disagreed with Steve P ?)

    IrishBill: I’ve just noticed this. Take a two week ban. You are continually overstepping the bounds and I see no reason we should host your oikish comments. I suggest you head over to Kiwiblog and call David a “partisan hack” day in day out and see what happens there.

  12. sweetd 12
    26 November 2008 at 3:21 pm

    Burt

    Did you just engage in a retrospective banning?

  13. Cameron 13
    26 November 2008 at 3:22 pm

    PPPs are an extremely idiotic scheme. It is sad both Labour and National suppor them! Time to fight back 😀

  14. sweetd 14
    26 November 2008 at 3:26 pm

    Its funny how PPP’s came about under the leadership of Blair in UK Labour and his wonderful 3rd way politics.

  15. burt 15
    26 November 2008 at 3:31 pm

    sweetd

    And everything Blair said was a good idea because his party name was “Labour”. That is why we had to have them too, like pledge cards and cash for honours.

    Times change and now the Labour party activists are just scared that National may use the tools that Labour put in place and be successful. Couldn’t have that because the key issue is not what is good for NZ but who delivers the good outcomes.

  16. PK 16
    26 November 2008 at 4:05 pm

    Why PPPs? Being cynical I thought they allowed the charging for use of an item of government created infrastructure against the users of that infrastructure. Such charges being politically very unsavoury to a populace who perceive the infrastructure should be paid out of taxes. It also takes debt off the government books. Looks nice. I personally don’t mind some form of user charges if it allows something to exist that would otherwise not be fundable.

    Being less cynical there is no denying that the government generally does not perform as well as commerce in terms of running businesses. So, if a PPP needs a well run business for future revenue streams and service then it’s a good candidate. Also a PPP is about allocating risk to the most suitable entity. Commercial entities often manage risk well as they go out of business if they don’t. Not sure roading fits those criteria as it’s more about building the roads than running them in terms of a business. I’ll talk about risk below.

    Risk – Burt made a valid point – Fletcher C do well out of major infrastructure works in NZ at the moment (not a huge amount of competition as a smaller market- FC said so themselves in the article and that they have a large backlog), manages to lay off a fair amount of the construction risk back on the government currently anyway and FC doesn’t really want to get in to running the piece of infrastructure its building as it would be taking on more risk in terms of future revenue flows (and running a business it has no expertise in). FC is making money now – why take more risk without a corresponding potential reward against the risk especially as the article is saying they don’t see the revenue stream? The funding comment is a bit of red herring I feel. But as FC said in the article whether it’s better for NZ to have a PPP is very dependent on the nature of the contract and who ends up owning what risk. FC are obviously not keen to have the risk but could be a rock and a hard place for FC tie the construction work to the PPP and then they are forced to take the risk as they need the construction work.

    On the comment around the government having to step in on the demise of a PPP – I did read an article about 9 months ago putting forward a decent argument (based on analysis of PPPs in Europe had a quick look could not find it to post a link) to say most of the time it cost the government less than if they did it themselves as the reasons for the death of whatever PPP usually related to low ongoing revenues for usage charging, which would normally have been the case anyway. The private company had losses, which the government did not have to bear. In the cases were the government really suffered it typically wasn’t really a PPP as they had contractually underwritten the project and offset no risk whatsoever!!

    The article did a rough comparison with cost overruns against non PPP infrastructure investment and found similar rates of blowouts so that implied it didn’t affect construction or set-up costs. It also found many PPPs that worked but invariably the first few didn’t as government did not know how to set them up, initially.

    Whoever said it’s about wealth transfer think a little the construction companies already make a profit. If done correctly it transfers risk to them greater risk equals less profit typically.

    So, a definite worth considering but needs to be carefully done and for the appropriate PPP.

  17. deemac 17
    26 November 2008 at 4:21 pm

    no need to argue about whether or not they are a good idea as they have been thoroughly trialled in the UK and are a complete disaster.
    Apart from the guaranteed profit margins for big business (small businesses don’t get a look in) the only attraction was keeping debt off the govt books in order to comply with arbitrary EU limits; but after the latest financial fiasco I think we are really over clever accounting fixes.
    There’s no problem with getting private companies to undertake govt projects providing the contracts are watertight. But PPP is like paying a mortgage then after 20 years the bank owns your house – madness.

  18. burt 18
    26 November 2008 at 5:09 pm

    Steve P.

    burt. rather than attack me, show why Fletcher challenge is wrong.

    If Fletcher Challenge made a statement that they thought all construction projects should be paid in full up front and that contracts should always have early completion bonus clauses but never have late completion penalty clauses would you agree with them on that as well?

    I can’t show you why Fletcher Challenge is wrong, because they may be wrong but they may also simply prefer standard deposit and progress payment arrangements because they are more profitable or because they are less problematic from an administrative perspective.

    I suspect Fletcher Challenge would rather engage in PPP arrangements over having no work at all, but I could be wrong on that as well.

  19. Quoth the Raven 19
    26 November 2008 at 5:35 pm

    burt – I don’t know many on the left that thought much of Blair’s government. Remember the Iraq war. Blair’s government did nothing but pander to business, abandon Labour’s principles and turn Britain into a police state. With that list you could easily replace Labour with National and Blair with Key and voilà you have the British Labour, I mean New Zealand National party.
    Stop making stupid assertions, Burt, you’re banned anyway.

  20. Steve Withers 20
    26 November 2008 at 5:42 pm

    I suspect PPPs aren’t about roads. They will be about privatising health care delivery. They won’t really be PPPs….that’s just the cover for letting greedy doctors and insurance companies rake in the dosh for doing nothing more than they do now…..and probably less.

  21. Millsy 21
    26 November 2008 at 5:47 pm

    We already have PPPs. The state puts up the money and the specifications, the private company signs a contract and goes off to build the item desired.

    Simple really. It works. Dont need to change it.

  22. TimeWarp 22
    26 November 2008 at 11:17 pm

    Millsy, that’s not a PPP. Paying someone to do something is not the same as entering a partnership with them.

    ‘Partnership’ is the key word in PPP, and the key to understanding what is so wrong with the concept in general.

    Commercially, partnerships are entered into to spread the required investment and the associated risk between the partners. Accordingly, the returns/profits are then spread equally proportionately amongst the parties.

    The problem with PPP fundamentally is that the Government, by the very nature of being a governance and not commercial body, takes on at least the major risk if not all of it. The US $20m bailout of Citigroup is a great example of what happens when risk is transferred to the public.

    Meanwhile, the commercial entity gets at least the major return, if not all. It would have to expect an outstanding return and/or low risk, for it to enter into a PPP in the first place. Because… If the partnership was fair and advantageous to both parties in regards to the risk/return profile, then generally two or more commercial parties would have already entered a partnership in order to capture this return. (Nature abhors a vacuum, and capitalist markets are absolutely no exception.)

    That statement is slightly simplistic in that in a PPP there may be consents or other barriers to commercial partnerships that are lowered. But the fundamental principle holds true… PPP’s are required where the risk profile is too high, or the return too low, for the project to be directly profitable economically. But the projects may be desirable to the government and the community because of the long-term social good, and return to the overall economy (if not the government coffers directly).

    In general I believe PPP’s will transfer risk to the taxpayer, and profit to the shareholder – socialising losses and privatising returns.

  23. TimeWarp 23
    26 November 2008 at 11:57 pm

    minor edit… “directly profitable economically” above is not strictly accurate, meant to say “directly profitable commercially”

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