Rates, debt, growth and PPP

Written By: - Date published: 9:38 am, October 8th, 2019 - 33 comments
Categories: business, capitalism, Economy, infrastructure, local government, Politics - Tags:

Stuff had an interesting piece looking at rates, taxes and local infrastructure “Rates are much lower than you think, and they’re responsible for miserable growth in cities“. Pretty much everything in that was correct – they just missed out one crucial factor. What was said was.

  • Rates are too low and haven’t grown with the responsibilities of councils.
  • Central government takes the benefit of population growth, and drops the costs on local government. They get the PAYE, GST, and economic growth. They control the filters that ensure that they get the most productive immigrants. About the only thing that they usually have to pay for is providing schools – even that of then just means that they don’t have to close down schools with falling rolls.
  • Local bodies get to finance the infrastructure for housing like local roading, stormwater and drainage, water and sewer connections, public transport, public facilities, parks, and even the mundanities of looking at how power and data is dragged into suburbs for denser housing. Effectively existing rate payers have to go into debt and/or have higher rates for every bit of growth.
  • Sure, as the economists would argue, eventually this pays itself back from growth – but seldom for current rate payers. They are the people who indirectly pay the bulk of the interest and rates upfront for any benefits that appear decades in the future.
  • It is a perverse set of economic incentives  – the  tagline of the last National Government.

But in recent decades, there has be a further blockage. The prevalence of the political blockage caused by Private Public Partnerships (PPP) advocates is a pervasive and insidious political stoppage point.

The basic premise of all PPP projects is that they will reduce the upfront costs by putting up the capital and relieving the rate payers of the financing cost. This is usually couched in terms of keeping rates down. 

Central government tends to support this because it means that they don’t have to help finance immense difficult infrastructure projects like the City Rail Link. Which is why that required transport hub  hasn’t been built in the last half century. It was simply too big for Auckland City (as it was) and too large for the Auckland super city  to finance, but offers immense direct and indirect benefits to the transport structure inside the whole of the Auckland region. 

The problem is that PPP invariably offers nothing to the local bodies apart from no benefit to the ratepayers and results in unowned assets that can’t be directed towards the betterment of the city.

That is the track record of just about every single PPP project that I have looked at so far. Investors in such projects are interested in taking as little risk as possible, so there are invariably parts of the contract that revert most risks back to the local bodies. Generally such parts of the contracts are marked as being commercial confidential – rater payers only find out about then decades later when the nasty expensive bits get exercised.

But the primary reason for it is that the commercial partners are going to be more expensive. The reason is obvious. Investors will be raising capital themselves, some their own, but mostly from purchasing debt at higher rates than the councils could raise debt.

The usual reason given by advocates is that private enterprises is more efficient at running such enterprises.  Which would be a surprise to just about everyone who has taken basic economics – to one degree or another every PPP project is in a monopoly or semi-monopoly position. This could be because they hold a economic position with few alternatives, or it could be what the local bodies are obligated to do in those commercial-in-confidence documents. Things like blocking off free public roads if the compete too strongly with the PPP roads. This is efficient for the PPP investors – not so efficient for the rater payers. 

But there is also the question of time scale when it comes to business efficiency. Personally I’ve always worked in private enterprise in everything from startups to corporates.  They’re fun compared to public enterprises (which I have only had brief liaisons with) because they change a lot.

Virtually no private enterprise business knows what in the hell it is really going to be doing in 5 years. In my experience few can even plan for 18 months. There is always a new broom sweeping through, a change in strategy, a merger, a buyout or a business failure. Staff turnover at a rapid rate. Private industry is efficient in an economic sense because they are flexible – they seek and fill in gaps in the markets rapidly and often efficiently.

They are essentially useless at the kind of long-term planning that is required to build and operate the infrastructure that all businesses operate on top of. 

Which leads me to the PPP political  blockage that wasn’t in the Stuff article. Businesses wanting to do PPP style investments are prepared to put up money for the promotion of their interests, like suckering politicians into signing away their ratepayer’s futures. The usual way that they do this is by raising the spectre of rate rises and the short-term thinking ratepayers groups against them, then suggesting that the way to get the crucial infrastructure is to PPP. 

This inevitably raises the counter-action by anyone who has had the sense to read about the history of PPPs to start working against the proposals. Small business owners, retirees, environmental groups, local NIMBYs, and just about every other group jumps in with their own interests – including the central government.

It seems to invariably deadlock the early and invariably less expensive start to infrastructure in the debades before it is needed.

Personally, to reduce the confusion, I’d suggest that PPPs are simply taken off the table and legislated against. That would clear a major distraction.

And incidentally, the Stuff article looked to me to be a classic PPP PR play – to frame the debate by offering a ‘new and exciting’ (and very tired PR framing) way to unblock the local vs central government blockage over infrastructure.

33 comments on “Rates, debt, growth and PPP ”

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  1. Blazer 1
    8 October 2019 at 9:58 am

    This nails it perfectly-'Investors in such projects are interested in taking as little risk as possible, so there are invariably parts of the contract that revert most risks back to the local bodies. Generally such parts of the contracts are marked as being commercial confidential – rater payers only find out about then decades later when the nasty expensive bits get exercised.'

    Private capital demands a guaranteed profit=heads we win,tails tax/rate payer loses.

  2. Pat 2
    8 October 2019 at 10:23 am

    Rates are too low?…..and yet over the past 20 years mine have quadrupled (an annual compounding increase of 7.7%) in an inflation environment of just over 2% pa….sustainable not.

    The explanation may more truely lie in ever increasing maintenance development demands as outlined in this piece…otherwise known as catabolic collapse

    • Dukeofurl 2.1
      8 October 2019 at 10:28 am

      The 'property rate' hasnt been rising as fast as the range of uniform annual charges which are the same for every property.

      • Pat 2.1.1
        8 October 2019 at 10:33 am

        That doth butter no parsnips when the bottom line increase is a factorial increase above CPI

  3. Gosman 3
    8 October 2019 at 10:29 am

    Okay so you remove PPP from being an option. Great. Then what? Council's are still faced with having to fund infrastructure projects. What is your proposed solution?

    • Drowsy M. Kram 3.1
      8 October 2019 at 10:39 am

      Maybe the Welsh Government's 'Mutual Investment Model' (also being considered for Scotland) – to complete "projects necessary for the growth of the economy", naturally.

      "But public confidence in private infrastructure investment has been lost. “Poor value for money”, “sham” and “rip-off” are all terms used to describe the use of public private partnerships (PPPs). UK Government has abolished the use of existing PPP models (PFI and PF2) for future projects. High-profile collapses to sector participants, such as Carillion, have amplified distrust in PPPs."

      https://www.scotsman.com/news/opinion/friends/public-service-funding-must-find-a-different-type-of-ppp-michael-urquhart-1-5018150

      • Gosman 3.1.1
        8 October 2019 at 10:43 am

        MIM's are just PPP's rebranded with slight tweaks.

        • Drowsy M. Kram 3.1.1.1
          8 October 2019 at 10:47 am

          So MIMs are just slightly tweaked PPPs – could you provide some information and/or links in support of that opinion?

          • Phil 3.1.1.1.1
            8 October 2019 at 1:16 pm

            It's literally right there in the conclusion paragraph of your own link.

            It is clear that PPP is not a panacea to the problems of public service funding. For all that it is maligned, however, it provides an opportunity to deliver much needed improvement to public infrastructure and, when managed effectively, can work well for all parties. With its focus on value for money, profit sharing and delivery of community benefits, there’s hope that the Mutual Investment Model can lead us down the path towards public private reconciliation, and ultimately the completion of projects necessary for the growth of the economy and the benefit of public Scotland and the wider UK.

            • Drowsy M. Kram 3.1.1.1.1.1
              8 October 2019 at 4:54 pm

              Thanks Phil – I read this as saying that MIMs would focus on "value for money, profit sharing and delivery of community benefits", the implication being that these were not the main focus of PPPs. That, and private funders accepting a greater share of risks.

              "MIM schemes will see private partners build and maintain public assets. In return, the Welsh Government will pay a fee to the private partner, which will cover the cost of construction, maintenance and financing the project.

              At the end of the contract the asset will be transferred into public ownership.

              During the construction phases of the projects, private partners will help the Welsh Government create apprenticeships and traineeships to benefit local communities.

              Current MIM schemes include:

              • redevelopment of Velindre Cancer Centre, Cardiff
              • work to complete the dualling of the A465 from Dowlais Top to Hirwaun
              • additional investment in Band B of the 21st Century Schools Programme"
    • lprent 3.2
      8 October 2019 at 2:10 pm

      Okay so you remove PPP from being an option.

      It hasn't exactly been a realistic option in most high growth areas. For instance try pointing to an actual PPP project in the highest growth area in NZ – Auckland.

      If you'd pull your brain out of your arse for a second and read my points, every debate about PPP in Auckland and most places I've looked, has simply slowed down the either the infrastructure being put in, OR slowed the subsequent projects as they argued about the efficacy of the last one. Clearly they are a failed ‘solution’.

      It really is only the anally retentive ideological idiots who seem to be interested in PPP. For anyone with brains to look up the material on them, it is just an impediment to development.

      Council's are still faced with having to fund infrastructure projects. What is your proposed solution?

      There are several basic systems as far as I can see for different types of systems. Many of them should be done at the same time.

      • Use taxation. Preferably central taxation where it relates to population growth. The biggest issue that happens in Auckland is that we get idiotic governments like the Key one increasing immigration and internal migration without bothering to fund it beforehand.
      • Charge developers with the up-front cost of connecting to local services. If there is a greenfield housing development, that would involve all of the roads, water, etc. If it is a infill or brownfield then the marginal cost of providing those facilities. This will put the costs up of upfront development to their true levels rather than causing ratepayers to subsidise developments.
      • Use local body raised debt. This would require that central government removes the current limits that they are using to try to push local bodies to PPP. But then charge the developers or new residents directly for the cost as a form,, of user pays.
      • Allow local bodies to exclude migration – ie stop growth. The simplest is charge for becoming a resident, but there are a whole number of ways to make sure that growth is accommodated to a sustainable rate. My favourite one in Auckland would be limit new migrants to Auckland from using cars – or raising the cost of parking in various ways – for instance like preventing all parking on the side of arterial routes.. Either would reduce the fast flush congestion issues from migration into urban areas from extra cars.

      The point is that if we get an idiotic government like the last one who increase immigration dramatically and then expect that somewhere like Auckland should pay for their 'costless' decisions, then there need to be constraints

  4. Dukeofurl 4
    8 October 2019 at 10:39 am

    "Local bodies get to finance the infrastructure for housing like local roading, stormwater and drainage, water and sewer connections, public transport, public facilities, parks, and even the mundanities of looking at how power and data is dragged into suburbs for denser housing."

    Thats not completely true. Councils grab large 'infrastructure charges for all new sections, to cover parks, roads, libraries.

    https://www.aucklandcouncil.govt.nz/building-and-consents/development-contributions/Pages/development-contribution-fees.aspx

    Its a sliding fee , but in Auckland would be over $50k per new section.

    Same goes for user pays brand new houses and business 'services' like data ( Chorus doesnt connect for free), power ( Vector charges each new house a network connection more than $12k, a business will be more), water and sewage( Watercare charge sover $15k for a network connection, ) Those network charges are on top of actual physical connection charges to their system.

    • lprent 4.1
      8 October 2019 at 2:23 pm

      Sure. However the true cost isn't nearly covered by those costs. Roading really really costs when they have to pay for all of the roads that connect a subdivision to the main roading network. Not to mention the extra congestion. You’ll note that there are no other ways for councils to regain those costs at present apart from rates? Plus whatever the central government deigns to put into via the NZTA.

      As well as a full cost then it should include all of the lost opportunity costs of other uses for those rates as well.

      It doesn't matter how you try to cut it, existing ratepayers are effectively paying a subsidy to developers and new residents. They also have very little input to the decisions that cause that to happen.

      Think of how much notice National gave Auckland as they effectively added 2-4% per year into the city, and then very late after the congestion increased, reluctantly started to divert the funds from Roads of Significance to National in the countryside to deal with the daily congestion on the roading network here.

  5. Ad 5
    8 October 2019 at 10:43 am

    NZTA and Corrections are the current strong exponents of PPPs.

    I'm not aware of any instigated by local government here.

    The current one under debate by MoT is the Auckland light rail project. Personally I'm pretty happy that isn't being debated during this local election.

    What you might see a bit more of is Alliances and other long term commercial partnerships between CCOs and one or two contractors for both capital and operations.

    • lprent 5.1
      8 October 2019 at 2:30 pm

      What you might see a bit more of is Alliances and other long term commercial partnerships between CCOs and one or two contractors for both capital and operations.

      That I could live with. It allows scale to build and continuity planning. .

      I'm not aware of any instigated by local government here.

      Nor am I. However there has been considerable political pressure to use them for quite some time. Decades.

      I think that much of the detail of the Act/National super city stitch up was an attempt to end-run around it both with the CCO structure and the small size of the decision making council.

      So was the cap placed by National on the debt levels in local government in Auckland – something seemed designed to make PPPs look better by pushing the costs into the future.

      • Ad 5.1.1
        8 October 2019 at 8:56 pm

        I almost want to get rid of CCOs, until I see some of the morons who get onto Councils.

        The biggest loss was the National government forcing local governments to sell off their electricity lines companies. Losing those was a massive income loss and executive power loss.

        The second biggest loss was the next National government forcing local governments to sell off their bus companies. Losing them was just a massive network power loss.

        And the third biggest loss was National forcing local governments to sell off their housing stock by stopping any public subsidy to them. That to me was a massive social crime.

        After that the 1989 Act gave Councils a power of general competency. This generated some failures, but also interesting things like setting up film studios and the like.

        Under National local governments have lost and lost and lost, in both income power and asset generation.

        • lprent 5.1.1.1
          9 October 2019 at 7:28 am

          I almost want to get rid of CCOs, until I see some of the morons who get onto Councils.

          Yeah I know. Every time I look at the history of C&R for instance or Auckland Now. But some opponents to most things on the left as well.

          Paradoxically having the ownership separated from the operational control makes it easier to defend the local government control infrastructural assets required to allow growth. Harder to get in and do the kinds of things that the Actoids really wanted to do. And it adds a filter between the politicians and the nimby lobbyists.

          For instance, the AT restructuring of the bus routes has been effective and widescale. It was damn near impossible to change for decades and was pretty damn obsolete. For example, it used to be pretty impossible to get from Grey Lynn to St Lukes unless you liked to walk a lot – something that I can't do since I wore out the pad between my big toe and foot bones.

          Routes still cause issues – for instance with city divide between Newton / Grafton Gully. But a lot of that was made worse by the misuse of K Rd which is steadily being fixed when they put in peak hour bus lanes. The only real routes across the gully are Bond Street, Newton Road (no buses), and K Rd (massive congestion at peak). Means that a route down to the bottom of Parnell that takes me 10-15 minutes by bike, and at least an hour by bus. But e-bikes and e-scooters make that a lot easier these days.

          I understand that the routes further out of the city are more rational as well. Just too dependent on the motorways. Trains help by they really need to put dedicated bus lanes on the motorways to make the trip more flexible and faster. Kick some cars out of the congestion and make the buses more attractive.

          The idiot naysayers like C&R types in the past always never seemed to get the basic idea that there needs to be enough parking around public transport hubs. The transport spokes to the stations simply doesn't work – especially in those weird roading networks on the North Shore.

  6. michelle 6
    8 October 2019 at 12:04 pm

    high rates and high insurance costs are now a huge barrier to people buying homes its pricing them out and it needs to be curbed if not we need to change the system it is not fair to future generations bad enough we are destroying the planet and them leaving many homeless accept the rich of course

    • Craig H 6.1
      9 October 2019 at 5:53 pm

      Rates have not gone up as a share of the economy since 1890 (not a typo) – that suggests rates are not the problem, land costs are.

  7. Stuart Munro. 7
    8 October 2019 at 12:47 pm

    I don't feel that PPPs are inherently flawed, but they have often been chosen ideologically and not monitored closely or disciplined when they fall short of good practice. Where they offer real benefits is if the private business has substantial existing expertise and business in the function they are to perform. A substantial ongoing public contract offers them stability and thus the ability to improve their efficiency.

    The discipline is crucial however, and in NZ frankly corrupt practices like those of Southern Response have avoided this. It's fair to say that NZ government is not fit to operate PPPs, they lack the essential rigour, so taking them off the table is only sensible.

    • Phil 7.1
      8 October 2019 at 1:33 pm

      It's fair to say that NZ government is not fit to operate PPPs, they lack the essential rigour, so taking them off the table is only sensible.

      If your statement is true, then the government is not fit to operate anything.

      The governance that should sit over the top of a PPP is not fundamentally different to the governance that already sits over the top of a Crown Operating Entity or a private company.

      • Stuart Munro. 7.1.1
        8 October 2019 at 1:41 pm

        "If your statement is true, then the government is not fit to operate anything."

        Well it's pretty much true of the last government, and I imagine it's true for some of the operations of the coalition. Bill English's wrecking of Solid Energy should have ended his political career, destroying getting on for a billion in public asset value without strident and sustained calls for his resignation shows a lack of rigour, this time on the part of our media.

        • greywarshark 7.1.1.1
          8 October 2019 at 9:15 pm

          The coal miner and the judge – musings by Peter Cook about rigour. Councils and other bodies should put contestants through this sort of rigorous exam before being accepted

          • Stuart Munro. 7.1.1.1.1
            8 October 2019 at 10:06 pm

            Much though I like Peter Cook, I think Billy Connelly has a better grounding in what the 'lower classes actually have to say for themselves, and it is frequently a lot more to the point than "Oh I've just found a lump of coal".

            "When I was nominated for a knighthood, the woman interviewing me said, very nicely, ‘It’ll be strange for you, having a knighthood, coming from nothing.’ And I said, I don’t come from nothing. I come from something.”

            As I get older and I watch the increasingly frequent and abject failure of our sneering neoliberal professional classes, I have more and more time for the less pretentious people they've shat all over, without in most cases, producing any of the social goods they promised to worm their way into their elevated positions.

            • greywarshark 7.1.1.1.1.1
              9 October 2019 at 8:39 pm

              It is pretty hard to keep up to my family's standards. They would like to move around their houses so hermetically that they wouldn't leave a footprint. And too often the tch tch comes out and why do 'they' do that etc. They just don't know how good some people are, and if such people do them a favour, the m-c take it as recognition of their superior entitlement.

  8. Sacha 8
    8 October 2019 at 1:32 pm

    The Stuff article is another excuse to give the business roundtable's tame economist Mr Crampton another platform to air his 80s neoliberal nonsense. Heard it before, seen the results. No thanks.

    • Gosman 8.1
      8 October 2019 at 3:50 pm

      Do you not think councils should get more of the benefits rather than footing most of the costs from developments in their areas?

      • lprent 8.1.1
        9 October 2019 at 7:48 am

        As I said – there is no obvious 'looking back from 30 years' economic evidence that PPPs help benefit the ratepayers or taxpayers. At least I have never seen any credible examples. I have seen a number of promotional investments for investing in them that laud the benefits for shareholders which are somewhat disquieting when you think through the implications.

        Mostly what seems to happen is that ratepayers and taxpayers just wind up paying more either in user pays or with ridiculous support for monopolistic profits at the expense of functional utility. Or just with practices that lead to long term problems. Look at the fiasco of the Serco Mt Eden prison. Or the perverse incentives at Wiri where a simple minded bonus system rewards low staffing levels and non-performance of declared functions because of what may be a local variation.

        The problem is that chronic understaffing in prisons usually just results eventually in the taxpayers having to put in police to quell riots. Especially when prison staff turns over too fast or goes on strike in private prisons (there are too many examples of this in the US to even mention). Pretty typical short-term business semi-monopolistic style thinking.

        These days it is only the ideological idiots, profiteers and corrupt or lazy politicians who seem to like PPPs. Everyone else has been looking at their long-term performance and not disliking the costs as being higher then the benefits.

  10. bwaghorn 10
    8 October 2019 at 1:36 pm

    Given that next to nobody votes in local elections isnt it time we shit canned councils . Then doubled the amount of electorates in the country . And have government do it all .

    • greywarshark 10.1
      9 October 2019 at 8:47 pm

      Government is a shitcan we want to keep. Having local government is a wrap of bubble wrap between us with our Council, and the plopping globulous mess that means we are either in Parliament or by a Rotorua Hot Pool. Don't know about Regional Councils though.