The money and the bag: getting the best out of public private contracting

Dominion Post readers have been treated in the last few weeks to two very different perspectives on Public Private Partnerships.  Tim Stone, KPMG’s London-based chairman of global infrastructure and projects, sang their praises and Brenda Pilott, the national secretary of the PSA, warned of their risks.

Interestingly, both used the UK to support their position.  Dr Stone said that in the UK 10 to 12 per cent of the government’s total infrastructure investment was through PPPs.  Brenda Pilott provided a number of examples from the UK of PPP ventures gone wrong.

Perhaps rather than reject the PPP model or assert that the benefits it can offer are easily accessed or risk free, the better response for New Zealand is to learn from the UK’s experience.  We have come later to the PPP party than most and have the chance to choose the courses that suit us best, rather than have to buy into the whole degustation.

Yes, PPPs can provide a source of private sector funding.  This can be a mix of debt and equity, though equity investors can have a rough ride.  But the Crown can always borrow more cheaply than the private sector and it will always be cheaper to borrow against the tax base or rating base than to borrow with security over a particular asset.

Yes, PPPs can release greater efficiency and cost savings from private sector innovation but we need to be realistic in the New Zealand context about what the scope for this is.  Does anyone really think that OnTrack, NZ Transport Agency, Transpower and Meridian are not efficient principals already?  All engage in competitive tendering as a matter of course, as do Government departments and much of local government, and bidders for big contracts already suggest innovations where that might help them win the contract. 

That said, two matters do restrict innovation, and they are related.  Typically principals in New Zealand do not favour functionality contracts as much as perhaps they should.  Usually they specify in some detail their physical requirements for the asset to be provided (a two lane road with specified passing lanes, or a pumping station of a certain capacity on a certain site), rather than specifying a functional outcome such as the ability to travel between X and Y in no more than Z minutes at peak time, or the ability to deliver A litres of water or waste water from B to C.

Related to this is the Resource Management Act.  The private sector cannot take the risk of winning a function based contract then face the timing and outcome uncertainties of a resource consent process.  And, of course, it cannot seek those consents in advance.

Yes, PPPs can generate create whole of life efficiencies from continued private sector involvement.  But these can be achieved also through more familiar instruments.  10 year performance specified maintenance contracts are well used and understood here, and variations of DBM (Design, Build, Maintain) and DBMO (Design, Build, Maintain, Operate) are common in areas such as water and waste water processing.

And, yes, PPPs can be a vehicle to shift risk to the private sector.

At one level, the Sydney Cross City Tunnel failure is proof of the value of PPPs because it was a private sector failure not a public sector failure.  But a failure is a failure.  Defaults may mean that Sydneysiders have acquired an asset cheaply, but they have demonstrated eloquently that it is an asset they do not value, and they will be responsible for its upkeep.

In the case of Melbourne’s Spencer Street Station, when the private PPP parties threatened to walk away the Victorian State Government rearranged the project and pumped in millions of dollars of taxpayers’ money.  No station was not an option; and everyone knew that.  Same with the UK hospitals.

Of course, at lesser extremes, risk can successfully be shifted to the private sector - although always at a price.  But, like funding or innovation initiatives, it is possible to shift appropriate risks without a full blown and costly PPP. 

A sophisticated “alliance” contract may be more appropriate.  Under an alliance contract, all parties share ownership of the risks.  Some risks are allocated at the outset of the project while those less likely to occur are addressed on a shared basis when and if they arise with any cost savings or cost overruns allocated between the client and the alliance partners.  Efficiency incentives can also be incorporated.  Auckland’s Grafton Gully project came in ahead of time and under budget using this model.

What is important is to identify the advantageous components of PPPs and to construct a model that selects the best and avoids the inappropriate.  If at the end of the process you want to call the outcome a PPP, then fine.  But whatever it is called, let it be on terms that suit New Zealand’s situation, not some imported cuckoo dropped into an unwilling or unsuspecting nest.

The views expressed here are those of David Cochrane and may or may not be shared by clients of the firm or those within it.

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Related topics: Public private partnerships; Public law


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