The Post: The trouble with PPPs ‒ problems, pitfalls and pain

Read the original article in the Post

In Northern Ireland, taxpayers have been spending millions of pounds maintaining the buildings of an empty school. Why? Because it was built through a public-private partnership (PPP), a complex form of financing already used on local projects like Transmission Gully and set to become even more prevalent here.

Having seen these financial structures fail first-hand, I hope they don’t spread. And the fact we’re even entertaining the idea reveals deep failings in how we think about government in New Zealand.

The core of it is this. If the state wants something built – a school, a road, a power station – it has several choices. In the old Ministry of Works days, it could do everything itself, from finding the funds to directly employing the tradies.

These days, typically, it pays a firm like Fletcher’s to do the construction, but nothing more. The private-sector involvement, though not insubstantial, is nonetheless limited, controlled.

In a PPP, though, all the government does upfront is specify that it wants a building – a hospital, say. It then contracts a private-sector consortium to do everything else: design the hospital, borrow the money for its construction, build it, and then operate the facilities – for a hefty fee – for 30 or so years.

These financing structures first flourished in Britain in the 1990s, and were in full swing a decade later when I worked there as an infrastructure reporter. But even then the flaws were apparent.

Private firms always pay steeper borrowing fees than governments do, so PPPs have higher upfront costs. They save money only if the consortium can find efficiencies elsewhere. And the rationale of PPPs is that if a firm has to run a facility for 30 years, they’ll build it beautifully, rather than cutting corners and hiding defects before handing over to the state.

This logic is, alas, undermined by our old friend complexity.

Negotiating a contract that covers everything that might happen over three decades is nigh-on impossible. So either the consortium agrees to take on large, amorphous risks, in which case it charges a packet for the privilege; or, when unanticipated problems arise – the hospital buildings need to be rejigged to meet new models of care, for instance – the consortium can refuse to make the changes unless it is again paid colossal sums.

This is precisely what happens in Britain, where stories of ridiculous charges – thousands of pounds for a new tap, for instance – abound. The worst thing in the world is a private monopoly – and that is exactly what you get, for 30 years, with PPP maintenance.

Hence the Northern Ireland fiasco. When the contract for the PPP school was signed, no-one anticipated rolls would fall so rapidly that it had to close. But the taxpayer must keep maintaining an empty school, because that’s what the contract says. Far from being efficient, PPPs are exceptionally inflexible.

The negotiations are also a consultants’ dream. Take, for instance, the notorious (and admittedly massive) early-2000s London Underground PPP contract, where the lawyers’ and accountants’ fees alone were £500m. That’s a billion dollars, just to negotiate a contract, before builders set foot onsite: resources squandered on an epic scale. National, supposedly the enemy of waste and consultants, should take note.

It’s hardly surprising that, drawing on decades of experience, Britain’s National Audit Office concluded a few years back that PPPs cost more than standard construction contracts and there was no evidence they delivered better services. New Zealand’s Transmission Gully fiasco, with its constant over-runs and poor-quality road seal, is no aberration.

So why would both Labour and National still contemplate PPPs for roads and other projects? Partly because of the myth that they solve the state’s financial problems by getting the private sector to pay for things upfront.

They don’t, of course: there’s no free lunch, and the state just has to pay back the (inflated) bill through 30 years of maintenance fees. There is, what’s more, no financial problem to solve, at least in New Zealand.

Our government borrowing, at roughly 20% of GDP, is low by global and historical standards. We could – and should – borrow more without running into any difficulties, in order to fund the infrastructure needed in coming decades.

How do we ensure these schools and hospitals are well-built? Restore the public sector’s construction expertise. We need a team of super-procurers, of expert engineers and architects, permanently based in government, designing beautiful and efficient buildings, driving tough deals with construction firms, and – crucially – retaining the knowledge and learning the lessons from each project, so as to be able to insist on lower costs, and higher quality, next time round.

The recent creation of the Infrastructure Commission, and the repurposing of Christchurch rebuild agency Ōtākaro into a wider project-delivery body, are already promising steps. Let’s build on them – and avoid embracing the failed, wasteful and hyper-complex world of PPPs.