News
Progress by partnership makes sense
First published in the Dominion Post, 3 October 2007.
Using private sector money and expertise to build and operate public buildings like schools and hospitals can deliver real benefits, argues Hugh Kettle.
Until now the debate around the private sector financing, building and operating public infrastructure assets in New Zealand has focussed on toll roads.
While private funding backed by tolling revenues has hastened the development of roading infrastructure overseas, telling the electorate that they will have to pay to drive somewhere is never an easy sell for any politician.
But will New Zealanders object to going to a local hospital where the buildings are financed and operated by a private company?
Will there be howls of protest from parents if their children's brand new school is built by a private consortium who also clean the classrooms each night?
National leader John Key appeared to be testing the waters on this issue when he reportedly told a recent property industry gathering that he saw public private partnerships (PPPs) playing a significant role in the property sector.
Specifically in areas such as prisons, schools and hospitals.
That approach shouldn't be seen as surprising. In the UK it is in the property sector that PPPs have been most successful. Over 550 PPPs have seen schools, hospitals, government buildings, even fire stations built and operated by the private sector.
To be clear, we are not talking about privatising state education, public health, or the fire service. The overseas models have (with some exceptions such as prisons) typically seen the private sector take on the design, build and finance roles. Once the development is completed the private sector continues to provide maintenance and facilities management services, but the core services (clinical, educational or otherwise) continue to be provided by the state.
In going beyond just toll roads there is a real opportunity for New Zealand to renew and revitalise our property infrastructure through private finance and expertise.
The barriers to this are clearly political.
There seemingly remains in New Zealand an ideological divide across the parties on the use of PPPs.
That divide no longer exists in either the UK or Australia where both right and left leaning parties have used PPPs to develop infrastructure assets. That's not to say PPPs don't have their critics in those countries.
Costs for implementing PPPs are seen as high because of the often complex contracts and structures. Bid costs in the UK were, before the commoditisation of PPP contracts, high enough to seriously limit the number of bidders prepared to kick the tyres of a project.
There are also questions about whether getting the private sector to build and operate a hospital is really more efficient than getting the public sector to manage the process - something the New Zealand Treasury itself raised in a recent report on PPPs.
Then there is the concern as to what happens if the private consortium at the heart of the PPP falls apart or becomes insolvent.
While it's true that costs were high in the initial PPP contracts in the UK, the procurement and documentation process has become much more efficient and standardised. PPP consortiums have "fallen over" in the midst of projects, but others have stepped in to continue. In some cases, developers' equity has been recycled several times over, with more general infrastructure investors buying in to projects once construction risk has passed leaving developers free to reinvest in new projects.
And although our Treasury may fairly question how efficient PPPs are, their counterparts in the UK have analysed 29 separate PPP projects and concluded they provided an average cost saving of 17% over public sector delivery. Detailed 'value for money' criteria, including quantitative and qualitative factors, have been introduced by the UK Treasury on all PPPs over a (low) threshold value. If the value for money criteria are not met, there is no PPP.
Given that other countries have faced and overcome the PPP pitfalls, there is a real opportunity for New Zealand to draw on those experiences to ensure that they have a far smoother introduction locally.
Before this can happen there is a need to demonstrate the tangible benefits PPPs can bring to the public, instead of it being painted as a creeping privatisation of public property and assets.
Put simply, does the public want a centralised public service to build and run property infrastructure like hospitals? Or, do they want their public servants ensuring that private sector companies do so against a series of tough contractual benchmarks?
Who do the public believe will fund and build infrastructure assets faster - the Government or the private sector?
Finally, if the land your children's school is built on remains in public ownership, does it really matter that the buildings are in private hands for the next 30 years?
Toll roads will never be a easy political message to sell.
Demonstrating to the public that new schools and hospitals in their area can be delivered better and quicker by the private sector may prove easier.
* Hugh Kettle worked on a number of PPP projects for one of the UK's largest law firms from 2002 to 2005.
