Julian Wood

By Julian Wood - 19/07/2019

Julian Wood

By Julian Wood -

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The pitfalls and priorities of Public Private Partnerships

New Zealand has a long and contentious history of private public partnerships (or PPPs). The biggest argument in favour of PPPs is that these partnerships can find new ways of solving problems. Private profits can allow businesses to create efficiencies and creative solutions to be found to existing problems. These gains can be significant when managed well. Better rehabilitation solutions can be found. Homes can be better designed and positioned well for the sun rather than simply facing the street.

When we’re talking about a delay in finishing a roading project, that’s one thing, but public services often have a lot to do with very human outcomes.

In a perfect world it wouldn’t matter if the government outsourced some of its responsibilities, paying expert providers from the private sector to deliver public services­ ­like prisons, housing, or even hospitals and aged care. Unfortunately we don’t live in a perfect world, we live in a real, human, world where saving money or making profits on public services can mean cutting corners, making for more violent prisons, damp homes, mean moteliers and a creaking aged care environment. So why are PPPs increasingly part of life in New Zealand? It’s useful to consider the work of Nobel prize winning economist, Oliver Hart.

Along with his colleague, Hart advanced the idea of “incomplete contracts,” pointing out that no contract can anticipate every possible situation or outcome. Based on this thinking, any agreement between public and private operators is incomplete, and it becomes incredibly important who has “control rights” when things turn out differently than promised, or if you need to achieve a social outcome that is simply going to cost more than what the private sector is willing to pay for.

When we’re talking about a delay in finishing a roading project, that’s one thing, but public services often have a lot to do with very human outcomes. Quick efficiencies or cutting corners can come at the cost of a social outcome that we all care deeply about. For example no-one wants really wants our prisons to become more violent in exchange for saving some taxpayer dollars, or for our roads to be more dangerous than they should be because of an unknown problem when the initial contract was signed.

By far the poorest argument in favour of PPPs are also those that seem to me to be most tempting to our current Government.

It also costs a lot to write up, monitor, and enforce these partnerships where control of the project and profit is shared. These higher costs are not universally bad. In the end if we are aware of what public services actually cost, this is itself can enable clarity around goals, better understood objectives and higher levels of accountability. Goals, objectives and accountability can all be massive blind spots when services are provided purely by the public sector.

By far the poorest argument in favour of PPPs are also those that seem to me to be most tempting to our current Government. It turns out that the financial flexibility that PPPs can bring means infrastructure debt off can be kept off a government’s books, which is appealing to any government that might be looking to skirt self-imposed debt restrictions. This is troublesome for two reasons.

Firstly taxpayers will often pay more for these kinds of PPP. Where there is a genuine benefit to be gained in undertaking a PPP, be it efficiency, private sector skill or talent, or otherwise, this extra cost can be deemed worthwhile. But PPPs shouldn’t be used just so the Government can flirt with the realities of debt restrictions, be it this government or the last.  

While PPPs can enable innovation and efficiency, we should never choose to use them simply to satisfy ideological predilections, circumvent debt rules or to avoid public accountability.

Secondly, PPP arrangements can often mean that requests for information under the OIA can be denied under the guise of commercial sensitivity. We should resist this as much as possible, as a loss of public accountability for government operations and spending would be a huge loss for transparency in New Zealand. Transparency is essential and so any move towards increasing opacity needs to be carefully guarded against.

In sum it’s clear to me that while PPPs can enable innovation and efficiency, we should never choose to use them simply to satisfy ideological predilections, circumvent debt rules or to avoid public accountability. PPPs are not the quick fix many make them out to be, but done well and in the right situations, the long-term pay off from involving private sector entrepreneurs can bring welcome gains for New Zealand. If we see the Government taking steps towards using these arrangements, we should watch carefully, and check that they proceed with caution.

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Julian Wood

By Julian Wood -

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