Brian Easton says New Zealand’s economic development has always been a partnership between the public and private sectors

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

Public-Private-Partnerships (PPPs) have become fashionable again, partly because of the government’s ambitions to accelerate infrastructural development. There is, of course, an ideological element too, while some of the opposition to them is also ideological.

PPPs come in so many different forms that it is tedious to characterise them all. Some of those forms have been used in the past. For instance, the First (Savage-Fraser) Labour Government wanted to accelerate house building to catchup from the housing deficit caused by the Great Depression. It turned to Fletcher Building. (There was even a – rejected – proposal to nationalise the company.)

More recently, the Third (Muldoon) National Government arranged for various companies to develop projects to utilise its energy surplus (including its gas from the Maui gas field). Think Big failed because when the new businesses came online, the world price of oil had fallen and was only about a third of the level that the investments had assumed. Even worse, the Government had given guarantees so that it took the downside risk of low oil prices. It cost taxpayers a fortune.

Those guarantees were secret. That cannot happen today because the law now explicitly states that to be legally valid, any government guarantees must be reported to Parliament. (They are listed in the government accounts as ‘contingent liabilities’.)

Even so, the Think Big failure remains a reminder that a PPP are often about sharing future risk (such as cost overruns, unexpected events – such as delays from Covid lockdowns – and uncertainty about future demand, prices and costs of borrowing). A nice example was the broadband roll out where, in effect, the government accepted the take-up risk, which the private sector was not prepared to bear, but was able to ensure the construction risk remained with the private sector.

The private sector is never enthusiastic at taking on these risks but neither should the public sector be. Trying to cover all these uncertainties is why a PPP agreement often ends up hundreds of pages long.

PPPs were popular in Europe about a quarter of a century ago. Members of the EU were required to constrain their government borrowing to 3 percent of GDP. However, the definition of what was government borrowing did not include the implicit borrowing that occurs under a PPP. It was like your bank asking for a list of all your debts but ignoring anything bought on hire purchase.

New Zealand’s public accounting does not allow such elementary lapses. The public accounts include an item covering the government exposure to PPPs. Here is a list from Note 17 of the Financial Statements of the Government of New Zealand as at 30 June 2024.

• Transmission Gully State Highway   $1,392m

• Puhoi to Warkworth State Highway $1,157m

• Waikeria Corrections Facility            $1,045m

• Education Assets                              $   934m

• Auckland South Corrections Facility $  373m

• Auckland Prison                                $   350m

• Total public private partnerships     $5,251m

   

Of that total, $3.6b still has to be paid by the Government to the private sector and the liability is included in total New Zealand public debt.

So PPPs are not a means of off-balance sheet borrowing. As the Government’s New Zealand PPP Framework: A Blueprint for Future Transactions states: 

     ‘PPP procurement should not be categorised as a financing tool. While the PPP model utilises private finance in support of achieving these enhanced outcomes, spreading infrastructure related cash flows through project finance arrangements is not the purpose of PPP procurement (if it were, this outcome could be achieved more efficiently through general Crown borrowing to finance infrastructure needs). 

     ‘Having private capital at risk for delivery performance offers significant benefits by creating stronger commercial incentives. ... With "skin in the game," they are motivated to prevent performance or availability failures, ultimately enhancing overall accountability and reliability ...

     ‘PPP will not be appropriate for all projects. It should be considered alongside a suite of  other procurement and delivery options, all of which will have pros and cons depending on unique project characteristics. 

I guess there is a bit of leeway about what is meant by ‘enhanced outcomes’. For instance, there is much grumbling about how quickly the road surfaces of Transmission Gully have deteriorated (some are already being replaced). What seems to have happened is that in order to meet their construction deadlines and avoid lateness penalties, the contractors skimped on the sealing. However, the contract arrangements require them to maintain the road for some decades, so the resealing is at their cost, not the public’s.

The Transmission Gully contract would be a fascinating case study on how PPPs work, much more use than, say, various studies of British PPPs, which have often proved to be costly disasters through poor management (and are regularly cited by opponents as examples of the dangers of PPPs). There is a Transmission Gully Post-Construction Review from which we can learn lessons. Unfortunately, the contractors and the government are in dispute so it says is not comprehensive. That there is such litigation is a reminder that PPPs can go very wrong.

So PPPs are not a solution to New Zealand’s infrastructural woes. They may make a contribution. But that contribution does not include getting around the debt targets we have set ourselves – hire purchase is out.

There is a European view that those governments who could do PPPs successfully did not need them. In contrast, those who needed PPPs had little chance of successfully pulling them off. Which category do you think New Zealand is in?

PPPs require careful management. We may have some people in the public sector who have the necessary skills and experience but they will not be able to handle all the projects which the government is keen to progress. Using the insufficiently skilled and inexperienced will lead to the kind of disasters that occurred in Britain. Like the sign on so many roadworks, ‘proceed with caution’. But you still roll the vehicle carefully forward.

Note. It would help public discussion and understanding to provide a supplementary account to the main government accounts which set out the government’s infrastructure balance sheet (including its size and the debt which might be attributed to it), and the changes over time. Personally, I would be much more comfortable about the government increasing its borrowing if I knew that it was borrowing to upgrade infrastructure.

Further Reading. The following may be useful

NZ Government: New Zealand PPP Framework: A Blueprint for Future Transactions.

Public Sector Vol 40:2 has a number of articles on PPPs

Craig Rennie: When should you use a PPP? – A bluffer's guide.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.