Put the Boot in

Public-private partnerships are not free lunches. 


Listener: 20 September, 2008. 


Keywords: Business & Finance;  


Wastewater from my dwelling goes out through a public-private partnership (PPP) scheme called “Boot” (Build-Own-Operate-Transfer) in which the sewerage plant was built and is owned and operated by a private company. Ultimately, the plant will be transferred to the public. It seems to be working well, perhaps because, unlike with the Telecom monopoly, the local council acts on our collective behalf to prevent direct exploit-ation of the consumer. 


Boots are a form of privatisation – the transferring of public provision to the private sector – but this example reminds us it need not be a disaster. Some PPPs were. The energy-based “Think Big” projects cost taxpayers and motorists a fortune: a classic case of privatising profits and nationalising losses. The pain from Think Big taught us to look very carefully at who -carries the risk when things go wrong in a PPP. 


There are proposals to use PPPs for infrastructural development – transport, energy, telecommunications and water. The history probably starts back in the 1970s when Rob Muldoon, faced with Budget overspending, cut back on infrastructural spending. Usually, there is a bit of spare capacity in a system, so it is possible to restrain investment for a while. 


Some gaps were resolved in the decade after Muldoon by corporatisation and privatisation, so the investment was done off the government balance sheet (but the investment still put resource pressures on the economy). And the long stagnation of the economy meant the demand for increased capacity fell away (and the engineers did some ingenious tweaking by). 


Even so, by the end of the 1990s the country had increasingly severe capacity shortages, which the National-New Zealand First and Labour-led Governments began to address. As a result, Government current spending and tax cutting had to be restrained. 


The shortages led to disasters such as the five-week power outage in the Auckland CBD in 1998, and debacles over the railway tracks, which the Government had to re-nationalise, and Telecom’s poor broadband performance, demonstrating that the private sector cannot be relied on to do the job properly. But we seem to be moving from the bottleneck approach – where investment is belatedly made to deal with jams and breakdowns – to the connectivity approach, where we try to install the network we need for the future. 


So although I expect petrol prices to remain high, discouraging private demand in the long run, business needs trucking. We still need a coherent roading network together with a public urban transport network and a high-quality long-distance rail track. (Some tunnels cannot take containers, and trains are over-dependent on diesel.) We lack a national infrastructural plan – it’s all too bits and pieces. I expect we will have to continue increased investment in our infrastructure, unless we want to lapse into the inadequacies of the 1980s and 1990s. That means we must devote more resources to those sectors. 


Can we avoid the consequences of the more we spend on infrastructure, the less there is for public spending and tax cuts (that is private spending)? 


Superficially, PPPs seem to be a means of doing this, since they move the items off the Government balance sheet – although they may later return if the Government takes the downside of the risk, as occurred with Think Big. The same macro-economic considerations apply. Bigger investment programmes, whether they come from public or private expenditure, put pressure on production. Unless the pressure is offset, it will increase interest rates or the exchange rate (and -probably both) as well as inflation. 


PPPs are not some ingenious solution to giving us extra public and private consumption without cost. They’re not free lunches: the downsides are additional public risk and pressure on production. All investment is like that: sacrifices made now for the future. 


<>That doesn’t mean we should never use PPPs. Where there is an offsetting revenue stream – such as the toll on the proposed Waterview connection to complete SH20 between West Auckland and South Auckland – it may make practical sense. But that is pragmatically looking at particular circumstances including who bears the risk, not piously hoping the real problems will go away.