Tony Holman: PPPs short-term gain but long-term pain

Auckland Mayor Len Brown. Photo / Greg Bowker

Mayor Brown has had another vision and is claiming public-private partnerships (PPPs) can relieve the burden on ratepayers. I wonder if he has done his homework. It's not a vision, it's a mirage.

PPPs are joint ventures between government, or local government, and companies to build major projects such as bridges, tunnels and underground rail - and, in Britain, also hospitals.

Too often PPPs overseas end in the failure of the commercial organisation, with the public picking up greatly increased costs to clear up the mess.

PPPs typically involve long-term agreements (25-50 years). They are secret - neither the public nor elected members know the terms. They are weak on accountability with virtually no transparency. They don't appear on the public body's "balance sheet" so its financial position looks rosier than it is.

Fixed returns to the commercial business are based on "notional" values and estimates. Real costs are almost always greatly underestimated.

PPPs are much more costly than normal public sector construction. Private companies build in higher costs, making the project more expensive and bringing high risk to the venture.

But considerable risk is also assigned to the government or local body. Companies can default or go into receivership, creating a debt that has to be paid for by the public and future generations, exactly as if the local body had undertaken the debt directly.

The PPP record is extremely poor.Lane Cove Tunnel in Sydney was placed in receivership over failure to repay its $1.14 billion debt (January 2010). About three years after it opened at a cost of $1.1 billion, the 3.6km tunnel proved a disaster to Connector Motorways (Leighton Holdings, Mirvac and Hong Kong billionaire Li Ka-shing who have all written off their investment in the project).

Another failed PPP project was the Cross City Tunnel, Sydney. One report said "after so many dud road-related public-private partnerships (PPPs), it seems the NSW Government has realised that if it wants to build the Metro, it will have to find the money itself. Part of the problem lies with the Government. In each case, the state Government chose the bid with the highest estimate on the grounds that it received a payment in advance, and through the PPP had transferred the financial risk to the private sector".

Private Finance Initiatives (PFIs) are used in the UK public health sector. A Guardian article, November 2010, contended the cost and inflexibility of PFI was an outrage. A colossal sum of 267 billion ($534 billion) was ring-fenced and index-linked for the next 50 years for money the state owes to private corporations under the PFI initiative.

PFIs may be one of the reasons Britain is undergoing savage cuts to its public services and welfare systems to repay enormous debt from taxation.

In 1997, the UK Labour Government gave relevant companies a legal guarantee that their payments would never be cut. Whenever there was a conflict between the needs of patients and PFI payments it would be resolved in favour of the consortiums.

The Public Services International Research Unit at the Business School, University of Greenwich, London, analysed 16 international studies relating to PPPs and PFIs in Europe and the US, concluding that PPP construction costs in the European road sector were about 25 per cent higher than public sector construction costs for road projects and that PPPs mobilised little private finance for urban infrastructure.

US researchers Flyvbjerg, Holm and Buhl (2002) found contractors' estimates of construction costs were underestimated and demand forecasts were overestimated so consistently that it must be because of systematic misrepresentation, i.e lying.

A 2008 report to the House of Commons Transport Committee on major failures of the London Underground PPP found that Metronet's inability to operate efficiently or economically proved the private sector can fail to deliver on a spectacular scale.

A few years ago our Treasury produced a report entitled Financing Infrastructure Projects: Public Private Partnerships (PPPs), which concluded PPPs may be a good way of procuring services only if three conditions are met: that project outcomes can be specified in service level terms, that performance can be measured objectively and that performance objectives are durable. If the answer to any of these is no then, it stated, the conventional procurement is likely to be preferable to a PPP. It is rare if any of these conditions are met, let alone all three.

Apparently PPPs rarely benefit the public purse. Rather, politicians hope for short-term gains, while the result is long-term pain for the taxpayers or ratepayers, often after the political originators have left office.

Don't go there, Len.