Public Private Partnerships 2.0

Today’s column in the Age and SMH

Public private partnerships (PPPs) haven’t been such a happy experiment. Using private money to build arterial roads just increases their cost because private capital requires much higher returns than government borrowing.

But I’ve long wondered about a different kind of PPP that plays to the respective strengths of public and private sectors, rather than their weaknesses.

The economic textbook says governments must build public goods because private endeavour can capture only a tiny fraction of their total value to society. But Google, Facebook, Twitter and Wikipedia are all privately provided public goods. What’s going on?

These public goods generate far more social than private benefit, but there’s still enough in it for the creators to make their creation worthwhile. Google probably generates more than $1 trillion worth of value, so advertising revenue of a tiny fraction of that still manages to generate a few lousy tens of billions. Meanwhile, the platform of Wikipedia was philanthropically created, which leverages the voluntary contributions of the expert and energetic few for the benefit of all.

It’s lucky these public goods didn’t need government involvement, because building them required the insight, drive and steadfast purpose of some of the finest entrepreneurs alive. That pretty much rules government out of the job description.

But what about all those potential public goods or platforms that languish undeveloped because there just aren’t the incentives for private entrepreneurs to deliver them without government help? A public-private partnership might bring them into existence.

I’d come to that conclusion by 2009 while participating in the Government 2.0 Taskforce, which explored the implications of ”Web 2.0”, or social media for governments. But it wasn’t until last year until I came upon a really compelling example. At the Health 2.0 Conference in San Francisco I listened to Anne Wojcicki, the wife of Google co-founder Sergey Brin and the co-founder and CEO of 23andMe.

23andMe sends customers a kit to swab their saliva to enable 23andMe to genetically profile them. 23andMe customers then use that profile to help manage their health throughout their lives. This kind of genetic information isn’t the godsend that people once thought it might be. Genes express themselves in complex ways. But already the information can be helpful in identifying some disease susceptibilities.

And 23andMe is becoming a powerful platform for research. Customers complete 23andMe questionnaires that identify specific health characteristics to be cross-referenced with their genomic profile and as its database grows, its diagnostic and research power grows. Scientists have used 23andMe’s database to publish in scholarly journals replicating 180 genetic associations with medical conditions that had previously been documented in the medical literature – at a fraction of the cost and time of traditional research.

23andMe and its like will help take us to personalised medicine where medicines are targeted to specific individuals based on what’s optimal for their genetic predisposition. Meanwhile, other countries are getting interested. The UK’s National Health Service has announced a program of full genetic sequencing for 10,000 Britons.

But as futuristic as it all sounds, the private sector on its own is making heavy weather of it. With a bank balance swelled to $50-odd million from its latest capital raising, 23andMe is cutting its prices – from $299 to $99, down from $999 in 2008 – to increase its customer base from about 200,000 to 1 million. But there are 7 billion people alive today.

Public-private partnerships could put us in the express lane to the future. Genetic profiles for patients have an immediate capital value to our health system. They can help target screening and improve safety – for instance by better vigilance against allergies or drug reactions. That’s worth more than $99 a patient right now. But at scale, unit costs would fall well below that.

So Medicare could ”bulk bill” genetic profiling while the health system ”nudged” people to take advantage of free profiling, while allowing those who wished to, to opt out. DIY kits could be bulk-mailed as they were recently as part of our bowel cancer-screening program. And at your next visit your doctor could ask if you wanted to be swabbed right there.

The provider of the profiling could be 23andMe or another company(ies). They’d have to open their database to researchers, with the contents duly anonymised and subject to safeguards to protect customer privacy. But they could also provide value-added services to their customers.

And as Australia’s genomic database grew, so, too, would its power as a diagnostic and research asset. It’s hard to think of a more powerful way to kick-start the personalised medicine revolution just coming into view. And hard to think of a better way to put Australian researchers, Australian companies, and the Australian health system at the forefront of that revolution.

This entry was posted in Economics and public policy, Innovation, IT and Internet, Web and Government 2.0. Bookmark the permalink.

18 Responses to Public Private Partnerships 2.0

  1. Alex says:

    The question underlying this and much of the discussion of the relation between the public and the private, I think, is this. What can the private sector do that governments cannot do? This may not be straightforward. It might also be related to questions about why we need firms at all.
    It can’t simply be to innovate. I suppose the net and the atomic bomb and the space programme and sputnic and so on were all pretty innovative. It might well be the case that government is good at big things. On the other hand innovation seeems to be an important part of the answer. Certain types of innovation? Maybe small scale? Something small might get bigger later of course. Maybe consumer products as differentiated from things that are obviously collective goods from the get go? A lot of the web type innovations seem to start small and don’t need lots of capital. Big problems like climate change and energy probably can’t be solved in the same way. In these cases governments probably have to organize large expenditures and arrange distribution to maximize social benefit rather than short term profits. This might also be the case for other large scale projects like roads and water. In these cases it might only be nenificial to privatize small parts of the system.

    • GrueBleen says:

      What can the private sector do that governments cannot do?

      A good question. Could the Roman private sector have built the Pantheon ? The Coliseum ? The aqueducts and viaducts ? Could the private sector of Byzantium have built Hagia Sophia ? Could the private sector of Australia have built the Postal and Telephone service ?

      What about the Cathedral of Reims ? Does that count as a PPP perhaps ?

  2. nottrampis says:

    Another interesting and thought provoking article Nick. Thanks

  3. Marks says:

    “…because building them required the insight, drive and steadfast purpose of some of the finest entrepreneurs alive. That pretty much rules government out of the job description…”

    And if you leave out the founders of really successful companies, such as those you cited, it also pretty much rules private enterprise out of the job description.

    Yes, the likes of a stretch of entrepreneurs from CP Steinmetz, Rockefeller, Carnegie….Gates etc can do it better than government, but they are as far from the norm of private enterprise as they are from Government. They are not the norm of private enterprise as we experience it in our markets in the common run – they are something quite unusual.

    If you are trying to extract the successes of the likes of Siemens, Brunel, George Westinghouse, or Steve Jobs for projects that you have in mind, you need to have that sort of person leading those projects. Any nominations from any CEOs in the present pantheon?

    I would put the order of likely success thus:
    1) Any spare Jobs/Westinghouses/Brunels/Steinmetzes currently cooling their heels.
    2) Government.
    3) Private enterprise a long third.

    PPP without the leadership of the types of people I have listed above has been a disaster or viciously expensive, pretty much without exception.

  4. Nicholas Gruen says:

    Marks, I think you’ve somehow tangled yourself up in ideological point scoring. In case you’re interested, I agree that your average private sector firm couldn’t found Facebook or any of the other great platforms. But I wasn’t making that point. I wasn’t talking about private-private partnerships.

    Regarding your assertion that PPPs are bad news without Steve Jobs type leaders, personally I think the idea that you want someone to ‘manage like Steve Jobs’ is a bit like trying to do physics like Albert Einstein, ie something that will mock any attempt to replicate it.

    In any event, why do you think the PPP I’ve proposed would be a disaster without a great leader? The public sector’s role is well defined and easy to deliver.

    • marks says:

      Nick,

      I was trying to address (partially) your question ‘what’s going on?’ as well as the other quote from your piece.

      I am not quite sure how pointing out that the successes of the Googles etc (and expanded that by citing the founders of other iconic enterprises) is almost entirely due to the drive of those founders, is somehow an ideological consideration. That is, it seems to me that a necessary precondition for the sorts of success you are aiming for are the sorts of leaders I cited. If you don’t have them, you will not get the transformational (to use a cliche, sorry) shift that it seems you are arguing for.

      The point I was trying to make was that while they were exclusively from the private sector, they are/were of such singularity that trying to class them with other contemporary managers in the private sector is simply unhelpful. Those successful entrepreneurs simply are/were in a class of their own.

      It just seemed to me that you were ignoring an essential precondition to success of the structure you were proposing. I guess we can agree to disagree, and I will be the first to admit I am wrong if you come up with something transformational in the PPP area without the sort of leadership I am talking about.

      • Nicholas Gruen says:

        As I said, there’s a kind of misunderstanding of my intentions in the piece. I guess the references to the Googles etc did try to say that PPPs are not easy, that the ‘platforms’ are the product of survival of the entrepreneurial fittest, but that was to make the point that the new platforms are privately built – even though the ‘textbook’ in some sense would have them publicly built. The challenge is to specify a simple demarkation between private and public in a PPP that will work – by referencing the principles of public administration that have developed over the last couple of hundred years. And then I provided an example of that.

        So while I accept the point you’re making, it’s not really relevant to the main idea in the column.

        • Marks says:

          So, why not reference the power, water and sewerage sector of the economy, there have been forms of PPP ranging from one end of the practical spectrum to the other for the past twenty years or more?

          I agree that the nonsensical type of PPP such as you referred to early in your article should be excluded.

          So, excluding the nonsensical model, and assuming you were not trying to reinvent the wheel that has characterised large swathes of the power, water and sewerage sector of the economy for the past twenty odd years, I guess what I was talking about was all that was left.

          Sorry if I got confused on that.

  5. Paul frijters says:

    I’d like to see the numbers on how expensive ppp’s are. Yes, their returns are supposedly high, but something like half of the firms in them go bankrupt and don’t get those fabled returns. Sometimes hence the state gets the infrastructure quite cheaply. The prevailing wisdom is that PPPs are indeed a disaster but it would be nice to see a good attempt at calculation.

    • Nicholas Gruen says:

      The trad PPP angle is just an opener here, but even where the infrastructure is ill judged and the investor ends up going broke, the tolls and restrictions on other infrastructure that have been agreed remain as rights to the residual funders which imposes its own efficiency costs. There’s often other tax benefit transfers going on meaning that the public sector was implicitly funding the investment all along.

      I used to think that where the investor goes broke it’s at least a good deal for the public, but am not so sure now. Anyway, it’s all in the detail, and who’s got time for that these days? Which brings me back to the governance of complexity ;)

    • derrida derider says:

      The trouble with PPPs is that whether one of them is a Good Thing or not tends to comes down to incredibly fine contract details, which detail is (because it is so fine) very non-transparent and hence very difficult to enforce accountability on. The incentives facing the players in them – both public and private – are often not at all calculated to maximise the public good.

      As John Kay says, the state is lousy at construction project management but great at using its monopoly of violence to raise money, while private enterprise tends to the exact reverse. So why would you get private enterprise to raise the money?

      I’m really puzzled by Nicholas’ implication that the government could not innovate. The whole IT revolution grew out of government research, right down to the protocols on which the internet is based. Really, the only really big enabling technology that did not have its roots in government was the invention of the transistor at Bell Labs. Even that required a monopoly so big and complete that it could hope to capture the returns from basic research in quantum physics and so funded it; the only organisations around today that are complete enough monopolies for that are governments.

      • marks says:

        You can add to that the work done by WRESAT on xerography (and then sold off for peanuts to Xerox), or the work done on water treatment by SA Water and which went out by the case full of drawings to the US for free.

        As for private sector superiority in project management: The recent mining project debacles, or that London stadium and any number of minor stuff ups should really put paid to that sort of claim for superiority. I mean if BHP got as far as it did with Olympic Dam, without having the basic technology proven, how competent can one assume that the second rankers in the private sector are. Truth is that good project management comes from good people in good project teams. Those good people often are passionate about project management, and will sign on to a major exciting project in a good organisation in whichever sector it is located. This year they might be private, next year public. It is the project manager and team that counts.

        In that sense, there are plenty of organisations using ppp with private sector project managers to run public sector projects. (SA Water does this for most of its infrastructure project management for example).

      • Nicholas Gruen says:

        DD, please read the sentence you’re objecting to carefully and then rewrite. I didn’t say what you seem to think I did.

  6. Nicholas Gruen says:

    Well, here we all are, with a column discussing a new way of handling information and here we are having a nice discussion about a well worn ideological set piece. The public versus the private sector.

    • Tel says:

      Probably by starting out with: “Public private partnerships (PPPs) haven’t been such a happy experiment,” you might have been inviting that.

      At any rate, as I’ve pointed out in the past, most of the roads of the Industrial Revolution were built by “turnpike trusts” and this was indeed successful at road building. Parramatta Road in Sydney was built this way for example.

      Part of the blunder of the turnpike trusts was that no time limit was imposed on the property rights, so in theory the private operators were able to collect tolls forever. Sovereign risk fixed that up, when people got jack of the idea of tolls and the property rights were revoked. In many ways patent law, and copyright law are also PPP’s on the basis that they create an artificial property right in return for a contribution to the general good. The compromise is between sufficient incentive to encourage the creator of the goods vs the onerous nature of one person’s property right imposing restrictions on other people.

      Strange that we are in the process of rediscovering the blunder of the turnpike trusts by continuously finding excuses to offer longer and longer time limits on intellectual property rights. No existing intellectual property should ever be time-extended under any circumstances, because once it has been created, obviously the incentive was sufficient. The only reason for handing out additional property rights would be if we have a real need for more incentive for future works, but I don’t see the slightest evidence for that right now.

      Getting over to the medical discussion above. One of the most essential features of all these PPP schemes is a user pays component. If you don’t find the turnpike useful, then don’t travel that way, and don’t pay for it. If you don’t want to watch the latest out-of-ideas Hollywood remake, then stay home and don’t waste your money. Offering medical treatment at zero cost to the end user is not really a PPP at all, it is just public money being forked over. The key decision-making component of the individual users is missing from the scheme. Without this component you have no real way of evaluating whether anyone wants your service.

      This brings me around to the idea of risk. DD above says:

      As John Kay says, the state is lousy at construction project management but great at using its monopoly of violence to raise money, while private enterprise tends to the exact reverse. So why would you get private enterprise to raise the money?

      Most projects require a substantial lump sum upfront, which is not easily collected via monopoly of violence (unless you want to test the bounds of that monopoly). We could teach governments to save money (ha! ha! as if that would happen), but really we are just discussing the distinction between borrowing under one set of conditions, or borrowing under another set of conditions (or money printing, but let’s pretend that never happens). Under all situations, private enterprise raises the money.

      The difference of the PPP is that private enterprise also carries the risk of failure, and most importantly, gets a return proportional to the usefulness of their product.

      With government bonds, the government carries the risk, and the return is unrelated to the end product. Worse, people who never wanted and never ever use that project still have to pay for it. Surely the worst of all worlds.

      • john r walker says:

        Tel agree on intellectual property rights , except
        that digital ‘property rights’ – is a work it out as you go, counter intuitive, type of mess at the moment this is worth a read.

        What’s more, if your file has already been uploaded by someone else – a digital copy of a Radiohead album, for instance – then Dropbox will just link you to the existing files rather than waste bandwidth and space by uploading a duplicate. Are those files uploaded by that other person now yours? Surely not. Untangling relationships with your possessions in the cloud quickly gets confusing. “It’s a muddle of abstractions,” says Richard Harper at Microsoft Research in Cambridge, UK.

        This is causing tension between our intuitive beliefs about property and the reality that this technology has created. How can we resolve this?

        http://www.newscientist.com/article/mg21729101.900-lost-in-the-cloud-how-safe-are-your-online-possessions.html

  7. nottrampis says:

    This piece has made IT!

Comments are closed.