The Victorian Government is interested in taking Public Private Partnerships (PPPs) into education as the Blair Government has done. PPPs have so far represented a scandal of economic reform. A method used to shift debt off governments’ balance sheets so they can commit to debt reduction and say ‘look Mum – no debt’, when everything about the transaction is like debt. You get a big asset and a long stream of payments you make on it. But it’s not debt because the private sector have funded it and you get to pay user payments instead of interest. The rub is that the private sector charge a lot more for equity than debt. So unless there is a good deal more risk transfer than there usually is – and sometimes even then – the deal is bad economics.
The Victorian initiative on swimming pools – reported here – will have the private sector funding the pools and also opening the pools after school hours. An obvious thing to do, but not one encouraged by a century or so of government silos. I went to primary school at Harkaway which was a small village in Victoria near the Dandenong Ranges. We played tennis on its tennis courts out of hours, but I expect it wasn’t government policy that we do so.
Anyway, this use of PPPs looks pretty benign to me, though the state might be able to get itself cheaper facilities via a more traditional route which is funding them and outsourcing the management.
It’s a pity in a way that we need to have the private sector involved for a point of bleeding obviousness to be seized upon – which is that assets that are funded by government should (to the extent practicable) be available to the community.
Rather than being a case where PPPs deliver this, it would be preferable if the government figured out that things that it funds should generally – that is in the absence of good reasons to the contrary – be treated as public rather than private assets. I argued this point thinking particularly of access and the Hilmer process where little distinction was made between publically and privately owned assets. But there are lots of applications of the same principle.
Government funded software should – in the absence of good reasons to the contrary – be open source. Whilst they were public assets, Telstra, the Commonwealth Bank and Qantas should have likewise been managed as public assets. This does not mean that they should not have got a good commercial return on those assets, but it does mean that – in the absence of good reasons to the contrary – they should not have behaved restrictively in providing access to the various networks they had to offer.
Commonwealth Bank should have offered good commercially priced access to its ATM and other networks to all comers, Qantas it’s terminals and Telstra its local loop and other assets. That would have been a better way to use these public assets while the industries they were big players in were being freed up. Once they had become sufficiently competitive they could have been sold off.
Anyway, – in the absence of good reasons to the contrary – you can read the paper on ‘extended access’ to government owned assets here (pdf).
I was a consultant for a tender for a PPP last year. It had a ‘social’ purpose and my job was writing stuff including a very detailed set of policies and procedures for a NGO member of a consortium. Other NGOS, part of rival consortia, were off doing the same thing.
It really struck me that a few short months before, policy was open and shared between NGOs. But the PPP changed all that. Policy was privatised with the result there was massive duplication. Indeed collaborating would have been colluding!
The end result is that that aspect was quite inefficient and I think that public policy lost out as a result. On the other hand, government policy in this area isn’t working too well so there are reasons to do things differently.
I agree with your sentiments Nicholas. There are only two good reasons to transfer ownership of public infrastructure investment to the private sector – efficiency or risk transfer. The efficiency benefits can generally be obtained by contracting out building, maintenance etc. without ownership – while the true extent of risk sharing is usually small. Having said that, the fact is that state governments, although becoming more flexible, are still irrationally preoccupied with their cash deficit (total spending, including capital spending, less receipts) – and not just their operational deficit. Because of that, they do not do enough to maintain, rebuild, remodel or refurbish schools. So PPP’s might do some good – provided the bureaucrats do a proper evaluation. In the UK, the Economist (5/10/06) reports an expert’s view that “the methodology (used to see if private finance will prove better value)has a built-in bias towards private financing.
Thanks for that Fred,
I’d not seen the economist article, but it’s findings don’t surprise. It’s a pity we’ve not had these debates on policy along rational lines and that it’s prooving so difficult to have them along such lines.
“provided the bureaucrats do a proper evaluation” is indeed a big proviso. It is amazing how much policy drives these evaluations. They are highly complex, not transparent and very clearly biased to the PPP (whether it is at the level of the interest rate used or more complex). It is not just in the UK that there is such a bias – it is very evident here too.
A big issue is the lack of flexibility these structures bring (in addition to their cost). Fine for roads, but tying a school or hospital into one of these structuress for 30 years makes some big assumptions about the future. We will also see the same as the UK I suspect, that when rationalisations take place, the driving factor will be which one has a PPP contract, rather than efficient outcomes.
Jonno,
It’s not fine for roads. Transport planners don’t know what they’ll need most in 5 or ten years time. 30 years is way too long a time to lock down your options.
The fundamental problem is that governments have not yet made the mindset change to accrual accounting. It doesn’t take an agile mind to understand that interest and repayment commitments on an $X million loan to fund a school have much the same effect as the, in effect, interest and repayment commitments to a firm that stumped up the money to build that school. In fact, because the latter also includes a profit component, the effect on government fiinancial position is actually worse. But on a cash accounting basis, PPP wins hands down.
Another difficulty presented by traditional government accounting practices is illustrated by the spate of schools that burnt down in NSW in the 1980s. Improving school security systems was a cost that had to be met out of the Education Department budget. But if a school actually burnt down, the cost of rebuilding it came from the Public Works Department budget. Education therefore had an incentive to spend as little as possible on security for run-down schools.
A PPP arrangement can solve this kind of problem, but it is a very roundabout way of doing it.
When I was growing up in Qld, all the local primary school pools had swimming clubs associated with them (and later on, public swims on weekends). The private school I went to did almost nothing with its pool out of hours, though I know of others that were more sensible (Nudgee College, eg). Anyway, if the objective is to get pools in use, I’d have thought there were simpler options than changing ownership.