Simon Arcus: Govt needs commercial nous to succeed at PPPs

Building things like through public/private partnerships must be done in such a way that doesn't leave the public holding the baby when things go wrong. Photo / Brett Phibbs

Have you noticed the Government has been all a buzz lately about its newly discovered idea of joint public-private partnerships (PPPs)?

About a decade after Australia we have woken up to the idea of the public sector delivering services in collaboration with private sector partners. The key to success will be using a model that doesn't leave the public sector partner holding the baby when things go wrong.

While PPPs have enormous potential for success there are downsides too. Australia is scattered with expensive bungles. One of the best examples is Sydney's Lane Cove tunnel which went into receivership with $AU1.14b of debt.

Just this month the failed road toll operator RiverCity Motorways became subject to a $AU700 million class action and Leighton Holdings took serious write downs on its Victorian desalination scheme and Brisbane Airport Link projects.

State governments behind the projects have incurred huge losses and cost blowouts. Australian PPPs have often involved the government financing the work of developers who walked away with taxpayer dollars.

PPPs have huge potential for win-win in New Zealand. Kiwis are naturally successful at collaboration, perhaps more than competition. But we should understand the potential pitfalls. The costs of PPPs are often underestimated while revenues and benefits are overestimated. The Airport Link project in Brisbane was estimated to make a $AU407 million profit but instead made a $AU430 million loss.

The worst sort of PPPs occur where tax, financing and regulatory benefits are maximised by the private partner but risk lies firmly on the public side. Australian experience suggests privatising of profit and eventual socialising of losses in many cases.

There is some acknowledgment in New Zealand that the application of corporate models to non-competitive parts of the public sector has not been wholly successful because the public sector works toward non-commercial and hard to measure outcomes.

It's doubtful there is a meaningful way to introduce free market 'competition' into defence or social welfare. But PPPs may be a way to introduce enhanced efficiency and alleviate some of the costs of activities the government currently shoulders alone.

To avoid taxpayer losses the public sector needs to be smart about PPPs. Commercial nous and mutual vested interest is vital. Projects must be overseen by specialists who understand commercial risk rather than left to bureaucrats responsible for administering budgets.

The government drive for efficiency and effectiveness in the public sector should not be mistaken as upskilling public servants in commercial savvy. We should fully explore the PPP opportunities, but with eyes wide open to risk.

Simon Arcus is a lawyer based in Wellington