Brian Rudman: Mayor should be wary of partnerships

Last April Mayor Brown opened his public private partnership "summit" saying the topic had never been more timely or appropriate. Photo / Ricvhard Robinson

Cargo-cult mystique of funding through private sector deals blurs burden of risk for public.

As a ratepayer, please tell me Ernst and Young's encyclical to Mayor Len Brown on the advantages of the public-private partnership model for building new infrastructure was a gift. Asking global consulting firm EY (as they now call themselves) for advice on PPPs is like knocking on the Pope's door and asking if Christianity is good for the soul.

Like 19th century missionaries, EY's international team of more than 400 "infrastructure advisers" roam remote corners of the globe to bring the good news about PPPs to the ignorant heathens. From Malta to Nigeria, Abu Dhabi to Kazakhstan, they can be found beating the drum.

Even in the mystical Himalayan Kingdom of Bhutan they've found converts by offering to make good the locals' vision of an Education City. Now, deep in the remotest reaches of the South Pacific, it's Auckland's turn.

With Mayor Brown desperately seeking ways to bridge a $12 billion infrastructure wish-list funding gap - $400 million a year for the next 30 years - it's perhaps understandable that he's willing to grasp at any straw. Unfortunately, even EY, despite much bending over backwards, feels the need to point out the obvious. Even if the private partner stumps up the cash for the initial building costs of a joint PPP venture, "the public sector will still be required to fund the repayment of this investment".

While putting on a brave face, Mayor Brown as good as concedes this. Launching the EY "position paper" last week, Mr Brown said Auckland needed "to take a good hard look at public-private partnership models for funding infrastructure ... to relieve the financial burden on ratepayers and taxpayers".

But later he admits that "PPPs will seldom if ever deliver lower capital costs. We can borrow money at least as cheaply as the private sector".

He said for a PPP to make sense, "the prerequisite equation is that the value it delivers - whether it be through applied expertise, commercial synergy, improved service delivery or risk allocation - is greater than any additional cost of finance".

Of course, that would depend on the civic bureaucrats' ability to outsmart the wily professional developers they're doing business with. To me that seems a risky wager.

The only recent example of a local government PPP scheme is Vector Arena on the Auckland waterfront. The EY report highlights it but omits the crucial fact that Auckland City paid $68.2 million up-front to build the place, while private developer Jacobsen Venue Management contributed just $11 million. EY refers to this as "the council funded a proportion of the construction costs through a pre-payment of the assets".

To me, "a proportion" hardly sums up the situation. For its $11 million, Jacobsen got to own and run the arena for 40 years. Then, when it needs scrapping, it hands it back to Auckland Council.

The builder, Mainzeal, did lose $12 million in cost over-runs, which supporters of PPPs would argue was a risk ratepayers didn't get caught with. But a watertight contract meant Jacobsen didn't get lumped with the bill either, suggesting it wasn't PPP that saved the day.

That was in 2006. Three years later an Auckland City Council report was lukewarm about using a PPP scheme to upgrade the Pt Erin swimming baths. It noted that "the key objective of a PPP agreement is to efficiently allocate risk", and unless there is "efficient risk allocation between the parties, the council will end up bearing the cost of expensive private capital plus substantial commercial risks". It didn't proceed.

Last April Mayor Brown opened his public private partnership "summit" saying the topic had never been more timely or appropriate. Feet firmly on the ground, he warned that "it's easy to talk about PPPs as if they are magic money, or will solve difficult funding problems. They will do neither".

"PPPs are not funding tools, they are a mechanism for delivering value for money and better outcomes."

He promised the Ernst and Young "warts and all" position paper "in the coming weeks". Seven months later he's finally released it.

Shorn of its cargo-cult mystique, building infrastructure through PPPs sounds rather similar to what councils and the Government already do, except it tends to put the "private" P in the partnership in a more dominant position than now.

The basic problem Mayor Brown needs to confront is not how his extra roads and railways and tunnels are to be built, it's how best to prune his $12 billion shopping list.