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The Unholy Alliance

Paul Paynter12 October 2014

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Have you noticed how politicians have this icky desire to be at the centre of anything popular or successful? They hope people will subconsciously associate them with success and boost their poll ratings and egos.

The ickiest example of this was when the All Blacks won the Rugby World Cup and, just as the trophy was being handed over, John Key snaked in between Richie McCaw and IRB chairman Bernard Lapasset for a nauseating three-way handshake.

Sport is high on their priority list as it presents lots of feel good moments and it can stir the hearts of a nation. Politicians particularly like to fund elite athletes in sports like rowing and track cycling, where we can safely price the Kenyans and Ethiopians out of the game. This strategy has kept our collective noses ahead of Belarus and Turkey on the Olympic medal table. Sport provides the best political bangs for bucks.

Another critical area that politicians focus on is economic prosperity, by which they mean jobs and incomes. “It’s the economy, stupid” is the political catch cry that is so often rehashed. The truth is that politicians can really only pull the underpinning levers of the economy: company tax rates, immigration policy, free trade agreements, employment law, etc. For the most part they can’t be active participants in the business world – or can they?

Over the last 20 years, so-called Public Private Partnerships (PPP’s) have arisen. The most common PPP form is where central or local governments invest with private companies in major infrastructure projects. This has happened in NZ with schools (Hobsonville Point), prisons (Paremoremo upgrade) and roads (Transmission Gully).

The theory of PPP’s is that the private sector is more competent and more efficient than government and so will manage things better. The private companies also stump up with most of the money, which is a relief to government and councils, who are already running thumping deficits.

All this sounds perfectly rational and it should work very well. Both the public and private sectors wax lyrical about the benefits of PPP’s, but, as you’d expect, there are a few fishhooks which don’t get such a good airing.

Treasury reviewed PPP’s in 2006 and concluded that “there is little reliable empirical evidence about the costs and benefits of PPPs.” They go on to identify the substantial negotiation costs for such projects. If you are signing up to build and operate a prison for, say 30 years, you need a detailed and comprehensive contract; even allowing for a new government giving the private turkeys the heave ho.

Treasury also identifies that once a company has secured a long-term contract, the pressure is off. If a private company fails to perform years down the track, what can you do? Hitting them with huge penalty payments and driving them towards bankruptcy isn’t helpful, and getting rid of them entirely often isn’t a realistic option.

PPP’s also have proven a great mechanism for governments of all types to veil their debts and obligations. PPP’s tend to compromise transparency and accountability and kick the obligation can down the road. They are particularly good at hiding the total cost of a project. The troubled PPP upgrade of the Sydney rail system was purported to be worth $3.6 billion, but the Sydney Morning Herald tallied up all the financing and maintenance costs and came up with a total of $9.5 billion.

The nature of many PPP projects means they’re one-offs, and as such they’re difficult to price with accuracy. It’s no surprise then that private companies build in a bit of a margin and this is typically 50-100% of the estimated building cost. There are usually a very small number of companies with the appropriate credentials for a major PPP project, so the price competition might not be that great.

I’m left to conclude that there is little doubt PPP’s are politically convenient, but quite a lot of doubt over whether they are cheaper and more efficient than the two obvious alternatives – the project could be managed by either the public sector or the private sector in its entirety. I don’t mind public and I don’t mind private – it’s the unholy alliance of partnership that worries me.

Political objectives can so easily pollute and undermine profit objectives. I suspect we can see this with our own PPP, the Ruataniwha Water Storage Scheme (RWSS). The private sector funders seem to have disappeared, which is a sure sign the numbers don’t stack up. This is despite using a common PPP practice where public investors accept a lower rate of return, effectively subsidising private profiteers in order to keep them happy.

Besides poor returns, the other thing that scares off private investors is future uncertainty. What happens if people don’t sign up for the water at the anticipated rate? Almost all of those who lodged expressions of interest in the RWSS will need to sign up to long term contracts in order to make it viable. Given many of them are older farmers who lack the capital and investment horizon to take advantage of the water, this looks implausible. It’s quite likely there never was, and never will be, enough people willing to sign up to make the RWSS stack up at the outset.

‘Build it and they will come’ is a fair enough alternative strategy, but the only way you’ll get the private sector to sign up to that is to guarantee their returns for a decade or so. This is another often-used PPP trick and one I’m certain ratepayers are uncomfortable with. The RWSS scheme looks to me like a political objective without financial legs. That’s a shame as water storage in CHB is conceptually a good idea.

The corollary is also true. Profit motives often pollute and undermine the very purpose of government. Governments are there for public good purposes and not to make money. Locally we can see these problems arising with Hawke’s Bay Regional Investment Company (HBRIC), who own Napier Port. The primary objective of HBRIC is to ensure “growth in shareholder value”. That’s accountant speak for ‘make money’. But if the port is only there to make money, then we should flog it off to the private sector.

Most oppose that on the basis that it’s a strategic regional asset and a natural monopoly. The port should stay in public hands, and it should exist primarily for the public good. That is, it should seek to serve the needs of the exporters whose meat, logs, apples, squash and wine, drive our economy. If you ask them how the port is performing, they’ll complain about the appalling queues of trucks trying to get in the gate.

Similarly, profit is polluting public good down in CHB. The HBRC find they have an extra 15 million cubic metres of water in the aquifers down there. And what becomes of this public good resource? Their profit making subsidiary HBRIC applies for the lot. Unless there is a secret plan for HBRIC to begin farming on a large scale in CHB, this is a shameful manoeuvre.

 

Business and the state should be as separate as the church and the state. When the private and public get too close, the winner is always the profiteers and the loser is good government. You can see this in America where corporations have worked out they can vote themselves heaps of money. Corporations and industries spend vast sums on Washington lobbyists and many key personnel move through revolving doors between government departments and private sector companies.

China is a step further down the track. There, it’s hard to make any real progress in big business without government endorsement.

Many argue that these economies are very successful and I shouldn’t be so cynical. It’s perfectly true that if you merge the power of both companies and government you have a powerful force. If the referee wears the same jersey as the players you can expect a lot of calls to go your way. The problem is that the merging of big business and the state has a name – it’s called fascism. China is as close to a fascist state as exists today.

What’s the solution to all of this? I’d say ditch the PPP’s and let the regulators return to their core functions; to protect the public good, mostly by appropriately regulating the private sector. And let the private sector pursue whatever it is they fancy.

Our port should be run efficiently and by business people, but with public good and customer service objectives made paramount. Therefore, let the Dr Jekyll council dispose of their HBRIC Mr Hyde and move their assets one step closer to the community they purport to serve.

 

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Paul Paynter12 October 2014

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