On the government’s new PPP deal in education

Supposedly, the big advantage of public/private partnerships is that they will bring the alleged efficiencies of the private sector to projects that involve public money – but here’s the catch. In the PPP deal on education announced yesterday, we’re not going to be allowed to know whether that’s true, because the government has decided the details of the deal are too “commercially sensitive” to be released.

As a result, the public will be left underwriting a process whereby private companies extract profits from the education sector, while being given little or no information about what deal (and safeguards) that government has negotiated behind closed doors. Instead, we are being required to take on faith the fulsome assurances by Associate Education Minister Craig Foss that it’s a really, really good deal. The Greens are not willing to be quite that trusting.

All along, this lack of transparency has been one of the main criticisms of PPPs which – by their very nature – are only as good, thrifty and efficient as the negotiating ability that the government brings to the table. Given that the Key government already seems convinced of the inherent virtues of PPPs, this isn’t a situation where rational scepticism is being brought to the public’s side of the bargaining table. All that that we know about yesterday’s PPP deal on education are the externals:

Learning Infrastructure Partners will be responsible for the design, construction, finance and maintenance of Hobsonville Point primary and secondary schools for the next 25 years. Hobsonville Point Primary School will open at the beginning of 2013 and Hobsonville Point Secondary School will open early 2014.

For now, almost everything else is unknown. That’s a problem, given that a recurring issue with PPPs overseas has been the relative impotence of central government to stop the private sector from rorting the tax payer over the course of the contract. That process can start well before the construction phase.

On the Australian evidence, PPPs routinely invite ‘beauty contest’ tendering – where unrealistically low bids win the contracts, allowing politicians to brag about cost savings. Then the same politicians prove incapable of ensuring the contractors were held to account for subsequent cost ‘over-runs’ and extortionate lease conditions and debt financing that can end up pushing overall costs through the roof. (Thus, the need for the transparency notably lacking so far in the New Zealand context.)

In such situations, politicians have an incentive to bail out failing projects, and/or to hide the damaging evidence under the blanket of the alleged ‘commercial sensitivities’ involved. As the Melbourne Age concluded a few years ago about the Australian situation:

Outsourcing [public transport projects ] is only as good as the contract on which it is based. The OECD report on competitive tendering of rail services in 2008 gave a damming indictment on franchising or PPPs as a method of managing public transport based on its evaluation of the experience in Melbourne and London.

The report suggested that public transport is managed more efficiently through operating contracts where the strategic management and responsibility of the system remains explicitly with the authorities. According to the OECD, one way of dealing with the problem is to “incorporate increasing prescription of the franchises, which undermines the ability of the franchisees for innovation and transfer of risk to the operator, which are the main benefits advanced for the system.

“Thus, as franchising evolved, it has come to lose its distinguishing characteristics — the alternatives which made it superior to alternative forms of provision. In this circumstance, the main alternatives to franchising are, obviously, the retention of public sector production or undertaking operating contracts (where only the cost risk is transferred).”

The OECD report judged the franchising/PPP arrangements in Britain and Australia to be a failure because, among other things, both governments “completely underestimated skills required to design, implement and monitor such franchising systems”.

In other words, if you monitor a PPP franchise operation properly, its alleged cost savings tend to vanish. Ultimately, it is not beyond Treasury to devise and enforce contracts that really do deliver the savings that PPP projects flirtatiously promise, and so inconsistently deliver. But then, if the government did that job properly all the way down the line, there wouldn’t be the same profit potential for business, would there? Thus, we’re not being told the profit margin deemed acceptable in the Birkenhead contract.

Moreover, how will contractual compliance be monitored and enforced – by the school board of trustees, or by Treasury? What costs for this monitoring-of-compliance role have been incorporated in the contract? Who will fund the legal costs of pursuing non-compliance, or in the event of the failure or bankruptcy of the private provider? These are only a few of the questions about this exercise.

Beyond the thrill of fostering neo-privatisation in the education sector, the immediate advantages of PPPs to the government lie in the short term, book-keeping bonus they provide. “From a fiscal standpoint,” as Macquarie University economist Andrew Dahdal explained in a 2010 paper, “PPP projects have the benefit of being funded by private sector capital reducing the requirement for public debt expansion.” Putting the ideological elements to one side, PPPs are financing tools whose adoption has been driven by the promise they offer of cost savings to public authorities. However, as Dahdal says, adopting them has certain downsides, in terms of democratic accountability:

Diluting the public accountability of government by mixing it with commercial pressures in a PPP venture makes it somewhat difficult to measure the entire spectrum of costs incurred… Political institutions built on government accountability to the public are the greatest safeguard liberal democratic societies have against oppressive, incompetent or fiscally profligate government. The lesson that is being learnt by constituents [in NSW] is that accountability in the context of failed PPPs is difficult to measure, and in terms of political costs, such confusion in responsibility is itself proving to be a significant liability to the incumbent government.

In other words, the public needs to be asking… what exactly, is the government trying to hide about the deal it has done with public money over these Birkenhead schools ?


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