The Public/Private Partnership Illusion
There has been over recent years a surprising reversal of roles. It was always thought that ideologues were to be found on the left while politicians of the right tended to be pragmatists. But, as the Herald pointed out last week over asset sales, today’s government of the right seems overly concerned with ideology, while parties of the left seem more driven by outcomes than by doctrine.
We see a similar commitment to ideology over another issue – the role that private finance should play in funding projects that are in most senses public in nature. If it is the mark of the doctrinaire that evidence and experience should be ignored in favour of political theory, then Bill English’s repeated assertions of the case for Public Private Partnerships (PPPs) – in the face of all the evidence that they represent a poor deal for the taxpayer – surely fills the bill.
As it happens, and after thirty years of experience of PPPs in the UK where they originated, a great deal is now known about how such arrangements perform. In principle, of course, the private funding of capital projects like new prisons will relieve a burden on the taxpayer, with supposedly a saving as a consequence to the public purse.
But a moment’s thought would suggest that this is unlikely to be the case. The cost of raising capital for a project will usually be lower for government than for a private borrower, as was confirmed in research recently completed by Professor David Hall of the University of Greenwich. And while the initial capital cost under a PPP might be met by the private investor, that investor will want to cover the cost of capital and in addition earn a return on capital (or profit) and will usually want to secure as well contractual rights to run the project (think Serco) over the lifetime of the scheme – typically, 25 or 30 years.
Not surprisingly, the UK experience confirms that PPP projects will cost the taxpayer much more over the whole period than if they were built and funded by more conventional methods. The UK Treasury reported in 2012 that the 717 PPI contracts, funding new schools, hospitals and other public facilities with a total capital value of £54.7bn, would ultimately cost £301bn by the time they are paid off.
Much of this difference was due to ongoing running costs built into the contracts, but the schemes were also criticised for providing poor value for money. The Treasury found that some National Health Service organisations will end up paying almost 12 times the initial sum over what is usually a 30-year contract.
Governments of the right have, in other words, quite unnecessarily and wastefully spent billions, saddling future generations of taxpayers with massive debts, for the sake of an ideologically driven preference for private business as opposed to public provision. And this despite the fact that there is no evidence that anything of value is gained from this excessive expenditure, other than inflated profits for the fortunate contractors.
It is certainly not the case that there is a gain in efficiency, since there are many instances of private providers, not least in New Zealand, performing very poorly – and this is on top of a study by our own Treasury that found that there was “little evidence of systemic underperformance” in New Zealand’s publicly owned State-Owned Enterprises.
Professor David Hall found that “the empirical evidence shows that the private sector is not more efficient than the public sector”. PPPs, he found, have to offset the handicap of a higher cost of capital by achieving lower operating costs, supposedly the result of greater efficiency, but usually meaning higher prices for consumers and lower wages for employees.
Professor Hall also draws on an analysis of UK privatisations by Professor Florio of MIT which meticulously examines all the companies privatised by the Thatcher Government and finds no evidence whatsoever of efficiency gains; Professor Florio also shows that in almost all instances of privatisations, the assets sold were underpriced, there was a large rise in management salaries and most important of all privatisation made little difference to long-term trends in productivity and prices.
In a scathing review of the history of British privatisation, the author James Meek identifies the signal failure of the safeguards that were supposed to protect British consumers – in industries like electricity and water – from the pricing policies of rapacious new owners. The regulators thought they had done enough by putting in place a regime that allowed the new owners to raise prices only in line with inflation. What they had not bargained for was the scope for cost-cutting that was gratefully exploited by the private owners; and reduced costs, of course meant that it was the workforces that lost jobs and had wages held down so as to allow large profits to be made by the new – and largely foreign – owners.
What can be offered to offset this wealth of expert research and evidence showing that Public Private Partnerships are an expensive folly? The answer is nothing – other than the political convictions of those who believe that in all circumstances private ownership is best.
Bryan Gould
27 October 2013
In Our Democracy, It’s Dollars Not Votes That Count
In what we are pleased to call a democracy, we count votes – one per citizen – on polling day, but on every other day we count only dollars; and when it comes to dollars, the more you have, the more political influence you wield.
Very few of us seem to realise how thoroughly the power of the purse has colonised and subordinated our supposed rights as citizens to an equal voice as to how we should be governed. Our government (and the present government especially), once elected, pays little further attention to ordinary citizens and makes its decisions according to what might serve the interests of the wealthy.
The rationale for this approach is presumably the long-discredited “trickle down” theory of economic wellbeing – that if the rich are encouraged to become richer, we will all be better off by virtue of the crumbs we might enjoy from the rich man’s table.
But the belief that wellbeing is to be measured purely in dollar terms takes us much further than that, and now penetrates almost every aspect of our national life. An obvious example is a trend that has begun to really gather pace over recent years – treating universities and other institutions of tertiary education, not as repositories of learning, mainsprings of new knowledge and the facilitators of a wiser and more far-seeing society, but simply as agents of economic development.
If an institution’s graduates cannot be shown to be immediately of value to the process of making a buck, it will be marked down and its future funding threatened. Little value is given to a more educated society for its own sake; the only purpose of education, it seems, is to promote a higher GDP.
Considerable effort is devoted to “educating” the public to accept that the only worthwhile goals are those with a dollar value. The search for profit, we are told, is the only motivation that will produce a higher level of effort and achievement. We see instances of this thinking wherever we look.
Selling off (or privatising) public assets? Who worries about levels of public service for society as a whole when better-off members of the public can be introduced to the joys of making some unearned income on the stock market?
The “free trade” deal with the US? Who cares about maintaining some element of control over our own destiny as a nation if some of us can trade that away for increased profits?
Instances of this kind abound, even at a very detailed level. I came across a further example the other day. This country welcomes immigration as a stimulus to growth, but we have also learned to value its benefits in helping to develop a society with a richer texture and a wider cultural base.
Commendably, our government set up a few years ago, under the aegis of Immigration New Zealand, a support service for immigrants to help them to settle and adapt to their new country. The service, known as Settlement Support, has done excellent work and has eased the path for countless new migrants so that they can enjoy greater success and can make a worthwhile contribution to our national life.
Until now, the service has provided face-to-face help to any migrant who cares to ask for it. The help largely takes the form of information on where to go for advice on a whole range of matters, and is of value both to the migrants themselves and to employers who might contemplate employing them. Customer satisfaction (at 91% for migrants and 83% for service providers and employers) is at a high level.
But someone has decided that the service is too “unfocused”. The inevitable consultant’s report has been commissioned and it has duly served the purpose of those who commissioned it.
It seems that too many migrants of low economic value are availing themselves of the service. What is needed, the consultants recommend, is a service that focuses on the 12% of “high priority” immigrants; the employers of such people are also to be priority customers. There will be a second category of medium-priority customers (20% of the total) who might one day become “high priority”. It is these categories who will receive a high level of support and attention.
At the bottom of the heap are the 58% of “low priority” customers. Under the new “Proactive Customer Management Model”, they will no longer have a face-to-face service. They will not be encouraged to seek help; they will have to make do with a web-based service.
These migrants, whose low economic value apparently makes them undeserving of real help, must overcome their unfamiliarity with the language, their lack of resources to allow them to access the internet, and their sense of confusion about the society in which they find themselves, to negotiate their own way through the maze of agencies and sources of help and advice that might be of use to them.
Immigrants of “low economic value” might be seen as of little consequence; but are they not just a sub-category of those ordinary home-grown citizens of whom our government makes the same judgment?
Bryan Gould
19 October 2013
Privatised Water Blues
Nick Cohen’s excellent piece in last Sunday’s Observer on the private water companies struck a chord with me. In September 1989, during the passage of the privatisation legislation and when I was Shadow Trade and Industry Secretary, I was asked by Ann Taylor (who was leading for the Opposition in the Standing Committee) to write a piece for the Financial Times setting out Labour’s position. The aim was to give potential investors pause when they came to subscribe for shares in the flotation to come.
I duly did so, explaining (as I recall in my subsequently published memoirs) that an incoming Labour government would expect a privatised water industry to see “its first responsibility to investment in a safe and efficient industry, and secondly, to maintaining fair prices to consumers. Only once these two needs had been met would there be any room for private dividends.” I refrained from saying anything about returning the industry to public ownership,since it was clear that this commitment was being quietly dropped.
I subsequently made a similar point in an interview with Jonathan Dimbleby in On the Record and was astonished to find myself repudiated by Neil Kinnock the following day, and the subject of some vitriolic press treatment, apparently engineered by the Labour Party’s Press Office, including a half-page article in the Sunday Times, portraying me as a Jekyll and Hyde figure, complete with graphic drawings showing my face being transfigured under the influence of a full moon!
It is little comfort to find that my recommended order of priorities has been vindicated by subsequent experience.
Learning the Lessons
Once in a while, a single event can bring a whole range of apparently unconnected developments into a new and clearer focus. One such instance was the two-hour stoppage a week or two ago by 1500 employees of the Oceania Group, the country’s largest rest home operator.
The stoppage, although staged again this week, quickly dropped out of the news, as other industrial disputes in the port of Auckland and in Affco freezing works took centre stage. But that limited action by aged care workers gave us a valuable insight into so much that is going wrong in our country.
The facts can be simply stated and are wearyingly familiar. The Oceania workforce is largely female and part-time; many are paid just $13.61 an hour, only 11 cents above the minimum wage. Oceania will not budge from their offer of a 1% pay increase – much less than the rate of inflation. The workers – with very little bargaining power – tried to draw attention to their plight in the only way open to them.
But it is when we dig a little deeper that the real significance of the dispute becomes apparent. The aged care industry (as we must now call it) is a prime example of the privatisation of what was once a public service.
As public services that care for the elderly in their own homes have been – supposedly on financial grounds – wound back, the opportunity to make a profit by providing accommodation and care in privately owned rest homes has increased. The public purse still provides the funding, so the taxpayer still largely picks up the bill; but the money now goes via a per capita payment to private companies rather than public employees.
The expanding industry has offered a tempting investment opportunity to private investors. Two New Zealand-owned companies, ElderCare and Qualcare, had built a strong market position; Oceania achieved its dominant position in the New Zealand industry by buying both of these firms.
Oceania is a group of private equity investors which was set up under the aegis of Macquarie Bank, the Australian banking entity popularly (or should that be unpopularly?) known as the “millionaire’s factory”. The new Australian owners knew nothing about care of the elderly, apparently motivated solely by the prospect of making a good return on their investment.
But they had miscalculated. The new venture offered a smaller return on their investment than they had hoped, perhaps because they had paid too much. They found themselves owing a large debt to Macquarie Bank, rather than enjoying the fat profits they had expected.
The investors demanded that this position should be corrected. Since the operation’s income was largely pre-determined by the amount paid to them by the government, the only way of squeezing out a higher return was to cut costs – and that meant making real-terms cuts in the wages of an already low-paid workforce. With costs cut, and the debt re-paid, rich pickings were in prospect.
That exercise has been reasonably successful, at least from the viewpoint of the investors. The operation is now producing a profit and the debt is being reduced. But the profits have been squeezed out of the workers, and have no doubt meant as well a lower standard of service to elderly customers who have little power to insist on better.
Those profits – tens of millions of dollars produced from the funding provided by New Zealand taxpayers – are now being paid across the foreign exchanges into the pockets of Australians. They thereby add to the burden we face in trying to balance our overseas payments and compel us to borrow more from overseas.
Changes in employment law – both actual and planned – mean that New Zealand workers are pretty much at the mercy of their employers, and – as other industrial disputes currently demonstrate – employers are newly confident that they can do what they want. Like most overseas owners, Oceania have little knowledge of and even less interest in the welfare of their New Zealand workers – to say nothing of New Zealand customers and taxpayers.
The current ethos, after all, is that the bottom line is all that matters. As in the cases of both the Port of Auckland and Affco, owners need only specify a desired rate of return to ensure that everything else – including of course the interests of the workers –must be subordinated to that goal. We increasingly see workers treated as just another production component rather than as human beings with families to support.
What lessons can we learn from this sorry tale? They are short and sharp.
The real goal of privatised companies is profit, not service. We cannot prevent privatised firms – despite the government’s obfuscation on this issue – from falling into foreign hands. Enterprises owned overseas have little concern for the interests of their workforce. New Zealand workers are increasingly at the mercy of hard-nosed employers. Profits paid to overseas owners are not only a loss to the country but an unwelcome addition to our borrowing requirement as well.
As we look at the wider issues now facing us and our under-performing economy, can we have any confidence that our leaders are learning these lessons?
Bryan Gould
8 March 2012
This article was published in the NZ Herald on 14 March.