No return on PPP investment

John Key’s Government is poised to start tendering for public private partnerships (PPPs) to build and run our schools.

I’ve said before what a terrible idea this is – overseas research suggests that no matter how you cut the PPP cake, the public ends up funding the projects while the private companies cream profit off the top. And there are plenty of horror stories about mismanagement of PPP education contracts overseas.

Now Radio NZ has unearthed the Government’s business case for PPPs with an official information request. It shows that it would cost $6m to set up and develop a framework for PPPs, but only save about $800,000 over 30 years. At that rate, we’d break even in the year 4300!

There are considerable risks involved, like the fact that private companies could end up deciding how school buildings are used outside of school hours, and the fact that the Ministry of Education doesn’t have the capacity to actually run or administer these PPPs.

Meanwhile we could have invested that money in early childhood health and education, for an exponential return.

Unfortunately, this Government doesn’t take any notice of trivial things like whether there’s a positive return on its investments. We know this because they’re spending $6b on motorways that will have a negative return. PPPs in schools is another example of an ideological policy they’re pursuing for its own sake, without regard for its actual impact.

Every child deserves a great education – that’s why we need a fair, well-resourced public education system. PPPs take us in the opposite direction, and will widen the educational gaps between the kids who have the most and the kids who need the most even further.

26 Comments Posted

  1. All leases come to an end, even the 99 and 999 yr ones… If the owner of the bdg no longer exists (ie it financially bust) then we need a legal opinion as to how sound the occupancy remains……whereas if the school is owned by the state it is owned by the state and the school exists as long as the need exists – Minister permirtting. (And I recall the Crown selling assets when it is hard-up – schools invcluded.)
    As for leaky schools-homes…. I suspect that as the Govt and LTAs have accepted some liability for leaky homes owned by residents the umbrella of protection provided by ther PPP is somewhat a leaky hypothesis.

  2. Grahanm says “There is no guarantee a receiver may not assess sale of the land”

    Only if you’re incredibly stupid and don’t have a contract that omits to say what happens in case of receivership.

    So with public schools, you mention failed maintenance contracts, and of course there is a $1.5 Billion liability form the govt from leaky schools (which would not have been a taxpayer liability with PPPs).

    Clearly you think PPPs will be a big disaster. How does this compare with the experience of education premises that are currently being leased?

  3. Gruhum responds – I at least do not hide behind psUdunUms folks….but back to the blackboard.
    Parents may well know about maintenance from owing their own homes etc…. and no reason to imagine why among BOT members/aquaintances of BOT members there are not those in the trades thus able to provide advicee etc ….
    but the eseential differnences in a school and office are many including a school is purpose built facility whereas one office is very much like another.
    We are discussing the viability of PPP and no doubt the report which indicated a gain of 800K over a large number of years had a risk assessment of potential failures by the private sector.
    A govt dept loosing an office may cause a problem but it is minor as it can easily relocate… there are plenty of empty offices…. a school is less easy to reloacte… space for playing fields, metal craft workshops, rooms large enough to cater for 30 or so children, science labs if a secondary school…..
    Phutunz indicated the receiver would be happy to receive lease payments. Perhaps. There is no guarantee a receiver may not assess sale of the land – converted to a dairy farm or car park – as providing a better rate of return as opposed to getting lease payments for the term after next. No guaraantee at all what the receiver may do and policy analysis is about risk assessment amongst other things.
    (And not wanting to brag, but I was the Min of Ed contract administrator for all the secondary schools (300+) and primary schools (2700) from when the old Dept of Ed and Educ Bds failed to exist (011088) to when the new BOTs officially came into existanc (010289. That was some 3,000 schools – granted I had very little contact with painters and plumbers because the day-to-day admin was sub-contracted so to ensure site inspections etc…. but I did have to discuss some failed contracts over ythe four months… As well, I recall grants to all a large number of privately owned schools for maintenance etc that Rob Muldoon bailed out when the respective owners became financially risky. History is a useful policy tool. Ideology useful too, but like Keynes, don’t get blinkered by it…..

  4. Gruhum Huwull says “Gobsmacked by phutunz’s belief that there is not much difference between a school and office block – says it all.”

    It’s a building. So it has to be built and maintained, just like every private building, be it a hospital, office block, house, workshop, or industrial building.

    Currently they are being managed by boards of trustees, effectively parents – many who don’t have the slightest idea (or any experience) about building maintenence.

    Because you have not looked at this with an open mind, you are making up problems that don’t exist, to try to make the situation fit your preconcieved ideology.

  5. Gobsmacked by phutunz’s belief that there is not much difference between a school and office block – says it all.

  6. Graham says “The nature of the operation – need for users (be it the state, the passengers or pupils etc) to access whenever required can be severly limited if the bank forced a mortgagee sale on the limited liability company that owned the buildings used by state as a school.”

    I don’t think there’s a great deal of difference between schools and office blocks.

    And I think you’re making up a problem that doesn’t exist.

    Any receiver would want the lessee (be it for a school or office block) to continue so there is monney coming in. Besides, any issues like that could easily be covered in the contract.

    And interesting that many leading private hospitals in NZ find it financially advantageous to lease their hospitals rather than buy them.

    I’m not saying we should definitely go ahead with PPPs for schools. Just that blinkers need to be taken off, and we need to look at the pros and cons with an open mind – and after we have all the info, THEN decide.

    Unfortunatley the whole thing is largely being prejudged along ideological grounds before we have the info. NZ deserves polititians who will look at things with an open mind, then make a decision instead of prejudging things all the time.

  7. While I know what leasing privately owned buildings means I am not aware of NZ govt depts leasing too many bits of infrastructure such as railway stations, schools or hospitals. Sure ACC and WINZ and HNZ can lease their administrative sites, no problems.
    The nature of the operation – need for users (be it the state, the passengers or pupils etc) to access whenever required can be severly limited if the bank forced a mortgagee sale on the limited liability company that owned the buildings used by state as a school.

  8. PPPs have been done overseas under a numerous different contract types. Some have been very successful. Some have been very unsuccessful.

    Anybody can cherry pick examples that they are either good or bad.

    But to generalise that they are all bad or all good is being misleading.

    Interesting that the report that Catherine gives links to, concludes that PPPs have benefits if done right, and are worth trying out.

    Of course there’s also the fully private ownership model, where private companies build, lease, maintain and OWN the buildings.

    Funny that some are horrified at the thought of this, forgetting that other govt departments have been doing exactly this and leasing privately owned buildings for decades.

  9. I did not make up the statement that the Government is tendering for a PPP trial I asked the Minister of Education at the Select Committee at the end of last year who made a vague reply and then RNZ wrote an OIA requesting the work the Ministry had done on this. More than a year ago the Minister said that theyw ere keen to look at trialling a PPP model for school buildings. As for saving time the overseas research from the study by Dexter Highfield is that administration took more time for the governance body because suddenly they had to manage contracts with diverse companies. ALso the idea of companies controlling the out of school use of school premises is an ugly reduction in the public service/public facility value of schools.

  10. PPP in ECE, well private providers, including not-for-profits, have been a significant ECE player for some time. And unless the funding rules have changed, the state funding of ECE includes those aged under 3, so citing the entire participation rate for all those under five seems valid, but of course we need to know the rates for the same cohort going back to 2000, 2005, whatever.
    I am also well aware National cut back on EVE in 1991/2 (after Labour had significantly increased it in 1988, and wow, surprise, surprise, National, with ACT and the MP are cutting it again. The participation rates fell post 191/92, I suspect they will again… and bonding aside, ECE has merit.

  11. For gods sake Todd – You got caught out trying to mislead everyone that early childhood education had plummeted from 94% to 50%.

    You tried to mislead everyone by using the figure for those who participate in early childhood education before they start school (94% for 3 and 4 yr olds)), then falsely claimed this figure had plummeted to 50%, by changing to a participation figure that also includes very young children right down to newborn babies (90% of newborn babies don’t participate in early childhood education because their parents would rather bond than damage them by handing them over to a stranger when they are so young).

    Todd – you were totally caught out attempting to mislead everyone. But your claims that early childhood education had plummeted were full of

    You got caught out bullshitting – it’s obviously very embarrassing. But face up to it and move on. (or take your own advice and stop reading my posts – you stuffed up – get over it)

  12. I initially relied on your statement that a 94% participation rate in ECE for the year 2000 was correct photonz1. I then found Statistics New Zealands statement that half of eligible preschooler attended ECE in 2010.

    Todd – wrong. 94% is actual participation.

    It was your false claim that the participation rate for ECE was as high as 94% when that is only indicative of those attending immediately prior to school year 1. The actual participation rate is 58.7% for 2009. You undertake such false claims on a regular basis and I’m bored of your lies photonz1, I am sure others are as well. Here are the facts again:

    My reliance on your false information was the reason for my assumption that participation rates were 94% in 2000, please be certain that I will not take anything you write for granted again. If I even bother to read your posts at all.

  13. hollyw asks “Photonz, are you sure that it is per school?”

    Sorry for the slow reply – I didn’t see your message.

    I just followed Catherine’s link to the Radio NZ audio, which talks about an $800,000 saving for “a PPP contract” to “design and build a school”.

    Todd says “Photonz1 has a habit of making false statements about amounts and percentages”

    I was just quoting from Catherines link. You are the one who falsly claimed early childhood education participation has halved in ten years.

    Oh – and Catherine links to teh report finished with saying PPPs would be worthwhile getting involved in

  14. I always the the credit rating was as much the nations overal indebtedness thus if the private sector needs to borrow to build the schools and hospitals rather than the state then it hardly matters.
    The PPP risk is even if $800K is expected savings per school, then it relies on 8 occuring without hitch in order to match to up-front outlat of $6 million. The risks of failure is quite high given the relative inexperience of Min of Ed in managing such projects to say nothing of the private sector managing such maintenance projects. (Such management is subtlky different than people managing the maintenance of property they own gentle-folk….as the PPP maintenance project has to ensure the value of the asset is the same at the end of the project as the start whereas owners need not ensure this if this is counter to their short term profit maximisation goal…).

  15. The thing is though that a PPP arrangement should not enable a state to avoid a downgrade. The state is still acquiring debt, even though it is in someone else name. Instead of the taxpayer paying off the debt directly, the taxpayer pays off the debt through a third party, with a transaction fee being lumped on top.

  16. Photonz, are you sure that it is per school? Can you cite anything that shows that? I would be interested to know if so, as I’ve read the RadioNZ and NZ Herald stories:

    “A Government proposal to introduce public private partnerships (PPPs) for the building and maintenance of some new schools would save just $800,000 over 30 years.” Herald

    And “Private-public partnerships for building new schools will save just eight hundred thousand dollars over thirty years. And that doesn’t include the six million dollar pricetag for developing the framework for the first PPP school.” RadioNZ

    Both suggest to me that $800,000 is the total saving.

  17. john-ston – which means they can also afford to start building many new schools, hospitalsd etc at once,

    and they get built faster

    and schools have far less time and money spend on administration

    so they have more time and money to spend on education.

    I don’t know what the big fuss is about. It’s little different to what’s been happening for decades where a private company get a govt deptartment to sign up to a long term lease, then build an office block to lease it out to them.

    Strange that no one has been screaming blue murder about that when it’s even more privatised than PPPs.

  18. The major advantage of a PPP of course is that it allows the state to get capital without raising debt and without the dreaded “ratings downgrade” (as an aside, I am of the view that the government should try and get a ratings downgrade – it might be enough to scare New Zealanders into saving).

  19. dbuckley – there are certainly examples in Australia and UK where PPPs have been very beneficial and examples where they have been disasters.

    I think the govt have their eyes open about this.

    Contrary to Catherine’s claim above that the govt are about to start tendering (does she have evidence of that or did she just make it up), they stated today that PPPs won’t go ahead if there’s little benefit.

  20. Yep, Photonz (welcome back!) has noted the way that PPPs are supposed to work; they transfer unexpected risk away from the public sector, placing that risk upon the private partner.

    The private partner on taking this risk expects to be paid for it, and if they do their homework right they’ll make a bob or two in the process. Do it wrong, and they don’t do well at all.

    Having said that, and having been on both sides of PPP outsourcing, in my opinion it is more bad than good, and a competent government (and by that I mean the civil servants, rather than the politicians) shouldn’t need to offload risk; they should understand what they are doing.

  21. Catherine – you are being completely misleading.

    The $800,000 is the saving PER SCHOOL.

    So your break even year of 4300 comes from lala land.

    You also mislead by failing to say the report stated that PPPs are a good idea and should be looked at.

    Or that govt risks like the current $1500 million bill for leaky schools could be avoided with PPPs.

    Or that schools boards and staff halve their administration time with PPPs.

    The pros and cons still need to be weighed up, but that should be decided with accurate information and an open mind – NOT with blinkered ideology and deliberately misleading information.

  22. You have to realise it was never about ROI or any benefit to New Zealanders.
    Just a guaranteed return for those who funded National into power.

    Businessmen who are unable to build up and run a real business want to steal ours.

  23. It’s because it is all about money, short-term money, and profit for the private sector. These guys and gals need to read their history – 18th century Britain had virtually no public education, mostly private, and it was exactly what you’d expect – entrenchment of privilege for the ruling classes and rich and marginalisation for everyone else.

    It took many years and many dedicated people to move education into being recognised as a public good and therefore funded from taxes.

    As Santayana said, those who do not know their history are condemned to repeat it.

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