BUDGET 2012: Where are the PPPs?

An austerity budget is no surprise, but don’t we need a slightly more balanced approach with some stimulus from the government to give the economy a kick start?

A zero budget will be considered prudent by many, recognising that we are living in challenging economic times.

One new initiative signalled by the budget is the establishment of the Future Investment Fund reinvesting proceeds from the partial sale of shares in four SOEs.

These funds have been earmarked to fund new and re-develop existing infrastructure such as schools and hospitals.

Does this mean that government sees tying up funds in infrastructure as a good bet for the future?

It certainly reduces the need for additional overseas borrowing, but what about showing a bit more creativity and driving Public Private Partnerships (PPPs) to the forefront to fund this much needed spending on our infrastructure?

PPPs can be effective vehicles for increasing productivity in the public sector particularly around the construction and management of major infrastructural assets or for the delivery of social services with significant quality or price risks e.g. medical services or prisons.

To some extent, New Zealand is already dabbling with PPP models through the management of some of its correctional facilities and use of private providers by ACC to fulfil client demands.

Why would the Government want to expand their PPP strategy?

Overseas have proven to deliver better value for money where:

• there are significant opportunities to innovate in asset design and to improve whole-of-life asset management;
• there are opportunities to innovate in terms of the services delivered from assets;
• there are real opportunities for risk transfer;
• the PPP can act as a catalyst for change in a sector’s productivity and in New Zealand’s case where it may be difficult to source cost-effective finance

The health sector seems ripe for expanding the PPP strategy.

While health has been one of the few ‘winners’ in the 2012 Budget, we need some innovative thinking on how we could stretch the health dollar even further.

Why does health matter?

OECD research in 2010 showed that an effective health system provides significant quality of life benefits to the wider population and increases the productive capacity of the economy as a whole.

In New Zealand 80.5 percent of health spending was funded by the public purse in 2009 (OECD average: 80.4 percent) however New Zealand ranked below the OECD average in terms of health spending per capita at US$2,983 compared with the OECD average of US$3,223.

The OECD report, Health System Priorities when Money is Tight prepared in 2010, reported that growth in health spending puts pressure on government budgets in times of fiscal constraint and this is a trend most likely to continue.

Undoubtedly governments through imposing regulatory or budgetary measures can have the greatest impact on the delivery of health services usually through austerity driven cost reduction decisions such as controlling access to care, controls on drug purchasing or introducing cost shifting policies e.g. user charges.

Many of these strategies have negative consequences further down the track.

What about using PPPs to shift costs and risk? They do not necessary need to have a detrimental effect on the quality of service that is delivered.

Historically OECD countries have tended to rely on “command and control” economic policies to hold healthcare costs down.

While these may work in the short term, in the longer term there will inevitably be a price to pay when patients present with more complex cases as a result of reduced funding for preventative strategies.

The health sector is one sector where there is a clear return on investment in preventative strategies unlike some others where the returns on such initiatives are less evident.

There are clear opportunities where efficiency improvements on the supply side could be achieved through the application of appropriate incentives for providers of services.

Where to from here?

Clearly to implement more PPP strategies we need suitable leadership from the top that recognises the significant role that innovation plays within government plus we need a culture within the public service that creates and supports innovation.

We also need to accept that there will sometimes be failure. We would need to see:

• clear leadership and commitment from all politicians on innovation in government
• talented, experienced public sector managers who recognise creativity and are incentivised to take managed risks
• explicit innovation processes within government, with the people and resources needed to drive real change
• strong communication with the public about the case for change and the economic and social benefits

Pam Newlove is national director of Grant Thornton's privately-held business advisory division. Email pam.newlove@nz.gt.com