Weekend reflections

Weekend Reflections is on again. Please comment on any topic of interest (civilised discussion and no coarse language, please). Feel free to put in contributions more lengthy than for the Monday Message Board or standard comments.

NZ Treasury on PPPs

The NZ Treasury has a paper looking at the advantages and disadvantages of Public-Private Partnerships (PPPs)*. The conclusions are almost exactly what I would have written myself.

This paper argues that:

* there are other ways of obtaining private sector finance without having to enter into a PPP
* most of the advantages of private sector construction and management can also be obtained from conventional procurement methods (under which the project is financed by the government, and construction and operation are contracted out separately), and
* the advantages of PPPs must be weighed against the contractual complexities and rigidities they entail. These are avoided by the periodic competitive re-tendering that is possible under conventional procurement.
The paper concludes that PPPs are worthwhile only if all three of the following conditions are met:

1. The public agency is able to specify outcomes in service level terms, thereby leaving scope for the PPP consortium to innovate and optimize.
2. The public agency is able to specify outcomes in a way that performance can be measured objectively and rewards and sanctions applied.
3. The public agency’s desired outcomes are likely to be durable, given the length of the contract.

The only thing missing is a discussion of the cost of capital. I’ve discussed this issue with NZ Treasury in other contexts, but I’m not sure where they would come out in relation to PPPs

* Acronyms are tricky things. In the post below, PPP means Purchasing Power Parity. And once upon a time, it meant Point-to-Point Protocol, which was used by modems.

Diewert on Quiggin, Castles and Henderson

A while back, I had an interesting debate with Ian Castles about the significance or otherwise of the choice between market and purchashing-power parity (PPP) exchange rates in the IPCC projections of global warming. You can read a number of contributions from Castles and David Henderson at the Lavoisier Institute website and their main article is published in Energy & Environment”, vol. 14, nos. 2 & 3: 159-85. They argue that the use of market exchange rates understates the income of poor countries and therefore overstates the growth in income and energy use that will occur as they catch up with rich ones.

My criticism is directed at the second part of this claim. I say that if the demand for energy is modelled using market exchange rates, the choice of income aggregate doesn’t matter much. If the income estimate is biased downwards, so will be the estimate of the rate at which energy use grows with income. I make this point in my submission to the Stern Review in the UK.

These debates are inevitably complicated, but someone with the right skills can make them a lot clearer. I can think of no one better than Erwin Diewert, who has been the leading researcher* in the theory of index numbers for the last thirty years (and a big name in other fields). So I asked Erwin for comments and was both surprised and pleased to receive not just comments but a whole paper, not quite by return mail, but after only a few days.

I think it’s fair to summarise by saying that Diewert agrees with my main point, but also agrees with Castles and Henderson that the IPCC should change its modelling approach.

I agree with everything in the comment, but there a couple of points of emphasis I would place differently, as noted in my response . In particular, I stress the importance of consistency. Using PPP numbers for income, then plugging in income elasticities derived from studies using market exchange rates, is a recipe for disaster.

* I should also mention Sidney Afriat who is famous for being both brilliant and esoteric. Afriat has made fundamental contributions to the field.

Seven propositions on water

A few weeks ago, I chaired a session at the Water ’06 Conference. Among the speakers there was the Chairman of the National Water Commission, Ken Matthews, who raised a number of claims often made about water issues that would require future community debate and discussion. These included:

1 that recycled water will never be acceptable in Australia for household use
2 that additional urban water supplies should not be sourced through market purchases from irrigators
3 that additional water for the environment should be sourced from the market only after all alternatives have been exhausted
4 that urban water use restrictions introduced during the drought should continue indefinitely into the future
5 that any water not abstracted for consumptive use is necessarily doing good to the environment
6 that uniform water quality and pricing should be maintained across all urban water users including industrial users, and
7 that water and sewerage are natural monopolies and should therefore be provided by governments.

There’s a bit more here (hat tip, David Adamson). Of these, I disagree with 1-4, and broadly agree with 7. Propositions 5 and 6 are too complex for a Yes-No answer.

Update I should add, if it’s not obvious that Matthews means to imply that all of these propositions are both widely accepted and overdue for sceptical scrutiny.