December 17th 2005


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Articles from this issue:

EDITORIAL: The death penalty and Van Tuong Nguyen

CANBERRA OBSERVED: Contenders for the Howard succession

CULTURE WARS: Fighting to defend civilisation

SCHOOLS: Truth and beauty to exchanged for 'relevance'

OPINION: Abortion drug victimises women

STRAWS IN THE WIND: Burma, ASEAN and selective breast-beating / Latham was right / Asia for the Australians / News item

FOREIGN DEBT: Greenspan issues warning over foreign debt

PUBLIC INFRASTRUCTURE Private funding 'more expensive'

INTERNATIONAL POLITICS: Global significance of China-India relations

IRAQ WAR: Saddam Hussein had weapons of mass destruction

ENVIRONMENT: Ensuring sustainable agriculture

TIMOR LESTE: 'Thanks for helping East Timor'

Compulsory voting a necessity (letter)

Disabled people at risk from euthanasia (letter)

ABC insults Australia's war dead (letter)

Low pay and joblessness (letter)

BOOKS: HOW MUMBO-JUMBO CONQUERED THE WORLD: A Short History of Modern Delusions, by Francis Wheen

BOOKS: FEMALE CHAUVINIST PIGS: Women and the Rise of Raunch Culture, by Ariel Levy

BOOKS: THE CASE FOR DEMOCRACY: The power of freedom to overcome tyranny and terror, by Natan Sharansky

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PUBLIC INFRASTRUCTURE
Private funding 'more expensive'


by Ken Francis

News Weekly, December 17, 2005
In order to attract private funds for public infrastructure, governments have often had to offer investors very high returns on relatively low-risk undertakings. As a result, Australia may well face a critical period until 2015 with inadequate infrastructure, writes Ken Francis.

The Australian economy demands huge investment in new infrastructure. Tens of billions of dollars are required in the medium-term for investment in ports, railways, roads, water conservation and power projects to provide for the survival of Australia as a producer and exporter of goods and services for the world market.

Owing to the cowardice of politicians of successive state and federal governments, and the myopia of those bureaucrats who are so inadequately classified as, and misnamed, "public servants", Australia may well be forced to face the critical period until 2015 with inadequate and ineffective infrastructure, unable to support our economy in the increasingly competitive global market.

History shows how our leaders have repeatedly stumbled and overlooked opportunities that would enable the country to provide low-cost finance, not only for the creation and expansion of export-oriented enterprises, but for urgently required infrastructure projects.

The Commonwealth Development Bank was sacrificed in the rush to remove government from ownership of financial institutions.

The compulsory superannuation scheme, with its $700 billion of workers' funds, has been handed over to a cabal of carpetbaggers misrepresenting themselves as financial managers and wealth-creation consultants.

Most recently, public-private partnerships (PPPs) - which have been universally adopted by governments and the economic rationalist mandarins as the preferred vehicle for the funding of infrastructure projects - have been discredited for their failure to protect the public interest, and for the way in which they pander to the greed of the financial community.

"One size fits all"

The "one size fits all" approach, applied to infrastructure funding, is now seen as a confidence trick played out on ordinary citizens and workers, for the benefit of private banks and other so-called "millionaire factories".

Over the past decade, governments have turned to PPPs to provide private funds for infrastructure development in place of taxes or other public funds.

This approach has enabled state and federal governments to balance their budgets and retire public sector debt, in part by accepting up-front payments from the successful bidder.

In seeking private funds, governments have ensured that investors receive very high returns in relatively low-risk undertakings based on taxation benefits, protection of the project from competition from existing public facilities (for instance, by closing competing roads), and by removing elements of risk from the private investor and placing it in the public domain.

A former head of the Commonwealth Bank and chairman-designate of the Federal Government's Future Fund, David Murray, had this to say about PPPs and their value to the community:

"We are sending our most skilled people to university to work out how we can transform a monopolistic (public) good into a monopolistic private good with a government-guaranteed return above the interest rate." (Australian Financial Review, November 25, 2005).

These remarks were made in the context of the debate about financing the Sydney Cross City Tunnel, which has been criticised for its secret deals and lack of financial and procedural transparency, leading to a crisis in community confidence in the NSW Labor Government.

Trenchant criticism

So trenchant has been the criticism of PPPs that NSW Premier Morris Iemma has backed away from using public-private partnerships to finance a proposed water desalination plant for Sydney.

Instead, the plant would be built, operated and maintained by private enterprise, but would be funded in the old fashioned manner by government debt or budget surpluses.

Similarly, the NSW Government is unlikely to involve the private sector in a $750 million expansion of the Port Botany shipping facilities.

The poor reputation of PPPs constructed on the Australian model, involving a pre-eminent role taken by specialised investment banks, was not enhanced by a recent report in The Australian (November 11, 2005), by the paper's economics editor, Alan Wood.

Wood reported on a controversy in England when Macquarie Infrastructure Group (MIG), having gained control of the Midlands Expressway, sought to increase tolls beyond the expectations of users of the road.

An MIG executive was quoted as saying: "We can put up the tolls by whatever we like and almost as importantly we can start the tolls on day one by whatever we like."

According to Wood's article, the MIG executive added that "if motorists weren't complaining about the toll being too high, Macquarie wouldn't have done its job properly".

He further noted that the Australian approach to PPPs has been marked by poor management, occasional corruption and inadequate competition.

The dominant role of investment banks has been questioned in that they provide 100 per cent of the equity and control the whole process from managing the bid, determining the pricing, assessing the risk parameters and selecting the contractors and facility managers - a pattern of management that is at odds with the approach to PPPs seen in Britain.

A leading authority on the construction and financing of major road projects, Dr John Cox, analysed research into PPPs in Britain and found that costs of capital there were "double that of the public sector while giving post-tax returns on capital to private sector operators of about 30 per cent." (The Australian, November 28, 2005).

More expensive

A report by the University of Manchester concluded: "Irrespective of how they are funded (via taxation, direct tolls or more usually some combination of the two), the turn to private finance is very expensive and more expensive than public finance for gains that have yet to be substantiated."

Once the facts about the usurious rates of return obtained by private financiers from the pockets of ordinary people as users of the roads and facilities constructed by the PPP become known, politicians move quickly to separate themselves from the use of this business model of obtaining project finance.

In any event, politicians will be more circumspect and judicious in the future when making decisions about the involvement of a PPP in financing their projects.

In reviewing road projects involving the payment of direct tolls, John Cox proposes that the benefits accruing to the community from toll roads are reduced for two reasons - first by the additional capital and operating costs of the automated toll system itself, and second by the fact that the cost of the tolls forces 20 to 40 per cent of motorists to use the existing stop-start arterial road system with all its added costs and inefficiencies.

He arrived at this conclusion as a result of undertaking an economic analysis of Melbourne's CityLink project, which showed that the net present value (NPV) of the road was reduced from $2.7 billion without tolls to $1.3 billion once tolls were introduced.

The Steve Bracks Labor Government in Victoria decided to introduce tolls on the Scoresby Freeway for financial reasons, citing the need to accommodate a $1 billion blowout in public transport expenditure. Yet, at the time, state revenues were rising steadily and soon afterwards the state revenue surplus for 2003/04 was announced as $1.7 billion.

Despite these observations, Cox recognises that there is a role for properly constituted PPPs in infrastructure development where the capacity of the private sector to gain access to funds and complete the project on time offers benefit to the community as a whole.

It is not simply good enough for PPPs to be adopted merely for financial and taxation reasons or because of pressure from privately-owned financial groups, rather than for any expected net benefit to the community.

Cox proposes that future PPPs should be constructed on a simple tender system, where the government would award a contract to the financiers and builders whose bid offered the lowest annual repayment over a 30-year period.

Public benefit

In this way, the ownership and operation of the facility could be in the government's hands and the public would benefit from paying lower rates than are experienced for PPP facilities as currently constituted.

Alan Wood puts the issue in these terms:

"What is needed is a structure for much better sharing of risk and reward and a much better informed selection of which projects should be financed and operated under PPPs and which financed by the public sector.

"The days of fat fees and monopoly profits for investment bankers at public expense are coming to an end." (The Australian, November 24, 2005).

He drew attention to research by the University of Adelaide, which showed that PPPs have the capacity to perform better than publicly-funded projects in that they tend to be finished on time and on budget without cost overruns accruing to the public purse.

This is not invariably the case as is demonstrated by the shortcomings experienced by the Victorian Government in the current $700 million redevelopment of the Spencer Street Station.

Scathing

Kenneth Davison (The Age, December 5, 2005) is scathing in his criticism of the Victorian Government's decision to finance the new Royal Women's Hospital project under a PPP for a period of 25 years.

Based on a damning analysis by the Auditor-General in his report on State finances, Davidson continues:

"The question that the A-G's report should have made explicit is why would the Government be prepared to do a deal that effectively meant paying interest on the $275 million funding of 7.4 per cent, when a reasonably creditworthy home-buyer could get a mortgage rate for a loan of $275,000 at 6.7 per cent variable over the telephone?

"Even more perplexing, why would the Government pay 7.4 per cent when the 10-year bond rate is 5.4 per cent?"

The Auditor General makes it clear that the Government, despite paying this inflated interest rate, is not transferring the project risk to the developers, but will retain the majority of risks associated with the project.

Public-private partnerships have for too long been cosy relationships between governments, public servants and private bankers.

They should not be adopted unless and until they are open to public scrutiny and the public benefit is demonstrated beyond doubt.

  • Ken Francis




























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