24 Jul 2013

Taxpayers Pick Up The Tab For Business

By Sarah Lumley and Jim Crosthwaite

If Public Private Partnerships are meant to take risk off the government's hands, then why does the public end up paying for them? Economists Jim Crosthwaite and Sarah Lumley on the patchy history of joint projects

Despite massive controversy, the Victorian Government is forging ahead with the East-West Link toll road. Over a hundred homes and commercial properties will be acquired by the state to put in the toll road.

Treasurer Michael O'Brien has indicated the project will be a public private partnership (PPP). In a May press release, the Victorian Government indicated it would soon seek expressions of interest and award a contract in late 2014. “There is a clear role for the private sector in delivering this project,”O'Brien said.

Opposition leader Daniel Andrews has committed to scrapping the project, if re-elected, with the proviso that legal delays with the property acquisition hold up the project long enough to prevent a contract being signed.

This kind of drama is a common story with PPPs. While many progress smoothly, some have given cause for serious concern – especially toll roads. PPPs gone wrong include Sydney’s Cross City and Lane Cove tunnels, Brisbane’s Clem and Airport Link toll road/tunnel, and in Victoria, the desalination plant at Wonthaggi and the Ararat Prison project, which had to be rescued.

In most cases taxpayers are footing the bill one way or another and there is a sneaking suspicion that PPPs are sometimes used as a way to hide public debt, about which there is currently much political hyperbole.

Paradoxically, some of the less successful PPPs appear to have placed a burden of debt on Australian taxpayers that we may be paying off for generations to come. According to The Age, Victorians will be paying $650 million a year for 28 years for the Wonthaggi Desalination plant even if they use no water from it, and $130 million a year for 25 years for the Peninsula Link Road regardless of the number of cars that use it.

This is in part due to the phenomenon of shadow tolls (“availability payments”) which are paid to the private partner by the government to cover shortfalls in use. Put simply, the operator gets paid regardless of the whether the service gets used, despite a stated advantage of PPPs being the ability for governments to pass risk to the private sector.

Since 2008, Infrastructure Australia, a Commonwealth statutory authority, has provided the overarching policy framework and guidelines for Australian PPPs, many of which are contracted and facilitated at state level. According to Infrastructure Australia’s National PPP Framework:

“The aim of a PPP is to deliver improved services and better value for money primarily through appropriate risk transfer, encouraging innovation, greater asset utilisation and an integrated whole-of life management, underpinned by private financing.”

PPPs have been used for projects ranging in cost from $13m (Search & Rescue – Darwin) to over $5b (Victorian desalination plant). They are applied to construction of hospitals, prisons and other buildings, water and waste treatment plants, and transport systems.

Problems associated with PPPs, including their debt status, have also been experienced in the UK (where PPPs are known as PFIs or private finance initiatives) and the US. In a 2012 report by the Treasury Committee of the House of Commons (UK) it was said that:

“This incentive [to pursue PFIs] remains in place because, first, the current rules exclude PFI liabilities from calculations of Public Sector Net Debt, and, second, privately financed investment allows government departments to spend more than their allocated capital budgets.”

In Australia private companies are required to bid for PPP projects and their bid is compared with the “Public Sector Comparator”, which estimates what the project would have cost if it were to be facilitated, built or serviced by the public sector. Unfortunately the full details of private bids are not always available for public scrutiny because of commercial confidentiality. This means that the financial implications of PPPs are not always transparent.

A 2003 report to the UK Parliament raised concerns about the way in which the Comparator was used saying “the desire to show that the PFI deal is ‘cheaper’ than the public sector comparator has led to manipulation of the underlying calculations and erroneous interpretation of the results”.

The Infrastructure Australia website provides a summary table of all Australia’s PPPs with their associated “value” (cost). We were able to glean the following costs for the projects mentioned earlier as being in trouble:

  • Sydney’s Cross City Tunnel - $680 million
  • Sydney’s Lane Cove Tunnel - $1,100 million
  • BrisConnections (Brislink) - $5,340 million
  • Brisbane’s North-South Bypass Tunnel (Clem7) - $3,200 million
  • Victoria’s Ararat Prison - $394 million

The Wonthaggi desalination plant, which has been plagued by controversy, missed deadlines, and threats by the proponent to sue the Victorian Government, is listed by Infrastructure Australia as costing $5,720 million. The Peninsula link is shown at $849 million. Canberrans are concerned about the financial burden that the Capital Metro light rail PPP might place on taxpayers.

If the 126 PPPs listed by Infrastructure Australia as currently contracted were included on the public balance sheet, we estimate that PPPs would increase the public debt, which is now around $300 billion, by just $60 billion. It is likely an overestimate given the higher cost of private borrowing that is incorporated into project cost. This needs more research because Infrastructure Australia does not list the cost of all PPPs in a standard way, and we have crudely summed the totals given.

The NSW Government seems to have had a change of heart about PPPs. In an article about the decision to fund the WestConnex toll road through other means, including from the sale of public assets and investment from superannuation funds, an Industry Super Network spokesperson Matthew Linden is quoted as saying “They recognise the PPP structures don’t work going forward. It’s obvious they’re exploring new ways to invest in infrastructure”.

According to an earlier report in the Sydney Morning Herald the NSW government also intends to use tolls on the M4 section “as seed funding to help pay for the rest of the $13 billion WestConnex under plans being drawn up to avoid the financial failure of past Sydney toll roads”.

Arguably, an underlying factor in opting for PPPs is the primacy given to the private sector in Australian politics. Protecting the capacity of major corporations to generate wealth has become central to economic thinking, industry lobbying and government agendas. Infrastructure Australia for example states on its website that “Public Private Partnerships are vital to the development of social and economic infrastructure in Australia.”

In regard to the Capital Metro light rail project, the ACT Treasurer Andrew Barr is quoted, perhaps confusingly, as saying that he still sees advantages in PPPs although borrowing for a major infrastructure project would be cheaper for the government than for a private partner because of the ACT's AAA credit rating. Potential pressure from international organisations is a major reason for politicians to be concerned about public debt, and the turn to apparent debt reduction through the use of devices like PPPs.

Perhaps we should begin to scrutinise how corporate Australia manages to influence public policy making while it obscures its own debt to the rest of the world, casts doubt on public debt accrued for demonstrably worthwhile purposes, and rips us off in the process.

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jackal012
Posted Wednesday, July 24, 2013 - 19:13

 

Well thank you very much ,Sarah Lumley, Jim Crosthwaite.

This is the sort of stuff we need to hear, these sorts of rip off's go back all the way to the rum rebelion days etc.. Most of our so called Nobility that graces place names etc were all corrupt crooks who feathered their own nests. So, thinks really haven't changed any here, different names etc. same rorting.

We sent our entire Gene pool to 2 wars so that our Landed gentry could remain the 3rd richest in the world and we failed at that despite the stupid carnage. Our export market England went broke, lost Empire status to the Yanks and we subsidised our crooks for the next 25 years until they could sell up and or get out.

Nothing new, but thanks for talking about it, long overdue.

Who did we pork barrel with all our gold that Costello sold for $325 then went through the roof up to $1700+ when the GFC finally hit. This country has always been a Thiefdom for English Baron's, our own elitist dogs and BP.

 

 

Stripling
Posted Wednesday, July 24, 2013 - 21:25

The Last Premier in NSW to talk about DECENTRALISATION was Neville Wran.

Since then it has all been about URBAN COMPACT and INFRASTRUCTURE.

This article raises the question,

WHAT IS REALLY GOING ON?

O. Puhleez
Posted Wednesday, July 24, 2013 - 22:38

NM should ask Bob Carr to write on this subject. Or at least stick in a comment. Carr was on the board of Mac Bank, which made a motza in its heyday out of PPPs, notably the M2 and M5 tollways. Both would have cost the taxpayer less in the medium term if funded through public debt and built by contractors to the government.

According to one highway engineer I have talked to on this: if you want a road 25% overbuilt, give the job to a government. If you want it 25% underbuilt, give it to private enterprise.

But Carr has topped up his NSW Parliamentary super quite nicely via this PPP-MacBank arrangement, not to mention his present Federal super plus perks. This is a good thing, as it eases the worry on my troubled mind that the poor bastard was headed for hard times in his twilight years.

jackal012
Posted Thursday, July 25, 2013 - 04:59

O. Puhleez  where is all the Greenies, their still on the other page talking about refugee's.

 

do they care about anything other then refugee's. I'm going back to the refugee articles, too, more noise.   

jackal012
Posted Sunday, July 28, 2013 - 10:41

 

This article and the lack of participation here raises the question, are Australian Pin Heads interested in anything other then what we consider in underwear issues. Hero Parades and scoring with foreign Females who are at a shortage. Refugee's mostly male.

Economics, whats that, anything to do with space flight. Talk to Nasa.

 

PINHEADS.

jackal012
Posted Sunday, July 28, 2013 - 10:44

MarilynJS, YOOOOOHHOOOOOO can u hear me. where are u, this is ur life.TOO. ?????? maybe not. Must have a rich husband that thinks about this shit. Handy.

jackal012
Posted Sunday, July 28, 2013 - 13:08

All those who actualy care about THE NATION rather then emotional Topics.

 

Go to

 

http://www.abc.net.au/tv/bigideas/stories/2013/07/08/3795835.htm

 

Let me know what u think, I believe that Christine Milne might have just won my Vote with her sheer brilliance. John Hewson, great man. Stateman.

 

HELLO, is their anyone out their in the world of Australian economic life.?????

Oh! Hell. Let me go to Refugeee 101 Portal.

 

jack11
Posted Saturday, October 5, 2013 - 20:15

Everyone in the industry knows this pass4sure 74-697 is partly due to the global financial crisis — which pricked the bubble of overproduction caused by the influx of "funny money" from Wall Street for over a decade. What no-one really knows is whether the sector will eventually rally. My gut feeling is that it won't. We're undergoing a revolution in pass4sure 150-810

jandave
Posted Monday, October 21, 2013 - 10:50

I really like this informative post. Keep posting for more. People will keep viewing your article for it really helps.

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