Taxpayers Pick Up The Tab For Business


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.

New Matilda

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