Public Private Partnerships no 'magic pudding'

In the heyday of the Kennett Government in Victoria “Public Private Partnerships” were promoted as the “debt free” way to fund public infrastructure. Although the idea that the public can get “something for nothing” through these partnerships has now been widely discredited, most Australian governments still find the idea of shifting debt “off balance sheet” attractive.

The current Victorian Government in particular, working in the shadow of alleged financial mismanagement by past Labor governments, seems to fear a backlash if it should run a budget deficit, or even fail to run a substantial surplus. Public Private Partnerships (PPPs) are therefore seen as a way to produce larger surpluses and win kudos for good financial management.

Economist John Quiggin has referred to this mentality as: “[the] idea that financial innovation represents some sort of magic pudding.” It is now accepted, he argues, that any apparent reduction in debt from the implementation of PPPs is illusory:

“However it is represented in the official accounts, a liability to make a stream of payments into the future is, in economic terms, a debt. There is no ‘magic pudding’ providing infrastructure services with no corresponding cost to the public.”

For those living in the shadow of PPPs the real cost of government debt-shifting soon becomes apparent. In the case of the cross-city tunnel, the New South Wales Government responded to public disquiet over high tolls by reopening routes that had been closed in order to guarantee the profits of the private operator. Predictably, this has led to the private operator demanding substantial compensation.

Another case in point is Victoria’s Scoresby Freeway. Although the original cost of building the road was estimated at $2.5 billion, the cost of “buying out” the project, including financial costs, so as to make the project “toll free”, was put at about $7 billion - the cost of compensating the private investor for foregone profits. This places the estimated value of tolls over the life of the project at almost three times the original cost of construction.

While the tollway may have created the illusion of a debt free project, the reality is that the accumulated cost of tolls over the lifetime of the project is the equivalent of perhaps as much as $7 billion of debt: or, alternatively construed, as a regressive “flat tax” on Victorian motorists amounting to approximately $7 billion over the life of the agreement.

Public Private Partnerships leave a trail of scandal

The new County Court building is yet another controversial Public Private Partnership which has become a public relations headache for the Bracks Labor government. While it only cost about $135 million to construct, the building will be leased back to the government over 20 years by the Packer family for about $533 million, and even then will not revert to public ownership.

As Ken Davidson argues, “At the end of the lease period, the Government will have nothing. If the Government in 2022 decided to buy an equivalent building, it would cost about $500 million, given the inflation in land and building costs.”

Meanwhile “the private partner (project financier ABN Amro) was given a 99-year lease on the site on the corner of Lonsdale Street and William Street for a peppercorn rental of $1 for 99 years.”

In the face of arrangements that fleece Victorian taxpayers of hundreds of millions of dollars, the Opposition has been conspicuously silent, with Shadow Treasurer Robert Clark acquiescing to the removal of the most damaging section of a recent public Accounts and Estimates Committee report on PPPs. Davidson argues that the “lazy, mushroom-like acquiescence of the committee members, makes a mockery of the (report’s) recommendation on governance, evaluation and accountability arrangements”.

Benefits of private versus public finance considered: can “risk” be transferred?

One of the main arguments against PPPs is the fact that public finance is cheaper than private finance. As Davidson notes, “even the least credit-worthy government could borrow money more cheaply than Australia's most credit-worthy corporate borrower”.