Public Private Partnerships no 'magic pudding'

The report argues that in the areas of electricity, gas, rail, road and water, there is underinvestment to the tune of almost $25 billion. This is without even considering the backlog of investment in schools, universities, hospitals, public housing and aged care facilities.

According to the report, broader estimates of the backlog of infrastructure investment, taking into account the inability of current infrastructure services to meet future demand, put the cost of necessary infrastructure investment at $150 billion.

The report recognises that objections to deficit financing are irrational and based on “intellectual fashion” rather than substance. Nevertheless, its authors accept that the current intellectual climate, fostered by a media that responds with alarmism to anything short of a substantial surplus, is “unlikely to change in the short term”. To some this may seem a “cop-out”, but in this argument the authors are working within the accepted wisdom prevalent in Labor circles at the moment.

The report sees a National Infrastructure Finance Corporation as having two main advantages over other forms of private finance.

To begin with, such an organisation would address the problem of the high cost of private sector borrowing. Because the Commonwealth would be an equal stakeholder in such a corporation, the body would benefit from competitive interest rates available to the federal government. Furthermore, the authors of the report foresee that pooled superannuation funds could provide debt capital to the NIFC at rates “much closer to the Commonwealth bond rate for investment into infrastructure projects”, and at rates “lower than would be [achieved] through normal PPP channels”.

In essence, it is argued, superannuation stakeholders would enjoy a stable and fair return on investment, while the public would benefit from the lower levels of interest paid by the federal government - even compared to the state and territory governments.

Additionally, the report envisages that a National Infrastructure Finance Corporation would address the problem of “supernormal returns that can accrue to private equity investors in some cases”.

Controversially, however, the report’s authors foresee that generous tax concessions may be necessary as a spur for superannuation funds to invest heavily in appropriate infrastructure.

As John Sutton, National Secretary of the Construction division of the CFMEU, argued in The Age (PDF 13.2KB) earlier this year:

“Targeted tax breaks would be a further way to entice super money into the projects Australia needs. Taxes on super funds are relatively low but the Government could allow tax exemptions for dividend earnings from investments in qualifying projects, and reduce or abolish the tax on capital gains from them.”

The long term cost of tax cuts for superannuation funds (an effective subsidy) would need to be worked into any overall calculations as to the efficiency and value for money provided by any National Infrastructure Finance Corporation.

Certainly, pooled superannuation funds represent a broad cross-section of the Australian populace. According to the report’s authors there were about 10 million superannuation members as at June 2004: roughly the number of Australian taxpayers. Unfortunately though, wealthier fund members inevitably hold more substantial fund holdings that those who have laboured on low incomes, or in part-time or casual work. It follows, then, those on higher incomes will benefit proportionately more from the (subsidised) earnings of a National Infrastructure Finance Corporation, reflecting the flaws of the superannuation system in general.