PPPs

Are very often dodgy.  Oddly only a few ‘economic rationalists’ have been willing to blow the whistle on them. Doing some research on our state governments’ peculiar penchant for pecuniary populism – their focus on government net debt rather than government net worth, I came across this speech by Peter Fitzgerald to the Fabian Society.

Peter is a member of the ALP and a consultant who could make a lot more money supporting the spivs who spruik PPPs.  But when given a Government job to review them, he came to the conclusion that they were a dud. So in addition to turning his back on the money he might otherwise make championing PPPs he didn’t endear himself to the more powerful members of his party.  Peter is, in my estimation, a good guy.

In any event, it’s a lively introduction to and education in the subject for the uninitiated. And sadly PPPs seem to be spreading.

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9 Responses to PPPs

  1. Fred Argy says:

    Yep it’s a good paper. I do see meirt in some PPP’s but one of the myths I have been trying to explode relates to the capacity to free resources for other infrastructure. This is the letter I sent to The Australian earlier this year.

    11/12/07

    The proposed privatization of retail electricity assets (Iemma pledges to sweeten power sale, The Australian 11/12/07) has been greeted with applause. Some of that applause may be justified. Provided future governments ensure there are many competing suppliers and/or strong price regulation, it may well lead to better prices and services for electricity users.

    But two other arguments being put forward for the privatization are complete furphies! The first is that privatization will improve the governments balance sheet and hence its credit rating. However, if the assets are sold for an amount equal to the risk-adjusted present value of expected future earnings, it will leave government net worth unchanged.

    The second furphy is that privatization will allow the government to spend more on other badly needed infrastructure such as a metro rail system and road upgrades. However all privatization does is transfer spending from the public to the private sector without adding anything to the overall productive capacity of the NSW economy e.g. it does not release scarce skilled tradespersons for other uses. So governments will not be able to step up spending on other infrastructure without adding to inflationary risks which is exactly the situation we are in now.

  2. Yes Fred,

    I broadly agree. The argument that the NSW Govt runs with is that it’s number one priority is to keep it’s AAA rating. Though I doubt very much that this (arbitrarily imposed) requirement would prevent the NSW Govt from hanging on to the electricity assets (because it’s debt levels are already low) it adds at least some plausibility to this argument that there’s an ‘opportunity cost’ to the government of borrowing to invest in infrastructure.

    In fact the ratings agencies would have some regard for the net worth of assets – would not focus myopically on debt alone as the Govt often does. But given their conservatism (at least when they’re not making squillions out of CDOs) they do have a strong eye for debt.

  3. wilful says:

    How did CityLink work again? A $1.5 Bn tollway delivered for the low low cost to the community of ~$6 Bn?

  4. Yes – roughly that – and not a cent of public money used on it. Clever that!

    Oh – well no public money – but that doesn’t include money from the public – through tolls which are nearly twice as high as they would otherwise need to be.

  5. Jonno says:

    Thanks very much for the article – I will circulate it to selected people at work. Thinking public servants have long questioned (privately with people we trust and not with Treasury) the value of PPPs. We always assumed it was just ideological as we could see no basis in fact. It’s great that the author has teased this out.

    I would like to emphasise the mystique of the whole exercise as part of the rationale (which is the author’s big end of town argument). The complexity and elaborate structures used to justify selection of PPP are excellent examples of sophistry.

    A broader question in the longer term is whether funding for other institutions will be squeezed when we have a strict payment schedule for PPPs such as RCH and RWH to be maintained at top condition by private contractors. The State budget won’t stay this good, that’s for sure.

  6. Alphonse says:

    Digressing slightly, I recall a 1995 EPAC study of road congestion, courtesy of Fred and colleagues. Broad implementation of its pricing recommendations should now be the rule, but existing and subsequent PPP toll revenue arrangements of 30 year duration stymie, or at best hideously complicate, any possible implementation for now.

    At least for roads, we should add to Fitzgerald’s list of PPP issues the surrender by governments of power to treat road systems as the systems that they are, and as subsystems of our greenhouse generation system. There are also the infamous PPP provisions that preclude competitive transport infrastructure – not just limited to alternative road routes, but inclusive of busways and rail as well. There’s massive unaccounted cost in these kinds of PPP side effects.

  7. Patrick says:

    However all privatization does is transfer spending from the public to the private sector without adding anything to the overall productive capacity of the NSW economy e.g. it does not release scarce skilled tradespersons for other uses.

    Nitpicking, but I understand that privatisation generally does add to productive capacity simply by introducing competition. So not perhaps per se,, but in the end, yes.

  8. wilful says:

    Patrick, the roads etc were built by exactly the same people under PPS and standard State financing models. VicRoads haven’t actually poured a lot of concrete in a long time, they’ve gotten competitively tendered construction companies to do all of it. So the only new skills are in creating dodgy financial vehicles. Advanced rent seeking.

  9. Patrick says:

    Well, roads, perhaps. But I was thinking about NSW electricity in particular, and energy more broadly.

    Also in relation to profit, I would pick up wilful’s point to say that the people making the real killing here are the constructors, engineering consultants and raw materials.

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