Public Private Partnerships Are Not The Answer

By Nick Renton

The methods of funding infrastructure and other major capital works in Australia by governments at all levels need further examination and public discussion.

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 To illustrate, at the time of writing many state governments favour forming a public private partnership (PPP), especially when a large development is under consideration. This is an arrangement under which an infrastructure project benefiting the community is funded and operated by a partnership involving the government and one or more private sector companies, often under a long term contract at the expiry of which the entire assets vest in the government concerned free of all debt.

Typical contracts involve the private sector in financing, designing, building and maintaining a public infrastructure, and in some cases also delivering associated services.

 The quoted theory is that a private sector organisation can manage such a project more efficiently than a government agency. Usually the intention is also for a smaller call on taxpayer funds and for the bulk of the business risks to be borne by private sector investors.

 However, working in the opposite direction are the higher costs for the community that are inevitably involved in such arrangements and passed on in some form or other. A private organisation needs to pay a higher interest rate than a government borrower and it also needs to impose terms that enable it to earn a commercial profit commensurate with the risks being undertaken and the capital tied up. There is no such thing as a free lunch.

Furthermore, if anything goes wrong, then the government concerned may still, as a practical measure, have to bail out the partnership by using the public purse.

To take another example, public transport systems in Australia, as in most other countries, are heavily subsidised out of taxation revenue. Fares cover only a relatively small portion of their total costs.

Privatising the system operators is no solution either – as explained in the above comments on public private partnerships.

Apart from a small number of toll roads, which are discussed below, the nation’s road network is built and maintained at public expense. Travellers by road do not pay on a “per use” basis. In the interests of equity, why should not travellers on public transport have the same privilege?

Curiously, public transport systems are always said to be running at a loss, but nobody ever points out that on the same reasoning the road network actually runs up a substantially larger loss per person using it.

 

It would be much better to make public transport in all its forms – trains, trams, buses and ferries – free of charge to all their users and to cover their costs out of taxation revenue, in the same way as in the case of roads.

The provision of public transport should be regarded as a community service in the same way as, say, the provision of the police force – and not as a business to be run with the aim of making a commercial profit.

 Abolishing fares would also:

  • eliminate the considerable cost of collecting them
  • eliminate the additional costs of pursuing fare evaders
  • encourage motorists to abandon their cars, thus greatly reducing the amount of money that would otherwise need to be spent on the road network and on reducing congestion.

The provision of roads by private businesses under arrangements that authorise these to collect tolls from road users is another example of governments believing in smoke and mirrors.

Clearly, the cost to the community of such toll roads is much greater than the cost of equivalent roads provided out of loan funds raised by the public sector.

The operators have to recoup both the higher interest charges they incur as private sector borrowers and the costs of actually collecting the tolls. They also have to make a commercial profit.

The community in addition also incurs a hidden cost – that caused by pollution and the congestion on some nearby side streets as motorists seek to avoid incurring the tolls.

Because toll roads involve only a limited number of suburbs, the system also creates inequities between motorists travelling through these and those travelling similar distances elsewhere.

Sometimes suggestions are made to the effect that the Commonwealth should issue tax-free bonds to fund some worthwhile project, as that would enable a lower interest rate to be paid and thereby improve the viability of the project.

Such suggestions sound superficially appealing, but they should be strongly resisted. Investors would always seek out whichever of the taxable or tax-free bonds gave them the better after tax return and thus the higher total cost to the government issuing them.

However, the use of taxable bonds rather than taxation to finance the capital cost of major infrastructure projects that are expected to benefit the community for many years to come would make sense.

This would enable both the initial and the ongoing costs of such projects (including interest charges and capital repayments) to be spread over the lifetime of the assets concerned and thus as a matter of fairness to be borne by the generation benefiting from them.

Such bonds would be of interest both to Australian superannuation funds and to capital secure managed funds. They would also appeal to overseas investors wanting to take a position in the Australian currency.

If desired for marketing reasons, they could also be offered to the wider local public under impressive sounding names such as “infrastructure bonds” or “transport bonds” which could be listed on the stock exchange. However, the cynical professional investors on the market would no doubt regard them just as ordinary Commonwealth or state government bonds.

The Age
29 January 2008

© 2008 N E Renton AM 
194 Kilby Road
KEW EAST Victoria 3102

(Nick Renton is an actuary and the author of about 70 books.)

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