In the Australian Financial Review, Thursday 11 June, there is an article by Damon Kitney (Eddington calls project critics to heel) in which he states:
Prime Minister Kevin Rudd has said he is a strong believer in PPPs as they free public resources to focus on other government services.
In the immortal words of Mandy Rice-Davies, he would say that wouldn’t he.
I have a much darker view of PPPs. I would prefer to regard them as a fraud perpetrated on the public for the benefit of the government of the day rather than the public that governments are purportedly elected to serve, and as a subset of all that fancy financial engineering that has brought the global financial and economic system to its current crisis and left us all shaking our heads at the state of our superannuation accounts.
I say “for the benefit of the government” because too often, no matter which government or political party we are talking about, the public resources that are supposedly freed up by PPPs are deployed to “focus on other government services” of the kind that serve as bribes to swinging voters – they certainly haven’t been used to reduce public hospital waiting times or enhance higher education or stimulate R&D.
Fraudulent because they are a very expensive way of raising investment capital for public purposes, in a way that commits the public to a continuing stream of payments (a current cost plus repayment of capital) but does not enter a loan onto the public account, and in some (but not all) cases also enables the government to commit the public to these payments without it looking like a tax.
Consider user pays infrastructure like toll roads. The cheapest and most equitable way for governments to provide new roads is to borrow the money, construct and maintain the roads, and let all users of all roads contribute to the repayment of the costs through their tax payments. Cheaper because governments can borrow money more cheaply, and more equitable because the current system for PPP roads condemns some users to pay for a particular stretch of road that they use while others get all their road use for free.
As for the deals that provide infrastructure for the core purposes of government, these are a massive fraud, a loan in all but name, and an expensive one at that. The Howard Government sold about $1 billion worth of government-owned real property assets between 1996 and 2001. As a report on this sales program by Ian Scarman, Professor of Finance, School of Commerce, University of South Australia, and Rob Kooymans, Lecturer in Property in the same school, demonstrates, many of these buildings were sold and leased back, with secure long-term Federal Government occupancy leases attached. There was considerable debate about the financial logic of these sales at the time, and a subsequent Australian National Audit Office report was very critical about both the logic and effectiveness of the process.
Scarman and Kooymans construct a case study of the sale and lease-back of the RG Casey Building, the DFAT headquarters building, which shows how the taxpayer got both a poor deal and exposure to various kinds of risks that would not apply if the Commonwealth retained ownership of the building – for example, in a building with poor energy efficiency, the landlord recovers energy costs and so has no incentive to improve the energy efficiency; DFAT simply has to pay, and can do nothing to improve the situation because it does not own the building. The agreed rental was assessed by ANAO as being 12% over market at the time deal was done, and there were other attributes of the deal which indicate that the project was fattened up for sale.
These points are compelling, but I would make an additional point. These buildings were already owned by the Commonwealth, and were required by the Commonwealth for a clear and continuing public purpose. To sell the building, bank the cash and provide a long-term commitment to lease it back from the buyer is as about as close as one can get to borrowing money without having to record it as a loan in the national accounts. As a means of “reducing debt” it is quite fraudulent and borders on the corrupt.
Similar considerations apply to purpose built PPP buildings that are for quintessentially public purposes, such as Defence’s Headquarters, Joint Operations Command at Bungendore. There is no loan on the Commonwealth’s books but Australian taxpayers will have a continuing stream of payments to amortize the capital, pay for the financing costs and provide a risk-rated return to the provider. Add up all these payment streams for all of the stock of PPP-type projects and there is a significant element of our annual taxes that will be going to cover them, just like paying interest on public debt. What is the point of being “debt free” if there is an ongoing obligation to pay rising rents on assets we once owned?
For my money I would rather have public assets owned by the government that operates them, having been paid for by loans which we can all see and understand.
And what self-respecting country would not want to own its foreign ministry building or the operational headquarters of its defence force?
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