Public–private partnerships have turned out to be an expensive way of plugging infrastructure gaps, writes Nicholas Gruen in an article published in Inside Story, 23 November 2010 (see here). He says, inter alia:
... the glories of unburdened balance sheets have been purchased at the cost of growing deficits in precisely the thing that higher government debt might have funded – infrastructure. Partly filling the gap has been private investment in some kinds of infrastructure, funded by tolls on roads and/or rent payments by government to investors. While superficially attractive, and almost certainly better than no investment at all, most of these public-private partnerships, or PPPs – in all manner of infrastructure assets, from roads and railway stations to hospitals and desalination plants – have been built at a higher cost to the public than would have been the case if they had been built the way they used to be, as government-owned assets built with debt finance.
and concludes:
As Kristina Keneally prepares for political oblivion, and John Brumby sweats it out wondering if he’ll get back in, it’s possible that the penny might drop. They should ponder this fact. Had New South Wales or Victoria funded the tollways that now thread their way through Melbourne and Sydney, those governments’ net worth would be billions higher with millions rolling into their budgets each year and debt attributable to the roads steadily falling.
To me Gruen’s article clearly demonstrates that governments need to get back into the investment business. The full article well repays a careful read. Access it here).
I had another of those “here we go again” moments when I read here in yesterday’s Weekend Australian that the Agriculture Minister, Joe Ludwig, is going to fast track a review of a pilot scheme for drought assistance that is currently under way in Western Australia.
The aim is “to force farmers to improve business models rather than simply rely on interest rate subsidies and cash payments” and thereby “reduce drought assistance payments to farmers the next time the nation is gripped by crippling drought”.
The article quotes Executive Director of the University of Adelaide's Environment Institute Mike Young as saying that taxpayer-funded drought assistance schemes need to be overhauled.
"The rationale to going to (drought) preparedness is to create a level playing field between those who do preparation and those who don't," Professor Young said.
"One of the biggest criticisms is that the previous approach created policy-induced drought.
"People who otherwise would have conserved feed, put funds aside to carry them through a drought, decided instead not to do that, to go for assistance in times of hardship."
All very well and good, but we have been around this track before. When I was Secretary of the Department of Primary Industries in the first two years of the Howard Government (1996-97), under National Party Leader John Anderson, we undertook as a high priority a thorough review of drought (and other natural disaster) assistance policy with the aim of putting it on a more business-like footing. The philosophy, strongly backed by John Anderson, was that people in the farming sector had to understand that as far as the Federal Government was concerned farming is a business, not a lifestyle choice, and the aim of policy will be to shift much more of the responsibility for risk management from the taxpayer to the individual farming enterprise.
One of our particular targets was to get rid of interest rate subsidies, which were seen (correctly) as thoroughly bad policy – the most assistance goes to the most indebted farmers.
Many smart people worked on the new policy framework for many months, and when finally Cabinet signed up we and all the troops had a cup of tea and a sticky bun in the office to celebrate. We had got some good policy up, we had really made a difference.
That difference lasted about five minutes. If memory serves, not long afterwards there was a flood in the Namoi Valley. John Howard put on that ridiculous Akubra, his moleskins and his elastic-sided boots and went up to Narrabri or somewhere to get himself on television looking caring and concerned. A farmer gazing out over the flooded fields looked him in the eye and said, “Mr Howard, we are going to need an interest rate subsidy to get through this”, to which Howard responded, on the spot, “Done!” And so months of work was blown away in an instant.
I had another such experience when I was Secretary to the Department of Defence. I was involved in the first face to face meeting with my PNG counterpart since Sandline, so this was an important meeting and we were keen to re-establish an appropriate defence relationship with our nearest neighbour. This necessarily involved getting the Australia-PNG Defence Cooperation Program back onto a sound footing.
When we came to discuss this my counterpart (whose last assignment had been Deputy Secretary to the PNG Ministry of Finance) requested Australian financial assistance for uniforms and rations for the PNG Defence Force.
I responded that I did not think it appropriate for PNG to be dependent upon us for such basic running costs as feeding and clothing the troops. I noted that there were funds in the PNG defence budget to pay for various capital works and for training, and said that we would be prepared to fund some of this expenditure to free up funds from within the budget to enable the PNG Defence Ministry to pay for uniforms and rations itself. It wasn’t about the money, I said, our main concern was to get the principles right. I said that part of the deal would be that my counterpart would have to persuade his former colleagues at the Finance Ministry not to respond to our funding by withdrawing funding from the PNG defence budget. All this was amicably agreed.
Only a few weeks later John Howard went to Port Moresby to meet the new PNG Prime Minister, Sir Mekere Morauta. During their meeting, Morauta said to Howard words to the effect, “Mr Prime Minister, we need your financial assistance to pay for rations and new uniforms for the PNG Defence Force”. “Sure, no problem”, replied Howard, so we ended up paying for the rations and uniforms as well as the capital items and training, and were no further forward with putting the Defence Cooperation Program on an appropriate footing.
The underlying problem with both of these episodes was that Howard’s style was Presidential, not Prime Ministerial. He was the boss, not primus inter pares leading a group of colleagues in Westminster style Cabinet Government, and so could decide things on the spot.
The great strength of Cabinet Government is that, when it is working, it is systematic and orderly, everyone with a stake in the issue is consulted before a decision is made, and when a decision is made it sticks unless Cabinet decides to change it. It sounds unexciting, and often it is, but it offers the prospect of erecting and maintaining a coherent framework of public policy. The Cabinet colleagues are important not just because they are senior people in the Government, but because they represent at the Cabinet table important domains of Government policy and administration that need to be considered every time a decision is made.
We lost the art of Cabinet Government during the Howard era, and don’t look like getting it back. Rudd had no idea, Gillard thinks she wants to run proper Cabinet processes but neither she nor anyone around her has any idea what they would look like because it is so long since they have been tried that the institutional memory has all but vanished.
The following letter to the editor by Andrew Farran on the proposal that Parliamentary approval be required for the deployment of Australian forces overseas was published in The Age on Saturday 23 October 2010:
The Editor,
'The Age'
Dear Sir,
The private members Bill now before Parliament that would require prior Parliamentary authorisation before Australian troops could be deployed in armed combat abroad is opposed by the major parties essentially on two grounds. First, because of secret intelligence and diplomatic contacts the Executive would know best and should be allowed to commit the troops regardless. Secondly, because critical decisions about war could be left in the hands of just a few people in one or both Houses (i.e. minority parties and independents).
One would think, when it came to war, that if the issue were not sufficiently clear cut to warrant bipartisan support the case for deployment would be weak, and being so, not worth risking the lives of troops in combat. If the issue were clearly divisive then justification on national interest grounds would need to be demonstrated and assessed in the Parliament. In anticipation of a situation where the two Houses might be deadlocked, a requirement for a Joint Sitting in such cases should be considered and submitted for Constitutional amendment.
In the light of contentious deployments to Vietnam, Iraq and Afghanistan, the case for Parliamentary debate and approval before future deployments, other than in circumstances of extreme national emergency, has already been made.
I attended a meeting at Melbourne University today and rather than take my car I decided, as I usually do, to catch a train to Melbourne Central and a tram to the University.
At a little after 8.00 am the train pulled into the station, the doors opened, and I was confronted by a wall of bodies. How, I wondered, am I going to get in here? No doubt the woman standing alongside me was wondering the same thing. Miraculously, while we were wondering, a couple of people managed to haul themselves through the crush and emerge from the train, so we were able to board.
At Armadale a couple got off and a couple got on. At Toorak, a couple got off and about six got on, don’t ask me how. By this stage there was a large number of people standing on the train without any possibility of holding on to anything, so if the train stopped suddenly they would all be thrown to the floor.
When the train stopped at a very crowded Hawksburn station, there were about eight people standing where our double doors opened. They didn’t even attempt to board the train. Nor did they look surprised, they all wore a look of dull resignation. This is their daily lot, clearly.
At South Yarra there was a major one for one exchange of passengers. A lot of people get off at South Yarra, but a lot of people get on. Some of them didn’t make it.
The same story at Richmond. The woman with the child in a stroller didn’t make it of course, how would she fit the stroller into that crush?
The unlamented former Minister for Public Transport, Lynne Kosky, was wont to say cheerfully that this crowding was a sign that the Government’s public transport policies were working (“everybody wants to catch the train”, presumably). I would take it as yet another sign that the public transport system is a shambles. And the Government has the hide to bash up the new operator, Metro, for poor performance with on-time running. The process of loading and unloading such crowded trains is so desperately slow that trains cannot hope to run on time.
Two more comments:
- Either the level of crowding is dangerous or the signs that say “Do not lean on the doors” are not required. We regularly see people forced by the crush against the doors which are not supposed to be leant on, with a considerable weight of bodies behind them.
- If we were really serious about the threat of terrorism we would not present such juicy soft targets as railway carriages packed with people. In Berlin, where the U-Bahn runs every couple of minutes, the carriages are lightly loaded, with a consequent reduction of the risk of a major casualty incident.
This morning I had a series of conversations with my local electricity retailer, AGL, which left me wondering whether to find a stray cat to kick or a tall building to jump off.
The background is that yesterday I received an electricity bill for the three months ending 30 November which, nothwithstanding being for a smaller amount of electricity than the three months ended 31 August, was going to cost me more than twice as much. It was covered by a letter from AGL which advised me of a “rate structure adjustment”:
Previously you were charged two different rates, one rate for your peak consumption and one rate for your off-peak consumption. The off-peak rate is only applicable to dedicated off-peak appliances such as off-peak hot water or slab floor heating. As our records indicate that you do not have a dedicated off-peak appliance, you are not eligible for the off-peak rate, therefore we have removed this. The setup has now been amended so that all of your consumption is being billed at the single rate and this was reflected in your previous bill. If you think that you are eligible to receive the off-peak rate as you have a dedicated off-peak appliance, please call us and we will facilitate the change with your Distributor.
The letter acknowledges that “unfortunately you were not notified before the change occurred”.
This letter led to the following five telephone conversations over the course of two hours, a great deal of which was spent on hold:
(1) I rang AGL customer service and told the customer service officer that I did indeed have a dedicated appliance (slab floor heating) and that if she consulted my previous bills she would see that most of my electricity usage was off-peak. She looked up my file and told me that the real problem was that our home did not have the right kind of meter to measure off-peak. I protested that it did and that they had been charging me an off-peak tariff ever since they became the supplier. She said that I had a “two peak meter”, not an off-peak meter, and accordingly AGL had really been undercharging me all this time. If I wanted to be eligible for an off-peak rate I would need to contact the distributor and have an additional meter fitted.
(2) I rang the distributor, United Energy, and was promptly assured by the person I spoke to that our home had the correct meter installed for off-peak pricing and that there was no need for an additional meter. He went on to say that United Energy provides bulk electricity to the retailers at a single price; the structure of their pricing and who is eligible for what is between them and the customer.
(3) I rang AGL customer service again and after several long consultations between the customer service officer and his supervisor, was told that I really did need to have a different kind of meter installed and accordingly he was going to switch me through to the connections department who could advise me on the next steps. I protested that I did not need to speak to the connections department because the distributor had assured me that I had the right equipment installed. He insisted that I really should speak to “Connections” and after a conversation with them, switched me through.
(4) I had a long conversation with a woman in the connections department, who consulted her supervisor and someone else, and finally came back to me to say that I could tear up that bill and they would be sending me a new bill based on the peak/off peak pricing that had applied previously. Problem solved.
(5) Well, not quite. About ten minutes later the woman rang me back to say that everything she had told me was completely wrong and the fact is that AGL is not giving anyone an off-peak rate pending roll-out of the new smart meters – everyone is being charged the peak rate for all electricity use.
Some observations and questions:
(1) Between the letter and the telephone conversations AGL gave me three different reasons for not giving me an off-peak rate: I did not have the right kind of dedicated appliance; I did not have the right kind of meter; well, actually, we don’t give anyone an off-peak rate.
(2) In public policy terms, why would we want to abandon the longstanding practice of encouraging households to shift their electricity demand to the period of lowest demand on the system. I actually asked one of the AGL people to confirm that it would be alright by them for me to reset the clock on my floor heating so that it comes on during the daily peak. “Yes”, she said brightly, “you can have it come on at any time you like”.
(3) There must be something offensive under the Trade Practices Act about changing the published price after the service has been provided. In the new environment of deregulated electricity prices I cannot do anything about the price of future services, but the retrospective hit is pretty rich.
(4) Clearly no-one at AGL customer services has any idea what they are talking about. So much for the wonderful new world of privatised utilities.
The Friday 16 October edition of the Australian Financial Review advises us of some of the highlights of the Australia Post Annual Report, which was tabled in Federal Parliament the day before:
Australia Post has suffered a 40 per cent drop in net profit as it argues the case with the Australian Competition and Consumer Commission to increase the price of basic postage stamps from 55¢ to 60¢.
The government-owned enterprise’s annual report tabled in federal parliament yesterday revealed a net profit of about $260 million in 2008-09, as revenue rose by just 0.5 per cent to $5 billion.
...
Letter volumes fell by 4.1 per cent and the number of delivery points grew by 200,000.
...
The corporation has sought to offset the ongoing decline in traditional letter volumes by diversifying its revenue streams.
Revenue in its parcels and logistics business rose by 2.5 per cent, while agency services and retail products grew by 3.2 per cent.
Some observations:
(1) The association of a 40 per cent profit drop with a 4.1 per cent drop in letter volumes sounds to me as though Australia Post is remarkably dependent upon the monopoly part of the business, the part that the Government prevents anyone else from entering, and which finances for Australia Post a huge infrastructure that it can use to attack private operators in other parts of the postal and logistics business.
(2) Whenever anyone pats themselves on the back for revenue growth I want to ask what was the contribution to profit. This is an important question when so much of Australia’s profit comes from the letter mail part of the business, which is sheltered from competition. Just how profitable are the parcels and logistics businesses that compete with the likes of TNT and DHL? Could it be that these parts of the business are cross-subsided by the letter business and the infrastructure it supports? Let us all hope that the ACCC takes a good hard look at that question before it inflicts a rise in the letter rate upon all of us.
A statistic that should be taken with a grain of salt:
Australia Post said that it had met or exceeded its community service obligations including the delivery of 95.5 per cent of domestic letters on time or early, against a target of 94 per cent.
Apart from the fact that a benchmark which permits about one letter in sixteen to be delivered late is hardly a stretch goal, there is the small matter of letters delivered to the wrong address. I get enough letters delivered outside the time parameters (and we are talking Sydney – Melbourne here) and spend enough of my time wandering around the suburb popping wrongly delivered mail into letter-boxes that may not even be in my street, to know that this statistic is hogwash. How would they gather statistics on the percentage of mail delivered to the wrong address? Or doesn’t that matter – as long as it is delivered within the time parameters somewhere, anywhere, it counts as a letter delivered on time?
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?
