..$223 million. In this instance the private sector will be responsible for finance, design, construction, and maintenance of the new schools over a 25 year period longer than the standard mortgage. The State will retain school ownership and responsibility for delivering educational services. Curious, you would think, given that the government has been building schools for over 100 years?
The current PPP problem has its roots in the fact that the investment community of bankers and superannuation funds are afloat with liquidity thanks to both compulsory superannuation and that central banks around the world are printing money – quantitative easing is the euphemism – and that bank interest is at pretty much zero in an attempt to stimulate the corpse of economic growth. As Australian government bond rates are not attractive, being well under 3%, there is a great push to persuade governments to give returns of up to twelve percent because they have been persuaded that they should maintain their AAA credit ratings by not going into debt. Hence the rise and rise of the PPP as it’s apparently not really debt in straight accounting terms. It does mean however mean billions of dollars in recurrent expenditure are stretching generations into the future.
However the initial phase of flogging the Victorian silver started as a by-product of Reagan/Thatcher economic policy which was heavily influenced by monetarist economics. Post 1994, the Kennett government disaggregated, corporatised and privatised the State Electricity Commission (SECV) raising the not inconsiderable sum of $22 billion. Some of the investments were wise, others best characterised as expensively whimsical by the corporate sector, but the ends result has been rapidly rising consumer prices (100% in five years) at the same time that demand has been falling. The profit from the sale of electricity now goes into private pockets rather than government coffers and the state has little or no control over technology investment – except a need to keep obsolescent technology operationally viable.
To make matters worse the financial constructs around many of the asset sales are masterpieces of aggressive tax minimisation - fancy trust structures, stapled securities, and related- party transactions with overseas entities - that have meant that minimal revenue has flowed to the any Australian government. Mind you the merchant banks that advised both sides of the deal laughed and strolled into the sunset pocketing their millions as they went.
But back to the arcane world of the PPP and why one should, apart from minimising infrastructure borrowing, let private industry finance, build and often operate government projects. Well you would only do it if it were cheaper and there is a mechanism for determining whether it is – the Public Sector Comparator'' (PSC). Let me quote Kenneth Davidson, the noted economic writer..
“Under the national public-private partnership guidelines used by the Victorian government, a so-called Public Sector Comparator (PSC) is constructed to give a ''truer'' basis of comparison between public and private funding of projects. “
That is, in an ideal world, a PSC should allow an economically rational choice between PPP schemes and traditional procurement methods.
“The key assumption in constructing any such comparator is the claim that the actual interest paid by the government underestimates the real cost of public financing. These costs include claimed inefficiencies inherent in government contracting - such as cost overruns. Other assumptions include the claimed ability of private partners to take over ''risks'' otherwise embedded in public ownership.”
Note also that that ‘the responsible parties for the PSC are not “neutral” but are “interested players”. In fact, consultants or public servants actively involved in the PPP programs often perform these calculations, and therefore, they are interested in the development of these projects. One might establish a parallelism with the optimism bias that takes place in most traffic forecasts in highways or consumption estimates in drinking water projects. Strange that no project, no matter how patently financially unstable ever gets knocked back – there is always a creative way to spin the figures to the desired outcome.
As you may know all government contracts are gazetted so that we the public can know what is being done in our name. So I looked at the latest contract for the Ravenhall Prison complex which GEO Consortium will design, build, finance, operate and maintain a new medium-security men’s prison to be located in Melbourne’s west. On land the government already owns in a state with an ever growing prison population - an “extra 1200 offenders have entered the prison system in just the past two years” . Prisons are good business. Prisons are a growing industry. The contract is worth around $2.5 billion in today’s dollars ($6.3 billion in to operate over its 25 year lifespan. Pages and pages of well contracted detail missing only the vital information relating to finances. Strange that even though very high level figures are available . We know that the comparator cost $148,500 to produce via CDL & Associates Pty Ltd, a Melbourne-based consulting firm and that there was $203 million in transferred’ risk to’ the consortium. Curiously the financial risk to the consortium would seem rather standard for any building project and rather minimised as it appears as if the state pays ~60% of the construction cost at build completion.
What I can’t see is (a) why the government just doesn’t tender normally to build the prison as this is not a risky building project (b) why it is a 25 year bundle for build and operate and not even 5 or 10 years. This isn’t income it is an perpetual annuity where most of us will be dead by the time the contact is over.
But if we look at the actual risk on previous PPP projects we find that private industry somehow manages to dodge the bullet.
In the case of the Royal Children's, the financial position of the project syndicate was improved when the government-owned Victorian Funds Management Corporation purchased $1.2 billion of bonds, the Children's Health Partnership, in 2007. The VFMC also2008 took "small interests" in debt issued by two other Victorian public-private partnerships, the Royal Women's Hospital and Southern Cross Station worth $44 million and $3.2 million in the Southern Cross Station. So the risk went back to the government.
On the most charitable estimation the jury should be coming back into the courtroom after a brief deliberation given an arrangement that is dependent upon the allocation of normal risks and the cost of money. There are occasions where it might be advantageous for Private Public partnership but if one looked at Victorian examples you might say that they either shouldn’t be done or not done with the mindset of a callow virgin in a cathouse.
Why do governments do this?
The kneejerk reaction is corruption but this isn’t usually the case (despite the many examples of pollies caught with their hands in other people’s pockets in NSW) and even despite the surprising number of ex-government ministers finding themselves lucrative jobs in the private sector. One can chortle along with Alan Stockdale, at one stage Victorian Minister of Finance and the man largely instrumental in facilitating the break up and sale of the Victorian Electricity Industry finding gainful work within the Macquarie Bank Ltd, as Executive Chairman, Asset & Infrastructure Group, as well as the other similar positions in other companies.
Firstly you have to remember that State Treasury officials are generally economists trained in the current university non-Keynesian beliefs with an emphasis monetarism, small government and the mythical efficiency of the free market. This is where ministerial advice comes ably supported by many right-wing think tanks like the Institute of Public Affairs.
But sadder than that is that most pollies, a group that generally want to be loved and respected more than most, can be corralled with flattery and the occasional seat at the big end of town. We will be saddled with 25 years of payouts for their five minutes of fame.