Anyone interested in the dark side as well as the benefits of PPPs should read this:
Henry Ergas, Senior Economics Adviser, Delloitte’s, in The Australian Oct 30, 2009:
EARLY this year (2009), Victorian Transport Minister Lynne Kosky locked away until 2058 all the documents surrounding the troubled construction of Melbourne's $700 million Southern Cross Station. Were transparency and accountability thereby eliminated? No, merely deferred, though if you want to see those contracts, you'll need to keep pretty fit.
Kosky's decision is, unfortunately, hardly unusual. It has become standard practice for Australian governments - and this holds true for the commonwealth's Infrastructure Australia - to hide from the public the detailed information that would allow any assessment to be made of large infrastructure contracts.
Nowhere is the trend more pronounced than with respect to so-called public-private partnerships, projects in which private parties takeresponsibility for financing, constructing and operating public-use infrastructure, in exchange forthe right to receive user fees andcharges.
While concession arrangements for toll roads and other infrastructure assets have existed since time immemorial, they were renamed PPPs in the late 1980s and have since become a primary means of financing mega-projects, with applications ranging from tunnels and desalination plants to hospitals and prisons.
The change in branding from concessions to PPPs is hardly innocent. A concession by a government to a private party of the right to undertake and charge for a monopoly asset has a clear negative connotation: taxpayers are giving up something that would otherwise rightly be theirs. Who, on the other hand, could object to a partnership, with all the sense of shared obligation that word implies? As with nation building, here words are being used not to assist understanding but to mislead.
For whether the contracts are indeed a partnership, and one that delivers net benefits to the community, is a question of fact, not ofform.
The crucial issues are whether the projects are worth doing and whether the concession contract provides the project outcomes at least cost to the community.
That PPPs could, in theory, help achieve these goals is clear. Two factors are involved.
First, because the parties financing the project need to recoup the costs they incur, projects need to be commercially viable. As a result, reliance on PPPs should reduce the scope for governments to pursue projects that are electorally popular but ultimately do little to improve community welfare. There should, in other words, be fewer boondoggles, lemons and white elephants littering the landscape.
That is why Adam Smith was a supporter of private roads. "When high roads are in this manner made and supported by the commerce which is carried on by means of them," he wrote in The Wealth of Nations, "they can be made only where that commerce requires them." As a result, "a magnificent high road cannot be made merely because it happens to lead to the country villa of the intendant of the province, or to that of some great lord to whom the intendant finds it convenient to make his court."
Second, as well as narrowing the range of projects selected, profit-maximisation should lead to projects being delivered more quickly and at lower overall cost, including through better management of project risks.
If PPPs delivered these outcomes, the boosterism of the PPP cheer squad could be readily tolerated. But the reality is far more mixed and, in many respects, frankly negative. To begin with, not even Smith was infallible, and on this point he was simply wrong. Smith's error lay in not envisaging the lengths to which governments will go to make projects that impose social losses yield private profits.
In the case of Sydney's Cross City Tunnel, for example, measures euphemistically referred to as traffic shaping were used so as to restrict the alternatives open to motorists, thus increasing expected patronage. The government, in other words, actually spent money degrading existing infrastructure so as to eliminate the competition the PPP would otherwise have faced.
Because there are myriad ways in which governments can create or entrench monopoly rights, increasing the profits that project sponsors can gain even from projects that would fail a proper cost-benefit test, the mere requirement of commercial viability cannot protect the community from poor project selection.
This is even more clearly the case when the government directly or indirectly bears the risk associated with project failure. In theory, those risks should largely be allocated to the project's financiers, if the benefits Smith pointed to are to be realised. In practice, governments are increasingly shifting those risks to users or taxpayers, including by financial arrangements that refinance large parts of the private financing before many of the project risks mature.
The result can be structures that allow socially undesirable projects to go ahead, provide few incentives for efficient operation, lock in inefficient user charges and all the other inflexibilities inherent in highly prescriptive long-term contracts, and leave taxpayers exposed to project risk, all the while shifting substantial profits to project promoters.
This, in turn, creates a political economy that is diabolical. Because PPPs concentrate the gains from major infrastructure projects (as part of those gains is now captured by the private "partner"), they increase the returns from rent-seeking. The rents are then shaded from public view by the claimed need for commercial confidentiality, with that confidentiality reducing the transaction costs of what amounts to cronyism, if not corruption. At the same time, the fact that the financing goes off the government's balance sheet relaxes (or, more properly, is widely but incorrectly claimed to relax) the public sector's budget constraint, thus allowing even more poor projects to be undertaken.
In short, everyone's a winner. The firms undertaking the projects get the rents. Governments get more ribbon-cutting opportunities, vocal support from PPP firms, lucrative jobs for their mates and welcome donations to campaign coffers. Only taxpayers and users suffer, but then again, ignorance is bliss. Little wonder that PPPs have proved increasingly popular with incompetent state governments and are now being vigorously promoted by the Rudd government. Full disclosure of all PPP contracts, and of the cost-benefit analyses underpinning PPP projects, is indispensable if these costs are to be averted.
There is no evidence that countries in which this information is disclosed suffer any penalties as a consequence: in fact, the opposite is true. Australian taxpayers and users have every right to know the terms on which governments contract and spend money on their behalf, and the fact that Australian governments - and now Infrastructure Australia - do not make such full disclosure is a disgrace.
Transparency is all the more important given the real infrastructure needs Australia faces, needs that are well documented in the report recently prepared for the Business Council of Australia by Port Jackson Partners. There is, as that report shows, a compelling case for infrastructure spending, but that spending needs to be efficient.
Deals made behind closed doors and contracts that are hidden from public scrutiny for decades to come will never achieve that efficiency goal. Rather, we need the full glare ofsunlight, and the sooner we get it the better.