Unhealthy partnerships

Paying for PPPs
Paul Fitzgerald

A fiscal vice has reduced capacity for government to invest in long term infrastructure. It requires most capital investment in infrastructure to be amortised over the political cycle, rather than as a capital asset amortised over the life of the asset, which in the case of major infrastructure can be over 50 years. Public private partnerships (PPPs) have emerged like a goose laying the golden egg because they are being promoted as the most effective and efficient way of bringing new resources to bear in the provision of infrastructure - both soft and hard.

Failure to mobilise resources and direct them into public infrastructure will constrain economic opportunities and impact upon Australia's competitiveness and sustainability. We have benefited from the long term investment made in the past. We cannot do this indefinitely without new investment.

There is a strong case to review the current fiscal imbalance that exists between the three tiers of government in Australia. Demand for better quality services and infrastructure is clearly felt at the local and state level. Yet it is the federal level that has the principle means of addressing these shortfalls.

In addition to the currently fiscal imbalance there has arisen a policy imbalance. With the notable exception of the Auslink Paper, little strategic consideration has been given by the federal government as to how the priorities of state and local government can be facilitated. The debate is essentially about overall quantum and levels of financial responsibility, and not the development of adequate facilities and finance policy initiatives that could facilitate state, local and federal government meeting it's obligations.

However, as efficiency and effectiveness are measured in the short term, PPPs in many circumstances can produce long term inefficiency and ineffectiveness. For example, many PPPs have inflation indexed payment clauses allowing for increased charges to be applied in line with inflation - something that is highly possible in the near future. From an economic point of view, the long term costs can be significant to the community. Public assets such as the Mater Hospital can be given away in return for a short term gain. Little regard is paid to the eroding effect of such a decision or the willingness of people to invest in their own infrastructure. Mater Hospital was not just built upon public funds but community goodwill and funds raised from the local community. This vital element of mutual responsibility is destroyed by the decision to effectively hand over a public asset to a private investor in return for short term gains.

The question that is usually raised here - faced with a declining quality of infrastructure - is where can the funds come from?

The PPP model is an alternative to short term government goals of zero debt and seemingly accelerated capital works programs to meet the increasing demand for better infrastructure. But like the 18 year old who finances a new car with no deposit and high interest rates - we pay.

Other options have been designed to facilitate the crucial growth of new infrastructure. Infrastructure investment has over the past 25 years has been significantly reduced as a percentage of Gross Domestic Product. We are currently living on the dividend created through long term investments made in the past.

This is not a radical view. The Allen Consulting Group analysed the main methods for financing public infrastructure for the Property Council of Australia. The most efficient was the provision of infrastructure through government raised debt. PPP ran a poor fourth place from the options available in Australia. This is a crucial point because the level of finance innovation in government in Australia is extremely low if compared to other countries. When combined with the control exercised by the federal and state government on each other, and in turn over local government, combined with the fiscal in balance of the federal government, it is understandable that the supply of funds is not meeting community and economic demands. There is a concept of productive debt to fund key economic and social infrastructure. No one is suggesting funding the recurrent deficit through debt.

Other comparable OECD countries have addressed the problem of funding in more equitable, creative and efficient ways.

We stand out as having one of the lowest debt ratios in the world, five times lower than most European countries and six times lower than the USA.

High priority road infrastructure development in the USA since 1992 has been facilitated by federal legislation that underwrites local county and state governments bond issues based on anticipated future federal funding. The risk is extremely low yet local priorities can be addressed more quickly.

Housing mortgage costs have been contained to a large extent by two federal corporations which securitise and refinance low to medium cost housing mortgages at no cost to the federal government on the secondary mortgage market.

Alternative energy infrastructures have been funded through low start loans made by the federal government limited to future earnings.

Since 1977 the Community Reinvestment Act has made financial institutions accountable for investing in so called "red lined" districts in the areas of housing and unemployment - at no cost to government.

Meanwhile the debate in Australia has become log jammed in the conservative paradigm of no debt, prudential regulation over facilitation, no new bureaucracy, markets being able to supply the needs of the community, user pays and that low tax will lead to greater investment.

Meanwhile we travel the potholes of substandard roads, ride trains that cannot reach the maximum speed and wait five hours in a hospital emergency ward.

In conclusion there is a compelling case for looking at alternative strategies for funding the increasing shortfall in soft and hard infrastructure that, unlike many PPP's, are effective, efficient and equitable.

Paul Fitzgerald is a Director of the Strategic Economics Group, a Sydney based applied economics consultancy specialising in the social and economic impact of economic and industry policy at local and international levels. He is also the Deputy Director of the Australian Centre of Co-operative Research and Development based at the University of Technology Sydney. This is the text of his address on the launching of The state of the states 2004 at Sydney's Vibe Hotel on Tuesday 26 October.

See also:

Progressive punishment?, by Mark Findlay



Suggested citation
Fitzgerald, Paul, 'Unhealthy partnerships', Evatt Journal, Vol. 5, No. 1, February 2005.<https://evatt.org.au/news/unhealthy-partnerships.html>