One of the big questions about Public Private Partnerships is what happens, when the deal needs to be renegotiated in some way, 10, 20 or 30 years after it was signed. This story about changes to an interchange affecting CityLink in Melbourne is of interest. The deal is being financed in part by replacing some payments due to be made by Transurban (the Citylink operator) with a smaller upfront payment. The financial arrangements are too complex to permit a clear assessment, but one point is striking.

Last year Transport Minister Peter Batchelor said the Government wanted $200 million for the upgrade. Transurban said it wanted to pay only $150 million – the eventual figure.

So, starting with a a $50 million gap between the initial positions, Transurban got the whole $50 million and the public got nothing.

Related to this is an interesting kerfuffle over the Scoresby (Mitcham-Frankston) motorway. As many will remember, the Bracks government initially promised not to impose tolls, then reneged, copping a lot of flak in the process. The Opposition leader, Doyle, has promised to renegotiate and remove the toll. This has presented the Bracks government with interesting incentives. Usually governments involved in PPPS want to stress what a good deal they have got for the public, in terms of the toll revenue that has been promised the private ownership. But now the situation has been reversed. Faced with Doyle’s promise, the government and its agencies commissioned a PwC report[1] which said that scrapping the tolls would cost $7 billion, with a cost of $4.5 billion for buying out the project. By contrast, construction cost is about $2.5 billion plus “other financial costs” of $1.3 billion.

It appears from these reports that the value of the tolls that have been alienated is nearly three times the cost of building the road[2]. Of course, the government’s report has been produced under pressure to make the repurchase option look as unfavorable as possible. But then, the vast majority of published analyses of PPP projects suffer from the opposite bias.

What’s even more striking about this is that, in PPP circles, the Mitcham-Frankston project is being touted as a huge success, evidence that we are finally getting these things right. Something does not add up here.

fn1. The conclusions have been released, but the interesting bits like the traffic projections are, as usual, commercial-in-confidence. At least, when I asked for them, that’s what I was told.

fn2. Using the $4.5 billion buyback cost and accepting that some of the “other financial costs” would be incurred under standard procurement would give a less extreme result. But the $7 billion number is the one the government has been touting.

The Economists’ Voice has printed a comment by Thomas Grennes on my article on the US trade deficit. The abstract

John Quiggins’ article, “The Unsustainability of U.S.Trade Deficits” ignores the gains from international borrowing and lending and the gains from trading according to comparative advantage.

isn’t very informative, but he mainly argues against the idea of a zero current account deficit. Grennes misses my point fairly comprehensively. Here’s my draft response

Thomas Grennes’ letter ‘Neither Borrower nor Lender Be’, in response to my article on The Unsustainability of the US Trade Deficit illustrates my observation that ‘much analysis confuses the current account deficit and the goods and services deficit’. As stated in the summary, ‘Although substantial current account deficits can be sustained indefinitely, large deficits in goods and services trade cannot be. Even to stabilise the current account deficit, the United States must restore balance in goods and services trade within a decade or so.’ Grennes ignores this, and focuses entirely on the current account balance.

Grennes suggests that ‘a zero current account balance implies neither borrowing nor lending, and a zero balance appears to be what Quiggin advocates.’ In fact, I examine the adjustment needed to stabilise the current account at its current (historically high) level of 5 per cent of GDP, and show that this requires a fairly rapid return to balance or surplus on the trade account.

Even in the world of web-based journal publishing, it will probably take a month or two for this to get through the publishing process, so comments and suggested improvements are most welcome.

For twenty-five years or so, the privatised pension scheme introduced in Chile under the Pinochet regime by his labour minister, Jose Pinera, has been touted as a model for the world to follow. It’s been particularly influential in the US debate over social security privatisation but has also had some influence in Australia, which has a somewhat similar setup, though we arrived at it by a different route – Chile scrapped its defined-benefit state pension scheme, keeping a basic safety net, Australia started with a means-tested flat-rate pension, but has tried to expand private superannuation since the 1980s

Now the New York Times reports that the Chilean scheme is not delivering the promised benefits . Lots of people are getting less than they would have under the old scheme and large numbers are falling back on the government safety net. Fees have chewed up as much as a third of contributions.

Why has this bad news taken so long to emerge. Complaints about fees have been around almost since the start, but right through the 1980s, they were ignored becuase investment returns were exceptionally high. This in turn reflects the fact that Pinera had the good luck or good judgement to start the scheme when the stock market was at an all-time low, thanks to a financial crisis (in retrospect the first of many cases where financial market darlings got into trouble). The economy recovered and the stock market boomed. Once gross returns fell back to normal levels, the bite taken out by fees became unbearable.
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