The issue of PPPs (public-private partnerships) has been bubbling along for almost a decade, but it has suddenly exploded, partly because of the fiasco with the Cross-City Tunnel in Sydney and partly because of a more general reaction against the string of bad deals that has been handed to the public in the process. I had a piece in the Fin a few weeks ago which elicited a very hostile response from Mark Birrell (former Kennett minister and now head of an industry lobby group). He quoted the British Auditor-general in favour of the British version (PFI), but as a subsequent letter-writer pointed out, some senior figures within the National Audit Office, notably Jeremy Colman, have been highly critical of the accounting for these projects, as have most academics who’ve looked at them.
Since then, there’s been a string of articles and media segments. The Australian, amazingly, has suddenly come out violently against PPPs. I just watched one on the 7:30 report with the redoubtable Tony Harris (whose recent piece has been reprinted at Troppo and also John Goldberg, a long-time critic of the traffic projections and tax arrangements in these deals. There’s some history from Chris Sheil over at LP. My column is over the fold.
Melbourneâ€™s Scoresby freeway project, now the Eastlink tollway, has caused plenty of grief to both sides of politics. Federal Laborâ€™s political woes of 2004 were worsened when the Bracks government announced, repudiating previous promises, that the project would be a toll road. Now Opposition leader Robert Doyle has been forced to abandon his own pledge to remove the toll.
Although Scoresby is commonly described as a $2 billion project, Doyle was advised that buying out the toll would cost at least $4.3 billion. The Bracks government published an even higher estimate, of $7 billion. Although the basis of these calculations was, as usual, not clear because of commercial confidentiality, it appears that the $7 billion is an estimate of the present value of tolls, discounted at the government bond rate, while the $4.3 billion is an estimate of the market value of the project, taking account of the additional risk borne by private investors.
This is not the first instance of this kind. The Carr government in NSW came to office promising to buy out a number of toll road contracts, but found that it was effectively impossible to do so, and had to resort to a complex system of compensating drivers. Undeterred, it has engaged in more toll road projects.
The most recent of these, the Cross-City tunnel, has been particularly controversial, since it has actually made traffic problems worse for many drivers. Apparently to protect toll revenue, other streets were closed when the tunnel was opened.
There are two major lessons in all this. The first, the consistent finding of many studies over the past decade, is that public-private partnerships are, in nearly all cases, an inefficient and costly method of financing network infrastructure projects such as roads. On top of the higher rates of return required by private investors to take risks that are more appropriately borne by governments, these projects typically involve substantial fees paid to financial intermediaries. The difference between the construction cost of projects like Scoresby and the figures quoted when considering a buyout of the toll is due, in large measure, to excessive financing costs.
Reliance on private funding for infrastructure was originally a method of getting around Loan Council restrictions on aggregate government borrowing. Despite some public disclaimers, it seems clear that the desire to deliver projects with the spurious appearance of no additional public debt remains a central component of the appeal of such public-private partnerships. In economic reality, a toll is a tax, and alienating a stream of tax revenue is exactly the same as taking on additional debt. The public is paying a high price to allow politicians to make spurious claims about â€˜zero public debtâ€™.
A more fundamental problem is that, in most cases, tolls are a perverse method of financing new road projects. The central aim of such projects is to shift traffic away from existing congested roads and onto the new roads, which are designed to have capacity for years into the future. The effect of a toll is to divert cars from the new roads to the old, congested routes. This is exactly the opposite of economically sound road pricing policy.
The need to collect tolls plays havoc with the design of the road system. Entrances and exits must be designed, not to smooth traffic flow, but to make toll collection easy.
The only sensible system of road pricing is one in which charges are based on congestion, not on the historical accident that the government was short of money when the road was commissioned. Motorists may object to paying for something they previously got â€˜freeâ€™, but the central lesson of economics is â€˜there ainâ€™t no such thing as a free lunchâ€™. What you avoid in explicit charges, you pay for in time spent in traffic jams.
One of the few politicians willing to learn the lessons of economics is London Mayor â€˜Red Kenâ€™ Livingstone, also notable as an opponent of the Blair governmentâ€™s partial privatisation of the London Underground. Drawing on the ideas of the great Chicago economist Milton Friedman, Livingstone imposed a congestion tax of five pounds on cars entering central London. The result was an immediate reduction in congestion and increase in average traffic speeds. And Livingstone remains highly popular.
The Bracks government has announced a review of Melbourneâ€™s transport problems, and foreshadowed its openness to radical policy options. Only one option has been ruled out in advance as too radical. You guessed it â€” a congestion charge.
John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland.