Home > Economic policy > Victoria’s PPP that lost two of its Ps

Victoria’s PPP that lost two of its Ps

November 26th, 2008

I couldn’t go past this neat headline on a piece by Michael West in the Age . The central point is that the impending failure of both financier Babcock and Brown and bond insurer FGIC will leave the Vic government holding the risk on a PPP hospital project. Money quote

Maybe the Government ought to have issued its own bonds, with a state guarantee and consequent cheap funding cost, because this now looks like a PPP that lost two of its Ps.

That’s what I thought at the time.

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  1. Socrates
    November 26th, 2008 at 10:43 | #1

    Sad for the taxpayer but I’m not surprised. PPPs are one of the great scams of our time. Most of them are pure marketing hype. I have been involved in review teams for 7 PPP projects over the past decade. Not one could be shown to pass the fvalue for money test for government (saved money on whole of life basis vs conventional procurement) yet two proceeded as PPPs. The only real motives for them are hiding debt (off balance sheet) or a zero sum game where the PPP authority saves tax but at the (greater) expense of Federal tax revenue. As this case shows, the risk is rarely transferred, while costs are always higher.

    The standout example is Queensland – they used QITC savings to fund their motorways and have made a very tidy profit on them, without paying a financier lots of fees. On some PPPs I have seen, proponents wanted as much as 6 to 8% of the capital just to arrange (not supply) the finance.

  2. November 26th, 2008 at 11:53 | #2

    As US Air Force Lieutenant Colonel (retired) Robert Bowman so eloquently put to a recent meeting hosted by the Cincinnati 9/11 Truth movement:

    “Our problems are not due to incompetence or inexperience or a government which is too big or too small. We have these problems because those in government no longer serve us. They server their corporate masters and benefactors and have deliberately chosen policies which harm our nation and its people.”

    As in the US, nearly all of our political leaders see their role not as serving the public, but rather to help the corporate profiteers who bankroll their re-election campaigns to ransack public assets and the public purse.

    PPP’s are but one of many means to achieve this.

    The dogma of economic neo-liberalism, peddled by a number of contributors to this site is no more than the ideological justification for this theft.

  3. November 26th, 2008 at 12:02 | #3

    Oh, maybe we can hope (fingers crossed) that the lightbulb will finally go on in politicians’ heads – I’m thinking of the Brumby Vic government particularly here – to scrap PPPs.

    Or not.

  4. carbonsink
    November 26th, 2008 at 13:01 | #4

    Michael West rocks.

  5. Will
    November 26th, 2008 at 18:42 | #5

    One argument for the other side. Once a project is taken down the PPP route, its scope and cost are fixed and cannot be changed. If done as normal public procurement, then there is always scope for politicians to meddle and costs/scope to blow out. There’s nothing more costly than variations to a construction contract, especially variations that are designed to buy votes.

    In any event the discussion may all a bit of a waste of time because there couldn’t be too many PPPs done for a while anyway. There’s no funding for them. The wrapped bond market is gone, possibly forever, and banks are now going to find it very tough. The loans of 25yr+ plus tenors at 90%+ leverage and margins less than 1%, that made the PPP model work, may not be seen again for a long time, if ever.

  6. Socrates
    November 26th, 2008 at 21:47 | #6

    Will

    That sounds good in theory but in my experience isn’t true in practice. As this Victorian example shows, there are essential services for which governments can’t offload the risk. They shoudl never be PPPs.

    There are many examples of PPPs where if they go bust the government does pick up the tab. Examples include Victoria’s previous PT privatisations. The worst example would be British Railtrack, where the final bill was some 8 billion pds higher than the comparitor (non PPP) cost.

    The point that there may not be any PPPs done for a while is beside teh poitn. The point is that it is not economically rational to do any of them.

    The outturn costs argument is also false in my industry (transport). The reality is that the costs are more hidden than in conventional procurement, which does little to limit overruns. The “solution” is often to simply hike the price for the services. Unless the contract is written very tightly this is hard to stop.

    Nor is there anything magical about PPPs that allows them better risk control. People need to distinguish between the finance mechanism for a projeect and teh delivery mechanism. There is no reason we can’t have a tightly written contract for provision of services or infrastructure that includes construction cost risk transfer and whole of life costing via BOOT contracts. But those can be publically financed; they don’t need to be PPPs. Such contract types pre-dated PPPs, going back to the late 80s.

  7. November 27th, 2008 at 07:37 | #7

    Once a project is taken down the PPP route, its scope and cost are fixed and cannot be changed.

    ROFL!

    Transurban, anyone?
    Southern Cross station?
    And that’s only the first two that come to mind.

  8. Hal9000
    November 27th, 2008 at 11:29 | #8

    Two comments.

    1) Despite the abject disaster that is Babcock and Brown, its head honcho remains Queensland’s Water Commissioner, on the basis presumably of her genius status as a provider of public/private debt-financed infrastructure. Like the Mayans and the Easter Islanders, we seem doomed to worship our preferred gods all the more as the evidence of their non-existence piles up.

    2)”variations that are designed to buy votes” What a pity we live in a democracy, eh Will? Those damned citizens are always demanding things their betters, of whom I’m sure you self-identify as one, know they shouldn’t have.

  9. wilful
    November 27th, 2008 at 11:55 | #9

    PPPs are a disgusting rort. Both sides (and Treasury) are entirely complicit in them. They are a wealth transfer from local consumers to faceless investors. The only real explanation of them is that they hide debt – so the media and political class are to blame, with their loopy fear of investments.

    I am fully in favour of road tolls (oughta be more of them, yet I don’t see why my rural mother should pay for a commuter road), and I think citilink is a great bit of useful engineering, however my understanding of the economics of it is that VicRoads could have tendered out all of it (for that oft-vaunted, rarely proved private enterprise efficiency) and the tolling system, for about $2.5 billion, rather than have a private offshore company deal with shady complex tax lurks, and ripping off motorists for 35 years, at a total cost I believe $6 bn.

  10. Socrates
    November 27th, 2008 at 12:45 | #10

    Wilful

    You are correct on Citylink. None of these projects can proceed without the land acquisition and other public powers of public authorities to implement them. I beleive someone at the Monash business school did an analysis of Citylink back in about 2003. If I recall correctly the original equity providers got an IRR of 19% pa (!!) for thirty years (!!!). If that rate of return seems impressive now, consider what it was like in the early to mid 90s, when investment returns had been flattened. They didn’t even have to provide the equity for very long. Most onsold their interests for a huge profit within 2-3 years of the road opening.

    Eastlink wasn’t much better – it was based on an IRR of around 13% at a time when governments could borror for 7%. The fact that patronage has turned out low doesn’t change the fact that with governmetn finance it would have been cheaper. Tolls might have been reduced by a third.

  11. Alanna
    November 30th, 2008 at 09:30 | #11

    PPS ought to be renamed PPPSS – political / private profit sharing scams… Or perhaps PPBS?
    The list of PPSs and PPS failures just continues on like an unstoppable train but is anyone in government bothering or inclined to look back and examine the growing list of PPS failures?. A couple of years ago the ABS (under instruction I have no doubt) tried to delete economic history as a legitimate field of research. Just perfect – no one equipped to examine policy failure closely.

    The general public is increasingly being seen as a cash cow to be milked and rorted by both the corporate sector and our own political leaders. Its corruption. It does what it does – erodes and degrades infrastructure systems.

  12. Alanna
    November 30th, 2008 at 09:45 | #12

    I remain disgusted by the Home warranty insurance legislation that enabled Vero to enrich itself imposing heaving insurance costs on the building industry (and no doubt transferring profits overseas for tax purposes) and being permitted to run a virtual monopoly. Then I read that the State Government also had substantial shares in Suncorp Metway – Veros parent.
    A last resort insurance which only applies is a builder dies or goes bankrupt and only after the consumer has been forced to pursue the builder at their own cost first. In what other industry is this type of “last resort” insurance forced upon the consumer? We should ask those who purchased Beechwood homes what they think about it.

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