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John Quiggin 
The NSW Audit Office have provided some support for PPPs in the area of providing schools in new urban release areas. The contracts involve management of school properties for 30 years. The NSW Treasury responded to these report by claiming capital savings and quicker completion The AFR editorial today endorsed ‘refining’ the PPP idea not chucking it out. Are there good and bad PPPs? Were the bad PPPs like the Tunnel avoidable?
I do not know about anyone else but I have just about reached saturation point with constant presentation of the PM, in print, on radio and television. Every piece of media you take up have the beaming or serious countenance of our great PM, its like living through a antipodean form of life under the Ceaucescues. Is the IDU version of the cult of personality?
I suppose that there are theoretical “good” PPPs. If you were presented with any of the following circumstances, a PPP might be the answer:
a) The situations where leasing is preferable to buying, i.e., where there’s a restriction on borrowing and/or there’s a tax advantage in changing capital expense into operating expense
b) Borrowing cost for the private party is lower than for the government
c) Operating costs are likely to be lower for the private party than for the government
d) Risk can be shifted to the private party
(a) and (b) don’t apply to entities like the NSW government, although it’s quote plausible that they may apply for some hypothetical municipal government in Burkina Faso.
c) is arguable, although PPP isn’t necessarily the appropriate solution. Contracting out the operation + maintenance expenses is pretty standard practice, even for the NSW government.
(d) is usually just wishful thinking.
All supporters of globalisation should be out on the streets burning US flags in protest at the bizarre and racist opposition of the political nativists of America to control by Dubai Ports World (DPW) of US port facilities.
Congressional opposition to this commercial transaction is a grotesque example populist moral panic. DPW, a Dubai-owned corporation proposed to buy some US ports from P&O, a British-owned corporation. P&O has operated these ports for decades.
What, precisely, was ok about P&O that is not ok about DPW? How much terrorism has originated in Dubai? How many more terrorists have originated in Britain?
Are American taxpayers prepared to compensate DPW for the costs associated with their forced fire sale of valuable commercial assets?
When will the cognitive dissonance end between perceptions of US commercial rhetoric and US commercial actions?
SJ, I concur with your skepticism. The Auditor Office wants the private contractor to be the residual claimant and take those risks. Then they will search for cheaper procurement of supplies etc.
I am getting confused about the idea of partnership here. I favour the private sector building things and so on. But for schools and transport systems I would have thought the state would face lower risk and lower capital costs.
IThis is not how cthe Audit Office see it.
“I am getting confused about the idea of partnership here.”
It’s not so confusing once you correctly identify the members of the partnership. The partnership isn’t between you and me (i.e. the public, with the government acting as our agent) and some private entity, it’s between the government acting on its own behalf, to the detriment of the public, and some nice fellows at say, Mac Bank, who offer the correct inducements to the members of the government.
Whatever the theoretical merits, the practice lacks transparency, and invites corruption at worst, and inefficiency at best.
Katz,
Does this mean that you are taking sides with the US president?
Does this mean you think that the US congress was ever in favour of free markets?
Regards,
Terje.
SJ,
Overall, I tend to agree with your conditions under which a PPP is conceivable to be economically defendable. Economically defendable excludes issues that are often associated with ‘corporatist’ economies (ie those where there is talk about ‘stakeholders’, ‘gate-keepers’; ‘big business’ works with ‘strong government’ and ‘strong unions’, and individuals don’t count). Lets call these ‘socio-political factors’.
A few comments on your economic conditions (a) to (d) , which may be no more than expansions or slightly different angles.
a) I agree, the comparison to the leasing versus buying decision problem is relevant. In general these decisions hinge on tax or information asymmetries between the parties.
b) Borrowing costs are tax-deductable for private operators. If one takes an accountant’s perspective, then it is conceivable that the after tax borrowing cost is lower for private partners than for the government. But, from an economic perspective, the tax deductability of borrowing costs are a tax subsidy (reduced taxes) to the private partner. So, one would have to compare before tax borrowing costs.
c) hinges on ‘likely’ (ie belief). Operating something is the easy part. The difficulty is the planning (ie a coordination problem). There is no ‘competitive market solution’ for this bit (eg the multiple gage private railways in the USA is the classic example of coordination failure).
d) Risk shifting is possible, but at price.
b’) and d’). I would prefer to work with the notion of ‘cost of capital’ rather than borrowing costs because it allows one to take into accout the ‘price of risk’ and the ‘return on equity’ (ie the profits, appropriately defined).
My private hypothesis is that PPPs are a solution to the problem created by 10 or 15 years (or longer) of the ‘micro-economic reform’ rhetoric produced by ‘naive market economics’ also known as ‘economic rationalism’ which came with words such as ‘competitive’, ‘private ownership’, ‘flexibility’. That is, wouldn’t it embarrassing for the current generation of promoters if ‘nothing’ is privatised after such a long promotional campaign? Furthermore, it seems to me the rhetoric of ‘competitive private ownership’ economics has been hijacked by the ‘corporatist-managerial’ version of ‘micro-economic reform’ – much easier to handle for accountants.
Katz, all supporters of ‘globalisation’ should have been on the streets for many years – not sure whether 2001 or 2003 should be chosen as the critical years.
“Does this mean that you are taking sides with the US president??”
Says Terje, who:
a) couldn’t recognise sarcasm if it was written in gigantic neon letters
b) seems to think that teen fiction author Ayn Rand had something meaningful to say.
Snerk.
Ernestine Gross Says:
It’s not just your own private hypothesis. It’s becoming quite obvious (at least to economists) that the Washington consensus is dead. And not just dead, but a stinking albatross hanging around the necks of Bush, Blair and tiny little Johnny Howard. 🙂
Here’s glory for you: http://blog.lewrockwell.com/lewrw/archives/010137.html – someone has seen fit to use some material I emailed as a blog entry (with my permission).
I nearly put “gloty”. Maybe I should have left it that way.
Terje,
“Does this mean that you are taking sides with the US president?”
Yes, while wearing a strong clothes peg on my nose.
“Does this mean you think that the US congress was ever in favour of free markets?”
Not at all. But the DPW scandal is a particularly transparent example of American thinking on the relationships between ethno/racial identity and legtimacy, and thus serves as an issue that should unite wider groups than those who are routinely hurt by US protectionism.
SJ, It seems to me to be not very helpful to assign the responsibility for the activities of the promotors of naive market economics and its corporatist version entirely to a few politicians. For example, the OECD bureaucracy published and promoted books with titles such as ‘what governments should do’. I know of a person who sent an email to the OECD asking whether this organisation will take the responsibility for the financial consequences of governments following their advice. (I thought this was a good question.) No response. A follow up communication yielded the message that the question has been put to the Directors. This was about 5 years ago. I checked. No answer has been received since.
Katz Says: March 10th, 2006 at 8:26 pm said “All supporters of globalisation should be out on the streets burning US flags in protest at the bizarre and racist opposition of the political nativists of America to control by Dubai Ports World (DPW) of US port facilities.”
Completely agree. The most confusing thing is not so much the free-trade Republicans opposing it (though the isolationist-Republicans were expected to oppose it), but the liberal Democrats have disgustingly played the race deck!
We should start by burning Democrat Party flags.
At least it shows that Bush is a committed internationalist, and isn’t a traditional isolationist, so favoured by the US Left.
SJ and Ernestine have identified why PPPs have been more favoured at State level in australia – the tax expenditure is at Commonwealth level, but the gains from concessional tax treatment accrue to the private provider of State government infrastructure, which can at least in theory share those with the State government and thus provide a good at a lower cost than the State itself could. In practice, though, the recent NSW cases seem to suggest even this is not the driver. Also, from the perspective of the economic welfare of the country as a whole it of course makes no sense.
My own perspective on the origins of PPPs is that they stem from a government using the wrong fiscal target. When Thatcher decided to target a reduction in the public sector borrowing requirement, smart operators figured out a way to get government projects with only a marginal impact on borrowing – and so PFI, PPPs as now known in the Australian context, was born. The business transferred to other countries even when the original rationale was well and truly overtaken.
Harry, there are some examples in the UK context that could be said to be “good” PPPs – although my source is myh unreliable memories of discussions with the Serco Institute, not a disinterested party. these include eg an air training facility that is able to be used for private training by the private operator in downtime. this is it seems to me a limited, but feasible, area where a PPP might make good economic sense – where there is spare capacity in a facility that the government for legal or political reasons cannot make good use of, but a private operator can.
I am not sure why Ernestine thinks that interest repayments should not be claimable as a business expense for tax purposes. Why is this expense different to other business expenses?
“SJ and Ernestine have identified why PPPs have been more favoured at State level in australia – the tax expenditure is at Commonwealth level, but the gains from concessional tax treatment accrue to the private provider of State government infrastructure, which can at least in theory share those with the State government and thus provide a good at a lower cost than the State itself could.”
This is undoubtedly one of the main drivers in Australia, and why most are State, not Federal.
The other one is the aversion of governments of all persuasions in all jurisdictions to debt finance. The legacy of the failed state finances of the early 90s is still with us, not necessarily for rational reasons.
Most PPPs involve a government granting a monopoly franchise over something to the private sector participant, in return for infrastructure or service .
This is the economic equivalent of an asset sale, with the proceeds to be delivered in the future, as far as I am concerned.
Until the proceeds are delivered, the sale is therefore the functional equivalent of borrowing (a decrease in assets is the same financial impact as increase in liabilities).
But it does not show up as an increase in debt in formal accounts! Both economic ideologues and governments are happy.
Of course the complexities of individual deals makes it difficult for outsiders to analyse whether any given PPP is “good” or “bad” because of so-called commercial_in_confidence issues.
SJ,
You may be surprise that whilst I own a book written by Ayn Rand I have never read past chapter one. So if she had something meaningful to say I never fully grasped it. In any case it was a work of fiction.
Clearly you have a negative view of me. And clearly you want to share that negative view with others. Was there some other point that you were attempting to make or is venting your negative feelings towards me the extent of it?
Regards,
Terje.
Bush has stated that Iran threatens the security of the U.S.
Have you heard that line before?
Dig your bomb shelter while you may.
Terje says: “I am not sure why Ernestine thinks that interest repayments should not be claimable as a business expense for tax purposes. Why is this expense different to other business expenses? ”
Terje, I can’t help you either. May I suggest you read what I have written rather than trying to guess what I thought?
Derrick Cullen says: “Until the proceeds are delivered, the sale is therefore the functional equivalent of borrowing (a decrease in assets is the same financial impact as increase in liabilities).”
Yes, I fully agree. IMHO, one would need to work with a national wealth account rather than national income statements (GDP-type) to see what happens.
My casual observations suggest that so-called ‘ordinary people’ understand the notion of ‘national wealth’ rather well.
And, I agree with those who argue that dogmatic positions for or against aren’t helpful, preferring a case approach, taking local conditions into account, and demanding transparency.
Ernestine,
You said:-
It was the bit that I have put in bold that I was responding to. It seems odd to call the deductability of “borrowing costs” a subsidy. If that is true then why is the deductability of all business expenses not also a subsidy?
So having read what you have written I am actually interested to know your thoughts. I thought a question might have helped me get there. Which is why I asked one.
And if it is not different then doesn’t that mean that the tax deductability of all expenses is a subsidy?
I am not trying to put words in your mouth. I am just trying to understand what you mean by the words you have used.
Terje, I read your statement as there being a demand for University education in Economics. There is a supply of such education available. Its your choice.
I hope Chris Corrigan had a few bob on the winner of Saturday’s Newmarket. Otherwise he would have been a really sick parrot after hearing that Toll have been given the green light to continue with their bid for Patricks. Sort of takes the gloss off getting the gig at PBL earlier this week.
One wonders what could be going on at ACCC. When they stopped the bid in January, Samuel said that he had rung Little at Toll to discuss the matter BEFORE the public announcement.
Extraordinary behaviour I would have thought for the head honcho of a statutory regulator smacking rather of the bad old days of self regulation when chaps would have a word to other chaps to do the right thing.
Has Samuel been in touch with Little subsequently to give him a bit of coaching on how to tidy up the bid? We should be told.
It will be interesting to see if the undertakings given by Toll will be worth a brass razoo if the takeover does go through. Given the ACCCs track record on such things (eg Ampol/Caltex) it’s doubtful.
The Queen has arrived in one of her mostl loyal dominions. I see the Age records this fact with the hopefully phrased “Queen’s visit here possibly her last� headline. But it would be unwise to underestimate the staying powers of the old stager and her loyal retainers:
Re PPPs
Though I am not in favour of PPPs in general, I’m not sure that we should used the Cross City Tunnel as our exemplar of a bad PPP. In this case, it looks like all parties overestimated the demand for the tunnel.
However, because the tunnel is a PPP, much of the cost of this error will be borne by the private sector rather than the state. I suspect it is in the ‘successful’ PPPs where the greatest public cost is to be found.
Let me apologise for my lapse of good judgement. When you put it like that I can empathise entirely. I am also too important and well educated to have to defend or explain statements I make in public forums. Isn’t it terrible how some people think that statements and claims made by highly educated people can be questioned? Us elite thinkers don’t need to make sence to all the less educated mortals. We should be free to pontificate in peace.
**sarcasm alert**
Yes, Jack. The only one of Her Majesty’s major possessions (A few minor ones also have) to have actively voted in favour of maintaining her, her heirs and successors according to law, as Sovereign. Long may she reign.
Terje, you talk alot about ‘freedom of choice’. Now you finally give a practical example of what you mean by it. Thanks, but no thanks to your notion of ‘freedom of choice’.
Ernestine,
As far as I am concerned you are free to say and think what you want. And I am free to say what I think of your statements. I am free to ask questions and you are free to not answer them. I am free to criticise you for your decision to not answering basic questions about strange statements that you have freely made. And you are free to interprete my criticism as an attack on your freedoms (although on that you would be wrong). And I am free to think that you are pontificating again. I am also free to think that you are being evasive and that you lack the capacity or inclination to defend your own remarks. I find it amazing that you will invest so much effort evading a basic question. And I freely think that you are way too precious and pretentious about your academic qualifications. However you are free to hide behind them if you think it makes you look more intelligent.
Regards,
Terje.
P.S. Your strange statement was: “the tax deductability of borrowing costs are a tax subsidy”
I had assumed that you could clarify this statment so that it makes some sence. However given that you can’t (or won’t) I am left to conclude that it was simply a false claim that can be easily dismissed.
Let me go on to state that if a government owned entity is allowed to retain earnings in excess of expences, which a private corporation in the same situation would normally pay company taxes on, then in fact the government owned entity is left with more working capital (and hence less need for borrowing) and is in effect gaining an operational subsidy relative to its privately owned equivalent.
Now unlike Ernestine I am prepared to clarify the logic of my statement as and when critics might like to test it.
Terje,
Lets first get the facts straight.
This exchange started with you, Terje, making an assertion as to what I think and you produced a truncated quote in support of your assertion. To quote your first statement:
“I am not sure why Ernestine thinks that interest repayments should not be claimable as a business expense for tax purposes.�
In reply, I told you I can’t help you either. You ask me to explain my logic. O.k, here we go: The reason for my conclusion and hence for my reply is: a) If I assume you know what you are doing then you would know that it is your thought which is the source of (what you later on call) the ‘strange statement’, not mine. Hence it is up to you to deal with your strange statement. I can’t help you and I would consider it impolite to point to what may only be an oversight on your part rather than a deliberate misquotation. b) If I assume you don’t know what you are doing then the nature of your problem is such that I can’t help you in any case (I am not a medical doctor).
You subsequently said you don’t understand what I wrote. I am not responsible for your problems. Note, by contrast to you, other commentators don’t seem to have a communication problem with me and vice versa. I refer you to the posts by SJ, stephen bartos, Derick Cullen on this thread.
On the assumption that you sincerely want to understand (I am using the information in fn1), the problem arises as to where one should start explaining. Econ101 seems to be a useful point. Hence I reminded you that you have a choice to take a University Economics course if you want to.
You responded with a ‘sarcasm alert’.
Now you don’t seem to understand why I told you that I don’t like your notion of ‘freedom of choice’. So I’ll spell it out for you. I don’t like your notion of freedom of choice because you want to choose what I think!
As for your last missive, don’t you get tired of trying to pick on academics by means of writing down projections of your imaginations regarding their motivations? Of course you are free to think what you want and to live in an imaginary world. However, it would be helpful to achieve clarity if you could preface your outpourings by stating that these are merely your thoughts.
In conclusion, your statement “Now unlike Ernestine I am prepared to clarify the logic of my statement as and when critics might like to test it� is false. (Fn2)
Fn 1: In an earlier post a few months ago, you disclosed that you are an engineer.
Fn2: In a recent post you disclosed that you are a paid-up member (who needs to check whether he is still a paid-up member) of the political arm of some type of Libertarian party – I have forgotten the exact name. However, I do recall posts by people who say they hold strong libertarian views but do necessarily subscribing to your party’s politics.
I have never attempted to dictate what you think. I made a statement about what you had said that seemed odd to me. You made it clear that I had misunderstood your thoughts. That was fair enough.
So I went back to the source of the misunderstanding, quoted the words that caused me to apparently misunderstand your thoughts and asked you to clarify the meaning of words that had lead me to the apparently false conclusion. That seems pretty reasonable to me.
On the diplomatic frount I went further. I make it clear that I was not trying to put words in your mouth but that I wanted to understand what you were really trying to assert.
I found your subsequent response all together hostile. You seemed to assert that in order to understand the intent of your single paragraph, or in fact one single phrase within your paragraph I would need to go and get an economics degree. And now you believe that I have violated your freedom or tried to dictate what you think because I asked for clarity. This is all very disheartening.
I don’t as a rule pick on academics. I am not even picking on you. However I do focus attention on statements that seem all together false. And I do focus attention on behaviour that seem petty.
Terje,
My conclusion that your statement: “Now unlike Ernestine I am prepared to clarify the logic of my statement as and when critics might like to test it.” is false, stands.
AR, lots of places have voted to maintain their current connections in recent times. Bermuda voted against a similar scheme for further empowering politicians, that time disguised as independence.
“The only one of Her Majesty’s major possessions (A few minor ones also have) to have actively voted in favour of maintaining her, her heirs and successors according to law, as Sovereign. Long may she reign.”
Nonsense.
Australians (60% to 70% of them) simply couldn’t agree about what form of republic was preferable.
Like the donkey that starved to death equidistant between two bails of hay, Australians weren’t suicidal, just wanting in wit.
The monarchy is like an unwanted guest who stays because their hosts can’t decide whether to tell them that their major vice is that they smell too much or that they eat too much.
Katz,
Looks like the denial bit you wrote on another thread is also relevant here.
Ernestine,
On this occassion I regret trying to understand your thoughts. It seems to have been a complete waste of effort.
Regards,
Terje.
Terje,
stephen bartos had completed the point (which developed involving several people) very clearly and before you started with your ‘fragment sentence-out of context quote’ tangents.
To quote stephen bartos:
“SJ and Ernestine have identified why PPPs have been more favoured at State level in australia – the tax expenditure is at Commonwealth level, but the gains from concessional tax treatment accrue to the private provider of State government infrastructure, which can at least in theory share those with the State government and thus provide a good at a lower cost than the State itself could. In practice, though, the recent NSW cases seem to suggest even this is not the driver. Also, from the perspective of the economic welfare of the country as a whole it of course makes no sense. “
Katz, Looks like the denial bit you wrote on another thread is also relevant here.
Is that so AR?
Perhaps these poll results may disabuse you of your fanciful notions and your state of denial about the attitude of Australians to the principle of a republic.
http://www.roymorgan.com/news/polls/2005/3835/
From the above opinion polls you will see that in November 1999, the month of the referendum, 38% of respondants were in favour of the monarchy, 54% were in favour of some form of republic, and 8% were undecided.
And by 2005 support for some form of republic was even more lop-sided (>60%).
Katz,
While Australians seem to like the idea of a republic, as soon as you put the actuality of one before them they reject it.
I might like the idea of socialism, but I would reject it if asked to vote for it. Does that make me a socialist?
AR,
Reasons for the defeat of the the 1999 referendum have been discussed recently and often enough on this blog to obviate any need for a rehearsal.
Suffice to say that the more moderate proposal failed to attract the support of democratic republicans who, stupidly in my opinion, preferred an empty glass to a half-full one.
The proposal failed because a large section of republicans believed it wasn’t sufficiently republican.
So yes, republicans did vote “No”, and yes that still makes them republicans, albeit stupid republicans.
Interesting opinion, Katz – I guess we’ll just have to see when (or if) the next referendum comes around if the “stupid republicans” repeat their mistake or if the republicans are capable of working out a formula that the voters can vote for.
Katz has said: ‘Like the donkey that starved to death equidistant between two bails of hay, Australians weren’t suicidal, just wanting in wit.’
Katz’s comments are always interesting and well-informed. I was bitterly disappointed by the loss of the Rep referendum, but have occasionally wondered how much of popular aversion to the Republican vote was subliminal. Malcolm Turnbull presented as the worst kind of arrogant Sydney yuppie (‘humility is for saints’) and the beautiful young Chinese-Australian spokesman, whose name escapes me, seemed to represent everything that old Australia is afraid of: Asia, globalisation, yuppiedom, lawyers. His work in the Hague on Yugoslavian war crimes were another reminder of the ugliness of world society: republics fall apart, republics have civil wars, they kill each other over there.
I’ve lost interest in republicanism; it’s irrelevant to life in Australia. I’ll always be a republican, but I don’t mind King Charlie.