The end of PPPs

I wrote a piece for the Centre for Policy Development on Public Private Partnerships which was also picked up by the Canberra Times. My favorite bit

The British government, which has nationalised or bailed out large parts of the banking sector is now suggesting that banks may be forced to lend to private investors in public projects under the Private Finance Initiative. In effect, the government will be lending money to itself, while paying the costs of a series of complex transactions (some of them highly vulnerable to exploitation) along the way.

58 thoughts on “The end of PPPs

  1. Nice article Prof. Q. Where can I sign up to become a banker? Seriously, this sort of financial intermediation suggest that the political and financial systems are very sick.

  2. From what I know of PPP’s, they seem to be little more than a different way of deferring the cost to taxpayers of major projects.

    But it sounds a lot more innovative and original to talk of “public-private partnerships” than to just talk of old-fashioned deficit financing and pump-priming. It makes for much better sound bites and spin doctoring. “Ending the old ideological divisions. Bringing the public and private sectors to work together”, etc. etc.

    This sort of thing sums up the vacuity of what was Blair’s third way mantra.

  3. John, re this quote from your article – “it will be necessary to apply user charges for public assets such as roads. The required charges should reflect the social cost of road congestion, and the need for a continuing return on capital assets and should not be related to the construction costs of recent additions to the road network.”

    These charges seem regressive to me – each person pays the same charge regardless of ability to pay. I see this as different to increasing the cost of cigarettes to achieve positive social and personal outcomes. In the cigarette case people can change their behaviour and reduce costs and have many support mechanisms available to help them do that.

    However for something like road use many people who use the roads have little or no flexibility over their usage. Road usage is influenced by availability and type of public transport, the demographic of the area- what the people do for a living, where they have to go to work and so forth.

    My concern is that the urban design of cities such as Brisbane will transfer costs associated with transport to those least able to pay.

    How would you see the development of an equitable or even progressive user pays system based on social cost and return on capital?

  4. Great article which correctly identified the two dodges at the heart of PPP:

    1. Phony economies on private financing which had artificially downgraded risk

    2. Phony economies on public charging which were artificially displaced by tolls and traffic jams

    It’s great to see the PPP economic liberalism get the thrashing it deserves. Fancy paying high-flying Maquarie Bankers a fortune for doing something that anonymous brown-suited bureaucrats from the Board of Works did for a pittance, without any fuss or bother.

    This is, as Tom Wolfe remarked a long while back, the era of The Great Re-Learning.

  5. nanks, I understand that you don’t mind being subsidised by the tax revenue of cigarette smokers even though there is evidence showing that the relatively low income and wealth segment of the population smokes relatively more.

    Why don’t you recommend that car drivers, who pollute the city air, do what they can do, namely live close to where they work and shop and walk instead of driving?

    I consider it fair that public premises are off limits for smokers on the grounds that non-smokers’s health may be affected. However, to tax cigarette smokers but not road and air transport users in environments where cars and aircraft contribute more to air pollution isn’t fair.

  6. “Why don’t you recommend that car drivers, who pollute the city air, do what they can do, namely live close to where they work and shop and walk instead of driving?”

    Perhaps because those low-income drivers can’t find affordable housing in areas where they can walk to employment and other community facilities.

  7. If it is to be the end of the PPP then someone in Canberra needs to be told of that – the NBN proposal is one such election promise that keeps on keeping on.

    Elsewhere the Tassie Govt is finding itself suddenly short of cash and ready to fire up the PPP – no doubt many other authorities are in a similar situation.

  8. nanks, user pays is regressive, but it’s efficient, which means more money can be spent on ameliorative actions.

  9. Ernestine the two are not comparable. The smoker has an alternative that is free and takes no time to implement – they can stop smoking.

    It is not possible for low or middle income earners to move closer to work and or transport with the same ease. Similarly few can change the urban fabric and make shopping miraculously appear close by.

    The problems of urban planning and transport have been discussed for decades but solutions that allow for ‘village level solutions’, implicit in your response, are seldom implemented. I wish they were.

    I would also ask you to consider the following – how will the disabled walk to work, how quickly must someone move once their employment changes, how will casual workers choose where to live. How will a family with one disabled child attending a special needs school 6 kms away 3 mornings a week and another child attending the local primary school organise their transport needs? How will someone with congestive heart failure walk 3km to the shops in Adelaide when the temperature is 38 degrees? etc etc

    Transition to more ecologically friendly cities requires changes to the urban fabric. Punitive measures, prior to these changes, penalise people who have no other recourse but to use the urban fabric as it exists. Smokers have free recourse to an alternative. Furthermore your idea that there is some vast group of bludgers sucking off the tax revenue from smokers is ill founded. The health costs of smoking far outweigh the tax revenues. I am not sure of more recent figures, but shows that the costs to the community were vastly greater than the revenues from taxation at least into the late 1990’s.
    I don’t however begrudge smokers their medical treatment and doubt many would.

  10. The whole underlying philosophy of PPS is wrong. They will fail far more often than they work. The public sector was designed to be separate from private interests for the sole purpose of conducting the basic infrastructure required for a healthy economy across a range of public interest areas (transport, health, education etc) in the public interest which includes the interests of private firms. Where private interests seek to lobby, bully, entice, court or infiltrate the public sector for their own profit seeking ends is precisely when our political and financial systems become weak and sick as Smiley suggests. Its like the separation of the judiciary from government. Thats how the public sector should be run – entirely separately from the private sector. There should be no PPS at all in my opinion. It encourages corruption and attracts public servants to do deals with private sector agents to further their own self interest, at taxpayers expense and at the expense of the public interest. When that happens, Kerry Packer is right in that he suggests “individuals owe it to themselves to pay as little tax as possible”. When taxes are being knowingly misappropriated by both private agents and public agents, the bountiful procession of commission agents and consultants that attach themselves to the average PPPS deal, I couldnt agree more. They should be called FFFS deals (Fanfare, Fraud and Failure deals.

  11. The biggest PPS of all (the huge bailout of US banks) is now being sat on by banks, instead of lent out, because banks can spot some cheap failing banks to buy. Did Paulsen have notions of working cosily together to fix the economy with these big bankers? Or were Paulsen’s real allegiances elsewhere as well? Thats the trouble, the system is already damaged and sick and possibly too sick for any one government to rectify.

  12. nanks @11,

    Your argument ignores the addictive property of nicotine and hence the price inelasticity aspect.

    The article you referenced contains the following data (with incomplete information on the estimation method, data collection, and analysis):

    Estimate of the social cost of smoking for the financial year, Australia, 1998-99:

    Tangible costs:
    Lost production $5064 million
    Health care $1095 million
    Fires $ 26 million
    Resources used
    in cigarette
    production $1402 million

    Total $7587 millio

    Intangible costs
    Value of loss of life $13478 million

    The only item I would consider relevant is Health. Where are the comparable revenue figures?


    The publication referenced is a NSW Public Health Bulletin. It seems to me the cost to the tax payer of having anti-smoking campaigns should be compared to the cost of having a major hospital in such a state of dysfunction that a woman gave birth in a toilette around the time when the then Minister for Health let her driver wait all night in the car park of a hotel while she was leaving by some other means. (This is my reply to your examples of some physically handicapped people being unable to walk a lot. Such exchanges are not leading to anything fruitful, are they?)

    If the evidence of the detrimental health effect on the smokers is so overwhelming, then the product should be declared illegal. Otherwise, the externality problem created by smokers for non-smokers is preventable by the means I’ve stated, namely prohibiting smoking in public buildings, and, if you like, otherwise insignificantly polluted public roads. Some public education of the young makes sense to me, too.

    I don’t accept your arguments that the negative externalities, created by smokers, is categorically different from that of other polluters. However, I would agree that it is politically and analytically easier to tax cigarette smokers than the creators of severe air pollution in PPP-constructed tunnels in Sydney. Who exactly would have the moral authority to impose a tax on the latter?

  13. Ernestine, here is the bit from that paper that you missed
    “smoking increased federal and state government
    outlays by $885 million but increased tax revenues
    by $3,647 million (taking into account some revenue
    losses). Thus, governments gain a substantial
    economic benefit from smoking while the community
    as a whole bears very high economic costs greatly
    exceeding revenue from tobacco taxes.”

  14. There are two issues here – the amount of infrastructure we have (failed to) build, and the way it is financed. The second one is easy – PPPs are dearer than regular public finance and shouldn’t be used for them.

    The first one is harder. Australia’s population is rising faster than most countries in the developed world, yet we don’t build enough infrastructure to service it. Demand management will not solve this problem. Poeple cannot decide not to go to work. Not only did PPPs cost more, but public authorities (NSW) got used to not spending money on transport. That free ride is over.

  15. Thank you, nanks @17, for making it so clear that the justifcation for taxation offered on so-called social grounds (the data I reproduced @15) is really a justification for increasing net taxation revenue (without solving the problem)in an unfair manner.

    Returning to the PPP. All Cost-Benefit analysis for PPP constructed roads I’ve looked at contain a monetary valuation of social benefits, defined as the monetary value of travel time saved. This bumps up the monetary value the Benefit component sigificantly. However, the social costs (negative externalities in the form of air and noise pollution) are ignored. Unfair? (Yes, but quite consistent with taxing cigarette smokers but not other polluters?)

  16. Alanna @ 12 and 13, Agree with you here.

    The whole notion of public-private partnerships is a nonsense, because the nature of what the public and private sectors are supposed to do, how they operate, and what interests they have, will always be inherently different. You can’t mix the two in this type of fashion.

  17. Socrates @ 18, it’s true that Australia has substantial population growth but this is heavily dependent on the economic cycle. There are a lot of short-term migrants on work visas. If there was a significant economic downturn, many of them would head back home.

    If the NSW economy continues to decline, a lot of people could well start moving away from Sydney. If that happens, there might not be much need for building a lot of new roads and other infrastructure that will be underutilised.

  18. Re: nanks @11 vs Ernestine Gross @15, the Collins and Lapsley study cited by nanks contains some spurious economics – essentially, it counts all costs, private and external, as social costs by assuming that all private costs are internalities. The key truth from an equity perspective is that smokers pay more in tax than they impose on others as a result of their smoking.

  19. Nanks says, “user pays is regressive, but it’s efficient”. I’d say yes or no.. it depends on how it’s implemented.

    Toll bridges and tollways are highly inefficient. There’re all those cars slowing down at the toll booth bottle neck and paying the attendants; inefficient and a damned nuisance. Electronic paying systems have partially reduced that inefficiency.

    Tollways are a bad idea. Simplest way to ‘tax’ car users in a user pays fashion and one that takes into account negative externalities is by registration charges (already done) and petrol excise (already done). All we need to do is fin that system and change petrol ‘excise’ to a petrol ‘carbon tax’.

    This would be a name change to some extent but the rates could be reviewed. And by the way, as I keep harping on, progressively remove all fossil fuel subsidies. The diesel fuel rebate and fringe benefit concessions on travel over 35,000 kms would be a good start. There is no way on earth we should be subsidisng fossil fuels now.

  20. #26 – Ikonoclast, “user pays is regressive, but it’s efficient” is from a comment by wilful – I’d probably replace efficient by ‘easy’.

  21. Nick @ 24 regardless of short term cycles, overall our population has been rising faster than the OECD average for a long time. Lack of investment in infrastructure has been a particular problem in NSW but (except for recent times in Qld and WA) it has been a general problem. There is a substantial backlog to make up. See BTRE papers on the cost of congestion and the loss from the underinvestment has been substantial. In recent times there has been a shift in demand from road to rail in all capital cities, but that only shifts the investment type, not the reality of the need for funds.

  22. My apologies nanks for mis-attribution of that quote. I have no problems with the “user pays” philosophy for cars. Implement it fully I say but through registration and carbon fuel taxes. There’s no point stuffing around with tolls.

    A fuel tax is a toll on every kilometer driven. Registration is the up front toll you pay to drive on public roads, to fund traffic control etc. etc. Heck, why not go further and make car/truck owners directly bear the entire cost of the road infrastructure? Public transport and rail freight would start to look very attractive then.

    However, for things like public transport, public libraries and public hospitals (for example) I favour a publicly funded model. Make the user pay a base cost in some cases but fund the difference from progressive taxes.

  23. nanks @ 27, I am fully conversant with the C&L approach, having critiqued it back in the mid-1990s. Endorsement by the WHO, given its agenda, is neither surprising nor something that adds much credibility in my view.

  24. TomN – can you please make a link to a critique of the C&L approach available. I would appreciate the opportunity to understand it better.
    thanks, nanks

  25. Unfortunately nanks, to link to the critique would also be to reveal my identity, something which for various reasons I do not wish to do.* The key point, however, is the one I made earlier; that C&L assumed that private costs of smoking are not properly accounted for in individual’s decisions, for example due to the effects of peer group pressure and the addictive nature of nicotene, and should be counted fully as social costs. I can accept that some of the private costs might fall into this category, but the C&L approach of lumping them all in is extremely tenuous. It is also not very revelant to the equity question: do smokers impose net costs on others in society?


    * I know that may sound unsatisfying to you, but that is how it is. In the meantime, those readers who know me only by my e-pseudonym will need to give weight to my statements simply on the basis of the extent to which previous claims and statements I have made, of which they are aware, have proven sensible and reliable.

  26. thanks Tom N – I appreciate your position re identity and the elaboration of your point regarding equity. As far as the smoking and equity issue goes it isn’t central to my main question to John regarding an equitable system for “user charges for public assets”. I have a concern that ‘user pays’ (as I understand it is currently applied) is too blunt an instrument and am interested in hearing more about how ‘user pays’ can be fairer, if indeed it even needs to be.

  27. rog

    the bank bailout was to unfreeze the credit crunch. Unfreezing means getting banks to lend top other banks and to borrowers. The interest rates are being lowered to encourage borrowing. The bail out was meant to keep liquidity circulating (ie loan funds) – that means lending not hoarding to buy other cheap looking banks.

    Thats how you keep banks afloat – when money is circulating – not being hoarded by the banks themselves in order to make capital gains on other bank assets they might buy cheaply right now. Defeats the purpose of the bail out and is a liquidity trap.


  28. The problem with user pays charges is that they are a blunt instrument. Everyone pays the same so called “market price”. Is it fair for those who can only afford to live far away from the Sydney CBD (yet have to pay the additional user pays charges because they travel furthest on toll roads or by train) further decreasing their income?

    I dont agree with user pays. User pays does not take into account that some people have to live a long way from where they work because they cant afford to live any closer – so user pays on toll roads just hurts the most vulnerable more.

    Back to my suggestion that these PPPs and user pays on basic necessary infrastructure ultimately widens gaps between rich and poor, adds to social costs, and ultimately hurts not helps the economy.

    It contributes to widening disparity. Do we really want to end up like some parts of the US where the poor are trucked in and out for hours each day in order to work for a dole equivalent?

    We dont have that big a population – we dont need the US market model – it doesnt work for them and its time to get back to our roots and be more of a mixed economy. It served us well for many decades but we have now lost the plot when it comes to infrastructure and how to plan and build for current and future needs.


  29. Alanna – I’m really glad to see someone else doesn’t like the user pays model. Even outside the economics I think it has a an effect on social cohesion as per the Thatcher model of there is no society, just individuals.

  30. Even without the scenario you describe in the CPD article, I’ve never understood how society gains when a public project is financed by a commercial organization borrowing money at a higher rate than the government could. The only advantage I can see is that it provides the appearance that a government is fiscally responsible in the short term.

    Of course, if contracts were written with watertight and well-thought-through requirements and conditions (including punishment for underperformance), the tender system for a fixed-price contract can work. That’s a BIG if when we look at current procurement procedures.

  31. Nanks

    I remember browsing the ABS website a year or so ago I think in the government expenditure area (?GFS). I noticed there had been a substantial increase in costs in the community not for profit sector over about 8 years. I looked into it and found these were the costs of running eg things like community halls , I suppose eg public facilities at parks, ? meals on wheels etcv. I wondered what had caused the relatively steep increase in costs. The explanation given by the accompanying notes was that a lot of community services had been “contracted out” and the cause of tyhe increase in costs was mainly due to the costs incurred in both tendering and now monitoring the provision of privatised services. Great – that makes real sense doesnt it? (it actually cost the government substantially more to privatise the services out) – but it might also explain why a lot of public facilities like change rooms on playing fields are now locked and shut in the middle of peak playing seasons.

    A whole lot of the decisions to engage in PPPS or decisions to tender out previously provided government services need auditing or forensic accounting analysis going back ten years. Id bet they cost governments more in many cases than doing it in house.

  32. I think community childcare centres were also included in those community sector not for profit costs.

  33. I also think the root cause of the push to privatisation and PPPs lays firmly in the Coalitions National Comnpetition Policy that was foisted on every government department. It has resulted in rididculous decisions being made. The Northern Territory Government decided to de regulate the Taxi industry – licenses available to practically anyone with a drivers license for a small fee. As no doubt every no hoper in regional Australia arrived to become a taxi driver in the NT the dept was inundated with complaints over years eg of “rides from hell”, assaults in taxis – you name it. As one public servant put it “the churning didnt abate” and the complaints didnt either. Eventually they had to re regulate the taxi drivers.

    Blind Freddy should have been able to see that one coming and it should never have been deregulated to that extent in the first place. Competition is good (when it works well) but it is reckless abandonment of governmental responsibility to even be of the opinion that the market will automatically deliver the best outcome in every circumstance.

  34. Alanna – re your #39 – when I was more involved with hospitals in the 90s I heard that one of the consequences of the rise of privatisation and managerialism in health was the alienation of volunteers. Companies who moved into healthcare apparently failed to take into account just how much work was done in hospitals by community spirited volunteers. These people were less liable to offer their services when it was for a healthcare corporation rather than a public or community based hospital. I have no figures, but it was a talking point at the time among the clinicians I worked with.

  35. Nanks @42 you have made an observation which is quite correct but as it was never quantified in the first place it will not and cannot be measured. Politicians will deny it is so.

    The real problem with Govt budgets is that there is a great deal of smoke and mirrors. The truth is hard to discern but the rise of PPPs serves a number of purposes for government.

    It reduces the wages bill in a department and moves this into the project bill. This minimises the common criticism that there are too many public servants as the government can point to the reduction. The result however is that there are a fewer public servants who no longer provide direct services but are monitoring and managing the contractors who are often more expensive and less efficient.

    A second advantage for a government is that the money is allocated in a manner which ignores the total debt and therefore has far less impact on the budget bottom line. It costs more in the long term but in the long term the opposition will be elected anyway.

    The third advantage is that it allows for lots of wriggle room and bluster for the relevant minister and premier or prime minister. If there are problems the contractor can be held to be at fault. It doesn’t improve the results but the minister is off the hook.

    A fourth advantage for government is that if things do go wrong then the person complaining has few places to go to complain. No one person or area will have total control of the process which will be divided up amongst a number of departments who have to cooperate- this often results in indecision, bickering over territory and adds to the time frames required for any major project.

    The downsides have been noted but the elements of corruption are a feature of any large project worth millions or billions. With such a lot of padding in a project a few million transferred to a Swiss bank account in payment will just come out of the total project budget.

    The temptation for politicians to help their friends (and vice versa) is not such a hidden secret.

    Money which could be used for direct service provision is lost by the taxpayers to private profit. Services become harder to access and are often reduced. Thus a school may be built but rooms will be smaller, the playground will be less interesting and other amenities will also be lost. Parents will probably have little influence on what is provided as it will all be tied up in a contract with the private company.

    Once upon a time governments would ask people to invest in infrastructure and mums and dads would purchase government bonds to build a hospital,a railway or a power station. The government department would deliver and in doing so train apprentices who often went into private practice afterwards.

    The PPPs cost more and are less productive for the nation and rarely feature the unseen benefits of nation building – although many an ex-politician has done very nicely after leaving politics organising the PPPs.

  36. John, I believe the Rees government can atone for the failures of the previous government by doing some minor surgery when it comes to the Sydney Ferries. My understanding is that Sydney Ferries is rooted because of the way management run the place. For example, on a good day takings can be as high as $140,000 but profits are quickly eroded because of the unprofitable hours from 9pm onwards due to a lack of patronage. If Rees wants to win the hearts and minds of voters, then make a red hot go by cutting costs and operating hours say from 6am – 9pm without shedding any full-time staff and reversing morale. No need to privatise something that can be fixed.


    Alana at #41 states “I also think the root cause of the push to privatisation and PPPs lays firmly in the Coalitions National Competition Policy (NCP), elaborating that “Competition is good (when it works well) but it is reckless abandonment of governmental responsibility to even be of the opinion that the market will automatically deliver the best outcome in every circumstance.”

    For the record, the NCP did not assume that the market would “automatically deliver the best outcome in every circumstance.” Indeed, it clearly recognised that the merits of pro-competitive polices/action needed to be determined case-by-case. What NCP did do was reverse the onus of proof on this matter.

    In sum, Alana’s criticism on NCP, like most criticisms of NCP that I have dealt with, is based on a misunderstanding of NCP.

  38. Tom N

    My criticisms of NCP are based on public servants criticisms of the widespread attempt to apply NCP to many ordinary and previously government regulated areas. I think a lot of public servants are not happy with the way NCP was promoted and implemented perhaps by those more senior in government positions.

    The NCP may not have assumed that the market automatically delivered the best outcomes but there certainly has been a lot of failed deregulations (I dont need to list them here) and failed pro privatisation policies, and I still dont see too many in the public sector wanting to acknowledge that and perhaps its time for some navel gazing on the matter of costly mistakes in the name of NCP, if nothing else but to save the public and taxpayers further unnecessary costs.

    As you can gather I am annoyed about it but I am not the only one.

  39. Alana
    From your earlier statements, I doubt that I would accept your take on what constitutes a “failed deregulation” or a “failed privatisation”; nor would the fact that some public servants share your world view either surprise or convince me. The key point I was making is that NCP did not require privatisation or deregulation; it required analysis. Reasonable people can disagree on particular analyses undertaken as part of the NCP program, but it is important in the first instance, if one is to criticise NCP (as you sought to do), to understand what NCP entails. Repeating the false impressions of some public servants does not fulfill that requirement.
    PS: NCP was introduced through COAG in 1995, following the earlier Hilmer Review commissioned by the Hawke-Keating government. Thus, it was not an initiative of the Coalition as suggested in your earlier post.

  40. There used to be a government department called the Department of Public Works. It was very large and employed thousands from public architects, to engineers to the very builders and labourers themselves. It had a storehouse of materials including a large stock of very valuable sydney sandstone (maintained for the repair of significant architectural historical buildings). Dont ask what became of that department. I understand it is now a mere shell, or committee. The sandstone was sold off, and the employees are gone along with the enormous skills they had. The underlying organisation is a mess of attempted cosy PPS private constructions. The Department of Public works no longer exists except as a shell – like so many public service departments.

    Move on to one government department after another such as the Valuer General’s department, responsible for the correct land valuations on which peoples rates are based. Try the new LPI (Land and property information services?) or some similar name – an entirely private organistion doing the work of the old Valuer generals department and so often in the news for getting valuations out of whack if they bother doing them consistently at all. Most land valuations are upward disprortionately and notwithstanding market corrections.

    I think most people are yet to realise State government services are a shadow of their former presence and I question as to why we need to pay a committee of people to run a State government when they have little control over what used to be government services (and it appears a lot of contingent liabilities instead). We are already paying higher user pays charges across a range of services, whether we originally wanted to or not.

    The public was not consulted on any of this.

  41. Sorry Tom

    Not that I have a lot of faith in the directions of the Hawke Keating government either. I dont intend it to sound as a political argument with the fault residing with this particular political party or or that party. My essential argument is that deregulation and privatisation has been taken to an extreme over the past two decades and that direction is now proving disastrous (and I am sure to an extent it provided benefits – but it is so like government not to know when to stop – its part of the ratchet effect – the policy gets written, implemented and becomes part of government processes and systems and its much harder to undo it even when its necessary).

    Analysis – backward is absolutely essential now. What privatisations worked? What was effective? How many failed? Why? Was there a blanket acceptance of the merits of privatisation over public provision? Did private provision become an ideology (at the epexense of genuine analyis) in government departments? Has there been an unwilligness to accept or acknowledge failure of PPSs? What is the alternative? Was there an unwillingness to acknowledge failed PPSs despite accummulating evidence of failures?

    When I see these questions being answered or even discussed through the public service, I might be somewhat happier because I pay for mistakes. We all pay for them.

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