Put PPP liabilities on the books, says John Quiggin

PPPs: Beneath the rhetoric

John Quiggin and Christopher Sheil stare down private-public partnerships (PPPs).

PPPs don't produce additional finance, explains John Quiggin, they swap cheap public interest obligations for expensive rents. Partnerships may require a contract, says Christopher Sheil, but a contract isn't necessarily a partnership.

The Enron approach masks hidden dangers

By John Quiggin

Before its recent spectacular bankruptcy, the Enron corporation was nominated by Fortune magazine as "America's most innovative" for six years in succession. It grew rapidly to be the number seven firm in the Fortune 500 (in terms of reported revenues) in 2001.

Enron attributed its success to two basic principles. The first was an "asset-light" approach. Whereas traditional energy businesses owned power stations, pipelines and transmission systems, Enron believed that a modern corporation should not be in the business of owning assets. This business was best dealt with through contracts with private partners.The second principle was that of financial innovation. Enron's army of lobbyists were vociferous in their claim that private-sector innovation would yield outcomes far superior to those achieved through public-sector regulation, let alone public ownership. In particular, Enron lobbied vigorously for the deregulation of the electricity industry in California and elsewhere. The system adopted in California reflected a compromise between Enron and established distributors such as PG&E, which also went bankrupt last year.

A third factor in Enron's meteoric rise, not publicly acknowledged until near the end, was the practice of shifting debt off the balance sheet through complex contractual arrangements. This practice was crucial in maintaining a strong credit rating, seen as a vital vote of confidence by Enron management.

Enron was not alone in pursuing an asset-light strategy in which financial innovation was used to deliver what appeared to be 'something for nothing'. Both in this respect and in the use of cosmetic devices to hide debt, Enron had little to teach the managers of Australian public finances. Like Enron, the Commonwealth Department of Finance has been busy selling off public assets and leasing them back, at rents that imply rates of return of 10 per cent or more. In some cases, such as that of general office space in State capitals, there is a reasonable argument that flexibility is enhanced by renting rather than owning. But many of the assets in these deals have been special-purpose facilities for which the Commonwealth is the only plausible user, and the terms of the leases have been correspondingly long.

Apart from blind ideology, the main attraction of these deals has been the apparent reduction in debt that has been achieved. In practice, however, a commitment to pay interest has been replaced by a commitment to pay even larger sums in rent. There has been no reduction in the risk borne by the Commonwealth. On the contrary, separation between the owner of an asset and the sole user creates new risks that must be shared between the Commonwealth and the private buyer. However the risk is divided up, the public pays.

The cosmetic appeal of sale and leasebacks and similar devices would be greatly reduced if governments and private companies were obliged to treat long-term lease obligations in the same way as borrowings, with the capitalised value of future obligations appearing as a liability on the balance sheet. This idea has been discussed by international accounting standards bodies, but not yet adopted as a formal policy.

The need for more explicit recognition of the liabilities associated with long-term contractual commitments is heightened by recent PPP proposals modelled on the Private Finance Initiative (PFI) in the UK. The most notable is the Partnership Victoria scheme put forward by the Bracks Labor government. A central idea is that private firms should construct, own and operate the school and hospital buildings in which publicly employed teachers, nurses and others would provide educational and medical services. Although each such proposal should be assessed on its merits, the general approach involves the creation of contractual risks that would be internalised under the standard system of private construction and public ownership.

Another serious concern is the use of assessment procedures, based on the notion of the 'public-sector comparator', that have already failed in the UK. Proposals for a PFI initiative to fund improvements to the London Underground have been shown to cost about twice as much as bond financing. Despite this, two of the big five accounting firms, hired by the Blair government, have signed off on the claim that the project represents 'value for money', relative to a public-sector comparator. (A third, Deloitte and Touche, hired by opponents of PFI, reached the opposite conclusion.)

The superficial appeal of the asset-light approach masks hidden, but grave, dangers. The idea of owning assets and putting the associated debts clearly on the balance sheet may seem old-fashioned, but in most cases, it is the right way to manage both private and public enterprises.

PPPs - It's time to take the PIIS

By Christopher Sheil

Triggered by some comments from the Premier of NSW, Bob Carr, the Australian Financial Review's pages have lately been enlivened by a debate about so-called public-private partnerships, or PPPs.

The term is preposterous. PPP is a label that covers some important policy issues and, no doubt, some lucrative investment opportunities. The preposterousness lies not in the policy substance, but in the suggestion that this substance embodies the idea of 'partnerships'. The policies described by PPPs are commercial government business deals. No more. No less. The arrangements are no more 'partnerships' than are a home mortgage, an employment contract or any other long-term commercial transaction. Far from constituting partnerships in any meaningful sense, PPPs provide for the contracting parties to pursue their separate, diverse and potentially conflicting public and private interests.

Does the rhetoric matter? After all, policy labels are often just harmless fashionable spin. Seasoned public servants, who have witnessed their departmental objectives turning into mission statements, which turned into vision statements, which have now turned into 'key result areas', no doubt shook their heads in bemusement as their reworked private infrastructure policies were all recently rebadged as public-private partnerships.

Yet there are unfortunate connotations attached to the use of 'partnership' in this context, a fashion that has been adopted from that font of Third Way gobbledygook, Tony Blair's UK government. Having made the rebuilding of Britain's public services a central feature of his successful bid last year for a second term, Blair has been employing his partnership rhetoric as a banner for his strategy to deliver on his commitment. On the one hand, Blair is attempting to appease his Labour constituency with promises to keep health and education services under full public control; on the other, he is also seeking to appease the City's Thatcher-born privatisation lobby by encouraging businesses to chase government contracts for almost everything else.

Mimicking Blair's double act, the latest round of Australian infrastructure policy documents has not only adopted his rhetoric of public-private partnership. The documents also emphasise, as the NSW policy does, the idea of expanding private involvement into "social infrastructure, such as health and education. While the Government will still deliver core services [such as] teaching services in education and clinical services in health." The dangers in Australia's governments being such uncritical followers of UK fashion are two-fold.

Firstly, and most annoying, the term encourages misleading comparisons. Blair's usage is generally broader than our local application, as his neo-corporatist concept of partnership also embraces complete privatisations, conventional contracting out and genuine partnerships, such as public-private joint ventures. This difference is important, as local lobbyists are given to quoting potential public savings from PPPs of around 20 per cent, based on the UK experience. The prospect of such savings from PPPs (Australian-style) was contradicted in a major study of these forms of 'partnership' published eight months ago by Blair's favourite think-tank, the Institute of Public Policy Research. In spite of the fact that the institute was heavily criticised for publishing an attempt to 'talk out' the policy's opponents, the report nevertheless found that the British results were highly variable, "offering significant gains in roads and prisons but not in hospitals and schools".

Secondly, and more disturbing, the idea of entering into a partnership veils the nature of the relationships involved in PPPs, suggesting positive connotations of equality, with both sides working toward a joint goal. The risk here is that these connotations will tend to disarm the bureaucracy, encouraging institutional capture, allowing some corporations privileged access to market and political intelligence, and generally interfering with the necessarily hard-headed and unprejudiced evaluation of whether or not these interactions are socially beneficial. Only recently, one tyro industry lobbyist found herself so imbued with the rhetoric of partnership that she passed over the fundamental principle that the risks in these deals should be allocated to the party most capable of managing them, passionately arguing instead that the "the level of risk should be shared equitably".

We should drop the language of partnership in the public interest. Let's simply call these deals private involvement in infrastructure services. At the least, this description would supply an acronym to remind us of what now needs to be taken out of the latest policies.

Also on the Evatt site:

• The trouble with PPPs: An un-holy alliance, by Christopher Sheil
• There are other ways: PPPs & public policy, By Sharan Burrow
• News of the world: PPPs are a disaster, by Kenneth Davidson
• Public fraud initiative, by George Monbiot
• Private finance and 'value for money' in Britain's public hospitals, by Allyson M Pollock, Jean Shaoul & Neil Vickers

Read Letters in response:

• The next great privatisation debate, writes Geoff Lazarus
• A misleading and coercive reform, writes Athena Vongalis

Do you have a view? Send-a-Letter

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