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Legislative Council - Fifty-Second Parliament, First Session (52-1)
2011-05-18 Daily Xml
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PRIVATE FINANCE INITIATIVES

The Hon. M. PARNELL (16:13): I move:

That this council notes—

1. The escalating use of private finance initiatives, including private-public partnerships, to fund major new public capital investment, including school upgrades, the Port Stanvac desalination plant and the new Royal Adelaide Hospital;

2. The privatisation of public assets in the state's South-East through the forward sale of timber harvesting; and

3. That this privatisation by stealth is in clear breach of the 'no privatisation' rhetoric of the Premier and other members of his government;

and calls on the government to initiate an independent review to compare the financial performance of private finance initiatives with alternative public infrastructure financing methods.

Private financing initiatives of various types have been around for many years. They are often referred to as public-private partnerships or PPPs, and they are being used increasingly or are being proposed for a range of public infrastructure projects, including school upgrades, the Port Stanvac desalination plant, the new Royal Adelaide Hospital and even the new prison, if that project ever comes back to life.

Governments are attracted to the idea of funding new public infrastructure with private investment because they do not have to borrow and thereby raise public debt levels, and they do not have to raise taxes. What is driving this trend is the illogical fear of debt. The latest incarnation of this trend, which Professor John Spoehr has described as a 'third wave of privatisation', probably has its origins back in Margaret Thatcher's Britain. Under prime minister Thatcher, the UK government embraced PPPs as a means of moving debt off the balance sheet and giving the illusion that public sector debt was declining.

The government payments to private companies under these PPPs could be regarded as expenses rather than debt; as many economists have noted, it was all about smoke and mirrors that confused the public. So, what is the alternative? Well, the simplest alternative is direct financing of government projects. That means the government taking control and the government financing infrastructure.

What we must not forget is that governments have the capacity to attract the best rates of interest for their borrowings and, whilst those savings vary over time, they have traditionally been in the range of 1 to 3 per cent. Private companies, on the other hand, have more expensive debt and also need to build in a net profit component for their shareholders.

So when it comes to essential public infrastructure, the government is never really off the hook because, even if a private developer is involved, these projects cannot be allowed to fail. The buck stops with the state, in any event. No government would put up with a half or three-quarter built project. Just because the private developer got into financial difficulty does not mean that the state would not be obliged to step in and finish the project. Like the recent bailouts of banks around the world, these projects are simply too big to fail.

Of course, one of the ironies of the current government approach is that sensible economic policy is being sacrificed on the altar of the AAA credit rating. The main value to this state of the AAA credit rating is that it enshrines our ability to borrow at the lowest rates, yet the government refuses to capitalise on this advantage and uses private sector investment instead of government borrowing. That is truly ironic.

A large amount has been written over many years in relation to public-private partnerships, but one document well worth reading is entitled 'The Myths of PPPs', subtitled 'Paying for Private Profit: A review of the public-private partnership models in the provision of community infrastructure and services' by Graham Larcombe and Paul Fitzgerald. This paper, which is published on the Evatt Foundation website, explodes 10 of the main myths surrounding public-private partnerships. I will not go through all 10, but I want to refer to three in particular.

The first myth the paper exposes is the myth that by reducing the call on public funds through PPPs the amount of funds available for other essential services is increased. The authors' analysis of that claim shows that it is not based on any assessment of reality; in fact, many commentators have pointed to the higher cost of financing through PPPs compared to the traditional public-sector debt financing. For example, Kenneth Davidson, the noted economics writer, pointed out that the private sector requires a rate of return of about 9 per cent on its projects compared to about 6 per cent for the public sector.

Davidson suggests that, using those rates, a project that would cost $4 billion through a conventional public sector financing model would cost $5.6 billion if it were financed through a PPP. That difference, that $1.6 billion, could have been used to finance new schools or health services, for example. So we can use that analysis and apply it to the PPP projects either in train or planned for South Australia to show that we are not getting a great deal for our taxpayers.

Another myth that is exposed is that the private sector is inherently better at providing services. That myth, I think, is born out of ideology, and it is an ideology that says that the government sector cannot possibly do anything properly and that the private sector is inherently able to do things better. Clearly that is rubbish, but if you are looking for the actual evidence you could look at studies done in the UK that analysed the performance of hospitals that were constructed and operated under public-private partnerships.

The UK experience showed that those PPP hospitals were desperately short of beds, there was great pressure on staff to get patients out of the hospital as quickly as they could, all the finances were under severe pressure in those hospitals, there were serious concerns about the poor quality of the design of the buildings—including poor ventilation, lack of space, inadequate fittings and materials—and overall the quality of health care had declined. That is the experience of the UK. The South Australian government model is to follow down that path.

Another myth in relation to PPPs is that somehow private sector involvement reduces the level of financial risk to government. As I have said, the difficulty with that approach is that the projects are too big to fail. Even if on paper it looks as if the risks are being borne by the private sector, in reality they are sheeted back home to the public sector.

Whilst the public sector balance sheet might look better in the short term, in the long term, when you find that projects run into financial difficulty, the state has to step in. A classic example was the Sydney Airport Rail Link contract: when the private operator falls over, the public sector is forced to act as guarantor. At one level, we could say, 'Let's cut out the middleperson and do it properly from the start, using public finances.'

Another commentator who has been vocal on this issue for over more than a decade here in South Australia is Dr John Spoehr, and he has done many analyses of this topic over the years, including one that goes back to 2002 in which he points out what all of us here know: privatisation in the public realm is always unpopular. When asked questions about whether public assets should be privatised, Australians overwhelmingly say no. What governments have done to try to fudge the situation is that they have simply removed the word 'privatisation'—they have erased that word—and they have replaced it with the word 'partnership', but they continue to advance the privatisation policies under the new banner. John Spoehr says:

The role of the 'partnership' rhetoric is to hide the unpopularity of privatisation behind a term that implies relationships of equality. There are places for genuine partnerships within government, but it is misleading to characterise PPPs as partnerships when they represent a transfer of wealth and power from the public to the private sector. In the end, PPPs allow select private firms privileged access to market and political intelligence. They represent the hollowing out of government, drawing no distinction between public and private interests.

The PPP policies have effectively been created from an unholy alliance between the irrational economics that underpin the zero public debt policy and the special pleading of the vested financial interests. There are no mysteries about why the lobbyists are pushing so hard for the policies. Private consortia will always seek to purchase the benefit of a very secure income stream, with risk characteristics similar to a government security, but higher returns. Who can blame business for chasing the security of government contracts as they always have? For business, self-interest is the focus and PPPs are recession-proof forms of corporate welfare. For business, the nanny-state is to be deplored, unless it is business that's being nannied.

There is little doubt that in South Australia successive governments have underspent on infrastructure—particularly in areas such as public transport and water—but the private sector does not have all the answers to this problem. In fact, fairly recently, commenting on the global economic crisis, John Spoehr said:

The role of government in infrastructure provisions has been transformed by the (global economic) crisis, with public investment becoming the only viable short-term option for financing infrastructure. While PPPs are likely to be a feature of the infrastructure development landscape in the future, they will not be viewed as uncritically as they often have been by governments. They are not a panacea for government underinvestment.

In terms of the current government's performance, many people have noted and been disappointed by the government's 'no privatisation' rhetoric being confined to the waste bin. The government talks about no privatisation, but that talk is not matched by practice. The forward-selling of publicly owned forest rotations in the South-East is privatisation, pure and simple.

The communities in the South-East are devastated by this decision, and they do not believe the government or its report that downplays the social and economic impacts of the sale on local communities, not least of which is this breach of trust, especially those who trusted the government's rhetoric that it would not privatise state assets.

So, the privatisation goes on. The PPPs for the desalination plant and the new hospital, as I have mentioned, are cases in point. Whether it is the sale of an existing asset or the private development of a new community asset, it is still privatisation. In fact, reports in the media of a $500 million profit for the private developers of the Adelaide Desalination Plant show how lucrative these contracts can be.

The Premier has broken his no-privatisation promise. It is up to this parliament to hold the government to account. So, what is needed? What the Greens believe is needed is a serious inquiry into how we fund important public infrastructure. John Spoehr said recently:

It would be prudent for state government, in conjunction with other states, to initiate an independent national review into the PPP experiences so far.

That brings us to the Greens' motion. We do need an independent and serious inquiry. The current models of financing important public projects are flawed. We must do better. We must move away from this myth that all public debt is bad and that all private profit is good. Public infrastructure, at every stage of development, must focus on the public interest because, after all, that is the proper role of government to advance.

Debate adjourned on motion of Hon. I.K. Hunter.

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