The Age’s Kenneth Davidson has today published a stinging critique of the financial costs associated with Public-Private Partnerships (PPPs) and argues that state governments could afford to fund more public transport projects if PPPs were paid-out by the government:
The biggest puzzle in Victorian politics is why both major parties are enthusiastic for the public-private partnership method of financing public infrastructure, even though the costs are at least twice those of financing through public borrowings.
The effective interest expense on public-private partnership deals done for roads, hospitals, schools, jails and police stations is higher than for the deals by credit-worthy individuals to get a mortgage or a loan for a car. The yield on Victorian 10-year debt is just under 4 per cent. The effective cost of funds for the Royal Children’s Hospital and the desalination plant is in excess of 11 per cent…
It is still not too late for the government to make substantial savings, by displaying a modicum of leadership and refinancing the desal deal itself. The government can borrow $6.5 billion to pay the full capital cost of the public-private partnership at 4 per cent over 30 years, which would involve an annual repayment of $380 million – saving $270 million a year on the present contract.
This money would be sufficient to finance an upgrade of Melbourne’s public transport system…
If government borrows at a lower rate of interest (namely 4 per cent), then… the Victorian credit rating should improve because the net outflows from restructuring the debt would be reduced. And there would be other benefits: the net worth of the state would be increased and – providing the savings are wisely invested in public transport rather than crazy projects such as the east-west link – its growth rate would be enhanced…
The real issue for the next state election should be how to finance a public transport system to cope with a Melbourne population of 5 million.
While I agree with Davidson that many of the PPPs undertaken by state governments offer poor long-term value to taxpayers, I am surprised that he does not argue for a shift in the tax base towards a broad-based land tax.
One of the best ways to make infrastructure self-funding for governments is to ensure that part of the uplift to capital values from improved infrastructure provision (e.g. new roads, trains, etc) is captured by the state via taxation. Indeed, state governments would also be far more likely to facilitate development, rather than act to restrict it in a bid to save on infrastructure costs, if they were able to capture some of the benefits derived from such investments.
With pressures on state budgets growing as the population expands, it is clearly in their interest to pursue reform and change the tax mix. So why, then, aren’t they making more of a fuss?
