Sunday, March 23, 2014

Public-private sector partnerships a mirage. The PC says so

Of all the strange things to have flowed from the corruption inquiry engulfing the former assistant treasurer, few are stranger than his use of the word ''passionate''. Arthur Sinodinos says Australian Water Holdings is a ''company whose mission I believed in and was passionate about''.

Passionate? Australian Water Holdings built pipes, tanks and pumps for Sydney Water that it could have built itself.

It's easy to imagine getting passionate about such a mission if it was the only means of getting pipes, tanks and pumps to Sydney's north-west. Or if AWH could do it more cheaply than Sydney Water itself.

Both are claimed by spruikers of public-private partnerships. In fact they are often asserted as universal truths.

Joe Hockey did so shortly after the election when he asked the Productivity Commission to inquire into ways to use the private sector more. ''The capacity of government to meet expectations for improved infrastructure services is always limited,'' he said. ''Options involving the private sector can reduce the call on government.''

The father of NSW public-private partnerships, the late 1980s and early 1990s premier Nick Greiner, made it a mantra.

Opening the privately built (and then privately run) M4 motorway, he said: ''The choice is very simple. Either have the road as a privately owned tollway or not have the road at all.''

It's complete nonsense, and a draft Productivity Commission report delivered to Hockey spells out the fallacy in excruciating detail. The private sector can't do anything the public sector can't, unless it charges. And the government itself could do that if it wanted to.

Sometimes the private sector will do things better than the public sector. The commission cites three studies that find private projects are more likely to be completed on time and near budget than government ones.

Often it'll do things worse. Borrowing is more expensive for firms such as AWH (chaired by Sinodinos) and the firm that built the M4 (whose board Greiner later joined). And the salaries are more expensive. Sinodinos was paid $200,000 for a part-time job as AWH chairman. Eddie Obeid jnr was paid $350,000. If AWH had scored the contract it was angling for, Sinodinos was set to get a bonus that would take his shareholding to about $20 million.

The fallacy is the view companies such as AWH can get access to money the government can't - what the commission calls the ''magic pudding'' fallacy.

Private sector money has to come from somewhere. Most often the private firm will siphon it out of the government, as AWH did when it billed Sydney Water for expenses including limousine rides, pornographic movies and Sinodinos' salary. Or it might borrow the money and later siphon it out of the government, meaning the government will face the same sort of costs as if it had borrowed itself.

Or it might charge tolls, which the government itself could do if it had the guts.

Either way there's nothing stopping the government borrowing more than it has for worthwhile projects. The commission thinks it can. On that point it thinks Hockey and Greiner are wrong. And probably also NSW Treasurer Mike Baird.

His plan is more subtle. It's called ''recycling''. He has sold the leases on Port Botany and Port Kembla to use the proceeds to build the first stage of WestConnex. When that's built, he will sell it and then use the proceeds to build the second stage, and so on.

As a piece of financial engineering, it's admirable. But the commission thinks it confuses two very different questions: whether something is worth building and whether it's better off privately run.

It's not happy with Baird's view of the world, but it reads as if it is much happier than it would have been with Greiner's, during whose term as premier the company that is now AWH gained the Sydney Water contract.

In The Age and Sydney Morning Herald