PPP Infrastructure Finance – A Case of Public Pain for Private Profit..?

The following is an article written by kiwi Joel Benjamin who is in the country for three months. Formerly from Hawkes Bay, he is currently a researcher for Goldsmith University in London and was formerly a campaigner for public finance. oblique-view-img4It's time for a serious public debate on infrastructure future.



This week at the Auckland transport summit 2014, experts from around New Zealand will gather in Auckland to discuss transport infrastructure planning solutions to address Auckland’s growing urban transport problems.



Entirely missing from the debate however, will be an open public discussion of how such infrastructure will be paid for by all New Zealanders, and paid to whom?



Having recently returned to New Zealand after several years in financial campaigning in London, I was interested to see what was being proposed in New Zealand across the infrastructure planning and finance space. The answer is PPP. Upon leaving a planning role with Napier City Council in 2006, I spent 3 years in Melbourne with State transport authority VicRoads, before briefly entering the consultancy game.



Through the experience of working on projects including the Calder Corridor and Geelong bypass in Melbourne and Sydney West Metro underground rail, I have seen the best and worst of what the private and public sector have to say and do on infrastructure development.



Compared with Melbourne, Sydney is a transport infrastructure basket-case, suffering from 20 years of State Government decision making paralysis. While the construction companies hate the constant transport planning u-turns, for the planning and engineering consultants, it’s a fee earning gold mine, with taxpayer funded “team-building” gigs sailing on Sydney harbour all the rage.



Ideologically I am not wedded to either public or private sector approach to infrastructure delivery. I am however extremely concerned about who pays for infrastructure, and that what is designed and built is fit for purpose and meets demonstrable public needs.



In the mid 1990’s Australia and the UK embarked on a infrastructure financing model called the Private Finance Initiative (PFI/PPP) to fund public infrastructure including schools, roads and hospitals “off balance sheet” using more expensive bank finance, instead of Government borrowing.



Whilst PFI has proved a gold mine for private financiers and construction firms, it’s been a disaster for the UK taxpayer.



To pay back £55 billion of PFI/PPP infrastructure will cost UK taxpayers £301 billion over the next 30 years.



Interest charges on PFI bank finance are at least double the cost of Government borrowing. In the NHS, academic Allyson Pollock has stated PFI has frequently meant “one hospital for the price of two.”



Our Prime Minister John Key spent his working life in London within a banking environment where such profits at taxpayers expense were considered not only desirable, but entirely normal.



With the recent creation of the Auckland “super city” and talk of local government mergers in Hawkes Bay where I grew up, I see plenty of warning signs that PFI/PPP super profits are occupying the thinking of politicians here, and taxpayers have every right to be concerned.



It turns out that the modern infrastructure industry is not especially concerned with financing development, its objective is developing finance.



The aim is to get as much private bank debt out the door as humanly possible with unsuspecting taxpayers on the hook to pay for it.



The public utility of any planned infrastructure (if it is even needed) is of secondary concern to authorities, whose job is to maximise private profits. Planned Public-Private (PPP) infrastructure projects including the Ruataniwha Dam in Hawkes Bay, and Transmission Gully in Wellington should be considered and scrutinised in this light. Coincidentally, both PPP projects which are financed by BNZ.



The “vertical integration” or alignment of commercial interest between the infrastructure developers and the bank is so complete that Andrew Pearce, the Chairman of HBRICL who are developing the Ruataniwha Dam project also sits on the BNZ board.



There is no accusation of impropriety involved, but taxpayers should certainly question whose interests are being advanced through development of the Ruataniwha Dam – local rate payers, or BNZ shareholders? to whom Pearce has a “fiduciary duty” to maximise BNZ profits.



PPP projects are typically designed to benefit from economies of scale and suck up thousands of hours of expensive private sector engineering and environmental consultants time.



However spend a few hours reading through a typical economic business case used to justify a PPP project and you’ll quickly discover more clouds of doubt than your average long range mountain forecast.



Economic forecasting is frequently full of grandiose predictions, models and assumptions. Build it and they will come, as opposed to projects servicing demonstrable existing needs.



PPP projects are fantastic business for the private sector, as lending to central government involves zero risk of default. Profits for private sector firms engaging in UK PFI/PPP projects reach 60-70% returns, as compared with 3% returns on standard construction projects.



Tangible benefits for taxpayers however are much more elusive to pin down, with many PPP projects owned, controlled and run via offshore shell companies paying negligible taxes. PFI/ PPP contracts are deemed “commercially sensitive” and are not made available for scrutiny in the public realm.



Despite the criticisms, let’s be clear about one thing. We need good public infrastructure. That much is obvious.



Road and rail networks connect trade and commerce, ports connect us to global markets and modern schools and universities ensure a skilled and innovative workforce.



We must however question an “infrastructure at any costs” philosophy, designed to indebt future generations for decisions made today in the interests of private sector profiteers, not the taxpaying public.



There are other means of funding infrastructure which much be explored before committing future generations of taxpayers to the folly of PPP.



A 2011 UK Treasury Select Committee Report on PFI/ PPP found the cost of bank borrowing to be at least twice as expensive as Government finance.



Questions must be asked why direct Government financing of projects like Transmission Gully, Auckland rail development and Ruataniwha Dam is not on the table alongside PPP. Where is the alternative?



We also have the option of public banks, like the Bank of North Dakota in the USA. The Bank of North Dakota has a mandate to support the local economy, support other local banks and fund rural businesses, infrastructure and irrigation projects of a type identical to Hawkes Bays Ruataniwha Dam.



The difference however, is that interest payments and profits at public banks (being State owned) are reinvested in the state, not siphoned off by private profiteers such as Australian owned BNZ - who finance both Transmission Gully and Ruataniwha Dam PPP projects.



When a public bank like the Bank of North Dakota makes lending decisions, we can be reasonably assured both the infrastructure project itself, and the profits that derive from it are aligned with, and ensure benefits for, local citizens. When private banks like BNZ are involved in infrastructure planning and finance on a strictly for-profit basis, we have no such assurances, and should remain vigilant to the corrupting effects that for-profit private infrastructure finance can, and demonstrably have had on democracy in the UK.

There is no shortage of bedrooms in Auckland but…

The Q and A programme on TVOne this week started with a debate on housing. Property investor Olly Newland and Hive News Publisher Bernard Hickey were asked by Susan Wood about how to control the housing bubble in Auckland, since the Reserve Banks had this week decided it was not budging and would leave the Loan To Value (LVR) restrictions in place.

Olly Newland seemed to want no restrictions at all so that rents will come down. Bernard Hickey pointed out that if you have first home buyers with 1% deposit you run the risk that the banks will fail and the Reserve Bank can’t take that risk. Olly replied that the banks can look after themselves, which fails to understand that we need a reliable banking system. He said that LVR restricts first home buyers and that is preventing them from getting on the housing ladder. He even used the term “moral aspect” and said he was the first to encourage home buying for first home buyers.

Bernard pointed out that if rents go up the government has a fiscal problem because it pays accommodation supplements. Bernard says if interest rates go up homeowners are in trouble. He reflected on the fact that RBNZ had been considering various ways of controlling lending to investors, including a different rule for those who have five or more properties.

They disagreed on whether interest rates will rise or go down, Olly opting for the latter and saying we are getting deflation starting round the world. He dismissed the RBNZ’s solution to control investment finance as “political claptrap” and said he wanted people to be able to rent property for a lifetime securely. He believes the market would steadily slow down and people were investing for the long term.

Oh well, interesting to have his views.

Then the panellists came on and included Matthew Horton and Laila Harre. Laila said the government doesn’t know whether
they want more people to live in their own houses
they want to control the rental market. They should get a policy on these.

Laila said there was an obsession with the supply issue and a lack of proper statistics. The housing shortage figures vary between 5000 and 30,000! Property investors owning 5-6 homes are often living in large houses themselves when all their children have gone. There isn’t a shortage of bedrooms in Auckland at all.

Matthew then pointed out the anomalies possible in the RBNZ’s other options e.g. does a property owner with five bedsits have a bigger portfolio than those with three huge student houses? Here we go again. If you don’t ask the right questions you don’t get the right answers and you end up with a complicated messy system full of anomalies.

So they managed to have a whole debate without once raising the issue of land prices and how to keep them down.

You know when I was writing my book Healthy Money Healthy Planet – Developing Sustainability through New Money Systems I was arguing that money be created without interest. Some said interest rates need to go up not down. But the strongest reaction I got from the drafts was from Robert Keall of Resource Rentals for Revenue. He basically said “zero interest loans over my dead body” because he knew land prices go up. He said we want higher interest rates not lower interest rates.

Ten years later I know what they all meant. Low interest rates mean a land bubble (people call them housing bubbles but it is really the land that rises in value not the building).

So while I am still of the opinion that money should be never be created as interest bearing debt, I am also acutely aware of the connection between land and money and know that in New Zealand new land tenure systems were introduced by British colonists at the same time as private banks and their money creation powers.

The whole point is that because land is naturally occurring, it belongs to everyone. Colonists brought with them a concept completely alien to Maori, and indeed to the thinking of indigenous people worldwide, – private land ownership. The setttlers, who had largely been tenant farmers in England and Scotland, wanted freehold land. Freehold means land ‘free of rent’. Thousands of years of enclosures of land in Britain had meant that freehold was the new ideal. They had forgotten that land belongs to everyone.

It is a sign of how little distance we have come in our understanding of land as a natural resource that a high profile debate like this QandA debate can go hard at it without mentioning land. One tweeter said ‘The elephant in the room is capital gains’, again without mentioning land.

Oh and they had a debate they had about ‘forcing people out of their homes’. When Laila pointed out that there was no shortage of bedrooms in Auckland, Matthew Hooten said you can’t force people out of their homes. Well a tax system can. That is what tax systems do – they alter behaviour. If a Remuera retired couple is living in a huge home and the only cost to hold their land is the rates, they stay there. If however they had to pay an extra 3% land tax they might reconsider buying a smaller property more suited to their needs.

The next day the Dominion Post carried a short piece making Laila look ridiculous for saying this but she was only pointing out a fact.

A recent Melbourne study has found that a great many property owners are not even renting, they are just sitting on their properties waiting for capital gain. In the commercial area it is a higher percentage and in each suburb it differs. 64,386 properties are likely vacancies during Melbourne’s record-long housing supply crisis - See more at: http://www.prosper.org.au/tag/speculative-vacancies/#sthash.cHtfoINb.dpuf

It is time such a study was done for Auckland.

Economics professor Steve Keen in a recent interview said it is only thing stopping unemployment rising to the levels of Europe is the the housing bubble. The housing bubble keeps money supply up. Goodness, that is a critical point and leads us to understand the interconnections between the money supply, unemployment and how the tax system affect where money is invested. Of course Steve Keen must then argue we need more money in the system as well as a tax system that taxes the monopoly use of the commons and not work. And we have to find a money system that is sufficient. Thank goodness for the citizen effort going on at the moment to start a Christchurch currency. Yes getting this new political economy is a huge challenge for the entire world. http://www.switzer.com.au/video/keen13112014/.

Will The US and Japan reach a deal on agriculture and automobiles, and offer virtually nothing to everyone else

eight_col_tppa_protest_welliLast Saturday was a very successful International Day of Action against the TPPA! Here is something Jane Kelsey wrote about the various scenarios. Here is hoping we don't get option 3. And watch the timing, as it could all happen when we are busy with Christmas...And here is Jane writing now:

“It is a hell of a lot easier to stop the TPPA being concluded than trying to prevent it coming into force after the deal has been signed. This is the time to ram that message home, not just to the government, but to the opposition parties as well – including the prospective Labour leaders whom I have yet to see stake a position on the TPPA.”

There is a mythology that the TPPA will never happen. That is a reckless assumption. It encourages complacency and inaction. And it is seriously wrong.

The political leaders of the twelve countries know they have to do the deal soon or it will become paralysed.

That won’t happen when the trade ministers meet on 8th November in Beijing on the margins of APEC. But it could happen within a couple of months. No one should doubt how serious they are.

That was obvious at the ministerial meeting ten days ago in Sydney.

The pressure on the negotiators in the handful of remaining sensitive chapters is intense, as if they have instructions to finish their technical work so the ministers can finalise the deal.

What has been saving us all is the continued standoff between the US and Japan over agriculture and automobiles.

That could continue to save us. But don't bet on it.

There are mixed views about what the Republican victory in Tuesday’s mid-term Congressional elections in the US will mean. It is already being spun to say that Republicans are pro-free trade and will be better for the TPPA, so they may give Obama fast track authority to ease the TPPA through Congress. That would reassure the other governments at the table and encourage them to finalise the deal.

Those who are tracking developments in Congress, such as Lori Wallach from Public Citizen, disagree. There is a real hatred of Obama in some Republican circles, and the price for fast track would be hugely controversial, such as rules on so-called currency manipulation, which some countries couldn't agree to.

On the Japan side, it is unclear how the political scandals in the Abe government might affect the shape of a final deal with the US on agriculture and automobiles. Abe also has a controversial tax change to steer through the Diet in the next few months that will use up a lot of his scarce political capital.

Despite these factors, both the US and Japan need an outcome. Soon. They could well do a pragmatic deal that works for them, and let the dominos fall.

I can see four scenarios.

Scenario one: The US and Japan decide to play by the supposed rules of November 2011 and liberalise everything for everyone. And flocks of flying pigs will fill the skies over the twelve countries.

Scenario two: The US and Japan cannot reach agreement on agriculture. Everything remains stalled. After some time – who knows how long - they stop pretending and suspend negotiations.

They know that once they do that, the momentum is almost impossible to regain. The Doha round at the World Trade Organization started in 2001, was suspended in 2007, then restarted but no-one would know! In this scenario, expect the TPPA to drag on with no one willing to pull the plug.

Scenario three: The US and Japan reach a deal on agriculture and automobiles, and offer virtually nothing to everyone else. That is consistent with what Japan reportedly offered to New Zealand on dairy in Sydney. Canada will happily follow suit, hiding behind the US and Japan. Faced with this, Groser can’t bring himself to walk away, swallows the rat, accepts what’s on offer and agrees to trade-off our medicines, internet, investment, SOEs, etc.

Scenario four: Groser does what he has threatened to do, and walks away because there is no meaningful liberalisation on agriculture. More flocks of pigs join their whanau in scenario 1.

The agriculture lobby is terrified because they know the third option is the most likely. That saw them at panic stations last week with a series of statements from Federated Farmers, the dairy lobby, Groser and sympathetic journalists insisting that New Zealand must be prepared to walk away from a lousy deal.

Groser will never walk away. He views the TPPA deal as his brainchild. He will spin whatever is in the final deal as the first step to something that will bring huge long-term benefits to New Zealand. ‘We can’t afford not to be part of the biggest deal between the world’s biggest trading powers … ‘

If he is clever – and he is - Groser could seek to defer implementation of the worst parts of the TPPA so the impacts are delayed. Better still, if Parliament didn’t have to change the law immediately, the US would be unable to hold New Zealand to ransom over compliance (the blackmail process known as 'certification').

Then Groser can say, 'see, the scaremongering about the TPPA was a big beat up.' By the time the impacts are felt, his role as the minister who negotiated the TPPA (and hopefully the National government) will be history.

This could well happen unless we turn up the heat, on and after Saturday.

Defeatists will say that taking to the streets won’t make any difference. But activists in Australia, Japan, Malaysia and the US will be doing the same. The collective pressure does matter. The other governments are nervous about who can deliver on what they are promising, especially when it is unpopular at home.

It is a hell of a lot easier to stop the TPPA being concluded than trying to prevent it coming into force after the deal has been signed. This is the time to ram that message home, not just to the government, but to the opposition parties as well – including the prospective Labour leaders whom I have yet to see stake a position on the TPPA.

Gatherings on Saturday were in Auckland, Hamilton, Raglan, Tauranga, Rotorua, New Plymouth, Napier, Palmerston North, Levin, Wellington,Nelson, Christchurch, Timaru, Dunedin, Invercargill. Details on itsourfuture.org.nz."

Land enclosures in England took centuries

UnknownAndro Linklater’s book Owning the Earth – the Transforming History of Land Ownership is a fascinating chronicle in the history of civilisation.

If you think that land speculation is something modern contemplate this: Thomas Cromwell, Henry VIII’s lord chancellor was big speculator. Here is Andro Linklater on the topic:
“In three frenzied years, from 1537 to 1539, he bought almost twenty properties in the southeast of England at a cost of £38,000, then sold most of them again for a total profit of more than £4000…..

But the profit to be made from the rising price of land was irresistible. When the mighty abbey of Tewksbury lost its lands near the south coast, a wealthy London cloth merchant, Sir Robert Palmer, bought three of its manors in 1540 for £1255, and immediately cleared off the villeins and cottagers. Then he turned on the tenants, harassing them and even breaking into their homes.”

Jump two centuries forward and the enclosures are well advanced. He writes “The rising price of land triggered a new surge in enclosure. Much of England’s farmland had continued to be cultivated as ‘open fields’ with some common rights of pasturing livestock, and almost a quarter remained communally owned and used. It was a measure of the landowners’ influence in Parliament that more than four thousand ‘Inclosure acts’ were passed between 1700 and 1830, allowing their promoters to hedge and fence in most of this land as private, exclusive property….. Altogether some seven million acres were transferred into private ownership through the enclosure orders, brutal testimony to the political power now wielded by landowners. In many cases compensation was paid, but the total value of enclosed land represented the transfer of about £175million of assets from communal possession to the lawyers, merchants and wealthy landowners who controlled Parliament.”

Why did landowners want to enclose their property? Because they ran sheep and when the sheep were confined to one area bounded by hedges or ditches or stone walls, they manured the soil. The word ‘manure’ also meant ‘improve’. Their land was then more productive.

So let’s go back to 1485 and follow it through.

1485 Henry V11 first year on the throne
1489 The land revolution was well underway. Henry legislated to stop engrossment
1536 Pilgrimage of Grace opposes enclosures
1549 Robert Kett’s rebellion against enclosures. None statutes and 3 government commissions designed to prevent ploughland being turned into pasture and highways being thronged with homeless who were dispossessed of their land.

1517-1537 fines or imprisonment for those who enclosed land including 264 peers, bishops and knights.
1533 Inheritance issue. Struggle was won by the landowners and Henry V111 found that he was short of taxes.

Review of Naomi Klein’s book This Changes Everything, Capitalism vs Climate

Book Review by Peter Healy, Marist Priest of Otaki

This Changes Everything, Capitalism vs the Climate by Naomi Klein, 2014, $37

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This is a comprehensive and timely book. Klein says in part one, “If there has ever been a moment to advance a plan to heal the planet that also heals our broken economies and our shattered communities, this is it.” In the introduction she says “this is the hardest book I have ever written because climate change puts us on such a tight and unforgiving deadline.”

This book is about our “climate moment” with all its challenges and opportunities. First, Klein says we have to stop looking away. We deny because we fear letting in the full reality of a crisis that changes everything. The need to change everything is not something we readily accept. If we are to curb emissions in the next decade we need a massive mobilisation larger than any in history. She quotes the Bolivian Navarro Llamos who suggests it is time for a “Marshall Plan for Earth”.

The question is posed: What is wrong with us? What is really preventing us from putting out the fire that’s threatening to burn down our collective house? The global economy always takes centre stage. Market fundamentalism has systematically sabotaged our collective responses. Our economic system and our planetary systems are at war. We are faced with a stark choice: “either we allow climate change to disrupt everything about our world or we change pretty much everything about our world to avoid that fate”. We need a radical rethink for these changes to be remotely possible.

Our “climate moment” is accompanied by what she calls a “fossil fuel frenzy”. A wild dig is going on in most nations on the planet. Aotearoa/NZ being no exception. With the “fossil fuel frenzy” Klein says, “We have become a society of grave robbers, we need to become a society of life amplifiers, deriving our energy directly from elements that sustain life. It’s time to let the dead rest.” Our most important task now is to keep carbon in the ground.

To do all this we need to be thinking differently. A new worldview is required, “a project of mutual reinvention” has to be entered into. The door to 2 degrees of warming will close in 2017. We are in the midst of a civilisational wake-up call. This call is coming to us in the language of fires, floods, droughts and extinctions. We are being called to evolve, and the thing about a crisis this big is that it changes everything.

Wealthy nations need to start cutting emissions by 8-10 percent per year. They have to begin this now. We need to consume less and get back to 1970’s levels. Low consumptions activities like gardening and home cooking are good. Changing everything means changing how we think about our economy. Large corporations dodge regulations, and they refuse to change behaviours. No company in the world wants to put itself out of business, their goal is to always expand their market share. Klein talks about addiction rather than innovation when it comes to new methods of extraction. We need to keep all the fossil fuel we can in the ground, at the same time more extreme and innovative methods are being invented to get at whats left. The madness of “extractivism” is a relationship of taking with little care being given to regeneration and the future of life. As Klein says the market economy and the fossil fuel economy emerged at about the same time. “Coal is the blank ink in which the story of modern capitalism is written.”

There are no messiahs. The green billionaires will not save us, we have to change our lifestyles. Our most intoxicating narrative is that technology will save us, and this is one of our forms of magical thinking. There are some fascinating passages about Klein going to a geo-engineering conference in the UK. She describes the attendees as, “a remarkably small and incestuous world of inventors and scientists and funders.” It is all very risky, untested and dangerous stuff that they are proposing. The solution to global warming is not to fix the world, rather we need to fix ourselves.

The book has inspiring things to say about “Blockadia”. This is a broadbased grassroots resistance movement intent on shaking the fossil fuel industry to the core. Indigenous peoples are key in the Blockadia movement, their rights can be a great gift for the revival and reinvention of the commons we all love. Bolivia and Ecuador have already put “the Rights of Mother Earth” into their national statutes. Blockadia asks the question, “How come that a big distant company can come to my land and put me and my kids at risk and never ask my permission?” The corporations come from far away and go everywhere because the fossil fuel industry is one of extreme rootlessness.

Followers of recent global climate talks are well aware of failure and deadlocks. A Greenhouse Development Framework from the Stockholm Environment Institute is an attempt to deal with disparities within and between countries claiming the rights to develop and pollute.

In chapter 13 of the book Klein talks about her attempts to have a child while researching this book. There are some lovely descriptions of Klein coming to realise that earth is facing fertility challenges of her own. Many species are now against “infertility walls” and finding it hard to reproduce. Fertility is one of the first functions to erode when animals are under stress.

The challenge for the climate movement hinges on pulling off a profound and radical economic transformation. In extraordinary historical moments “the usual category that divides “activists” and “regular people” become meaningless, the activists are quite simply everyone”.

So this book is for you and me and everyone. We are all implicated in everything this book is about, so get hold of it, read it and pass it around. As a slogan at the recent climate march in New York said, “To change everything we need everybody.”

I found myself saying to someone the other day, “If any book will push us through and beyond the Great Transition that we all have to make, then this is it!” Along with the film that Klein’s partner is making on the same subject, we can take some hope. We still have our brief window of time. We are inventive and creative. We can join with the tangata whenua as guardians of Mother Earth.