Daily Archives: November 18, 2014

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

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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…

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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/.