Two privatisations, neither quite as they seem.
One, the Ararat Prison Project in Victoria, is being hammered as a government disaster when it is really an example of genuine risk transfer by the state.
The other, the sale of the Sydney desalination plant, is hailed as a triumph when consumers have been locked into buying water they don’t need for the next few decades.
Warragamba Dam has been literally overflowing and the people of NSW need this water like the northern provinces of Chad require a new source of sand.
It is a PPP (public private partnership), however, and the second P requires its financial return. And so it is that the O’Farrell government has sold its plant for $2.3 billion, netting $300 million after paying down $2 billion in debt.
Meanwhile in Victoria this week, work has stopped at the newest prison project and at least one of the developers, St Hilliers, is said to be in strife and unable to pay its workers. The contractors and the unions are furious, understandably.
Yet, as this is a public-private partnership (PPP) deal too, the state has transferred the development risk to the private consortium running the $400 million project and its private partners will have to dig deep and see the job through.
Wealth transfer
PPPs are criticised, and often justly, for transferring wealth from taxpayers to the private sector. And the private sector regularly gets the upper hand in negotiations. But a PPP deal cuts both ways.
In the case of Ararat, it appears the private sector is going to incur substantial losses in delivering the new prison. This, after all, is a fixed-price deal with the Victorian government.
And so the state is rightly insisting that the private sector equity players, Commonwealth Bank and Bilfinger Berger, the project bankers (again CBA, Bendigo Bank, Adelaide Bank and West LB) and the builders (St Hilliers and Hawkins Construction) fix the mess by pumping in more cash.
If there is any debacle in the sphere of public-private partnerships (PPPs), it is the failure of the state to ensure proper disclosure of its private partners.
A BusinessDay investigation last week found that the Victorian government does not reveal the financial status of its private counterparties, not could it even demonstrate that it knew these details itself.
Ironically, Victoria’s most successful PPP tenderer, the Plenary Group, was the under-bidder for the Ararat prison project. Given Plenary’s track record and the fact that its development partner on the deal was engineering giant John Holland, it seems the state selected the wrong bidder.
If there was a mistake in the Ararat process, this was it. Nonetheless, the state has a contract and Commonwealth Bank and Bilfinger Berger have deep pockets.
Off balance
The Ararat kerfuffle goes to the heart of the debate over PPPs in Australia. Many argue they are just a way for governments to get large infrastructure liabilities off their balance sheets.
And there is a price to pay. Why not use a state credit rating to raise cheap debt finance on the semi-government bond markets then simply mandate a developer instead of forking out 18 per cent in finance costs to a gravy train of pin-striped bankers and structurers?
Why indeed? Because that is the price of eliminating risk.
The one thing the state does need to demonstrate, however, is an open and transparent process. Did the Department of Justice have the financial statements of St Hilliers and Hawkins Group, the Ararat constructors when its struck its deal with them?
Were their financial statements filed on time with the corporate regulators? Were they filed at all?
Essentials
Regardless of one’s opinion of PPPs it is absolutely essential that the public is availed of the bona fides of those counterparties with which it is dealing.
There should also be “public sector comparator” studies (PSCs) available to demonstrate the government has weighed up the comparable costs of simply raising finance on the state bonds market and outsourcing the job itself.
There is one other absolute essential: the state, having struck its deal, must stick to it.
In the case of the Sydney Airport Rail Link, the state bailed out its private partners putting taxpayers on the hook for $800 million.
Otherwise, some PPPs which have been hailed as disasters may actually have saved taxpayers money. Each deal has its own myriad complexities and in many the disclosure is shoddy.
But more than $5 billion in losses have been racked up by assorted PPPs. Typically, the equity participants get wiped out first, and often the banks and other creditors have to take a haircut too.
In all cases, though, the investment bankers, lawyers and expert consultants have already taken their fees upfront. They rarely lose, despite their often misleading deal projections.
Looking at a few of the notable cases, there were $800 million in losses on Sydney Airport Link, some $100 million in losses on the Brisbane Airtrain, the Adelaide to Darwin Frieghtlink, $1 billion in losses on Brisbane’s Clem 7 Tunnel (Rivercity), Sydney’s Lane Cove and Cross City tunnels losing $1 billion and $300 million respectively and an estimated $770 in losses on Melbourne’s Eastlink.
It is the equity holders who have fared worst in almost every case. In some cases, the state has had an asset built almost risk-free with the private sector taking the losses.
This is no fool-proof case for PPPs but a reminder that even when they look disastrous it is not necessarily the taxpayer who is getting thwacked.
Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.