Governments hand over key infrastructure on a silver platter

Debt-frightened governments keep bungling their infrastructure ventures with private investors.

In the beginning were the privatisations: the sale of government-owned businesses like the Commonwealth Bank, Qantas and of course Telecom; and the not-quite businesses like the Commonwealth Serum Laboratories and the state-owned TABs.

Some sales could have been done better — notably the mistake of selling Telecom-becoming-Telstra as integrated dominant retailer and monopoly fixed network. We are only now fixing that, at huge cost, with the NBN.

Some sales were at prices too cheap — notably CBA (and I wrote exactly that at the time). But broadly the sales made sense. They released value for the taxpayer; they generated value for the nation and individual Australians as investors: spectacularly so in some cases like CSL.

While there had been, for instance, good public policy — and basic operational business — reasons in, say, 1911 to have a government-owned bank (when the CBA was created), that vanished in the wake of financial deregulation in 1983 and globalisation more generally.

And as we saw with the bankruptcy of almost all the state-owned banks in the early 1990s, the massive shifting of risk — and multi-billion-dollar losses — from the private to the public sector was effectively a tax on the citizen to no countervailing benefit to that citizen.

The same reality applied broadly to the not-quite businesses like the TABs, with their broadly third-third-third mix of business (wagering), taxing, and industry subsidisation/product payment.

But after the business privatisations came the sale of the entities which were as much providers of basic public services and, critically, core infrastructure, as straight businesses — most notably the power industries.

We also saw a broader substitution of government borrowing and investment by private sector investment — in its most refined/extreme form, Build Own Operate Transfer, BOOT.

The intellectual justification was, in a sense, antisocialism: that the higher cost of private sector capital would be more than offset by the costs saved in the efficiency of both the build and the operation. More simply, risk would be transferred to private investors. More simply still, the real driver was government aversion to debt, based on either rational or political grounds or more probably a somewhat hysterical combination of both.

Or maybe, not so hysterical when you look at how quickly Queensland’s state debt exploded when the Beattie Labor government abandoned the state’s previous aversion to debt.

The costs and benefits of this latter expansion of private ownership or quasi-private ownership into the building of core community infrastructure and the provision of essential services has proved much, much more problematic.

It was based on the same justification/rationalisation, along with the broader claim of user pays. But people have ended up paying much higher prices for the services — to service much higher private sector costs of capital, even when owners haven’t been extracting monopoly profits.

Complex problems have inevitably arisen when private sector asset ownership and operation has had to intersect with publicly owned assets in the same space. More broadly, governments have ceded critical infrastructure decision-making to private sector owners and profit.

Three examples show the very serious problems caused and the very significant, increasingly unjustified, costs imposed on users and citizens alike: CityLink in Melbourne, the desal plant southeast of Melbourne and Sydney Airport.

With the desal plant, the state government — Victorian taxpayers — have paid to get it built at very high private sector cost-of-capital, made worse by the fact that far from being built more efficiently and cheaper in the private sector the exact opposite happened because the state Labor government ceded control to the unions.

This is not an argument about whether or not the “the rains would ever fill the dams again”. Let’s assume that it was good public policy to build it.

But if it had been built in the public sector, it could have been mothballed without having locked in those hugely excessive payments to the private owners. And if it had been properly in the private sector the owners would have had to sell the water at a loss to compete until they went broke.

Transurban’s CityLink has become the road that has colonised the wallets and purses of Melburnians; and then moved on to do the same in Sydney and Brisbane. It captures the phony nature of these private sector-financed infrastructure projects. They add a huge additional cost — the private sector cost — while retaining the risk with the public.

Then government power is used to mandate a monopoly profit to the owner. To say nothing of the huge fees that are extracted at the start by the “smartest and greediest guys in the room”, operating on both sides as the deal is done, which are baked into the cost and have to be paid back, with a fat margin, by users.

Even more, government power mandates an ever rising, outrageously high monopoly profit for CityLink with rising margins that are now at least double its real cost of capital. It has now become almost impossible to, ahem, bypass CityLink on new road builds.

These are progressively then added to its network, not only risklessly but with locked-in above-market profit.

CityLink has also picked up free the benefit of the explosion in Melbourne’s population, not anticipated in 1995 when the deal was sealed. Or the low price of petrol in the original modelling.

This sort of deal inevitably locks in an above-market profit — at cost to both user and taxpayer; the owner is protected against the downside and gets all the unanticipated upside.

Is it any wonder that CityLink is now the most profitable toll road in the world, generating a staggering 86c of gross profit out of every dollar of toll revenue?

Sydney Airport: here the problem is much more basic. We have handed not just operational but strategic decision-making control of the city’s most important transport asset to private sector decision-making and profit.

We see it in the refusal of the owners to rectify the separation of the domestic and international terminals. Why spend the money and reduce profitability? And we see it in the 100-year monopoly lock the owners have on Sydney Airport access. Not only do they get to generate a monopoly profit, they have control of fundamental infrastructure decision-making. Never again? Don’t bet on it.