I am a naturally curious person. Yes, I guess that can be read in two ways. Still, I like to know how things tick.
This curiosity has sometimes led me in strange directions, picking up interests and then putting them down to follow other trails. This has made for a sometimes varied life, if not always the variation I would have liked.
At one point I became fascinated with the workings of the capital markets. I was in my economist phase then, and indeed started a masters thesis on interest rates. It was all just so interesting. During this quite long phase, I organised an exchange that saw me working as Manager, Corporate Finance for a small merchant bank. I did their first leveraged lease and was then offered a new position as Manager, Project Finance.
I turned the position down because I had already enrolled in a PhD in history and wanted to return to full time study for a period to complete the thesis. Futures turn on such decisions. The PhD re-ignited my interest in New England history and the history of the country movements, and I put the world of corporate finance aside for several years.
One of my difficulties in the corporate finance arena lay in my poor maths. I lacked the mathematical tool kit required to develop new financial products without technical support.
This weakness was offset by a very real strength, my ability to drill down to the underlying principles, to see how things worked or might work, to understand relationships. This was quite useful.
Some of the work that I did then, and again later, involved what are now called public-private partnerships.
Excluding fees, something that is very important in merchant banking, financial institutions sell debt. The return comes from the difference between interest rates received and interest paid, adjusted for risk. The challenge is to find new ways of selling the debt while increasing the spread received, the difference between interest received and paid.
I recognise that I am simplifying, but I am sorting things out in my own mind.
From a client perspective, they would be interested if your offering allowed them to access more funds, at a better rate, or on better terms.
I mention all this because it bears upon something that I have never fully understood, the obsession with private-public (or public-private) partnerships.
One of the things that I looked at in a preliminary way during this period involved Government cars in an Australian state.
Each agency leased cars for its own purposes. As I remember it, the proposal under consideration involved combining all those leases into a single package. The Government would benefit because consolidation would lower lease costs, we would benefit if we got the mandate through fees and spread on funding.
A little later, I did some work for a client who had completed one of the first really big private-public partnerships in Australia.
This was a jewel in the crown deal, one that was highly profitable to the client. In this case, the Government benefited because it got a long term asset without putting up cash, while the costs of the project were covered by tolls paid.
Whether the citizens in the state benefited was a different issue.
The actual financial maths in this case meant that there was little difference in financial terms between Government borrowing and then charging tolls and private sector borrowing and then charging tolls. If anything, the private sector option was more expensive because of the added fees and charges. However, from a Government perspective, it got the project off-balance sheet.
Much later, I was involved for a short period in project managing a social housing project.
The idea was a simple one. Instead of the Government building certain social houses, it would fund community housing organisations to build them. The Government would give the housing organisations a very long term lease, thus allowing them to borrow against the rental streams to build new housing.
I am sure that this sounds very reasonable and at one level it was. However, the financial viability of the project rested, as it had done in my first leverage lease all those years before, on taxation treatment.
Community housing organisations receive certain tax benefits not available to Government agencies. In particular, but subject to certain very complicated conditions, they can claim back GST on construction costs. Other things being equal, this meant that the GST savings could be spent on more social or affordable housing.
From an agency perspective, this was a good thing. Strapped for cash because of real Federal Government cut-backs to social housing over an extended period, it meant more houses. However, from a national perspective it was a transfer payment. GST revenue was lost, but the amount lost was then spent on more housing.
I may seem to be meandering, so let me cut to the chase.
Public-private partnerships are simply a funding mechanism, one actually based on a small number of variables. Whether they make sense or not depends upon the circumstances of the individual case.
Further, just because they make sense for an agency or Government does not mean that they make sense in broader national terms. A transfer payment is a transfer payment.
It should not therefore come as a surprise that Nick Gruen's analysis should conclude, Me on debt and infrastructure, that the actual return from the arrangements has been negative.
There is, after all, no such thing as a free lunch.