Rail deal may go off track for Su­per Fund

Weekend Herald - - Viewpoints -

John Roughan

Can you credit it? Our na­tional su­per­an­nu­a­tion fund wants to in­vest in an Auck­land tram­line. “Can you credit it”, is essen­tially the ques­tion cooler heads in public ad­min­is­tra­tion are now ask­ing.

When the Su­per Fund’s in­ter­est was made known by the Gov­ern­ment this week, one or two ex­cited re­ports said work was about to start on light rail for Auck­land. The truth is, jack­ham­mers will not be tear­ing up the city’s streets any­time soon. The work about to be­gin will be on pa­per in Welling­ton.

The Cab­i­net has agreed the Trans­port Agency, work­ing with the Trea­sury and the Min­istry of Trans­port, should work out “a ro­bust process to ex­plore a range of pos­si­ble pro­cure­ment, fi­nanc­ing and project de­liv­ery op­tions”.

Thank God for face­less bureau­crats, they are of­ten the only peo­ple stand­ing be­tween po­lit­i­cal en­thu­si­asm and eco­nomic lu­nacy.

Trans­port Min­is­ter Phil Twyford was prob­a­bly will­ing to grab the Su­per Fund’s cap­i­tal with both hands when its un­so­licited in­di­ca­tion of in­ter­est came in last month. He is now pre­dict­ing his trams will be up and run­ning within six years.

But the “ro­bust process” of eval­u­a­tion that will be rec­om­mended by of­fi­cials will prob­a­bly in­volve first, a com­pet­i­tive ten­der, sec­ond, that a con­vinc­ing busi­ness case should show how the trams will be suf­fi­ciently well pa­tro­n­ised to pro­vide the in­vestor with a com­pet­i­tive re­turn, and, third — most im­por­tant — that any com­mer­cial in­vestor must face a fi­nan­cial risk.

That last con­di­tion is the whole point of so-called “public-pri­vate part­ner­ships”. The ben­e­fit com­mer­cial in­vest­ment can bring to a public project is not just cap­i­tal that doesn’t weigh on the public bal­ance sheet, though that is usu­ally its main at­trac­tion to gov­ern­ments.

The real value to the public is that the project will be sub­jected to a hard­headed as­sess­ment of its worth by

Far too of­ten, public pri­vate part­ner­ships are set up in such a way that the pri­vate part­ner can­not lose.

in­vestors who stand to lose if they mis­cal­cu­late its likely re­turn.

Re­turn on in­vest­ment — all in­vest­ment, public and pri­vate — is the essence of a strong econ­omy and all the so­cial ben­e­fits that de­pend on an econ­omy. The Trea­sury will tell you that but it is al­ways sur­pris­ing how few out­side the core public ser­vice are aware of it.

Lo­cal gov­ern­ment seems un­aware of it, even in the busi­ness world there’s a ten­dency to think public in­vest­ment doesn’t need to show a re­turn, es­pe­cially if it is for in­fra­struc­ture their busi­ness can use.

Far too of­ten, public pri­vate part­ner­ships are set up in such a way that the pri­vate part­ner can­not lose. The com­mer­cial par­tic­i­pant raises the cap­i­tal to build the project and gets to op­er­ate it, re­ceiv­ing fares and sub­si­dies agreed at the out­set.

If it has cal­cu­lated the likely pa­tron­age cor­rectly, the rev­enue will give the pri­vate part­ner a good re­turn on its cap­i­tal. But if the project turns out to be not as well used as its public pro­mot­ers and pri­vate in­vestors thought it would be, the Gov­ern­ment will prob­a­bly raise the sub­sidy, or maybe just take over the op­er­a­tion, lower its charges and run it a loss.

Of­ten this is even agreed at the out­set, with the Gov­ern­ment un­der­writ­ing the pri­vate part­ner’s risk. Heads, the com­pany wins, tails, the tax­payer loses. It’s called pri­vatis­ing the profit and so­cial­is­ing the loss.

But the real loser is the na­tional econ­omy. Ev­ery poor public in­vest­ment takes re­sources that could be used for a bet­ter re­turn and a project such as public trans­port can in­flu­ence many other ac­tiv­i­ties and in­vest­ments in its re­gion. Too much un­duly costly and in­ef­fi­cient in­fra­struc­ture makes an econ­omy deeply and chron­i­cally poorer than it should be.

Fortunately, Labour gov­ern­ments par­tic­u­larly de­test the idea of pri­vatis­ing a profit and so­cial­is­ing a loss. Na­tional tends not to mind so much, happy just to have the cap­i­tal pro­vided off-bud­get and be­liev­ing even a heav­ily sub­sidised pri­vate com­pany will run the op­er­a­tion more ef­fi­ciently than a public body.

But a Labour Gov­ern­ment might not be so averse to un­der­writ­ing the risk of a com­mer­cial part­ner when it is a public pen­sion fund, es­pe­cially this fund.

Its in­vest­ment de­ci­sions have been very sound over the past 10 years, prob­a­bly be­cause they had to be. Na­tional never thought the “Cullen” fund was needed and sus­pended con­tri­bu­tions while the Bud­get was in deficit. It was in no hurry to re­sume when a sur­plus re­turned.

Now the guardians have come in from the cold and look­ing for­ward to more cap­i­tal con­tri­bu­tions re­sum­ing, prob­a­bly in the Bud­get on Thurs­day.

Public su­per­an­nu­a­tion funds are al­ways li­able to be­come a ready source of cap­i­tal for poorly con­ceived, wildly am­bi­tious po­lit­i­cal schemes such as fixed rail trans­port that can pro­vide only a frac­tion of the daily travel in Auck­land. If the Su­per Fund thinks it can earn a re­turn on our money, good luck to it. But it is vi­tal to face that test.

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