Who knew? Keeping roads in public hands works best

Behold a rarity. Some questioning in the mainstream media about privatising everything:

TONY EASTLEY: For years now, toll roads and tunnels have been all the rage in many Australian states. Under the preferred model, the private sector takes the risk, finances the project and earns the profit but critics say the toll road model takes motorists for a ride.

New research suggests governments could do a lot better if they borrowed the money, built the roads and kept the assets in taxpayers’ hands.

AM’s Simon Santow spoke to the study author, economist Dr Nicholas Gruen.

NICOLAS GRUEN: The fundamentals are that if you have got a strong balance sheet and you have got infrastructure needs then you use that balance sheet to borrow the money and build the infrastructure. That is the cheapest way, the most effective way, fairest way to do it.

SIMON SANTOW: Why does it bring benefits to taxpayers that the public/private partnership model doesn’t?

NICOLAS GRUEN: Essentially because the public/private partnership model will be trying to make a return on its investment of 10 per cent, 12 per cent something like that and the state government, even at the beginning of this spree of public/private partnerships was facing long-term cost of debt of about 8 per cent and it is now down to a little over 5 so that is a much lower cost of capital and what a freeway is, is mostly capital.

SIMON SANTOW: Voters are consistently told that the public/private partnership model is more efficient.

NICOLAS GRUEN: Er, yes they are. Well, we are told that by a combination of governments who like the sound of saying that we have got a AAA rating and by banks who are making literally billions of dollars out of public/private partnerships.

SIMON SANTOW: So if in the case of New South Wales, the state government had decided to borrow and do the project itself or finance the project itself, would there have been any danger to the state’s AAA credit rating?

NICOLAS GRUEN: Very early on when this was possible, the state government after the 1990/1991 recession had more pressure on its balance sheet so yes it is possible there would have been a downgrade.

By now we would have been laughing because by now it would be adding over $350 million every year to the New South Wales budget. If we’d built a toll road in Sydney using borrowed money at the sorts of rates of return that you get from a public/private partnership, I think it would be outlandish to suggest that that would do any harm to New South Wales credit rating and over 15 years it would actually strengthen its credit rating because it would return money to the budget.

SIMON SANTOW: How do you then assess more recent toll-road projects like the ones in Brisbane, the Clem7 comes to mind?

NICOLAS GRUEN: Well, look I haven’t look at these things closely so obviously caveats would apply but generally speaking, I mean I am a fan of the private sector. I am in the private sector but building roads is not really a very sensible thing to do for the private sector generally speaking. That is because the asset is mostly capital and because one ends up having to write contracts which cost millions of dollars to write and then constrain the government in making planning decisions for the next 20 or 30 years.