Coonan's next can of worms: PPPs

Is a place of residence a home, an investment, a business or a tax dodge?

By Christopher Sheil

Getting the differences confused can be highly embarrassing, as the Federal Revenue Minister, Helen Coonan, has been discovering. Yet the policy - as distinct from career - implications of the Coonan affair are trivial compared with the tax changes the embattled minister has foreshadowed for public-private partnerships next autumn.

Encompassing issues crudely analogous to those now besieging her, the minister has promised tax changes that will encourage genuine PPP-type leases by distinguishing them from leases that are confected only to create tax dodges.

Long the bane of the privatisation lobby, the relevant tax laws deny deductions to private firms when their assets are leased or controlled by state governments (section 51AD and division 16D).

Without these provisions, it would be open slather for the sub-national governments to scam the Commonwealth by contriving leases to notionally transfer to private firms the deductions that the states can't use because they don't pay tax.

As a major criticism of PPPs is that they are already contrivances that aim to disguise public debt by shifting government liabilities for infrastructure investment off their balance sheets, Coonan's promised amendments are automatically controversial.

This is because they could artificially lower the major barrier to the rampant privatisation of social infrastructure, which is the higher cost of private compared to public finance.

With the states at least notionally committed to demonstrating that their PPP deals represent public value for money, hitherto pro-privatisation policy makers have attacked this barrier from three directions.

Initially, policy makers relied on asserting that the differences in financing costs are compensated by the inherent efficiencies that come with private ownership or control.

Statements along these lines still pockmark PPP policy documents. But the failure to be able to substantiate them with hard evidence has now been joined by the world record-breaking frauds, inefficiencies, failures and losses associated with major corporations in Australia, the US and elsewhere.

The second approach has been to assert that there really is no difference in public and private financing costs.

Ignoring sophisticated arguments to the contrary, state treasuries assert that the observable cost difference is an illusion.

They dogmatically insist that the observable difference fails to take into account implicit subsidies for unrecognised, unpriced project risks.

Once these risks are recognised, priced and added to the public sector comparator, so the treasury argument goes, PPPs can be cheaper if the risks are transferred to the private parties in the deals. This is where the foreshadowed Coonan tax amendments come in.

The minister has promised to change the test for whether PPP leases are real or contrived from the present one of assessing which party has "effective control" to determining the extent of "risk transfer".

If she survives the current controversy, it will be intriguing to see if Coonan accepts the black boxes the states have concocted to rationalise their risk arguments.

Just how formidable Coonan's operational challenge will be is illustrated by the facts that PPP policies not only explicitly commit the states to retaining responsibility for all the outcomes - and therefore all the residual risks - from their projects, they also entail 30-year government guaranteed monopolies that absolve private demand risks.

The danger is that the Coonan amendments will just collapse into the third and most common way that policy makers have attacked the higher cost of private finance, which is to orchestrate tax breaks.

Australia's infrastructure lobby was effectively born of public subsidies introduced by former prime minister Paul Keating in his 1992 One Nation statement.

And as Coonan noted in her address to The Australian Financial Review's infrastructure summit last August, the lobby continues to play on a field nicely inclined in its favour by tax advantages valued at 5 per cent of asset values.

On behalf of ordinary taxpayers, let's hope she displays more concern for the public interest in framing the amendments than her current critics suggest she has shown with her private affairs.

Dr Christopher Sheil is a Visiting Fellow in the School of History at UNSW, a member of the Evatt Foundation's Executive Committee, and the author of Water's Fall: Running the Risks with Economic Rationalism (Pluto Press: 2000). This column is reprinted with kind permission from the Australian Financial Review of 6 December 2002.

December 2002 contents