Re: Why don't they just build it themselves?

["Andrew Honan" <ahonan@zipworld.com.au>]

"Maurie Daly" <mauried@tpg.com.au> wrote in message
3ad90713.6526281@can-news.tpg.com.au">news:3ad90713.6526281@can-news.tpg.com.au...
> On Sat, 14 Apr 2001 23:05:43 +1000, "Andrew Honan"
> <ahonan@zipworld.com.au> wrote:
>
> >
> >"Maurie Daly" <mauried@tpg.com.au> wrote in message
> >3ad64057.218998@can-news.tpg.com.au">news:3ad64057.218998@can-news.tpg.com.au...
> >> On Thu, 12 Apr 2001 11:36:05 GMT, "Peter Berrett"
> >> <pberrett@optushome.com.au> wrote:
> >>
> >> >
> >> >Hi all
> >> >
> >> >I appreciate that this is a radical idea but why don't they just spend
> >the
> >> >money themselves and build it?
> >> >
> >> >As I understand it the cost was about $700+ million and they were
> >prepared
> >> >to put in about 2/3 of that to get private sector funding.
> >> >
> >> >$500 + million would get a couple of key lines built fully at least,.
> >Once
> >> >built the funds generated by imcreased patronage (milked from the
private
> >> >operators by way of impost) could be put towards doing te remaining
> >lines.
> >> >
> >> >Mixing private and public sector funds is not a a good idea IMHO.
Better
> >to
> >> >go the whole hog yourself.
> >> >
> >> >cheers Peter
> >> >
> >>
> >> Yes , its totally unclear to me why private sector investment is
> >> needed at all for projects like this,and its also unclear just what
> >> the end benefit to the rail users is from having private sector
> >> investment, other than higher fares.
> >> (Look at the fares on the Sydney Airport line.)
> >> A cynical view would be that making the projects contingent on private
> >> sector funding means that the Govt can conveniently never build the
> >> lines when private secror funding isnt forthcoming and not have to
> >> take any blame itself.
> >>
> >> MD
> >>
> >There can be several ways that private sector can finance these projects.
> >One way is to merely issue debt and have the Govt. rail operator meet the
> >interest and debt repayments. This is similar to the state treasury
(Central
> >Borrowing Authority - CBA) getting pooled debt via the portfolio minister
> >for the rail project, however if a corporation is formed, that
corporation
> >takes on (more directly) the liability of the finance.
> >The issue comes down to:
> >Is there a real market for this traffic? (i.e. is the patronage there as
> >well as the competitive forces operating efficiently)
> >Does  the Govt. want to get involved in rail financing (does it see
itself
> >as providing this service as opposed to someone else)
> >Is the regulatory environment conducive to private participation?
> >
> >I suggest in Victoria that there is NOT the market for competitive for
high
> >speed rail between regional centres and  Melbourne. This is not to say
that
> >the Govt does not think high speed rail is a worthwhile thing for social
> >benefits (such as regional development). But it needs to say that (for
> >example) that 2/3 of the total benefits would be social (external)
benefits
> >and that 1/3 would be direct benefits.Therefore the Govt. would put up
2/3
> >of the costs while private sector would put up 1/3.
> >
> >The question then turns to the regulatory environment. How does the
private
> >participation get a fair and equitable return without milking the
passengers
> >or the Govt. dry? I don't believe that any private participation in rail
> >projects in Australia has been successful (other than perhaps the Sydney
> >Light rail - which was set up as part of the Better Cities Program).
> >The commuter service in Sydney for the airport line is interesting in
that
> >the debt was guaranteed by the NSW Govt. I wonder if the patronage on the
> >line is covering the interest payments (I think not).
> >
> >I don't think the Victorian Govt has got the regulatory environment right
> >for Private -Public-Participation in infrastructure projects, and that
the
> >Govt. will ultimately finance the whole project. It then remains to be
seen
> >how the Govt. will support this operation for the next 30 years with Best
> >Practise management and ongoing financial commitment (when political
> >imperatives turn to other areas of the political landscape e.g. schools,
> >hospitals etc). Invariably the long term commitment to these projects
which
> >are under full Govt. control goes only as far as they satisfy political
> >opportunism and not even social benefits (forget any private
participation).
> >
> >Regards
> >Andrew Honan
> >
> >
> Yes there is no doubt thjat the private sector can finance Govt Rail
> projects ,but this means that the component of the project that is
> privately financed must then yield a commercial rate of return on the
> capital outlay.,ie make a profit after tax.

Govt. have been toying with the idea of the cost of capital and how to
remove debt off State Govt. 'balance sheets'.
This Cost of Capital includes all the 'nasties' that private corporations
get involved in (e.g. equity finance, debt finance and the tax deductibility
of debt finance).
In true PPP models the rate of return that private participation requires is
only to the extent of their capital involvement.If they only contributed
$100M (or 1/3 of the capital) then they only are entitled to 'adequate'
returns on this sum.

> Normally passenger rail services arnt known for their
> profitability,thats why Govts have to subsidise them ,so it seems to
> me pointless to involve the private sector in the financing if this
> means then the a public subsidy is required to make the line
> profitable.
> Its cheaper for all concerned in the long run to simply pay for the
> whole project out of Govt finances,(as the Govt doesnt have to make
> profirs.)
>
I don't know what you mean by cheaper. Certainly the Central Borrowing
Authorities of each state can normally get long term debt at a cheaper
interest rate than private companies (but at a dearer rate than the Federal
Govt.) and the state Govt. have the ability to tax people (to create these
projects). But it is the long term operation and commitment to these
projects which I question.
Inner city commuter services have a high 'external' cost and are much more
prone to the political pressure points. Commuter are voters and if their
only realistic means of getting to work has a poor quality of service they
will vote the politicians out.
Regional areas are more marginal. Rail, I would suggest, is not their first
priority (it would even rate lower than regional roads)
Freight is even less politically sensitive.

> Its also true that where there is no competition in the rail market
> (and currently we have no competition anywhere in the pass rail
> market) , then there is no mechanism to bring the fares down.
> Any private sector involved is also most likley to come from overseas
> as this then means dividends being paid to overseas shareholders .
> How does this benefit anyone?

Up to now, overseas operators have been the people involved in private
participation. Our low level of national savings plus our regulatory
environment has led to overseas companies taking a lot of risk. This
companies however are doing it tough (e.g. Freight Australia). Hopefully NRC
and Freight Corp will involve Australian equity holders.
I think the debt market in Australia has the capacity to finance these
projects (Superannuation funds are flush), its just that the market risk is
high (i.e. pricing policy - patronage revenue or freight revenue is not
strong, due in part to lack of competitive neutrality) and the regulatory
risk is weak (track access, jurisdictional influences etc)
>
> MD
>
>

Andrew Honan