The PFI Politic
In addition to the Commonwealth PFI programme, Australian minister
of /Finance and Administration Nick Minchin's office will be
policing state government PFI policy. What is the measure of
political will to get the programme running countrywide and how
cohesive will the programme be?
What do you see as the differences between Australian PFI and the established UK PPP system?
Minchin: It is a matter of function. Functions undertaken by many central governments are by and large the reserve of state governments in Australia. Federal government responsibilities in Australia don't generally relate to the construction and acquisition of physical assets. Therefore by definition the relevance to the federal government of PPP is much less obvious. We are more than happy that the states are going down this path, but they should apply the discipline, the value for money to taxpayers, and the extent that value for money analysis leads to a PPP then that's what they should do. It's not my view we should be either telling the states to do it or not to do it. It's all about what's the best deal for taxpayers.
And yet any deal in excess of A$20 million is vetted by your office?
While we've adopted a more decentralised approach to government than ever before - and I think that's good in developing the responsibility of the partners for the management of their resources. We follow that approach according to a developed set of principles that have got to be applied by the partners if they want to pursue a private financing. And our department will be the kind of policeman of that.
How much power will your department have? There is some scepticism in the investment banking community about the political will to get this through ? and I quote: ?over the next three to four years if all the politicians and bureaucracy get on board there could be decent deal flow.? A Citigroup estimate puts A$15 billion of Australian projects in the market in the coming year and only 1% will be public-private.
The states can do what they like. The states don't have to come to me and ask my permission. Any state minister goes to the state treasurer or whatever rules each state has as to the governance of the thing.
I'm a great believer in private enterprise ? as is my government. And I'm a great believer in value for the taxpayers. To the extent that it makes sense for the states to pursue these deals then they should pursue them. And we won't stand in the way ? we don't have the constitutional authority to do so anyway.
But does there come a point when national interest overtakes state interest?
I can't foresee a set of circumstances in which we would be motivated to try and stop a state going down this path. They complain to us about the way federal tax law operates ? they accuse us of inhibiting PPPs because our tax laws aren't sufficiently generous. But tax law is developed independent of its impact on PPP and we are not going to pervert our tax law just to help the states in that sense. Ultimately any PPP project is the decision of the state. We don't like them lecturing us and we are not going to lecture them.
When it comes to projects that involve federal and state funds - that's slightly different. And again we still have a bit to learn here. The proposal by our Transport minister for a more rational and cost effective approach to the funding of transport infrastructure in Australia. What we have done in the past is, in effect, simply subsidise the states. Deputy prime minister and Transport minister John Anderson is proposing to all the state transport ministers a much more integrated approach that doesn't just say that we are going to give x money for road, rail, ports etc. They will look for opportunities in joint federal-state funding for infrastructure involving private finance. To the extent that involves federal funds my department is going to be involved and I'll be looking out for value again for the taxpayer. But it depends on the states ? they've got to come on board with this. But if they do it will present some exciting opportunities.
I'm not saying that there aren't opportunities at federal government level. Defence is probably the only area where the federal government is actually in the business of acquiring assets. We asked for tenders on patrol boats with PFI options. The deal was designed as an operating lease but the tax office felt the structure was a finance lease. And the reason we couldn't do it as a finance lease was the problem of the ultimate risk. We can look at other areas in defence but I expect that things that get shot at are not going to be that appealing to private finance.
You have shown willingness to abolish sections of the tax code that hinder PFI ? 51AD and Division 16D reviewed by the Ralph Report ? by making it expensive. Is legislation planned for next year going to be pushed through, what shape will it take and is there any chance of a provision to grandfather legislation to kickstart the market sooner?
I can't see any prospect of grandfathering ? any legislation will be applied prospectively. And I wouldn't be unduly optimistic that any changes are made in the way proponents of these projects necessarily want. I saw the Ralph recommendations and we certainly haven't per se accepted them. Obviously what we are worried about is essentially states transferring this through the tax system and in effect asking us to pay for reconstruction via the tax backdoor. These deals have to stand on their own two feet and shouldn't have to be tax generated ? we've had too much of tax driven investment in Australia.
Given that much of PFI in UK been has been done by project finance, you have two potential problems coming up ? as does any country going down the PPP path. First, how aware are you ? and very few outside the banking sector are ? of potential changes in the form of Basle2 which could make project lending untenable in the future in terms of cost? And how concerned are you about vetting potential foreign investors in Australian PPP given the queue of corporate governance scandals in the US post-Enron ? for example having pulled the private sector into a deal the last thing you want federal or state government to have to do is bail out that sponsor at a later date or go looking for a new sponsor and all the negotiation that would involve.
First, I am unfamiliar with the Basle problem so I can't comment on that.
We have fairly open regimes about foreign investment ? 98% of requests to invest in Australia go through. We've always understood our need for foreign investment and we spend a lot of time trying to attract it. But you are raising a wider issue ? how the fundamentals of certain corporations could have an effect on PPP. That issue has not been raised with me before. Our three core fundamentals are value for money, transparency, accountability and any PPP must meet those.
As inward investment policy stands, in 1999 Australia announced a reduction in notification obligations on business. This ensured that foreign investment is consistent with the interests of the Australian public, while removing the more rigid controls. However, that is not to say we don't recognise community concerns about foreign ownership of Australian assets. Our challenge is to balance these concerns against the strong economic benefits that foreign investment can deliver.
In the past few years, we've had to make a number of decisions to balance competing interests and ensure that foreign investment is conducive to the development of the resource and processing sectors in Australia. Shell's proposed bid for Woodside Petroleum in 2001 was a case in point. It was a tough decision. The issue was not about whether the companies were Australian or foreign ? both firms are foreign under the Foreign Acquisitions and Takeovers Act. The issue was whether the government could be sufficiently certain that following the takeover, the North West Shelf Gas Fields would be developed in a way that would maximise the benefit for Australia.
In that case we took the view that it was contrary to the national interest. But overall, that was rare knock-back for foreign investment, and the Government's view continues to firmly encourage and facilitate investment.
I must repeat that in 1999-2000, our Foreign Investment Review Board (FIRB), which assesses substantial inward foreign investment, approved almost 98% of applications.
Do you see PFI ? or at least the potential scope of it ? as being a major boost to inward investment in the future?
Australia has always had a strong direct investment profile because of resource projects. Most of the major investments are resources-driven and nothing to do with government. But I am excited by the prospect of sensible PPP although I don't think it will have a huge impact on our traditional direct investment profile.
What do you see as the differences between Australian PFI and the established UK PPP system?
Minchin: It is a matter of function. Functions undertaken by many central governments are by and large the reserve of state governments in Australia. Federal government responsibilities in Australia don't generally relate to the construction and acquisition of physical assets. Therefore by definition the relevance to the federal government of PPP is much less obvious. We are more than happy that the states are going down this path, but they should apply the discipline, the value for money to taxpayers, and the extent that value for money analysis leads to a PPP then that's what they should do. It's not my view we should be either telling the states to do it or not to do it. It's all about what's the best deal for taxpayers.
And yet any deal in excess of A$20 million is vetted by your office?
While we've adopted a more decentralised approach to government than ever before - and I think that's good in developing the responsibility of the partners for the management of their resources. We follow that approach according to a developed set of principles that have got to be applied by the partners if they want to pursue a private financing. And our department will be the kind of policeman of that.
How much power will your department have? There is some scepticism in the investment banking community about the political will to get this through ? and I quote: ?over the next three to four years if all the politicians and bureaucracy get on board there could be decent deal flow.? A Citigroup estimate puts A$15 billion of Australian projects in the market in the coming year and only 1% will be public-private.
The states can do what they like. The states don't have to come to me and ask my permission. Any state minister goes to the state treasurer or whatever rules each state has as to the governance of the thing.
I'm a great believer in private enterprise ? as is my government. And I'm a great believer in value for the taxpayers. To the extent that it makes sense for the states to pursue these deals then they should pursue them. And we won't stand in the way ? we don't have the constitutional authority to do so anyway.
But does there come a point when national interest overtakes state interest?
I can't foresee a set of circumstances in which we would be motivated to try and stop a state going down this path. They complain to us about the way federal tax law operates ? they accuse us of inhibiting PPPs because our tax laws aren't sufficiently generous. But tax law is developed independent of its impact on PPP and we are not going to pervert our tax law just to help the states in that sense. Ultimately any PPP project is the decision of the state. We don't like them lecturing us and we are not going to lecture them.
When it comes to projects that involve federal and state funds - that's slightly different. And again we still have a bit to learn here. The proposal by our Transport minister for a more rational and cost effective approach to the funding of transport infrastructure in Australia. What we have done in the past is, in effect, simply subsidise the states. Deputy prime minister and Transport minister John Anderson is proposing to all the state transport ministers a much more integrated approach that doesn't just say that we are going to give x money for road, rail, ports etc. They will look for opportunities in joint federal-state funding for infrastructure involving private finance. To the extent that involves federal funds my department is going to be involved and I'll be looking out for value again for the taxpayer. But it depends on the states ? they've got to come on board with this. But if they do it will present some exciting opportunities.
I'm not saying that there aren't opportunities at federal government level. Defence is probably the only area where the federal government is actually in the business of acquiring assets. We asked for tenders on patrol boats with PFI options. The deal was designed as an operating lease but the tax office felt the structure was a finance lease. And the reason we couldn't do it as a finance lease was the problem of the ultimate risk. We can look at other areas in defence but I expect that things that get shot at are not going to be that appealing to private finance.
You have shown willingness to abolish sections of the tax code that hinder PFI ? 51AD and Division 16D reviewed by the Ralph Report ? by making it expensive. Is legislation planned for next year going to be pushed through, what shape will it take and is there any chance of a provision to grandfather legislation to kickstart the market sooner?
I can't see any prospect of grandfathering ? any legislation will be applied prospectively. And I wouldn't be unduly optimistic that any changes are made in the way proponents of these projects necessarily want. I saw the Ralph recommendations and we certainly haven't per se accepted them. Obviously what we are worried about is essentially states transferring this through the tax system and in effect asking us to pay for reconstruction via the tax backdoor. These deals have to stand on their own two feet and shouldn't have to be tax generated ? we've had too much of tax driven investment in Australia.
Given that much of PFI in UK been has been done by project finance, you have two potential problems coming up ? as does any country going down the PPP path. First, how aware are you ? and very few outside the banking sector are ? of potential changes in the form of Basle2 which could make project lending untenable in the future in terms of cost? And how concerned are you about vetting potential foreign investors in Australian PPP given the queue of corporate governance scandals in the US post-Enron ? for example having pulled the private sector into a deal the last thing you want federal or state government to have to do is bail out that sponsor at a later date or go looking for a new sponsor and all the negotiation that would involve.
First, I am unfamiliar with the Basle problem so I can't comment on that.
We have fairly open regimes about foreign investment ? 98% of requests to invest in Australia go through. We've always understood our need for foreign investment and we spend a lot of time trying to attract it. But you are raising a wider issue ? how the fundamentals of certain corporations could have an effect on PPP. That issue has not been raised with me before. Our three core fundamentals are value for money, transparency, accountability and any PPP must meet those.
As inward investment policy stands, in 1999 Australia announced a reduction in notification obligations on business. This ensured that foreign investment is consistent with the interests of the Australian public, while removing the more rigid controls. However, that is not to say we don't recognise community concerns about foreign ownership of Australian assets. Our challenge is to balance these concerns against the strong economic benefits that foreign investment can deliver.
In the past few years, we've had to make a number of decisions to balance competing interests and ensure that foreign investment is conducive to the development of the resource and processing sectors in Australia. Shell's proposed bid for Woodside Petroleum in 2001 was a case in point. It was a tough decision. The issue was not about whether the companies were Australian or foreign ? both firms are foreign under the Foreign Acquisitions and Takeovers Act. The issue was whether the government could be sufficiently certain that following the takeover, the North West Shelf Gas Fields would be developed in a way that would maximise the benefit for Australia.
In that case we took the view that it was contrary to the national interest. But overall, that was rare knock-back for foreign investment, and the Government's view continues to firmly encourage and facilitate investment.
I must repeat that in 1999-2000, our Foreign Investment Review Board (FIRB), which assesses substantial inward foreign investment, approved almost 98% of applications.
Do you see PFI ? or at least the potential scope of it ? as being a major boost to inward investment in the future?
Australia has always had a strong direct investment profile because of resource projects. Most of the major investments are resources-driven and nothing to do with government. But I am excited by the prospect of sensible PPP although I don't think it will have a huge impact on our traditional direct investment profile.
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