PPPs, the long term perspective and the tax payer | 54 comments (54 topical, editorial, 0 hidden)

The question then becomes (4.00 / 3)

will the cost of these risks stay with the private sector, or will it be dumped back onto the public sector?

Of course, there is little doubt what will happen (the taxpayer will be stuffed), which will be the strongest argument that the whole idea was insane (and borderline dishonest) from the start.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Nov 24th, 2006 at 04:28:31 AM EST

Re: The question then becomes (none / 0)

What would have been a sane and honest way to finance these projects?

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Fri Nov 24th, 2006 at 04:33:52 AM EST
[ Parent ]

Re: My answer is (none / 1)

that when we talk about "Private" as distinct from "Public" that we mean "owned by shareholders" in that most toxic of legal forms the Public Limited Company.

And because we define Public as "Not Private" we limit the financing of investment by the "Public" sector to borrowing.

So we get Gordon Brown's "Golden Rule" that over the economic cycle borrowing should only be used for investment.

I have a technical term for this. Bollocks.

There are (at least) two ways in which "asset-based finance" as I call "Investment" (distinguished from "Deficit-based" credit/debt) - may be made in public assets.

The first is the "Income Trust" - where revenues are put into trust and then unitised. A massive hit in Canada - pension funds can't get enough of them - to the extent that the Government thinks it has to change the tax regime to cope.

But complex legally, major tax issues, and of course, there is still a conflicted relationship with the managers of the assets held in Trust. And Trusts suck as an enterprise model, since an entrepreneurial trust is an oxymoron.

The second is the new possibility of the "Capital Partnership" using what I call an "Open" Corporate - of which the UK LLP is the first example - as a legal wrapper. The US LLC a close cousin to the UK LLP.

Here the asset class for Investors consists of proportional "Equity Shares" in the revenues or production of assets held in Trust for the Community ie maintained in public ownership.

So we don't "privatise" the assets, but we do allow investment in and sharing of the usufruct/fruits of those assets. Which happens to be Islamically sound in a way that the current wave of Islamic Finance can never be.

In this model, where the Developer/Operator is a revenue-sharing partner, the better the quality and the more efficient the management, the more revenue he will get, so that the outcome is more likely that public subsidy will be minimised.

PS Help, please

I know how to do block quotes

But how do I include a diagram or photo?

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Nov 24th, 2006 at 06:33:07 AM EST
[ Parent ]

Re: My answer is (none / 0)

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Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Fri Nov 24th, 2006 at 06:40:10 AM EST
[ Parent ]

Re: My answer is (none / 0)

How about

raising taxes as needed;
creating money as needed;

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Fri Nov 24th, 2006 at 06:42:41 AM EST
[ Parent ]

Re: My answer is (4.00 / 3)

raising taxes as needed

One of the relatively untapped sources of tax is the institution of "Property".

I agree with the principle underpinning Henry George's "Single Tax" that those who have exclusive private use of a Commons, such as Land, Knowledge (and Non-Renewables...) should compensate those they exclude.

I believe that this principle can be elegantly accommodated within the "Community Land Partnership" as a "land rental" based upon the amount and "location value" of land. For instance, I fail to see why the beneficiaries of the £17bn windfall land price gains from the £2bn public investment in London's Jubilee line should not give something back from the increased land rental value (aka property price increase) they have been gifted.

creating money as needed

In fact the stream of property rental value arising out of a "Community Land Partnership" investment has a value in exchange or "money's worth".

I believe that Governments can and should issue credits (against future tax receipts) that are available to invest in property "interest-free" but in return for an agreed "Capital Rental" - perhaps (in the case of a farm or other business, a "tithe").

ie there would be no OBLIGATION to repay government (which makes this "Equity" not "Debt"), but for as long as the Government investment is used, the "Capital Rental" would be paid.

In particular, these investments would be available to:
(a)anyone wishing to repay mortgage debt; and
(b)anyone wishing to release Equity in a "non-toxic" way in property they own.

Note in relation to (b)that over £1 trillion in UK property is owned free of mortgage by individuals over 65. Moreover, while public properties are being improved (at vast cost to future generations courtesy of the PFI, which is where we came in) private property owned by pensioners is deteriorating rapidly in many areas of the country, and in London in particular.

ie a Public Land/Property Investment scheme.

The outcome of all this would be the replacement of most (over 70%) of our existing (unsustainable) "Deficit-based" but "property-backed" Money supply (ie the National Debt) with a "National Equity" and a "Property-based" Money not a million miles away from that advocated by John Law in 1705 (although he did rather bugger up the implementation in France)

And we would also see two types of "National Dividend" or Citizen's Income through the simple means of:
(a) pooling Land Rentals from individual use of land and redistributing them;
(b) pooling a "Tithe" from business use of land and redistributing the pool.

It's not Rocket Science, but rather imaginative use of a new - and entirely "open" - vehicle.

I reckon the talent available on this site would be quite capable of cracking the practical problems of implementation.....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Nov 24th, 2006 at 08:09:44 AM EST
[ Parent ]

Re: The question then becomes (none / 0)

What's wrong with public debt? See here (french, bits of data already published on ET a while ago.

by Laurent GUERBY on Fri Nov 24th, 2006 at 06:44:51 AM EST
[ Parent ]

Re: how dare you ask ? ;-)) (none / 0)

I will report you to the EU budget commission watchdogs. ever heard of the Maastricht criteria ? I am joking of course for sure you are aware of all that, but your question was too provocatively naive ;-)

When through hell, just keep going. W. Churchill

by Agnes a Paris on Fri Nov 24th, 2006 at 11:56:10 AM EST
[ Parent ]

Re: how dare you ask ? ;-)) (none / 0)

Italy is part of Europe :)

by Laurent GUERBY on Sun Nov 26th, 2006 at 04:51:48 PM EST
[ Parent ]

Honest and sane way to finance (4.00 / 2)

Public debt. Because PPP is just a more expensive form of public debt, which enriches banks and private contractors at texpayers' expense.

The only reason this works is that, for some reason I cannot fathom, the "rents" paid by the government to use the assets are not counted as debt, even though they quack like a duck (money to be paid), walk like a duck (set amounts to be paid for a set duration) and look like a duck (no way to stop the payments), and thus do not count under the Maastricht criteria of public debt.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Nov 24th, 2006 at 09:42:00 AM EST
[ Parent ]

Re: Honest and sane way to finance (none / 0)

Creative accounting.

So if all this crap is needed to get around the maastricht criteria, why don't we relax them?

And why don't we raise more taxes or simply print the money needed to finance the projects?

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Fri Nov 24th, 2006 at 09:51:23 AM EST
[ Parent ]

Re: Honest and sane way to finance (4.00 / 3)

I think right there, you and I are in total disagreement, at a philosophy level, on what should be done.

It's not the Maastricht criteria that should be relaxed, it's the accounting principles that should be tightened. And the member states that must balance their budget immediately, even if it's painful. Otherwise, the pain will be truly lethal, just later...

My brother in law works in London. He designs and sells "innovative fixed income products" for a big US investment banks. He's market segments is eurozone governments. He's "succesful". End of smooth talk: he's tailoring some time-bomb credit derivatives to enable states to borrow more and more while not technically emitting "debt" in the sense of the maastricht criteria. And he has ... "competitors" !!

Bigger picture: PPP and real estate+public companies fire sale are just the emerged part of the iceberg, the recent years have seen "innovation" at a much faster pace than what ECB accounting can follow. All driven by a mad desire in all governments, to promise ever more spending, fewer tax, and never tell the public the hard truth, in the hope that the whole shit will hold long enough until the next election/they leave office/they retire in a bunker.

I fear that when debt notation agencies, the ECB and the business press get to understand the real level of deficits and cumulated debt of the whole eurozone, we may have a rough ride.

Pierre

by Pierre on Fri Nov 24th, 2006 at 10:11:52 AM EST
[ Parent ]

Re: Honest and sane way to finance (4.00 / 3)

It's not the Maastricht criteria that should be relaxed, it's the accounting principles that should be tightened.

Amen.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Nov 24th, 2006 at 10:27:03 AM EST
[ Parent ]

Re: Honest and sane way to finance (4.00 / 2)

Which is why we need Public Equity to replace the greater part of Public Debt.

There's nothing remotely "equitable" about "Equity" in a Plc: it is a deeply sociopathic structure.

There is nothing "equitable" about the contract of debt either - this is what Islam has against it (and what other religions have forgotten) - the failure to share risk and reward adequately and bugger all to do with what the level of return happens to be - which depends on the nature of the "investment".

So, as I say above, let's use new "asset-based" mechanisms that may actually work better than the existing "deficit-based" but "asset-backed" funding model.

Which is why they are "emerging" - investors eg pension funds investing in Income Trusts in Canada - happen to quite like the thought of sharing revenues BEFORE rather than after the management gets its hands on it....

I wonder why?

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Nov 24th, 2006 at 11:30:56 AM EST
[ Parent ]

Want to make sure I understand (none / 0)

So your basic argument is to issue, in some way, Public equity and separate, call it, the 'dividend' stream and the rights of ownership?

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Nov 24th, 2006 at 11:57:21 AM EST
[ Parent ]

Re: Honest and sane way to finance (none / 1)

SO we need to fix the accounting and raise more taxes (unless, of course, we're spending money in unnecessary things).

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Fri Nov 24th, 2006 at 12:07:10 PM EST
[ Parent ]

Re: Honest and sane way to finance (4.00 / 2)

Unnecessary spendings in France ? You can't be serious, right ?

Pierre

by Pierre on Fri Nov 24th, 2006 at 03:46:19 PM EST
[ Parent ]

Re: Honest and sane way to finance (none / 1)

I'm being Ironic in a socratic way.

So you're saying France should fix its accounting or raise its taxes?

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Sat Nov 25th, 2006 at 07:32:15 AM EST
[ Parent ]

Re: Honest and sane way to finance (4.00 / 2)

All of it.
Fix accounting (using asset-liability accounting like a business)
Raise taxes (not necessarily those that are already the world highest like income taxes)
Cut spendings (mostly disguised subsidies to all sort of providers...)

Pierre

by Pierre on Mon Nov 27th, 2006 at 08:12:04 AM EST
[ Parent ]

Re: Honest and sane way to finance (none / 1)

not necessarily those that are already the world highest like income taxes

Income taxes are actually pretty low in France, even if you include the CSG (they get average). But combined with some of the highest social contributions, you get a big burden. I have a graph somewhere...

Here you go:

Note that this is for a single. Families are much better treated in France than elsewhere, tax wise.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Nov 27th, 2006 at 04:16:46 PM EST
[ Parent ]

Re: Honest and sane way to finance (none / 0)

I'd remove the social contributions we know are poorly handled by private/individual choice.

Having one of the most efficient healthcare system in the world (quality and cost), covering all citizens, is not a burden by any definition (since they pay more and get less elsewhere if not in income mandatory taxes).

by Laurent GUERBY on Tue Nov 28th, 2006 at 06:55:27 AM EST
[ Parent ]

Re: Credit rating (none / 1)

From an insiders' standpoint, credit rating agencies are too busy right now (and perhaps too wise to ignite a bomb) to start digging into public accountancy.
Not all federal governments are rated (some sovereign states have no credit rating), and local government rating is quite recent by credit agency standards. French Regions are not rated, unless I really missed something recently, and to take the Spanish example, only the most prominent Comunidades such as Cataluna, have gone through the rating process.
As long as theses entities do not need to raise bond money, they will not allow and pay for a credit rating that would reveal how shaky the foundations are.

So public entities still have a good time of safe creative accounting ahead of them.

When through hell, just keep going. W. Churchill

by Agnes a Paris on Fri Nov 24th, 2006 at 12:24:10 PM EST
[ Parent ]

Re: Credit rating (none / 1)

I have a vague memory of Huchon, head of Ile-de-France region, boasting that he got a fine credit rating recently. And something similar: several small municipalities and regions formed a syndicate to issue jointly some rated bonds. So certainly the conseil général de Correze has no rating, but there must be some for the debt of Paris/Lyon/Marseille and a few other entities.

Pierre

by Pierre on Fri Nov 24th, 2006 at 03:49:15 PM EST
[ Parent ]

Re: Credit rating (none / 1)

Correct, the City of Paris is rated AAA by S&P, who assigned the same rating to the 100 Mios Euro, 7 year bond issue of the municipality.

Lille Metropole Communaute Urbaine has an A+ rating, ie several notches below. Avignon and Tours also have been rated by S&P(in the A- to BB+ range back in 2004). A bit late for more research today.

When through hell, just keep going. W. Churchill

by Agnes a Paris on Fri Nov 24th, 2006 at 07:11:44 PM EST
[ Parent ]

Re: Honest and sane way to finance (4.00 / 2)

I am not saying what should be done, just what could be done.

If nobody proposes things that go against the grain we're not going to learn much from the discussion.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Fri Nov 24th, 2006 at 12:30:26 PM EST
[ Parent ]

Re: Honest and sane way to finance (none / 1)

The financial world is well aware of these products, so are the rating agencies. The ECB is too, but is covering business friends while keeping their stupid discourse on "structural reforms" for states.

The "debt" derivative explosion will happen in the private sector, not in the public sector.

Of course government will have to pay for private failures, but that's another story.

by Laurent GUERBY on Sun Nov 26th, 2006 at 05:01:25 PM EST
[ Parent ]

Re: Honest and sane way to finance (4.00 / 2)

I came in too late, but your explanation is pristine, Jerome, though differently worded from the one I just wrote. In French public accountancy, for eg., you have
"depenses d'ivestissement" and "depenses de fonctionnement".
In other words, the availability fee paid by the public authorities to the project company operating the hospital/school/prison/motorway is not accounted for in the capex section, but in the opex section of the public budget. As there are no IFRS for public entities, when public indebtedness indicators are provided to the EU watchdogs, PPPs remain unnoticed... so far.

When through hell, just keep going. W. Churchill

by Agnes a Paris on Fri Nov 24th, 2006 at 11:54:02 AM EST
[ Parent ]

Re: Honest and sane way to finance (4.00 / 4)

So take a festering pile of garbage in your balance sheet and hide it in the cash statement.

<head explodes>

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Nov 24th, 2006 at 12:00:58 PM EST
[ Parent ]

Re: In essence, you are right (none / 0)

I am unsure whether public entities have a balance sheet at all. They have a budget, which is on a cash in /cash out basis, but what's nice, in France at least, is that the deficit is always carried forward, when not made up by the State at year end. If only private entities could do the same... <snark>

When through hell, just keep going. W. Churchill

by Agnes a Paris on Fri Nov 24th, 2006 at 12:07:49 PM EST
[ Parent ]

Re: In essence, you are right (none / 1)

I suggest public entities have a balance sheet -- they just don't bother to run the numbers.

thinking about it, forcing public entities to compute and then publish balance sheets might be a way to start turning this mess around.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Nov 24th, 2006 at 12:21:18 PM EST
[ Parent ]

Re: In essence, you are right (none / 1)

With le LOLF we'll have our first balance sheet soon, but it's a political very hot potato.

by Laurent GUERBY on Sun Nov 26th, 2006 at 04:53:41 PM EST
[ Parent ]

Re: LOLF (none / 0)

even hotter than the healthcare sector reform (see links below to a couple of diaries I wrote on the subject, and so did Jerome) aiming at shifting to a DRG-related funding for public hospitals. The initial target for a 100% tarification a l'activite was 2012 (when law first discussed 3 years ago) now it seems to be edging towards 2020.
Policies, not politics, he ? (that is a very good sig' quote over here, apologies as I forgot whose)

When through hell, just keep going. W. Churchill

by Agnes a Paris on Mon Nov 27th, 2006 at 06:55:22 AM EST
[ Parent ]

Re: LOLF (none / 0)

I wrote an article on my blog (french) on Hospital "payment by the act" (see excellent Guy Vallet blog linked there).

In short: define an act and put a price on it is not simple (and change all the time due to technology).

"Good" intentions and bad reform again?

by Laurent GUERBY on Mon Nov 27th, 2006 at 01:49:07 PM EST
[ Parent ]

Re: T2A (none / 0)

Alas. Will Tarification a l'activite cost us our so envied health care system ?
I'd say good intentions, poorly marketed reform (lack of pedagogy) but there is hope in store on this one, as T2A will only apply to certain categories of medical acts, the "vital" ones not being subordinated to the rules of profit.
There seems to be a reasonable amount of effort made to respect the particularities of each area of health care provision (for eg. emergency services/first aid care will not be subject to T2A). Whether this all will survive the general elections is another story.

When through hell, just keep going. W. Churchill

by Agnes a Paris on Mon Nov 27th, 2006 at 05:33:34 PM EST
[ Parent ]

Re: T2A (none / 0)

Just like the LOLF, this stuff it is likely to be of no benefit to the public and create more useless administration and costs within the healthcare system.

I'd replace that with regular experts+random citizen audits, more likely to be useful.

by Laurent GUERBY on Tue Nov 28th, 2006 at 06:56:54 AM EST
[ Parent ]

Re: The question then becomes (4.00 / 4)

It will come as no surprise to you, I guess, that this has never been a question for those directly involved (investors, contractors, and public authorities) : the cost will definitely bounced back to the tax payer.
Besides, anyone who has a little maths can tell the higher of the two costs : a 30y Treasury bond issue or a 30 year bank loan extended to a project company but repaid out of government funds.
The key driver behind PPPs is that governments did not want to raise debt on their own name. Public accountancy window dressing, that's mostly what it's all about.

When through hell, just keep going. W. Churchill

by Agnes a Paris on Fri Nov 24th, 2006 at 11:45:31 AM EST
[ Parent ]

Re: The question then becomes (4.00 / 2)

This is a huge sham, and as Pierre says it's going to end up exploding in our faces.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Fri Nov 24th, 2006 at 12:05:56 PM EST
[ Parent ]

Re: what worries me most (4.00 / 2)

is that it is going to explode not only in our faces, but also in our children's.

When through hell, just keep going. W. Churchill

by Agnes a Paris on Fri Nov 24th, 2006 at 12:09:02 PM EST
[ Parent ]

Re: The question then becomes (4.00 / 2)

The key driver behind PPPs is that governments did not want to raise debt on their own name. Public accountancy window dressing, that's mostly what it's all about.

There's also the low political objective of creating a faction of middle-class voters who have a pecuniary interest in seeing the revenue streams associated with govt programmes continuing. I have no idea if this is a sincerely held motivation, but it has been suggested to me as being a factor in the thinking of the Brown treasury team.

Of course there are ample historical precedents to the fact that creating a class of tax-farming rentiers is a bad idea in the long-term, but there you go....

Regards
Luke

-- #include witty_sig.h

by silburnl on Mon Nov 27th, 2006 at 09:16:24 AM EST
[ Parent ]

PPPs, the long term perspective and the tax payer | 54 comments (54 topical, 0 editorial, 0 hidden)

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