Sue Newberry: Taxpayers put at risk by hidden debt

COMMENT

As New Zealand pushes ahead with free-trade agreements - whether bilaterally with countries like Thailand and, perhaps, the United States, or multilaterally through the World Trade Organisation talks - attention is focused on anticipated gains in agriculture.

What is escaping attention are developments at home that will lever open sensitive sectors of the economy to the enforceable free-trade rules we seem determined to sign up to, and expose New Zealand's resident taxpayers to considerable financial risk.

Public-private partnerships (PPPs) and changes to public finance law exemplify these developments.

Whether we achieve gains in agriculture from the World Trade developments is doubtful. For example, the latest Doha round changes still allow the US to greatly subsidise its major agri-business companies.

However, the trade developments also involve imposing enforceable rules to liberalise trade in services, and these represent a threat to our public services.

Internationally, resistance to the privatisation of public services regarded as core or particularly sensitive has impeded privatisation and trade liberalisation efforts. PPPs are constructed as long-term contracts for the provision of services and thus help to overcome this popular resistance.

A former US trade negotiator described the adoption of a single PPP as an "action forcing" event. This is because extensive regulatory changes are required before a PPP can proceed. The changes are exactly those required to open all services of that type to competition.

In other words, a single PPP levers open a whole sector of the economy to privatisation, trade liberalisation, and the application of enforceable trade in services rules.

In Auckland, roading provides an obvious example. Elsewhere, PPPs are being pushed into water, health, education, and even policing.

Typically, PPPs involve major assets, especially infrastructure assets such as roads. In other words, the services that make up a PPP are asset-based, with the assets held by a private sector partner.

The idea is that either the users of the services or the government will pay a fee to use the asset, with that fee supposed to cover all costs of building, maintaining and operating the asset as well as providing an acceptable return on investment.

Beneath the surface of a PPP are many complex contractual arrangements with multiple parties. The international experience of PPPs suggests we should not allow the soft "partnership" language to blind us to the dangers of these arrangements.

When PPPs involve essential services, and the assets required to provide those essential services are held by others, we can very easily be held to ransom.

Despite public reservations about PPPs, we are finding ourselves pushed into them. Apparently, the Government cannot afford to buy the assets involved outright and the level of public debt is such that we cannot borrow to buy the asset outright. This is because the Government budgeting system is arranged to make it so.

In economist-speak, the Government budgeting system has "incentives" designed into it. Unlike the more usual understanding of incentives, these may be defined as biases and distortions intended to prompt a particular outcome. In plain English, the Government budgeting system is rigged.

The level of public debt that is represented as such a worry is confined to that reported on the public sector balance sheet. No one mentions the off-balance sheet debt. A PPP contract might extend over 30 or 50 years. It will involve an agreement to pay fees for that time and guarantees, typically, a particular income or return on assets for the whole of that time.

Legally, the obligations involved in these agreements are public debt, but it is public debt that does not appear on the public sector balance sheet. PPPs seem to solve only our debt problem because off-balance sheet debt is conveniently ignored.

The budgeting system and deceptive off-balance sheet accounting tricks involved in PPPs raise the spectre of Enron and its disgraced auditor, Arthur Andersen.

A key worry about PPPs is their potential to expose New Zealand taxpayers to an accumulation of hidden off-balance sheet debt. Unlike shareholders in a company, our liability for public debt is unlimited. Whether that debt is reported on the government balance sheet or hidden in the off-balance sheet, we guarantee it. Because of this we should insist on control over its incurrence. This is Parliament's role.

The 1986 Constitution Act attempts to protect us from a negligent or plundering Crown. It requires all proposed Crown expenditure of public money and all borrowing to first be subjected to parliamentary scrutiny. But the 1989 Public Finance Act undermines the Constitution Act, and proposed changes in the Public Finance (State Sector Management) Bill make matters worse.

The Public Finance Act allows the form of debt represented by PPPs to evade early parliamentary scrutiny. But it does at least specify reporting requirements that allow parliament to find out about such debt afterwards. This might be a small consolation, but the requirement to present to parliament a statement of commitments and a statement of contingent liabilities does force disclosure about off-balance sheet debt.

The public finance bill is consistent with the Public Finance Act. It allows the nature of debt involved in PPPs to continue to evade the early parliamentary scrutiny.

Worse, especially in light of the increased efforts to promote PPPs, it overcomes any political problems that might arise should subsequent published financial reports reveal a growing mountain of off-balance sheet debt. It does this by removing the requirement to present a statement of commitments and a statement of contingent liabilities.

In other words, the bill attempts to conceal from the public the level of off-balance sheet debt. When the almost inevitable collapse comes, unlike Enrons shareholders, we will be forced to pay up every cent of that public debt.

While our attention is focused on the doubtful benefits to agricultural interests from increasing free-trade commitments, it is diverted from the dangers these commitments represent to our public services.

PPPs are particularly dangerous because not only do they threaten core public services but their acceptance is likely to be eased by the changes proposed in the public finance bill.

This fiscally irresponsible bill represents a major threat to our democracy.

* Sue Newberry is a senior lecturer in accounting at Canterbury University.