Faced with rapid population growth in Brisbane, the Queensland Government handed the task of financing and providing new arterial roads to a private entity – BrisConnections, a complex investment trust underwritten by Deutsche Bank and the Macquarie Group.
On the day BrisConnections floated in July 2008 its partly-paid shares
lost more than half their value and soon plunged to junk values. This was due to a $2.00 liability still attached to each share – the result of general market conditions and because the firm had already lost $500 million in derivatives trading.
Many small investors grabbed the shares unaware of the $2.00 liability. Collectively these shareholders owe another $780 million, and even if the underwriters send them bankrupt, there will still be a huge funding gap. Legal cases are proceeding, and the Queensland Government, which has already injected $267 million into the project, is trying to keep at arm’s length from the brawl.
While this brawl is fuelling a great deal of reportage in the financial press, journalists are yet to ask why the Queensland Government used such an expensive and high risk means of financing the project.
The glib answer is that governments cannot afford to raise the millions needed for infrastructure – but this makes no sense. Whoever collects the finance, there is still a call on capital markets – we pay whether through public or private finance. Whoever constructs the project, there is still the same need for construction labour, concrete and earthmoving equipment.
In regards to infrastructure, governments can raise funds more cheaply than private companies – they can apply lower risk premiums, they do not have to pay huge underwriting fees, and are unlikely to use their working capital to gamble in financial markets. They should be able to find smarter ways of collecting revenue than tolls, which are expensive to collect and, as experience in New South Wales confirms, have the perverse effect of diverting traffic on to already congested streets while the new roads remain under-used. And they do not have the ongoing costs of renegotiating with private infrastructure firms that are either losing money or reaping monopoly profits.
How many more failures do we need before we revert to the more traditional and simpler ways of financing infrastructure through government bonds? Far less glamorous, but far more reliable.