Gordon Campbell on the lack of preparations for the financial crisis

Famous fictional boss CJ didn’t get where he is today by not planning for a financial crisis


On paper, the new government’s reaction to the global financial crisis – namely, a $7 billion ‘stimulation package’ of government spending spread over the next two years – looks like a combination of Think Big and speed dating. However, we won’t see the full details until after Parliament starts sitting again on December 8, which is when the padding in the package may suddenly become apparent – because little, if any, of this package seems to involve new money. Most of the ingredients were foreshadowed weeks and months before the crisis even began.

The litany of very familiar features in this crisis package happen to include ( a) the Labour government’s $1.5 billion package of tax cuts that began to take effect nearly two months ago (b) the April 1st 2009 tax cuts which are the first tranche of National’s $5.7 billion tax cut agenda by 2011 (c) the $1.5 billion faster broadband project announced mid year and (d) the ‘infrastructural’ projects announced months ago to the tune of $8.6 billion over the next 6 years, and finally (e) the $42 million a year Transitional Relief Package of extra assistance for those worst hit by the global meltdown, which John Key has already signalled will come out of the $1.75 billion new spending provisions in Michael Cullen’s last budget, and in future Budgets.

Hard to see there how there could be much change left from all the above, given a two year package of only $7 billion. In reality, the “stimulation package’ looks more like a re-labelling of old policy commitments than a fresh response to the trouble heading our way. Unfortunately, this tendency to look at an unprecedented crisis through the lens of old agendas seems likely to happen right across the political spectrum – and will succeed only in turning people off entirely.

You can predict the rhetoric. The Greens can be relied on to insist that any stimulation/job creation package should focus on eco-friendly development and public transport. The Act Party can be relied on to insist there be should be less government spending during this crisis. ( Hide’s answer to a deflationary crisis is to create more deflation.) Labour can be relied on to tell us that things would have been far worse if they hadn’t been so fiscally prudent – at least until they stopped being fiscally prudent in the May Budget and subsequently. And rest assured, the Maori Party will find many ways to depict the financial crisis as another fine mess that pakeha have landed their people in.

Putting the old policy agenda on autopilot though, will not cut it. The new economic conditions are making those policies obsolete. The global credit crunch, as Scoop predicted at the outset, was always going to endanger the ability of the Key government to launch their beloved public private partnerships, since PPP projects tend to be so heavily debt leveraged. Sure enough a few days ago, Fletcher Construction turned up its nose
turned up its nose at PPPs in New Zealand, even though the firm would be a logical frontrunner to score most of the contracts.

Mark Binns, chief executive of Fletcher Building’s infrastructure division, said [that] if the aim was to bring projects to fruition quickly, making them PPPs would be a retrograde step, as so much time is involved in setting up the legal framework between participants in the project, he said. He also questioned whether private sector funding would be viable in the current credit environment without Government guarantees, which nullified the transfer of risk to the private sector.

So you can’t bring PPPs speedily into play, without rushing the legal framework necessary to protect the parties, and the taxpayer. And besides, Binmns is saying, the credit crunch will make it too hard to raise the money. Oh, and most of the PPP projects will be too small to justify the lawyers, and the contracts and the overall planning costs involved. But will any of that stop the government from ramming through the proposals regardless ? All the evidence suggests that if the PPP jobs are worth doing, its worth the government doing them itself. Which is what Fletcher Construction advise :

Sometimes benefits of transferring the risk of PPP projects to the private sector were illusory, [Fletcher Construction] said, citing the British Government’s bailout of Metronet, the private operator of the London Underground.
Binns suggested that if the transfer of risk was not complete, the true benefits of PPPs came down to an analysis of the funding costs, and there was a strong argument that the Government would be better off just raising debt, potentially through infrastructure bonds, to do the project using other traditional methods of contracting.

Unfortunately, the government is unlikely to listen to this good advice, because the warnings clash with its own ideological pre-conceptions, which are : government bad, and private sector goood. Back on planet Earth though, the rest of the world is proceeding down the opposite track. It is regarding the unregulated private sector as the problem, not the solution – and is treating government as the only agency able to get us out of the mess that private sector greed and incompetence have created.

That’s the unfortunate reality. New Zealand is approaching a 2008 crisis with solutions – provided by the Act Party and its friends in business – that are 25 years old. An entire generation has passed since these policies had any genuine currency in the economic debate, anywhere else in the world. In the short term, where can we expect the government to charge ahead with its plans for PPP project financing? Chapman Tripp have been all over the business media with this useful summary of the current state of play the current state of play

Their list starts with the $1.5 billion fibre to the home open access network for faster broadband. About this, the law firm asks some pertinent questions that concern many people who have good reasons to feel nervous about Telecom’s nfluence with National government in the past . “The outstanding issue,” Chapman Tripp ask, “is the vehicle for the investment – who will roll it out, who will own it, and who will set terms of access for competing telcos?” Can we really expect a self declared ITT novice like Stephen Joyce to stop Telecom from calling the shots ?

Beyond that, we have the Waikato expressway, which will cost $750 million over ten years, and a $500 million infusion into schools over three years. There will also be the $315 million spent on the new prison that will be just one of the costs to the taxpayer from the new government’s tough law and order stance.

Beyond that point, it is all speculation. Electricity generation is an obvious priority area, given the recurring issues around security of supply. Any policy programme in thast sector will entail more than just tinkering with the rules on thermal generation, and reviewing the regulation of Transpower. Mergers in this sector are definitely on the cards.

Beyond the electricity sector, Auckland roading and public transport nationwide are the other main priorities cited in the Chapman Tripp analysis. Changes to the road tolling legislation would enable more toll roads to be built, presumably with fewer protections ( by way of non-toll road options] for the public. As yet, there has been no analysis of whether say, building light rail in Wellington would provide better job creation/economic productivity bang for the buck than say, building the Transmission Gulley route.

None of the above adds up to a plan, or to a co-ordinated response to the oncoming crisis. It looks a lot more like scrambling to get the old agenda in place before the tsunami comes ashore. Apart from the Reserve Bank frantically chopping away at interest rates with an axe, we don’t seem to be doing much beyond crossing our fingers, hoping for the best and building roads as fast as we can.

We could do much better. Rather than bringing in the private sector to be part of the reviews of government spending – fox, meet henhouse – shouldn’t we first be cultivating a bipartisan political consensus on our response to the crisis ? And maybe convening a gathering of business and community leaders to help prepare for the challenges the country is shortly going to face ? Chances are, the financial crisis is not going to shut down over the Christmas break.