tag:theconversation.com,2011:/global/topics/rural-finance-8847/articlesRural finance – The Conversation2018-07-01T20:05:50Ztag:theconversation.com,2011:article/990862018-07-01T20:05:50Z2018-07-01T20:05:50ZRoyal commission shows bank lenders don’t ‘get’ farming, and rural economies pay the price<p>The Financial Services Royal Commission has exposed the fraught relationship between farmers and financiers. We have heard about <a href="https://www.afr.com/business/banking-and-finance/financial-services/banking-royal-commission-carnell-wants-another-round-on-business-lending-20180605-h10z58">loan terms being changed</a> without notice or consultation, loans <a href="http://www.abc.net.au/news/2018-06-27/anz-apology-for-tasmanian-farmers-at-royal-commission/9916220">revalued to suit the agendas of financiers</a>, and <a href="https://www.news.com.au/finance/business/banking/anz-admits-unfair-and-unethical-behaviour-towards-rural-customers-at-banking-royal-commission/news-story/eee705662de2d059b74304ef2b23a639">heartless and harsh treatment of farmers</a> once the loans are revoked. </p>
<p>A number of factors have contributed to this, including instability in the market value of farms, policy changes that make farms <a href="https://www.tandfonline.com/doi/full/10.1080/00049182.2017.1388555">more reliant on financial instruments</a>, and shifts in the global positioning of farm land relative to other forms of property. </p>
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<p>The commission has heard that local lending brokers were <a href="https://www.theaustralian.com.au/business/banking-royal-commission/rural-specialist-bank-sent-farmers-to-brink/news-story/35b136355896be0591a9729d074b633d">not qualified to value farm properties</a>, and that farm valuations have become fluid and unpredictable. </p>
<p>Sometimes farms and farmland were <a href="https://www.theaustralian.com.au/business/banking-royal-commission/banking-royal-commission-hayman-island-trip-bonus-for-rogue-adviser/news-story/b82117a522eac1758351ef25d637f61e">deliberately overvalued</a>. Higher values enable farmers to borrow more money for farm improvements, and the local lending branch manager to earn higher commissions. </p>
<p>Not only do the central administrators in banks lack the information and expertise to question these assessments, their business models <a href="https://www.theaustralian.com.au/business/banking-royal-commission/banking-royal-commission-hayman-island-trip-bonus-for-rogue-adviser/news-story/b82117a522eac1758351ef25d637f61e">have encouraged</a> overvaluation and overborrowing as a means to grow their businesses.</p>
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<a href="https://theconversation.com/the-financial-services-royal-commission-highlights-the-vulnerability-of-many-older-australians-93359">The Financial Services Royal Commission highlights the vulnerability of many older Australians</a>
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<p>Across the Murray Darling Basin banks have taken the separation of water from land – a precursor to the marketisation of water – <a href="http://research.usc.edu.au/vital/access/manager/Repository/usc:16471?query=">as a cue to devalue land</a>. </p>
<p>This has provided a reason to void existing loan agreements and to offer refinancing under more arduous conditions. Farmers have no option to refuse, and so borrow with the expectation that a couple of good years will put them back on track. </p>
<p>And if the good years don’t materialise, farms fall into financial stress. </p>
<p>This confronts a third issue, which is that in the bad years farms are harder to sell so their <a href="https://grdc.com.au/resources-and-publications/grdc-update-papers/tab-content/grdc-update-papers/2017/06/the-valuation-of-agricultural-assets-in-australia">market value plummets</a>. This compounds the problem.</p>
<h2>Farmers are more reliant on banks</h2>
<p>Policy changes have made farms more reliant on banks. </p>
<p>Since Australia adopted open-market policies in the 1980s and agricultural markets have become global, farmers have been exposed to global price changes. </p>
<p>The removal of single-desk marketing boards like the <a href="https://trove.nla.gov.au/people/620029?c=people">Australian Wheat Board</a>, which protected farms from price fluctuations, increases the impact of price changes. Farmers are now expected to <a href="https://www.investopedia.com/terms/h/hedge.asp">purchase financial products to reduce the risk</a> of this volatility. </p>
<p>Drought assistance has also been reoriented to rely on market-based instruments, such as loans from banks rather than grants from governments. In the wake of the deregulation of the financial system, and the post-financial crisis consolidation of the farm lending sector, many farm-specific loan products have disappeared. So banks tend to treat farms as businesses like any other. </p>
<p>The open-market policies also create an imperative to expand landholdings (“get big or get out”) and to invest in the latest equipment and technologies. Since this requires borrowing, it thrusts farmers onto a credit treadmill. </p>
<p>Of course, low interest rates have also stimulated borrowing for farm expansion.</p>
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<a href="https://theconversation.com/why-we-cant-just-throw-more-regulation-at-the-ethical-issues-raised-by-the-banking-royal-commission-96646">Why we can't just throw more regulation at the ethical issues raised by the banking royal commission</a>
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<p>Increasing corporate control of farm inputs (seeds, fertiliser etc.) and outputs is squeezing farmers’ capacity to earn enough to service their loans. </p>
<p>To make matters worse, the declining <a href="https://www.investopedia.com/terms/t/terms-of-trade.asp">terms of trade</a> impel farmers to increase productivity just to stand still.</p>
<p>The farmers before the royal commission have mostly managed to stay on the treadmill, but only until the banks’ rule changes cranked up the speed to throw them off. </p>
<p>It’s clear that despite their crucial role, many banks still don’t really “get” the vagaries of farming. They don’t understand how different farm lending is – or should be – to commercial and housing lending. Neither do they seem to appreciate the broader social and economic dimensions of the role they have in managing farm risks. </p>
<p>Dramatic revisions to land valuations, as discussed in numerous cases described in the commission, can undermine an entire farming region’s equity. </p>
<p>The accelerated thinning out of the farming population impacts on local economies and sporting teams, among others. In the lead-up to and during the whole process of deregulation, farmers were continually reassured – in <a href="https://www.pc.gov.au/inquiries/completed/agriculture/report/agriculture.pdf">reports</a> by the Productivity Commission, for example – that the credit market would evolve to meet their needs. </p>
<p>The evidence that the commission has heard in many respects represents a case of market – and regulatory – failure.</p>
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<a href="https://theconversation.com/evidence-from-the-banking-royal-commission-looks-like-history-repeating-itself-97090">Evidence from the banking royal commission looks like history repeating itself</a>
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<p>Since the global financial crisis, farm land has become an attractive investment for wealthy families and institutional investors, and for governments worried about food security. </p>
<p>As this pushes up land values, banks can be more aggressive towards failing farms. Foreclosures free up land for deep-pocketed investors. </p>
<p>It would be a mistake, then, to conclude that the stories coming out of the commission are an isolated issue relating to the one bank’s heavy-handed mopping up after the failure of a specialised rural lender – as was the case with <a href="https://www.sbs.com.au/news/anz-admits-issues-over-landmark-customers">ANZ and Landmark</a>. </p>
<p>On the contrary, there are many stories of different banks imposing financial risk frameworks on farmers that are ill-equipped to accommodate the vagaries of farming production and pricing. </p>
<p>When farmers jest about being owned by the banks, they aren’t joking. </p>
<p>We should ask why the government took so long to acknowledge the problems of rural finance and the effects on farming communities.</p>
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Read more:
<a href="https://theconversation.com/losing-wealth-health-and-life-how-financial-loss-can-have-catastrophic-effects-93639">Losing wealth, health and life: how financial loss can have catastrophic effects</a>
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<p>After the commission concludes, it is likely that banks and regulators will tighten the risk parameters on farm lending and make it harder for smaller family farmers to access finance. </p>
<p><a href="https://www.sciencedirect.com/science/article/pii/S0743016714000412">Vulnerable farms</a> will not be able to borrow as much money as in the past. This might be prudent from a financial risk perspective. </p>
<p>However, if city bankers don’t understand farming and don’t make allowances for the volatile and uncertain economies of farming, there’s still no guarantee that tighter rules will translate into better decisions and more positive outcomes.</p>
<p>Rather, tighter rules are likely to have uneven consequences, further disadvantaging smaller family farms relative to deep-pocketed agribusinesses. So, in effect, restricting credit is likely to accelerate the transfer of farmland from family farms to more corporate entities including transnational corporations.</p><img src="https://counter.theconversation.com/content/99086/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sally Weller has received funding from the Australian Research Council and the Victorian Government to examine processes of farm restructuring </span></em></p><p class="fine-print"><em><span>Neil Argent receives funding from the Australian Research Council.</span></em></p>A number of factors have contributed to the horrible stories coming out of the Royal Commission, including market instability and the financialisation of farming.Sally Weller, Reader, Australian Catholic UniversityNeil Argent, Professor of Rural Geography, University of New EnglandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/917122018-02-12T19:06:25Z2018-02-12T19:06:25ZTrump’s infrastructure plan rests on some rickety assumptions<figure><img src="https://images.theconversation.com/files/206012/original/file-20180212-58315-zu37lf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The new plan is supposed to boost the construction of new roads, bridges and other public works projects.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Closer-Look-Road-Projects/31ac874ef44c492ca9bffa712faabcb2/75/0">AP Photo/Seth Perlman</a></span></figcaption></figure><p>Experts greeted the long-awaited details of President Donald Trump’s promise to unleash a <a href="https://www.whitehouse.gov/wp-content/uploads/2018/02/INFRASTRUCTURE-211.pdf">US$1.5 trillion wave of new infrastructure</a> spending <a href="https://www.politico.com/newsletters/morning-tax/2018/02/12/infrastructure-week-100656">with skepticism</a>.</p>
<p>There’s widespread concern about whether his plan can deliver because it puts only <a href="https://www.whitehouse.gov/briefings-statements/building-stronger-america-president-donald-j-trumps-american-infrastructure-initiative/">$200 billion in federal funding</a> on the table, which Democrats say is roughly <a href="https://s3.amazonaws.com/s3.boldprogressives.org/images/Trump_Budget_Infrastructure_Analysis.pdf">equal to the money that the White House has been trying to cut</a> from similar programs, such as the Highway Trust Fund. There are also <a href="http://thehill.com/policy/transportation/371790-lawmakers-left-with-more-questions-than-answers-on-trump-infrastructure">ample questions</a>
from the <a href="https://www.reuters.com/article/us-usa-trump-infrastructure/trump-urges-congress-to-help-stimulate-1-5-trillion-in-infrastructure-spending-idUSKBN1FK0C7">lawmakers who need to approve that money</a> about where even that sum will come from.</p>
<p>As expected, <a href="http://fox40.com/2018/02/12/trump-infrastructure-plan-relies-on-state-local-funding/">Trump wants</a> to rely on states, local governments and, most importantly, <a href="https://www.citylab.com/transportation/2018/01/so-much-for-that-bipartisan-infrastructure-plan/551849/">private investors</a> to foot most of the bill. As researchers studying ways to boost private infrastructure spending, we believe that it will fall short of the target investment because it does not address private investors’ key concerns, and it would not work for many kinds of high-priority projects.</p>
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<h2>Matching and mismatching</h2>
<p>Half the proposed new federal funding – $100 billion – would cover the cost of making direct grants to local governments intended to spur more infrastructure spending. Another $50 billion would cover the cost of new block grants for rural projects. Some $20 billion would support what the White House calls new “<a href="http://www.businessinsider.com/trump-infrastructure-plan-details-bill-2018-2">transformative projects</a>.” The remaining $30 billion would help pay for miscellaneous existing infrastructure programs.</p>
<p>Trump’s plan would also streamline and expedite the process now required for legally mandated <a href="https://www.bna.com/trump-call-faster-n57982088327/">environmental reviews</a>. It would also make it easier for states to raise money through tolls, user fees and the sale of land and other assets.</p>
<p>Overall, the plan rests on the premise that the government can <a href="https://www.usnews.com/opinion/economic-intelligence/articles/2018-01-31/trumps-infrastructure-pledge-in-state-of-the-union-raises-many-questions">leverage private investment</a> to help pay the nation’s infrastructure bill. </p>
<p>That is why <a href="https://www.bloomberg.com/news/articles/2018-02-12/trump-unveils-long-promised-plan-for-upgrading-u-s-public-works">his plan favors</a> “<a href="https://theconversation.com/heres-how-to-fix-americas-crumbling-bridges-33781">public-private partnerships</a>,” or P3s, the most common way governments attract and <a href="https://iconsofinfrastructure.com/will-trump-use-p3-help-infrastructure-take-off/">leverage private investment</a>.</p>
<p>Here’s <a href="https://www.brookings.edu/wp-content/uploads/2016/06/1208_transportation_istrate_puentes.pdf">how they work</a>. A public sponsor – either the federal government agency or a state or local government agency – contracts out part or all of the financing, construction, maintenance and operation of a project to a group of private companies following a competitive bidding process.</p>
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<h2>P3 bottlenecks</h2>
<p>The amount of infrastructure money in new U.S. P3s has waned in recent years. It fell to <a href="https://home.kpmg.com/au/en/home/insights/2015/06/public-private-partnerships-global-trends.html">$710 million between 2011 and 2014</a> from higher levels seen a few years earlier, the most recent period for which data is available. And P3s only facilitated about <a href="https://www.cbo.gov/sites/default/files/113th-congress-2013-2014/reports/45157-PublicPrivatePartnerships.pdf">1.5 percent</a> of the $4 trillion all levels of government spent on highways between 1989 and 2013, according to the nonpartisan Congressional Budget Office.</p>
<p>However, the number of pension funds and other <a href="https://www.investopedia.com/terms/i/institutionalinvestor.asp">institutional investors</a> putting money into infrastructure <a href="https://www.reuters.com/article/us-usa-infrastructure-pensions/public-pension-funds-seek-infrastructure-as-market-heats-up-idUSKCN0YZ22J">has doubled</a>.</p>
<p>What’s been holding things up?</p>
<p>Investors do not typically say that a lack of federal subsidies, like the $200 billion Trump seeks, is a <a href="https://www.oecd.org/daf/fin/private-pensions/Private-financing-and-government-support-to-promote-LTI-in-infrastructure.pdf">big bottleneck</a>. Instead, to draw much more private investment, the U.S. needs <a href="https://www.oecd.org/daf/fin/private-pensions/Private-financing-and-government-support-to-promote-LTI-in-infrastructure.pdf">clear, consistent regulations</a> that will help make projects more likely to withstand any shifts in political power – such as when the majority party changes at any level of government.</p>
<p>Establishing a more successful track record for these partnerships, which have <a href="https://www.ncppp.org/wp-content/uploads/2013/02/CRS-Insights-Indiana-Toll-Road-Bankruptcy-Chills-Climate-for-P3s.pdf">often faltered</a>, will also help.</p>
<p>These proposed changes could help raise money, but they would not help state or local governments reassure their constituents that P3s serve their best interest.</p>
<p>One step the U.S. could take now is to follow the examples set by <a href="https://www.vic.gov.au/publicsectorreform/people/office-of-projects-victoria.html">Australia</a> and <a href="http://www.p3canada.ca/en/about-p3s/">Canada</a>, where more infrastructure is being built through these partnerships.</p>
<p>Specialized P3 teams in those countries have developed uniform competitive bidding processes, standardized contracts and project pipelines all based on lessons learned from prior partnerships. They also help identify projects that will help the public the most, rather than those with the greatest potential to generate revenue.</p>
<h2>Californian precedents</h2>
<p>The spotty track record for some U.S. efforts to establish P3s underscores the importance of that kind of coordination.</p>
<p>California, for example, sought in 1989 to harness four of these partnerships as “<a href="http://www.dot.ca.gov/hq/innovfinance/public-private-partnerships/PPP_main.html">demonstration</a>” projects. It <a href="http://whoswholegal.com/news/features/article/30387/public-private-partnerships-successes-failures-plans-future">only completed two</a> of those four.</p>
<p>First, California’s transportation department created a <a href="https://www.transportation.gov/policy-initiatives/build-america/sr-91-express-lanes-orange-county-ca">P3 to build express lanes for its busy SR-91</a> highway to ease Orange County congestion near Los Angeles. </p>
<p>Because the department agreed to not build <a href="http://whoswholegal.com/news/features/article/30387/public-private-partnerships-successes-failures-plans-future">free roads running parallel to the tolled ones</a>, a public outcry ensued after the 10-mile-long road opened to traffic in 1995.</p>
<p><a href="https://www.transportation.gov/policy-initiatives/build-america/sr-91-express-lanes-orange-county-ca">Orange County</a> then bought out the private-sector partner stake in this project eight years later, cutting its long-term contract short.</p>
<p><a href="https://www.transportation.gov/policy-initiatives/build-america/south-bay-expressway-sr-125-san-diego-ca">Expanding the South Bay Expressway</a>, the other P3 California announced in 1989 that got done, took until 2007 to complete. Three years later, the project’s private partner <a href="http://medcraveonline.com/MOJCE/MOJCE-02-00030.php">declared bankruptcy</a>, largely because of years of litigation that delayed the onset of tolls – which then generated less revenue than expected.</p>
<p>These planning errors, which were due to lack of experience, <a href="http://www.texasturf.org/2012-06-01-03-09-30/latest-news/public-private-partnerships/1928-taxpayers-get-shafted-in-bankrupt-san-diego-tollway">undercut confidence</a> in the partnership approach for investors and the public alike. </p>
<p>We believe that unless the Trump administration – despite his <a href="https://www.politico.com/magazine/story/2017/01/how-trump-could-shrink-the-government-while-still-keeping-the-good-stuff-214679">disdain for bureaucracy</a> – establishes new government offices to oversee federally backed P3s, it is likely to repeat the errors that hampered California’s pioneering projects.</p>
<h2>If they build it</h2>
<p>With infrastructure, investors are looking for <a href="http://edhec.infrastructure.institute/wp-content/uploads/publications/blanc-brude_2016c.pdf">relatively stable returns</a> and less risk, more akin to bonds than stocks. This makes financing these partnerships attractive for pension funds and other institutional investors.</p>
<p>At the same time, it can make investors more eager to back projects that already exist and are generating revenue through user fees, such as toll roads, airports, ports and some rail projects with nearby land that can be sold or leased. </p>
<p>In the U.S., however, the government mainly needs the private sector’s help meeting other less profitable priorities, such as improving <a href="http://blogs.ei.columbia.edu/2017/06/13/rural-americas-drinking-water-crisis-no-help-from-trump-budget/">water quality</a>, expanding <a href="https://www.brookings.edu/blog/brookings-now/2015/06/03/the-10-u-s-metro-rail-systems-that-lose-the-most-money-per-passenger/">public transit</a> and building <a href="https://www.infrastructurereportcard.org/wp-content/uploads/2017/01/Levees-Final.pdf">levees</a>.</p>
<p>Although those projects may not be attractive to investors, they can stoke economic growth and productivity while <a href="https://ideas.repec.org/a/fip/fedbne/y1990isepp11-33.html">fostering a higher quality of life</a>. </p>
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<span class="caption">Dwayne Boudreaux Jr., owner of a Circle Food Store in New Orleans, shown dumping dirty water that was vacuumed up after a flood. His city needs more than $11 billion to update key parts of its infrastructure but has only about $2 billion in hand.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Trump-Infrastructure-New-Orleans/73f36bf2fcd74e549a0f0bafdbd919b5/12/0">AP Photo/Gerald Herbert</a></span>
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<h2>India’s mixed results</h2>
<p>Interestingly, Trump’s $100 billion <a href="https://www.whitehouse.gov/briefings-statements/building-stronger-america-president-donald-j-trumps-american-infrastructure-initiative/">Infrastructure Incentives Program</a> resembles <a href="https://www.pppinindia.gov.in/schemes-for-financial-support">India’s approach</a>, which has had mixed results since its 2004 inception. There, the national government foots about 20 percent of the bill when it enters into <a href="http://journals.sagepub.com/doi/abs/10.1177/0974930613488295">public-private partnerships</a>, just as the White House proposes to do.</p>
<p>The Indian policy was intended for toll roads and airports for which the government fixed the user fees. The subsidy closed the gap between this regulated revenue stream and investors’ expectations. </p>
<p>However, India <a href="http://journals.sagepub.com/doi/abs/10.1177/0974930613488295">has failed to spend most of the money it budgeted</a> for this initiative, suggesting that it will take more than subsidies to entice private investment.</p>
<p>Between India’s track record and signals about insufficient federal guidance and support for public-private partnerships, we doubt that Trump’s plan can catalyze the infrastructure spending he envisions.</p>
<p><em>Editor’s note: This is an updated version of an article published on Feb. 9, 2018.</em></p><img src="https://counter.theconversation.com/content/91712/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The long-awaited $1.5 trillion plan fails to address some major obstacles to private investment.Caroline Nowacki, PhD Candidate, Global Projects Center, Stanford UniversityKate Gasparro, Graduate Research Fellow of Sustainable Design and Construction, Stanford UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/803502018-02-09T13:28:46Z2018-02-09T13:28:46ZWhy Trump’s infrastructure ambitions are likely to stall<figure><img src="https://images.theconversation.com/files/205165/original/file-20180206-88788-1aqw49g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The White House favors public-private partnerships for widening congested roads and getting other pricey projects done.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Commute-Travel/f721e0c7188340a49342ad08d5c08016/2/0">AP Photo/Charles Dharapak</a></span></figcaption></figure><p>President Donald Trump recently raised the ante with his promise to unleash a <a href="https://www.cnbc.com/2018/01/30/trump-advisor-cohn-president-to-focus-on-1-point-5-trillion-infrastructure-plan-tonight.html">wave of new infrastructure</a> spending. During his first <a href="https://www.youtube.com/watch?v=exsOim0Lyl4">State of Union address</a>, he conjured up images of “gleaming new roads, bridges, highways, railways and waterways all across our land” without getting into the details.</p>
<p>The <a href="https://www.cnbc.com/2018/02/06/trump-to-unveil-infrastructure-plan-monday--white-house-official.html">White House will soon unveil</a>
Trump’s “<a href="https://www.axios.com/draft-white-house-infrastructure-plan-1516644555-0d43f417-6ccd-43f7-9eae-3ccbe711314d.html">Infrastructure Incentives Initiative</a>,” which Trump now says will usher in at least <a href="https://www.bloomberg.com/news/articles/2017-09-27/trump-reverses-course-on-plan-to-rely-on-private-money-for-roads">US$1.5 trillion in spending</a>. That’s a 50 percent jump from the $1 trillion he had previously pledged and nearly triple the money he talked up on the <a href="http://thehill.com/policy/transportation/371790-lawmakers-left-with-more-questions-than-answers-on-trump-infrastructure">campaign trail</a>.</p>
<p>With only <a href="https://www.theatlantic.com/politics/archive/2018/02/infrastructure-week-is-always-next-week/552047/">$200 billion in federal funding</a> apparently on the table, and <a href="http://thehill.com/policy/transportation/371790-lawmakers-left-with-more-questions-than-answers-on-trump-infrastructure">ample questions</a>
from the <a href="https://www.reuters.com/article/us-usa-trump-infrastructure/trump-urges-congress-to-help-stimulate-1-5-trillion-in-infrastructure-spending-idUSKBN1FK0C7">lawmakers who need to approve that money</a> about where even that sum will come from, will the plan deliver?</p>
<p>A <a href="https://www.axios.com/draft-white-house-infrastructure-plan-1516644555-0d43f417-6ccd-43f7-9eae-3ccbe711314d.html">draft of his plan</a> indicates it would rely on states, local governments and, most importantly, <a href="https://www.citylab.com/transportation/2018/01/so-much-for-that-bipartisan-infrastructure-plan/551849/">private investors</a> to contribute the rest of the $1.5 trillion pie. As researchers studying ways to boost private infrastructure spending, we believe that it will fall short because it does not address private investors’ key concerns, and it would not work for many kinds of high-priority projects.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"956225056161624070"}"></div></p>
<h2>Matching and mismatching</h2>
<p>During his address, Trump repeated a message he’s made many times before: that <a href="https://www.usnews.com/opinion/economic-intelligence/articles/2018-01-31/trumps-infrastructure-pledge-in-state-of-the-union-raises-many-questions">private investment</a> should help pay the nation’s infrastructure bill. “Every federal dollar should be leveraged by partnering with state and local governments and, where appropriate, tapping into private-sector investment – to permanently fix the infrastructure deficit,” he said.</p>
<p>That makes it sound like he favors “<a href="https://theconversation.com/heres-how-to-fix-americas-crumbling-bridges-33781">public-private partnerships</a>,” or P3s, the most common way governments attract and <a href="https://iconsofinfrastructure.com/will-trump-use-p3-help-infrastructure-take-off/">leverage private investment</a>.</p>
<p>Here’s <a href="https://www.brookings.edu/wp-content/uploads/2016/06/1208_transportation_istrate_puentes.pdf">how they work</a>. A public sponsor – either the federal government agency or a state or local government agency – contracts out part or all of the financing, construction, maintenance and operation of a project to a group of private companies following a competitive bidding process.</p>
<p>The amount of infrastructure money in new U.S. P3s has waned in recent years. It fell to <a href="https://home.kpmg.com/au/en/home/insights/2015/06/public-private-partnerships-global-trends.html">$710 million between 2011 and 2014</a> from higher levels seen a few years earlier, the most recent period for which data is available. And P3s only facilitated about <a href="https://www.cbo.gov/sites/default/files/113th-congress-2013-2014/reports/45157-PublicPrivatePartnerships.pdf">1.5 percent</a> of the $4 trillion all levels of government spent on highways between 1989 and 2013, according to the nonpartisan Congressional Budget Office.</p>
<p>However, the number of pension funds and other <a href="https://www.investopedia.com/terms/i/institutionalinvestor.asp">institutional investors</a> putting money into infrastructure <a href="https://www.reuters.com/article/us-usa-infrastructure-pensions/public-pension-funds-seek-infrastructure-as-market-heats-up-idUSKCN0YZ22J">has doubled</a>.</p>
<p>What’s holding things up?</p>
<p>Investors do not say that a lack of federal subsidies, like the <a href="https://www.theatlantic.com/politics/archive/2017/05/the-phantom-infrastructure-proposal-in-trumps-budget/527859/">$200 billion</a> Trump reportedly seeks, is a <a href="https://www.oecd.org/daf/fin/private-pensions/Private-financing-and-government-support-to-promote-LTI-in-infrastructure.pdf">big bottleneck</a>. Instead, to draw much more private investment, the U.S. needs <a href="https://www.oecd.org/daf/fin/private-pensions/Private-financing-and-government-support-to-promote-LTI-in-infrastructure.pdf">clear, consistent regulations</a> that will help make projects more likely to withstand any shifts in political power – such as when the majority party changes at any level of government.</p>
<p>Establishing a more successful track record for these partnerships, which have <a href="https://www.ncppp.org/wp-content/uploads/2013/02/CRS-Insights-Indiana-Toll-Road-Bankruptcy-Chills-Climate-for-P3s.pdf">often faltered</a>, will also help.</p>
<p>One step the U.S. could take now is to follow the examples set by <a href="https://www.vic.gov.au/publicsectorreform/people/office-of-projects-victoria.html">Australia</a> and <a href="http://www.p3canada.ca/en/about-p3s/">Canada</a>, where more infrastructure is being built through these partnerships. Specialized P3 teams in those countries have developed uniform competitive bidding processes, standardized contracts and project pipelines all based on lessons learned from prior partnerships.</p>
<h2>Californian precedents</h2>
<p>The spotty track record for some U.S. efforts to establish P3s underscores the importance of that kind of coordination.</p>
<p>California, for example, sought in 1989 to harness four of these partnerships as “<a href="http://www.dot.ca.gov/hq/innovfinance/public-private-partnerships/PPP_main.html">demonstration</a>” projects. It <a href="http://whoswholegal.com/news/features/article/30387/public-private-partnerships-successes-failures-plans-future">only completed two</a> of those four.</p>
<p>First, California’s transportation department created a <a href="https://www.transportation.gov/policy-initiatives/build-america/sr-91-express-lanes-orange-county-ca">P3 to build express lanes for its busy SR-91</a> highway to ease Orange County congestion near Los Angeles. </p>
<p>Because the department agreed to not build <a href="http://whoswholegal.com/news/features/article/30387/public-private-partnerships-successes-failures-plans-future">free roads running parallel to the tolled ones</a>, a public outcry ensued after the 10-mile-long road opened to traffic in 1995.</p>
<p><a href="https://www.transportation.gov/policy-initiatives/build-america/sr-91-express-lanes-orange-county-ca">Orange County</a> then bought out the private-sector partner stake in this project eight years later, cutting its long-term contract short.</p>
<p><a href="https://www.transportation.gov/policy-initiatives/build-america/south-bay-expressway-sr-125-san-diego-ca">Expanding the South Bay Expressway</a>, the other P3 California announced in 1989 that got done, took until 2007 to complete. Three years later, the project’s private partner <a href="http://medcraveonline.com/MOJCE/MOJCE-02-00030.php">declared bankruptcy</a>, largely because of years of litigation that delayed the onset of tolls – which then generated less revenue than expected.</p>
<p>These planning errors, which were due to lack of experience, <a href="http://www.texasturf.org/2012-06-01-03-09-30/latest-news/public-private-partnerships/1928-taxpayers-get-shafted-in-bankrupt-san-diego-tollway">undercut confidence</a> in the partnership approach for investors and the public alike. </p>
<p>But the Trump plan’s leaked preliminary details, such as an “<a href="https://www.axios.com/draft-white-house-infrastructure-plan-1516644555-0d43f417-6ccd-43f7-9eae-3ccbe711314d.html">interagency selection committee</a>” administered by the Commerce Department and “federal technical assistance” with “no funding provided,” sound like they will fall short of what’s required.</p>
<p>We believe that unless the Trump administration – despite his <a href="https://www.politico.com/magazine/story/2017/01/how-trump-could-shrink-the-government-while-still-keeping-the-good-stuff-214679">disdain for bureaucracy</a> – establishes new government offices to oversee federally backed P3s, it is likely to repeat the errors that hampered California’s pioneering projects.</p>
<h2>If they build it</h2>
<p>With infrastructure, investors are looking for <a href="http://edhec.infrastructure.institute/wp-content/uploads/publications/blanc-brude_2016c.pdf">relatively stable returns</a> and less risk, more akin to bonds than stocks. This makes financing these partnerships attractive for pension funds and other institutional investors.</p>
<p>At the same time, it makes investors more eager to back projects that already exist and are generating revenue through user fees, such as toll roads, airports, ports and some transit projects with nearby land that can be sold or leased. </p>
<p>In the U.S., however, the government mainly needs the private sector’s help meeting other less profitable priorities, such as improving <a href="http://blogs.ei.columbia.edu/2017/06/13/rural-americas-drinking-water-crisis-no-help-from-trump-budget/">water quality</a>, expanding <a href="https://www.brookings.edu/blog/brookings-now/2015/06/03/the-10-u-s-metro-rail-systems-that-lose-the-most-money-per-passenger/">public transit</a> and building <a href="https://www.infrastructurereportcard.org/wp-content/uploads/2017/01/Levees-Final.pdf">levees</a>.</p>
<p>Although those projects may not be attractive to investors, they can stoke economic growth and productivity while <a href="https://ideas.repec.org/a/fip/fedbne/y1990isepp11-33.html">fostering a higher quality of life</a>. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/205540/original/file-20180208-180836-12p98cz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/205540/original/file-20180208-180836-12p98cz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/205540/original/file-20180208-180836-12p98cz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205540/original/file-20180208-180836-12p98cz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205540/original/file-20180208-180836-12p98cz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205540/original/file-20180208-180836-12p98cz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205540/original/file-20180208-180836-12p98cz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205540/original/file-20180208-180836-12p98cz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Dwayne Boudreaux Jr., owner of a Circle Food Store in New Orleans, shown dumping dirty water that was vacuumed up after a flood. His city needs more than $11 billion to update key parts of its infrastructure but has only about $2 billion in hand.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Trump-Infrastructure-New-Orleans/73f36bf2fcd74e549a0f0bafdbd919b5/12/0">AP Photo/Gerald Herbert</a></span>
</figcaption>
</figure>
<h2>India’s mixed results</h2>
<p>Interestingly, Trump’s infrastructure plan may resemble <a href="https://www.pppinindia.gov.in/schemes-for-financial-support">India’s approach</a>, which has had mixed results since its 2004 inception. There, the national government foots about 20 percent of the bill when it enters into <a href="http://journals.sagepub.com/doi/abs/10.1177/0974930613488295">public-private partnerships</a>, just as the White House proposes to do.</p>
<p>The Indian policy was intended for toll roads and airports for which the government fixed the user fees. The subsidy closed the gap between this regulated revenue stream and investors’ expectations. </p>
<p>However, India <a href="http://journals.sagepub.com/doi/abs/10.1177/0974930613488295">has failed to spend most of the money it budgeted</a> for this initiative, suggesting that it will take more than subsidies to entice private investment.</p>
<p>Between India’s track record and signals about insufficient federal guidance and support for public-private partnerships, we doubt that Trump’s plan, as drafted, would catalyze the $1.5 trillion in infrastructure spending he envisions.</p>
<p>What’s more, we’re concerned that Trump’s proposed plan would primarily aid the kinds of projects that already attract private dollars, leaving many big priorities without a federal assist.</p><img src="https://counter.theconversation.com/content/80350/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Caroline Nowacki's research is funded by the Stanford Global Projects Center</span></em></p><p class="fine-print"><em><span>Kate Gasparro receives funding from the National Science Foundation. </span></em></p>The $1.5 trillion plan he’s proposing would do the most for ventures that don’t really need the government’s help and ignores some major obstacles to private investment.Caroline Nowacki, PhD Candidate, Global Projects Center, Stanford UniversityKate Gasparro, Graduate Research Fellow of Sustainable Design and Construction, Stanford UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/234682014-05-06T20:37:27Z2014-05-06T20:37:27ZShould drought support measures survive the budget axe?<p>Last week’s Commission of Audit advocated a “commonsense approach to handling risks in society,” targeting drought assistance for its role in “discouraging drought preparedness and self-reliance”.</p>
<p>The Commission recommended the <a href="http://www.daff.gov.au/agriculture-food/drought/assistance/farm-finance/concessional-loans">Farm Finance Concessional Loans Scheme</a> be abolished. Although earmarked for productivity enhancing investments and debt restructuring, the scheme represents a form of interest rate subsidy, similar to the previously ended ECIRS (Exceptional Circumstances Interest Rate Subsidy).</p>
<p>The Commission’s call mirrors many previous calls from the Productivity Commission, most recently in the 2009 drought review. Yet, Agriculture Minister Barnaby Joyce seems confident the measure will stay. In his view, abolishing the A$700 million concessional loans scheme would be “counterintuitive” to a recently announced and agreed government <a href="http://www.daff.gov.au/agriculture-food/drought/assistance">policy on drought assistance</a>.</p>
<p>Droughts are a feature of the Australian landscape, and farmers have learnt to manage them, but not without significant hardship and financial burden. </p>
<p>As droughts gets more intense and occur more often, as indicated in climate models, farmers are also finding it difficult to cope in an increasingly competitive, globalised economy. Governments around the world are regularly called upon to help farmers. </p>
<p>In the deliberations leading to the next week’s federal budget, it’s worth asking: should farming be considered different to other small businesses seeking government support?</p>
<h2>Getting policy right</h2>
<p>When looking for policy solutions, it all boils down to the social merits of what governments do, and involves the balancing of opportunity costs. Simply stated, what else could we do with the funds targeted for drought support, and would it make matters worse?</p>
<p>The Commission of Audit argues:</p>
<blockquote>
<p>the scheme encourages farms to take on more debt, when there is little evidence to suggest that farm businesses that are viable over the longer term have difficulty accessing commercial finance. </p>
</blockquote>
<p>The <a href="http://www.abc.net.au/news/2014-05-05/rural-finance-corporation-to-be-sold-to-bendigo-bank/5429928">proposed sale</a> of Victoria’s Rural Finance Corporation (RFC) to Bendigo and Adelaide Bank for A$1.78 billion partly supports the Commission’s view on the commercial viability of rural finance businesses. </p>
<p>When interest rates are at a record low level, businesses that can prove their viability do not find it difficult to access finance.</p>
<p>It is widely believed that at any time of the interest rates cycle, concessional loan schemes carry the risk of distorting incentives for long-term planning such as drought preparedness. It can deter long-term unviable businesses from leaving farming, and thus extend the “agony” that the policy is trying to resolve.</p>
<p>Successive reviews of drought programs since 1997 have found that the ECIRS is ineffective and inequitable. For example, in 2009 the <a href="http://www.pc.gov.au/projects/inquiry/drought/report">Productivity Commission</a>’s Inquiry into Government Drought Support noted a number of issues. It found the ECIRS may:</p>
<ul>
<li>provide incentives to increase debt</li>
<li>make farm businesses less responsive to drought conditions and </li>
<li>discourage farm businesses from adopting self reliant strategies.</li>
</ul>
<p>Misguided incentives such as interest rate subsidies can also drive up property prices and dissuade much-needed new entrants. </p>
<p>Australian farmers are already facing uncertainty relating to changing environmental conditions that affect farming more directly. Farming is becoming increasingly more complex. And better business management, in particular risk management, is becoming the much-needed focus of farming. </p>
<p>While it may be reasonable to assume that the farmers’ risk profile may have changed more than other businesses, it’s important to note that farmers also have access to specific measures to help smooth out income disparities caused by fluctuating market or seasonal conditions. </p>
<h2>Farm Management Deposits</h2>
<p>Beginning in 1992, the Farm Management Deposits (FMD) Scheme allows eligible farmers to make deposits into a bank account that are tax deductible in the year the deposits are made. The deposits become taxable income in the year they are withdrawn.</p>
<p>FMDs have become popular, particularly over recent years. A <a href="http://www.daff.gov.au/agriculture-food/drought/nrac/work-program/effectiveness-farm-management-deposits-scheme">review</a> of the scheme found that, although used mainly by mature-aged farmers in the early years of the scheme, with the onset of widespread drought across eastern Australia since 2002–03, the scheme has attracted younger farmers. </p>
<p>By June 2013, the value of FMD’s hit an all-time high of A$3.72 billion. By the end of January 2014, nearly 27% of an estimated 157,000 Australian farmers subscribed to FMDs. The average holding of $76,670, is higher than the highest estimate ($61,600) of the <a href="http://www.challenger.com.au/funds/TechnicalUpdates/CRIR_How_much_super_do_Aussies_have_Apr12.pdf">average super savings</a> held by Australians, including farmers. </p>
<h2>Distorting signals may be costly</h2>
<p>What this suggests is that Australian farmers are taking business risk management seriously and government policies need to encourage such self-protection activities. Addressing mismatches in drought risk management, in particular social concerns that drive governments into quick fix solutions, may be better done through direct social policy. </p>
<p>Distorting the incentives for competitive farms that have invested their savings in preparing for vagaries of weather and other risks in working the land may not be wise.</p>
<p>On the other hand, the government also has a philosophical problem: if debt is bad for good governance, how can a government encourage farmers to take more debt?</p><img src="https://counter.theconversation.com/content/23468/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Thilak Mallawaarachchi has previously worked for the Department of Agriculture, Fisheries and Forestry.</span></em></p>Last week’s Commission of Audit advocated a “commonsense approach to handling risks in society,” targeting drought assistance for its role in “discouraging drought preparedness and self-reliance”. The…Thilak Mallawaarachchi, Principal Research Fellow, Risk and Sustainable Management Group, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/237732014-03-04T19:06:52Z2014-03-04T19:06:52ZWho will be the next round of investors in Australian farming?<figure><img src="https://images.theconversation.com/files/42894/original/yqgtsb94-1393819541.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Patient investors are needed for Australia's farm sector.</span> <span class="attribution"><a class="source" href="http://www.flickr.com/photos/taylr_/3776731721/sizes/l/">taylr/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>The Victorian Government has a <a href="http://www.premier.vic.gov.au/media-centre/media-releases/8100-food-and-fibre-exports-continue-record-breaking-run.html">goal</a> of doubling the state’s agricultural production over 20 years. Achieving that will require substantial new investment. </p>
<p>A recent <a href="http://www.anzbusiness.com/content/dam/anz-superregional/AgricultureInsightsGreenerPastures.pdf">report</a>, for example, estimates that Australian agriculture as a whole needs A$600 billion in new capital to realise the “global soft commodity opportunity”. Where could this money come from, and does the source matter?</p>
<h2>Beyond debt finance</h2>
<p>Last week Rob Goudswaard, CEO of Rural Finance launched the <a href="http://www.ruralfinance.com.au/victorian-farmland-values-index">Victorian Farmland Values Index</a>, a substantial new piece of research tracking broad patterns in the value of agricultural land across the state. It covers four agricultural industries - mixed farming, cropping, grazing and dairy - and reflects 44,000 land sale transactions over a 23-year period to mid-2013.</p>
<p>Rural Finance, which is 100% owned by the Victorian Government, provides commercial loans to farms and other rural businesses much like other banks, but also has a <a href="http://www.ruralfinance.com.au/about-us">mission</a> to provide “services that build business capability and resilience”. </p>
<p>Commenting on the Victorian Government’s growth goal, Goudswaard said:</p>
<blockquote>
<p>Over the last 20 years Victoria’s production did double, but in the process the level of farm debt increased from $2 billion to $12 billion. We don’t think an increase in bank debt of this order is a feasible model for achieving the next doubling.</p>
</blockquote>
<p>In part this is because of the particular operational risks of bank debt for farm businesses. Banks these days are acutely focused on the security of their loan books. Heavily geared farmers whose land values drop can find themselves rapidly in trouble, as <a href="http://www.stockandland.com.au/news/agriculture/general/news/ag-fears-for-rural-collapse/2660261.aspx">happened</a> to a number of south-west Victorian dairy farmers just last year.</p>
<h2>Taking the long-term view</h2>
<p>Due to their dependence on natural biological and physical processes, farm businesses have long development and life cycles. Their returns are also highly variable from year to year due to both natural factors (such as weather) and high volatility in the prices of both inputs and products.</p>
<p>For these reasons the claim is often made that agriculture needs “patient investors”, willing to expose themselves to more of the business’ risks, and with an eye on the medium and long term. This would be equity investment rather than debt, which of course has its own particular pros and cons.</p>
<p>Damian Murphy, a 2012 Nuffield Australia Farm Scholar, also spoke at the Rural Finance launch. He has personal experience of the difficulties young farmers face in raising capital, and has concerns about equity investors too. Institutional investment managers with no knowledge of, or interest in, agriculture may also lack the long-term view, and equity investment comes with some loss of autonomy for the business operator. He says that in his experience “those words, patience and investor, they don’t equate at all.” </p>
<h2>The view from the kitchen table</h2>
<p>But there are many ways that equity investment arrangements can be organised. Here’s one example. Four co-investors I know have recently bought a dairy farm in north-east Victoria. We’ll call them Angus, Chris, Angie and Bob.</p>
<p>They’ve employed a young couple – Glen and Lorraine - to manage the farm operations on a day-to-day basis, while the owners focus on developing the property and planning and managing the business. Farm management is the logical next career step for Glen and Lorraine, and the plan is to offer them the opportunity to buy into the business down the track.</p>
<p>Angus is himself a recently retired 4th generation family farmer. He told me recently “it’s so great not to be doing this stuff on my own!” Chris, who has had an executive career further along the dairy supply chain said: “I sit at our management meetings and look at the range of skills sitting around the kitchen table, from agronomy to investment structures, employment law and grain futures and I think: how do we expect farmers to know all of this?”</p>
<p>This is a one-off based in personal relationships. Damian Murphy has a proposal to institutionalise this idea of “ag investing in ag”, and thinks it could be structured to meet the “patient investor” test. The core of <a href="http://nuffield.com.au/damian-murphy/">his proposal</a> is providing an institutional vehicle for retiring farmers’ superannuation funds, and also current farmers’ Farm Management Deposits, to be available as an investment pool.</p>
<p>In <a href="http://www.ifsa2012.dk/downloads/WS3_2/Michael_Santhanam-Martin.pdf">my own research</a> I’ve started to explore the implications of different investment and farm business models – for farmers and the communities they belong to. There are opportunities, and risks. But clearly there is a need to move beyond thinking about <a href="http://theconversation.com/old-macdonald-sold-the-farm-so-whats-the-future-for-agriculture-22933">“family farming” and “corporate farming”</a> as the only two, mutually exclusive options. </p><img src="https://counter.theconversation.com/content/23773/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Santhanam-Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Victorian Government has a goal of doubling the state’s agricultural production over 20 years. Achieving that will require substantial new investment. A recent report, for example, estimates that Australian…Michael Santhanam-Martin, PhD Candidate in the Rural Innovation Research Group, Melbourne School of Land and Environment, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/226982014-02-05T19:48:58Z2014-02-05T19:48:58ZFarmers are in debt, and more debt won’t help<figure><img src="https://images.theconversation.com/files/40746/original/88hpt3ng-1391573108.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Farm debt is increasing in Australia, but will writing it off make more farms viable?</span> <span class="attribution"><span class="source">Grenville Turner/AAP</span></span></figcaption></figure><p>Farm debt in Australia has increased by almost 75% over the past decade, from A$40.3 billion in 2004 to an estimated A$70 billion in 2014. Barnaby Joyce, the Federal Minister for Agriculture, has <a href="http://www.abc.net.au/news/2014-02-03/barnaby-joyce-tells-farmers-he-wil-take-drought-issue-to-cabinet/5233438">argued</a> the government should take on $7 billion of the riskiest proportion of this debt.</p>
<p>The suggestion by Joyce is that a government Rural Reconstruction and Development Bank be established to buy up bad loans, making the government joint owner of some farm businesses until the loans are repaid.</p>
<p>The federal budget is in deficit by A$47 billion dollars, total net debt is approaching A$200 billion and interest repayments will soon exceed A$10 billion per year. It will be a hard sell to convince the government to take on $7 billion of risky debt, and Treasurer Joe Hockey has already <a href="http://www.afr.com/p/national/victorian_labor_pledges_spc_X6nnOLhqtxl2QZkPRGQkxO">poured cold water</a> on the idea, arguing “there are swings and roundabouts in agriculture all the time”.</p>
<h2>Why help agriculture and not other industries?</h2>
<p>At a time when the motor vehicle and fruit processing industries haven’t received additional government help, why should the agricultural sector? </p>
<p>Agriculture is different to other industries in that it’s characterised by long-term financial viability but short-term vulnerability. Its output and survival depend primarily on the weather, which is not something that most other industries face. Pests and disease also add additional uncertainty and risk.</p>
<p>Therefore it’s reasonable to have short term emergency funding from the government for periods of severe drought to support an industry that exports around two thirds of its output and is estimated to generate A$38 billion in export earnings in 2013/14. Further, the long-term outlook for agriculture is positive as the world’s population grows, along with the increased demand for meat products from the growing middle-income classes in Asia.</p>
<p>The federal government has for decades provided emergency drought relief funding, and in 2013 the Farm Finance Concessional Loans Scheme came into effect. This provides A$420 million in low-interest loans (4.5%) to “eligible and viable” farm businesses. The key point here is that only “viable” farms can receive assistance.</p>
<h2>Equity levels are high</h2>
<p>Debt is an important source of funding for investment in agriculture, for expansion, improved machinery, technology and techniques.</p>
<p>Debt is not usually a problem if sufficient equity is held. Because the value of agricultural land has been rising, the ratio of debt to equity hasn’t changed significantly over the past decade. For example, the average price per hectare in a broadacre farm (crops and/or livestock) was around A$270 in 2000 and is around A$470 per hectare today. While debt has grown significantly, so too have average farm values. It’s similar to owning a home that has increased in value which enables more borrowing against its value to occur.</p>
<p>Equity ratios in Australian broadacre farms are high, averaging around 88%. This rate is similar to 10 years ago (89%), and a little higher than in 2010 (87%). Banks do not usually lend to a farm with an equity ratio of less than 70%.</p>
<h2>Who’s really affected?</h2>
<p>70% of farm debt is held by only 12% of farms. These are mainly larger operations that produce over 40% of total broadacre output and can service their debt.</p>
<p>Around 6% of farms are estimated to be at high risk. This is of great concern, but is lower than the 10.3% of high-risk farms in the early 1990s, which occurred due to extremely high interest rates in 1988-89. More than 80% of broadacre farms hold more than 80% of the equity in their businesses and almost 70% have equity that exceeds 90%.</p>
<h2>The problem is long-term viability</h2>
<p>The current severe droughts in northern Queensland and parts of New South Wales, have led to calls for increased government assistance. In Western Australia, recent droughts in some regions led to similar financial stress. A good season in 2013 meant that many farms recovered, but some farms on the eastern parts of the wheat belt region didn’t receive rain and are suffering long-term drought. The concern is that droughts may also be long-term in parts of Queensland.</p>
<p>Banks won’t lend to farms in this situation as the likelihood of repayment is low. Land values plummet in areas of prolonged drought, and as the land has few or no alternative uses, the situation is dire. Famers either sell their land at a low price, or cannot find buyers at all. Further, farmers are forced to sell animal stock at low prices.</p>
<p>In these extreme circumstances, more government loans or the government buying the bad debts and assuming co-ownership is unlikely to contribute to long-term viability.</p>
<p>Other farms have large debts as they bought more land when interest rates were low in the 2000s. Land purchase is the largest single contributor to the increases in farm debt over the past two decades. In 2012, 44% of debt was due to land purchases. If financial stress is occurring today, when interest rates are at historic lows, repayments will become even more difficult when interest rates rise. Taking on more debt today is not likely to help those in this situation.</p>
<p>Clearly several drought affected regions are facing severe financial pressure. Smaller operations have been surviving for years only due to earning off-farm income. But the farm sector has healthy equity ratios and positive long-term prospects. Drought assistance and short-term loans are important, but government high-risk loans totalling $7 billion are not good use of taxpayers’ money and are not likely to increase long-term farm viability.</p><img src="https://counter.theconversation.com/content/22698/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anne Garnett has in the past received funding from the Australian Research Council and the National Centre for Educational Research.</span></em></p>Farm debt in Australia has increased by almost 75% over the past decade, from A$40.3 billion in 2004 to an estimated A$70 billion in 2014. Barnaby Joyce, the Federal Minister for Agriculture, has argued…Anne Garnett, Senior Lecturer in Economics, Murdoch UniversityLicensed as Creative Commons – attribution, no derivatives.