Public-Private Partnerships Fad Fails

Jerri-Lynn here. This succinct post dissects the fad for public-private partnerships – touted to replace another neoliberal god that failed: privatization.

By Jomo Kwame Sundaram, a former economics professor, was Assistant Director-General for Economic and Social Development, Food and Agriculture Organization, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007. Originally published by Inter Press Service

After the failure and abuses of privatization and contracting-out services from the 1980s, there has been renewed appreciation for the role of the state or government. Earlier promoters of privatization have taken a step backward, only to take two more forward to instead promote public-private partnerships (PPPs).

PPPs for Most Purposes

PPPs are essentially long-term contracts, underwritten by government guarantees, with which the private sector builds (and sometimes runs) major infrastructure projects or services traditionally provided by the state, such as hospitals, schools, roads, railways, water, sanitation and energy.

PPPs are promoted by many governments associated with the Organization for Economic Co-operation and Development (OECD) and some multilateral development banks – especially the World Bank – as the solution to the financing shortfall needed to achieve development, including the Sustainable Development Goals (SDGs).

Since the late 1990s, many countries have embraced PPPs in many areas ranging from healthcare and education to transport and infrastructure – with mixed consequences. They were less common in developing countries, but that is changing rapidly, with many countries in Asia, Latin America and Africa now introducing enabling legislation and initiating PPP projects.

PPPs are now an increasingly popular means to finance mega-infrastructure projects, but dams, highways, large plantations, pipelines and energy or transport infrastructure can ruin habitats, displace communities and devastate natural resources. Typically, social and environmental legislation is weakened or circumscribed to attract investors for PPPs.

There are also a growing number of ‘dirty’ energy PPPs, devastating the environment, undermining progressive environmental conservation efforts and exacerbating climate change. PPPs have also led to forced displacement, repression and other abuses of local communities, indigenous peoples, displaced farmers and labourers among others.

PPP Financing More Public Than Private

Nevertheless, experiences with PPPs have been largely, although not exclusively, negative, and very few PPPs have delivered results in the public interest. There has been some supposed success with infrastructure PPPs, mainly due to financing arrangements. Generally, PPPs for hospitals and schools have much poorer records compared to infrastructure.

One can have good financing arrangements, due to preferential interest rates, for a poor PPP project. Nevertheless, private finance all over the world still accounts for a small share of infrastructure financing. However, good financing arrangements will not make a bad PPP project any better.

PPPs typically involve public financing for developing countries to attract bids from influential private companies, often from abroad. ‘Blended finance’, export financing and new supposed aid arrangements have become means for foreign governments to support powerful corporations bidding for PPP contracts abroad, especially in developing countries. Incredibly, such arrangements are increasingly counted as overseas development assistance, as North-South, South-South or triangular development cooperation.

Like privatization, PPPs often increase fees or charges for users. PPP contracts often undermine the public interest in other ways, with generous host government incentives and other privileges, often compromising and undermining the state’s obligation to regulate in the public interest. PPPs can limit government capacity to enact new legislation and other policies – such as strengthened environmental or social regulations – that might adversely affect or constrain investor interests.

PPPs – Public Pain, Private Gain?

PPP contracts are typically complex. Negotiations are subject to commercial confidentiality, making it hard for civil society and parliamentarians to provide checks and balances in the public and national interest. Such limited transparency significantly increases the likelihood of corruption and undermines democratic accountability.

It is important to establish the circumstances required to achieve efficiency gains and to recognize the longer-term fiscal implications of PPP-related contingent liabilities. Shifting public debt to government guaranteed debt does not really reduce government debt liabilities, but obscures accountability as it is taken off-budget and is no longer subject to parliamentary, let alone public scrutiny.

Hence, PPPs are more likely to be abused because they are typically ‘off balance sheet’ so that they do not show up as government debt, giving the illusion of ‘easy money’ or credit. Despite claims to the contrary, PPPs are typically riskier for governments than for the private companies involved, as the government may be required to step in to assume costs and liabilities if things go wrong.

PPPs also undermine democracy and national sovereignty as such contracts tend not to be transparent and subject to unaccountable international adjudication — due to investor-state dispute settlement (ISDS) commitments — rather than national or international courts. Under World Bank-proposed PPP contracts, for example, national governments can even be liable for losses due to strikes by workers.

Government Procurement

One alternative, of course, is government or public procurement. In many instances, PPPs have become the most expensive financing option and much less cost-effective than transparent competitive government procurement. They cost governments significantly more in the long run than if the government procures on an open competitive basis, or if projects are directly financed by government borrowings.

Generally, PPPs are much more expensive than government procurement despite government subsidized credit. However, with a competent government doing good work, government procurement can be efficient and low cost.

With a competent government and accountable consultants, efficient government procurement has generally proved far more cost-effective than PPP alternatives. It is therefore important to establish when and why meaningful gains can be achieved through PPPs, and when these are unlikely.

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  1. Thuto

    Great post. One thing I would add that wasn’t mentioned by the author is the upfront fees, typically running into millions, that the government has to fork out to gather a transaction advisory team (I.e. legal, technical, financial etc) to write out the terms of reference to guide the bidding process and to assist in bid evaluation. Said fees aren’t part of any financing arrangements but must come directly from a pool of unencumbered government funds and are incurred irrespective of whether the deal reaches financial-close or not.

    One other thing is the inherent clash of ideologies in PPPs, one party driven by the mandate of profit maximization, the other by a developmental mandate to provide public services as efficiently as possible vis a vis cost. I wouldn’t be surprised, given that the government ultimately backstops everything, if the private sector sets IRR hurdles higher for PPP projects than other projects in their pipeline.

  2. PlutoniumKun

    I have yet to hear a coherent argument in favour of PPP that make sense, apart from some fairly minor and very specific applications (for example, some types of urban renewal where government involvement is necessary as a catalyst).

    A key issue which is often forgotten in the arguments over PPP which relates to Single Payer in healthcare is that governments have a huge advantage over the private sector in infrastructure apart from being able to borrow cheaper – that is the scale (temporally and financially) of expenditure. One reason that cities in Continental Europe have been able to deliver public transit much cheaper than in the US or UK is that they put in place very large, long term rolling contracts for delivery, sometimes over 20 years. This both gives contractors the confidence to invest in plant and staff, but also puts the State in the situation of a monopsony buyer – it has enormous power to drive down costs over time if the contracts are managed correctly. The short term ‘single project’ nature of PPP’s makes this impossible – it gives far too much scope to the contractor to ratchet up costs.

    This doesn’t just apply to major projects – a typical local government authority can do simple things like repair potholes and fix sidewalks significantly cheaper than the private sector, because large annual tenders for standard items invariably end up cheaper than individual small tenders, plus a local authority has the monopsony advantage. PPP (and compulsory tendering) destroys this advantage which, as Yves would no doubt say, is a feature, not a bug.

  3. Another Scott

    I wish I could be as optimistic about the decline of public private partnerships, but I have seen a lot of stories to suggest the contrary. For example, Prince George’s County, Maryland wants to use them for 18 new schools. Does anyone think this structure is in the best interest of the schools and citizens over the long-term?

    Democrats in Connecticut thankfully killed Ned Lamont’s (remember when he was considered a progressive?) proposal for a similar arrangement for Connecticut’s tolls.

    And this contract structure has spread to higher education, whose administrators don’t want to stop the construction boom. Leading to these arrangements at schools like UC Merced and Ohio State, as well as similar proposals at Dartmouth and University of Iowa

  4. Michael C.

    My alma mater is using public-private partnerships for construction of new buildings. Just another way that privatization of public domain, in this case a state university, pursues the neoliberal model.The public domain shrinks at the behest of profit makers.

  5. Chauncey Gardiner

    Topical post regarding funding of the $2 trillion federal infrastructure proposal being discussed, largely under the radar. As Congressional representative Omar from Minnesota said, “It’s all about the benjamins.”…

    Regarding the proposed $2 trillion national infrastructure plan, the Trump administration reportedly wants only 20% of the proposed total infrastructure package to be funded by the U.S. government, with the balance to come from private sources through partnerships with private firms, with projects to generate revenue and generally be managed by private firms under some sort of “Public-Private Partnerships”, presumably with U.S. government financial subsidies or guarantees to cover any revenue shortfalls and financial risk of private financing.

    The majority of the House reportedly believes that investment should be funded primarily by the federal government.

    As the article states:

    “Generally, PPPs are much more expensive than government procurement despite government subsidized credit. However, with a competent government doing good work, government procurement can be efficient and low cost.

    With a competent government and accountable consultants, efficient government procurement has generally proved far more cost-effective than PPP alternatives. It is therefore important to establish when and why meaningful gains can be achieved through PPPs, and when these are unlikely.”

  6. eg

    PPPs are a scam to divert public funds into private pockets, full stop.

    Any thinking government with monetary sovereignty will reject them utterly — but that leaves lots of thoughtless governments and lots of governments without monetary sovereignty to be bilked.

  7. David

    In the UK, PPP began in the early 1980s, under the name of Private Finance Initiative (PFI). It was based on two ideas. One was the result of the seepage into government of the idea that financial outcomes were more important than real ones. So living within your Department’s budget became more important than actually doing anything with the money. PFI offered the near certainty of cost-savings in the short term, and, in the long-term, who cared? In any given year, for example, renting a building would cost less than new construction, even if it cost more overall. The Treasury loved this, and soon it was effectively impossible to get funding for non-PFI projects. The other idea was that private sector management techniques would result in massive savings, to offset the higher cost of borrowing by the private sector. It’s fair to say that these techniques were never actually specified, and no-one can ever remember seeing them in action.

  8. KLG

    Got this link in an email from the Chronicle of Higher Education just yesterday:

    The outsourced university. Grifters gotta grift, and most of the grifters seem to be a member of or associated with the relevant Board of Trustees/Regents. Imagine that! My “favorite” scam is the student housing racket, in which the Private entity of the PPP gets concessions to build high-end dorms and a 20-year stream of captive renters. At 20 years the building(s) may revert to the university or college, public or private, just in time to require complete rebuild/renovation. Nice work if you can get it.

    1. wilroncanada

      On Canada’s east coast, when we lived there, a Liberal government decided to “partner” with the private sector to build some new schools, including a new high school near us. Later, when students occupied the premises, they discovered to their surprise that the doors were locked 45 minutes (I think. It may have been 30 minutes) after the last class, and didn’t open until 30 minutes before classes. Suddenly the band couldn’t practice in the morning; neither could the sports teams after school, unless the school board paid extra fees. As for evening dances, the drama club major production, and other events, those became special contracts to be arranged with the private “owners.”
      I commented at the time that while older schools were built to look like factories–multi-storied, brick construction–because the majority of students would spend most of their adulthood in one, these new schools were built to easily convert into shopping malls, for the consumers to come, and so very few structural changes would be mad 20 years in the future when the private “owner” took full control.

  9. Scott1

    It was the ISDS Tribunals that sunk the TPP for me. Whatever govs. agree to it are from the get go doing the wrong thing. Corporations were and are supposed to serve the interest of the governments that give them their being.
    The main issue I see, and was mentioned by the author Jomo Kwame Sundaram is the failure to unite the goals of the Private Contractors with those of Govs. You would think private profit would be limited by Gov. and further Government would be the entity whose goals must take precedent.

    Hello to Another Scott. I was Scott, then I started seeing some things from plain ole Scott, and now I wonder if Another Scott is that Scott. I had take the name Scott 1.

  10. alan

    PPP is another name for racketeering. Here in Virginia, we gave them our highway, which was already built with tax dollars. The company then puts in place variable rate tolling and a massive number of surveillance cameras. The money this company collects is sucked out of our local economy but the insanely high peak hour tolling has created a fast lane around traffic jams for the people who can afford it, in true neoliberal fashion.

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