Beware Public Private Partnerships

Many public highways paid for by taxpayers and transferred to public-private partnership toll roads end up costing motorists vastly more while the substantial profits are sent offshore.

By Jomo Kwame Sundaram

Many public highways paid for by taxpayers and transferred to public-private partnership toll roads end up costing motorists vastly more while the substantial profits are sent offshore.

Public-private partnerships (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.

Embracing PPPs

PPPs are promoted by many OECD governments, and some multilateral development banks – especially the World Bank – as the solution to the shortfall in financ­ing needed to achieve development including the Sus­tainable Development Goals (SDGs).

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

Nevertheless, experiences with PPPs have been large­ly, although not exclusively negative, and very few PPPs have delivered results in the public interest. However, the recent period has seen tremendous en­thusiasm for PPPs.

Financing PPPs

Undoubtedly, there has been some success with in­frastructure PPPs, but these appear to have been due to the financing arrangements. Generally, PPPs for social services, e.g., for hospitals and schools, have much poorer records compared to some infrastruc­ture projects.

One can have good financing arrangements, e.g., due to low interest rates, for a bad PPP project. All over the world, private finance still accounts for a small share of infrastructure financing. However, concessional fi­nancing arrangements cannot save a poor project al­though they may reduce its financial burden.

PPPs often involve public financing for developing countries to ‘sweeten’ the bid from an influential pri­vate company from the country concerned. ‘Blended finance’, export financing, and new aid arrangements have become means for governments to support their corporations’ bids for PPP contracts abroad, especial­ly in developing countries. Such business support ar­rangements are increasingly passed off and counted as overseas development assistance (ODA).

Undermining Rights

PPPs often increase fees or charges for users of ser­vices. PPP contracts often undermine consumer, cit­izen and human rights, and the state’s obligation to regulate in the public interest. PPPs can limit govern­ment capacity to enact new policies – e.g., strength­ened environmental or social regulations – that might affect certain projects.

PPPs are now an increasingly popular way to finance ‘mega-infrastructure projects’, but dams, highways, large-scale plantations, pipelines, and energy or trans­port infrastructure can ruin habitats, displace com­munities and devastate natural resources. PPPs have also led to forced displacement, repression and other abuses of local communities and indigenous peoples.

There are also growing numbers of ‘dirty’ energy PPPs, exacerbating environmental destruction, undermining progressive environmental conservation efforts and worsening climate change. Typically, social and envi­ronmental legislation is weakened to create attractive business environments for PPPs.

PPPs Often Expensive, Risky

In many cases, PPPs are the most expensive financing option, and hardly cost-effective compared to good government procurement. They cost governments – and citizens – significantly more in the long run than if the projects had been directly financed with govern­ment borrowing.

It is important to establish the circumstances required to make efficiency gains, and to recognize the longer term fiscal implications due to 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 no longer subject to parliamentary, let alone public scrutiny.

Hence, PPPs are attractive because they can be hid­den ‘off balance sheet’ so they do not show up in bud­get and government debt figures, giving the illusion of ‘free money’. Hence, despite claims to the contrary, PPPs are often riskier for governments than for the private companies involved, as the government may be required to step in to assume costs if things go wrong.

Marginalizing Public Interest

Undoubtedly, PPP contracts are typically complex. Negotiations are subject to commercial confidential­ity, making it hard for parliamentarians, let alone civil society, to scrutinize them. This lack of transparency significantly increases the likelihood of corruption and undermines democratic accountability.

PPPs also undermine democracy and national sover­eignty as contracts tend to be opaque 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, national govern­ments can even be liable for losses due to strikes by workers.

Thus, PPPs tend to exacerbate inequality by enriching the wealthy who invest in and profit from PPP projects, thus accumulating even more wealth at the expense of others, especially the poor and the vulnerable. The more governments pay to private firms, the less they can spend on essential social services, such as uni­versal social protection and healthcare. Hence, PPP experiences suggest not only higher financial costs, but also modest efficiency gains.

Government Procurement Viable

One alternative, of course, is government or public pro­curement. Generally, PPPs are much more expensive than government procurement despite government subsidized credit. With a competent government do­ing good work, government procurement can be effi­cient and low cost.

Yet, international trade and investment agreements are eroding the rights of governments to pursue such alternatives in the national interest. With a competent government and an incorruptible civil service or com­petent accountable consultants doing good work, ef­ficient government procurement has generally proved far more cost-effective than PPP alternatives. It is therefore important to establish under what circum­stances one can achieve gains and when these are unlikely.

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