Be­ware Pub­lic Pri­vate Part­ner­ships

Trillions - - In This Issue - By Jomo Kwame Sun­daram

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 gov­ern-

ment 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 Oten 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 in- vestor-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.

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.

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