Beware of those Public-Private Partnerships!

Mar 30, 2014 News

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 “P3s should be called P12s, Public-Private Partnerships to Plunder the Public Purse to Pursue Policies of Peril to People and the Planet for all Posterity.” – Canadian impressionist Greg Malone

Not much has been established or articulated about Public Private Partnerships (PPPs/P3s) even though it is decidedly relevant within its application to Guyana. For the most part, a lot of persons don’t know what it is, how it’s used and the effects and implications that it could have on the country, especially the hard-working taxpayers.

PPP is defined by Emilia Istrate and Robert Puentes in their work for The Brookings-Rockefeller Project on State and Metropolitan Innovation, ‘Moving Forward on Public Private Partnerships’ as a “contractual agreement between a public agency and a private sector entity resulting in greater private sector participation in the delivery and/or financing of infrastructure projects.”
PPPs have been around for quite some time, but interestingly, have not been used by a lot of countries. Going by records, they are mostly used by highly developed countries where the private sector is capable of engaging with the public sector and where there are adequate provisions and legislation in place to ensure accountability, transparency and efficiency.
Public Private Partnerships differ significantly from sector to sector and from project to project. They also differ from country to country, given that contracts are based on different legislative frameworks across the world.
Guyana has embarked already in PPPs such as the Berbice River Bridge and the controversial Marriot Hotel construction that is currently ongoing. It was used also in the Amaila Falls Hydro Electric Project that is essentially at a standstill.
According to Istrate and Puentes, there are numerous ways to classify PPPs, but the most important from a public policy perspective is based on the sharing of responsibilities and risks. “The simplest form of a transportation PPP project, for example, involves contracting out of individual operations, such as design, paving, or maintenance. On the other end of the continuum, the private sector would build, own, and operate a new piece of infrastructure, with the government providing maybe tax-exempt status for the project, but no direct funding. In reality, there is a plethora of combinations of PPPs that mix different elements and transfer different types of risk to the private sector.”
The Berbice Bridge was constructed in a similar way, however, with most of the risk being with the government since, even though in principle it invests minimally, Guyana’s government forked out the largest chunk of investment ($2.7B) while the Private investors placed $320M, but inexplicably will see the bulk of the returns on the project.
There are proponents who argue that PPPs are necessary, since they enable investment in infrastructure which would not otherwise have been possible or would have been delayed until later. It is argued that the primary reason for the use of PPPs is that such a project will not require public sector funding today.
“With ‘traditional’ public sector procurement Capital costs are charged immediately against the public sector budget while with PPP Private Sector finances construction costs and the costs are then recouped over time through either payment of service charges by authority or revenues from project.” (Source Public Sector for or against PPP)
It is for this reason the toll for the Berbice Bridge is fixed at such a high price for commuters since the Private investor has to recoup the capital investment it pumped into the project, in addition to rates on return.
Another argument that intellectuals express is that because PPP allows investment in public infrastructure to be accelerated, a project which may have otherwise been procured by the public sector in several parts (e.g. a road-widening project let in sections,) can be procured as a whole.
Paul Davies and Kathryn Eustice in their work ‘Delivering the Promise a review of PPP, Issues and Activity’ posit that PPPs maximize the use of private sector skills. Additionally, the quality of service under a PPP is specified at the outset and is not expected to decline throughout the life of the PPP.
“The price committed to by the private sector is to maintain those standards throughout. This obligation contrasts starkly with traditional procurement, where asset condition and hence service levels will often decline significantly as the asset becomes older.”
According to Eustice and Davies, many PPP transactions can be classified as off the public sector’s balance sheet.
“This means the authority will only account for the annual payments it makes to the PPP Company, and not for the assets and liabilities of the project, including its debt. The off balance sheet treatment of PPPs is attractive in so far as long-term obligations under PPPs do not appear under governments’ overall budgets…an on balance sheet approach effectively forces the procuring authority to have sufficient cash allocated to the entire concession’s charges at contract signature.”
What is noteworthy, however, is if the PPP fails or goes wrong, Private-sector investors may lose any equity investment, “but there is no obligation on them to commit further money to rescue the project. The Public sector’s objective is to ensure that PPP continues to provide contracted service so either: It allows the PPP to fail and then incurs extra costs to maintain the public service (Metronet); or it provides extra support for the project rather than terminate the PPP Contract, this will usually involve taking back responsibility for risks that had been transferred to the private sector, either way, the intended risk-transfer benefit of the PPP is negated.” (Ibid)
Toby Sanger and Corina Crawley in their article ‘The Problem with PPPs’ express similar sentiments when they outline that “risks can never be completely transferred through P3s, because governments will always be ultimately accountable for delivering public services and infrastructure…this responsibility is not changed by expensive and lengthy P3 agreements. If problems arise, it is the public that always has to pick up the bill at the end of the day.”
In providing an example they outlined that “Metronet, a private company that won a £30 billion, 30-year P3 deal to upgrade and maintain London’s Tube network, failed and had to be taken over by the City of London’s transport authority. The Metronet failure has already cost U.K. taxpayers an extra £2 billion and left Londoners with 500 subway stations in various states of disrepair for a P3 deal that was forced on their city by the central government under its PFI initiative. And this is just the beginning: costs for the City of London are already expected to grow by an additional £1 billion. Even the normally conservative Economist magazine now admits that these P3 deals now look like ‘complicated costly mistakes.’”
“P3s had been used by politicians as a form of off-book accounting to make it appear as if public spending and deficits were lower than they actually were but then public auditors forced governments to include these obligations on their books.” (Ibid)
According to Sanger and Crawley, PPP “proponents then claimed that their projects could be less expensive, more innovative, speedier, and more accountable than public service delivery but a string of failures, delays, little transparency, and secretive deals proved these claims wrong” – something that we have experienced firsthand with the Marriot Hotel project in Guyana.
Public Private Partnerships are not just highly questionable deals for the taxpayers; they also have a negative impact on the economy.
“The investment banks and funds that are now heavily promoting P3s would do more good for the economy if they returned to what should be their primary role: financing investments to boost productivity and growth in the languishing private sector economy.” (Ibid)
Some of the questions that intellectuals pose, and which should be asked when engaging with PPPs are: Does sufficient private sector expertise exist to warrant a PPP approach? Does the public sector have sufficient capacity and skills to adopt it? What about transparency and accountability, is there enough? Is the project suitable for a PPP structure?
These are things that need to be kept in mind when engaging with PPPs.
According to Sanger and Crawley, as Canadian impressionist and aspiring politician Greg Malone once asserted: “P3s should be called P12s, Public-Private Partnerships to Plunder the Public Purse to Pursue Policies of Peril to People and the Planet for all Posterity.”

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