NEWS

By Ken Kritz

First of two parts

Public-private partnerships (PPPs) are a divisive idea, as we in the Philippines have seen firsthand. There is not much middle ground in between the arguments for or against them, and that makes understanding and using them effectively — or making a reasoned choice not to, as the case may be — extremely difficult.

The main argument in favor of PPPs since they first became popular about 30 years ago is that they are a relatively easy way for governments to fill in funding gaps in developing infrastructure and public services. This argument naturally presupposes most of the broader arguments in favor of the privatization of public services.

The major global sources of development financing — institutions such as the European Commission, Organization for Economic Cooperation and Development (OECD), European Investment Bank (EIB), European Bank for Reconstruction and Development (EBRD), World Bank Group, Asian Development Bank (ADB), and Asian Infrastructure Investment Bank (AIIB), among others — have well-developed capabilities to support and work with client-governments on PPP projects. Some of them (the OECD and World Bank, for instance) tend to “promote” the PPP modality more so than others (ADB and EIB) that seem to consider it a little more objectively as a good option if appropriate to the situation.

There are a number of arguments against PPPs, but if they had to be summed up in a single statement, the succinct conclusion of an EBRD-backed study in 2013 might be it: “Pretty on paper, poor in practice.” A paper published about two weeks ago by the European Public Services Union (EPSU) and European Network on Debt and Development (Eurodad) — the former a confederation of about 250 trade unions across Europe; the latter, a network of about 50 various nongovernmental organizations in the continent — presented eight reasonably robust, though not necessarily ironclad arguments on why PPPs as a method of public development are flawed. Of the eight, there are five that advocates of PPPs have difficulty dismissing: PPPs create hidden debt; private debt financing is more expensive than government debt financing; the government or public ultimately bears the biggest risk of any PPP project, which is the demand risk; PPPs do not guarantee better value for money; and a preference for PPPs can skew government policy priorities.

One of the big selling points of PPPs to the public is that such projects allow the government to avoid incurring debts, but this is not entirely true. The investment recovery aspect of any PPP project is literally debt — the state has to pay for it, one way or another, usually by shifting the cost to the public at large in the form of fees. True, it does not appear on the government’s balance sheet, but that cost does not disappear and is, in almost every instance, ultimately much higher than it would have been had the government funded the project conventionally.

When private proponents finance their projects that are being developed under PPP schemes, their financing costs are higher than most governments’ would be. It varies from country to country, but in general, financing costs are about double: interest rates of 7 to 8 percent for private-sector loans versus 3 to 4 percent for most loans to governments.

Another advantage of PPPs, it has been argued, is that projects developed under the scheme transfer most of the risks associated with construction and availability away from the government and to private partners. The one risk that cannot be transferred, however, is the demand risk. If the expected demand for a particular project is overestimated, that is on the state, not the private partner, and it can be extremely costly. The most extreme examples of this kind of problem to surface in recent years involve the Chinese development of Sri Lanka’s Hambantota Port and Pakistan’s Gwadar Port, neither of which will ever reach anything close to the amount of traffic they were planned for, leaving their respective countries on the hook to China to make up the economic difference through means that might be politically compromising or otherwise unpalatable.

PPPs are fundamentally based on the common belief that, in general, the private sector can provide better quality, more cost-effective, and more efficient services than the government. However, in several broad reviews of PPP projects in various countries — mainly in Eastern Europe, Africa, and Latin America, as well as a few in Asia — it has been found that most projects do not pass what is called the “public services comparator” test. The test compares the costs of a PPP project with the hypothetical case of the project being fully funded and managed by the government, making the assumption (which, to be fair, is not always true in real life) that it has equal resources and competencies. According to this yardstick, many PPP projects are more expensive than a conventional public works project would be, sometimes by a wide margin.

Finally, PPP projects can and do sometimes change government policy priorities, and the reason for this is obvious. To attract investors, the proposed projects have to be commercially viable, and some of what governments aspire or feel responsible to do for the benefit of their constituents are not necessarily moneymaking propositions. Thus, in some cases, that means the government either has to forego providing a service or, as an equally unappealing alternative, turn a “free” service into one with some form of tariff, either directly — a road toll, for example — or indirectly in the form of additional taxes to provide the project concessionaire a revenue stream.

Reading these arguments, one can conclude that PPPs are indeed a bad deal for countries, particularly for the Philippines, where successive administrations have demonstrated a deep devotion to the PPP religion. There are, however, two sides to most coins, and this is one of them, and taking a fair look at both sometimes reveals a gray area between them that might not have been apparent at first. I’ll get into that in the next column.

To be concluded

Source: The Manila Times