Public-Private Partnerships Fad Fails Jomo Kwame Sundaram

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.

(This article was originally published in Inter Press service (IPS) news on May 21, 2019.)