PPPs’ Private Gain at Public Expense Jomo Kwame Sundaram

At high cost and with dubious efficiency, public-private partnerships (PPPs) have increased private profits at the public expense. PPPs have proved costly in financing public projects.

PPPs’ high costs

Eurodad has shown high PPP costs mainly due to private partners’ high-profit expectations. Complex PPP contracts typically involve high transaction costs. Worse, contracts are often renegotiated to favour the private partners.

They also take advantage of lower government borrowing costs compared to private borrowers. Most PPP debt costs are ultimately borne by host governments but are often obscured by the secrecy of contracts.

PPPs are often not on official government books or accountable to legislatures. PPPs thus often avoid transparency and accountability, invoking the excuse of private commercial confidentiality.

Such ‘off-budget’ government-guaranteed liabilities often make a mockery of supposed government debt limits. Investors generally expect much higher returns from developing countries than developed economies, supposedly due to the greater risks involved.

These ‘fiscal illusions’ obscure transparency and undermine government accountability, generating huge, but little-known public liabilities. High and rising interest rates threaten new government debt crises as economic stagnation spreads.

High fiscal risks

The high costs and fiscal risks of PPPs drain government resources, resulting in public spending and fiscal resource cuts. With growing demands for fiscal austerity, from the IMF and markets, PPPs’ high costs threaten government spending, especially for social services.

A 2018 IMF Staff Note warned PPPs reduce fiscal policy space: “while spending on traditional public investments can be scaled back if needed, spending on PPPs cannot. PPPs thus make it harder for governments to absorb fiscal shocks, in much the same way that government debt does.”

But such warnings have not deterred the Fund and World Bank from promoting PPPs. Worse, austerity measures rarely significantly increase budgetary resources, forcing governments to rely even more on PPP financing.

PPPs the problem, not solution

Growing reliance on PPP financing to address climate change is new, but no less problematic. This purported PPP solution has worsened financial vulnerabilities in developing countries, also undermining sustainable development and climate justice.

The 27th UN climate Conference of Parties’ outcome statement urged multilateral development banks to “define a new vision and commensurate operational model, channels and instruments that are fit for the purpose of adequately addressing the global climate emergency”.

But historical experience and recent trends show PPPs cannot be the solution. Advocates claim PPPs deliver better “value for money”, but evidence of efficiency gains is inconclusive at best.

An African Forum and Network on Debt and Development (Afrodad) study found Ghana’s Sankofa gas project failing. Much touted efficiency gains were all very context-specific, relying on project design, scale, regulation and governance.

Efficiency gains were typically very costly, mainly due to insufficient private investments and other such cost savings. Profits were also increased by cutting jobs and hiring cheaper, insufficiently trained and qualified staff.

Human costs

The public should be wary and sceptical of growing reliance on PPPs to provide infrastructure and public services. Unsurprisingly, such PPPs prioritise commercial profitability, not the public interest.

Corporations are accountable to shareholders, not citizens. Worse, regulating and monitoring private partners are difficult for fiscally constrained governments with modest capacities, vulnerable to political and corporate capture.

Unsurprisingly, PPPs have typically imposed higher costs on citizens. Public services provided by PPPs usually charge user fees, or payments for services. This means access to services and infrastructure depends on capacity to pay.

Thus, PPPs maximise private profits, not the public interest, undermining public welfare and the UN Sustainable Development Goals (SDGs), worsening inequalities. PPPs’ high fiscal costs worsen fiscal austerity measures, reducing other public services, often needed by the most vulnerable.

Inevitably, PPPs prioritise more profitable services and those easier-to-serve. Public healthcare is especially vulnerable as profit and insurance imperatives compromise service delivery. There is no evidence PPPs can better address the health challenges most developing countries face.

Health PPPs worsen public access to essential services, subverting progress towards ‘health for all’ and ‘universal health care’. Private provisioning, including PPPs, has never ensured equitable access to decent healthcare for everyone. Pretending or insisting otherwise is simply wishful thinking.

During the COVID-19 pandemic, countries relying more on private healthcare provision generally fared worse. Those without means cannot afford private charges, especially by providers who face few constraints to raising their charges.

U-Turn?

After a critical report by its Independent Evaluation Group, the World Bank – long a leading promoter of private financing of education – had to change its earlier approach to financing public education.

The International Finance Corporation, the Bank’s private sector lending arm, has also worsened educational access, quality and equity. It had to stop investing in pre-tertiary (kindergarten to grade 12) private schools from mid-2022.

Despite overwhelming evidence that the Bank should stop abusing public funds to promote PPPs, the new Bank leadership has still not abandoned this financing strategy thus far. Instead, the SDGs and the urgent need for more effective climate action have been invoked to give it a new lease of life.

(This article was originally published in Inter Press service (IPS) news on January 24, 2024)