What are Public Private Partnerships?
Public Private Partnership (PPP) is a generic term used to describe privately financed projects and partnerships to design, build, finance and operate facilities.
It is important to understand the key structural elements of PPPs and not be taken in by the ‘partnership’ hype. These include:
Special Purpose Companies: A new company is established for each project by the consortia, usually the construction company, bank or major investor and the facilities management company. PPPs were usually 90 per cent debt (with a 10 per cent equity ratio) although the economic crisis led to equity accounting for a higher proportion of the company’s financial structure.
Secondary market: PPPs can be refinanced once construction is completed and the project is operational. At this stage the major risks associated with construction have been eliminated and loans can be often be refinanced at lower interest rates. A secondary market has developed in Britain, and is emerging in other countries such as Canada and Australia, with new investment companies/funds acquiring equity stakes in a large number of PPP project companies.
Securitisation: A form of financial engineering in which financial institutions seek to spread the risk of investments by transferring them to other financial institutions, and/or spread share ownership across a number of different investment funds.
Complexity: PPPs create financial, organisation and legal complexity, which leads to specialisation and wider use of management consultants and lawyers. Client and bidders in every PPP project have their own consultants and legal teams, thus creating a new market, a vested interest in expansion of the PPP model, and little interest in knowledge transfer to the public sector.
Off-balance sheet financing: About half of Private Finance Initiative (PFI) investment in Britain to date has been off-balance sheet, which means that the debt arising from what is in effect capital expenditure does not appear as public debt despite it being entirely financed by the public sector. PFI is financed from public sector revenue accounts through a monthly charge consisting of the lease or use of the facilities (reflecting the construction and finance costs over 25-40 years) and the facilities management services such as cleaning, catering and so on. PPP strategic partnerships, such as ICT and back office projects in local government, are also financed from revenue budgets.
Commercial confidentiality and lack of accountability: Both the procurement process and the operation of PPP projects is dominated by secrecy. ‘Commercial confidentiality’ is used extensively by the public and private sectors to prevent the disclosure of options appraisals, business cases, contracts and project performance. This is compounded by the secondary market because it imposes another corporate layer with minimal accountability and transparency. Construction and financial companies may issue a press release or statement when they sell equity in a PPP project company, but most are not required to do so.
Outsourcing: The full range of facilities management services are rarely delivered by one contractor. Instead, waste disposal, catering, transport, grounds maintenance are usually outsourced to subcontractors. The wider the range of services included in the scope of the contract the larger the scale of outsourcing. PPP strategic partnerships often have a secondary contractor and may also subcontract specific transformation processes or services.
Marketisation with deregulation and minimal oversight: The deregulation of financial, labour and other regulatory frameworks has been accompanied by minimal oversight with lax inspection and monitoring regimes. Contractors have been encouraged to ‘self-monitor’ using less than rigorous ‘key performance indicators’.
PPPs are a product of neoliberal economic policy and public sector reform. Financialisation, commodification and marketisation are creating a global wealth machine to further exploit public needs and resources. Transnational construction, energy and service companies, banks, management consultants and law firms, aided and abetted by governments, are turning schools, hospitals, prisons and roads into commodities which are bought and sold globally.
As PPPs and privatisation proliferate, more new infrastructure investment funds are set up, increasingly with the collusion of pension funds, to trade in this new ‘asset class’. This is not an economic or social crusade to get ‘additional investment’, but has the objective of full privatisation of the public infrastructure and services, and consolidating the corporate empires to facilitate this process. PPPs are not just about buildings, they are increasingly focused on the ‘whole service’ concept.
PPPs, or variations of the design, build, finance and operate model, initially allow governments to improve and expand the public infrastructure to a greater extent than the resources available from a low tax/balanced budget regime permits. However, this is short-lived and is flawed as a long-term strategy.
Firstly, a low taxation/low public spending regime does not provide sufficient resources to properly maintain the existing infrastructure and to build new facilities and networks required by economic growth and population increases. This results in governments switching to increase financial resources through indirect taxation by imposing charges, tolls and market tariffs on service users. But this has fundamental economic, equity, social justice and public interest problems. In other words, PPPs mask the fact that it is impossible to have a low taxation/low public spending model of government and provide comprehensive good quality public infrastructure to meet the economic and social needs of modern society.
Secondly, PPPs manipulate public sector financial and accountancy rules to conceal public debt and the ownership of public assets. Off-balance sheet projects are structured on a ‘build now, pay later’ basis, and are in practice no different from the credit card consumerism boom that contributed to the global financial crisis. Project debt is securitised similar to mortgages. Furthermore, PPPs create the illusion of infrastructure being privately financed when, in fact, it is ultimately entirely financed by taxpayers and/or service users. Public debt is transferred to contract obligations under long-term leases, which require government to repay the private sector via a stream of revenue payments and/or future generations of service users are saddled with ever-increasing tolls and charges. Narrowly defined public sector comparators and value-for-money appraisal ensure that democratic accountability, economic development, sustainability, social justice and other public interest matters are marginal to the financial assessment of risk and ‘whole life’ costs.
Thirdly, the construction industry, financial institutions and consultants gain by having a larger workload than would otherwise be the case under a low taxation/low public expenditure regime. Having diversified into facilities management, construction subsidiaries frequently gain long-term operating and maintenance contracts. PPPs, in effect, commodify and privatise future efficiency gains so that they primarily benefit the private sector consortia rather than the public sector. There is nothing innovative about this, it is simply identifying the potential long-term gains in a 25-30 year contract and capturing them for private value.
Banks, private equity and infrastructure funds gain new opportunities for investment and accumulation, supported by government-backed security, designed to maximise their profits and minimise risk. The full extent of government guarantees, subsidies and tax concessions are rarely disclosed. Private architects, lawyers, engineers and management consultants gain new commissions, and advisers benefit in direct proportion to the increasing financial and legal complexity of PPPs.
Fourthly, PPPs transfer some risks to the private sector but at a price. Contractors and financial institutions charge a premium for taking on risks, which, in other circumstances, they would be responsible for, but would have other methods of avoiding, mitigating or eliminating. PPPs place certain responsibility for construction and operational risks on contractors, who, on payment of the risk premium, can now build on time and within budget!
Fifthly, work and jobs are reorganised to maximise productivity. Public sector workers are made redundant, transferred or seconded to a private contractor with more extensive use of cheaper migrant labour on construction sites, with poor work conditions.
Finally, the refinancing of projects and sale of equity has resulted in the growth of a secondary market, in which schools and hospitals are sold like commodities to infrastructure and private equity funds and companies. They manage ever larger bundles of assets to extract further profit.
In 2001, I concluded in Public Services or Corporate Welfare that the PPP model is ‘… a new development paradigm and raises key questions of who will own and control cities/regions in the future. It is rooted in capital accumulation, marketisation of the state, private land and property ownership and corporate governance in the developmental, regeneration and urbanisation processes’ . This prediction, unfortunately, remains relevant today as PPPs emerge beyond the global financial crisis.
The World Bank, global management consultancies and lawyers glowingly report the ‘successful’ implementation of PPPs and privatisation. There are project finance handbooks and journals for both PPPs and the project finance industry. The PPP and privatisation ‘industry’ has a strong propensity to focus on individual projects, the PPP process, deal flow, procurement, legislation and project finance. This effectively limits, either by design or default, debate and analysis of broader public policy issues and the longer-term implications.
The provision of public infrastructure and the role of public investment, PPPs and privatisation raise many profound financial, technical and legal issues, but public policy cannot be limited to technical debates within the PPP industry. Decisions on infrastructure investment must be part of a wider democratic and participatory decision-making process.
The implications of the continued growth and spread of PPPs and privatisation are far-reaching for democratic governance, social justice, jobs and the quality of public services. Despite the introspection and gloss of the PPP lobby, it is evident that the PPP model is fundamentally flawed, as evidenced by the abandoned and terminated projects and the contrived assessment of ‘value for money’.
Alternatives to PPPs
The alternative to PPPs is publicly provided and operated infrastructure. Progressive public management for the 21st century requires in-house delivery, capacity building, the democratisation and consolidation of public bodies and agencies; a genuine holistic and integrative approach to economic, social, health, environmental and sustainable development policies.
A new public infrastructure contract is urgently needed which maintains a separation of the design, finance and construction responsibilities. A new model, Construction Management At-Risk (CMR), has been successfully tested in the US in which the client selects the construction manager, based on qualifications, before the design stage is completed. The architect and construction manager work together in the final stage of the design process following which the contractor gives the client a guaranteed maximum price and coordinates all the subcontracted work. This approach strengthens coordination, enhances transparency, delivers efficiencies and minimises delays. This approach should create a new evidence base of public sector contract performance and help to nullify the use of old data that has been peddled globally by the PPP lobby, World Bank, IMF and development banks.
Demands for increased investment and fiscal stimulus measures must include demands for public investment in publicly owned and operated projects – policies which duck the public-private policy divide only provide more scope for the asset monetization/PPP industry. A publicly controlled infrastructure bank to invest public money will be beneficial but not one modelled on the European Investment Bank, which has financed and expanded the PPP model. Rapid deficit reduction policies should be opposed because they are primarily motivated by vested interests to create the conditions that promote more PPP/asset monetisation projects.
At a global level, reforms should include a Financial Transaction Tax, firewalls between investment and commercial banking, a ban on the use of tax havens, controls on private equity and hedge funds and the prohibition of off-balance sheet financing. This new regulatory framework must be accompanied by policy changes such as stopping the financialisation of pensions and other services and both EU and WTO public sector marketisation policies.
A new evaluation framework is also needed, with every project assessed against a governance and accountability template. The planning and procurement process must be democratised with community and trade union participation and full transparency.
Finally, these policy changes would have to be accompanied by strategies to reduce or eliminate the deal flow of new PFI/PPP and privatisation/asset monetisation projects. New controls would have to be imposed on existing PFI/PPP projects to radically improve democratic accountability and transparency. I set out a 10-point plan in Global Auction of Public Assets.1
1Whitfield, D. (2010) Global Auction of Public Assets, Spokesman Books, http://www.spokesmanbooks.com/acatalog/Dexter_Whitfield.html