A NEW report released by the UK-based Jubilee Debt Campaign provides a scathing critique of the failure of PPPs across a range of sectors and serves as a warning against the use and abuse of PPPs the world over, says Public Services International global trade union federation.
Public-Private Partnerships (PPPs) are a type of contract under which private companies build and operate public services and infrastructure, while much of the financial risk remains with the public body concerned.
The UK was one of the first countries to develop PPPs in the early 1990s, and its PPP programme, known as the Private Finance Initiative (PFI), was subsequently expanded by the Blair/Brown Labour governments across all parts of public spending including healthcare, education and the military.
Jubilee Debt Campaign said: ‘This briefing sets out the major problems and risks the UK has encountered through its extensive experiment with PPPs, including how they have:
• Cost the government more than if it had funded the public infrastructure by borrowing money itself
• Led to large windfall gains for the private companies involved, at public expense
• Enabled tax avoidance through offshore ownership
• Led to declining service standards and staffing levels
• Hollowed out state capacity to design, build, finance and operate infrastructure
• Eroded democratic accountability.
‘PPPs are hugely unpopular in the UK, with 68% of respondents to a survey in England saying PPPs should be banned. In Scotland, which has a higher proportion of projects per person, 76% of respondents say they should be banned.
‘This has led to PFI being rebranded in both England and Scotland, and the number and value of new projects falling since 2008, reaching its lowest level since the mid-1990s in 2014 (the latest year with figures available).
‘However, the UK government and companies are now heavily promoting PPPs around the world.
‘In recent years, more than 90 countries around the world have passed laws relating to or enabling PPPs to be taken on.
‘This briefing sets out the real story of PPPs in the UK, with the hope of better informing interested and affected parties in other countries around the risks and costs involved in PPPs.’ The report says: ‘The hidden cost to the public sector is that the interest rates payable on PPPs in the UK have been twice as expensive as on UK government borrowing.
‘This means that PPPs cost the taxpayer far more than if the government had borrowed to fund projects itself. In addition to the higher interest costs are the transaction costs to pay accountancy and legal firms to arrange the deals, and the high profits the private companies which invest equity in PPPs demand.
‘The IMF note: “Instead of government making upfront payments to cover the cost of building an asset, the private sector bears this cost and government covers the opportunity cost of capital as part of its service payment to the private sector. This is how PPPs can be used to record initially lower government borrowing and debt than with traditional public investment.”
‘The IMF warn: “PPPs can be used mainly to bypass spending controls and move public investment off budget and debt off the government balance sheet, while the government still bears most of the risk involved and faces potentially large fiscal costs.”
‘This has been the case in the UK. Since 1992 PPPs yielded public assets with a capital value of $71 billion. The UK government will pay more than five times that amount under the terms of the PPPs used to create them. In some cases, like the Edinburgh Royal Infirmary hospital, the government will never own the asset, because the PPP is a leasing agreement.’
The report adds: ‘Four major accountancy firms – PWC, KPMG, Ernst & Young and Deloitte: known as the ‘Big Four’ – have dominated PPP consulting in the UK. One firm advises on government procurement, another advises the PPP consortium of banks and construction firms. Other large transactions costs include those of law firms working on the deals.
‘The European Investment Bank found “transaction costs” for PPP deals have “not received much attention”, yet amount to “well over 10% of total project capital value”. Testimony from Richard Abadie from PWC to the UK parliament’s Treasury Select Committee suggests PWC charge $312,500 – $500,000 in advisory fees for school PPP projects and $625,000 – $1,000,000 per hospital.
‘High, fixed transaction costs (legal and advisory fees) on PPP contracts contribute to a trend towards larger, more complex projects and longer procurement timeframes. Increasing size and complexity in PPP infrastructure projects – said to be a sign of corruption in developing countries – is observable within UK PPP projects, such as St Bartholomew’s Hospital, which cost $1.4bn to build, but will cost UK taxpayers $9.1 billion.’
The report warns: ‘Ownership and control of public infrastructure has profound political, social and financial implications for public service provision and democratic accountability. PPPs result in a profit-driven, market logic within public service provision and the creation of an increasingly corporatised public service management layer. Considerations such as public safety and satisfaction are subordinated to meeting contractual repayments to PPP providers.’
The report concludes: ‘PPPs in the UK have delivered public infrastructure with a capital value of $70.6 billion.
‘But this has not come for free. The government is committed to paying much more to use the infrastructure than if it had borrowed the money itself. Furthermore, some poor quality PPP infrastructure is already collapsing, as in Edinburgh. Through PPPs, public assets are now controlled by offshore investors located in tax havens.
‘PPPs reflect the assumption that corporate financial interests and the public interest are synonymous. Jean Shaoul, Professor at Manchester Business School says PPPs in the UK have been “an enormous financial disaster in terms of cost” adding: “Frankly, it’s very corrupt… no rational government, looking at the interests of the citizenry as a whole, would do this.”
‘A growing body of evidence from the UK parliament’s Treasury Select Committee and Public Accounts Committee, and the UK government’s National Audit Office, confirms PPPs have failed to deliver value for money, have created outcomes heavily skewed in favour of private interests, and are built upon overly optimistic models and assumptions that have borne little resemblance to reality.
‘Despite this highly negative overall experience of the domestic use of PPPs, the UK government is playing an active role in promoting PPPs to developing countries and presenting the UK’s own experience as a success story. For example, it set up and funds the Private Infrastructure Development Group (PIDG) which exists to promote PPPs to finance infrastructure in developing countries.
‘Between 2002 and 2013 the UK’s Department for International Development has disbursed $663 million from its aid budget to PIDG, covering two-thirds of the contributions by all donors. The reason the UK government continues to promote PPPs around the world despite their disastrous record at home is because UK companies stand to benefit.
‘After two decades of working on PPPs in the UK, British consultants, banks and legal firms, as well as various forms of PPP operators, see themselves as well placed to win contracts globally.
‘Before listening to the advice of UK companies and the UK government, decision-makers across the world should take on board the disastrous record of PPPs in the UK.’