PPPs: DO THEY WORK?

Here is an excellent, balanced article on public-private partnerships by economic consultant, Phil Barry of Taylor Duignan Barry Ltd.

He is the author of the report The Changing Balance Between The Public And Private Sectors commissioned by the Business Roundtable.

The article notes that:

More than 90 countries are now using PPPs in areas as diverse as designing and building roads and schools, constructing and running prisons, and designing, building and operating water and wastewater treatment facilities.  Amongst the most active countries using PPPs have been the United Kingdom, Australia and Canada, countries we have much in common with.

But do PPPs work?  Here is Phil Barry’s assessment:

The formal studies that have been undertaken generally provide a qualified “yes” to that question. I say qualified because the PPPs don’t always work. And even when they do work, the PPPs are by no means perfect.

A study by the UK National Audit Office (refer the table below) provided one of the most comprehensive independent evaluations of PPPs. That study found PPPs had their flaws: of the 37 PPP projects evaluated, 9 of the projects (24%) were late and the projects incurred cost-overruns, on average, of 22%. But the experience in the public sector was a lot worse: 70% of the projects were delivered late and the cost overruns averaged 73%.

A comparison of PPPs and conventional public sector performance
 

PPP performance

Public sector performance
Cost overruns

22%

73%

Delay in project delivery

24%

70%

Source: UK National Audit Office

Some people think PPPs have failed because private investors have gone belly up.  But this is just a normal business risk that they should bear.  As the article notes:

There have been some high-profile collapses of companies involved in PPPs in Australia in recent years. For example, the consortium behind the Cross-City Tunnel underneath central Sydney went bankrupt, largely because of its over-optimistic projections of traffic volumes. Much the same happened with the Brisbane and Sydney airport rail links.  Does that mean the PPPs failed? There was no loss of service – the tunnel and rail links remained open – and the taxpayer didn’t lose out. Those who lost their money were the private investors who took the risk. Another road PPP, Melbourne’s Citylink freeway, has been highly successful, and when there were problems with one of the tunnels the entire rectification cost was borne by private parties with no call on taxpayers.

Phil Barry debunks the old canard that PPPs are not appropriate because the government can finance the project more cheaply:

Certainly the government can almost always borrow more cheaply than the private sector. But that doesn’t mean the government should necessarily finance a project. If that logic was correct, the government would end up funding all the riskiest activities in the economy. Why not have the government fund property development or own football teams if all that mattered was access to cheap finance?  Higher private sector rates allow for risk, but the true cost of government borrowing is higher than it appears – the risk element is often only recognised when taxpayers end up bailing out unsuccessful projects.

The article notes the relevance of PPPs to the social sector.  A case in point is the recommendation of the recent Welfare Working Group that much of the job placement role of Work and Income New Zealand should be outsourced to the private (voluntary and for-profit) sector.

It concludes with a comment on the relevance of PPPs to the Christchurch earthquake recovery effort.  They are an obvious source of capital for replacement infrastructure.

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