• The Public/Private Partnership Illusion

    There has been over recent years a surprising reversal of roles. It was always thought that ideologues were to be found on the left while politicians of the right tended to be pragmatists. But, as the Herald pointed out last week over asset sales, today’s government of the right seems overly concerned with ideology, while parties of the left seem more driven by outcomes than by doctrine.

    We see a similar commitment to ideology over another issue – the role that private finance should play in funding projects that are in most senses public in nature. If it is the mark of the doctrinaire that evidence and experience should be ignored in favour of political theory, then Bill English’s repeated assertions of the case for Public Private Partnerships (PPPs) – in the face of all the evidence that they represent a poor deal for the taxpayer – surely fills the bill.

    As it happens, and after thirty years of experience of PPPs in the UK where they originated, a great deal is now known about how such arrangements perform. In principle, of course, the private funding of capital projects like new prisons will relieve a burden on the taxpayer, with supposedly a saving as a consequence to the public purse.

    But a moment’s thought would suggest that this is unlikely to be the case. The cost of raising capital for a project will usually be lower for government than for a private borrower, as was confirmed in research recently completed by Professor David Hall of the University of Greenwich. And while the initial capital cost under a PPP might be met by the private investor, that investor will want to cover the cost of capital and in addition earn a return on capital (or profit) and will usually want to secure as well contractual rights to run the project (think Serco) over the lifetime of the scheme – typically, 25 or 30 years.

    Not surprisingly, the UK experience confirms that PPP projects will cost the taxpayer much more over the whole period than if they were built and funded by more conventional methods. The UK Treasury reported in 2012 that the 717 PPI contracts, funding new schools, hospitals and other public facilities with a total capital value of £54.7bn, would ultimately cost £301bn by the time they are paid off.

    Much of this difference was due to ongoing running costs built into the contracts, but the schemes were also criticised for providing poor value for money. The Treasury found that some National Health Service organisations will end up paying almost 12 times the initial sum over what is usually a 30-year contract.

    Governments of the right have, in other words, quite unnecessarily and wastefully spent billions, saddling future generations of taxpayers with massive debts, for the sake of an ideologically driven preference for private business as opposed to public provision. And this despite the fact that there is no evidence that anything of value is gained from this excessive expenditure, other than inflated profits for the fortunate contractors.

    It is certainly not the case that there is a gain in efficiency, since there are many instances of private providers, not least in New Zealand, performing very poorly – and this is on top of a study by our own Treasury that found that there was “little evidence of systemic underperformance” in New Zealand’s publicly owned State-Owned Enterprises.

    Professor David Hall found that “the empirical evidence shows that the private sector is not more efficient than the public sector”. PPPs, he found, have to offset the handicap of a higher cost of capital by achieving lower operating costs, supposedly the result of greater efficiency, but usually meaning higher prices for consumers and lower wages for employees.

    Professor Hall also draws on an analysis of UK privatisations by Professor Florio of MIT which meticulously examines all the companies privatised by the Thatcher Government and finds no evidence whatsoever of efficiency gains; Professor Florio also shows that in almost all instances of privatisations, the assets sold were underpriced, there was a large rise in management salaries and most important of all privatisation made little difference to long-term trends in productivity and prices.

    In a scathing review of the history of British privatisation, the author James Meek identifies the signal failure of the safeguards that were supposed to protect British consumers – in industries like electricity and water – from the pricing policies of rapacious new owners. The regulators thought they had done enough by putting in place a regime that allowed the new owners to raise prices only in line with inflation. What they had not bargained for was the scope for cost-cutting that was gratefully exploited by the private owners; and reduced costs, of course meant that it was the workforces that lost jobs and had wages held down so as to allow large profits to be made by the new – and largely foreign – owners.

    What can be offered to offset this wealth of expert research and evidence showing that Public Private Partnerships are an expensive folly? The answer is nothing – other than the political convictions of those who believe that in all circumstances private ownership is best.

    Bryan Gould

    27 October 2013

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