Eurodad intervention at UNECE side-event on PPPs
The drivers of Public Private Partnerships (PPPs): Why are PPPs currently very high on the agenda of many European governments and private sector companies?
- Austerity policies: The adoption of austerity policies in Europe and all over the world means that governments are constrained by the International Monetary Fund (debt limits policy) or by EU treaties (“fiscal compact”) from borrowing or spending more. In practice, governments are incentivised to come up with alternative financing models to deliver goods and services. PPPs is a very attractive one as states do not have to raise funds upfront to develop and manage projects. Instead, the governments use public resources to bring in the private sector, which entails consequences for the public service provision and requires even extra capacity, in terms of financial resources, negotiation and monitoring, than if the public sector would have taken care of the service itself.
- Accounting incentives: Current accounting practices create perverse incentives in favour of PPPs. PPP project and its contingent liabilities are kept “off balance” sheet. The IMF has stated clear “In many countries, investment projects have been procured as PPPs not for efficiency reasons, but to circumvent budget constraints and postpone recording the fiscal costs of providing infrastructure services.” This creates a strong bias in favour of the model. Governments can hide the true and full costs of PPPs, but costs will appear in future periods – leading to increased public debt – or will be paid by users.
- Private sector push: Meanwhile, there is also a strong push from the private sector – in many cases from Northern countries – to get engaged in PPPs, and increasingly into mega-infrastructure projects. Institutional investors worldwide, including pension funds, insurance companies and sovereign wealth funds, hold trillions of dollars under management and are eager to invest it into “bankable projects”. PPPs represent a business opportunity with attractive returns. Since the risks of these projects are often quite high, PPPs also offer a less risky way for the private sector as they give them a flow of income for a long period of time, usually underwritten to a large extent by the government itself. The commercial interest of many donor countries are currently and sadly mixed with development interest.
In many different forums we are seeing that European governments and European-led institutions are trying to export the model that have been underway in the UK and many European countries for many years, in some cases with dramatic consequences for the users and the public purse. Why is it problematic that European countries and others, like the G20, are promoting the PPP model?
Some key problems with the PPPs
- PPPs are more expensive and risky in the long run. They should be seen as a perverse and risky instrument to promote if they are not backed by on-balance sheet accounting practices. PPPs are, in most cases, the most expensive method of financing projects, significantly increasing the cost to the public purse. A PPP project can be twice as expensive for the public purse than if the government had borrowed from banks or issued bonds directly. Evidence shows that fiscal implications of PPPs pose a huge risk to the public sector that should not be underestimated. Even IMF staff says that: PPPs are all too often a risky way of financing for public institutions and divert policy priorities. Many examples provide evidence of this: The Memorial hospital in Lesotho costs at least 3 times what the old (public) hospital would have cost today, and it consumes more than half of the state health budget. The government remains locked into this agreement until 2027.
- PPPs serve short term political interests and discourage long term political thinking: Due to current accounting standards, PPPs are a perfect model for politicians to serve their political interests in the short term, without thinking about long term fiscal implications. By keeping PPPs off balance sheet, politicians are incentivised to go for the PPP option. This option allows politicians to please their electorate in their short legislative term rather than focusing on the fiscal implications of PPPs in, for example, 30 years and the burden for future governments and generations.
- PPPs entail an uneven risk sharing: Many different arrangements are being developed to minimise private sector risk that have important implications for the public sector. For example, companies are increasingly asking for public sector support in the form of subsidies, grants or guarantees to compensate for demand risk, political and regulatory risks, among others. This generates financial implications for the public sector and reduces the capacity of governments to respond to new information and introduce measures that can create unfair competition with other private sector companies. However, in many cases governments are forced to rescue the project, if not the private sector company, when the private partner fail to cope with the cost of those risks. Given the fact that PPPs are used as a mechanism to deliver public services, the risk sharing is definitely uneven. States have a duty to ensure provision of at least a basic level of these services, such as health, basic education, clean water or electricity. Therefore, it is responsible for ensuring that the partnership works. This means that if a project goes wrong, the government has to rescue the PPP project, with financial consequences for the state and social impacts for the people.
Why is the current standard setting process for PPPs problematic?
- First of all, there are many initiatives going on at national, regional and global level on setting standards and guidelines for PPPs, including the work of the World Bank Group, at the request of the G20, and the UNECE. But there is not unified process in line with commitments made in the Addis Ababa Action Agenda, i.e. open, inclusive and transparent discussions. In our view, the work of the UNECE on PPPs should not be taken as the voice of the UN on this. Although UNECE – and even the World Bank Group argues that it is not promoting PPPs, the fact remains that many European countries that are currently promoting PPPs at home, are involved in UNECE’s decision-making process around PPP standards, which are drafted with the objective to be international standards. There is a high risk that UNECE’s standard-setting process on PPPs is being used by these governments to promote a risky model at international level.
- The FfD follow up process should explore ways of reclaiming the standard setting process for blended finance and PPPs at the global level in order to
- a) ensure that current perverse incentives are addressed – by explicitly promoting a change in the accounting and reporting practices, and an cost-benefit analysis of PPPs vis a vis an alternative financing methods;
- b) that development outcomes are at the fore front, and
- c) that accountability mechanisms are established.