Public Values

Economic crisis, P3s cut from the same cloth

Research shows flaws in accounting, faulty assumptions.

The Brampton Hospital is one example of a P3 gone wrongby CUPE

November 21, 2008 — The economic and financial crisis is exposing the misguided economics and faulty accounting behind public-private partnerships (P3s). This crisis has added to the growing string of problems, delays and failures with major public-private partnerships that reveal the high risks and questionable accounting involved in these deals.

The shifting rationales and public value of P3s have always been dubious. While even supporters acknowledge that they cost more, the gap narrowed slightly in recent years because of relatively low borrowing costs for the private sector. Despite their higher costs, proponents justified P3s by claiming they transferred massive amounts of "risk" to the private sector.

The basis for both of these apparent benefits — the relatively small difference between public and private sector borrowing rates and the ability to transfer risk to the private sector — has evaporated in recent months. In summary:

Private financing is more costly and more risky: the relative financing costs for P3s has increased and will continue to stay high for some time. The easy credit and low interest rate spreads for private borrowers of the past few years were an anomaly. Despite trillions in public bailouts and subsidies to the financial industry, the difference between private and public sector borrowing is high and volatile. This will continue to make P3s both more costly — and more risky.

The financial crisis was caused by the same policies that are behind the push for public-private partnerships: deregulation, privatization, and inadequate investment by the public and private sectors in their areas of responsibility.

There is no foundation to the claim that the private sector is better at managing risk than the public sector. The unprecedented bail-outs of recent months were described by an eminent economist as a "new form of public-private partnership, one in which the public shoulders all the risk, and the private sector gets all the profit." A growing list of failures, bail-outs and excessive costs shows that this applies more broadly to P3s.

Risks can never be completely transferred through P3s and governments will always ultimately be accountable for delivering public services. This responsibility is not changed by expensive and lengthy P3 agreements. If problems arise, it is the public that always has to pick up the bill at the end of the day.

Additional and complicated P3 requirement lengthens process and adds to delays. Evidence shows that P3 projects take longer to get underway. This makes P3s particularly inappropriate for the type of accelerated infrastructure spending that our economy now needs.

While the financial crisis has exposed some of the higher costs and risks associated with P3s, deceptive accounting and "value-for-money" calculations will continue to cover up the true costs and risks of P3s projects for the public. Despite these higher costs and risks there will be increased pressure to engage in more P3s because they provide private investors with relatively high returns at a low risk. This should be resisted.

The financial crisis has shown that there is a real need to move away from complicated and risky financial deals and get back to basics. Public services are best financed and delivered by the public sector. Private financiers should focus real productive investments to get industry and the private sector economy growing again . . .

To read further . . .

Links and sources
  Economic and Financial Crisis Exposes Risk of P3s - A CUPE backgrounder Text size (What are these?) November 21, 2008 11:30 AM The economic and financial crisis is exposing the misguided economics and faulty accounting behind public-private partners
  Police probe Montreal university P3 deal, Public Values, August 26 2008

Posted: November 27, 2008

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