Irish Times
Friday, December 7, 2001
By Eoin Reeves
In recent years policymakers have enthusiastically promoted public private partnerships (PPPs) to address the Republic's critical infrastructural deficit. As a result, PPPs have been proposed as the preferred model for investment in projects such as road-building, water services and waste management.
This widespread adoption of PPPs has been planned in the context of a broad consensus between the social partners. The perceived wisdom suggests that, compared to traditional public procurement, the PPP model yields better results.
These include faster delivery of vital infrastructural projects, better value for money and a reduced burden on the Exchequer. Experience from Britain, however, suggests differently. Since its introduction in 1992, the Private Finance Initiative (PFI) has failed to meet expectations.
Target levels of investment have been consistently undershot. There are concerns about the methods used for assessing whether value for money is achieved or not and evidence in this regard has been mixed.
Many of the problems encountered in using the PPP model were addressed in a report by the Commission on PPPs in Britain earlier this year. Chief among the lessons highlighted by the commission is the need to clarify the rationale for the PPP model as a better alternative to traditional procurement.
The commission specifically dismisses one of the arguments commonly advanced by proponents of the PPP model in the Republic - that PPPs reduce the burden on the Exchequer as the projects are financed by the private sector.
To demonstrate why this argument is spurious it is necessary to distinguish between the financing and funding of a project. Under PPP models such as design, build, operate and finance contracts and concession contracts, the private consortium will typically finance the project and make whatever investments are necessary.
The public sector, however, will fund the project over the life of the contract by making regular payments to the private contractor under the terms of the contract.
Unless the private sector delivers cost savings through greater efficiency, the eventual cost to the taxpayer will be the same as it would be under traditional procurement.
Whether the private sector can deliver significant savings under the PPP model is debatable and evidence is at best patchy and speculative (as PPP contracts can run for 20 to 30 years). It must be noted, however, that efficiency savings must be significant if they are to outweigh the higher cost of borrowings that the private sector faces compared to the public sector.
In Britain, it has been estimated that the cost of capital to the private sector is between 1 and 3 per cent more expensive than the cost to the public sector - a significant differential over a 30-year period.
If PPPs are to deliver efficiency savings, it is necessary that they deliver economies via other channels (e.g. better innovation than traditional procurement models).
The importance of understanding the difference between funding and financing a project cannot be overstated. In Britain, the misplaced belief that capital investment under PFI will significantly improve the net financial position of the exchequer has given incentives to consider the PFI/PPP model as the "only game in town".
Worse still, the desire to press ahead with PPPs in order to keep large-scale capital investments "off balance sheet" has led to short-cuts being taken in relation to accountability and value-for-money procedures.
The British experience demonstrates that, if PPPs are to achieve public policy goals, it is imperative that a common-sense approach to public investment is adopted. In simple terms, this requires the public purchaser to specify the outputs it wishes to achieve through the development of a particular public service that usually involves a significant capital element.
The purchaser should then examine the different options for delivering these outputs, which might include a PPP option that involves private finance. Having undertaken a thorough and transparent value-for-money assessment, the option that delivers the most efficient and effective service should be chosen. If this happens to be the PPP model, the public sector manager should then manage the project, working closely with its private sector partners.
Overall, it is important to recognise that the PPP model in Britain is developing in a climate characterised by analysis and ongoing (often contentious) debate. This has served to highlight the many conditions that must be satisfied if the PPP model is to improve the efficiency and effectiveness of public service delivery.
In contrast, the PPP programme in the Republic is expanding in a context of broad consensus between key players (i.e. Government, business and trade unions) and the level of debate has been very limited.
Already the Irish PPP programme is well under way. Recent data from the Department of Finance indicates that 134 projects with an estimated value of £9.6 billion (€12.2 billion) have been earmarked for investment as part of the Republic's PPP programme. It is important that lessons from Britain's experience informs policy in the Republic as these projects come on stream.
Dr Eoin Reeves is a lecturer in economics at the University of Limerick.
Copyright © 2001 ireland.com
|
