As the title suggests, this blogger is not a fan of public-private partnerships (PPPs). While there may be occasions where this model makes sense, they are relatively rare. Why? What is the problem? The problem involves an inherent conflict of interest. Whenever the government’s ties become too strong to a particular company and its ventures, how can we expect government officials to regulate that company with any objectivity?
Wikipedia, which tries to cover just about everything, has an interesting article on PPPs. Here is a brief excerpt which begins to suggest the kind of problems involved.
Because of the focus on avoiding increases in public debt, many private infrastructure projects in the early 1990s involved provision of services at substantially higher cost than could have been achieved under the standard model of public procurement. The central problem was that private investors demanded and received a rate of return that was higher than the government’s bond rate, even though most or all of the income risk associated with the project was borne by the public sector. (from here)
Businessmen go into business to make money, and the only thing some businessmen will not do to make money is break the law. Politicians, on the other hand, are too often enamored with power, and politicians need money to run for political office. Since politicians have control over the public’s assets (money), and politicians make laws; businessmen can find cozy relationships with politicians far too convenient. After all, with the right connections we can steal without it being against the law.
Fortunately, sometimes the businessmen get so greedy, the public notices. Then politicians cannot make the deal fly. Consider this example from Pennsylvania (Apparently, Virginia politicians are not the only ones who want to sell our roads to foreign companies.).
In Pennsylvania, lawmakers debated a proposal to lease the cross-state turnpike to Citi Infrastructure Investors and the Spanish firm Abertis Infraestructuras for an upfront payment of $12.8 billion. The high-profile deal was shelved last fall after a number of legislators refused to support the plan over concerns about the state’s financial assumptions and oversight, among other reasons. Pew conducted an in-depth analysis of the state’s effort to help policy makers around the country learn from the Pennsylvania experience. The report identifies the information states need and the issues they should consider when evaluating proposed agreements with private companies to fund infrastructure improvements. (from here)
So when does a PPP actually make good sense? The best case for a PPP occurs when a private charity or nonprofit works with government to charitably fulfill a public need. This is a case where no one makes a profit. Instead, government steps aside and accepts the help of private citizens.
Unfortunately, the term “public-private partnership” has little to do with true charity. What the term does is provide glamor for public consumption. Meanwhile, we get fleeced. For example, we have a website dedicated to PPPs. This website kindly lists the criteria for PPP success. I got a good laugh out of this one.
Guaranteed Revenue Stream:
While the private partner may provide the initial funding for capital improvements, there must be a means of repayment of this investment over the long term of the partnership. The income stream can be generated by a variety and combination of sources (fees, tolls, shadow tolls, tax increment financing, or a wide range of additional options), but must be assured for the length of the partnership. (from here)
Tax, tax, and more taxes. Even shadowy taxes. Shadow tolls? I had to look that one up. Here is how the Federal Highway Administration (FHWA) defines the term.
Shadow tolls can be an element of a highway finance approach whereby a public or private sector developer/operator accepts certain obligations and risks — such as construction, operations and most specifically traffic — and receives periodic shadow toll payments in place of, or in addition to, real or explicit tolls paid by users. Funds for shadow tolls can come from diverse (and multiple) government and/or private sector sources, including State Highway Funds, special assessments on nearby properties and regional dedicated tax streams. (from here)
The FHWA proudly describes this form of financing as innovative. Politicians and bureaucrats are never more inventive than when they are figuring ways to tax and spend. Here the public pays, and the fact the money goes into the pockets of a private company garners minimal notice.
So why did I bring up PPPs now? We have no shortage of inventive politicians in Virginia, and PPPs seem to the latest fad in Virginia. In particular, as I last noted in this post, our politicians think PPPs are great way to fund roads. To point out the risks involved I will do a series of posts. For the moment, however, let’s just enjoy some cartoons.
The article from which I copied the cartoon below made this observation.
It’s time to take a pause and ask some questions: given that the Government is a PPP advocate and has a preference for private finance, how can it be at the same time a steward for the public interest? (from here)
In the next cartoon, the public-private partnership is praised as providing a competitive advantage. It is always nice to have a sugar daddy, but can you tell which side is government and which is private?
In a win/win scenario, the private operator would gain competitive market advantage without expending capital on network construction. Those private sector operators who currently enjoy success in private-sector operations are best positioned and the most experienced to take advantage of this trend. (from here)
In the final cartoon, the well-dressed government official is portrayed as an indispensable source of funds and expertise. What is sadly hilarious about the depiction below is that in order to get its funds and expertise, government must tax the “stakeholders.”
Consider the realism of the words that went with the cartoon.
Stakeholders felt that it was important for them to be involved with poverty reduction. Farmers, artisans, traders, businessmen, entrepreneurs and public officials should create non party political organisations (including public/ private partnerships) that will allow them to work well together. (from here)
Non party political organizations? What planet could that be?