The Livable Blog

The University of Greenwich Business School has published a startling report on the crisis in Private Public Partnerships (P3s), which in the UK are more accurately described as Private Finance Initiatives (PFIs).

The long and short of it is that in the present economic situation PFIs just don't make any economic sense because governments can now borrow money much cheaper than private corporations. In addition, many previous PFI toll freeway schemes are unraveling.

This has major implications for the province's freeways expansion schemes (the Port Mann has already reverted to public finance and ownership), but much more for the private power industry. It no longer makes any economic sense at all to go to the PFI/IPP(Independant Power Producer) model. It always cost more to use private financing, but not it costs WAY more.

But crooked politicians never let the business case stand in the way of their friends dipping into the public purse.

(Thanks to Susan Jones for pointing this report out!)

Crisis and public services note 2. January 2009.

A crisis for public-private partnerships (PPPs)?

January 2009

David Hall

Andy Rose, the executive director of the UK’s PFI unit, said in November 2008 that PFI projects can no longer rely on their previous method of raising bond finance, and are now dependent on bank loans which are only available at much worse terms:
“the bond market, which has been the financial structure of choice for large PFI projects over the past 10 years, is now effectively closed to new transactions. This has increased reliance on the banking market…and increased the strain on the project finance banking model…….funding availability is limited and credit margins have moved up… many banks are indicating that the tenor of loans might be shorter.”

John Tizard, the director of the new Centre for Public Service Partnerships at Birmingham University, says that this has already halted finance for PFI schemes and may make them unattractive for the foreseeable future:
“At the time of writing, there is no – or next to no – capital available to finance any PFI deal that has not already been closed.”

[snip]

Tizard suggests that the obvious response is to revert to traditional government borrowing, which is in any case cheaper:
“If the cost of capital and/or debt increases or becomes more difficult to secure, the value for money equations, which are undertaken on PFI deals, may tip over against the use of PFI. …In these circumstances, all other things been equal, it might be appropriate to consider financing through models such as the Credit Guarantee Scheme and other forms of funding through government bonds and public finance. Government can borrow more cheaply than the private sector.”

[snip]

Australia has made considerable use of PPPs, especially for road schemes, but a number of projects have not delivered results and the credit squeeze threatens the future. In January 2009 an article in The Australian summarised the position:
“The brutal reality is that most private sector toll operators are a shambles. Most have overinflated their traffic forecasts, financed them with a slice of equity from the public markets, then geared up, and paid investors back their own capital in distributions (which enticed them into the float in the first place). As the debt markets worsen and most listed infrastructure funds have fallen apart, a new model is needed to help finance the estimated $800 billion the country needs to spend on infrastructure in the next decade….. The Infrastructure Partnerships Australia chairman Mark Birrell said that: "Otherwise, we could find that projects simply won't attract a suitable level of interest in the much-changed global economy," he said.”

Construction companies themselves are pointing out the advantages of the traditional model, whereby the government borrows money itself and then invites tenders for simple construction contracts, rather than attempting to construct PPPs in the context of the credit crisis. Mark Binns, the chief executive of a major Australian contractor, Fletcher Construction , told an enquiry in New Zealand:
“If the aim was to bring projects to fruition quickly, making them PPPs would be a retrograde step, as so much time is involved in setting up the legal framework between participants in the project, he said. He also questioned whether private sector funding would be viable in the current credit environment without Government guarantees, which nullified the transfer of risk to the private sector…..Sometimes the benefits of transferring the risk of PPP projects to the private sector were illusory, it said, citing the British Government's bailout of Metronet, the private operator of the London Underground…. if the transfer of risk was not complete, the true benefits of PPPs came down to an analysis of the funding costs, and there was a strong argument that the Government would be better off just raising debt, potentially through infrastructure bonds, to do the project using other traditional methods of contracting.”

The simple alternative is the traditional method of financing public infrastructure - through government borrowing to raise finance, issuing construction contracts, and then operating the facility, whether through direct labour or contractors.

This remains perfectly feasible. Governments are still able to borrow the necessary money: their credit is not affected in the same way as private companies. Traditional procurement is also simpler and quicker than PPPs: attempts to maintain PPPs as a core method of funding risk delaying infrastructure projects. The desired level of infrastructure investment can thus be achieved without any use of PPPs at all.

A recent PSIRU paper contains a detailed discussion of the choice between traditional procurement and PPPs.

Read the full report at http://www.psiru.org/reports/2009-01-crisis-2.doc