The Theory and Evidence Concerning Public-Private Partnerships in Canada and Elsewhere

Abstract

The popularity of Public-Private Partnerships (PPPs), as a way for governments to get infrastructure built, continues to grow. But while the public is often led to believe that this is because they result in a more efficient use of taxpayer funds and a more streamlined process, this is not necessarily the case. In fact, the clearest advantage that PPPs offers is to politicians, who are able to transfer to private partners the risks of miscalculated construction costs and revenue projections (as with a toll road, for example). For taxpayers, the deals can often work out worse than if the government had simply pursued a fixed-price design-build Public Sector Alternative (PSA) arrangement. Even from the very start of the process, there are often a limited number of private consortia equipped to bid on major PPPs, which already leads to the potential for bidders to build in higher profits, and thus, higher costs for taxpayers. Nor are these private consortia oblivious to the risks they assume; they must therefore build into their bid an effective “insurance premium” to account for unforeseen delays and increased costs. The use of private debt to finance construction further inflates prices over a government’s lower cost of capital.

To an incumbent government, a key advantage of PPPs is the ability to avoid upfront costs, and let the private consortium arrange financing until the project is complete, allowing politicians to take the credit for new infrastructure while passing future maintenance and operating costs off onto future politicians, taxpayers and/or users. This, however, only provides both the incentive and bookkeeping artifice — since costs are incurred off the government’s current balance sheet — for governments to build more infrastructure than might otherwise be justified. Advocates of PPP would argue that one clear benefit PPPs do offer the public is an impressive record of bringing in projects on time and on budget. It is true that the inflexibility of contracts and the financial risk transferred to the private partners have a powerful effect in keeping projects on track. However, the yardsticks by which the on-time.

Keywords: PPP, public private partnership