Monday, 4 January 2016

One area of Public Investment: PPPs

Paul Sweeney looks at one area of public investment:  It is worth noting that the Government seems be to a little cooler on Public Private Partnerships than it and its recent predecessors were in the past. Does this mean that a new government might finally undertake a serious study of their effectiveness and cost?
The main advantage of PPPs is that the State gets infrastructure for which it could not afford to borrow during lean times, or was not allowed to borrow under EU rules. While no independent study has been done on them, the latest government plan informed us that since 1996, almost €6bn has been spent on PPPs. The 6 year plan which began in January of this year to 2021 will restrict them for the first time - now capped at 10 percent of government investment from now on.
In the mid 1990s when PPPs were first introduced in Ireland, there was no need for them. No borrowing - even of capital investment - was needed because surpluses were being made by the Exchequer. All current and capital spending could be easily have been funded out of revenue during the late 1990s and early 2000s.  However, the then governments were simply following the British fashion, an ideological idea, and of course it was also very popular with private financiers. They could make additional profits on such new private investments in what had been traditional public infrastructure. PPPs were part of the financialisation of the economy.
Ironically, after the crash of 2008, the case for PPPs was no longer simply ideological and had become necessary with the level of public borrowing incurred since to fund the bank bailout and to make up for the collapse in taxes after the Crash and with the restrictive EU rules on borrowing.
The new Plan, Building on Recovery, explains; “PPPs involve contractual arrangements between the public and private sector to deliver infrastructure or services that were traditionally provided directly by the public sector. Under the arrangements, infrastructure is delivered by a private sector firm and, following construction, the asset is made available for public use. The State pays an annual unitary payment to the PPP company over an extended period, typically 25-30 years.” “At the end of the contract period, the asset comes into State ownership but in the meantime the PPP is regarded as ‘off balance sheet’”.
It is this off balance sheet financing of public infrastructure which is so attractive to over-borrowed, hard pressed governments. But it is pushing the cost down the road and sometimes the risk is not transferred to the private investor.
Recent news of huge payments to PPP investors by the taxpayer for under-used motorways may be due to the recession but also may be due to poor negotiation by the state in the deals. This is the kind of area that needs to be explored by the much needed and overdue study of PPPs by the next government.
The Plan admits that “Looking beyond the 2021 horizon, the Exchequer will be committed to paying an average of over €360 million per annum (indexed for inflation) in PPP unitary payments between 2022 and 2035, followed by an average of about €280 million per annum from 2036 until 2042. It will be a further 10 years (2052) before all payments due under these PPP commitments are made in full.” This is why PPPs are now capped at 10 percent of government investment from now on.
UK business commentator John Kay is scathing of PPPs saying “instead of borrowing on spectacularly favourable terms, governments are aggressively buying back their long term debt and cutting their capital expenditure in the name of austerity. The common sense that sees the outcome as absurd contains more wisdom than technical explanations peppered with acronyms such as PPPs, PFI, QE and SIV” (2015, p160).
As Keynes said “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” But with substantial gross public borrowings at 95% of GDP the state still needs PPPs?
Yes and the new Plan anticipates continuing use of them, but now restricted somewhat.
But there is a much better way to fund investment in our public infrastructure. It is cheaper, faster and less cumbersome, both for the state and for builders. It is the old way – direct funding.  This, the sources of capital and more will be examined in latter blogs.

Paul Sweeney is Chair of TASC Economists’ Network and his investment ideas are set out in the recent paper on which the above is based in “A Time for Ambition” on the TASC website here.

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