“This appears to confirm our worst fears. Far from being an exercise in simply managing budgets and increasing efficiency, this shows that the government is planning to fundamentally change the shape of the welfare state. With unemployment expected to rise and billions of pounds being cut from the benefits paid to some of society's most vulnerable people, it is deeply troubling to consider the implications of loosening the ties that hold our criminal justice system together.”
– Mark Serwotka, General Secretary of the Public and Commercial Services union, responding to a planned 30 percent reduction in the budget of the UK’s Ministry of Justice (1)
To borrow a formulation from Karl Marx, a specter is haunting the world: the specter of the privatization of public assets. At an accelerating rate, the infrastructure that makes civilization possible, such as transport routes, communication lines, hospitals, schools, energy delivery, sanitation, etc. is being privatized, with serious consequences to the welfare of society today and in the future. Privatization comes in various forms, and is often disguised in so-called “Public-Private Partnerships”(or “PPPs”, or “P3s”), which we shall detail below.
The transfer of control over infrastructure assets to the private sector, and the imposition of market-based forces on this sector of the economy, is integral to the pro-market, anti-government ideology that has rooted itself so deeply in public discourse over the last few decades, especially in the West. P3s, as the argument goes, bring private capital to the rescue of cash-strapped local, regional, and national administrations faced with endemic deficits of resources to cope with infrastructure needs. Some portion of existing infrastructure is always going obsolete; new technologies require new infrastructure, as do shifts in the economy, population density, and demography. P3s allow private capital to fund, design, build, and often operate infrastructure assets for the state. Ownership of the assets is scheduled to revert to the state at some point in the future. Government pays its private sector partners back over time, and with interest, for their upfront investment in P3 projects. Alternatively, as in the case of toll roads, for instance, end-users (drivers), pay the private partner back, with use fees (road or bridge tolls).
Where governments are short of funds, and have difficulty borrowing, P3s have obvious advantages. Infrastructure projects move forward thanks to private investment. Further, as the argument goes, the infrastructure projects benefit from the purported efficiencies of the private sector, saving as much 20-25 percent or so of expenses, it is often claimed. (2)
The stakes involved in P3s are high indeed. Over 1,000 P3 deals were signed in the EU alone from 1990-2006, with a capital value above 200 billion Euros. The UK, where the movement first acquired momentum, accounted for about 60 percent of this. (3) P3s in the UK topped 10 percent of total investment in public services already in the first few years of this century. (4) And the rest of the world has started to follow suit: P3s accounted for at least 4 percent of public services investment by 2007. (5) Private equity funds, insurance companies, pension funds, and sovereign wealth funds are investing liberally in global infrastructure trusts, on the prospect of superior returns. Such trusts accumulated contributions of more than $34 billion in 2007, up from just $2.4 billion in 2004, and the pace slackened only slightly in the crisis year 2008. (6)
Looking forward, the stakes stand to get a great deal higher. Budget austerity measures in Europe and at sub-federal levels in the US will effectively preclude governments from pursuing myriad critical infrastructure projects for years to come. Headlines related to the topic pop up almost anywhere you look. Thus, the UK is now preparing a 30 percent reduction in funding to the Ministry of Justice, which implies the shuttering of 150 courts, selling off a significant portion of prisons, and the release of thousands of inmates. (7) In the US, New Jersey’s Governor has recently cancelled in midstream a $9-11 billion effort to link the state with New York City via a new tunnel. (8)
Proponents of P3s and similar forms of privatization anticipate significant acceleration of the phenomenon. Consensus forecasts predict 15-20 percent of investment in public infrastructure will come from the private sector by 2025, which is a lot, but may turn out to be a significant understatement. (9) Moreover, we can expect deeper incursions of the private sector into service provisioning, not just the construction of assets. In increasing numbers, schools, prisons, youth detention centers, senior living centers, and many other institutions are likely to be in private hands.
The dangers posed by P3s are, unfortunately, all too numerous. They are, moreover, little discussed outside of specialist literature, which leaves societies worldwide that much more vulnerable to the gathering steamroller of privatization. To begin with, the very label “Public-Private Partnership” is badly misleading. The investment funds that put up the money for P3 projects do so with profit in mind, not public service. They aim to maximize the projects’ profits, and to safeguard as much of those profits as they can for themselves, not for reinvestment into meeting other public needs, as would the government.
Further, private sector participation in P3 projects does not come cheaply. Private industry eyes an annual return of 10-15 percent from new infrastructure projects, or 8-11 percent for refurbishments. (10) This is the profit they require for themselves; it is lost to the public sector. It is lost, moreover, to the local community, because the private investment firms are overwhelmingly concentrated in big financial centers like New York or London. Further, private investment firms frequently refinance infrastructure projects so as to lower the interest rate they are paying on the capital they collected to pursue the projects. Naturally, they do not share the resulting boost to profitability with their government “partners”. Nor do they share profit when they sell their share of P3s on the secondary market. (11) Increasingly, these various profits escape taxation even at the national level, as private capital routes its infrastructure investments through subsidiaries set up in offshore tax havens.
The Private Sector Efficiency Fiction
“Much of the case for PPPs rests on the relative efficiency of the private sector. While there is an extensive literature on this subject, the theory is ambiguous and the empirical evidence is mixed.”
– International Monetary Fund, 2004(12)
The standing justification for governments to use P3s is the assertion of efficiencies the private sector brings to project execution. If you believe private industry spokesmen, the difference reaches 20 percent or more, as we saw above. But the feasibility studies that prepare the ground for P3 projects tend to be less than rigorous and objective, to put it mildly, when they calculate and assert these efficiencies. The best empirical research–which honestly tables all costs, including construction delays and cost overruns–tells a very different story. Thus, P3 coordinators at the European Investment Bank (a proponent and leading funder of P3s) admitted after comparing P3 and traditional government road projects over the period 1990-2005 that the P3 projects were a whopping 24 percent more expensive. (13) Blanket studies of the rate of return for public vs. private investment in infrastructure have identified similar results between the two categories over the short and medium term, but a decisive superiority for public investment over the longer term (17-20 percent, as compared to 10-13 percent). (14)
Further, these calculations exclude any number of externalities accompanying P3s. Thus, once governments surrender ownership of meaningful portions of infrastructure, they lose control over coordination of infrastructure. To take a simple example, a city cannot rearrange a transport network to accommodate fresh needs if it has signed over control of toll roads to a private company and guaranteed it will not construct competing means of transport within specified distances of those roads. Beyond that, governments lose their ability to design and execute infrastructure projects.
More important, since private industry prioritizes its profits, it tends to pursue P3s that cater to the economically better off layers of society. P3s effectively short change the lower classes of society, therefore, and hamstring government efforts to raise the overall level of welfare by developing less affluent areas. It is no accident that money for P3s flows overwhelmingly to transport, telecommunications, and energy projects, while avoiding clean water or sanitation projects that would do society more good. (15)
In the same vein, it is characteristic that P3s tend to slash more labor than do their publicly owned counterparts, dilute the mix of remaining jobs to the lower skilled categories, and strip down support for pensions. (16) P3s also ramp up user fees faster than do government administrations. Road use tolls are a well-known example, but not at all unique. P3 network train fares in Europe are notoriously higher. (17) In the US, privately delivered water and sewer service costs consumers more than public sector equivalents by an average of 33 percent and 63 percent, respectively. (18)
The High Ground of Policy Formulation
Despite all the drawbacks of governments losing control over public assets, P3s continue to control the high ground of policy formulation. The World Bank, the OECD, the EU Commission, the European Investment Bank, and other commanding institutions endorse and subsidize P3s, in keeping with a pro-privatization line. (19) Further, these global financial organizations are well organized to protect the interests of P3-related private capital when it encounters pressure of any kind from host governments. (20) With this sort of leadership from above, the predictable outcome is for P3s steadily to acquire more momentum, and to see them propel the global economy along well-worn paths, and underutilize opportunities to redirect energy use practices onto sustainable footings. (21)
The efforts of some public employees’ trade unions and activist groups in places like the UK and Canada have succeeded in tarnishing the reputation of P3s and slowing their advance. (22) But appeals to economic value-for-taxpayers-money and various ethical arguments against privatization have not reversed the momentum towards P3s. Ideology and business interests are aligned in favor of P3s, as is the lure of corrupt dealing between officials and corporations. The money flow in the P3 industry produces a whole matrix of vested interests prepared to lobby for more projects (lawyers, accountants, investment banks, contractors, land developers, and others), making the struggle all the more difficult for progressives to win. Hope lies only in spreading the word, and forming broad alliances to resist the privatization steamroller.
(1) Quoted in Toby Helm, Anushka Asthana and Mark Townsend, “George Osborne takes spending axe to prisons and legal aid”, www.guardian.co.uk, October 16th, 2010.
(2) Dexter Whitfield, Global Auction of Public Assets: public sector alternatives to the infrastructure market & Public Private Partnerships, Spokesman (Nottingham, England), 2010, p. 73.
(3) Frederic Blanc-Brude, Hugh Goldsmith, and Timo Valila, “Public-Private Partnerships in Europe: An Update”, EIB Economic and Financial Report 2007/03, pp. 7-8.
(4) Ibid., p. 12.
(5) Whitfield, op. cit., p. 46.
(6) Whitfield, op. cit., p. 116.
(7) Helm, Asthana, and Townsend, op. cit. Legal aid to Britons in divorce and family law cases will also be cut.
(8) Susan K. Livio, “Gov. Christie firm on canceling Hudson tunnel project unless federal officials find other financial source”, www.nj.com, October 18th, 2010.
(9) Whitfield, op. cit., p. 329.
(10) Infrastructure Managing Group, “Valuing Concessions: Making Equity Work in P3s”, Presentation, Bethesda MY, January 13th, 2008. A breakdown of typical profit margins across different categories of infrastructure appears in Whitfield, op. cit, p. 94.
(11) The secondary market in P3 interests has developed rapidly. Over 40 percent of P3s in the UK had changed hands already by 2006 (DLA Piper, European PPP Report 2006, 2007, p. 155: http://www.irfnet.ch/files-upload/knowledges/DLAPiper_European-PPP-Report2007.pdf). For some specific cases, see Whitfield, op. cit., p. 257. Uniquely, as far as I can tell, the UK has taken steps to secure at least some sharing of the private partner’s refinancing profits with the public sector (ibid, pp. 185-87).
(12) International Monetary Fund, Fiscal Affairs Department, “Public-Private Partnerships”, March 12th, 2004, p. 14.
(13) Frederic Blanc-Brude, Hugh Goldsmith, and Timo Valila, “Ex Ante Construction Costs in the European Road Sector: A Comparison of Public-Private Partnerships and Traditional Public Procurement”, EIB Economic and Financial Report 2006/01, p. 2. For a broader discussion, see Whitfield, op. cit., p. 241, and elsewhere.
(14) See Whitfield, op. cit., p. 52.
(15) See, e.g., The World Bank Group, Private Participation in Infrastructure Database, PPI data update note 28, November 2009, Figure 6, p. 3.
(16) For an overview of various studies, see Whitfield, op. cit., pp. 277-79.
(17) For ongoing discussion centering on the UK, see www.passengerfocus.uk.org, especially the Passenger Focus Annual Report.
(18) Food and Water Watch, “Questions & Answers: A Cost Comparison of Public and Private Water Utility Operation”, June 2009, p. 1.
(19) For the World Bank Group, see its “Sustainable Infrastructure Action Plan FY 2009-2011”, (July 2008); for the OECD, see its “Infrastructure to 2030” program; for the EU Commission, see its “Mobilising private and public investment for recovery and long-term structural change: developing Public Private Partnerships” (Brussels, November 19th, 2009); the European Investment Bank has funded at least 120 P3 projects (see, e.g., DLA Piper’s European PPP Report 2009, p. 10).
(20) For instance, the World Bank Group has an International Center for the Settlement of Investment Disputes devoted to this purpose.
(21) Green infrastructure P3 projects are very rare. The DLA Piper European PPP Report 2009 has only a few token words about green projects (op. cit., pp. 16-17). Governments too have grossly underachieved with respect to green infrastructure projects. There is no shortage of well developed green infrastructure proposals that point to obvious social and economic benefits. One large-scale example from the US is The New Apollo Program (http://apolloalliance.org/category/new-apollo-program/the-full-report/).
(22) See Whitfield, op. cit., pp. 321-23.