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"What a Trump America Can Learn from a Berlusconi Italy" New York Times

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The Great Solution?

The Great Solution?

Across a variety of sectors, public-private partnerships (also known as PPPs & P3s) are being touted as the one-stop solution for the demands of tomorrow. High-profile officials, such as Gary Cohn and Andrew Cuomo, have endorsed this venture as a means to address increasingly apparent faults in our nation’s infrastructure, such as the forthcoming overhauls of LaGuardia (LGA) and JFK airports. This level of intensity begs the question: are PPPs worth pursuing?

Background

The history of PPPs can be traced back to the times of the Ottomans, as they were initially utilized to build a new tunnel in Istanbul. From then on, the scope of PPPs has expanded, but all PPPs revolve around the central concept of balance, whether it be of risk allocation, payment schemes or costs. Public-private partnerships are ventures between the government and the private sector in order to finance, and, in some cases, build and maintain a project over a given period of time with the government making yearly payments in return for the private sector’s services. Running on the assumption that government-led projects, such as the New York City AirTrain, are likely to run into cost overruns as well as prolonged projects, governments seek to leverage the private sector’s efficiency with resource allocation, while guaranteeing a stable line of revenue from the venture. In the modern era, PPPs have been limited to Western Europe, Canada and Latin America as countries, such as the United States, tended to borrow money in order to fund federal projects. This has led to other areas of the world maintaining a far more developed PPP market, as seen with Europe’s PPP market below.

Sources: The European PPP Expertise Centre; Bloomberg

Sources: The European PPP Expertise Centre; Bloomberg

PPPs have been particularly alluring to politicians on both sides of the aisle due to their ability to plug budgetary gaps. In fact, under US President Barack Obama, the United States Department of Transportation formed the Build America Bureau in order to promote public-private partnerships in building highways and bridges. Furthermore, the World Bank has reported that PPPs now compose 15-20% of infrastructure investments in the world. Though, multiple questions remain to be answered, including: do PPPs generate positive return on investments to both the public and those involved, and is the private sector interested in pursuing these ventures?

Private Sector Involvement

Source: HM Treasury, Private Finance Initiative and Private Finance 2 projects: 2015 summary data (2015) 

Source: HM Treasury, Private Finance Initiative and Private Finance 2 projects: 2015 summary data (2015) 

A cornerstone to PPPs is the involvement of the private sector. Yet, there are multiple hurdles that have impeded the majority of firms from entering into these agreements. For instance, the size of these deals limits the number of companies that are able to bid and manage the ventures. In order to further boost involvement from the private sector, five things must be clearly articulated: viable revenue generating opportunity, political commitment, costs and benefits, regulatory framework, reduced life cycle costs, and risk allocation. Even in countries, such as the United Kingdom, not satisfying the above conditions can lead to a steady decrease of interest by private firms, as shown in the graph to the right. Furthermore, in most countries including the United States, there is not a government-backed PPP unit to help facilitate the development of PPPs and PPP laws are often ill-defined, thereby reducing the interest of the private sector. Not only does this hamper the ability of nations to boast the presence of PPPs in strategic industries, but it also leads to faulty agreements that prove to be costlier.

Source: World Bank, Benchmarking PPP Procurement 2017

Source: World Bank, Benchmarking PPP Procurement 2017

Equity

Due to the involvement of the private sector, there are concerns that the public will not be well-served by the venture. In particular, healthcare partnerships have proven to be ill-executed, as was abundantly clear with the ongoing crisis at the Albert Lutuli Hospital in Durban, South Africa. One of the trailblazers of PPPs, the UK has invested greatly in PPPs. Though, in courting the private sector with lucrative deals, the British government has accumulated more than £220 billion in debt.  Additionally, concerns from the prospect of these partnerships focusing on urban centers as opposed to rural areas, where there would be lessened demand for partnerships there. This was illustrated in Lesotho, where healthcare PPP has devastated the Ministry of Health’s budget as a result of huge cost overruns as well as multiple clauses that have further burdened the Ministry. As a result of this, resources that could have otherwise been utilized in underserved areas have had to be reallocated to this hospital, thereby widening the urban-rural divide & the income gap. 

Transparency

Other concerns with PPPs emerge from a relative lack of transparency in the overall partnership process. Of both companies and governments surveyed, the greatest concern was with transparency as it is essential for achieve better value for money through sustainable contracts, improved management of fiscal contracts, strengthened governance, reduced risk of renegotiation, and a better delivery of services. Yet, in the majority of countries, there is a surprising lack of regulation to ensure transparency in the PPP process as illustrated below; moral hazard is a difficult to address. 

Source: World Bank, Benchmarking PPP Procurement 2017

Source: World Bank, Benchmarking PPP Procurement 2017

There are only three countries in the world that require complete transparency. This lack of oversight has the potential to not de-rail any agreement, but it also deprives the public the knowledge how their taxpaying dollars are being spent.

Conclusion

Public-Private Partnerships can be an important avenue for countries to further develop the capacity of key industries, such as in healthcare and infrastructure. Although, there are multiple obstacles to implementing these ventures, a PPP can be essential if they are able to satisfy the conditions of clear communication, a detailed contract, stakeholder support, ‘best value’ partner being secured as well as structured regulatory & legal frameworks. Due to the strategic nature and potential of these agreements, PPPs should be looked at with the utmost of importance. If not, governments seeking to utilize them will be lead into poorly executed agreements that do more harm than good. 

-Hakan Stanis