Standpoint: Buy now, pay later
Stephen Harris asks if the global economic downturn will put paid to the internationalisation of public private partnerships (PPP)?
There are now around forty countries in the world with their own PPP units and another fifty looking seriously at PPP as a preferred funding model. That’s nearly half the nations of the world. Many of these countries are fast tracking PPP healthcare schemes – Greece, Egypt and, most recently Sweden, all have PPP hospital tenders out to market.
However, just as PPP takes off globally, the market has been hit by an economic situation that is both making bank debt more expensive, and reducing the size of loans that banks are prepared to make on PPP deals. This is a triple whammy.
Developed markets have been hit hard. But in newer markets, such as Pakistan, nascent programmes are grinding to a halt. I’m writing this piece from California, where I have just attended an infrastructure conference. PPP is on everyone’s lips. But in the US, an understanding of what PPP is and what problem it is trying to solve, is far from clear.
In essence, governments around the world look to PPP for three different reasons. Firstly, it is the motivation to improve public services through private sector innovation and aligning the delivery of public services to those best able to undertake them. This is the motivation of countries like the UK and the Netherlands. It’s about best value for money, not lowest cost. This approach can only be managed by countries prepared to spend tax revenues on paying for service delivery by the private sector.
Secondly, there are countries which wish to reduce government debt by shifting spending on infrastructure off their balance sheets and onto those of the private sector. This category includes most of the Central European countries.
Progress has been slow here as the lure of EU aid and a refusal to invest in the PPP process has prevented countries such as Poland from developing a programme. Thirdly, there are those countries that perceive PPP as free infrastructure.
The US is in this category at present. This approach eliminates the chances of undertaking social infrastructure projects like hospitals as consideration is only given to projects such as roads, bridges, ports and airports that can generate revenue.
But are these sorts of projects “real” PPP? In the last week I have seen total confusion over its definition in the US; with references to PPP, privatisation and concessions, often in the same sentence. Privatisation is a permanent devolution of a state entity into the private sector with minimal government control over the quality of the private sector delivery.
This is fundamentally different from PPP, where quality of delivery is assured by performance based payments and the arrangement is for a limited period. The term ‘privatisation’ worries citizens who think that their national assets are being sold off. Politicians must grasp the difference. PPP in the US means concessions. You get the private sector to build something and they make their investment back by charging citizens a user fee for the road, or the water, etc.
This is great for governments, which don’t have to worry about the provision of infrastructure. It’s great for the private sector, as they make money. But it’s not always so great for the citizen, as the quality of the service delivered by the private sector often fails to meet minimum standards. If properly scoped and executed, PPP service quality levels are maintained to a standard ‘set by government’. To do this, however, a proper performance based payment
system, effective monitoring and private capital money at risk are all required.
Despite the difficult economic situation, the need for new infrastructure internationally remains. In many ways a “buy now, pay later” approach is the only way during a cyclical downturn. There are still infrastructure funds around the
world with billions of pounds to invest in the ‘right’ projects.
This is the key factor. The collapse of the monolines, who could bring a low rated project up to a higher rating, and the more conservative approach to lending by banks means only top-quality projects in stable, developed countries will be able to attract finance. PPP is only applied by countries experiencing problems delivering key infrastructure. When times get hard, ‘nice-to-haves’ disappear, but healthcare remains near the top of most countries’ priority list. My feeling is that healthcare PPP will continue worldwide whilst other categories may struggle.
Stephen Harris is international development director at Tribal Group.