Evidence From Overseas Shows High Risks Of PPP Projects

The Government’s announcement that it will force all government agencies to consider PPPs for projects over $25 million provides little evidence of the benefits it claims nor the risks it is entering into, said the CTU today. Neither does it state the rules for making these decisions.

“The Government can always borrow more cheaply than the private sector, so it is difficult to see why public infrastructure should be built with private funds,” said CTU Economist and Policy Director Bill Rosenberg. “The balance could be shifted by the Government introducing biases against public provision. For example the Treasuries guidelines to government departments on cost-benefit analyses recommends they add a loading of around 20 percent to their costs if the project uses tax revenue or regulation.”

For school buildings, the best the Government can estimate is a very small 2.6 percent saving, which was estimated for similar deals in Victoria. But in the UK, Britain’s Audit Commission concluded that new schools built on similar lines were ‘no cheaper, better or quicker’ to build than those built with public money.

In addition, there are big risks in long term 25-35 year projects. Not all these risks can be transferred to the private operator. The risks that are transferred will be built into the price of the contract or the ongoing payments for it, increasing the cost. But it is impossible to anticipate all the possible changes that might occur over such a long time period. What if the population in the school's neighbourhood falls more than expected because of changes in employment patterns, or if it rises very steeply for the opposite reason? A contractor may insist on continued payments despite fall-off in use, or the Government may have to negotiate expansion with an operator who is by then in a monopoly position. If the contractor walks away, the Government is still left with the cost.

For roads, traffic patterns are notoriously difficult to estimate. In Europe, financial analyses of PPP roading projects show the additional cost of PPP projects over using public debt was up to 40 percent of the revenue for the roads.

There are also very high costs in negotiating the very complex contracts.

“If funding the projects is a problem for the Government, rather than handing over control by selling shares in the projects, it could offer long term infrastructure kiwibonds which investment funds such as the New Zealand Superannuation fund and kiwisaver funds could invest in.”

“In the long run, PPPs are more likely to increase public debt and loss of community control of facilities,” concluded Rosenberg.

ENDS

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