Blogs are opinion pieces and reflect their author’s views

The popularity of Public-Private Partnerships (PPPs), as a way for governments to get

infrastructure built, continues to grow. But while the public is often led to believe that this

is because they result in a more efficient use of taxpayer funds and a more streamlined

process, this is not necessarily the case. In fact, the clearest advantage that PPPs offers

is to politicians, who are able to transfer to private partners the risks of miscalculated

construction costs and revenue projections (as with a toll road, for example). For taxpayers,

the deals can often work out worse than if the government had simply pursued a fixed-

price design-build Public Sector Alternative (PSA) arrangement.

Even from the very start of the process, there are often a limited number of private consortia

equipped to bid on major PPPs, which already leads to the potential for bidders to build

in higher profits, and thus, higher costs for taxpayers. Nor are these private consortia

oblivious to the risks they assume; they must therefore build into their bid an effective

“insurance premium” to account for unforeseen delays and increased costs. The use of

private debt to finance construction further inflates prices over a government’s lower cost

of capital.

To an incumbent government, a key advantage of PPPs is the ability to avoid upfront costs,

and let the private consortium arrange financing until the project is complete, allowing

politicians to take the credit for new infrastructure while passing future maintenance and

operating costs off onto future politicians, taxpayers and/or users. This, however, only

provides both the incentive and bookkeeping artifice — since costs are incurred off the

government’s current balance sheet — for governments to build more infrastructure than

might otherwise be justified.