In this opinion essay, Dr Eleanor Woodhouse, Associate Professor in Public Policy at UCL, discusses the impact of public-private partnerships and the opportunities and challenges they provide.
Recent news reports suggest that an in-coming Labour government will rely heavily on private investment to rebuild Britain’s public services, in an intense effort to avoid either tax rises or public spending cuts. In one briefing, it was said that Labour believes that the private investment firm BlackRock can be persuaded to “rebuild Britain”.
These efforts remind many of the public-private partnerships (PPPs) of the Blair/Brown years, so what do we know of their implications for the quality of public goods and services?
Since the 2008 financial crisis such agreements between government and the private sector have remained popular in many high-, middle- and low-income countries as fiscal constraints have tightened. Some of the reasons for this continued success are that: PPPs provide a way to finance large-scale projects that the government may otherwise be unable to provide; they allow the government to push forward expenditures and to claim credit ex ante for projects that may never be completed; and they give governments the chance to front-load investment obligations onto private partners, such that the government itself has essentially no up-front costs.
The initial rationale for PPPs was to do with getting around formal public sector debt levels. “Private financing promised a way to provide infrastructure without increasing the public sector borrowing ratio […] [and] would reduce pressure on public sector budgets” (Hodge & Greve 2010, p. 9). Indeed, Reeves is considering such models precisely because of the fiscal pressures the UK is currently under. PPPs potentially offer a way to avoid tax rises (in the immediate) and breaking fiscal rules. However, whilst PPPs do offer a way to get around short-term fiscal rules, they do not really reduce pressure on public sector budgets in the longer term. All they do, in essence, is push expenditure forward, off this year’s budget whilst remaining to be paid by future generations.
PPPs are also said to offer better value for money for citizens. The reason for which PPPs should lead to greater value for money is due to the ‘bundling’ that they entail. Bundling refers to the fact that in a PPP the construction and management/operation of a piece of infrastructure are managed by the same entity. As such, the consortium in charge of the PPP will build the piece of infrastructure to a higher quality because they know that they will be in charge of managing it later and would suffer if any issues arose related to the quality of the construction.
However, there is highly mixed evidence that PPPs offer better value for money for citizens in practice. As such, care should be taken when considering under which conditions to engage in PPPs to deliver key public goods and services. The literature tells us that two key sets of factors influence the likelihood of success of PPPs.
First, the ability to write complete, clear contracts: that is, they are more likely to succeed where projects are not overly complex, and the government has a good sense of what demand for the service will look like in the future and where better infrastructure quality can significantly reduce on-going costs, including maintenance costs.
This set of factors suggests that PPPs in the transport and water sectors, for example, tend to be more successful as here the “quality of the infrastructure can significantly reduce costs […] infrastructure quality has a great impact on the quality of the service and service demand, and […] demand for the service is stable and easy to forecast.” Whereas PPPs for nursing homes and in schools, for example, would tend to be less successful as here “service quality is mainly determined by human capital investment, or for IT services, where demand evolves quickly over time” (Iossa & Martrimort 2015, p. 40).
The second set of factors that influence the likelihood of success for PPPs include good governance practices being in place for the procurement and operation stages of the PPP. Namely, the enforcement of proper accounting rules, competitive tendering for additional works and the independent review of renegotiations.
Poor governance and design of contracts of this nature can be especially problematic as they can lead to the sometimes frequent renegotiation of PPPs. “Renegotiations generate problems, because they substitute bilateral renegotiations for competitive tendering, and thus stimulate lowballing at the tendering stage” (Engel et al. 2020, p. 32).
The point here is that good governance practices are essential in ensuring that the advantages offered by PPPs, where they exist, are not undone by renegotiations of the original contract. Renegotiations “create adverse selection by attracting firms with a comparative advantage at renegotiating over technical skills, and generate moral hazard by allowing governments and concessionaires to renegotiate away their mistakes in the design of the project” (Engel et al. 2020, p. 32).
Less complex projects or brownfield projects are usually associated with a lower propensity for renegotiations to occur, whereas in more complex projects and “where governments are providing financial or credit enhancement, such as sharing risk or co-financing” renegotiations are more likely to occur (Guasch et al. 2014, p. 4).
All of this entails that while PPPs are understandably an appealing option in the immediate term they should come with serious hazard warnings.
PPPs can offer good value for money, but only under certain circ*mstances. Where the infrastructure or service to be delivered is not very complex, where the government has some experience in contracting for this type of project and where better quality infrastructure comes with decreased operating and maintenance costs over time, PPPs can bring quality and cost benefits. However, where projects are complex and good governance structures are not in place, room is left open for renegotiations and both value for money and quality can be compromised. Given that the price for PPPs that do not offer good value for money will be paid for by future generations, policymakers should pay close attention to ensuring that the conditions for successful partnerships are in place before embarking on such projects.
Dr Eleanor Woodhouse is an AssociateProfessorin Public Policy at UCL'sDepartment of Political Science.
- What more to read?
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