With the many privatisations wreaking havok, particularly in the water sector, the corporate world prefers to promote what are called public-private partnerships (PPP). Privatisation can involve the full sell off of government infrastructure to the private sector. PPPs are also a form of privatisation.
In a PPP a private company or consortium finances, constructs and/or operates a facility on behalf of the government for a set time period, usually many years, after which time it reverts to government control. The returns to the company are in the form of payments for use of the facility by users (water rates or road tolls) or the government. Occasionally a PPP involves a joint venture between a private company and a public authority, where ownership of the facility is also shared. These contracts are also called ‘Design, Build, Finance, Operate’ (DBFO) or ‘Build, Operate, Transfer’ (BOT).
Although PPPs are often presented as a way of raising capital for public works, they are basically funded by rates or government funds. "PPPs do not supplement public spending – they absorb it." Government contractual commitments to PPP payments means that they cannot be cut back and so when governments are forced to cut their budgets it has to be in non PPP areas of government.
Such contracts may also inappropriately influence government policy as has been the case with some Australian motorway projects where contract conditions required private companies involved to be compensated if public transport is provided that might reduce car traffic on the toll roads. In the US contracts "may even explicitly protect companies against the consequences of democracy" with clauses giving companies “the right to object to and receive compensation for legislative, administrative, and judicial decisions”.
In Europe PPPs are encouraged through limitations on government borrowing combined with unwillingness to raise taxes. (However the unwillingness of governments to go into deficit to pay for public infrastructure does not extend to deficits that are used to bail out banks.) Most PPPs in Europe (82%) are for transport infrastructure such as motorways. However there is no evidence that PPPs can constuct road more cheaply than public authorities: "A European Investment Bank (EIB) report compared the cost of PPP road projects across Europe with conventionally procured road projects, and found that the PPPs were on average 24% more expensive than the public sector option." In the UK, 28% of PPPs between 1987 and 2006 were for transport projects, followed by health (23%) and education (15.5%).
PPPs may also apply to existing infrastructure, particularly in developing nations. For example, water supply and sewerage infrastructure may be leased to the private sector, which takes over its operation and maintenance for a fixed time period – often 30 to 40 years – and collects the rates. Alternatively, the private sector may be contracted to provide the service for a fixed fee paid by the government, which collects the rates itself. Often the terms of the contract are kept secret from the public by commercial-in-confidence clauses, even in countries like Australia.
In the UK, Private Finance Initiatives (PFI), a form of PPP whereby the private sector financed and constructed government infrastructure and operated it at for a guaranteed return for some decades before handing it back to the government, were introduced by the Tory government and embraced by the succeeding Labour government.
By the end of 2005, so central had PFI become to government policy that contracts with capital value (the cost of the facilites before interest and service charges) of nearly £50bn had been signed, committing the taxpayer to annual payments of up to £7.5bn for at least twenty years to come.
Billions of pounds of contracts more were committed in the following years. Such contracts cost the taxpayer more than government spending on infrastructure as the cost of loans to the private sector was more, but the costs didn't count as government expenditure and contribute directly to government debt. However the costs of PFI "escalated dramatically" after construction began as did operating expenses once the infrastructure was completed. The extra costs translated into handsome profits.
For example between 2000 and 2002 shareholders in PFI hospital schemes made returns of over 100 percent. However these same hospitals offered fewer beds and services than earlier government-provided hospitals and suffered numerous problems ranging from blocked sewerage pipes to basic design faults.
A first step towards electricity privatisation, is to allow new generation of electricity to be undertaken by independent power producers (IPPs). The electricity produced is then sold to the existing state utilities who distribute it to customers. This is considered to be “particularly appropriate for countries that are just beginning to consider industry restructuring and have a need to attract additional capital to meet growing electricity needs.”
Whilst investment in Latin America has tended to be a result of full privatisation and mostly involved foreign acquisitions of government enterprises, investment in East and South Asia “focused on introducing independent power producers in markets dominated by vertically integrated, state-owned enterprises”. IPPs are now a large market in Asia, particularly in China, Indonesia, the Philippines, India, Pakistan, Malaysia and Thailand.
The rationale for IPPs is that private investment will provide the capital and expertise needed to increase generating capacity quickly. However, the amount of money invested is often small compared with the amount of money paid back by state-owned local utilities, often in foreign currency, money that then leaves the country. For many IPP projects, foreign investors only put up, on average, 24 percent of their own money. The rest is obtained through loans, mostly from foreign banks and agencies.
The multilateral development banks won’t lend money to the governments because their existing foreign debt levels are too high, but these projects impose financial obligations that are little different from foreign debt, except that it cannot be refinanced, making their financial position even worse than additional loans would have done.
IPPs expand capacity at a very high cost that in fact increases government spending and foreign debt, inhibits competition, blunts technological innovation and increases consumer costs. They have also forced governments to bear most of the burden of risk associated with electricity projects and so “undermined the very reason for introducing private power in the first place – to cap public debt and force private power producers to take the financial risks instead of governments”.
In Asia, IPPs generally sell their electricity to a single state-owned utility according to a contract called a Power Purchase Agreement (PPA). PPAs have ended up costing governments far more foreign capital than that originally invested in the electricity projects. “In addition, the purchase contracts have forced use of high cost power over lower-cost power already available”.
Kate Bayliss and David Hall, from the Public Services International Research Unit (PSIRU) at the University of Greenwhich, claim that because payments must be put in an escrow account or are subject to government guarantee “using the private sector for power generation does not increase the funds available to pay for power generation” or other government activities. “Rather, an IPP will absorb large amounts of government finance through high prices and restrictive terms of a PPA. While IPPs are one way of financing power generation, they are far from the cheapest.”
World Bank researchers noted in the late 1990s that throughout Asia:
The development of the IPP market has been accompanied by allegations of corruption and price padding. One reason for these allegations is that prices have varied widely across and within countries. Another is that rules for the solicitation, award, and close of contracts have been unclear and onerous, have allowed opportunities for graft, and have been perceived as unfair by sponsors losing out to competitors.
In Indonesia, for example, Suharto family and friends are reported to have received “loan-financed” shares in the IPPs that were awarded contracts. They then paid back the loans with dividends from the shares. In Pakistan, allegations of corruption were investigated but not proven.