21-12-2012, 03:13 PM
public-private partnerships
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The importance of public-private partnerships
Over the past two decades more than 1400 PPP deals were signed in the European Union, which
represent an estimated capital value of approximately €260 billion.[3] Since the onset of the financial
crisis in 2008, estimates suggest that the number of PPP deals closed has fallen more than 40
percent.[4] These difficulties have placed significant strains on governments that have come to rely on
PPPs as an important means for the delivery of long-term infrastructure assets and related
services.[5] Moreover, this has occurred precisely at a time when investments in public-sector
infrastructure are seen as an important means of maintaining economic activity during the crisis, as
was highlighted in a European Commission communication on PPPs.[6] As a result of the importance
of PPPs to economic activity, in addition to the complexity of such transactions, the European PPP
Expertise Centre (EPEC) was established to support public-sector capacity to implement PPPs and
share timely solutions to problems common across Europe in PPPs.
Controversy
A common problem with PPP projects is that private investors obtained a rate of return that was
higher than the government’s bond rate, even though most or all of the income risk associated with
the project was borne by the public sector.
It is certainly the case that government debt is cheaper than the debt provided to finance PFI projects,
and cheaper still than the overall cost of finance for PFI projects, i.e. the weighted average cost of
capital (WACC). This is of course to attempt to compare incompatible and incomplete economic
circumstances. It ignores the position of taxpayers who play the role of equity in this financing
structure. Making a simple comparison, however, between the government’s cost of debt and the
private-sector WACC implies that the government can sustainably fund projects at a cost of finance
equal to its risk-free borrowing rate. This would be true only if existing borrowing levels were below
prudent limits. The constraints on public borrowing suggest, nevertheless, that borrowing levels are
not currently too low in most countries. These constraints exist because government borrowing must
ultimately be funded by the taxpayer.
A number of Australian studies of early initiatives to promote private investment in infrastructure
concluded that, in most cases, the schemes being proposed were inferior to the standard model of
public procurement based on competitively tendered construction of publicly owned assets (Economic
Planning Advisory Commission (EPAC) 1995a,b; House of Representatives Standing Committee on
Communications Transport and Microeconomic Reform 1997; Harris 1996; Industry Commission
1996; Quiggin 1996).