Thoughts on Public Private Partnerships

Photo credit: The Guardian (UK)

In 2008, the London Underground absorbed the two Metronet infracos (private infrastructure companies) which had been responsible for running the sub-surface division of the metro system. In 2010, Mayor of London Boris Johnson condemned the Public Private Partnership contracts (PPPs) and subsequently, the government agency Transport for London (TfL) took control of Tube Lines, the infraco which is responsible for the Jubilee, Northern, and Piccadilly lines.

By all measures, the PPP scheme was a catastrophe for the already cash-strapped government, and an expensive one to boot. The private corporations which had taken ownership and responsibility for the operations and upgrade of existing Tube lines cost taxpayers more money, provided worsened service with more disruptions, had a record of safety incidents, and failed to meet project deadlines and requirements.

PPPs were promised to do the exact opposite things for London's network. What went wrong? Read on to find out.

The theory

PPPs originated as a new business model that would get private corporations to provide infrastructure to the public at essentially no cost, by using governmental powers to acquire land and property as necessary, then granting the private corporations the rights to revenue from the finished product or service. (This rarely worked out in practice.) In modern times, they are a way of offloading the work from public agencies to private companies.

The free market can often operate with lower costs and more efficiency, have fewer procedural roadblocks, have more flexible management and labor, have access to additional sources of labor, and/or have more specialized experience performing the required tasks.

Private partners can be enlisted to design, build, finance, operate, lease, or any combination of these things, depending on the need. Private partners can either be subsidized by the government for a limited period or be required to secure their own private financing.

The controversy

Source: In The Public Interest

In reality, the "free market" advantage of PPPs generally evaporates once the winning bidder is selected. Much of what the government does is by nature a natural monopoly—that is, they provide services that have a tremendous economy of scale and thus make competition impractical. (Can you imagine GM deciding to build a second subway system in New York?) So, in essence, PPPs often grant monopolies on public goods to private corporations.

Of course, monopolies are problematic because, in the absence of competition or alternatives, there is little motivation to improve the quality or performance of a product—even when the corporation begins with "good" intentions. When the government operates a monopoly (such as a metro system), they are at least theoretically accountable to taxpayers voting them out. (In practice, it's a little messier!)

PPPs are problematic in a myriad other ways:

• Probably the largest problem with the current way PPPs are handled by government is the lack of oversight in the contracting process. After all, the contract and its outlined obligations are the only ways the public can ensure that the private corporation is held to do a "good" or, at least, adequate job. Serious contractual problems seem to be the norm, with nearly 50% ending up in renegotiation—which means more legal costs for the citizenry to pay. 
• Theoretically, the threat of the contract being transferred at the end of the term would motivate the corporation to do a better job. In reality, the contracts tend to be extremely long and the cost of entry for a replacement contractor high. 
• Taxpayers bear more of the risk. If the PPP fails, the government has to step in and assume the burden—because the alternative is to let the infrastructure itself collapse. These costs are high. 
• Governments may save on the short-term, but long-term prospects are usually worse. And, one of the largest problems facing governments is long-term insolvency. For instance, Chicago has already spent most of the money they saved by leasing the parking meters for 99 years, and no longer has the stream of revenue, severely undervaluing its long-term assets; worse, Chicago has less jurisdiction over the use of its own street space as it is contractually challenging, to say the least, to alter the number of parking spaces (this is one of the major issues in planning Chicago's Bus Rapid Transit and protected bike lane network.) 
• There are ethical and legal concerns about the use of eminent domain and transferring seized property to a private entity. Sometimes these battles can end up in massive inefficiencies in legal costs and delays, as in the Columbia University Manhattanville case. 
• The formation of a PPP can be extremely expensive for the government. 
• Although PPPs often use taxpayer funds, they are generally not subject to the same transparency laws that the public sector is. 

Private business is an important partner

Source: urbanrail

There are PPPs that seem to be working well, and bike sharing programs are a promising frontier for the model. Private business is a critical partner to the government, and private corporations can indeed be far more efficient, specialized, and flexible than their government equivalents—in the right conditions. But we are at serious risk of suffering disaster through short-sighted planning. We have to ensure:

• That private partners are held accountable, either through legislation requiring transparency, or majority share ownership by the government (like MTR); 
• That we perform a thorough Cost-Benefit Analysis of PPP structures to prove they will actually save government money in the long-term, either through direct or indirect (i.e., economic development from an otherwise impossible-to-fund project), or significantly improved delivery of service for taxpayers;
• That the contracts themselves are required to go through much more oversight, analysis, and public input.