UK Parliament questions ‘value for money’ of PPPs in highly critical report
The committee overseeing the UK government’s expenditure has published a searing report on Private Finance Initiatives (the UK version of Public Private Partnerships - PPPs). The Public Accounts Committee raises serious concerns about the “risks to value for money for the taxpayer” and identifies shortcomings in the assessment of their benefits. The report states that “it is unacceptable that after 25 years the Treasury still has no data on benefits to show the PPP model provides value for money”. The UK Treasury, meanwhile, continues to insist that it does.
Apart from concerns about transparency, the report underlines the following shortcomings with the PPP model - many of which Eurodad have repeatedly highlighted:
- The specific costs associated with PPPs are a concern, including the “rigidity and inflexibility of the contracts and their associated long term costs” and higher borrowing costs. Indeed, according to the report “the cost of private sector borrowing can be as much as 2% to 3.75% more expensive than the cost of government borrowing”. In the absence of proper cost-benefit assessments of ongoing PPPs by the Treasury, the committee therefore concludes: “if the public sector can borrow more cheaply as well as manage the risk of project overruns and delays more effectively than before, then the future scope of PF2 [the second phase of Private Finance Initiatives] investment appears limited”. This is a serious concern and the reason why Eurodad and others have called on decision makers to stop hiding the true costs of PPPs, and to end the aggressive promotion and incentivising of PPPs for social and economic infrastructure financing.
- Some private investors have made large returns from PPP deals, suggesting that departments are overpaying for transferring the risks of projects to the private sector – which is one of the Treasury’s stated benefits of PPPs. In fact, PPPs are often expensive and highly risky and are therefore a threat to public finance – see the PPP Global Campaign Manifesto launched by Eurodad and partners last year. The Public Accounts Committee recommends that the Treasury and Infrastructure and Projects Authority (IPA) set out more clearly the nature and level of risk.
- The report stresses the Treasury’s “obvious desire to keep PPP projects excluded from Government debt statistics”. Indeed, “under national accounting rules, most PFI debt is recorded off balance sheet and excluded from public debt calculations, which is advantageous for the Treasury”. As Eurodad has also noted, current accounting rules and practices allowing governments to keep PPPs off balance sheet create an incentive for PPPs compared to traditional public procurement alternatives. That’s why Eurodad has called for high transparency standards, particularly with regard to accounting of public funds.
- Last but not least, the report unveils that “offshore infrastructure funds own around half of the equity in PPP Projects, with the 5 largest of these offshore funds paying less than 1% in tax on their PPP projects”. The committee had already drawn the Treasury’s attention in 2011 and 2012 to the potential for tax avoidance through the sale of PPP equity to offshore investment fund on the secondary markets.
The Public Accounts committee recommends that the Treasury and IPA should, by April 2019, publish the results of their work in collecting data on PPP projects. An in-depth analysis of the suggested benefits of PPP projects is also requested by December 2018. As transparency is a key issue when it comes to PPPs, CSOs look forward to the publication of these analyses. Transparency and democratic accountability are at the heart of the debate, and the public deserves full disclosure of contracts and performance reports of all social and economic infrastructure projects.
Through reports like this, the UK parliament has repeatedly and publicly recognised the financial and other significant risks that PPPs entail on its own shores. Yet the UK still promotes PPPs intensively through its development cooperation, including as one of the biggest shareholders of the World Bank. Governments from Europe and other OECD countries bear particular responsibility for ensuring that they do not promote development policies and models that have failed or, at best, remain unproven in their home countries. As the evidence of the problems associated with PPPs piles up, it is high time to take action. Public services have to be financed in a way that is responsible, transparent, environmentally and fiscally sustainable, and in line with their human rights obligations.