In times of crisis - Poland's take on the Emperor's New Clothes

Europolitics yesterday reported that the Polish government is pushing for European legislation on public private partnerships (PPPs) [1] that would allegedly make this mode of financing an solution for public investments in the face of budget deficits and debt.

The solution, according to Poland lies in not including the (inevitable) public costs of a project in the public finance books when a contract with a private partner is being signed. Eurostat - the EU's statistical office - already allows many PPP investments to be left out of public accounts, provided that certain kinds of risks are transferred to the private sector, but classifies public costs as deficit and debt. This, so the Polish believe, leads to "the principle of PPP [losing] its appeal".

To be more clear, what Poland proposes is basically to completely ignore the future costs of a public investment, although these are already agreed, signed and sealed in the PPP contract. Unfortunately that is no solution at all – except in the dreams of public administrations. (Building public infrastructure and hiding the debts it runs up? Fantastic!)

PPP is already now a way to keep most of the debt off the public balance books. If Eurostat followed Poland’s suggestion, this would become an even more encompassing habit with profound effects. Public expenditure and public debt would be much less foreseeable. The impact of the postponed debt is then felt later by administrations and consequently by tax payers. That this is no theoretical threat is proven by the serious repercussions of invisible debts run up through PPP projects in European economies like Hungary and Portugal, which are both reviewing whether they should use PPPs at all any more.

After two decades of PPP bingeing in the UK (one of the “PPP pioneers”) recent studies evaluating the British public private partnerships have led to a number of very sobering conclusions.

I will only include a few quotes here that point out the enormous risk that PPPs (and the British variant, the Private Finance Initiative, PFI) pose to public finances. As you can see, these conclusions all go in the opposite direction of Poland's proposal.

• PFI means getting something now and paying later. Any Whitehall department could be excused for becoming addicted to that.
• We can’t carry on as we are, expecting the next generation of taxpayers to pick up the tab.
• PFI should be brought on balance sheet. The Treasury should remove any perverse incentives unrelated to value for money by ensuring that PFI is not used to circumvent departmental budget limits.

Andrew Tyrie, Chairman of the Treasury Select Committee in the UK parliament presenting a new report assessing PFIs in Britain, August 19, 2011.

Source: www.parliament.uk

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• it is far from clear that it has provided value for money. At present, PFI looks like a better deal for the private sector than for the taxpayer.
• the use of this form of financing has been based on inadequate comparisons with conventional procurement
• We have seen information which strongly suggests that investors are making excessive profits from selling on shares in PFI projects. However, the Government currently lacks sufficient information on the returns made by investors, who have been able to hide behind commercial confidentiality.

Rt Hon Margaret Hodge, Chair of the Committee of Public Accounts, speaking on the publication of the report Lessons from PFI and other projects on September 1, 2011.

Source: www.parliament.uk

To read more on experiences from central and eastern Europe, read our 2008 study Nevermind the balance sheet - the dangers posed by public-private partnerships in central and eastern Europe

1. An arrangement whereby a public project or service is partially financed or run by a private company - http://oxforddictionaries.com/definition/PPP

PPPs have especially in the UK, but increasingly also elsewhere, become a popular way to partly avoid the financial burden for example of public infrastructure investments on administrative budgets. The financial burden certainly isn't being avoided at all, but merely postponed to the future by allowing the private partner to charge either the users or the state (or often both) for the public service the PPP project provides.