Editing Public–private partnership (section)

== P3 justifications ==
Using PPPs have been justified in various ways over time.<ref name=":1" /><ref>{{Cite web |url=http://www.unesco-mars.com/pdf_document/Peccia_et_al._Public_private_partnership_VIII_1_2017_1.pdf |title=Archived copy |access-date=14 November 2018 |archive-date=15 August 2018 |archive-url=https://web.archive.org/web/20180815200158/http://unesco-mars.com/pdf_document/Peccia_et_al._Public_private_partnership_VIII_1_2017_1.pdf |url-status=dead }}</ref> Advocates generally argue that PPPs enable the public sector to harness the expertise and efficiencies that the private sector can bring to the delivery of certain facilities and services traditionally procured and delivered by the public sector.<ref>{{cite journal|last1=Caldwell|first1=Nigel D.|last2=Roehrich|first2=Jens K.|last3=George|first3=Gerard|date=September 2017|title=Social Value Creation and Relational Coordination in Public-Private Collaborations|journal=Journal of Management Studies|volume=54|issue=6|pages=906–928|doi=10.1111/joms.12268|doi-access=free}}</ref> On the other hand, critics suggest that PPPs are part of an ideological program that seeks to privatize public services for the profits of private entities.<ref name=":0" />

=== Off-balance-sheet accounting ===
PPPs are often structured so that borrowing for the project does not appear on the balance sheet of the public-sector body seeking to make a capital investment. Rather, the borrowing is incurred by the private-sector vehicle implementing the project, with or without an explicit backup guarantee of the loan by the public body. On PPP projects where the cost of using the service is intended to be borne exclusively by the end-user, or through a lease billed to the government every year during the operation phase of the project, the PPP is, from the public sector's perspective, an "[[Off-balance-sheet|off-balance sheet]]" method of financing the delivery of new or refurbished public-sector assets.

This justification was particularly important during the 1990s, but has been exposed as an accounting trick designed to make the government of the day appear more [[Fiscal responsibility|fiscally responsible]], while offloading the costs of their projects to service users or future governments. In Canada, many [[Auditor general|auditors general]] have condemned this practice, and forced governments to include PPP projects "on-balance sheet".<ref name=":0" />

On PPP projects where the public sector intends to compensate the private sector through availability payments once the facility is established or renewed, the financing is, from the public sector's perspective, "on-balance sheet". According to PPP advocates, the public sector will regularly benefit from significantly deferred cash flows. This viewpoint has been contested through research that shows that a majority of PPP projects ultimately cost significantly more than traditional public ones.<ref name="Siemiatycki 2012">{{cite journal|last1=Siemiatycki|first1=Matti|last2=Farooqi|first2=Naeem|date=July 2012|title=Value for Money and Risk in Public-Private Partnerships|journal=Journal of the American Planning Association|volume=78|issue=3|pages=286–299|doi=10.1080/01944363.2012.715525|s2cid=153603588}}</ref><ref name="UN OHCHR 2018">[https://www.ohchr.org/EN/NewsEvents/Pages/DisplayNews.aspx?NewsID=23740&LangID=E][[Extreme poverty]]<span> and human rights*, Report of the Special Rapporteur on extreme poverty and human rights, Philip Alston, submitted in accordance with Human Rights Council resolution 35/19</span>, NYC, 26 September 2019</ref>

In the European Union, the fact that PPP debt is not recorded as debt and remains largely "off-balance-sheet" has become a major concern. Indeed, keeping the PPP project and its contingent liabilities "off balance sheet" means that the true cost of the project is hidden.<ref>{{Cite book|last=Romero|first=Maria Jose|url=http://www.eurodad.org/files/pdf/1546450-what-lies-beneath-a-critical-assessment-of-ppps-and-their-impact-on-sustainable-development-1450105297.pdf|title=What lies beneath? A critical assessment of PPPs and their impact on sustainable development|publisher=Eurodad|year=2015|pages=5}}</ref> According to the [[International Monetary Fund]], economic ownership of the asset should determine whether to record PPP-related assets and liabilities in the government's or the private corporation's balance sheet is not straightforward.<ref>{{Cite book|title=GOVERNMENT FINANCE STATISTICS MANUAL 2014|publisher=IMF|year=2014|isbn=978-1-49834-376-3|location=Washington|pages=324–327}}</ref>

===Project costs===
[[File:Abbotsford Regional Hospital & Cancer Centre.jpg|thumb|A discredited 2001 report by [[PricewaterhouseCoopers]] predicted that building the [[Abbotsford Regional Hospital and Cancer Centre|Abbotsford Regional Hospital & Cancer Centre]] (pictured) through a PPP would lead to cost savings of 1% at best. This option was selected, and then the projected construction costs increased by 68% over the course of PPP contract negotiations that lasted two years.<ref name=":0" />]]
The effectiveness of PPPs as cost-saving venture has been refuted by numerous studies.<ref name=":3" /> Research has showed that on average, governments pay more for PPPs projects than for traditional publicly financed projects.<ref name="Siemiatycki 2012" /><ref name="UN OHCHR 2018" /> The higher cost of P3s is attributed to these systemic factors:
*'''The private sector's higher cost of capital:''' governments can typically borrow capital at an interest rate lower than any private company ever could. This is because governments have the power of [[tax]]ation, which guarantees that they will be able to repay their debts. Since lending to governments almost always come at a lower risk than lending to private entities, governments get better credit and cheaper financing costs for building large infrastructure projects than private finance.<ref>Mols, F. (2010). Harnessing market competition in PPP procurement: The importance of periodically taking a strategic view. Australian Journal of Public Administration, 69(2), 229-244</ref><ref>Germà Bel and Xavier Fageda, "What have we learned from the last three decades of empirical studies on factors driving local privatization? ", Local Government Studies, vol. 43, No. 4 (2017), pp. 503–511</ref><ref>Languille, "Public-private partnerships in education and health in the global South", p. 156</ref>
*'''Transaction costs''': P3 contracts are much more complex and extensive than contracts made in traditional publicly financed projects. The negotiation of these contracts require the presence of lawyers on all sides of the table and can take months or even years to finalize.<ref>European Court of Auditors, Public-Private Partnerships in the EU, p. 9</ref> Barrie Mckenna reports that "transaction costs for lawyers and consultants [in P3s] add about 3 percent to the final bill."<ref>{{Cite news|last=McKenna|first=Barrie|date=October 14, 2012|title=The hidden price of public-private partnerships|work=[[The Globe and Mail]]|url=https://www.theglobeandmail.com/report-on-business/economy/the-hidden-price-of-public-private-partnerships/article4611798/|access-date=2020-05-18}}</ref>
*'''Operating profits''':  Private companies that engage in P3s expect a return on investment after the completion of the project. By financing PPPs, they partner engages in low-risk speculation. Over the course of the contract, the private partner can charge the end-users and/or the government for more money than the cost of the initial investment.<ref name=":0" />{{rp|chapter 4}}

Sometimes, private partners manage to overcome these costs and provide a project cheaper for taxpayers. This can be done by cutting corners, designing the project so as to be more profitable in the operational phase, charging user fees, and/or monetizing aspects of the projects not covered by the contract. For P3 schools in [[Nova Scotia]], this latter aspect has included restricting the use of schools' fields and interior walls, and charging after-hours facility access to community groups at 10 times the rate of non-P3 schools.<ref name=":0" />{{rp|chapter 4}}

In Ontario, a 2012 review of 28 projects showed that the costs were on average 16% lower for traditional publicly procured projects than for PPPs.<ref name="Siemiatycki 2012" /> A 2014 report by the [[Auditor General of Ontario]] said that the province overpaid by $8 billion through PPPs.<ref name="CBC_">{{Cite web|date=December 10, 2014|title=Ontario AG reveals Public-Private Partnerships aren't a savings bonanza after all|url=https://www.cbc.ca/news/business/ontario-ag-reveals-public-private-partnerships-aren-t-a-savings-bonanza-after-all-1.2867645|access-date=August 10, 2020|work=CBC News}}</ref>

===Value for money===
[[File:The Deputy Chairman, Planning Commission, Shri Montek Singh Ahluwalia delivering the Keynote Address at the inauguration of the conference on Public Private Partnership in transmission of electricity, in New Delhi.jpg|thumb|The Deputy Chairman, Planning Commission, Shri Montek Singh Ahluwalia delivering the Keynote Address at the inauguration of the conference on Public Private Partnership in transmission of electricity, in New Delhi. (2010)]]
In response to these negative findings about the costs and quality of P3 projects, proponents developed formal procedures for the assessment of PPPs which focused heavily on [[value for money]]. Heather Whiteside defines P3 "Value for money" as:<blockquote>
Not to be confused with lower overall project costs, value for money is a concept used to evaluate P3 private-partner bids against a hypothetical public sector comparator designed to approximate the costs of a fully public option (in terms of design, construction, financing, and operations). P3 value for money calculations consider a range of costs, the exact nature of which has changed over time and varies by jurisdiction. One thing that does remain consistent, however, is the favoring of "risk transfer" to the private partner, to the detriment of the public sector comparator.<ref name=":0" />{{rp|chapter 1}}</blockquote>Value for money assessment procedures were incorporated into the [[Private finance initiative|PFI]] and its [[Public–private partnerships in Australia|Australian]] and [[Public–private partnership in Canada|Canadian]] counterparts beginning in the late 1990s and early 2000s. A 2012 study showed that value-for-money frameworks were still inadequate as an effective method of evaluating PPP proposals.<ref name="Siemiatycki 2012" /> The problem is that it is unclear what the catchy term "value-for-money" means in the technical details relating to their practical implementation. A Scottish auditor once qualified this use of the term as "technocratic mumbo-jumbo".<ref name=":0" />{{rp|chapter 4}}

Project promoters often contract a [[PPP unit]] or one of the [[Big Four accounting firms]] to conduct the value for money assessments.  Because these firms also offer PPP consultancy services, they have a vested interest in recommending the PPP option over the traditional public procurement method.<ref name=":0" /><ref name=":04" /> The lack of transparency surrounding individual PPP projects makes it difficult to draft independent value-for-money assessments.<ref>{{cite web|date=23 May 2012|title=Comment: PFI is dead, long live PFI|url=http://www.politics.co.uk/comment-analysis/2012/05/23/comment-pfi-is-dead-long-live-pfi|access-date=30 September 2012|publisher=Politics.co.uk}}</ref>

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.<ref>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</ref> In 2009, the [[New Zealand Treasury]], in response to inquiries by the new [[New Zealand National Party|National Party]] government, released a report on PPP schemes that concluded that "there is little reliable empirical evidence about the costs and benefits of PPPs" and that there "are other ways of obtaining private sector finance", as well as that "the advantages of PPPs must be weighed against the contractual complexities and rigidities they entail".<ref name="MISGUIDED">{{Cite news|date=1 June 2009|title=Brian Rudman: Promised electric trains derailed by misguided enthusiasm|work=[[The New Zealand Herald]]|url=http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10575753|access-date=21 February 2010}}</ref>

In the United Kingdom, many [[private finance initiative]] programs ran dramatically over budget and have not provided value for money for the taxpayer, with some projects costing more to cancel than to complete. An in-depth study conducted by the National Audit Office of the United Kingdom concluded that the private finance initiative model had proved to be more expensive and less efficient in supporting hospitals, schools, and other public infrastructure than public financing.<ref>United Kingdom, National Audit Office, PF1 and PF2, a report by the Comptroller and
Auditor General (London, 2018)</ref> A [[Treasury Select Committee|treasury select committee]] stated that 'PFI was no more efficient than other forms of borrowing and it was "illusory" that it shielded the taxpayer from risk'.<ref name="BBCnews2011">{{Citation|last=Tyrie|first=Andrew|title=PFI poor value for money, says MPs|date=19 August 2011|url=https://www.bbc.co.uk/news/uk-politics-14574059|newspaper=BBC News|access-date=<!----- 25th July 2012 ----->}}</ref>

===Transfer of risk===

One of the main rationales for P3s is that they provide for a transfer of [[Risk (finance)|risk]]: the Private partner assumes the risks in case of cost overruns or project failures. Methods for assessing value-for-money rely heavily on risk transfers to show the superiority of P3s. However, P3s do not inherently reduce risk, they simply reassign who is responsible, and the Private sector assumes that risk at a cost for the taxpayer. If the value of the risk transfer is [[Economic appraisal|appraised]] too high, then the government is overpaying for P3 projects.<ref name=":0" />{{rp|chapter 4}}

Incidentally, a 2018 [[UK Parliament]] report<ref>{{Cite web|title=Treasury must set out clear position on PFI - News from Parliament|url=https://www.parliament.uk/business/committees/committees-a-z/commons-select/public-accounts-committee/news-parliament-2017/private-finance-initiatives-report-published-17-19/|access-date=2018-06-27|website=UK Parliament|language=en}}</ref> underlines that 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, one of the Treasury's stated benefits of PPP.
[[File:Npl new building module1.JPG|thumb|The maintenance of the new National Physical Laboratory building was transferred back to the [[Department of Trade and Industry (United Kingdom)|British Department of Trade and Industry]] in 2004 after the private sector partners involved in the PFI contract made losses of over £100m.<ref name=":nlp">{{cite web|year=2013|title=The Termination of the PFI Contract for the National Physical Laboratory &#124;National Audit Office|url=https://www.nao.org.uk/report/the-termination-of-the-pfi-contract-for-the-national-physical-laboratory/|access-date=23 December 2013|work=nao.org.uk|archive-date=24 December 2013|archive-url=https://web.archive.org/web/20131224111648/https://www.nao.org.uk/report/the-termination-of-the-pfi-contract-for-the-national-physical-laboratory/|url-status=live}}</ref>]]
Supporters of P3s claim that risk is successfully transferred from public to private sectors as a result of P3, and that the private sector is better at [[risk management]]. As an example of successful risk transfer, they cite the case of the [[National Physical Laboratory, UK|National Physical Laboratory]]. This deal ultimately caused the collapse of the building contractor Laser (a [[joint venture]] between [[Serco]] and [[John Laing plc|John Laing]]) when the cost of the complex scientific laboratory, which was ultimately built, was very much larger than estimated.<ref name="tcnp">{{Citation| title = The Termination of the PFI Contract for the National Physical Laboratory| year = 2006| publisher = [[National Audit Office (United Kingdom)|National Audit Office]]| url = http://www.official-documents.co.uk/document/hc0506/hc10/1044/1044.pdf| archive-url = https://wayback.archive-it.org/all/20071129091206/http://www.official-documents.co.uk/document/hc0506/hc10/1044/1044.pdf| url-status = dead| archive-date = 2007-11-29}}</ref>

On the other hand, Allyson Pollock argues that in many [[Private finance initiative|PFI]] projects risks are not in fact transferred to the private sector<ref name="Pollock 2005 3">{{Citation
  | last = Pollock
  | first = Allyson
  | title = NHS Plc: The Privatisation of Our Health Care
  | publisher = [[Verso]]
  | year = 2005
  | page = 3
  | isbn = 1-84467-539-4}}</ref> and, based on the research findings of Pollock and others, George Monbiot argues<ref name="bwry">
{{Citation
  | last1 = Monbiot | first1 = George
  | title = The Biggest Weirdest Rip-Off Yet
  | newspaper = The Guardian
  | date =7 April 2009
  | url = https://www.theguardian.com/commentisfree/2009/apr/07/olympics-2012-m25-pfi
  | location=London}}
</ref> that the calculation of risk in PFI projects is highly subjective, and is skewed to favor the private sector:

{{blockquote|When private companies take on a PFI project, they are deemed to acquire risks the state would otherwise have carried. These risks carry a price, which proves to be remarkably responsive to the outcome you want. A paper in the [[British Medical Journal]] shows that before risk was costed, the hospital schemes it studied would have been built much more cheaply with public funds. After the risk was costed, they all tipped the other way; in several cases by less than 0.1%.<ref>
{{Citation
  | last1 = Pollock
  | first1 = Allyson M
  | last2 =  Shaoul 
  | first2 =Jean
  | last3= Vickers
  | first3=Neil
  | title = Private finance and "value for money" in NHS hospitals: a policy in search of a rationale?
  | journal = [[British Medical Journal]]
  | volume = 342
  | pages = 1205–1209
  | date = 18 May 2002
  | issue = 7347
 | doi = 10.1136/bmj.324.7347.1205
  | postscript = .| pmid = 12016191
  | pmc = 1123165
  }}</ref>}}

Following an incident in the [[Royal Infirmary of Edinburgh]] where surgeons were forced to continue a heart operation in the dark following a power cut caused by PFI operating company Consort, Dave Watson from Unison criticized the way the PFI contract operates:

{{blockquote|It's a costly and inefficient way of delivering services. It's meant to mean a transfer of risk, but when things go wrong the risk stays with the public sector and, at the end of the day, the public because the companies expect to get paid. The health board should now be seeking an exit from this failed arrangement with Consort and at the very least be looking to bring facilities management back in-house.<ref>{{Citation
  | last = Carrell
  | first = Severin
  | title = Power cut leaves surgeons operating by torchlight at PFI hospital
  | journal = [[The Guardian]]
  | date = 21 April 2012}}</ref>}}

Furthermore, assessments ignore the practices of risk transfers to contractors under traditional procurement methods. As for the idea that the private sector is inherently better at managing risk, there has been no comprehensive study comparing risk management by the public sector and by P3s. Auditor Generals of [[Auditor General of Quebec|Quebec]], [[Auditor General of Ontario|Ontario]] and [[Auditor General of New Brunswick|New Brunswick]] have publicly questioned P3 rationales based on a transfer of risk, the latter stating he was "unable to develop any substantive evidence supporting risk transfer decisions".<ref name=":0" />{{rp|chapter 4}} Furthermore, many PPP concessions proved to be unstable and required to be renegotiated to favor the contractor.<ref>{{Cite journal|last1=Cruz|first1=Carlos Oliveira|last2=Marques|first2=Rui Cunha|date=2013|title=Endogenous Determinants for Renegotiating Concessions: Evidence from Local Infrastructure|journal=Local Government Studies|language=en|volume=39|issue=3|pages=352–374|doi=10.1080/03003930.2013.783476|s2cid=153619884|issn=0300-3930}}</ref>