More public rescues for more private finance failures.docx

More public rescues for more private finance failures.docx

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Morepublicrescuesformoreprivatefinancefailures

Morepublicrescuesformoreprivatefinancefailures

-acritiqueoftheECCommunicationonPPPs

DavidHalld.j.hall@gre.ac.uk

March2010

AreportcommissionedbytheEuropeanFederationofPublicServiceUnions（EPSU）www.epsu.org

PrefacebyEPSU2

1.Introduction4

2.AssessingPPPs4

2.1Unbalancedandweakarguments4

2.2PPPs:

consumingpublicfinance5

2.2.1TransportinUK6

2.2.2PPPsincentralandeasternEurope6

3.PoliticalandfinancialproblemswithPPPs7

4.StaterescuesforPPPs7

4.1EUandGovernmentsupport7

4.2InternationalinstitutionslobbyforPPPs8

4.3Publicsectorguarantees,subsidiesandloans9

Table1EU:

publicassistancetoPPPs9

4.3.2EIB:

publicinterestratesforprivatecompanies9

4.3.3Financialengineeringtochannelpublicmoneytoprivatecontractors9

4.4The‘Keyactions’oftheCommunication10

4.5IMFwarningsignored11

5.TheroleofPPPsintheeconomicstrategyofEurope202011

5.1Economicandfiscalstrategy11

5.2Privatesectorfailuresininfrastructureinvestment12

6.Annex:

‘Innovative’financinginstruments13

6.1ThecosttopublicauthoritiesinEuropeandtheUSA13

6.2Greekdebtswaps13

6.3FinancialhavocforEuropeanmunicipalities13

6.4USA:

publicauthorities,bribes,andinnovativefinancialinstruments14

7.Selectedbibliography15

8.Notes16

PrefacebyEPSU

TheEuropeanCommissionhasovermanyyearspromotedPublic-PrivatePartnerships.TheCommissionseestheseasanefficienttooltospendpublicfunding.WiththefinancialcrisisinfullswingfundingforPPPsdriedupin2008andearly2009.PPPsranintodifficulties.TosupportprivatebusinesstheEuropeanCommissionpublishedaCommunication“DevelopingPublicPrivatePartnerships”inNovember2009.Itisafirstclasspropagandapieceforprivatebusinessratherthanabalancedaccountofriskandadvantagesofpublicprivatepartnerships.

TherisksofPPPswerehighlightedwhenAquiris,asubsidiaryofFrenchmultinationalVeoliaWater,chargedwithtreatingwastewaterinBrussels,homeoftheEuropeanCommission,stoppeddoingso,8December2009.Untreatedwaterof1.1millioncitizenspollutedtheriverZenneduring10dayswhenthecompanywasforcedtostartupoperationsagain.ResearchofCorporateEuropeObservatoryrevealedhowthecompanywasseekingmoremoneyofpublicauthorities,couldnotfulfillitscontractandhadbasicallyliedaboutitstechnologyinitsresponsetothetender.ButmoreworryingisthatBrusselsisnowlumberedwiththecontract.Pullingoutwillbeextremelycostly.CEOconcludesitsresearch:

“Behindthesespectaculareventsisthestoryofhowaprivatecorporationusedpublicmoneytodevelopanewtechnologywhichwillbesoldelsewhereforthecompany'ssoleprofit（VeoliaWaterusedtheAquiriscaseextensivelyinitsmarketing,becauseasafeandmoreenvironmentally-friendlymethodtodisposeofwastewatersludgeismuchindemandatthemoment）.Unfortunatelythisprovedtobeariskierbetthanoriginallyenvisaged,andthetwo”partners”ofthecostliestwaterPublicPrivatePartnership（PPP）inBelgiumnowfacemountainsofsludgewaitingtobetreated,pilesofdebtandabrandnewplantwhichhasstillnotbeenshownasuptothejob.”

WhenwelearnedthattheforthcomingEU2020strategywouldagainseektopromotePPPsEPSUdecidedtoaskPublicServicesInternationalResearchUnittocommentontheEuropeanCommission´sproposalsintheearliermentionedCommunication.PSIRUhasresearchedandpublishedreportsonPPPsinEuropeandinternationallyoverthelastdecade,carriesoutinternationalstudiesliketheEU-funded€1.5millionWatertimeproject,andprovidesevidenceandadvicetopublicauthoritiesandelectedrepresentativesatalllevels.

ThisreportmakesclearthatPPPssuckuppublicfunding,increaseriskstopublicfinanceandingeneralareabadwaytospendtaxpayers’money.ItalsorevealstheextenttowhichDGInternalMarketispursuinganideologicalcoursetosuititscoreconstituency:

privatebusiness.AndnowBusinessEurope,theEuropeanorganizationforbigcorporations,wantsmorecorporatewelfare.Itpublisheditscallformorepublicmoneyforbigbusinesson15March2010inareportCombiningfiscalconsolidationwithsustainablegrowth:

AEuropeanactionplan.Itisafullscaleattackonpublicserviceworkers,onpublicpensionsandhealthcare.Butguesswhat–BusinessEuropearguesthatprivatebusinessshouldreceivefundingtorunyourhealthservice,childcare,drinkingwaterandallotherpublicservices.Andofcoursetreatyourwastewater:

oneoftheauthorsisakeyVeoliarepresentative.BusinessEuropedoesnotshyawaytopushitsagendaonyourMinistersforFinancewhichmet16March2010arguingthatiftheyarenotlistenedtoEuropewillgrindtoahalt.AndtodosoitpropagatesmythsonPPPs.ThisnewreportofPSIRUdebunksthesemyths.

OurconclusionisthattheEuropeanCommissiondoesnotpromotethepublicinterestwhencomingoutinforceinsupportofPPPs.ItshouldhaveafarmorecriticalandbalancedattitudeonhowprivatebusinessoperatesPPPs.ThisbalancecanpossiblyonlyberestoredifpublicprocurementandPPPsaremovedtotheEuropeanCommission´sDGwhichdealswithconsumerprotection.Afterall,withtheProcurementdirectivesinplace,itisamatterofprotectingtheinterestsofcitizensoverthoseofcapital.

Butyoumightdisagree.Youmighthavecommentsonthereport.Youmighthavedoneresearchthatcontradictsthefindings.Pleaseinformus.Butequally,ifyouknowofcasesthatconfirmwhatisarguedinthereportpleasedonothesitatetosendittous.Itwillassisttheworkersinpublicandprivatecompaniesandinstitutionsdeliveringpublicservicestocitizenseverydayinoftendifficultanddangerouscircumstances.Becauseintheendourmembersandyouastaxpayerhavetosharetheburdenoffaultypublic-privatepartnerships.

JanWillemGoudriaan

EPSUDeputyGeneralSecretary

epsu@epsu.org

1.Introduction

InNovember2009theECpublishedaCommunicationon‘DevelopingPublicPrivatePartnerships’.

ThepaperdoesnotofferabalancedassessmentofexperiencewithPPPs,ortrendsinPPPsinEurope.Inparticular,itdoesnotaddressthewaythatPPPsreducetheresourcesavailableforpublicservicesbyabsorbingahigherproportionofspending.ThemainpurposeofthepaperisratherareviewofvariouspolicyinstrumentsoftheEU,focussedonthesingleoverridingquestionofhowthesecanbeusedtosubsidiseandcreatemorePPPsthanwouldotherwisebethecase.

ThisreportreviewsandcriticisestheCommunicationinanumberofrespects:

-Itsinadequateanalysisofexistingexperience

-ItsunbalancedattempttomaximisetheuseofpublicfinanceandpublicinstitutionstosupportPPPs,includinginparticularitsuseof‘innovativefinancialinstruments’

-TheemptinessoftheroleofPPPsinthe2020economicstrategy

-Thewiderproblemsofpublicauthoritiesusing‘innovativefinancialinstruments’

ThiscritiquefollowsanumberofotherPSIRUreportsonPPPs,whicharelistedinthebibliographyattheendofthispaper.

2.AssessingPPPs

2.1Unbalancedandweakarguments

Thesectionon'thecaseforPPPs'istoosuperficialandone-sided.Asthetitlesuggests,itonlysetsoutargumentsinfavourofPPPs,itdoesnotofferabalancedassessment.ArecentPSIRUpapersetoutananalysisoftherisksandimpactofPPPs,includinganumberofexamples.ThepresentCommunicationdoesnotmentionanysuchcases,（although7yearsago,aCommissionbriefingonPPPsdidacknowledgetheserisks,andgaveexamples）.Theseproblemcaseshavecontinuedtoincrease.

∙ThepaperclaimsthatPPPsaremainlyon-timeandon-budget,butfailstoobservethatthisisbecausetheyarebasedonturnkeycontracts,whichrequiresuccessfulcompletionbeforepaymentsaremade-butatacostwhichis25%higherthannormalprocurement.

∙ItclaimsPPPsprovidebettervalueformoney,andquotestheresultsofaPPIAFstudyonwaterandenergywhichfoundevidenceofhigherefficiency-but（a）itfailstonotethatthePPIAFstudyfoundnoevidenceatallofincreasedinvestmentorlowerprices,sononeofthebenefitsofanyefficiencygainsgotothepublicsector,theyonlyincreaseprofits（b）thePPIAFstudyisonlyoneamongstmany,thegreatmajorityofwhichfindnosignificantdifferencesinefficiencybetweenpublicandprivatesectors.ThisisextremelydamagingforthecaseforPPPs:

astheIMFhasobserved,sincetheircostofcapitalisalwayshigher,theywouldhavetomakemajorefficiencygainsinoperationstoevenmatchthepublicsectoroption. 

∙Theclaimthatthey'spreadthecostoverthelifetimeofanasset'istrivial-thisistheeffectofanyborrowingbygovernments,notonlythroughPPPs.Theclaimaboutrisk-sharingalsoneedsmorehardevidenceratherthananassertion-themanycaseswhereserviceshavebeencutortaxesincreasedmustbeexaminedaspartofafullassessment.

∙ThepaperprovidesnoevidenceforitsclaimforinnovationbyPPPs,yetthereisfreshevidenceconfirmingthattheprivatesectorspendslittleornothingonR&Dincrucialsectorssuchaselectricity（seebelow）.The2020economicstrategypaperalsoacknowledgesthatR&DspendinginEuropeistoolowcomparedwithJapanandtheUSA“mainlyasaresultoflowerlevelsofprivateinvestment”

∙Thefinaltwopoints-thattheprivatesectorgetsacentralroleinplanninginfrastructure,andgainsexperiencethatisusefulforwinningprojectsoverseas-aretrue,butthesearebenefitstotheprivatesector,nottothepublicinterest.Thereisclearevidence,fore