I see the folks now working at my old shop, the TD Bank economics department, have put out a report suggesting that the cost overruns and delays that seem to affect all major infrastructure investments in Canada could be avoided if private expertise and money were brought in: public-private partnerships, or P3, as it's known nowadays.
Er, no. Back when I was living in the UK, P3 (or PPP as it was known there) was ubiquitous -- and so were horror stories of how often it failed. I blogged about it a lot at the time: here are a few quotes from some of those posts.
Don't you just hate it when Ken Livingstone's right? Hizzoner was vehemently opposed to the so-called "part privatisation" of the London Underground all along. That may just have reflected his intellectual biases, but there were a lot of people who shared his sense that allowing private sector firms to manage the maintenance and refurbishment of the Tube might be either expensive or a failure.
It's turning out to be both. Today's Guardian reports that the cost overruns on the two contracts awarded to the so-called "Metronet" consortium could reach £2 billion. Metronet's banks are threatening to pull the plug, and the engineering companies that own the consortium are unwilling to put in more money, so it looks like Transport for London (TfL, aka the taxpayer) will either have to pony up more cash, or scale back the work.
There must be something I don't understand here. Everyone knows that the Treasury (G. Brown, prop.) forced public sector agencies like TfL to use "public-private partnerships" primarily to keep debt off the Government's balance sheet. But there was supposed to be another element: private sector management was supposed to keep costs down and deliver projects on time, with the private investors taking on the financial risks if they failed to do so. What's happened at Metronet is that the project is being delivered late or not at all, at hugely inflated costs, and the taxpayer is being asked to shoulder the burden of what looks like an abject failure. (Money down the Tubes, 29 June 2007).
Not long after that, the inevitable happened:
Metronet, the consortium holding a contract to maintain about two-thirds of the London Underground, filed for bankruptcy this week after an arbitrator refused to award it extra funds for carrying out the work. Metronet's bankers had previously said they would not extend its line of credit unless it could squeeze more money out of Transport for London (aka TfL, aka the taxpayer).
I last wrote about this as recently as June 29. In brief, Metronet has spent way over budget while massively underperforming its obligations under the contract. In fact it's done even worse than that, since it has admitted that it was responsible for the recent derailment of a Central Line train, which hit a tarpaulin that Metronet staff had left in a dangerous spot.
Media reactions to Metronet's collapse are interesting. In an editorial, the Times admits that Metronet has only itself to blame for its failures. However, it argues that this does not invalidate the principle of "public private partnerships" (PPPs), and it comes close to throwing responsibility back onto TfL. According to the Times, the test will be whether TfL can readily find someone else to take on the work. I'm not sure if this is a principle that can be applied very widely: "I'm sorry that your meal cost more than it said on the menu and that you were sick for two days afterwards. No, you can't have your money back, and we're not paying your medical bills, but there's another restaurant down the street that you can try when your appetite returns".
Jeremy Warner in the Independent's business section has a more reasoned view. He admits that the Metronet fiasco has driven a coach and horses through two of the supposed benefits of the whole PPP approach to public works: that the private sector will do the work more efficiently/cheaply than the public sector, and that if it fails to do so, it will bear the cost. He observes that it seems that the City has, as usual, run rings around the public servants in putting the deal together.
To me, this last point -- that the private sector will try to bamboozle the public sector in these deals -- almost amounts to sufficient reason not to continue with the whole PPP approach. (I say "almost" because the Government has shown itself quite capable of playing fast and loose with contracts -- take a look at the experience of GNER with its contract to run the East Coast Main Line). There isn't much hope that the Government will abandon PPPs, but we should at least ask if there are any lessons that can be drawn from this episode.
One that occurs to me is that the Government should choose its partners carefully. Metronet isn't a real company -- it's a consortium put together by five engineering companies solely to bid on the Underground contracts. These shareholders all appear to have limited liability for Metronet's doings. Apparently the Government's negotiators either never heard of, or at any rate did not insist on, things like guarantees, deficiency agreements, covenants or even comfort letters that would have made the partners liable for Metronet's failings. In these circumstances, it was misleading for the Government ever to suggest that the private sector would be on the hook for any cost overruns. In fact, when you consider the huge sums that have already been paid to Metronet under the contract, it's likely that the losses incurred by the partners are quite limited -- and, of course, deductible from earnings elsewhere. (PPP RIP? Probably not, 18 July 2007)
It became clear some time later that all sorts of dubious practices had been widespread:
The private sector has done a pretty good job of trashing its own reputation since the UK Government started privatising the provision of all kinds of public services (the so-called Private Finance Initiative, or PFI). The mega-disasters are well known: the collapse of the Metronet consortium that was selected to run half of the London Underground (it ran out of money and credit only a couple of years into a thirty-year contract); the soaring cost of the privately-run railways, which absorb far more in subsidy than poor old British Rail ever did; the out-of-control BAA monopoly that has made London's airports musts to avoid; and so on.
It's pretty clear that public sector negotiators have been outsmarted by their private sector counterparts at every turn. Contracts have been let for the wrong term, risks and rewards are hopelessly skewed against the government, and there is an absence of real accountability.
Now it transpires that things may be even worse than this. Metronet or BAA are clear examples of failures of public-private finance to deliver what was promised at the agreed price. However, even in many cases where the partnership has "worked" in terms of delivering the project without any headline-grabbing screw-ups, it seems as if the public may still have got the short end of the stick. The Office of Fair Trading (OFT) has just accused 112 construction companies of irregularities relating to the bidding process for publicly-funded construction projects. The offences include "cover pricing" i.e. forming cartels with competitors to inflate prices in order to ensure they don't win contracts (no, I don't know why they would do this either -- if you don't want the job, don't bid), and faking invoices in order to compensate losing bidders. (PFI-ddle, 17 April 2008)
I assume the good folks at TD Economics are confident that Canadian bureaucrats negotiating P3 deals would avoid all of these pitfalls and protect the interests of taxpayers. I'm not sure I'd bet any of my own money on that, but given her recent praise of P3, it looks as though Premier Kathleen Wynne is going to do that for me.
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