P3s and Common Sense


 

Fancy words are back in fashion: modernisation, innovative development, public-private partnership. Public-private partnership, or gosudarstvenno-chastnoye partnerstvo, is particularly popular. Those three words - many can spell them but few don’t go to pieces over the meaning – are impressively long and conveniently ambiguous. They lead us to believe that someone else, not the taxpayers, will shell out billions on new roads, bridges or hospitals. Projects don’t look so lavish and openly careless about the public purse when they are labelled gosudarstvenno-chastnoye partnerstvo.

By 2020 the Russian government plans to spend $1 trillion dollars on infrastructure. The bulk of the finance will have to come from the private sector under the P3 arrangements. These are high hopes: in 2011 foreign investments in all sectors of the Russian economy did not exceed $30 billion. At last those who know what a public partnership is have come into their own. They, we should think, are the most wanted people in the land; they are loved and cherished.

Yet despite a great deal of talking, actual P3s are few. Many boast they do gosudarstvenno-chastnoye partnerstvos – long words are good – but look a bit closer and you’ll see that they do not. At times, it might seem that the whole business is a form of active idleness. Conferences, seminars and round tables create a lot of heat but hardly any light.

There is some confusion about the nature of P3s stemming, in part, from the name. Any collaboration between public and private sectors is sometimes called a public-private partnership. This is not correct. Business and governments have gone hand in hand since the beginning of time. Societies can do nothing without private companies. They, and not civil servants, build roads or equip hospitals.

The material point is how this collaboration is financed. The conventional way for governments to build new infrastructure is to hire contractors and pay them. Under a P3, private companies fund the construction costs, build the facility and then rent it back one way or another to the public sector.

Adam Smith believed that large, complex projects for the common good are too risky for the private sector, and it up to the government to undertake them. Public-private partnerships live to prove him wrong.

In the 1920s the Soviet Republic was in dire need of foreign money and technology. Western companies were given generous concessions, the precursors of today’s P3s, to build and operate what later became the frontiers of the USSR’s industry.

This was a difficult compromise between political agenda and economic reality. ‘Isn’t it risky to invite capitalists; doesn’t it mean to build capitalism?’ wrote Lenin in 1921, ‘Yes, this means capitalism, but it's not risky because political power remains in the hands of the workers and peasants, and the ownership does not return to landlords and capitalists. The concession is a kind of lease. The capitalist becomes a tenant of public property by a fixed-term contract, but doesn’t become the owner. Ownership rests with the state.’

Concessions had some success. There were more than 350 of them; most lasted for several years; one or two until the 1970s. The Soviet government soon realised that this was not the cheapest way of attracting finance or know-how. By the early 1930s all but a few foreign concessions were withdrawn or squeezed out through taxes, bureaucracy and restrictions on repatriation of capital. The USSR, however, never stopped using western specialists but hired them for cash.

Additional money brought by P3s in the economy is a delusion cherished by governments who claim immediate political dividends for new roads, schools or hospitals but put off the payment for tomorrow, possibly to another government.

In a P3 the private sector raises the money, at higher rates than available to governments, and then recoups what it spends by operating the asset over a long period and either charging users or renting it to the government. There is a great temptation, not least in Russia, to claim that little or no public money was used for the project. Yet the private sector has to repay the interest and passes on to the public that expenditure. In the end, the full cost is borne by the taxpayer.

Whether banks and investors are willing to lend to private companies for infrastructure projects in Russia is a big question. P3s, by nature, are non-recourse financing schemes where a loan is secured by and repaid from future cash flow generated by the facility when it is built. Even in the most favourable economic conditions this is perhaps the most difficult and costly way of finding finance which has almost dried up today.

Western High Speed Diameter, a toll motorway linking St. Petersburg with Scandinavia, has been presented as a flagship of public-private partnership in Russia. The project’s cost of $7.6 billion, or $155 million per one kilometre, was supposed to be co-financed by private investors. So far, the money comes from the taxpayers’ pocket, and any private sector investment, should it materialise, is guaranteed by the treasury. Somehow the very essence of a P3, the transfer of risk to the private sector, has disappeared.

On the other hand, the traditional method of financing, out of current revenues or the sale of bonds, still remains feasible. It is baffling why Russia, having a modest national debt of 9.5% of GDP and an impressive $500 billion in foreign reserves, is so eager to enter the murky, dense and costly world of P3.

Perhaps the idea behind P3s is the decentralisation of the Russian economy. Though the law ‘On Concessions’ is a federal one, actual deals come under the scope of regional legislation. Local communities should realise that their prosperity lies in their own hands. In practice, most regions live on transfers from the federal budget. As economic entities they are not self-sufficient and need backing from the centre.

Even relatively well-off regions risk going beyond their means. In Saint Petersburg, where the regional economy is second only to Moscow, the costs of Western High Speed Diameter amount to half of the city’s revenues. Despite being supposedly local, most projects are negotiated at federal level.

If the idea of P3s was to scrap corruption and incompetence, this was the wrong instrument to choose. In their present state, shielded from society by a plethora of confidential agreements and misleading claims of private investors’ generosity, P3s risk becoming just another rhetorical exercise covering good old vices which they are meant to combat.

picture: Igor Zakowski - Fotolia.com

 

 

Public-Private Partnerships: Will They Work for Russia?
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