Government and Institutions

PPPs may offer poor value for money, argues study


Government and Institutions

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Monetary Policy

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Projects have been plagued by political interference and high transaction costs
A new study* from the Institute of Economic Affairs suggests that public-private partnerships (PPPs) have often failed to deliver good value for money for the taxpayer. While the New Labour government has favoured PPPs as a method of providing investment in “public services”, these arrangements have been plagued by political interference, contractual difficulties and the exercise of special interests.

Politicians and civil servants have been required to exercise business judgements about the governance of PPP projects which they are not qualified to make. The absence of proper market processes, including free competition, has meant that significant efficiency gains have generally not been forthcoming.

Indeed, PPPs in the NHS appear to have been particularly unsuccessful. The study chronicles a litany of PPP failures and a large future financial burden. Worryingly, the additional costs involved may mean that fewer resources are available for patient care.

Railway PPPs have also been disappointing in terms of cost and efficiency. They have involved complex contractual arrangements and regulatory mechanisms in order to measure performance and enforce safety standards, leading to very high transaction costs. Moreover, it has proved virtually impossible to transfer risk to the private sector since basic infrastructure, at least in the eyes of politicians, cannot be left to the ultimate market discipline of bankruptcy.

Despite the weaknesses of PPPs the authors do point out that traditional public-sector procurement is also flawed. It has been plagued by cost overruns, political meddling and poor incentive structures. And because taxpayers have borne the risks, it has proved difficult to compare traditional procurement with PPPs in terms of value for money.

Full-blooded privatisation may be a better option than either when it comes to infrastructure enhancement and service provision. If transaction costs are cut, the contracting process depoliticised and responsiveness to consumers improved, privatisation can offer better-quality services at the same time as reducing the burden on taxpayers.

*Public-Private Partnerships, edited by David Parker, Economic Affairs , Volume 29, Number 1, £7.50.