PPP pushers: why can't the EBRD stop?

Public Private Partnerships – the off-balance-sheet instrument of choice for indebted governments – are still central to the European Bank for Reconstruction and Development's mantra. Why can't they stop foisting instruments thoroughly discredited in Western Europe on those in the East?

Fidanka Bacheva-McGrath
15 November 2010

The economic crisis has starkly exposed the perils of accumulating hidden debt commitments through public-private partnerships (PPPs) for infrastructure, with their enticing promises of ‘build now, pay later’. Yet the European Bank for Reconstruction and Development still insists on using public money to promote them in former Eastern Bloc countries that can ill afford making expensive stabs in the dark.

Years of economic ‘reforms’ followed by the economic crisis have taken a heavy toll on the people and economy of Hungary. Yet will Hungary, for the third year in a row, come out top in the transition rankings awarded by the European Bank for Reconstruction and Development (EBRD) when it publishes its transition report for 2010 on November 17? The answer is probably no, as in the last 12 months both the former and current Hungarian governments have announced that they will not undertake new public-private partnership investments (PPPs), and those PPPs that are being carried out are now under review.

The EBRD, the multi-lateral development bank set up in 1991 to support the transition to market economies of eastern Europe's former communist states and the largest financial investor in the region, likes PPPs and it supports their use via multi-million public loans in order to provide for eastern Europe and central Asia's infrastructure needs. These EBRD investments are funded by taxpayers from developed nations around the world – the US has the biggest shareholding, the UK joint second biggest and the EU member states collectively have a 62 percent stake in the bank.

In the EBRD's annual transition report, a marker on how well its 29 countries of operations are progressing towards becoming market economies, the countries are graded in 13 categories including large-scale privatisation, price liberalisation and various kinds of infrastructure development, and then given an overall rating. Yet the EBRD’s interpretation of a market economy practically insists on transition countries turning to PPPs or full privatisation in the road, rail and water/wastewater sectors if they want to score high marks – in effect they are being asked to go further than what has been done in many of the west's well-established market economies.

The last two decades’ experience with PPP projects – mostly for motorway projects – in central and eastern Europe has been distinctly patchy. The Byzantine complexity of PPP contracts, combined with the region’s high corruption levels and poor quality development planning, has meant that even when PPP projects have been started, very few have actually ended up as well-functioning projects. The most recent in a string of such cases was the Slovak government's ditching in September of the 9 billion euro PPP contract for the first phase of the D1 motorway, a PPP investment that both the EBRD and the European Investment Bank intended to back to the tune of at least half a billion euros. Having looked at the contract, however, the newly elected Slovak government deemed it to be over-priced and too much of a burden on the national budget.

The cost and implementation realities of PPP projects, especially in these budget-sensitive times, curiously tend to get overlooked in the near-evangelical promotional efforts still being undertaken by the EBRD and others. One of the main PPP alliances driving the model's acceptance across Europe goes by the name of 'Community Realization European Aid Masterplan', or 'C.R.E.A.M. Europe' as its website unabashedly proclaims. In his 'state of the union' address to the European Parliament in September, the European Commission President Jose Manuel Barroso talked tough on reigning in the cavalier excesses of Europe's financial sector and ensuring that the quality of EU spending becomes the “yardstick for us all”; Barroso's speech also name-checked PPPs and the intention to develop them further across Europe.

But with PPPs coming under increasing question in the EU's older member states, and with the mantra of “do more with less” accompanying every new round of state spending cuts, shouldn't fewer PPPs now be on the agenda in eastern Europe?

In the UK, certainly, a hangover is starting to set in after a two-decade binge on 920 PFI (the UK version of PPP) projects. A House of Lords report published in March called for the UK’s PFI liabilities to be published alongside the public sector net debt, and for the government to rethink the biased way it compares the value for money of PFI projects with publicly procured ones, in order to remove the existing bias that favours the use of PFIs. Long-held concerns also re-surfaced in August – even before UK Chancellor George Osborne's announcement on major spending cuts in October – that rigid, untouchable PFI contracts are presenting the National Health Service with limitations on its budget allocations.

While the new UK coalition government has not announced any wholesale jettisoning of PFIs, it has moved quickly to freeze the GBP 55 billion Building Schools for the Future PFI programme, with Education Secretary Michael Gove citing “massive overspends, tragic delays, botched construction projects and needless bureaucracy". Elsewhere in western Europe, Portugal has recently announced that all but three PPP projects will be shelved, and that the projects under implementation will be reviewed.

While the economic crisis, among other things, has forced a more level-headed assessment of PPPs in those European countries that had opted for this approach, a look at any EBRD strategy document reveals the bank’s unshaken belief in PPPs, and its investments demonstrate the same.

In 2009, while Paris was getting ready to remunicipalise its water supply after calculating that it could save EUR 30 million per year through public management of its water supply, the EBRD was busy investing EUR 70 million in increasing its stake in Veolia Voda and EUR 80 million in equity in the Spanish FCC-owned Aqualia so that they could further expand water sector PPPs and outright privatisations in the transition countries. Just this month the bank has revealed plans to invest up to EUR 100 million in the Luxembourg-based Meridiam Infrastructure Co-Investment Fund for transport PPPs in central and eastern Europe and Turkey, raising questions not only about the PPPs themselves but also about the development impacts of using a Luxembourg-based investment vehicle, one of whose major shareholders is registered in the US tax haven state of Delaware.

Beyond these examples, a recent EBRD-commissioned report aimed at re-examining the concept of transition and the bank's contribution to it was delivered by a group of authors headed by former Bank of England Monetary Policy Committee member Tim Besley. It contained the suggestion that “in order to achieve sustainable transition impact, there is a case for considering an extension of EBRD lending into areas such as education, healthcare, (social) housing, environment....[partly] through greater lending to public-private partnerships”. It is still not clear whether the EBRD will take up this suggestion, but the fact that it is even being proposed in the face of the domino of PPP project failures and over-commitments across Europe is more cause for alarm.

The EBRD would no doubt respond that PPPs should be used only in appropriate circumstances and using best practice. Yet recent history shows that no country in Europe that uses PPPs widely has shown any ability to judge when use of this investment model is appropriate, what constitutes good value for money, and how many PPPs can be carried out before they start to heavily impact on government budgets and overall public debt commitments.

Given this stark reality, the EBRD’s ongoing promotion of PPPs in public infrastructure in the transition countries not only goes beyond what is required for a market economy, but also fails to learn one of the key lessons of the crisis: that storing up vast amounts of public debt is highly dangerous. While debates can be and are being had about the limits of sustainable state debt, about how far public procurement can deliver, it has become clear that PPPs do not provide budgetary wiggle room to address infrastructure needs – more often than not their track record shows them aggravating debt levels only further. Hungary's cottoning on to this fact is worthy of some praise, just don't expect any from the EBRD this week.

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