A new global snapshot shows the financial crisis has hit P3s hard.
The Public Services International Research Unit’s summary of recent developments finds that companies “are practically unable” to extract P3 financing from reluctant banks and investors. This means “very few new PPPs will be signed for the foreseeable future”.
The study is also a warning about the stability of existing P3s. Many schemes are built around short-term debt that gets refinanced at a lower interest rate once the project is completed. In the current credit climate, that refinancing will cost more than expected – or be unavailable.
What’s more, the recession is reducing cash flow for P3s that rely on user fees for revenue, creating further difficulty repaying interest and loans.
The paper adds to CUPE’s analysis of the implications of the economic and financial crisis for P3s, warning of public bailouts of privatization schemes and project delays.
A major highway project in the United Kingdom only went ahead after a public sector bank bailed out the deal last month. Closer to home, the BC government has propped up a P3 highway expansion and bridge project to the tune of $1.15 billion in public financing.
The day after the Port Mann bridge deal was sealed, the project’s private ‘partner’ announced it was in major financial trouble, joining several other provincial P3s with shaky finances.
The hostile credit climate is exposing other governments to the dangers of P3s, including in Quebec where the government has become a banker for Montreal’s privatized concert hall development.
A recent editorial in Britain’s The Guardian newspaper dismantles the case for P3s, known there as PFI, point-by-point. In Canada and elsewhere, the private sector is contorting itself into a new position where the public sector is expected to take on the risk of financing P3 projects – a shift that eliminates a central reason for privatizing in the first place.
As the crisis deepens, private investors will press governments to increase the number of P3s, since they provide long-term, secure and relatively high returns. And some governments will try to keep P3s afloat at all costs – by changing their structure, paying higher honoraria to bidders, or providing public guarantees for some of the debt.
The private financing options that remain in the current “capital desert” are even more expensive, as banks capitalize on the shortage of credit by hiking interest charges. In Britain, where P3s (known there as PFI) are well-established in hospitals, schools and municipalities, the government is boxed in and “has little choice but to meet the banks’ demands”.
The situation is a sobering prospect for Canada, where the federal government is about to embark on a P3 push that puts local governments and communities in a similar fix. The Ontario’s Auditor General damning report on the Brampton P3 hospital and a BC forensic auditor’s analysis of four major P3s add to the case for public financing and procurement.
That’s the conclusion of the PSIRU note, which points out that government credit hasn’t been hit like the private sector, and emphasizes the relative speed and simplicity of public procurement.
The paper is the second in an ongoing series. An earlier paper examines the role of public services in wake of the global financial meltdown. UNISON, CUPE’s sister union in the UK, has also spoken up about the need for public services during a recession. PSIRU has published a longer critical assessment of P3s, and has a wealth of other research in its resource centre.