Tuesday, August 30, 2011

Government Destroying Free Markets With Public-Private Partnerships

We are hearing more and more lately about Public-Private Partnerships (PPPs) as the ideal way to administer the areas of healthcare, transportation, public buildings, water and the environment. President Obama and other politicians are proudly announcing the launch of new partnerships with the private sector. What are PPPs? They are contracts between government and private entities where both share in providing a good or service to the public, while divvying up assets, risks and profits. The average American city now employs PPPs in 23 out of 65 municipal services. In some countries, the majority of civil infrastructure projects are contracted as PPPs. Sounds good, right, for government to assign more areas to the private sector? In theory it seems like less government. In reality it works out to be government granting monopolies to favored corporations which no longer act like free market entities and are controlled substantially by government.
Cash-strapped governments maxed out on taxes and spending have figured out that PPPs are a sneaky way around being forced to cut costs. Government officials deceptively describe PPPs as a way to “overcome budgetary constraints,” using the promise of more private sector involvement to make their junk science ideas of “sustainability” projects more acceptable. PPPs allow governments to continue launching large ambitious expensive projects by using a private entity to put up the initial cost in exchange for guaranteed returns. Unfortunately, government ends up in more debt in the long-term because the private entity no longer acts like a private entity in a PPP.
There are a myriad of problems with PPPs. Some or all of the risk is transferred from the private sector to taxpayers, diminishing the incentive for the private entity to perform well. Optimally, the risk should instead be on private financiers who have a direct stake in the outcome. With government guaranteeing payment, there is less motivation for the private entity to cut costs. The private partner has little risk of going under since government will bail it out. Of PPPs that reach the implementation stage, at least 50% end up in renegotiations of the contract due to unexpected circumstances such as less revenue than projected.

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