Can P3s work?

Two weeks ago I wrote a critique of a very poorly done Conference Board of Canada report on P3s (public-private partnerships).    This conference board study ignored recent major criticisms by provincial auditors general and interviewed almost exclusively P3 proponents.

I’m happy to say that two business professors from B.C., Aidan Vining of SFU and Anthony Boardman of UBC,  have recently written an excellent two page summary, Making P3s work of detailed research they previously published in a longer paper.

In this short summary they report:

In our review of the case study evidence, we came to two major conclusions. First, although risk transfer is, at least initially, a major posited goal of many governments, the evidence suggests that in negotiating (and renegotiating) P3 contracts, governments often failed to achieve significant risk transfer. …

Furthermore, when construction costs of P3s are unexpectedly high, government has to step in and bail out the project. As we are currently more aware, low probability, high cost events do occur with positive probability and do have a high cost.  

Second, the transaction costs of many P3s are often high….

One surprisingly common occurrence is the dissolution of P3s more quickly than envisioned in the original contracts, either through government buy-outs, redesign of the contract, bankruptcy of the private entity, or some mix of these.  Also surprisingly common is protracted conflict, with high contracting costs borne by one party, or both.  

Our findings throw into doubt the social utility of P3s as a widely replicable mechanism for delivering public infrastructure, at least without extremely careful forethought by government. More encouragingly, however, P3s in Canada have worked reasonably in certain specific circumstances…

However, these circumstances are close to traditional “design-build-transfer” or “build-transfer” contracts. …

Given their spotty record, why are P3s so popular? There are often large political benefits from keeping capital expenditures off the government’s official budget or at least to transferring them to future time periods (and future politicians).

However, it is important to emphasize that the underlying economic reality of a public investment is not altered if it is not on the books. No matter how a project is financed, the government or users ultimately have to pay for its construction and operation.

Their report and this summary is a refreshingly reasonable antidote to the type of boosterism we’ve seen elsewhere. 

(Thanks to Howie West for pointing this article out.)