Mar 27, 2009

Is the stimulus killing the P3 model?


While BC has not formally abandoned the P3 model, there is a notable absence of new P3 projects at a time when billions of dollars are being channeled to infrastructure spending. If P3s really provided value for money and brought the benefits of private sector efficiency and innovation to the delivery of public-sector infrastructure, then why aren’t we seeing more of them?

I’d love to be able to tell you that the government has come to recognize the multitude of problems of this model of providing public infrastructure (which have been described at length in other posts), but I don’t think that’s it. And while it was the financial crisis which made it considerably more difficult and more expensive for the private sector to secure financing for these type of projects, I think it’s stimulus spending that is killing the P3.

You see, two decades of spending cuts in Canada (and many other Western countries such as the UK and Australia) resulted in chronic underinvestment in public infrastructure. At a time when raising taxes or running deficits amounted to political suicide, it’s hardly surprising that governments would be tempted by the idea that they could provide much needed public infrastructure without having to put the money up-front (by using a P3). This, in my view, was the big attraction of the P3 model for governments.

I doubt that high-level bureaucrats were not aware that P3s cost more over the long-run and that they expose taxpayers to higher risk over the lifetime of complex 30 to 40 year-long contracts, but as long as they weren’t prepared to raise taxes or run deficits, what other options did the government have?

Now that it is once again politically acceptable and even desirable to run budget deficits and to spend public funds on infrastructure projects, the model looks like it has outlived its usefulness (at least temporarily). It’s no longer worth the government’s effort or political capital to have to come up with ways to rationalize the cost overruns and project downsizing that have aroused considerable dissatisfaction with the outcomes of many P3s.

But until the public realizes that there is no such thing as free public infrastructure and that we all have to pay for the roads and hospitals we rely on, governments will be tempted to engage in short-sighted deals like P3s, putting short-term considerations ahead of long-term gains.

Topics: ,