11/18/11

British Tories recognize P3 failure (but not the solution)

After repeated British reports revealing failure  of public private partnerships (P3s) for public infrastructure projects, the British Chancellor has announced a fundamental review of the government's use of P3s (or, as the Brits call them, PFIs) .  

A recent House of Commons Committee report put the cost of capital for a typical PFI project at 8%, which is double the government rate of around 4%.  And for capital intensive projects like new hospital buildings, that adds up to a whole lot of extra cost for the public to swallow.  

Chancellor George Osborne said  “We have consistently voiced concerns about the misuse of PFI in the past and we have already taken steps to reduce costs and improve transparency...We want a new delivery model which draws on private sector innovation but at a lower cost to the taxpayer and with better value for public services.”

The Financial Times suggests that the government wants more "direct" private sector investment in public infrastructure, possibly through pension plans  Instead of banks financing these projects for decades through a mixture of debt and equity, banks would finance projects only until building was complete. 

This would reduce the period of time that the public is stuck covering the high cost of bank borrowing.  Pension plans (or other "direct" investors) would then buy out the debt, once construction was complete, and hold on to it for good long time.  

Of course, the public is still going to have to pay a profit to those "direct" investors for many years.

The financial crisis is driving up the costs of private sector P3 borrowing and even conservative governments are beginning to look for alternatives.  But, even in the face of failure, they are unwilling to give it up completely.

Likely, government authorities in Canada are coming up with all sort of inventive plans to deal with the crisis of private finance of P3s too.  They just aren't telling the public.    

We'll see what the British Tories come up with....

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