August 2012        

Public-private partnerships


The “stimulus plan” announced by Brendan Howlin will cost €2¼ billion and will produce 13,000 short-term jobs over a number of years. This is a very inadequate response to an unemployment crisis in which 440,000 people were on the live register in June 2012.
     More than half the cost of the projects will be funded by “public-private partnerships.”
     David Harvey in his book The Enigma of Capital (2009) defines neo-liberal economic doctrine as a class project that came together as a response to the crisis of the late 1970s. Its advocates used effective and persuasive arguments about individual freedom, liberty and personal responsibility and the virtues of privatisation, the free market, and free trade.
     Margaret Thatcher was the first European ruler to set about introducing the neo-liberal agenda in 1979. She changed trade union law to make it harder to strike. She smashed the miners’ and printers’ unions. She increased unemployment from one million to three million. The long-term effect of these changes was to weaken the power of labour and so lower wages in the long run and increase the profits of the capitalist class.
     Thatcher also pushed the dogma that the capitalist sector was more efficient than the government sector. (This dogma was not proved in studies carried out in Britain in the 1980s.) From this it was argued that the role of the state should be reduced and the role of the capitalist sector increased.
     There were a number of strands to this.
     (1) Government spending should be cut. This idea was sold using a simple trick. People were persuaded that taxes were too high and that if they were cut they would have more money in their pockets. But they were not told they would have fewer government services. A variant of this was incorporated in the national wage agreements in Ireland, when tax cuts (and fewer services) were substituted for wage increases.
     (2) Privatisation—the selling of state businesses to the capitalist sector—was promoted.
     (3) Public-private partnerships were introduced in 1992 by John Major. In these, capitalist businesses finance infrastructural projects undertaken for the government.
     All these reduce the government sector as a proportion of gross domestic product (the total output of the economy in a year). As the government share falls, the proportion provided by the capitalists rises and their opportunities to make profits increase.
     In summary, neo-liberalism is for making the capitalists richer at the expense of workers and their families. Public-private partnerships are part of the neo-liberal agenda.

The euro, neo-liberalism, and PPPs

The Maastricht Treaty (1992) included the Stability and Growth Pact. This pact limits the ability of governments to borrow money each year and sets limits on the total borrowings of governments. Governments finance their services through taxes, other income, and borrowing. They have to keep their annual borrowing to 3 per cent of GDP; under the Stability Treaty this would become 0.5 per cent.
     Previously, the Irish Government divided its income and expenditure into the current account, for day-to-day expenditure, and the capital account, for infrastructural expenditure. The Government tried to balance income and expenditure on the current account, but it borrowed to finance capital expenditure.
     Once the state adopted the euro, it became obvious that the Government would not be allowed to borrow for large capital projects by the EU, because of the 3 per cent limit. But the EU did not mind if capitalist businesses funded the projects.
     The cost of projects funded by PPPs is not part of the general government balance (deficit or surplus), but the payments by the Government to the private (capitalist) firms to pay for the costs over the term of the project are included.
     In this way, public-private partnerships got the approval of the EU. This is a win for the capitalists and a loss to taxpayers.
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The Irish experience

In PPPs the private firm may design, fund, build, operate and maintain a piece of infrastructure. In school and similar projects the PPPs design, fund, build, operate and maintain the school. The capitalist builds the school, provides caretakers, and provides maintenance. The contract lasts usually for twenty-four years, and the “partner” receives payments each year over the life of the project.
     Road PPPs are the same as school PPPs as regards design etc. The Government may provide some of the funding; the capitalist is then given a concession to collect tolls for up to forty years or more. If traffic on a toll road is below a certain level in a year, the Government has to pay a subsidy; if it is above that level the Government shares in the excess.
     Housing (“regeneration”) PPPs involve the transfer of land to a builder, who makes a commitment to building social, affordable and private housing. The builder gets his return by selling the private and affordable houses and from the rental income from the social housing.
     The Comptroller and Auditor-General in his report for 2010 listed the following PPP projects on which expenditure was incurred by central government before December 2010 and that will require future expenditure from the taxpayer:
Number of projectsExpenditure before 2010Expenditure, 2010Outstanding commitments
Department of Education and Skills5€168 million€38 million€1,128 million
Courts1 €39 million€588 million
Office of Public Works1 €41 million€716 million
National Roads Authority10€844 million€228 million€1,872 million
Department of Environment, Community, and Local Government20€525 million€69 million€18 million
Total37€1,537 million€415 million€4,322 million
     The total of all expenditure, €6,274 million, is a sizable sum of money; but it is not only the revenue that the capitalists get from central government: in the case of road PPPs they collect tolls, which are indexed to inflation for the period of their concession, which can be up to forty-eight years. If the volume of traffic falls below a certain level in a year, they get a subsidy from the Government. This does not include payments from local authorities.
     Most of these projects and payments go to transnational capital, as the Government has to advertise these projects in the Official Journal of the European Union, and cannot give a preference to Irish firms.
     An evaluation of these projects cannot be made, because it is a policy decision by the ministers for finance that this is a “market-sensitive” issue. The minister, by hiding the operations of these transnationals from scrutiny, is putting the interests of these capitalists before the interests of the taxpayer. As part of this policy, no detailed information is given on costs, so it is impossible to compare the cost of PPPs and the cost of the government itself financing a project.
     The schools project awarded to Jarvis was the only project of the thirty-seven listed above that was evaluated by the Comptroller and Auditor-General. He was critical of the procedures adopted in the evaluation by the Department of Education, and he estimated that if the department ran the project itself there would have been a saving of between 8 and 13 per cent.
     These percentages would become extra profits for Jarvis at the expense of Irish taxpayers. Jarvis, an English company founded in the 1980s, made its money originally buying privatised assets in Britain for a song. It got into financial difficulties in 2005.

Toll roads

The Fianna Fáil government allowed National Toll Roads, headed by Tom Roche, to build two toll bridges in Dublin, the East Link and the West Link, in 1990. Roche was a former chief executive of CRH (a company whose first chairman was Seán Lemass). He invested €635,000 and sold 52 per cent to financial institutions for €10.16 million. NTR borrowed a further €34.3 million. With the money it built the West Link Bridge and the two-mile stretch of the M50 from the bridge to the M3 exit.
     The Government then proceeded to spend taxpayers’ money to upgrade the M50, and the volume of traffic increased. As a consequence, NTR’s income rose rapidly, and it is estimated that €1.15 billion was generated by the bridge.
     In July 2012 the National Roads Authority decided to buy out NTR for €600 million. This will be paid from annual toll income until 2020. If the Government had built the bridges itself and borrowed €50 million to finance them, the €1.15 billion would have ended up as revenue for the state. This massive rip-off of taxpayers was allowed by successive Governments—Fianna Fáil and coalitions of Fine Gael and the Labour Party—since 1990.
     The National Toll Roads saga began before the introduction of properly structured PPPs. The M3 is an example of one of the present toll roads. It was built in 2007 by a consortium of SIAC, an Irish firm, and Ferrovia, a Spanish firm. It has a concession to collect tolls that rise in line with inflation for forty-five years. We don’t know what it cost to build, or what the Government put in in the form of a grant towards the capital cost. We don’t know the annual income from tolls; but we do know that in recent years the M3 consortium has received a subsidy because the volume of traffic is not at the guaranteed level.
     According to a debate in the Seanad on 16 June 2011 the subsidy for all motorways was running at €500,000 a month, equal to €6 million a year. The M1 and M4 were making an annual contribution of €1.47 million, because traffic was above the projected level. So the Government is giving the operators a guaranteed income. According to the EU, the private partners should be carrying the risk; but what risk is there if the operators have a guaranteed income?
     The fact that the M3 is not achieving its traffic target means that the road, a four-lane motorway, is too large. A smaller road would probably have done an adequate job and would have saved the Government, and motorists, millions. But IBEC and the Construction Industry Federation would have complained to a Fianna Fáil Government receptive to their demands.

Regeneration projects

Dublin City Council had five PPPs with the developer Bernard McNamara. He was given land on which to build social, affordable and private houses. When the crisis came, and it was clear to him that he could not make a profit, he pulled out of the deal, and the people waiting for social and affordable housing were left high and dry.
     This episode shows that the capitalist “partners” are interested only in profits. Before this the council had been hailing PPPs as the way forward in housing.

Schools

Dr Rory Ahearne studied PPPs in five schools for the Combat Poverty Agency. He found problems with the design of the rooms: some had a design that was more suitable for commercial activities than for classrooms; one school had leaks in the roof, and it was difficult to get the operator to fix it.
     If there was a maintenance agreement, the operator would do maintenance only that was in the PPP contract or would charge a high price for any maintenance outside the contract.
     Employees of the operators were paid less and had worse conditions than workers in similar positions who work directly for the state. The savings achieved through lower wages increase the profits of the capitalist operator.

The British experience

In Britain, PPPs are called the Private Finance Initiative. According to the Daily Telegraph (23 July) there are 717 such schemes at present, for building new hospitals, roads and other public facilities, with a combined capital value of £54.7 billion. The Guardian reported that the final cost of paying off these projects will reach £301.3 billion over the coming decade. Critics say it would have been cheaper for the government to have borrowed the money directly for these schemes.
     It emerged in the case of South London Healthcare Trust (Guardian, 26 June) that it was spending 14 per cent of its income on repayments to a PFI. One of its three hospitals took £118 million to build yet will cost roughly £1.2 billion in repayments.
     These examples show that the British scheme is much more open than those of Irish governments, who have been arguing that information on PPPs is “market-sensitive.” But they also show that it too is a rip-off of the taxpayer, just as in Ireland.

Summary

PPPs are a mechanism used by the Government for transferring wealth from the taxpayers and workers to capitalist operators, which are mainly foreign companies. IBEC (representing large employers) welcomed the stimulus plan because of the PPP content. Bank of Ireland welcomed the plan because it hopes to fund some of the projects.
     It is understandable that right-wing parties, like Fianna Fáil and Fine Gael, are supportive of PPPs; but it is difficult to understand how a minister from the Labour Party, a party that holds a commemoration to James Connolly each year, could put forward a plan based on rip-off PPPs. For the same reason, it is hard to work out which side the ICTU is on, whether the side of capital or the side of labour.
[KC]

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