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Monday, May 18, 2009

Private Sector Financing should not be an option for Public Infrrastructure

Andy Wynne, the editor of the International Journal on Governmental Financial Management, described why the public sector should not use public sector financing for public infrastructure. Mr. Wynne argues that private sector finance, public private partnerships or privatisation are never an efficient option for public sector infrastructure.

PPPs seem like magic like free money. Yet, companies have made significant profits. The magic is that the debt is hidden where the government has the obligation to repay the debt to the private sector.

Private Sector Financing – why it is never an option for public infrastructure

PPPs appear to reduce the level of borrowing. Andy believes that PPP sounds more cuddly and friendly than privatization. Mr. Wynne provided evidence for why PPPs do not provide value for money:

•in UK private sector borrowing is 1-2% more expensive than state debt
• December 2008: Lagos ₦50 billion bond at only 13% (inflation 15%)
• 2002 – 57% of public sector accountants in UK did not think PPPs provided value for money

Mr. Wynne pointed out that risk is never fully transferred to the private sector. This means that the government assumes the liability. Allowing the private sector to charge for public services as part of PPPs is not sustainable. The poor cannot afford to pay.
If you wanted to design a system to maximize the opportunity for corruption, you would create something like PPPs, according to Mr. Wynne. "You have all the ingredients to maximize corruption."
Mr. Wynne believes that PPPs have never been an appropriate vehicle. The reduction in PPPs after the late 90's represents this experience.

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