Public-Private Partnerships, Financial Extraction and the Growing Wealth Gap

Nicholas Hildyard | Guest Blog | December 8, 2014
PPPs

Wealth is increasingly concentrated in fewer and fewer hands. The gap between rich and poor is widening between and within countries all over the world, a trend that “menaces vigorous societies” says Will Hutton, the former editor-in-chief of the UK’s Observer newspaper. But such growing inequality does not come about by itself. “It is a proxy”, says Hutton, “for how effectively an elite has constructed institutions that extract value from the rest of society.”

Public-Private Partnerships are one such institution.

PPPs come in many forms, each representing a slightly different contract between the private sector and a government as to who designs, builds, finances, owns, develops, operates and manages an asset – a power plant, a toll road, a hospital – for how many years.

But they all have one crucial feature in common: they provide private companies with contract-based rights to flows of public money for many years, if not decades, or to monopoly income streams from services on which the public rely.

Indeed, private investors do not view “infrastructure” as bricks and mortar but rather as “stable, contracted cash flow for the long term”, in the words of one private equity management firm – and it is precisely such contracted cash flows that PPPs provide.

Unlike subsidies or tax breaks, the PPP contracts cannot be removed at a government’s discretion. Once in place, they are enforceable for the length of the contract. Although the World Bank and other promoters of PPPs claim they are a means of eradicating poverty, the opposite is the case. The profits made from PPPs typically do not trickle down: they are extracted up – to the already rich.

Take Lesotho’s Queen Mamohato Memorial Hospital, a new 425-bed facility supported by a network of refurbished urban clinics, built in 2011 to replace the country’s main public hospital.

The new hospital is a public-private partnership, the first for a hospital in Africa and the first of its kind for a low income country anywhere in the world. All the facilities were designed, built, financed and operated by a private consortium under a PPP arrangement structured under World Bank advice. Ninety-nine per cent of the money to build the new hospital was public money – and all but a fraction of the financial risk ultimately falls on the Lesotho Government. 

The Consumers’ Protection Association (Lesotho) and Oxfam International found that the PPP hospital and its three filter clinics cost at least three times what the old public hospital cost; consume 51 per cent of the Lesotho Government’s health budget; and divert resources from primary and secondary healthcare in rural areas where three-quarters of the population live.

The World Bank structured the contract so that the PPP generates a 25% return on equity, although the consortium’s main shareholder estimates a return of 13-18%. But even the 13% lower rate would amount to some $12.3 million in private profit returns – not bad for an upfront investment of just under half a million dollars, returns incidentally that are ultimately underwritten by the people of one of the world’s poorest countries.

Some 60% of these returns, divided among the private consortium’s five shareholding companies, will go to companies outside Lesotho. The bulk of them (40%) will go to hospital operator Netcare, the majority of whose shareholders are banks, insurance companies, pension funds and collective investment schemes or mutual funds, the top investors being South African-based. So the PPP extracts wealth not only out of one of the poorest countries in Africa but also up to the richest of the already rich.

More generally, PPPs (and other forms of private sector finance) offer numerous other possibilities for extracting value. Financing infrastructure invariably involves private equity, venture capital, hedge and pension funds, and private banks, each of whom take their fees and profits along the way.

In addition, loans to projects are parcelled up and the right to their income sold on to other investors. Credit default swaps and other bets are made on how creditworthy the companies involved in a project are. Shares in the companies building a project are loaned out for hedging purposes. The monthly payments of the bill-paying public are parcelled up and sold on. PPP contracts are sold on secondary markets once projects are up and running. In this way, infrastructure projects become generators of multiple financial instruments, criss-crossing sectors and commodities that anyone can buy and sell. A single infrastructure project becomes a means of constructing millions of dollars’ worth of ancillary trading. Public-Private Partnerships are key to this process, because they provide the stable, guaranteed income streams that can be transformed into financialised products that are then used to increase profits.

The effect of PPPs goes deeper still. As the private sector becomes increasingly influential in infrastructure, the state or public sector becomes more and more aligned behind the interest of infrastructure investors and private companies. The choice of infrastructure is now heavily influenced by what serves the long-term, profit-making interests of the private sector. In effect, a few thousand fund managers decide what gets funded.

PPPs are less about financing development, which is at best a sideshow, than about developing finance. They are about constructing the subsidies, fiscal incentives, capital markets, regulatory regimes and other support systems necessary to transform “infrastructure” into an asset class that yields above average profits. PPPs are thus primarily part of a wider response of capital to a crisis of over accumulation – too much sloshing around the system in search of fewer and fewer profitable investment opportunities.

Clearly, Public-Private Partnerships enable the extraction of public wealth for private gain. They are best viewed as institutions constructed to extract value from the rest of society and as mechanisms that increase inequality.

Nicholas Hildyard works with The Corner House, a UK-based research and solidarity group. He can be reached at nick[at]fifehead.demon.co.uk.

Image courtesy of 123rf.com

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