One of the arguments sometimes advanced to explain why governments use P3 procurement is that it enables them to avoid increasing public sector deficits. The first wave of P3 projects in Canada and in Europe were often motivated in part by governments seeking off-balance-sheet treatment for their capital spending (e.g., Confederation Bridge). However, this type of accounting treatment provides no economic or fiscal benefits, and most governments in Canada have now recognized this. In fact, all the public sector capital obligations incurred under the second wave of P3s examined here are on balance sheet.
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In this situation, governments are deferring the cost of borrowing by effectively borrowing through the P3 partner, which relies on private financing charged at higher interest rates than government issued bonds. |
This leaves the issue of whether governments derive any fiscal benefits from relying on private financing in P3s to fund some of their public infrastructure spending.25 We explain here why there are no such benefits. For Canadian P3 projects based on availability payments, governments usually start paying for access to the facility only once it is open and fit for use.26 This means that governments face lower disbursements during the construction phase than they would under a conventional procurement. In this situation, governments are deferring the cost of borrowing by effectively borrowing through the P3 partner, which relies on private financing charged at higher interest rates than government-issued bonds. When governments do pay the P3 partner for the use of the infrastructure through service payments over the term of the contract, these payments must reflect the cost of private financing. So it is misleading to suggest that P3s reduce the public debt by the end of the useful life of the asset.
Any efficiency gains or net benefits resulting from P3 procurements can contribute to a lower debt burden if they lead to lower public spending (e.g., through cost savings). However, the potential reductions in public spending (and in public debt levels) are modest compared with the public debt levels required to fund a P3 project.
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25 In one variation of this argument, former U.K. Prime Minister Tony Blair said in 2002: "The reason that we are engaged in this public-private investment [for the London Underground] is so that the infrastructure work, which is urgently needed in the Tube, can be done … there is no way Government through the general taxpayer can do it all." Cited in Glaister, "Transport," p. 220. Glaister goes on to write that "this view that PFI and PPP somehow entice the private sector to provide resources that the taxpayer will not provide, is plainly nonsense."
26 Some projects allow for milestone payments to the consortium prior to the completion of construction.