As discussed in Section 2, during direct rule PPP was advocated as one way of rebalancing NI's economy in favour of the private sector, and the Treasury has continued to lobby for this policy to be pursued during the current period of devolution (e.g. Varney 2008).
This "macro-economic" rationale for the use of PPP is problematic for three reasons:
(1) The argument that the public sector is too large in NI is an oversimplification. It is the case that NI has a higher level of public expenditure per head than in GB (Mclean et al 2008). However, an important part of this is connected with social security payments. These are much higher than in GB, not least because the number of benefit claimants is 50% higher than on the mainland. Relatedly, certain government reforms, for instance on tax credits, have inflated the 'subvention' to NI (Gudgin and Gibson, 2008). The public expenditure differential between the NI and GB is therefore largely a function of transfer payments and does not imply higher spending on public services.
In terms of employment share, NI has a higher percentage of individuals in the public sector than the rest of the UK - estimated at 28% in NI, compared to 20% (NI Executive 2008). However, when the size of the public sector is measured in terms of public employment as a proportion of population, NI is similar to other parts of the UK. What this suggests is that the private sector after decades of under-investment during The Troubles is too small, not that the public sector is too large. In this context, a crude attempt to reduce the size of the public sector could have serious consequences for the economy (Gudgin and Gibson, 2008).
(2) A significant implication of procuring through PPPs, rather than conventional procurement, is the freezing out of local companies in favour of large multinational corporations, which can better handle the transaction costs involved. The average bidding period for PPP schemes is around three years, requiring significant legal, financial, and technical advisory costs for both sectors (National Audit Office 2007). Because of this, authorities tend to 'batch' individual construction schemes into larger units in order to create economies of scale,11 with the result is that most projects are in the range of £50-£250 million range in terms of capital value. Together, these factors are known to deter small and medium enterprises (SMEs) from bidding for PPPs (Ezulike et al 1997).
This is likely to have a negative impact on economic growth in NI, a region that has a relatively small number of large, high-turnover companies and an important SME sector. According to Varney (2008), the Province has only 45 businesses with more than 500 employees, compared to 4,510 in the UK as a whole - a difference of a hundredfold, even though the UK population is only around 34 times higher than that of NI. Even if the few large NI firms were able to find the resources to bid for this work, it is unlikely they would be competitive. Established PPP firms from the UK, Europe and the US have absolute cost advantages over potential local bidders, since bank finance rates will be unfavourable for consortia with limited experience of PPP (Standard and Poors 2004).
To this extent, the prioritisation of PPP over other forms of public procurement actually runs counter to the project of stimulating growth in the domestic private sector. It also runs counter to one of the recommendations of the Varney review to the NI Executive: to ensure that "government procurement can play an important role in driving SME innovation and growth" (p.109).
(3) The suggestion that shifting a service from the public to the private sector could, in and of itself, add value to an economy is a misconception. Moving a given service from the public to the private sector has no impact on GDP, nor on the underlying worth of the economy. Services transferred to the private sector through PPP will still be tax-funded. All other things being equal, PPP does not imply any reduction in public spending, or any relaxation of the public sector's budget constraint.
An argument has been made that public servants are too highly paid in NI's public sector, and this is "crowding out" the private sector, where wages are some 20% lower. This argument is strongly contested by public sector trade unions. In any case, under TUPE and related UK government regulations, staff transfers through PPPs cannot result in lower wages or pensions, so PPP is irrelevant to this issue. In any case, Heald (2003) suggests that the public sector in NI now competes for manpower and skills with the Republic of Ireland, where public sector employment has grown rapidly in recent years. Any attempt to radically reduce wages in the North is likely to lead to net out-migration of mobile, well-qualified staff (Gudgin and Gibson 2008).
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11 Indeed, Treasury guidance issued in 2003 expressly forbids PPPs under £20 million in capital value.