The Problem With Public-Private Partnerships

by Fred Smith on November 5, 2010

in Economy, Odds & Ends, Politics as Usual

In our half-political, half-private world, there are a growing number of public-private partnerships.  Almost nothing in the current world can be done without implicit or explicit permission by local, state, federal or (increasingly) global regulators.  But the term, public-private is normally used to denote the joint funding and, sometimes, joint management of some “public” facility — streets, water systems, and so forth.

The rationale for “public” investments is that they are “public” goods, whose benefits are not adequately captured by the provider.  There are many problems with this concept – in practice, it means that someone wants something and nobody seems to be providing it.  Note, from a Coasian/Schumpeterian free market perspective, these are exactly the “lures” that lead mankind to pursue the unexplored entrepreneurial paths to the future.  Rushing in with government assistance distorts and preempts those creative forces.

Sometimes, public-private partnerships can be a transitional step toward privatization.  The concept of “corporatization” that is, reorganizing an activity now performed by some political agency so that its inherent economic realities become more understandable and transparent, may be a useful step in privatizing the activity.

In most cases, however, public-private partnerships are simply a means of using tax breaks, regulatory easing, taxpayer support and so forth to subsidize some private activity: stadia, light and heavy rail — mass transit generally, sometimes (for God’s sake) hotels and malls, downtown development districts.  Where I live in Washington, D.C., businesses are allowed to add a “special tax” to pay for services the city supposedly pays for with normal tax revenues.  Such public-private partnerships suffer from the full array of government failures:

  • Log-rolling and pork-barrel politics: I’ll vote for your PPP if you vote for my PPP.
  • Weakened market tests: resources are devoted to a project not because it benefits the citizenry but rather because it benefits a powerful interest group and/or because a creative referendum entices a majority of voters to support their special interests.
  • Weaker Management: Absent market tests, managers are less motivated to find that mix of services and creative array of financing tools to ensure that it proves “profitable” (that is, a rational allocation of capital). Roads, even charter schools, etc all have suffered here immensely.
  • Lack of innovation: No institution in the private world can allow itself to stagnate – the creative forces of destruction will soon make it obsolete. PPP managers face much weaker innovative forces – if things go wrong, they can always appeal to their “public” nature for taxpayer bailouts.
  • Corruption: Crony capitalism abounds in the PPP world.
  • Faddism: Markets sometimes go on kicks – the tech boom, for example – but these soon collapse. Governments go on kicks for many decades – “renewable energy” and “mass transit” being perhaps the best examples but “magnet” investments in downtown malls, stadia and convention centers are perhaps even more persistent ones. Before Walmart became a PPP, it did more for consumers than all the PPP malls in the world.
  • Crowding Out: Capitalism plays a critical role in allocating capital – planting the seeds for our future. That is a very difficult task, one made much more difficult by the existence of PPPs. Government already seizes a disproportionate amount of our wealth and the PPP concept allows it to further distort the allocation by market forces. I’ve argued that the genius of the Progressives in the late 19th century was to preempt or push large sectors of the emerging future (the environment, schools, electromagnetic spectrum, infrastructure, welfare, the medical world) into the political world. The PPP concept simply exacerbates this tendency.

Our challenge is to find ways to expand the private sector and only very rarely does the PPP concept do that.  It allows people to be sloppy — “That would never pay for itself but it obviously has value, thus, we need some government help.  Let’s not make it an honest government function, let’s make it a Public-Private partnership and get the best of all possible outcomes!!”

This Mixed Economy model is less honest than true socialism (government acting directly) for many reasons.  If as is often the case, things go wrong, it will be capitalism — not government — that will be blamed.  PPP activities are less subject to consumer sovereignty (look at airports or schools).  The true costs of the activity don’t appear on government budgets — making it appear that PPP arrangements are “bargains.”

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