This week saw Spain unveil a €17bn infrastructure spending plan to be implemented with the help of private investments — in other words, a public-private partnership.
For governments, the great advantage of PPP arrangements of this type is that they immediately push much of the associated spending off-budget.
It’s a useful short-term tactic then for a country like Spain, which has to cut up to €50bn in public outgoings over the next four years to meet its austerity objectives.
Above all, it means the country won’t have to postpone already planned infrastructure projects — which it is counting on to stimulate the economy.
That said, the current plan is the largest of its kind in Spain and has come somewhat out of the blue. It also appears designed to facilitate the 3.9 per cent spending reduction which the department of public works is obliged to take, and to do so without adding to the public debt burden.
As Reuters quoted Rodriquez Zapatero:
“There will be no impact on the budget deficit until 2014,” Prime Minister Jose Luis Rodriguez Zapatero told reporters.
And if that strikes you as infrastructure alchemy, that’s because it probably is.
The European Parliament, for example, has looked at these sorts of rushed endeavours to balance budgets before. Their conclusion (our emphasis):
To sum up, PPPs are not a miracle solution and need long time to produce visible results. More than on a general expansion of this type of agreement to other sectors, governments should focus on refining their administrative capacities and their evaluation tools to ensure that PPPs allocate risks to the party that is best suited to manage them and that the benefits of involving the private sector in service provision are effectively reaped.
Without this approach, the public sector runs the risk of using PPPs for the wrong reasons, for example to seek a short-term make-up of public accounts to the detriment of long-term financial sustainability.
But let’s look at the details.
Spain is hoping to use 70 per cent of the money on rail projects and another 30 per cent on roads.
According to Reuters, the plan as it stands would source 20 per cent of financing from the private sector, with another 80 per cent from Spain’s ever expanding Instituto de Credito Oficial (ICO), the European Investment Bank and other commercial banks.
The Iberian challenge, though, will lie in attracting many of the obvious candidates to the projects — as they may or may not be put off by the financing terms. Some economists, for example, have estimated future payable income streams could equate to as much as an 8 per cent effective rate.
And while the construction enterprises awarded the bids would ultimately be responsible for the both the implementation of the works and their subsequent management — up to 20-30 years in some cases — there’s the understanding in Spain that all cost overruns or project failures are picked up by the public institutions involved.
The EU paper, for example, emphasises this as a key risk point:
Political expectations on activities and services that the State may and may not delegate to the private sector also exert a significant impact on the financing of PPPs and on governments’ ability to control and address possible failures without severe consequences for public accounts. This can be clearly observed in the case of Spain, where the legislation spells out that the State always maintains responsibility in contracts involving the public party. As a result, when a PPP turned out to be more expensive than what had been calculated ex ante, the government was expected to fund the project and ensure its viability, thus setting a precedent for future cases.
The overall message from the EU seemingly being that such initiatives are no quick fix to budgetary woes at all.
That, of course, is because the real cost burden to the public finances simply becomes obscured.
Related links:
EU states accused of ‘hiding’ deficits - FT (2005)
Spanish risk: let’s get regional – FT Alphaville
Spanish borrowers don’t ❤ swaps – FT Alphaville
Spain plans 17 bln euro infrastructure spend – Reuters