EARLY NEXT MONTH, 502 individuals will involuntarily make history when they are relocated from various places in Germany to the town of Hünfeld, close to the border that used to divide West and East Germany. Unlikely to be uppermost in their minds when they arrive at their new home is that they will be among the first in modern German history to be “accommodated” in a private prison.
While the prisoners count the cost of whatever they did to fetch up at Hünfeld, Hesse’s government will count the euros it will save through going private. Specifically, it has been estimated that Hünfeld’s construction costs amounted to €100,000 per prisoner, compared with €250,000 at a recently constructed facility such as the prison at Weiterstadt. That is chiefly a reflection of the speed with which the prisons were built: Hünfeld took four years, Weiterstadt nine. And the running costs of Hünfeld will be 15% less than those of a comparable publicly run prison elsewhere, saving Hesse an estimated annual €660,000.
Those numbers are a sufficiently compelling argument for inviting private operators to participate more in economic activities hitherto viewed as the exclusive domain of the public sector. But Germany’s ambitions for its private prisons remain modest compared with the plans of some other countries, notably France, which is building 30 private facilities worth more than €1 billion.
That’s not to say that all governments agree about the benefits of private-sector prisons. About 17.5% of Australia’s criminals were locked up in private prisons at the last count but New Zealand’s Corrections Act (204) prohibits the management of private prisons. And while European countries such as the Czech Republic are looking to the private sector for prison accommodation, Greece ruled prisons (along with national defence and policing) out of its recently drafted legislation on public-private partnerships (PPP).
Matter of opinion
Therein lies one of the many problems of PPP – the sheer diversity of opinion over whether it should be implemented. There are even differences of opinion about the definition of infrastructure. As consultants PricewaterhouseCoopers put it in a recent report, “there is no discernible EU PPP policy”.
That is a source of frustration to evangelists of the private finance initiative or PPP concept, who say that attracting private capital to participate in infrastructure projects is the only viable way of dragging public services into the 21st century without exerting crippling pressure on already strained government budgets.
In bald terms, those that say that PPP has failed to live up to expectations beyond a handful of markets identify three culprits for the failure. They blame governments with an ideological mistrust of private capital profiting (or being seen to profit) from essential public services. They blame lawmakers and regulators for failing to put together clear and uniform laws supporting private investment in infrastructure. And they blame capital market practitioners at a variety of levels for failing to develop credit skills that can assess and absorb infrastructure risk.
That’s the bad news for advocates of these financing structures. The good news is that all three of these shortcomings are being addressed with varying degrees of intensity. Most important of all, governments are acknowledging that they have few choices but to look at the potential of PFI/PPP-style solutions to what has been called the infrastructure gap or infrastructure deficit.
Yawning budget deficits aside, one reason why political opposition to the PPP blueprint is weakening, even among left-leaning governments, is that available precedents suggest that the concept works. “In spite of the criticism they have attracted, the bulk of PFI and PPP projects are delivering what they were contracted to deliver,” says Paul Leatherdale, head of infrastructure finance at Depfa Bank in Dublin.
“Where there have been faults in the delivery of essential services, the private sector operator responsible has suffered because it hasn’t been paid. Poorly designed buildings are not the fault of PFI or PPP per se. They are the fault of the decision-makers at the procurement stage.”
Promise and delivery
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“In spite of the criticism they have attracted, the bulk of PFI and PPP projects are delivering what they were contracted to deliver”
Paul Leatherdale, Depfa Bank |
The assertion that PFI delivers what it promises is supported by numerous studies. In the UK, for example, such empirical evidence as there is suggests that whether you like or loathe the PFI concept, it has fulfilled its pledges. PwC’s summary of recent studies of
value for money in PPP projects appears conclusive enough. A recent UK Treasury analysis of 61 PFI projects, for example, found that 89% were delivered on time, and that all had been delivered within public sector budgets. Another survey, from the National Audit Office, found that 81% of public authorities believed that PFI projects were achieving satisfactory or improved value for money, with only 4% describing value for money as poor.
That track record has not gone unnoticed in markets beyond Europe. Take the example of Canada, where several provinces have adopted the PPP concept decisively and enthusiastically. There, according to the Canadian Council for Public-Private Partnerships (CCPPP), basic infrastructure is (or was) in such a bad state that it was scaring away foreign direct investment. Specifically, according to a detailed study published last year by TD Bank: “For Canada as a whole, estimates of the [infrastructure] gap range from a low of about $50 billion to a high of $150 billion.”
Derek Burleton, the senior economist at TD Bank in Toronto who wrote the report, says that he thinks Canada is losing the publicity battle on PPP. But that does not seem to be the conclusion of the limited empirical evidence that is available on the subject. A CCPPP survey published at the end of 2004 found that 60% of respondents agreed that it was “time to allow the private sector to deliver [essential public] services in partnership with government”. More surprising was its finding that 55% of public sector union members supported the concept of PPP.