One of the main axioms in economics states that “there is no such thing as a free lunch” – there is nothing that one can benefit from which there isn’t a cost involved. Yet Prime Minister Edi Rama seems determined to challenge this belief. For the umpteenth time he has declared his support not only for the existing public-private partnership (PPP) schemes, but also promised that they will continue to grow in size and scope – all under the promise that they are not a burden on public spending. However, this line of argumentation couldn’t be further away from the truth.
PPPs are definitely a burden on public wealth, they simply rely on more creative accounting rules so as not to show up as public spending.
Examples: the National Stadium and healthcare contracts
In order to illustrate this point more clearly, let’s take the example of a very shady PPP scheme currently used by the public authorities: the building of the new national stadium. While the details of the contract have never been made public, PM Rama has claimed that allowing private investors to build a residential and commercial tower on what was once public property will pay for the stadium costs – without having to increase the public debt. But by allowing this kind of development to occur on public property the government avoids not only current spending but also future earnings. That’s right, any asset that private investors develop under current PPP schemes also involves future revenues that could have very well been in the public’s hands.
So why should the government simply forego these future earnings?
A popular line of argument states that the government is currently constrained, that is, there are public investments that it wants to develop but that it simply cannot due to a high public debt and high costs. Yet this argument couldn’t be further away from the truth. Currently the government can borrow money with the lowest ever interest rate (due to the fact that private investors are still scared of investing)! If ever there was a time to invest in worthy public projects, this is definitely it! And if private investors are willing to get involved in some of these projects, than they are definitely worthy.
What about other PPPs that do not involve future developments of valuable assets, like the medical check-up contract for which the Ministry of Health has been often criticized? Well, those projects include guaranteed future public spending: the government has committed to pay a certain amount per year in the future in order for the private firm to fulfill a service. This in fact a guaranteed public spending, but because of its nature it does not show up immediately in the statistics for public debt. This is a point that the IMF has stressed many times by stating that the government has committed itself to future spending that will pose a threat to public finances very soon.
PPPs are not more efficient; they create monopolies
So why should anyone go to these lengths to design these creative schemes? Well, as we saw in the latter case, they might be a way to hide public debt. But if this is valuable public spending, then why should we be worried it, especially at a time where it seems that market is willing to loan money to the government at extremely low rates? The answer, as the first case showed, is that through these schemes the government is in fact incurring a cost either by foregoing future earnings or by committing to future spending.
By engaging in PPPs the government basically ends up doing a backhanded privatization, simply by relying on shadier and less transparent schemes.
But doesn’t every state, even the most transparent and democratic ones, engage in some sort of PPPs, one might ask? Of course they do. But the argument that classical economists advanced was never based on the foregone costs that this involved. Unlike PM Rama, economists were always well aware that these projects involved a public cost, and that they were not a “free lunch” simply because they did not show up immediately as public debt. The argument that classic economics offered for PPPs was efficiency; the private sector is assumed to be more capable of handling certain types of transactions, especially in a competitive setting. But is this the case for Albania? Of course not!
Instead of fostering a competitive environment, our PPPs have simply ended up creating more monopolies in specific sectors. Therefore they have generated high profits for a few individuals and high costs for the rest of society.
Our PPPs have never been used to spur competition and innovation a specific sector, but simply to eliminate it.
Next time you hear anyone claim that PPPs are a free lunch, do not believe them! You, as part of the public, are facing a cost for it by foregoing earnings or facing future payments. Instead of creating a more dynamic private sector economy the PPPs are being used to shut it down.