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Public-Private Partnership in Canada
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Sources: This is a research essay. Students should make careful use of the required course readings, but also engage in additional research (e.g. academic books and journal articles, government documents, newspapers, think-tank reports) to complete the task.
Citing Sources: Sources must be referenced using in-text parenthetical citations. The corresponding reference list should be in alphabetical order at the end of the essay. Students must follow the format (for in-text, parenthetical or author-date citations) outlined in the Canadian Journal of Political Science style guide posted online at:
http://www(dot)cpsa-acsp(dot)ca/pdfs/Editorial%20Style%20Guidelines%202008.pdf. Essays that do not follow this style guide properly will be penalized by at least 10%. Larger problems with the citation of sources may result in a paper receiving a failing grade.
Grading Criteria: Papers will be graded in terms of three specific criteria:
Content: the essay content will be assessed in terms of argument, description, analysis, organization and logic. Is there a clear thesis and main argument in the essay? Is the evidence presented in a logical and convincing manner?
Research and use of sources: the essays will be assessed in terms of research and use of evidence. Have a variety of sources been utilized? Does the essay demonstrate both extensive and effective use of available sources? Does it properly cite its sources?
Writing Fundamentals: Have you expressed your ideas clearly and in an organized fashion? Is the paper organized and written as clearly and directly as possible? Does it avoid spelling and grammatical errors? Poor grammar and/or spelling create an immediately negative impressive and impede your ability to express your ideas. Spellchecking is a start, but you must also carefully proofread and edit your work.
PLEASE USE THE BOOK ENTITLED: Public service, Private Profits by author: John Loxley. The ISBN Number is: 978-1-5526-6338-7
PLEASE ALSO USE THE BOOK ENTITLED: The Service State, Rhetoric, Reality and promise by author: Patrice Dutil, Cosmo Howard, John langford, and Jeffrey Roy. The ISBN Number is: 978-0-7766-0743-6
Essay Sample Content Preview:
Public-Private Partnership in Canada
The case of PPP in Social Housing Sector
Introduction: What is Public-Private Partnership?
According to John Loxley (2010: 2), private public partnerships, or P3s, are described as “any kind of arrangement that entails the involvement of the private sector in some element of the provision of public infrastructure and services.” In a paper released by Partnerships – British Columbia (2003: 2), a company owned by the province, P3 is defined as “a legally-binding contract between government and business for the provision of assets and the delivery of services that allocates responsibilities and business risks among the various partners. Since the inception of P3s, this has been contested by its critics arguing that empirically observable transactions and operations hardly show any risk sharing or transfer, among others. It is in this light that this paper will analyze PPP or P3 projects in the Canadian public sector. The advantages and disadvantages of P3 will be outlined that will serve as the basis in analyzing the provision of social housing in this country.
It is argued that the logic behind the establishment of non-service types P3 projects is to enable the public sector “to meet its responsibilities for the provision or rehabilitation of infrastructure without the up-front capital outlay and risk that accompanies conventional methods of procurement” (Loxley, 2010: 3). In Canada, a key reason in the adoption of P3 as a government policy is the so-called “infrastructure gap” (Loxley, 2010; Dutil, et al., 2010) or “infrastructure deficit” (CUPE, 2011). This phenomenon will be described in the succeeding sections of this paper. Infrastructure gap refers to the disparity between government expenditure and the ability of the government to finance and sustain public service provisions. Thus, neoliberal fiscal policies such as budget constraints and reductions in social spending became a viable option. The contracting-out of social services has been in practice for decades now but it was only in the 1990s that P3 became the policy options of governments to maintain the provision of services.
Neoliberalism and PPPs: A brief background
The beginnings of PPPs coincide with the increasing dominance of the neoliberal ideology in the international economic and political landscape in the 1970s and 1980s. According to David Harvey (2006: 7), the extent of the influence of this ideology is clearly apparent to what has become the “neoliberal state” which is predicated on the notion that the crises of stagflation that occurred during the said decades was due to the increasing power of the welfare state. This was the period when rapid accumulation of public debt prompted the governments of countries around the world to regulate government expenditures and manage capital expenditures. The macroeconomic quagmire during the said decades prompted the government to adopt alternative policy to the standard model of public procurement.
Proponents of this theory argue that state intervention stifles competition and consequently, the freedom of the market itself. But Harvey (2006: 7) believed that “The freedom it embodies reflects the interests of private property owners, business, multinational corporations and financial capital.”
The first PPP initiative started in Great Britain during the Conservative government of John Major through the private finance initiative (PFI) (Bettiegnies and Ross, 2004: 136). In Canada, it started with the federal conservative government during the time of Stephen Harper (CUPE, 2011).
Benefits of Public-Private Partnership
The essence of public-private partnerships is the sharing of decision-making authority in contrast to the “supplier” relationship where “the government decides exactly what it wants and buys it” and the “public enterprise” model where “the government produces the services with no private sector involvement’ (Bettiegnies and Ross, 2004: 136). According to Partnerships – British Columbia (2003: 3), there are a number of benefits that can be generated from P3 projects both for the government and the taxpayers. These include: (a) improve service delivery; (b) improve cost-effectiveness; (c) increase investment in public infrastructure; (d) reduce public sector risk; (e) deliver capital projects faster; (f) improve budget certainty; and, (g) make better use of assets.
Contracting-out remains to be the foundation of P3 projects which has been the practice of governments even before the formal adoption of P3 as a deliberate strategy in the public provision of services. The key reason for the success of contracting-out is ex ante competition; while there will only be one provider of the service for a particular period of time and thus no competition “in the market,” the bidding process allows competition “for the market” and thus, force bidders to lower costs and ensure the quality of the project (Bettiegnies and Ross, 2004: 139). On the other hand, pure public sector provision of services is monopolized by each government department (Bettiegnies and Ross, 2004: 139).
Another reason is the concept of economies of scale, that is, “governments typically do not have enough work to generate the volumes of business needed to allow a full-service construction company to get unit costs down to their minimum, through scale or learning economies” (Bettiegnies and Ross, 2004: 139). The investments of the private sector in public sector services such as infrastructures have kept national economies running. The infrastructure projects initiated by PPPs create jobs and sustain economic activities in the long-term.
Finally, contracting-out projects offers “high-powered incentives” and “optimal allocation of risks” associated with the P3 projects (Bettiegnies and Ross, 2004: 139). It is argued that the government debt is cheaper than the debt used to finance PPPs and cheaper still than the aggregate cost of finance needed by PPP projects, which is the weighted average cost of capital (WACC).
Disadvantages of Public-Private Partnership
Critics of public-private partnerships point to the higher return of investments enjoyed by the private sector compared to the government’s bond rate. This is one of the disadvantages of PPPs and these partnerships transfer the income risks associated with the projects to the taxpayers.
It is contested whether it would be cheaper to finance PPPs than the WACC. If the government can sustainably fund PPP projects, then it must do so at its risk-free borrowing rate (Bettiegnies and Ross, 2004: 146-7). But this would only exist when borrowing levels are below the limits. The borrowing levels of most countries around the world are not too low because of the constraint from the taxpayers. Government borrowing will be ultimately shouldered by the taxpayers. According to Jean-Etienne de Bettignies and Thomas Ross (2004: 147), it is unclear whether the government will be able to borrow at a lower cost than the private sector and the full evaluation of the relative costs will have to consider the following factors:
(a) the credit worthiness of the private borrower and the protections offered in its contract with the public sector partner; (b) the extent to which tax savings may come from the other levels of government; and, (c) the degree to which the supply of funds to the public sector borrower is upward sloping.
The main concern raised by opponents of P3 is about the loss of control associated with allowing the private sector to have certain contractual rights (Bettiegnies and Ross, 2004: 144). The critics argued that perfect contracts cannot be written and thus, it cannot be perfectly monitored (Bettiegnies and Ross, 2004: 144).
Public-Private Partnership in Canada: Public Housing
In Canada, Loxley (2010: 4) argued, the reason why governments turned to P3s in recent years is because of the so-called “infrastructure gap,” which is “a considerable physical deficit in which publicly provided infrastructure is in urgent need of repair or replacement.” The deficiency in and maintenance and replacement of Canadian public infrastructure stock is widely recognized but the value is difficult to estimate. This stock includes roads, water and sewage treatment facilities, and housing, education, and health and recreation facilities. It does not include public buildings, land and public enterprise assets, such as public utilities. Both those who favor P3 such as TD Bank and those opposing it, such as the Canadian Union of Public Employees (CUPE) recognize this infrastructure gap. However, the problem is that the increases in this gap have not kept pace with the maintenance needs and with population and income growth (Loxley, 2010: 4).
The infrastructure gap can actually be filled by channeling more resources to infrastructure and optimizing existing procurement and operating methods without too much involvement from the private sector (Loxley, 2010: 4). However, the governments...
The case of PPP in Social Housing Sector
Introduction: What is Public-Private Partnership?
According to John Loxley (2010: 2), private public partnerships, or P3s, are described as “any kind of arrangement that entails the involvement of the private sector in some element of the provision of public infrastructure and services.” In a paper released by Partnerships – British Columbia (2003: 2), a company owned by the province, P3 is defined as “a legally-binding contract between government and business for the provision of assets and the delivery of services that allocates responsibilities and business risks among the various partners. Since the inception of P3s, this has been contested by its critics arguing that empirically observable transactions and operations hardly show any risk sharing or transfer, among others. It is in this light that this paper will analyze PPP or P3 projects in the Canadian public sector. The advantages and disadvantages of P3 will be outlined that will serve as the basis in analyzing the provision of social housing in this country.
It is argued that the logic behind the establishment of non-service types P3 projects is to enable the public sector “to meet its responsibilities for the provision or rehabilitation of infrastructure without the up-front capital outlay and risk that accompanies conventional methods of procurement” (Loxley, 2010: 3). In Canada, a key reason in the adoption of P3 as a government policy is the so-called “infrastructure gap” (Loxley, 2010; Dutil, et al., 2010) or “infrastructure deficit” (CUPE, 2011). This phenomenon will be described in the succeeding sections of this paper. Infrastructure gap refers to the disparity between government expenditure and the ability of the government to finance and sustain public service provisions. Thus, neoliberal fiscal policies such as budget constraints and reductions in social spending became a viable option. The contracting-out of social services has been in practice for decades now but it was only in the 1990s that P3 became the policy options of governments to maintain the provision of services.
Neoliberalism and PPPs: A brief background
The beginnings of PPPs coincide with the increasing dominance of the neoliberal ideology in the international economic and political landscape in the 1970s and 1980s. According to David Harvey (2006: 7), the extent of the influence of this ideology is clearly apparent to what has become the “neoliberal state” which is predicated on the notion that the crises of stagflation that occurred during the said decades was due to the increasing power of the welfare state. This was the period when rapid accumulation of public debt prompted the governments of countries around the world to regulate government expenditures and manage capital expenditures. The macroeconomic quagmire during the said decades prompted the government to adopt alternative policy to the standard model of public procurement.
Proponents of this theory argue that state intervention stifles competition and consequently, the freedom of the market itself. But Harvey (2006: 7) believed that “The freedom it embodies reflects the interests of private property owners, business, multinational corporations and financial capital.”
The first PPP initiative started in Great Britain during the Conservative government of John Major through the private finance initiative (PFI) (Bettiegnies and Ross, 2004: 136). In Canada, it started with the federal conservative government during the time of Stephen Harper (CUPE, 2011).
Benefits of Public-Private Partnership
The essence of public-private partnerships is the sharing of decision-making authority in contrast to the “supplier” relationship where “the government decides exactly what it wants and buys it” and the “public enterprise” model where “the government produces the services with no private sector involvement’ (Bettiegnies and Ross, 2004: 136). According to Partnerships – British Columbia (2003: 3), there are a number of benefits that can be generated from P3 projects both for the government and the taxpayers. These include: (a) improve service delivery; (b) improve cost-effectiveness; (c) increase investment in public infrastructure; (d) reduce public sector risk; (e) deliver capital projects faster; (f) improve budget certainty; and, (g) make better use of assets.
Contracting-out remains to be the foundation of P3 projects which has been the practice of governments even before the formal adoption of P3 as a deliberate strategy in the public provision of services. The key reason for the success of contracting-out is ex ante competition; while there will only be one provider of the service for a particular period of time and thus no competition “in the market,” the bidding process allows competition “for the market” and thus, force bidders to lower costs and ensure the quality of the project (Bettiegnies and Ross, 2004: 139). On the other hand, pure public sector provision of services is monopolized by each government department (Bettiegnies and Ross, 2004: 139).
Another reason is the concept of economies of scale, that is, “governments typically do not have enough work to generate the volumes of business needed to allow a full-service construction company to get unit costs down to their minimum, through scale or learning economies” (Bettiegnies and Ross, 2004: 139). The investments of the private sector in public sector services such as infrastructures have kept national economies running. The infrastructure projects initiated by PPPs create jobs and sustain economic activities in the long-term.
Finally, contracting-out projects offers “high-powered incentives” and “optimal allocation of risks” associated with the P3 projects (Bettiegnies and Ross, 2004: 139). It is argued that the government debt is cheaper than the debt used to finance PPPs and cheaper still than the aggregate cost of finance needed by PPP projects, which is the weighted average cost of capital (WACC).
Disadvantages of Public-Private Partnership
Critics of public-private partnerships point to the higher return of investments enjoyed by the private sector compared to the government’s bond rate. This is one of the disadvantages of PPPs and these partnerships transfer the income risks associated with the projects to the taxpayers.
It is contested whether it would be cheaper to finance PPPs than the WACC. If the government can sustainably fund PPP projects, then it must do so at its risk-free borrowing rate (Bettiegnies and Ross, 2004: 146-7). But this would only exist when borrowing levels are below the limits. The borrowing levels of most countries around the world are not too low because of the constraint from the taxpayers. Government borrowing will be ultimately shouldered by the taxpayers. According to Jean-Etienne de Bettignies and Thomas Ross (2004: 147), it is unclear whether the government will be able to borrow at a lower cost than the private sector and the full evaluation of the relative costs will have to consider the following factors:
(a) the credit worthiness of the private borrower and the protections offered in its contract with the public sector partner; (b) the extent to which tax savings may come from the other levels of government; and, (c) the degree to which the supply of funds to the public sector borrower is upward sloping.
The main concern raised by opponents of P3 is about the loss of control associated with allowing the private sector to have certain contractual rights (Bettiegnies and Ross, 2004: 144). The critics argued that perfect contracts cannot be written and thus, it cannot be perfectly monitored (Bettiegnies and Ross, 2004: 144).
Public-Private Partnership in Canada: Public Housing
In Canada, Loxley (2010: 4) argued, the reason why governments turned to P3s in recent years is because of the so-called “infrastructure gap,” which is “a considerable physical deficit in which publicly provided infrastructure is in urgent need of repair or replacement.” The deficiency in and maintenance and replacement of Canadian public infrastructure stock is widely recognized but the value is difficult to estimate. This stock includes roads, water and sewage treatment facilities, and housing, education, and health and recreation facilities. It does not include public buildings, land and public enterprise assets, such as public utilities. Both those who favor P3 such as TD Bank and those opposing it, such as the Canadian Union of Public Employees (CUPE) recognize this infrastructure gap. However, the problem is that the increases in this gap have not kept pace with the maintenance needs and with population and income growth (Loxley, 2010: 4).
The infrastructure gap can actually be filled by channeling more resources to infrastructure and optimizing existing procurement and operating methods without too much involvement from the private sector (Loxley, 2010: 4). However, the governments...
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