Better Economics for a Better Tomorrow: Public private partnerships: Beware

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We’re beginning to see more references to public private partnership possibilities especially when it comes to the infrastructure needs of the nation. While Democrats prefer that the investments be funded, and owned, entirely by the federal government, Republicans, claiming that the size of the nation’s investment needs are beyond the ability of the government to finance, advocate a public private partnership, where some of the funding comes from the private sector.

Given our low unemployment rate of 3.8 percent, and evidence of labor shortages, taxation would be the ideal method of financing a large scale infrastructure program. Tax increases would shift spending, resources, and employment from the private sector to the government sector without risking a sharp and possibly sustained increase in the inflation rate. But given the political reality in Washington, a tax hike to finance investment spending is not going to happen. Knowing that they can block any tax increase, and knowing that the nation’s infrastructure is falling apart, it’s conservatives, and only conservatives, who are pushing for the inclusion of the private sector into these public investment decisions.

What’s never mentioned is that any financing from the private sector will not come from retained earning or the issue of new corporate stock, but from the sale of bonds in the capital markets. Likewise, in the absence of a tax hike, an investment program financed by the government would have to done via deficit financing through the selling long-term government bonds in the capital markets.

Proponents of this proposed partnership suffer from the illusion that there is one capital market for the federal government and a different capital market for private investors. This is simply not the case. The world’s capital markets are open to all sellers. Governments and businesses compete with each other in selling their bonds. Are the world’s capital markets capable of financing the Trump administration’s infrastructure spending? Yes. In 2017 it was estimated that the world’s money supply, money that could be used to purchase bonds, was in excess of $90 trillion dollars.

Bringing in the private sector is going to increase the cost of any project. Critics will object to this claiming that the private sector is more efficient than the government. But no matter who finances the infrastructure investments, the actual construction will be done by private firms. The issue at hand is who will pay for these investments, and by extension, who has ownership of them. Is it the government, which is another way of saying society, or will our public infrastructure, in part, be owned by private firms?

The reasons for the higher costs using private funding of investments are three-fold. Corporations can fail, bankruptcy is a possibility, the federal government cannot go bankrupt. For this reason corporate bonds are viewed as riskier requiring a higher “interest rate.” Second, the government has no profit requirement, private investors will want a return on their investment that is at least equal to their next best investment opportunity. Whatever revenues flow to the firm, they will have to be high enough to pay off the bond issue and earn a profit. And finally, when the bond issue is fully paid off, will the private firms who helped finance the infrastructure investments relinquish whatever agreements they have with the government, agreements that generate a flow of revenue to them. With a public private partnership, the infrastructure is partially owned by the private sector and any fees or tolls may be assessed in perpetuity.

A public private partnership minimizes the cost only to the federal government, not to society as a whole. In the end whatever the total costs of the investment programs are going to be, its society who will pay the bills. Engaging the private sector through a public private sector partnership is going to needlessly enrich private firms at the public’s expense, since whatever investments are needed, the ability to finance them is never beyond the government’s ability to do so.

This public private debate is, in essence, what the single-payer health care insurance argument is about. When it comes to paying medical bills, do we need private firms to make these payments, firms whose first order of business is to earn a profit, or would we be better served by a nonprofit entity (the government) who has no profit requirements, less administrative overhead, and who, acting in a fiduciary capacity, would have a mandate to negotiate lower prices thus eliminating the monopoly profits earned today. The arguments that favor a single payer health care system are the same ones that favor a “single payer” government financing plan for investment programs that, in the end, will cost less and keep the ownership of our infrastructure in the public’s hands.