Bailout fatigue

The year has started inauspiciously with a number of public-private partnerships being bailed out by the UK and Australian governments. The infrastructure market will be hoping this does not become a major trend

Last week, public authorities in the UK and Australia – widely regarded as two of the world’s most developed public-private partnership (PPP) markets – had to step in to prevent a number of important infrastructure projects from defaulting on their debt obligations.

In the UK, the Department for Health said it would provide £1.5 billion (€1.8 billion; $2.4 billion) over 25 years to make sure that seven National Health Service Trusts will be able to keep functioning while honouring their Private Finance Initiative (PFI) contracts. PFI is the UK’s standardised procurement process for PPPs.

Down Under, the New South Wales government had to promise to invest A$175 million (€143 million; $187 million) in a rolling stock PPP involving the renewal of a fleet of trains serving Sydney’s suburban network. If it hadn’t, the jittery banks backing the sponsor would probably not have let it draw down some A$375 million of debt needed to continue its work.

The two examples are interesting in a number of ways. Firstly, these troubled PPPs are located in two developed – and rich – economies. Over the past year, we’ve got used to the idea that PPPs might run into trouble in some of Europe’s peripheral economies – seeing them also encounter difficulties in the most developed economies is not an encouraging sign. 

Secondly, in both instances, the troubled projects were bailed out fairly quickly, but the governments footing the bill did not waste the chance to blame their political predecessors and private sector incompetence for the state of these deals. Some of this mudslinging was fairly typical, but the industry should pay attention because, in many ways, it provided the cover these governments needed to bail out what are essentially crucial infrastructure assets.

Thirdly, and perhaps most importantly, these bailouts lend strength to an increasingly popular argument: that the risk transfer in PPPs is illusory, because, when the going gets tough, the public sector always has to step in to rescue these assets – and by extension the private sector itself. 

In the end, it doesn’t really matter if this argument is correct. What matters is that money keeps flowing from governments to the private sector so that the latter does not go under. As people’s living standards decrease and governments find themselves increasingly cash strapped, the chorus of voices asking why the private sector is not taking more of a hit will grow louder.

If there’s one thing the crisis has taught us it’s that infrastructure correlates more closely than expected with the wider economy. One addition to this is that infrastructure probably correlates more closely than expected with economic sentiment too, such as the growing backlash against banks and a general bailout fatigue. 

Simply put, people will find it increasingly hard to accept that they are being asked to pay more for infrastructure – in tough times – so that the private sector – in tough times – can keep collecting its 100 cents on the dollar.