"BAD BEFORE, WORSE NOW - The Financial Crisis and the Skyrocketing Costs of
Public Private Partnerships (P3s)"
June 2009 - by Hugh Mackenzie, economist

(an excerpt from the summary)

" This paper examines the extent of the impact of credit conditions on the economics of P3 financing.

The fundamental problem with P3s as a financing vehicle for public projects is that public authorities are able to borrow money at a cheaper rate than private corporations. There is a “spread” between the interest rates paid by governments to borrow money and those paid by private corporations. Even at the historically low – and with hindsight, unreasonably low – interest rate-spreads that prevailed in Canada before the credit crunch, P3 financing was such a bad deal for governments that on financing cost grounds alone, choosing to develop infrastructure projects through P3s was economically irrational.

With a 200 basis-point (2%) spread between a P3’s borrowing cost and a government’s borrowing cost, the present value of a P3’s financing costs would be 60 per cent higher than the present value of financing at the government’s borrowing cost. In other words, a 2 per cent difference in interest costs increases financing costs by 60 per cent. Or to put it another way, financing through government borrowing would support 60 per cent more capital spending than financing through a P3.

In the past two years, however, the changing financial situation has meant even higher costs and extra risks for P3 projects."

READ THE FULL REPORT (external link)