Russia should use PFIs to rebuild its public services

Put together a government with too little money and a private sector with too much money and you have the making of Public/ Private Partnership. In Russia today, government revenue comes to 19.3% of official GDP, or $85bn. If the black economy (estimated at about 40 per cent) is added on, government revenue comes to only 14% of GDP – between a third and a quarter of public revenue as a percentage of GDP in the European Union. With this sum, the Russian government has to build and maintain almost the whole of Russia’s public infrastructure. No wonder it is crumbling away.

On the other side, there are 23 ‘official’ billionaires in Moscow alone and hundreds, if not thousands, of millionaires, in Russia as a whole. So why not get them to invest in Russia’s hospitals, schools, prisons, transport systems –and even run the services these assets provide –under government contract?

This is the essence of the idea of Private/Public Partnership (PPP). The government buys public services from the private sector rather than producing the services itself. Street cleaning is a municipal responsibility. But there is no reason why it should not be outsourced to a private company. Of course, the public authority still has to pay to get the streets cleaned. But, in theory, it pays less than if it employs the street cleaners itself –especially if it puts street cleaning out to tender. In Britain, private companies have even started to run prisons.

PFI –the Private Finance Initiative-applies the idea of outsourcing to capital projects. The government contracts with private consortia to design, build, maintain and in some cases run public assets such as hospitals, schools, prisons, roads and railways for a period of up to 30 years. The private consortium raises the money for the capital costs and running expenses of the project. The government pays it a ‘rental’ sufficient to cover interest and repayment charges and make a profit, and fines it for breaches in the contract specification.

The advantage is twofold. The first is that it transfers risk from the government to the private sector. Because its own capital is at stake, the private sector will deliver projects quicker and at lower unit cost than can a government department –which has the taxpayer behind it to underwrite the cost of budget and time overruns and faulty designs. The second advantage is that the government does not have to pay any money ‘up front’. This means that more capital projects can be undertaken for a given level of public spending. Practically the whole of the UK’s public infrastructure –long neglected by cash-poor governments –is being renewed through PFI.

It is not a perfect system, and there are still many unknowns. Early experience with PFI shows that much of the expected cost saving is swallowed up in the expense of preparing and submitting bids. But unless the procurement contract is very carefully specified, the division of risk is not clear and risk-sharing easily turns into blame sharing. Who has to pay if things go wrong –or if new technology makes the original specification obsolete? The additional problem in Russia is that the terms of the contract would more than likely be settled by a corrupt deal between the contractor and the commissioning authority.

But what choice does Russia have? If the government hikes taxes for the rich, there will be another massive flight of capital. If it borrows the money itself, interest rates will go up. PFI offers a civilised way of inducing the oligarchs to invest the proceeds of Russia’s natural resources in their own country, rather than buying London football clubs or Western real estate. To use the private profit motive to rebuild Russia’s public services would be a worthy aim for Putin’s second term.