Is bail out of privately financed infrastructure projects good idea?

When I have first heard about PPPs, the most significant accent was on PPPs being privately financed with private money at stake. Now I hear news about need to bail out PPP projects, with taxpayer money and I wonder; is this good idea?

Financial recession and credit crunch did bring new concerns to very large PPP markets. This concern is how does the financial crises hit PPP projects and how do we rescue projects, which are not going to make it? We have to look first, if the reasons for failure are on the side of mismanagement of the project by private partner, or on the side of macroeconomic impact, which could not have been mitigated and foreseen by neither procuring authority nor private partner. And in the case that it is macroeconomic impact, there is very good rational for public sector bail out. In the case that this infrastructure would be public, the same problem would escalate and therefore as long as if private sector partner is performing well, under given circumstances, it can only be recommended to public sector to consider playing properly its partnership role. And this means to find solutions for the project to survive and deliver expected results.

UK, which is the largest PPP markets so far, have decided to establish Treasury Infrastructure Finance Unit (TIFU) to lend to PFI /PPP projects to “ensure that infrastructure projects go forward as planned despite financial markets conditions and thereby support jobs and economy”. Generally good idea, but at first, it seemed almost, as it will not be needed and used. Banks in the end always formed a club or EIB supported the project. However margins went further up and banks could deliver only short maturities in form of mini-perms. Bank clubs are much larger with single banks holding smaller share that it would 2 years ago and this has also impact on competition as it is hard to form several bank clubs to support number of bidders.

Bond market and credit insurance is dead for the time being and so finally the good idea found first project to bail out in April 2009, when “TIFU completed its first loan facility on 8 April 2009, providing a £120 million loan for the Greater Manchester Waste Disposal Authority’s PFI project alongside the European Investment Bank and a syndicate of commercial banks “.

Second project, to be bailed out, was considered in May for the waste treatment Wakefield project. Finally two years after selection of proffered bidder, the financing of £700 million has been preliminary secured in June, without TIFU assistance and is expected to financially close within several weeks. Bailing out PPPs might be controversial for taxpayers but remain the only practical option for public sector. Hopefully financial crises will be over soon and financial markets will come back to traditionally aggressive and long term lending to PPPs.