Hansen, Baird Continue to Push p3s Despite Global Warnings

The British-inspired model in which private companies build and maintain railroads, schools and hospitals is losing traction as credit dries up and vital institutions struggle. European governments have embraced so-called Public Private Partnerships (PPP), which they believe offer a cost-effective way to invest in key public infrastructure. But the credit crisis has led to sharp increases in borrowing costs, cut the sector's base of long-term lenders, and all but eliminated the "monoline" insurers who once stood behind PPP bonds so they were judged safe enough for even the most conservative investors.

The reality is that the flow of PPP projects has come to a halt and is unlikely to be revived. Major participants such as ABN Amro, Babcock & Brown and Transfield have suffered severe financial setbacks, and many are likely to disappear or be broken up. The resulting ''fire sale'' of assets provides an attractive alternative to participation in new projects for those infrastructure businesses that have so far survived the crisis.

As the global economic crisis deepens, this dynamic will only intensify. Construction firms and service providers will be eager to participate in public infrastructure projects, since private investment is collapsing. But equity investment and bank lending for such projects will be unavailable except on very expensive terms.

The British Government, which has nationalised or bailed out large parts of the banking sector, is now suggesting that banks may be forced to lend to public projects under the Private Infrastructure Initiative. In effect, the Government will be lending money to itself while paying the costs of a series of complex transactions (some of them highly vulnerable to exploitation).

Meanwhile, governments are able to borrow at very low rates of interest, and in some cases at zero or even negative rates. Under such circumstances, the idea that private investors could offer a competitive financing package is out of the question.