Private-Public Partnerships

The Relevance of Budgeting

Paul L. Posner
George Mason University
With Shin Kue Ryu
Introduction
 Build on previous OECD study to
examine budgetary treatment and
issues posed by ppp’s:
 Interviews with budget officials in
Australia, Chile, France, Hungary,
Korea, Portugal, United Kingdom,
United States
Background
 Worldwide Major PPP Projects Since
1985 (By Region)
 Europe 205 31%
 North America 175 27%
 Asia 137 21%
 Latin America 126 19%
 Africa14 2%

 Total Value: $887.4 billion

Background
Background

Public-Private Roles and Tools

Delivery/Finance Public Finance Private Finance

Public Delivery Direct Government User Fees

Private Delivery Contract Vouchers PPP’s

Background
 Important features of ppp’s
 Private financing provided up front for
 Comprehensive “cradle to old age” –
design, construction, operation and
maintenance.
 The private sector bears a significant
and appropriate portion of the risk.
 Competition and metrics essential
Various forms of PPPs across
nations
 Different types of PPPs
(Role played by private sector)
 Build-own-maintain (BOM)
 Build-own-operate (BOO)
 Build-develop-operate (BDO)
 Design-construct-manage-finance (DCMF)
 Design-build-operate (DBO)
 Buy-build-operate (BBO)
 Lease-own-operate (LOO)
 Build-operate-transfer (BOT)
 Build-own-operate-transfer (BOOT)
 Build-rent-own-transfer (BROT)
 Build-lease-operate-transfer (BLOT)
 Build-transfer-operate (BTO)
Impetus for PPPs
Infrastructure and Capital Budgeting
 Public infrastructure backlog and
potential role in economic growth.
 Rationale for ppp’s premised on the
mixed incentives in budgeting for
capital
 Political credit claiming
 Spikes in funding and competition with
other mandatory spending items
 Little incentive to fund maintenance
Capital projects recorded
traditionally by government
 Most nations use cash based unified
budget regimes
 Full construction costs recognized up
front
 Comprehensive fiscal policy captured
 Spikes in funding can discourage
capital projects
 Some nations use separate capital
budget processes
Capital projects recorded
alternatively by government
 Accrual based systems: Stretching
out budgetary recognition over time.
 Smoothe funding and overcome
potential spiking problems
 Full costs of asset not required to be
funded at project inception.
 Both cash and accrual systems
compensate to mitigate concerns
over spiking and up front costs
Increasing the level of public
infrastructure
 Limited, and political painful, set of
options
 Raise taxes
 Levy or increase user fees
 Cut spending elsewhere in the budget
 Borrowing
 Reduce or manage demand
 PPP’s perceived to offer another way
to provide for capital
Budgetary Impacts of PPP’s
 Do PPP’s provide improved
efficiency despite extra financing
costs and transaction costs?
 Are PPP’s affordable under
intertemporal budget constraints?
The Efficiency Imperative
 Efficiency benefits stem from
 Competition
 Long term comprehensive contracts
 Risk sharing
 Reducing barriers to user charges
 Results are early and mixed
 Some gains in construction phase
 Potential offsetting losses in operations
phase
Public management problems
complicate the efficiency argument
 Characteristic problems magnified
 Goal Conflict
 Principal agency problems
 Limited competition
 Rent seeking
 Asymmetrical public sector risks
 Boundary blurring undermines value
provided by each sector
Fiscal Imperative
 Fiscal rationale for PPPs
 Permit funding of more capital projects
 Free up near term fiscal space
 Potential fiscal impacts
 Fund higher levels of capital than can be
afforded over long term
 Encumber future fiscal space in
operating budgets
 Promote selection of lower value projects
United Kingdom
UK Long Term Payment Projections for PFI Projects

8000

7000

6000

5000
(Millions of Pounds)

4000

3000

2000

1000

0
1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 2022 2025 2028 2031 2034 2037 2040 2043 2046

Years
Affordability considerations
 Long term costs include
 Mandatory annual payment
 Capital contributions
 Revenue losses from foregoing user fees
 Contingent liabilities such as guarantees

 Long term encumbrance of fiscal space

can occur even if projects represent value
for money
 Crowding out other priorities
 Funding for nonentitlement costs will be more
constrained in the future
Budgeting Processes and
Practices for PPPs
1. Are PPPs on or off budget?
 Critical in determining whether projects are
governed by overall budget constraints and
guidance
 Impact of Eurostat guidance
 Nations vary significantly
 UK experience
 Concessions
Budgeting Processes and
Practices for PPPs
2. How are ppp costs booked in budgets?
 Most nations do not recognize costs of
ppp’s up front
 Less stringent than government capital
 Several nations do book ppp costs up
front
 Indirect subsidies for ppp’s often not
budgeted for up front when
commitment is made
Budgeting Processes and
Practices
3. Do nations impose limits on ppp’s?
 Some nations have imposed budgetary
limits on annual PPP Korea and Hungary
 UK overall capital DEL
 Most nations include annualized ppp
costs in medium term frameworks
 Most nations not providing long term
budget projections
 UK data on long term trajectory
Budgeting Processes and
Practices
4. Is legislative and public oversight
comparable with other spending?
 In most nations, the annual
appropriations process will not disclose
the presence of new PPPs
 Several nations do not provide for
legislative approval of ppp’s
 Public information on contract and
private partner difficult to obtain
Budgeting Process and Practices

5. What other practices have nations

adopted to provide for ppp reviews?
 Robust analytic review processes
 PPP units
 Public sector comparator
 Greater rigor than government capital
 Question whether analysis is
sufficient without budget controls
Conclusions
 Use of private financing and
delivery for public services has its
well known advantages.
 Stronger budgetary processes and
controls are necessary to provide
greater assurance that PPPs are
being funded for the right reasons.
Suggestions for Strengthening
Budgetary Controls

 Up front funding for ppp’s in competition

for limited resources
 Full on budget treatment, regardless of
accounting
 Affordability criteria and limits
 Up front estimation of guarantees
 Strengthening long term budget analysis
 Improved disclosures of long term
obligations
“Public and Private Sectors are Alike
in All Unimportant Respects”
Wallace Sayre