Private-Public Partnerships

The Relevance of Budgeting

Paul L. PosnerGeorge Mason UniversityWith 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% Africa 14 2%

Total Value: $887.4 billion

Background

Background

Delivery/Finance Public Finance Private Finance

Public Delivery Direct Government User Fees

Private Delivery Contract Vouchers PPP’s

Public-Private Roles and Tools

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 PPPsInfrastructure 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

0

1000

2000

3000

4000

5000

6000

7000

8000

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

Years

(Milli

ons

of P

ound

s)

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 frontLess 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