Private-Public Partnerships - Relevance of Budgeting

8/10/2019 Private-Public Partnerships - Relevance of Budgeting

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Private-Public Partnerships

The Relevance of Budgeting

Paul L. PosnerGeorge Mason University

With Shin Kue Ryu


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Introduction

Build on previous OECD study toexamine budgetary treatment andissues posed by ppps:

Interviews with budget officials inAustralia, Chile, France, Hungary,Korea, Portugal, United Kingdom,United States


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Background

Worldwide Major PPP Projects Since1985 (By Region)

Europe 205 31% North America 175 27%

Asia 137 21%

Latin America 126 19%

Africa 14 2%

Total Value: $887.4 billion


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Background


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Background

Delivery/Finance Public Finance Private Finance

Public Delivery Direct Government User Fees

Private Delivery Contract Vouchers PPPs

Public-Private Roles and Tools


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Background

Important features of ppps

Private financing provided up front for

Comprehensive cradle to old age design, construction, operation andmaintenance.

The private sector bears a significant

and appropriate portion of the risk. Competition and metrics essential


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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)


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Impetus for PPPs

Infrastructure and Capital Budgeting

Public infrastructure backlog andpotential role in economic growth.

Rationale for ppps premised on themixed incentives in budgeting forcapital

Political credit claiming

Spikes in funding and competition withother mandatory spending items

Little incentive to fund maintenance


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Capital projects recorded

alternatively by government

Accrual based systems: Stretchingout budgetary recognition overtime.

Smoothe funding and overcomepotential spiking problems

Full costs of asset not required to be

funded at project inception. Both cash and accrual systems

compensate to mitigate concernsover spiking and up front costs


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Increasing the level of public

infrastructure

Limited, and political painful, set ofoptions

Raise taxes

Levy or increase user fees

Cut spending elsewhere in the budget

Borrowing

Reduce or manage demand

PPPs perceived to offer anotherway to provide for capital


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Budgetary Impacts of PPPs

Do PPPs provide improvedefficiency despite extra financingcosts and transaction costs?

Are PPPs affordable underintertemporal budget constraints?


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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


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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 valueprovided by each sector


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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 valueprojects


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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

(MillionsofPounds)


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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 spacecan occur even if projects representvalue for money Crowding out other priorities Funding for nonentitlement costs will be more

constrained in the future


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Budgeting Processes and

Practices for PPPs

1. Are PPPs on or off budget?

Critical in determining whetherprojects are governed by overall

budget constraints and guidance

Impact of Eurostat guidance

Nations vary significantly

UK experience Concessions


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Practices for PPPs

2. How are ppp costs booked inbudgets?

Most nations do not recognizecosts of ppps up front

Less stringent than government capital

Several nations do book ppp costs

up front Indirect subsidies for ppps often

not budgeted for up front when

commitment is made


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Practices

3. Do nations impose limits on ppps?

Some nations have imposed

budgetary limits on annual PPPKorea and Hungary

UK overall capital DEL

Most nations include annualized ppp

costs in medium term frameworks

Most nations not providing longterm budget projections

UK data on long term trajectory


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Practices

4. Is legislative and public oversightcomparable with other spending?

In most nations, the annual

appropriations process will not disclosethe presence of new PPPs

Several nations do not provide forlegislative approval of ppps

Public information on contract andprivate partner difficult to obtain


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Budgeting Process and Practices

5. What other practices have nationsadopted to provide for ppp reviews?

Robust analytic review processes PPP units

Public sector comparator

Greater rigor than government capital

Question whether analysis issufficient without budget controls


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Conclusions

Use of private financing anddelivery for public services has itswell known advantages.

Stronger budgetary processes andcontrols are necessary to providegreater assurance that PPPs are

being funded for the right reasons.


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Suggestions for Strengthening

Budgetary Controls

Up front funding for ppps in competitionfor 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 termobligations


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Public and Private Sectors are Alike

in All Unimportant Respects

Wallace Sayre

Documents

Private-Public Partnerships - Relevance of Budgeting