Should government use public-private partnerships to get investment in public services?

Timothy Irwin

World Bank

6 April 2005

2

Cash flows with public finance: No tolls

-100

-80

-60

-40

-20

0

20

40

60

80

100

0 1 2 3 4 5 6 7 8 9 10

"Financing" cash flows

Investment and operating cash flows

3

Net cash flows with public finance: No tolls

-100

-80

-60

-40

-20

0

20

40

60

80

100

0 1 2 3 4 5 6 7 8 9 10

Net cash flows

4

Net cash flows with public-private-partnership with availability payments: No tolls

-100

-80

-60

-40

-20

0

20

40

60

80

100

0 1 2 3 4 5 6 7 8 9 10

Net cash flows

5

The accounting appeal of public-private partnerships with long-term purchase contracts

Public borrowing to finance an investment

Entering into PPP with long-term purchase contract

Get asset without having to raise taxes immediately

Get asset without having to raise taxes immediately

Must repay debt whether you need the asset or not

Must make availability payments whether you need the asset or not

Have a liability that you must report

Have a liability that you might not have to report

6

Cash flows with public finance: Tolls

-100

-80

-60

-40

-20

0

20

40

60

80

100

0 1 2 3 4 5 6 7 8 9 10

"Financing" cash flows

Investment and operating cash flows

7

Net cash flows with public finance: Tolls

-100

-80

-60

-40

-20

0

20

40

60

80

100

1 2 3 4 5 6 7 8 9 10 11

Net cash flows

8

Consider a public-private partnership with a guarantee of revenue

0

50

100

150

200

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

$million

Forecast revenue

Guaranteedrevenue

9

A possible good outcome

0

50

100

150

200

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

$ millionPayment

Forecast revenueActual revenueGuaranteed revenue

10

A possible bad outcome

0

50

100

150

200

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

$ millionPayment

Forecast revenueActual revenueGuaranteed revenue

11

Payments can be large: The Incheon airport expressway in Korea

0

50

100

150

200

250

300

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

Year

Bill

ion

1999

won

Forecast revenue Guaranteed revenue Actual revenue

12

The accounting appeal of public-private partnerships with tolls and guarantees

Public borrowing to finance an investment

Entering into PPP with guarantee

Get asset without having to raise taxes immediately

Get asset without having to raise taxes immediately

Collect tolls, but must repay debt whatever the revenue

Don’t collect tolls; might have to pay out on guarantees

Have a liability that you must report

Have a liability that you might not have to report

13

Gov’t

Lender

OpCo

ConCo

Financecontract

Operating contract

Constructioncontract

Consider public finance with separate construction, operating, and financial contracts

Ultimate finance providers

14

Gov’t

Firm

OpCo

ConCo

Bundled finance, construction,and operating contract

Operating contract

Constructioncontract

Compare private finance with long-term (“take-or-pay”) purchase contract

Ultimate finance providers

15

Calculating the present value of availability payments in a public-private partnership

-100

-80

-60

-40

-20

0

20

40

60

80

100

0 1 2 3 4 5 6 7 8 9 10

Net cash flows

1 1

Tt

tt

APV

r

16

But how to calculate the present value of highly uncertain payment streams in guarantees?

0

50

100

150

200

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

$ millionPayment

Forecast revenueActual revenueGuaranteed revenue

17

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

0 5 10 15 20 25 30 35 40 45 50 More

Payment bins

Fre

qu

en

cy

Histogram of government payments in 2016 from Monte Carlo simulation (N = 10,000)

Average payment in 2016 is $4.19 millionAssume riskfree rate is 5%Approximate value of 2016 component of guarantee is 4.19/(1.05)11 = $2.45 millionRepeat for all years.

18

The advantage of recognizing nontraditional liabilities: Philippine National Power Company

Balance-sheet items (31 December 2002)

Trillion pesos

Assets 1.15

Legally owned plant 0.27

Plant procured under power-purchase agreements

0.45

Liabilities 1.15

Long-term debt 0.38

Power-purchase liabilities 0.60

19

The advantage of recognizing nonstandard liabilities: US approach to loan guarantees

Year Event Budget appropriatio

n account

Financing account

1 Government guarantees $10 loan for $1 fee; expected discounted cost of future calls is $3

$2 -$1

2 Guarantee is called and government pays $10

$0 $10

20

Disclosure as second best option in Chile: Expected guarantee cash flows (billion pesos)

-10

-8

-6

-4

-2

0

2

2005 2006 2007 2008 2009

Minimum revenue Revenue sharing Exchange rate

21

Disclosure continued: Value of Chile’s revenue and exchange guarantees (billion pesos)

Revenue Exchange rate

Total

Santiago-Los Andes 3.1 3.1

Camino de la Madera

-1.3 –1.3

Los Vilos-La Serena 2.3 3.2 5.7

Total 128.6 10.6 139.2