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
North America
Asia
Latin America
Africa

Total Value: $887.4 billion




205
175
137
126
14
31%
27%
21%
19%
2%
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

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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)






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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

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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

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
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.

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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

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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

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Competition
Long term comprehensive contracts
Risk sharing
Reducing barriers to user charges
Results are early and mixed

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Some gains in construction phase
Potential offsetting losses in operations
phase
Public management problems
complicate the efficiency argument

Characteristic problems magnified
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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

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Permit funding of more capital projects
Free up near term fiscal space
Potential fiscal impacts
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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
(Millions of Pounds)
7000
6000
5000
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

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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
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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
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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?
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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
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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
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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