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Private-Public Partnerships

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:

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Private-Public Partnerships

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  1. Private-Public Partnerships The Relevance of Budgeting Paul L. Posner George Mason University With Shin Kue Ryu

  2. 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

  3. 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

  4. Background

  5. Background Public-Private Roles and Tools

  6. 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

  7. 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)

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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?

  13. 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

  14. 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

  15. 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

  16. United Kingdom

  17. 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

  18. Budgeting Processes and Practices for PPPs • 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

  19. 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

  20. 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

  21. 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

  22. 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

  23. 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.

  24. 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

  25. “Public and Private Sectors are Alike in All Unimportant Respects” Wallace Sayre

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