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Public-Private Partnerships PPP s

Definition. IMF/OECD:

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Public-Private Partnerships PPP s

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    1. Public-Private Partnerships (PPP’s) 6th annual OECD public sector accrual symposium, Paris 6-7 March 2006 Presentation by Morten Baltzersen Norwegian Ministry of Finance

    2. Definition IMF/OECD: “Public-private partnerships refer to the private sector financing, designing, building, maintaining and operating infrastructure assets traditionally provided by the public sector.”

    3. Distinctive feature of PPP’s Public-private partnership: A contract between the government and a private supplier that integrates the initial provision of capital assets (public infrastructure) and the subsequent operations and maintenance of these assets into one contract. Conventional procurement: Contracts for provision of capital assets (public infrastructure) are separated from contracts for operation and maintenance of the assets.

    4. Postponed expenditures Conventional procurement: Capital expenditures recorded up front, followed by current expenditures for operations and maintenance. PPP: Private financing allows capital expenditures to be spread over the contract period or economic life time of the capital.

    5. Outsourcing and competition Do PPP’s enlarge the scope for using private suppliers of public goods? – No. Conventional procurement can well be based on contracting out both supply, operation and maintenance of capital assets (e.g. by separate public tenders). Do PPP’s enhance market competition? - Generally no. PPP’s may reduce competition as the government enters into one long term contract instead of separate short term contracts. On the other hand, PPP’s provide an alternative to conventional procurement and contracting out.

    6. Transfer of risks Transferring (financial and functional) risks from the government to the private sector is the basic objective of PPP’s. However: Transfer of risks is not for free. Increased expenditures for reduced risks can only be justified if the private partner is in a better position to manage risks than the government. Transfer of risks is also possible within conventional procurement.

    7. The main rationale for PPP’s PPP’s place the responsibility for both supplying, maintaining and operating the infrastructure on the same supplier, regulated in one long term contract. This integration of responsibility gives the private supplier an incentive to obtain an overall cost effectiveness of the production – from the provision of infrastructure to its maintenance and operations.

    8. Counterarguments A tempting possibility to bypass budget constraints. Increased capital costs: Government’s borrowing cheaper than private financing. Contractual complexity: Demanding task to regulate potential future outcomes. Strategic vulnerability: Government tied to a private monopolist at future renegotiations of the contract.

    9. How should the public sector account for PPP’s? Complex matter. Extent of risk transfer to the private partner a robust criterion for recording investments and corresponding debt off budget? Accounting for PPP’s in a similar fashion as for conventional public financing and procurement, would limit the incentive (temptation) for choosing PPP’s for short term budget considerations rather than economic grounds.

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