Private-Public Partnerships

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 ppps
• 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
Delivery/Finance Public Finance Private Finance
Public Delivery Direct Government User Fees
Private Delivery Contract Vouchers PPPs
6
Background

• Important features of ppps
• 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 ppps 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
• PPPs perceived to offer another way to provide
  for capital

12
Budgetary Impacts of PPPs

• Do PPPs provide improved efficiency despite
  extra financing costs and transaction costs?
• Are PPPs 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 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

20
Budgeting Processes and Practices

• 3. Do nations impose limits on ppps?
• 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 ppps
• 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 ppps 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