Affordability means the “ability to be accommodated within the inter-temporal budget constraint of the government”. Due to the long-term and contingent nature of PPP costs, it is not easy to decide whether they are affordable. In practice, affordability is assessed by considering the medium-term (typically three years or longer) expenditure framework, and then the annual budget constraint.
- What is the medium-term expenditure framework? Make conservative assumptions as to how overall budget limits will evolve, and consider whether the estimated annual payments for a PPP (under a reasonable range of scenarios) could be accommodated within those limits;
- Budget limits are set in a number of different ways. In Brazil, project studies must include a fiscal analysis for the next ten years. In the UK, procuring authorities must demonstrate the affordability of a PPP project based on agreed departmental spending figures for the years available, and on cautious assumptions of departmental spending envelopes thereafter. In France, the affordability of a PPP is demonstrated by reference to a “ministerial program” a multi-year indicative budgeting exercise. South Africa’s approach (2004) to affordability also describes a similar approach; and
- What is the annual budget constraint? Introduce budget rules to ensure that PPP commitments are considered in the annual budget process. Again, this can be done in a number of different ways. In the state of Victoria, Australia, once a project is approved for PPP delivery, the government will reflect it in the expected PPP capital cash flows for that project as an estimated finance lease liability in the budget, along with any capital contribution expected to be made by the state. Colombia’s law on contingent liabilities (1998) requires implementing agencies to make a cash transfer to a contingency fund when a PPP project is signed. The cash transfer is set equal to the expected value of payments under any revenue guarantees provided (these payments may be phased over several years). This means the decision to accept a contingent liability has an immediate budget impact that must be considered.
See chapter 4.12 for further discussion in fiscal limits and affordability.
 OECD (2008) Public Private Partnerships: In Pursuit of Risk Sharing and Value for Money.
 As highlighted by OECD (2008) Public Private Partnerships: In Pursuit of Risk Sharing and Value for Money.
Congress of Colombia (1998) Law 448 (on managing contingent liabilities of government entities), Article 6.