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PPP Introduction and Overview

15.1. Reasons Claimed: PPPs as a Financial Mechanism for Governments to Develop Infrastructure Projects

The financial motivation may be divided into two subgroups. One relates to the statistical and national accounting perspective (private financing that may be regarded as “off balance sheet” of the government, which constitutes a dangerous bias in favor of PPPs). This should be differentiated from the pure cash motivation, that is, the access to external resources to tackle a funding shortage for infrastructure development, regardless of whether or not this is considered, in the respective accounting system, as public debt (explained in 5.1.2.).

5.1.1. PPPs as an Alternative Method for Financing Infrastructure (private financing)

PPPs are an alternative method for financing the new development or upgrading of infrastructure. As an alternative to public finance, it may allow for the acceleration of infrastructure development.

Funds to finance the works will come from the private partner (in the form of equity plus debt, raised by the promoter through the PPP vehicle), instead of coming from the government budget. This does not necessarely mean that the investment will not be accounted for as public debt, particularly if it is a government-pays PPP (see chapter 2 and chapter 4.12). However, many PPPs may not impact public debt if they meet certain criteria (depending on the national accounting standards followed by the respective country).

Therefore, when public borrowing is limited by fiscal regulations and the level of debt is close to the prescribed limits, the PPP solution may allow a government to develop infrastructure that otherwise could not be developed. This, in turn, can allow the government to accelerate a plan or a program. In such circumstances, governments should note that regardless of the fiscal treatment of the PPP, significant resources are being committed under a long-term contract. In government-pays projects, the cost is met by taxpayers, whereas in user-pays PPPs the general public (users) are charged directly for the use of the infrastructure. Hence, there is a danger that a potential abuse of the tool to circumvent debt restrictions will unduly burden society, either directly through the user charges, or indirectly through the impact of government future payments. See box 1.15.

When using a PPP to access an alternative source of financing, governments should also be cautious regarding the potential loss in terms of efficiency or Value for Money. If the PPP option does not show evidence of VfM (that is, incremental efficiency and Value for Money for society in comparison to a traditional delivery or government financed option for the project), a PPP may significantly reduce the cost-benefit outcome of the project (see 5.2). [34] [35].

BOX 1.15: A PPP that Does not Result in Public Debt will Nevertheless Create a Commitment

Even when the assets and liabilities associated with a PPP (in government-pays PPPs) are not reflected in national accounts — so that there is no increase in public debt — there will still be a long-term commitment of public payments (explicit or implicit as contingent liabilities) which affect the government’s long-term fiscal position. For that reason, a number of jurisdictions impose a legal limit on PPP procurement, usually as a percentage of the total amount of capital expenditure that may be procured through PPPs, or similar methods such as a percentage of the gross domestic product (GDP).

Chapter 2.8 provides further explanation on the need for assessing and controlling fiscal commitments and PPP aggregated exposure.

5.1.2. The Access to Cash Motivation

Another financial motivation for PPPs is that private sector financing may provide more financial flexibility for the government, regardless of the implications for a government’s reported debt position. The “cash motivation” is usually the main driver in the case of many EMDEs.

If a PPP is used, there is no need to allocate resources in the short-term budget for the year or years of construction. Nor is there a need to include the funds required for the project in the government’s treasury strategy, or for the government to negotiate specific or additional debt for the project. Even if the PPP is reported as public debt, it has the advantage of transparency and accountability as it is a financial facility clearly dedicated to the specific need.

Regardless of the debt accounting implications, PPPs allow governments to mobilize additional sources of funds. Debt funders that may be interested in lending to the PPP infrastructure project may not be interested in providing direct lending to the government.

 

[34] Furthermore, some national accounting standards (for example, European System of Accounts [ESA] in the EU) may boost higher risk transfer to the private partner than the optimum allotment of risk to maximize VfM. Optimum risk transfer or risk allocation is explained extensively in chapter 5.

[35] “PPPs: in the pursuit of risk transfer and value for money” (OECD 2008) provides an explanation on the risk of the PPP bias in section 1.2.

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