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

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Presentation on theme: "Private-Public Partnerships The Relevance of Budgeting Paul L. Posner George Mason University With Shin Kue Ryu."— Presentation transcript:

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) Europe20531% North America17527% Asia13721% Latin America12619% Africa142% Total Value: $887.4 billion

4 Background

5 Delivery/FinancePublic FinancePrivate Finance Public DeliveryDirect GovernmentUser Fees Private DeliveryContractVouchers PPPs Public-Private Roles and Tools

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 PPPs Infrastructure 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 1.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

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