1. Should government use public-private partnerships to get investment in public services? Timothy Irwin World Bank 6 April 2005

2. 2 Cash flows with public finance: No tolls

3. 3 Net cash flows with public finance: No tolls

4. 4 Net cash flows with public-private-partnership with availability payments: No tolls

5. 5 The accounting appeal of public-private partnerships with long-term purchase contracts Public borrowing to finance an investment Entering into PPP with long- term purchase contract Get asset without having to raise taxes immediately Must repay debt whether you need the asset or not Must make availability payments whether you need the asset or not Have a liability that you must report Have a liability that you might not have to report

6. 6 Cash flows with public finance: Tolls

7. 7 Net cash flows with public finance: Tolls

8. 8 Consider a public-private partnership with a guarantee of revenue

9. 9 A possible good outcome 0 50 100 150 200 2007200820092010201120122013201420152016 $ million Payment Forecast revenue Actual revenue Guaranteed revenue

10. 10 A possible bad outcome 0 50 100 150 200 2007200820092010201120122013201420152016 $ million Payment Forecast revenue Actual revenue Guaranteed revenue

11. 11 Payments can be large: The Incheon airport expressway in Korea

12. 12 The accounting appeal of public-private partnerships with tolls and guarantees Public borrowing to finance an investment Entering into PPP with guarantee Get asset without having to raise taxes immediately Collect tolls, but must repay debt whatever the revenue Don’t collect tolls; might have to pay out on guarantees Have a liability that you must report Have a liability that you might not have to report

13. 13 Gov ’ t Lender OpCo ConCo Finance contract Operating contract Construction contract Consider public finance with separate construction, operating, and financial contracts Ultimate finance providers

14. 14 Gov ’ t Firm OpCo ConCo Bundled finance, construction,and operating contract Operating contract Construction contract Compare private finance with long-term (“take- or-pay”) purchase contract Ultimate finance providers

15. 15 Calculating the present value of availability payments in a public-private partnership

16. 16 But how to calculate the present value of highly uncertain payment streams in guarantees? 0 50 100 150 200 2007200820092010201120122013201420152016 $ million Payment Forecast revenue Actual revenue Guaranteed revenue

17. 17 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 05101520253035404550More Payment bins Frequency Histogram of government payments in 2016 from Monte Carlo simulation (N = 10,000) Average payment in 2016 is $4.19 million Assume riskfree rate is 5% Approximate value of 2016 component of guarantee is 4.19/(1.05) 11 = $2.45 million Repeat for all years.

18. 18 The advantage of recognizing nontraditional liabilities: Philippine National Power Company Balance-sheet items (31 December 2002)Trillion pesos Assets1.15 Legally owned plant0.27 Plant procured under power-purchase agreements 0.45 Liabilities1.15 Long-term debt0.38 Power-purchase liabilities0.60

19. 19 The advantage of recognizing nonstandard liabilities: US approach to loan guarantees YearEventBudget appropriation account Financing account 1Government guarantees $10 loan for $1 fee; expected discounted cost of future calls is $3 $2-$1 2Guarantee is called and government pays $10 $0$10

20. 20 Disclosure as second best option in Chile: Expected guarantee cash flows (billion pesos)

21. 21 Disclosure continued: Value of Chile’s revenue and exchange guarantees (billion pesos) RevenueExchange rate Total Santiago-Los Andes3.1 Camino de la Madera-1.3–1.3 Los Vilos-La Serena2.33.25.7 Total128.610.6139.2