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August 03, 2013

PPPs on the Balance Sheet, Please!

Posted by Tim Irwin

Public-private partnerships create a practical problem for public financial management, because their fiscal costs are deferred. Instead of paying for a project during its construction, the government starts to pay only when construction is complete, which may be four or five years after any deal is signed. That means that the main tool of public financial management—budget scrutiny—can’t be used to ensure that PPPs are affordable and a better use of public money than the alternatives. For PPPs with long construction periods, even the analysis of medium-term spending plans doesn’t help.

So what can be done to ensure that the budgetary implications of PPPs are properly considered?

The World Bank Group has just published an Operational Note on managing fiscal commitments from PPPs that helps answer this question. It looks at how these fiscal commitments can be assessed and monitored, whether they are commitments to pay for the availability of a service or to protect a PPP company from certain risks. The Note gives examples of the tasks that can be carried out by different government agencies, such as budget departments, debt-management offices, and PPP units. And it considers the kinds of rules that can be put in legislation to help ensure that the right assessment and monitoring occurs.

However, the Operational Note does not take a position on whether or not PPPs should be put on the government’s balance sheet. Budgeting and Reporting for Public-Private Partnerships by Katja Funke, Isabel Rial, and me argues that they typically should be.

Putting a PPP on the government’s balance sheet means first that the PPP asset, such as the school or hospital, appears on the government’s balance sheet as one of its assets. It also means that

  • The investment in the PPP is counted as public investment.
  • The government’s debt increases as the investment occurs.

When PPPs are on the government’s balance sheet, the government’s accounts will look more or less the same whether a project is done as a PPP or with public finance.

Putting PPPs on the government’s balance sheet creates some practical problems for budgeting and accounting, but it helps achieve two widely shared goals:

  • First, that the government’s fiscal commitments in PPP contracts are affordable;
  • Second, that there is a level playing field between PPPs and publicly financed projects, so there is no bias in procurement decisions.

To achieve these goals, a government needs to project how much a PPP will cost over the long term and assess whether the government can afford to spend this much given its other commitments (affordability analysis) and it needs to compare the expected costs and benefits of the PPP with those of a publicly financed alternative project (value-for-money analysis).

It is possible—and desirable—to do these analyses whether or not PPPs are put on the government’s balance sheet.

If PPPs are off balance sheet, however, a government that is struggling to meet debt and deficit targets may find it difficult to accept the results of such analyses. For example, if value-for-money analysis suggests that a PPP is more expensive than the publicly financed alternative, the government may still be tempted to choose the PPP to make meeting its debt and deficit targets easier.

If the government does take the analyses seriously, the people doing them may come under pressure to modify them until they favor PPPs. This is often possible because the analyses involve many assumptions. Value-for-money analysis, for example, can usually be made to favor PPPs just by sufficiently raising the discount rate that is assumed to be appropriate for calculating the present value of future cash flows.

Putting PPPs on the government’s balance sheet circumvents these problems and makes it more likely that affordability and value-for-money analyses will guide the government’s decisions and be undertaken without bias.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy. 

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