One of the reasons for PPPs has been the desire of governments (local, state, or national) to provide public works even when they are restricted by budgetary constraints. For this reason, the accounting standards-setting organizations have struggled to determine when a project with a private partner should be included on the balance sheet of the public sector. Governments would prefer that the implicit debt incurred (or the temporary asset transfer) not be considered in the budget in order to observe debt covenants or keep rating agencies from downgrading government debt. Taking projects of the balance sheet allows governments to circumvent spending and debt caps. Under conventional provision, on the other hand, caps on spending or net fiscal debt are reasonably effective in controlling the bias toward spending anticipation, because projects must be included in the budget. This is the reasoning behind the comments of Governor Mitch Daniels of Indiana quoted in the introduction.
Including public - private partnership on the balance sheet in the same way as conventional public investment can reduce the incentives to anticipate government spending
In Europe, a standard-setting committee, Eurostat, has promoted a system by which PPP investment is of the public balance sheet if the private party bears a large fraction of the risks of the project. The reasoning seems to be based on an analogy with the fact that, with full privatization, the private party assumes all risks. However, since the definition of a large fraction is discretionary, most PPP projects ended up of the balance sheet.
How should PPPs be accounted for in the budget? The starting point is to note that, as we have already seen, PPPs change the timing of government revenues and disbursements and the composition of financing, but do not alter the intertemporal budget constraint. Given a demand trajectory, the present discounted budget will be the same under public and optimal PPP provision. The main conclusion is that PPPs should be treated just as standard government investments. To see why, consider first a project fully financed by future payments from the budget. From an accounting point of view, this PPP just substitutes debt to the private concessionaire for standard public debt. Thus, there is no reason to treat PPPs differently from projects under traditional public provision. It follows that, upon award of the PPP, the present value of the contract should be counted as a public capital expenditure and public debt should be increased by the same amount.
In the case of projects whose main source of revenues is user fees, the analysis is somewhat different, but reaches a similar conclusion. To see this, consider a project whose user-fee revenues will pay all expenses, including capital expenses, over the lifetime of the PPP. In that case, the project will have no effect on the intertemporal budget constraint of the government. Under conventional provision, project revenues from user fees would have accrued to the government and would have been registered as revenues during each year of the operational phase. At the same time, the government would have made interest and principal payments to pay back the debt. Under a PPP, therefore, one should, as before, register user fees as current revenues and credit those revenues as payments for interest and principal of the "debt" with the concessionaire. At the end of the concession, the debt will be run to zero.
Including these projects in the government balance sheet in the same way as conventional public investment has several advantages. First, the incentives to anticipate spending-which are chronic with PPPs-are reduced, so that PPPs will be chosen when they are socially beneficial and not because they help avoid budgetary controls. Second, treating partnerships with private firms the same way as public provisions implies that both types of projects compete on a level playing field for scarce resources. In particular, both types of projects should be subject to social cost-benefit analysis. Third, the possibility of increasing spending by renegotiating PPP contracts decreases, because any additional investment that results from a renegotiation will also add to recorded debt and thereby be forced to compete with other projects.