Budgeting procedures are designed for planning and controlling the allocation of resources for capital investment programmes and operational expenditures, in line with national (or local/regional) budget laws. They may also be used for determining the impact of PPPs on fiscal policy and fiscal management.
Budgeting procedures need not replicate either the accounting or statistical treatment of PPPs. However, the accounting or statistical treatment may often influence the budget treatment, and in particular, how PPP transactions are recorded in the budget.
As noted above, the accounting treatment of PPPs is determined in accordance with standards set at the national level. The statistical treatment is defined at the European level. The national budget treatment of PPPs is defined at the national level and may follow either a "control" or a "risk and reward" approach to determine the asset classification.
In the United Kingdom for example, the budget treatment is aligned with the statistical treatment of PPPs. Therefore, off-balance sheet PPPs are not included in the capital budget of the relevant government department. However, the annual payments to the non-government partner are clearly recorded "on budget" independently from the "off" or "on" balance sheet treatment of PPP assets in national accounts. The budget treatment of on-balance sheet PPPs is similar to traditional capital protects (i.e. the full capital investment is reported upfront in the budget).
There is a fundamental difference between (i) budget procedures and (ii) PPP accounting and statistical treatments: the first are cash based, while the second follow accrual-based standards. This difference has a major impact on the recognition and budget control of financial commitments originating from PPPs and traditional capital projects:
• Investments costs: For traditional government-procured projects, the full investment cost of the projects is reported in the budget upfront. Off-balance sheet PPPs do not require such reporting.
• Annual charges: PPP projects require budgeting annual payments to the nongovernment partner (including a combined charge covering financing, operating and maintenance costs) as and when the charge is payable -usually starting once construction is completed. Traditional government capital projects often do not require project lifecycle costs (other than the initial capital investment) to be budgeted ex-ante (i.e. such costs typically need to be approved every year).
Because governments typically budget separately for (i) capital and (ii) operating (or revenue) items, differences in the budget treatment of PPPs and traditional government projects have an impact on both the allocation of budgetary resources and the management of fiscal space. An off-balance sheet PPP results in a shift in commitments from a capital budget (today) to an operating budget (over the years to come). This may "free up" space in the current capital budget for other (on balance sheet) projects.
The value for money assessment implemented by most EU countries generally requires that PPP projects demonstrate greater (or at least equivalent) value than the government-procured alternative. However, the fact that a project delivers value for money, is no guarantee of its affordability. For this reason, several countries have introduced affordability tests which establish budget limits to annual PPP commitments (e.g. in Hungary), to avoid PPP commitments creating budget constraints and crowding out long-term fiscal space. Other countries (e.g. the United Kingdom) have also disclosed in their budget annualised PPP commitments over the medium and long-term10.
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10 See OECD, " Public Private Partnerships: The Relevance of Budgeting" Journal on Budgeting Volume 2009/1