Concession contracts raise important issues for the public-sector party regarding public accounting practices and the ownership of residual assets. The private finance aspect of concessions can allow the public sector to finance the construction of infrastructure 'off the balance sheet'. The accounting treatment of payments by the public-sector party to the private sector can make the fiscal budget look healthier than it actually is, thereby undervaluing the cost of PPP financed infrastructure. This can bias decisions in favor of PPPs as opposed to more traditional procurement arrangements, and also make PPPs a means to unduly transfer costs from current to future generations (see IPPR (2001) for a discussion of how off balance sheet considerations mattered in the early PPP projects in the UK).
PPPs have become attractive to governments as an off-budget mechanism for infrastructure development as this arrangement may not require any immediate cash spending. The public sector's other main advantages include the relief from bearing the costs of design and construction, the transfer of certain risks to the private sector and the promise of better project design, construction and operation. [..] There are, however, underlying fiscal costs and contingent liabilities of PPPs to government that may arise in the medium and long term. Besides, there are many important economic, social, political, legal, and administrative aspects, which need to be carefully assessed before approval of PPPs are given by the government. PPPs have various limitations that should also be taken into account while consideration of this modality is made. The major limitations include:
• Not all projects are possible (for various reasons: political, legal, financial etc).
• The private sector may not take interest or may lack the capacity to undertake a project.
• A PPP project may be more costly unless additional costs (due to higher transaction and financing costs) are off-set by efficiency gains.
• Change of ownership to the private sector per se may not be sufficient to improve economic performance unless other necessary conditions are met, which include appropriate sector and market reform, and change in operational and management practices of infrastructure operation.
• Often, the success of PPPs depends on regulatory efficiency.35
Fiscal Responsibility [Brazil: Lei 11.079, Art. 4] Art. 4. The following guidelines shall be observed when contracting public-private partnerships: IV - fiscal responsibility when contracting and implementing partnerships; [Peru - Decreto Legislativo n. 1012 Art. 5] Responsabilidad Presupuestal. Deberá considerarse la capacidad de pago del Estado para adquirir los compromisos financieros, firmes y contingentes, que se deriven de la ejecución de los contratos celebrados dentro del marco de la presente norma, sin comprometer la sostenibilidad de las finanzas públicas ni la presentación regular de los servicios. |
Debt reduction and PPP: an uncertain belief [Mexico: Acuerdo Secretaria de Hacienda Diario Oficial 9 Abril 2004, Considerando] ..Que con motivo de la restricción presupuestaria que enfrentan las dependencias y entidades de la Administración Pública Federal, resulta fundamental la participación de los sectores sociales y privado como coadyuvantes en el objetivo de hacer un uso eficiente del gasto público federal; Que es necesario aprovechar la experiencia y los medios de financiamiento y desarrollo de infraestructura con que cuentan los sectores social y privado, con el fin de dirigir los recursos público hacia las funciones esenciales de la Administración Pública Federal, así como a la prestación eficiente de los servicios públicos por parte del Estado; Que una forma de incrementar la eficiencia en el uso de los recursos del sector público es transferir a los sectores social y privado la mayor cantidad de riesgos y contingencias relacionados con los costos financieros y de ejecución de obras, mediante la utilización de esquemas para la realización de proyectos para prestación de servicios con base a los cuales se celebran contratos de servicios de largo plazos, a fin de que el gasto de cada ejercicio fiscal se concentre en los aspectos más importantes de la función pública; Que el grado de eficiencia que los sectores social y privado pueden aportar a las dependencias y entidades de la Administración Pública Federal en la prestación de servicios de largo plazo, con el uso de activos que posean dichos sectores, puede redundar en ahorros significativos para las dependencias y entidades, con el consecuente incremento en la eficiencia y racionalidad del gasto público a ser ejercido anualmente.. |
Ensuring Affordability In Victoria (Australia) the decision about how a project is funded is separate from the decision about how it is delivered. Potential PPPs compete for limited budget funding along with all other capital projects (to ensure that all projects fall within the range that is considered affordable). Funding is approved on the basis of the preliminary public sector comparator (PSC) for the project (see section 2 in this chapter for a discussion of the PSC), thereby allowing a project to proceed under a traditional delivery method should private bidders not offer value for money. The PSC forecasts both the capital cost and the whole-of life operating costs, discounted to a net present cost (NPC). Bids are measured against the PSC. In Brazil, project studies must include a fiscal analysis for the next ten years. In addition, the commitment of the federal budget to PPP projects is limited by law to 1% of the net current revenue of the government. In France, affordability is demonstrated by reference to the ministerial programme (a pluriannual indicative budgeting exercise) and not to the individual annual budgets of the departments. In Hungary, starting in 2007, there is a limit on the amount of expenditure on PPPs within the budget, so each programme must fit within this limit. The use of budgetary limits on the total amount that can be spent on PPP projects also relates to the discussion in section 1.2 of this chapter on affordability and limited budget allocations. In the United Kingdom, procuring authorities are required to complete an affordability model for any planned private finance initiative (PFI) project. The affordability model includes a sensitivity analysis. The procuring authorities complete these affordability models based on agreed departmental spending figures for the years available and on cautious assumptions of departmental spending envelopes in the future. Source: Building Flexibility: New Delivery Models for Public Infrastructure Projects, Deloitte Research, 2005. |
Finally, it is worth mentioning that PPP and public works do not necessarily imply different impacts on the budget. In fact, if in public works the contractor is normally paid at the completion of the project, the procuring authority may always borrow the sum needed for that payment diluting the impact of the same on various budgets.
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35 UNESCAP, Public-private partnerships in infrastructure development. An introduction to issues from different perspective\es, Seul 2007