The second question is even harder to answer: Is the PPP project affordable? There are two main challenges in answering this question for a PPP project.
First, it is not always clear how much the PPP will cost. Direct fiscal commitments are long-term, and may depend on variables, such as demand (in the case of shadow tolls), or exchange rates (where payments are made in foreign currency). Moreover, many fiscal commitments to PPPs are contingent liabilities, whose occurrence, timing, and value all depend on some uncertain future events. Section 3.2: Appraising PPP Projects provides guidance and examples on how the cost of fiscal commitments to a proposed PPP can be calculated. Mostly this involves considering the modal or 'best estimate' value, hopefully correcting for optimism bias, and scenarios for how that value might vary.
Second, because costs are long-term, and may be contingent, it is not easy to decide whether they are affordable. An OECD publication on PPPs [#196, page 21] defines affordability to mean the 'ability to be accommodated within the inter-temporal budget constraint of the government'. For most government expenditures, affordability is assessed by considering the annual budget constraint, and in some cases the medium-term (typically three-year) expenditure framework. Table 2.5: Options for Assessing the Affordability of Fiscal Commitments to PPPs describes two alternatives for PPPs. The approach may be different for different types of fiscal commitments. Limits on the total stock of fiscal commitments to PPPs, as described further below, may also affect decision-making for particular projects.
Table 2.5: Options for Assessing the Affordability of Fiscal Commitments to PPPs
Option | References and Examples |
Forecast budget limits -that is, make conservative assumptions for how overall budget limits will evolve, and consider whether the estimated annual payments for a PPP (under a reasonable range of scenarios) could be accommodated within those limits | An OECD survey published in 2008 [described in [#194], pages 42-43] found: • In Brazil, project studies must include a fiscal analysis for the next ten years • In the UK, procuring authorities must demonstrate the affordability of a PPP project based on agreed departmental spending figures for the years available, and on cautious assumptions of departmental spending envelopes thereafter • In France, affordability of a PPP is demonstrated by reference to a "ministerial program"-a multi-year indicative budgeting exercise. The PPP Manual of South Africa (2004) section on affordability [#219, Module 2] also describes a similar approach. |
Introduce budget rules that mean the affordability of PPP commitments are considered in the annual budget process | For example: • In the State of Victoria, Australia, a department considering a PPP must first seek approval for the capital spending that would be required if the project received public funds-as required in the 2010 PPP Guidelines [#19, Module 2] and described in Irwin's review of PPP contingent liability management [#162, pages 10-11] • Colombia's law on contingent liabilities (1998) requires implementing agencies to make a cash transfer to a contingency fund when a PPP project is signed. The cash transfer is set equal to the expected value of programs under any revenue guarantees provided (these payments may be phased over several years). This means the decision to accept a contingent liability has an immediate budget impact that must be considered [#49, Article 6] |