32. Governments sometimes consider PPPs as an alternative to public procurement due to a lack of public sector funds or fiscal capacity. This demonstrates a lack of understanding of PPP transactions. The state is purchasing an asset or providing a service and this will entail costs for the state. PPPs do not provide "free" infrastructure as the nature of the private-sector means it cannot construct and operate facilities without being adequately compensated for the costs and risks involved.
33. Under an availability-type PPP, the private-sector party's main source of revenue is availability payments paid by the public authority. These payments can be thought of as consisting of three components, a component for operating costs, for life-cycle maintenance costs and for the cost of building and financing the infrastructure (capital costs). By amortising capital costs over the entire duration of the project agreement, the state is relieved from the burden of financing construction in one or a small number of large payments over the construction period, but it pays the capital cost of the asset nonetheless. Under both a PPP and public procurement scenario the state pays operating and maintenance costs. In availability PPPs it is obvious that the state incurs costs and is paying for the asset over the life of the PPP agreement. The rationale for procuring via PPP is not to avoid these costs but rather to lower them a by achieving optimal value for money.
34. Concession-type arrangements bring other considerations. While governments may not be contractually liable for a stream of future cash flows as under an availability arrangement, they will still incur costs. First, project preparation costs: all PPPs are complex arrangements and preparing the tender and negotiating the contract requires substantial capacity and resources that governments facing spending constraints may not have. Pure concession arrangements by definition push all volume or traffic risk to the private party, so volume levels must be very well-quantified and there must be a high-level of confidence in future volume projections for a concession to be attractive to the private sector. In MENA countries, it is unlikely that private investors or their lenders will be willing to face volume or traffic risk without some form of minimum revenue guarantee from the government6. Any such guarantee creates additional liabilities and costs for the state.
35. Procuring via a concession or toll-based arrangement shifts the responsibility for paying for the infrastructure from the government to users and is therefore easily conceptualised as reducing government expenditure. However, by conceding the right to collect tolls or user fees, the government loses revenue that it would have collected if the project had been financed by traditional public procurement (OECD/International Transport Forum 2013). This opportunity cost, while not usually included in government accounts, remains a cost. There is also a high risk of public backlash against tolls due to insufficient communication with the broader public from the start of the project design.
36. Given that a PPP implies reduced government capital expenditure, at least in the short-term, its short-term effect is to reduce total government expenditure and improve the fiscal balance. In the long-term, the future stream of fees and payments to the private partner must also be taken into consideration. When that is done, the PPP may not be cheaper in present value terms when compared to public procurement. Whether it will be cheaper will depend on the cost of capital and on the relative levels of efficiency achieved (see the value for money discussion above). Thus, if the efficiency gains are such that government derives more value for money through the PPP than through traditional public procurement, the net present value of future revenue and expenditure streams might improve, thereby rendering the PPP project more affordable. Therefore, it can be argued that a PPP is relatively more affordable than public procurement if it delivers more value for money. However, in either case, absolute affordability depends on whether or not the total expenditure can be accommodated within government budget constraints.
37. The perception that PPPs can be without cost is perhaps due to the treatment that PPPs have sometimes been given in national accounts. The question of whether a project is "on the books" (in the national accounts), or "off the books" is a question of accounting treatment determined by the apportioning of risk and the nature of future explicit or contingent obligations for which the government is or may be liable. Some governments have believed, wrongly, that if a project is off the books, it becomes more affordable. The "off the books" characteristic of PPPs has been especially appealing for countries with self-imposed fiscal rules or budgetary limits that can create incentives to delay expenditures instead of financing them up front (OECD, 2008). A government under pressure to reduce its deficit or debt in the short term may therefore prefer PPPs over public financing, even if the PPP costs more in the long run. This bias creates a risk of accumulating financial commitments that prove unaffordable (OECD/International Transport Forum, 2013).
38. The PPP concept was developed and has been most successful in OECD countries. One of the key attractions of PPPs for private sector developers and investors in these jurisdictions is that the cash flows to be earned by the project company (in an availability-based transaction), and which can be earmarked for repayment of investors in priority, are a long-term contractual obligation of the state. This issue is of such importance that investors and/or their creditors will usually seek legal comfort that the obligations of the public counterparty are obligations of the state either due to the status of the public counterparty at law or by way of an explicit guarantee. The desire of governments to deny their responsibility for payment obligations, or have them treated as "off the books" is diametrically opposed to one of the primary reasons that private developers and investors find PPPs attractive.
39. Many jurisdictions with strong fiscal profiles, for example the Australian State of Victoria and the Canadian Province of Alberta, engage in PPPs. These governments currently hold some of the highest credit ratings obtainable, have significant fiscal capacity for additional debt and enjoy attractive funding costs. They engage in PPPs not because they cannot afford to fund infrastructure on a public basis, but rather because procurement by PPP creates value for money for their taxpayers and citizens.
____________________________________________________________________
6 . The apportioning of traffic or volume risk is a key issue that will be further discussed in Chapter 4.