Region: Global
Country: Global / Non-Specific
Topics: Procurement
Keywords: Legal Framework, Legal issues, Risk, Risk allocation, PPP Options
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Public-private partnerships (PPPs) involve private sector supply of infrastructure assets and services that have traditionally been provided by the government. An infusion of private capital and management can ease fiscal constraints on infrastructure investment and increase efficiency. Reflecting these advantages, PPPs are taking off around the world: there are well-established programs in a number of countries (including Chile, Ireland, Mexico, and the United Kingdom), and less developed programs or a good deal of interest in many others. However, it cannot be taken for granted that PPPs are more efficient than public investment and government supply of services. One particular concern is that PPPs can be used mainly to bypass spending controls, and to move public investment off budget and debt off the government balance sheet, while the government still bears most of the risk involved and faces potentially large fiscal costs.
Adequate risk transfer from the government to the private sector is a key requirement if PPPs are to deliver high-quality and cost-effective services to consumers and the government. But this is only one of a number of preconditions for success. The quality of services has to be contractible, so that payments to service providers can be linked to their performance and the need for costly contract renegotiation is minimized, and there has to be either competition or incentive-based regulation, which is essential for efficiency. An appropriate institutional framework characterized by political commitment, good governance, and clear supporting legislation is also needed. In addition, the government will have to develop the skills needed to manage a PPP program, and in particular to refine its project appraisal and prioritization.
Assessing risk transfer is difficult given the multitude of risks to which PPPs are exposed and the complexity of PPP contracts. While some countries make such an assessment, the focus is on selected provisions of PPP contracts that may be indicative of limited risk transfer to the private sector. In this connection, a recent Eurostat decision on the criteria to be used to assess risk transfer may open the door to PPPs which are intended mainly to circumvent fiscal constraints on euro area countries. In any event, disclosure of PPP contracts is necessary to assess risk transfer.
There is not yet a comprehensive fiscal accounting and reporting standard for PPPs.
However, existing standards cover a number of PPP operations that can be reported in a straightforward manner. Accounting for PPPs that involve limited risk transfer to the private sector is more complex. In the absence of the internationally agreed guidance on how to do this, the known and potential future cost of PPPs—which derive from the government’s contractual obligation to purchase services from the private sector and from government guarantees, respectively—should be disclosed, and taken into account when undertaking debt sustainability analysis. Once an internationally accepted accounting and reporting standard for PPPs is developed, it should be used if it adequately meets the need for transparency and provides an appropriate basis for assessing the fiscal consequences of PPPs.
Updated: October 25, 2021