This presentation by Isabel RIAL was made at the 7th Meeting on Public-Private Partnerships held on 17-18 February 2014. Find more information at http://www.oecd.org/gov/budgeting/ppp.htm

1. Budgeting Sustainably for PPPs and Traditional
Capital Projects in the Medium and Long-term
Isabel Rial
Fiscal Affairs Department, IMF
irial@imf.org
OECD Annual Meeting for PPP Officials, February 17, 2014
The views expressed in this presentation are those of the author and do not necessarily represent those of the
IMF or IMF policy.
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2. Outline
I.
Why is budgeting for public investment and
PPPs from a long-term perspective important?
II. What should we aim at?
III. What can be done?
IV. Final remarks
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3. I. Why is budgeting important?
Why is budgeting for public investment and PPPs from
a long-term perspective important?
Two main reasons:
– Efficiency of public spending
• Adequate budgeting is key to ensure efficiency
both in traditional public investment and PPPs
– Fiscal risk management
• Avoid “fiscal surprises”
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4. I. Why is budgeting important?
a. Efficiency of public spending
• Limited fiscal space in advanced economies led to a declining
trend of public investment and capital stock.
• This trend may hinder medium- and long-term growth and
endanger the sustainability of required fiscal consolidation.
Debt-to-GDP Ratio
(2012, in percent of GDP)
Japan
Greece
Italy
Portugal
Ireland
United States
Belgium
Iceland
France
United Kingdom
Spain
Canada
Germany
Hungary
Austria
Netherlands
9
238
157
50
100
Source: WEO database, October 2013.
150
Advanced economies
Emerging market economies
Low-income countries
8
7
127
124
117
103
100
99
90
89
86
85
82
79
74
71
0
General Government Investment
(Percent of GDP)
6
5
4
3
2
1
0
200
250
1970-90
1990-2000
2000-08
2009-12
Sources: Penn World Tables (2012); OECD; and IMF staff
estimates.
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5. I. Why is budgeting important?
a. Efficiency of public spending
• Higher public spending does not necessarily translates fully
into productive capital assets [Gupta and others (2013)]
• There is room to stabilize public capital stock by improving
the efficiency of public investment
– The Public Investment Management Index (PIMI), the core of the
efficiency-adjustment, shows that project selection and budgeting are
crucial to ensure efficiency
• Eliminating inefficiencies in public investment processes
can go a long way in meeting the infrastructure gap
worldwide.
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6. I. Why is budgeting important?
a. Efficiency of public spending
• Yet, addressing inefficiencies may not be enough to
stabilize public capital stock…..
• Governments could rely further on PPPs…
• But, efficiency gains can only be achieved if they are
pursued for “good reasons”, where PPP projects
compete for budget resources on a level playing field.
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7. I. Why is budgeting important?
b. Fiscal risk management
• During the global financial crisis, PPPs have been a
significant source of unexpected increases in
governments’ debt and contingent liabilities.
• PPP "surprises" in countries where PPP stock magnitude
was largest revealed large hidden risks (e.g., Portugal)
• Given high levels of public debt in most AE, caution is
warranted to avoid choosing PPPs for the wrong
reasons….
• Adequate budgeting plays a critical role in managing
fiscal risks from public capital, including PPPs.
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8. I. Why is budgeting important?
b. Fiscal risk management
120
Example: General Government Debt in Portugal*
(percent of GDP, 1997-2011)
Arrears
120
General Government gross debt
100
80
SOE & PPP reclassifications
SOE & PPP debt outside the
General Government
Non-SOE & PPP General
Government debt
80
60
60
40
100
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
*Only includes Central Government SOE debt pre 2007
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9. I. Why is budgeting important?
b. Fiscal risk management
Sources of Unexpected Increase in General Government Debt
(percent of GDP, 2007-2010)
FRA DEU NLD
Underlying fiscal position
ESP
PRT GBR USA GRC
IRL
ISL AVE*
Issues Revealed
by the Crisis
1.7
3.2
-2.4
1.8
11.3
3.7
8.1
16.3
1.3
10.9
6.0
1.7
1.8
-0.9
-0.1
0.1
1.5
7.1
2.5
1.6
4.0
4.7
-0.7
1.4
-0.2
0.6
9.4
1.9
0.9
11.2
-0.1
2.5
1.1
SoEs & PPPs
0.7
0.0
-1.3
1.3
1.7
0.3
0.0
2.6
-0.2
4.5
0.2
Arrears
8.4
12.8
14.2
15.4
8.1
17.0
6.3
40.0
60.2
39.5
9.8
Macroeconomic shocks
8.3
4.7
5.2
13.0
4.4
8.9
3.8
38.4
35.7
-3.3
6.0
Financial sector interventions
0.0
8.1
9.0
2.5
3.6
8.1
2.5
1.6
24.5
42.8
3.8
Contingent
Liabilities
Policy changes
2.3
3.8
1.9
4.9
4.7
1.1
6.4
-8.0
-9.9
-4.3
4.7
Stimulus /
Consolidation
Other factors
2.1
-0.3
6.5
1.9
3.7
6.2
8.3
-6.7
7.5
21.6
5.9
14.4
19.5
20.2
24.0
27.8
28.0
29.1
41.7
59.1
67.7
26.4
Revisions to 2007 deficit & debt
Changes to government boundary
Cash-accrual adjustments
Exogenous shocks
Total Unexpected Increase in Debt
* GDP-weighted average
Unreported
Deficits
Macroeconomic
Risks
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10. II. What should we aim at?
• Budget investment decisions should be determined primarily by
policy priorities, cost-benefits analysis, and long-term
affordability, and not by the timing of cash flows
• Avoid the “accounting bias” towards PPPs
• All investment projects should be treated equally, irrespective of
the ultimate financing method
10

11. II. What should we aim at?
• Ensure that full life-costs of a project are taken into account at
project approval
– While this is relevant for all investment projects, whether
they are implemented as PPP or as traditional
investment…
– …it is particularly a concern for PPPs due to long
construction and contract periods
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12. III. What can be done?
What can governments do to ensure that long-term budget
affordability and not the timing of the cash flows drives
investment decisions?
At a budgeting level, some options include:
• Up-front budget recognition for all financial commitments
– Medium-term budget framework where PPPs are treated
as publicly financed projects
– Commitment budgeting
• Impose budgetary limits
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13. III. What can be done?
• Medium-term budget framework (MTBF) where PPPs are
treated as publicly financed projects
– Can be implemented in both accrual and cash budgeting process
– Requires budget authorization for the acquisition of investment
assets created by PPPs during the construction period
– Yet, if the construction of an asset stretches beyond the time
horizon covered by the MTBF….
– …. it does not ensure that the full financial implications of the
project are considered when the investment decision is taken
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14. III. What can be done?
• Commitment appropriation
– Two kinds of authorizations:
• Spending appropriation: authorizes spending in current year
• Commitment appropriation: authorizes to commit public resources
for future years
– Addresses the affordability issue
• Draws attention to the full costs of all investment projects
• Government requires budget authorization before entering any
long-term contract
• Parliament is informed and could limit fiscal implications of
investment decisions
– Helps reducing the bias in favor of PPPs, albeit not totally
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15. III. What can be done?
• Budgetary limits
– Limits on long-term commitments (direct liabilities)
•
If up-front budget recognition is not possible, it could be
compensated by budgetary limits on the level of PPP
commitments
•
Limits could be measured on the basis of total net present value
of long-term costs and/or total annual payments for projects
already approved
– Limits on total guarantees (contingent liabilities)
•
Should be estimated at the time that commitments are authorized
and monitored during the whole project life-cycle
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16. IV. Final remarks
• To avoid efficiency losses, and “fiscal surprises” PPPs and
traditional public investment should be aligned in a medium to
long-term planning framework
• Governments have sought to compensate for weaknesses of
budgetary controls and accountability in investment projects in
various ways (e.g., improving accounting practices,
disseminating better information, etc.)
• Yet, stronger budgetary planning, selection, and approval
procedures are necessary to support high quality public spending
while ensuring fiscal sustainability
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17. Thanks!
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