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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.

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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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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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.

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1970-90 1990-2000 2000-08 2009-12

Advanced economiesEmerging market economiesLow-income countries

General Government Investment(Percent of GDP)

Sources: Penn World Tables (2012); OECD; and IMF staff estimates.

Source: WEO database, October 2013.

7174798285868990

99100103

117124127

157238

0 50 100 150 200 250

NetherlandsAustria

HungaryGermany

CanadaSpain

United KingdomFranceIceland

BelgiumUnited States

IrelandPortugal

ItalyGreece

Japan

Debt-to-GDP Ratio(2012, in percent of GDP)

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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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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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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*Only includes Central Government SOE debt pre 2007

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60

80

100

120

40

60

80

100

120

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

SOE & PPP reclassifications

Non-SOE & PPP General Government debt

SOE & PPP debt outside the General Government

General Government gross debt

Arrears

I. Why is budgeting important? b. Fiscal risk management

Example: General Government Debt in Portugal* (percent of GDP, 1997-2011)

Sources of Unexpected Increase in General Government Debt (percent of GDP, 2007-2010)

FRA DEU NLD ESP PRT GBR USA GRC IRL ISL AVE*

Underlying fiscal position 1.7 3.2 -2.4 1.8 11.3 3.7 8.1 16.3 1.3 10.9 6.0

Revisions to 2007 deficit & debt 1.7 1.8 -0.9 -0.1 0.1 1.5 7.1 2.5 1.6 4.0 4.7

Changes to government boundary -0.7 1.4 -0.2 0.6 9.4 1.9 0.9 11.2 -0.1 2.5 1.1

Cash-accrual adjustments 0.7 0.0 -1.3 1.3 1.7 0.3 0.0 2.6 -0.2 4.5 0.2

Exogenous shocks 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

Policy changes 2.3 3.8 1.9 4.9 4.7 1.1 6.4 -8.0 -9.9 -4.3 4.7

Other factors 2.1 -0.3 6.5 1.9 3.7 6.2 8.3 -6.7 7.5 21.6 5.9

Total Unexpected Increase in Debt 14.4 19.5 20.2 24.0 27.8 28.0 29.1 41.7 59.1 67.7 26.4

* GDP-weighted average 9

Unreported Deficits

SoEs & PPPs

Arrears

Macroeconomic Risks

Contingent Liabilities

Stimulus / Consolidation

Issues Revealed by the Crisis

I. Why is budgeting important? b. Fiscal risk management

• 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

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II. What should we aim at?

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• 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

II. What should we aim at?

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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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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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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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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III. What can be done?

• 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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IV. Final remarks

Thanks!

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