There is a dilemma for fiscal rule-makers, such as the EU and the IMF, between enforcement of fiscal discipline – which would require much stricter rules for PPPs – and a desire to promote privatisation in general, which would imply making it easier to use PPPs.
The European Commission (EC) has taken various views on the relations between PPPs and fiscal discipline. The 2003 report on the European Economic and Monetary Union (EMU) (produced before the Eurostat ruling) said, “There is the risk that the recourse to PPPs is increasingly motivated instead by the purpose of putting capital spending outside government budgets, in order to bypass budgetary constraints. If this is the case, then it may happen that PPPs are carried out even when they are more costly than purely public investment.”
In October 2005, PPPs were again being treated with suspicion: “Monetary Affairs Commissioner Joaquin Almunia accused national governments of using ‘tricks’ to artificially cut budgetary deficits, as member states try to be seen to be following the Eurozone’s rules…. He particularly referred to so-called Public-Private Partnerships (PPP), which share the financial burden of large infrastructure projects. According to Mr. Almunia, it has become increasingly difficult for the EU executive, in charge of monitoring member states’ budgetary performance, to look through such tendencies and figure out the real height of the countries’ deficits. … The commissioner stressed that Europe should avoid the situation where public accounts imitate the creative accounting of some companies in the past.”
The dilemma was solved, for supporters of PPPs, by a ruling of Eurostat, the Statistical Office of the EC, that the assets involved in a PPP should be classified as non-government assets, and therefore recorded off balance sheet for government, as long as (a) the private partner bears the construction risk, and (b) the private partner bears either availability or demand risk.
The IMF was unimpressed with this ruling, seeing this as an invitation to creative accounting to avoid the fiscal rules. In March 2004 it described the Eurostat decision as “problematic,” declaring that the “recent Eurostat decision on accounting for risk transfer gives considerable cause for concern, because it is likely to result in most PPPs being classified as private investment. …. Since most PPPs involve the private sector bearing construction and availability risk, they will probably be treated as private investment, even though the government bears substantial demand risk (e.g., when it guarantees to the private operator a minimum level of demand for the service provided through the PPP). …the recent decision …. thus could provide an incentive for EU governments to resort to PPPs mainly to circumvent the Stability and Growth Pact (SGP) fiscal constraints.”
Vir: Hall, 2015