Public Private Partnership and fiscal illusion: A systematic review

Abstract

Public-Private Partnerships (PPPs) are mostly presented as a means to introduce efficient procurement methods and better value for money to taxpayers. However, the complexity of the PPP mechanism, their lack of transparency, accounting rules and implicit liabilities make it often impossible to perceive the amount of public expenditure involved and the long-run impact on taxpayers, providing room for fiscal illusion, i.e., the illusion that PPPs are much less expensive than traditional public investments. This psaper, thanks to a systematic review of the literature on the EU countries experience, tries to unveil the sources of this illusion by looking at the reasons behind the PPPs’ choice, their real costs, and the sources of fiscal risks. The literature suggests that PPPs are more costly than public funding, especially when contingent liabilities are not taken into account, and are employed as mechanisms to circumvent budgetary restrictions and to spend off-balance. The paper concludes that the public sector should share more risks with private sectors by reducing the amount of guarantees, and should prevent governments from operating through a sleight of hand that deflects attention away from off-balance financing, by applying a neutral fiscal recording system.

Riskeness of public-private partnership concept

“…Secondly, the annual installment of PPP projects is not reflected in the public debt, because it is allowed by Eurostat and is therefore politically very advantageous. However, this creates a hidden debt that will burden the country throughout the repayment period [11].…”

Public Finance, Fiscal Rules and Public–Private Partnerships: Lessons for Post-COVID-19 Investment Plans

“…A large literature (Benito et al 2008;Acerete et al 2019;Reeves 2015;Cepparulo et al 2019 among others) documents the explicit use of PPPs to circumvent budgetary restrictions thanks to the off-balance sheet accounting of the partnership transactions. In this respect, the EU accounting rules have contributed to the preference for PPPs, because, under certain conditions-amounting to enough risks being transferred to the private partners-, the contracts do not show on the government balance sheet, and the share of PPP-related debt is not considered for compliance with the Stability and Growth Pact (SGP) 1 (Benito et al 2008;Cruz and Marques 2011;Reeves 2015;Bergere 2016;Engel et al 2020).…”

Who does it better and why? Empirical analysis of public-private partnership in infrastructure in Asia-Pacific

“…Further, the inefficiency of public sector in fulfilling the managerial duties and lack of sound financial planning led to the emergence of New Public Management during the late 1980s and early 1990s with the target to fuse the working principles of private firms into public institutions, and thereby, ensuring the reorganization of fundamental structure of the organization and improving the lucrativeness of the joint venture. Hence, over the years, PPPs gained momentum and resulted in increased dependence of governments as alternative ways to reduce the financial burden and achieve the enhanced productivity (Engel et al, 2013;Albalate et al, 2018;Casady et al, 2019;Cepparulo et al, 2019;V€ alil€ a, 2020). Consequently, governments of all countries are fueling efforts to attract PPPs to construct robust and modern infrastructure facilities.…”