324 Government Finance Statistics Manual 2014
Public-Private Partnerships
Introduction
A4.58 Public-private partnerships (PPPs) are long-
term contracts between two units, whereby one unit
acquires or builds an asset or set of assets, operates it
for a period, and then hands the asset over to a second
unit. Governments engage in PPPs for a varie ty of rea-
sons, including the expectation that private manage-
ment may lead to more effi cient production and that
access to a broader range of fi nancial sources can be
obtained. Such arrangements are usually be tween a
private corporation and government, but other com-
binations are possible, with a public corporation as
either party or a private nonprofi t institution as the
second unit. For ease of reference, the second unit
will be referred to as the private corporation. Th ese
schemes are referred to by diff erent names depending
on the type of contracts that are in place. Examples
are: private fi nance initiatives (PFIs); design, build, op-
erate, and transfer schemes (DBOT); build, own, and
transfer schemes (BOTs); or build, own, operate, and
transfer schemes (BOOTs). For ease of reference, the
remainder of this section will refer to PPPs.
A4.59 Th e nature of activities that PPPs are involved
with varies greatly. Generally, the private corporations
construct and operate assets of a kind that are usu-ally the responsibility of the general government or
public corporations. Th ese commonly include roads,
bridges, water supply and sewerage treatment works,
hospitals, prison facilities, electricity genera tion and
distribution facilities, and pipelines.
A4.60 Th e private corporation expects to recover
its costs and to earn an adequate rate of return on its
invest ment. Th e government may make periodic pay-
ments during the contract period,^14 or, alternatively,
the pri vate corporation may sell the services to the pub-
lic (e.g., a toll road), or a combination of the two. Th e
price is oft en regulated by the government and set at a
level that will allow the private corporation to recover
its costs and earn a return on its investment (bench-
mark price). If the regulated price is set at a level below
such a benchmark price, the government will have to
compensate the private partner, usually through sub-
sidies or other transfers. Th ere can be many variations
in PPP contracts regarding aspects such as the dispo-
sition of the assets at the end of the contract, the re-
quired operation and maintenance of the assets during
the contract, and the price, quality, and volume of ser-
vices produced. At the end of the contract period, the(^14) Th e contract period refers to the length of the contractual
agreement between the parties involved in the PPP.
Box A4.3 Practical Example of Leases as Assets
Suppose a lease on an apartment agreed some time ago specifi es the rental at 100 per month but its current market
rent is 120 per month. From the lessor’s point of view, the apartment is “encumbered” by the existing lease; that is,
it carries a penalty (in this case of 20 per month) because of the existence of the lease. The encumbered value of the
apartment is based on the present value of future rental payments taking the existence of the lease into account; that
is, the future income stream is 100 for the remaining period of the lease and 120 thereafter (ignoring any allowance for
infl ation). The unencumbered value of the apartment is a present value based on an income stream of 120 per month
from the current period forward. The value to be entered in the landlord’s balance sheet is the encumbered value,
which is also all the landlord (lessor) can hope to realize if he sold the apartment while the tenant has the right to
maintain the lease. To realize the unencumbered value, the lessor would have to pay the tenant the difference between
the unencumbered value and the encumbered value to be free of the lease. This amount, the encumbrance, can in some
circumstances be treated as an asset of the tenant. The circumstances are that it is both legally possible and is prac-
ticable for the tenant to sublet the apartment to a third party. Because of the diffi culty of identifying when such assets
may exist, it is recommended that in practice these assets be recorded only when there is evidence that they have been
realized.
The encumbered value of the apartment may be higher than the unencumbered value if rentals have fallen since the
lease was agreed. In this case, it is the landlord who benefi ts from the discrepancy between the contract price and the
market price because the value of the apartment in his balance sheet is still the encumbered value. If the tenant wishes
to cancel the lease, he may have to pay the landlord the difference between the encumbered value and the unencum-
bered value. Only in the exceptional case where the tenant pays a third party to assume the lease at the price specifi ed
in the lease does this payment represent an asset of negative value to the tenant. Once the lease expires or is cancelled,
the value of the apartment returns to its unencumbered value.