When a "PPP" costs the budget more than a loan

We recently reviewed a project a government agency had prepared as a PPP. A private partner builds a $50 million social facility, and the state pays a fixed annual amount for 15 years.

On paper it is an availability payment. In practice the contract has no deductions. The payment does not depend on whether the facility works, and construction overruns are covered by a side agreement.

So the private partner carries no material risk. What the state is really buying is finance, not a service.

The numbers

To keep it simple, capital component only, no operating costs.

Private money, debt plus equity return, costs around 9% a year:

• annual payment: $6.2 million
• total over 15 years: $93.0 million

The same facility funded by a sovereign loan from a multilateral development bank at 4.5%:

• annual payment: $4.7 million
• total over 15 years: $69.8 million

That is $23.2 million in nominal terms, or about $16.6 million in today's money at a 4.5% discount rate. Roughly a third of the asset's cost.

What the premium should buy

Expensive private capital makes sense when risk goes with it. Cost overruns, failed equipment and an unavailable facility should hit the private partner's revenue, not the budget.

If the risk stays with the state, the $16.6 million simply buys a more expensive loan. And the commitment often sits outside public debt reporting, even though it behaves like debt.

Five checks before calling it a PPP

• are there deductions for unavailability and poor performance
• what share of the annual payment can actually be withheld
• who pays for construction overruns and delays
• was the cost compared with public borrowing (value for money)
• is the commitment recorded in the Ministry of Finance fiscal risk register

A fixed payment with no deductions is not necessarily a bad deal. It is a different instrument, and the budget should show it as one.

Illustrative calculation: the 9% rate is a regional average assumption; real project parameters will differ.