PPP debt, benefits and risks of “1 billion euro package”
Prime Minister and Minister of Finance on Tuesday introduced what they called the 1 billion euro package of investment, which, presumably, will be a battle horse in the upcoming election campaign. It figures 1 billion euro, is one of those specially selected by the policy to be impressed and to make proper marketing of a public project, however, has not many details about its implementation. In principle, such a project can have positive effects on the economy. It aims to increase spending, trying to reinvigorate lending and to use available funds of the banking system.
Certainly, the business and the banking system welcome such an initiative. At the core of the platform is the philosophy of public-private partnerships, is not a novelty for this government and is already implemented in some of the previous contract.
However, further swelling of the PPP platform brings a question and risks in the future. These risks are often highlighted by partners and the International Monetary Fund.
Initially, making a balance of the situation. So far, the government has signed eight concessionary contracts with financial support from the budget, with a duration that in some cases reaches 15 years.
1.35 billion euros, that state will pay you in the future for the construction work to private or public service delivery
According to estimates of Scan TV, the value of the remainder to be paid by these contracts is approximately 46 billion ALL or 355 million euros. If you add these another billion announced by the Prime Minister, the receipt is about 1.35 billion euros, that state will pay you in the future for the construction work to private or public service delivery.
Although the Finance Minister was careful to point out that the loans taken by the implementers of projects the government will not provide sovereign guarantees, the essence does not change: the banks will lend to the guarantee of the government and in the end the money will be paid from the state budget. If at the end of 2016 public debt was estimated at around 8 billion euro, the obligations undertaken through PPPs lead him to 9.3 billion euros.
The government believes that it will reach to repay the money without increasing official debt level by using the expected improvement of the economy, which will gradually increase budget revenues.
However, this does not take into account the possible negative scenarios in the future. If the objectives of the economic growth will not be realized, it would affect macroeconomic and fiscal stability.
The government will be forced to increase the debt formally or sacrifice of other expenditure items. Another issue to be discussed is the advantages of such a choice. At the end of the cycle, the government will pay not only the value of the construction work, but also the interests of bank loans and the business profit margin that will provide such works or services.
If the government intends to increase spending to stimulate the economy, it can be done through direct borrowing and acknowledging, officially, the cost of raising debt. Let us not forget that currently interest rates are at historically low levels. Interests that would ensure the government, through direct borrowing, would be lower than those that would receive private companies.
Just 10 days ago, the euro coupon bonds issued by the government was only 0.8%. A private company can not benefit today such interests, even for a project guaranteed by the government. Given that the underlying philosophy of all concessions, or PPP, it wants to call the current government, is of concern as can be borrowed without increasing debt.
Within reasonable limits, this “trick” may be useful in improving public services and infrastructure, but building on a large scale carries the same risks with increasing public debt.
Because, no matter how we play with the terminology or definitions, a contractual obligation is owed, neither more nor less.