Controlling Spending Commitments in PPPs

Many governments have recently started using long-term service contracts to finance assets such as roads, schools, prisons, hospitals, and office buildings—or, more precisely, to procure services provided with those assets. In these arrangements, the government specifies the service it wants and then selects a firm to supply the service. The chosen firm must use its own or borrowed capital to build the service-producing asset and then must maintain and operate the asset to supply the service. In exchange, the government agrees to make payments to the firm that, over the life of the asset, are expected to cover all the firm’s costs. The government is not obliged to pay if the firm fails to supply the service, but it cannot avoid paying just because it determines later that it no longer needs the service.