Buy back PPPs: An arbitrage opportunity

Joaquim Miranda Sarmento and Ricardo Ferreira Reis

OECD Journal on Budgeting, 2013, vol. 12, issue 3, 1-14

Abstract: As Portugal is facing strong fiscal pressure, government spending on public-private partnerships (PPPs) in the road sector has become a main budgetary constraint. In this article, we show how the financial crisis has created a unique arbitrage opportunity that provides a solution to this problem. Since the private sector is in urgent need of liquidity, we suggest that the Portuguese government should use some of the bailout funds, borrowed at lower interest rates, to buy back the roads concessions, discounting future payments at the high interest rates currently charged to Portugal. For the roads already in operation, the purchase of the assets would significantly reduce future public payments and would also release money into banks and the economy. For the roads currently under construction, we propose that the government buys only the equity of these companies. That would also reduce future payments, and allow for the postponement or even cancelation of some of these projects, while granting private companies an exit from projects that they are no longer able to finance. This operation would save around half of PPP payments over the next 20 years.

Date: 2013
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