Financial Foresight | Tax Traps of Public-Private Partnerships

All around the world, government entities are creating long-term partnerships with domestic and international investors to generate new municipal revenue streams while freeing themselves from the burgeoning costs of maintaining their physical infrastructure.

These entities are turning highways, bridges, tunnels, rail systems, airports, water facilities and other public assets into sources of revenue by forming public-private partnerships (PPPs).

The Canadian Council of Public-Private Partnerships defines PPPs as cooperative ventures between the public and private sectors, built on the expertise of each partner, that best meet clearly defined public needs through the appropriate allocation of resources, risks and rewards.

The assets available for PPPs are typically monopolies or quasi-monopolies. They are attractive to investors because they usually have very good credit ratings and, in the case of many transportation assets, generate steady cash flow in the form of tolls and other fees. It is almost like having access to the tax base.

“In the United States alone, infrastructure spending needs will approach $1.6 trillion over the next five years, creating great demand for public-private partnerships,” says Leo Naughton, director of Deloitte Tax LLP’s International Tax Practice. “But like highways riddled with potholes, these complex transactions can contain tax traps for unwary investors.”

This issue of Financial Foresight offers insight into public-private partnerships: factors to consider, structuring the entity, dividend distribution and repatriation, exit strategies, depreciation and amortization, repairs and capital improvements, sales and use taxes, periodic payments, valuing the partnership’s assets, income approach to value, valuation challenges and purchase price allocation principles.

Financial Foresight is a publication providing analysis about trends and issues important to senior and middle management. Topics span the banking, securities, insurance and investment management industries.

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