Implicit liabilities may arise when the market expects the Government not to allow certain projects to fail and to take on a payment obligation despite the absence of a legal commitment to do so. Although a Government may not have given any undertaking to protect the lenders from insolvency of the PPP company, it may consider the prospect of a project failure unpalatable. Often, the bigger the investment or political profile of the project, the greater the temptation to sacrifice long-run objectives and market reputation for an immediate bailout. Likewise, providing SGs for certain projects may be perceived by the market as a signal that Government would support all PPP projects should they run into difficulties.
Guidance: Governments should avoid incurring implicit liabilities or promoting a guarantee culture. This can best be achieved through clear statements to the market and ensuring that actions are consistent with those statements. Where Governments offer SGs, what is guaranteed and what is not should be made clear. Governments also need to recognise that they may come under pressure from lenders and sponsors to act beyond these boundaries when projects run into trouble. Governments should have a clear strategy for this eventuality. Ad hoc policy-making may result in bad precedents3.
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3 The actions of the UK Government in the case of the failure of an important contractor in its PPP schools programme in 2004 could be regarded as a model. The insolvency of Jarvis plc threatened to place a number of PPP projects in default. The UK Treasury made it clear to lenders that no additional Government support would be forthcoming. As a result, funders were forced to deal with the consequences of the failure. The risk transfer worked, and although a number of funders lost money, all schools were ultimately completed and the programme was maintained.