Governments that use public-private partnerships to build infrastructure usually assume contingent liabilities relating, for example, to early contract termination and to debt and revenue guarantees. Deciding whether to assume these liabilities and, if so, working out how to value, monitor, and limit them is difficult for most governments. This report describes how governments in Australia, Chile, and South Africa have tackled the problems, and discusses whether other governments, including those with less administrative capacity, should adopt similar practices.
All three countries rely on careful project preparation, competitive bidding, and review of proposed PPPs by a specialized unit in the ministry of finance. South Africa, for example, requires that PPP proposals be approved by the Treasury at four stages before a contract is signed, and the reports that seek the Treasury's approval discuss contingent liabilities. A PPP manual and a set of standard contractual terms guide the development of the PPPs and thus limit contingent liabilities they create. Chile is notable for measuring and valuing contingent liabilities associated with revenue (and previously exchange-rate) guarantees for toll-road and airport concessions, and for publishing the results of the measurement and valuation every year. Australian governments are notable for restricting their risk bearing in recent projects to a narrow set of risks that they can control, thus minimizing their contingent liabilities. They also publish PPP contracts and prepare financial reports according to International Financial Reporting Standards, which reduces the temptation to use PPPs to disguise fiscal costs.
Other governments that wanted to improve the management of contingent liabilities associated with PPPs might adopt some of these policies, including multistage review of proposed PPPs by people in the ministry of finance with expertise in PPPs and fiscal management; the quantification of certain contingent liabilities, especially when quantification is likely to influence the decision whether to incur the liability; publication of PPP contracts and summary descriptions of their financial implications. The adoption of modern accrual accounting is helpful in Australia, but raises bigger issues than the management of PPP-related contingent liabilities.