In all three countries, someone other than the line minister promoting a PPP must approve the PPP before it is undertaken. In all three, that decision maker is advised by a group in the ministry of finance with expertise in PPPs. This approach looks suitable for almost any government. A process of review, in which the ministry of finance is involved both during the design of the project and just before contract signature, seems desirable. For review by the ministry of finance to be effective, of course, the decision whether to proceed with a PPP must involve either the ministry or a body, such as the cabinet, that is interested in the recommendation of the ministry of finance.
There are also significant differences among the countries. In Chile, the major source of PPP expertise resides in the Ministry of Public Works, and the ministry of finance has only a three-person team working on the issues. In Victoria and South Africa, the ministry of finance is itself the major centralized source of expertise on PPPs.
Having a PPP unit in the ministry of finance, as in Victoria and South Africa, has advantages for the management of PPP-related contingent liabilities. In Chile, concerns have been raised that the Ministry of Finance has the chance to intervene in the development of a concession only when it is too late to propose major changes without serious disruption of the investment program. Similar concerns arise in Indonesia, where PPPs are developed by line ministries and then reviewed by a risk-management unit in the Ministry of Finance. The riskmanagement unit has tended to get involved relatively late in the process of PPP development. Its choice then may be either to acquiesce in a poorly designed PPP or, by objecting, to be seen as a naysayer that stops badly needed investment.28 Such problems are less likely if the ministry of finance houses the expert PPP unit that gets involved early in project development.
Moreover, managing PPP-related contingent liabilities requires not only skills in finance and quantitative analysis but also a strong understanding of infrastructure projects. PPP-related contingent liabilities have similarities to financial guarantees, and the techniques used to value financial guarantees and other options can be used to value them. Some aspects of the management of financial guarantees are relevant to the management of PPP-related contingent liabilities.29 But an understanding of PPP-related contingent liabilities also requires an understanding of the details of PPPs and infrastructure projects. Consider, for example, the contingent liabilities related to rock falls on Chapman's Peak Drive or unmapped gas pipelines in Santiago or the question of exactly which risks in a Melbourne toll-road project are under the control of the government. Chile's Contingent Liabilities and Concessions unit has a strong understanding of PPPs (some of its staff have worked in the PPP unit in the Ministry of Public Works). But it is easier to ensure such understanding if responsibility for the management of PPP-related contingent liabilities is grouped with responsibility for other aspects of the management of PPPs.
But Chile's approach has advantages of its own. PPP units, wherever they are located, tend to like PPPs, and may therefore be less than vigilant in limiting contingent liabilities. That problem is avoided by separating the main center of PPP expertise from the review of contingent liabilities. Also, because one group in Chile's ministry of finance is responsible for monitoring a wide range of contingent liabilities, the attention given to each kind of contingent liability can more easily be tailored to its significance.
Lastly, on a separate approval-related issue, it is worth highlighting the advantage of the requirement in Victoria that departments get budget funding for a publicly financed project before a decision is made whether to undertake the project as a PPP. This technique helps avoid the fiscal illusion in which PPP seem free and publicly financed projects seem expensive.
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28 Although it doesn't discuss Indonesia's most recent efforts to manage contingent liabilities associated with PPPs, Wells and Ahmed (2006) is an excellent account of Indonesia's experience in the 1990s with independent power projects (PPPs by another name). Although it doesn't expressly refer to the management of contingent liabilities, it vividly describes the messy reality of a government's response to claims by investors for compensation in the wake of the Asian crisis, which crippled many of the projects. Among other things, it points to the problems that arise when the public sector is not as competent, accountable, and clean as those of Victoria, Chile, and South Africa.
29 Merton (1977) shows that guarantees can be valued as options. Merton and Bodie (1993) provide an excellent discussion of the management of financial guarantees.