Rationale of public authority support
(a) A decision to support the implementation of a project is based on an assessment by the government of the economic and social value of the project and whether it justifies particular government support (certain projects cannot be financed by the private sector alone at an acceptable cost, others cannot materialize without government support, given the appreciation of an overall investment climate in the countries).
(b) Three distinct justifications are generally presented in favour of government support: (i) the existence of uninsurable political risks; (ii) a policy decision that certain services should be provided at below real cost and thus subsidized to reduce user fees; and (iii) the theory that the government has a lower cost of risk bearing than private investors.
(c) Political risks traditionally include the risk of expropriation, the risk of political violence (war, terrorism, etc.) and convertibility and transfer risk. However, the definition of political risks can extend to modifications of legal framework, unfavourable regulatory decisions or failure by publicly-owned enterprises to uphold their obligations to the project
(d) Government financial support can be provided through three basic instruments (i) subsidies; (ii) financial instrument (debt, equity); or (iii) guarantees. (e) When defining public authority support, care should be taken inter alia (i) not to breach international/regional obligations of the country; (ii) to choose the most appropriate methods for estimating the budgetary costs of support measures, taking into account the present value of future costs or loss of revenues; and (iii) to ensure transparency (timely communication to all bidders). | e.g. M5 Toll Motorway project in Hungary: for the first six and a half years of commercial operations, the government provided the private sector consortium with compensation in the form of a subordinated loan facility, repayable after discharge of project indebtedness to senior lenders, in the event that the consortium's actual revenues , for whatever reason, were below certain levels. |