The government has an important stake in all PPP projects. Besides usual responsibilities concerning regulatory and legal affairs and in policy and administrative matters, the government may have both direct and indirect direct stakes in PPP projects. The government involvement may be through assets ownership, equity participation, subordinate debt financing, risk sharing and provision of various incentives including loan guarantees for sub- sovereign and non-sovereign borrowings. These types of involvement require the government to bear explicit direct and contingent liabilities.

Government stake in PPPs

Explicit direct liabilities are those liabilities which are recognized by law or as mentioned in a contract agreement, for example, the fixed periodic payments that are made in a PFI type of project or a grant or an agreed level of subsidy to a project. They arise in any event and are therefore certain. Contingent liabilities on the other hand, are obligations if a particular event such as default of a guaranteed loan occurs, and are therefore uncertain in nature and difficult to predict.

Explicit direct liabilities

Often guarantees are used to pursue policy objectives in support of priority infrastructure projects and governments may provide loan guarantees to cover some or all of the risk of repayment. Guarantees can be extremely valuable in reducing the financing cost of a project. A loan guarantee can substantially reduce the risk of loan default. As a result debt finance may be available at a lower rate of interest. The value of a guarantee depends on the risks of a project, the size of the investment, and the time to maturity. Guarantees, however, may impose cost to the government. Such a cost is not explicit but may be real. Analytical methods have been developed to anticipate fiscal liabilities that may arise because of providing such guarantees. Many governments (for example, in Canada) have established procedures for providing loan guarantees, to create reserves and channel funds through transparent means to ensure that costs of guarantees are evident to decision makers from the outset.

What is government guarantee

The government also bears certain implicit direct and contingent liabilities for PPP projects including for which there may not be any direct financial involvement. Implicit liabilities may arise owing to public expectations and pressure of interest groups. Implicit direct costs include any future recurrent costs, such as for contract management (see Section VIII B) and infrastructure maintenance. Implicit contingent liabilities include default of a sub-sovereign and public and private entity on non-guaranteed loans and other liabilities such as environmental damage, buyout, bailout, and default of the central bank on its obligations to allow repatriation of capital and profit. The government, therefore, has an inherent stake in all PPP projects.21

Contingent liabilities

The direct and contingent liabilities (explicit or implicit) have important implications for fiscal management in government. The underlying fiscal costs of PPPs that may arise in the medium and short term would require provision of substantial public financing in budget. Therefore, there is a necessity to estimate the likely direct and contingent liabilities in future before approvals of PPP projects by government are considered.22

Implications of government liabilities