A number of key fiscal commitment management functions need to be undertaken when developing, awarding, and implementing a PPP project. During project development, these functions include identifying and estimating the cost of all fiscal commitments under a proposed project (which, if the contracting authority is a state-owned enterprise (SOE), may include reviewing overall SOE financial health and ability to cover the proposed PPP commitments). Another key function at project development is to consider the affordability of the fiscal commitments, in light of budget priorities and constraints as well as from an overall liability and macro management viewpoint. At project implementation stage, key functions are project monitoring and information gathering for regular fiscal commitment tracking over the life of the project, fiscal commitment reporting and disclosure, budget management and timely release of funds called for any fiscal commitment.
Defining institutional responsibilities for managing PPP fiscal commitments can be complicated, since it typically requires input from a range of government entities. The primary motivation of a contracting authority, and any internal advisory function such as a PPP unit (depending on the latter's mandate), is to develop a PPP project and get the deal done. Ensuring the fiscal discipline of a project might not be their primary objective or mandate. Thus, other government entities have an important role in managing the fiscal exposure and budgetary implications of PPP projects. Due diligence of fiscal commitments needs to be led by the entities with prime responsibility for safeguarding the public purse.
Table 1 shows examples of government institutions that can be involved in undertaking these functions. Although the contracting authority and its transaction advisors cannot be primarily responsible for fiscal commitment management, they nonetheless have important roles to play, as highlighted in the table. The table also highlights the roles of "fiscal commitment oversight entities"; in practice, these functions may be combined in a single entity or a team (typically within the Ministry of Finance), or they may involve input from several different departments and agencies. Ultimately, the PPP decision maker, or approving body, is responsible for ensuring that the inputs from these oversight entities are taken into account when deciding to approve a PPP. The table is meant to be illustrative of the various functions and does not prescribe any specific institutional set-up. The structures can vary considerably from one country to another, and in practice many countries do not perform some of these functions. Ultimately one will need to adjust the proposed functions to the local environment and capacities. For instance, after the recent financial crisis and following advice from the IMF, the European Commission, and the European Central Bank, the central bank in Portugal has become involved in assessing PPP projects' fiscal health, and the Ministry of Finance was put in charge of leading PPP procurement (instead of line ministries).9 In Chile, the decisions about guarantees and other financial commitments to concessionaires are made jointly by the Ministry of Public Works and Hacienda (the Ministry of Finance).10
Recommendations on a project's fiscal commitments need to be coordinated; also, the entities undertaking the gatekeeping functions will need to provide feedback at various stages of project development. Depending on the institutional structure in a particular country-for example, if debt management and budgeting are responsibilities of different entities-some mechanism may be needed to manage and synchronize the various recommendations on the fiscal commitment that are communicated to the PPP approving body (such as the Minister of Finance, a PPP approval committee, Parliament, and so on). Options could include designating one entity as the lead fiscal appraiser responsible for gathering inputs from the others, or establishing a committee composed of the different key entities. The cited World Bank (2007) report on Chile highlights the challenge of coordination between the concessions department and the Ministry of Finance; sometimes the latter's involvement in reviewing the concession's bidding documents might be too late in the process to constitute an effective intervention. The status quo institutional setup is believed to create a bias towards the use of concessions.
Estimates of the required government support for a PPP project are commonly developed during the transaction due diligence stage and should be reviewed at different stages of project preparation. The actual level of fiscal commitment will often not be known until the tender process has been carried out and the winning bidder selected-particularly when a fiscal commitment such as a level of subsidy)-is among the bid criteria. Thus a subsequent review
| Table 1: Related Roles and Responsibilities of Various Government Entities for Managing Fiscal Commitments from PPPs | |||
| Government department or agency | Role | Role during PPP preparation/approval | Role during PPP implementation |
| Project Management Functions | |||
| 1 Contracting Authority (may be supported by internal and/or external advisors) | • Contracting authorities may be government departments, agencies, local government, or state-owned enterprises.. It is the signatory to PPP contract from the government side. • Sometimes line ministries delegate procurement responsibilities to a central procurement agency, but typically they keep responsibility for policy. | • Prepares the initial economic appraisal of each project. • Presents the rationale for procuring the project as a PPP. • Develops the outline business case/feasibility studies for the PPP. • Submits a draft contract and tender rules for each project. • Identifies and estimates the cost of fiscal commitments as part of the project preparation (with support from transaction advisors). • Leads the procurement process, or cooperates with a central procurement agency. | • Monitors the project. • Regularly obtains information needed from the PPP sponsor for fiscal commitment tracking over the life of the project. • Monitors and responds to fiscal commitment related project risks. • Includes fiscal commitment payments in budget requests submitted to government. |
| 2 PPP Project Advisory Function | • The entity/unit responsible for PPP policy formulation and coordination; technical assistance for PPP projects; standardization and dissemination of contracts; and PPP promotion and marketing. (commonly known as a PPP Unit) • This function can be in the Ministry of Finance/Treasury (as is the case in France, Ghana, Kenya, Portugal, South Africa, the United Kingdom), the office of the Prime-Minister (Italy), a non-sectoral ministry (the Ministry of Planning in Brazil, the Public Works Ministry in Chile), or a standalone unit (Indonesia, Korea, Rep.). | • Supports and quality assures the above process (such as review of tender documents). • Helps develop standard contractual clauses and other guidance material, namely on fiscal commitments. | • Monitor PPP programs and project implementation in order to improve standard contractual clauses and other guidance materials. |
| Fiscal Commitment Oversight and Gatekeeping Functions | |||
| 3 Debt Management Department | • Commonly in the Ministry of Finance | • Assesses and advises on fiscal commitment liabilities from a long term liability management point of view. | • Monitors the impact of PPP fiscal commitments (particularly contingent) on fiscal risks. • Incorporates updated fiscal commitment estimates into debt and fiscal sustainability analyses, and discloses in reports. • Undertakes scenario analyses and stress tests. |
| 4 Budget Department | • Commonly in the Ministry of Finance | • Assesses and advises on fiscal commitment affordability from a budget priorities/constraints point of view. | • Incorporates fiscal commitment as needed into relevant reports. • Allocates and releases budget for direct payments and realized contingent liabilities. • Creates provisions for PPP contingencies (explicit and implicit) and fiscal rules on the use of any resources that are set aside to respond to these contingencies. • Undertakes scenario analyses and stress tests. |
| 5 Macroeconomic Forecast Entity | • Commonly in the Ministry of Finance | • Assesses and advises on the PPP projects' fiscal commitments from an overall liability and macro management viewpoint. • Including assessment on possible adverse impact of excessive subnational exposure to PPP fiscal commitments. | • If relevant, incorporates updated PPP liabilities in macro/fiscal projections. • Undertakes scenario analyses and stress tests. |
| 6 Entity Overseeing State-Owned Enterprises | • It is sometimes in the Ministry of Finance or can be a standalone entity/commission. It oversees SOEs' performance and financial health. | • Assesses and advises on SOE health and exposure to PPP commitments. | • Monitors SOE performance, including for PPP contracts. • Reviews implications for government expenditure and the need for any budget transfers. |
| 7 PPP Approving Body | • It can be Finance Minister, Cabinet, Parliament, and so on. • May be supported by a unit playing some kind of secretariat function to the gatekeeper, responsible for checking that all procedures have been followed. • The Finance Minister should have veto power in this process. | • Takes above assessments and recommendations into account when approving a proposed PPP project at the project development stage. • Approves draft contract and tender rules.
| • Approves any (formal or informal) renegotiation of a PPP contract. |
of the project fiscal commitment will be required. Fiscal commitments may change after selection of the winning bidder and before the "finalized execution copy of the contract" (although the bid process should aim to minimize negotiation at this stage). A final review of the fiscal commitments may be needed at this final stage, bearing in mind that small changes in contractual wording may imply significant changes in fiscal commitments.
The next sections discuss in more detail the various steps and considerations during the PPP project preparation and implementation phases to identify, assess, monitor, report on, and budget fiscal commitments.
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9 Government of Portugal, the European Commission, the European Central Bank, and the International Monetary Fund (2011), "Portugal: Memorandum of Understanding on Specific Economic Policy Conditionality," Section 3.21.
10 World Bank (2007), "Improving the Management of Concessions: Better Reporting and a New Process for Decision When to Use a Concession."