Having estimated the cost of PPP fiscal commitments, the government needs to decide whether those commitments are affordable and fiscally responsible. Generally, this can be achieved by: (i) comparing annual cost estimates against the projected budget of the contracting authority; (ii) considering the impact on debt sustainability; and/or (iii) introducing specific limits on different types of PPP commitments.
Assessing the affordability of proposed PPP fiscal commitments in light of budget constraints and priorities is the responsibility of the budget department. At a minimum, this assessment should compare the estimated annual cost of the fiscal commitments (whether direct or contingent) with the annual budget of the relevant sector. Most countries have a medium-term expenditure planning horizon of three to four years. In the absence of a long-term expenditure plan, this assessment may involve projecting forward sector spending over the lifetime of the PPP contract. The simplest approach is to assume growth in sector spending beyond the end of the Medium Term Expenditure Framework (or any other equivalent medium-term framework) equal to GDP growth.
Assessing the affordability of fiscal commitments under a PPP project in terms of the government's overall liability and fiscal risk management can be the responsibility of the Ministry of Finance or debt department. The debt department should consider whether the PPP debt will need to be recognized as a public liability and included in debt measures, and thus it will determine the project's impact on overall debt sustainability. The debt department should also consider the size of the government's commitments under the PPP contract-both direct payments and contingent liabilities-and how these compare and contribute to the government's existing liability portfolio. (In countries where the debt department is responsible for only debt management, as opposed to debt sustainability, this function will be undertaken by an alternative entity. However, Cebotari (2008)11 makes the argument for the debt department undertaking these proposed functions. (See also World Bank-IMF "Guidelines for Sound Practices in Sovereign Debt Management.")
The impact of all PPP projects on the overall government fiscal position and an assessment of systemic risk need to be addressed. The entity or body responsible for macroeconomic forecasting should also consider whether and how the government's liabilities under the PPP may affect fiscal projections and analysis. This entity, in collaboration with the debt department and budget department, will need to analyze PPP projects on a portfolio level, and assess if the nature and sectoral concentration of PPP projects constitute systemic risk. As previously noted, all PPP road projects in countries affected by 2008 macroeconomic crisis (for example, Greece, Portugal and Spain currently, and previously Mexico) simultaneously suffered demand challenges (and faced bankruptcy risk) creating a systemic risk. The entity responsible for macroeconomic forecasting can also assess the national level fiscal risk associated with subnational PPPs.
| Box 1: Country Examples of Limits on Fiscal Commitments to PPPs Some countries have introduced explicit limits on PPP fiscal commitments. The United Kingdom, for example, has specified individual departmental spending limits for each department, ranging from 6 to 7 percent of total annual spending. Brazil's current PPP law prohibits undertaking new PPPs if the projected stream of payments under the overall PPP program exceeds 5 percent of government revenue in any future year. In Greece, current payments of approved PPP projects account for 6-7 percent of its public investments program are expected to reach 10-12 percent in five years, and are ultimately capped at a limit of 15 percent. In India, an inter-ministerial task force was constituted to recommend budgetary ceilings for annuity commitments under PPP projects. The task force's September 2010 report proposed that the sum of total annuity commitments for a particular grant or scheme of any department for the next five years should not exceed 25 percent of the department's current five-year plan outlay of such grant or scheme. However, no cap is set for guarantees issued to PPPs.a __________________________________________________________________________________________________________ Note: for other examples of ceilings for PPPs in El Salvador, Hungary, and Peru, see Funke, Irwin and Rial (2013), "Budgeting and Reporting for PPPs," OECD/ITF Joint Transport Research Centre Discussion Paper 2013/07. a India Planning Commission (2010), "Report of the Task-Force on Ceilings for Annuity Commitments." |
Some governments introduce specific limits on direct fiscal commitments to PPPs, either as part of the spending commitments of the specific department or in aggregate for the PPP program (such as in the United Kingdom, Greece, Brazil, and India-see Box 1). The rationale for such limits is to avoid tying up too much of the budget (whether at the sector or aggregate level) in long-term payment commitments. Such a limit is not typically necessary in the very early stages of a PPP program and can be later developed as the potential of the PPP program becomes clearer (further analysis will need to be undertaken to determine the basis of setting such limits for each country). Among the reasons that the IMF lists for the review of the Manual on Fiscal Transparency (2007) is the need for better fiscal management of PPPs and to capture a broader range of direct and contingent liabilities12 (a revised version is planned for late 2013).
Table 3 summarizes some key indicators and ratios that can be used to assess the affordability of a proposed PPP. These indicators are from both the budget and liability management perspectives and also can be used during the monitoring of the PPP contract.
If a PPP project is undertaken by a SOE or subnational government, the fiscal impact assessment needs to
| Table 3: Examples of Key Indicators and Ratios on Affordability Assessment and Risk Exposure from PPPs | ||
| Fiscal commitment type | Relevant measure | Relevant comparator for considering affordability |
| Budget implications | ||
| Long-term direct fiscal commitments | Annual payment | • The relevant measure as a percentage of sector ministry or agency total and capital annual budgets • (projected forward for the duration of the PPP contract-beyond the Medium Term Expenditure Framework (MTEF) horizon) |
| Guarantees | Estimated annual payment - "base" and "downside" cases; and associated stress tests. (Contingency budget required for this value.) | • The relevant measure as a percentage of sector ministry or agency budget • (projected forward for the duration of the PPP contract-beyond the Medium Term Expenditure Framework (MTEF) horizon) • The relevant measure as a percentage of the "contingency" line • The relevant measure as a percentage of total and capital annual budgets. • (to consider impact of having to make sudden payment) |
| Termination payments | Estimated "worst case" payment; (Contingency budget required for this value.) Early termination should be considered-typically, termination payments differ according to the timing and cause of termination. A good PPP contract should include specific rules for computing compensation for early termination, according to the several reasons for termination. | • The relevant measure as a percentage of "Contingency" line • The relevant measure as a percentage of total and capital annual budgets. • (to consider impact of having to make sudden payment) |
| Risks contractually allocated to the public partner (such as force majeure, major environmental problems, costs of expropriating land) | Estimated "worst case" payment, with tentative assessment of the probability of occurrence and possible mitigation. (Some of these risks may be harder to estimate, for example, force majeure.) | • The relevant measure as a percentage of "contingency" line • The relevant measure as a percentage of total and capital annual budgets. • (to consider impact of having to make sudden payment) |
| Renegotiation | Estimated "worst case" payment, for each relevant scenario of technological, demographic, or commercial change, as well as for relevant changes in public policy. | • The relevant measure as a percentage of "contingency" line • The relevant measure as a percentage of total and capital annual budgets. • (to consider impact of having to make sudden payment) |
| Cost of PPP project related investments and associated works | Estimated annual payment - "base" and "downside" cases (Executed from the budget) | • The relevant measure as a percentage of sector ministry or agency total and capital annual budgets |
| Liability Management Implications (to consider the impact of adding the proposed commitments - on the debt sustainability and liability position) | ||
| All PPPs | Value of PPP debt | |
| Long-term direct fiscal commitments | Present value of government payments | |
| Guarantees on particular risk variables | Present value of annual payments - "base" and "downside" cases | • The relevant measure as a percentage of total public debt exposure |
| "Payment" guarantees | • Present value of underlying payment stream ("face value" of guarantee); • Present value of payments under different scenarios. | • The relevant measure as a percentage of GDP |
| Termination payments | Maximum payment required (typically = debt + equity) | |
| Cost of PPP project-related investments and associated works | Prevent value of payments that might be beyond the budget time horizon - "base" and "downside" cases | • The relevant measure as a percentage of total public debt exposure • The relevant measure as a percentage of GDP |
take into consideration the broader financial position of the SOE or subnational government. In the case of SOEs, their PPPs create contingent liabilities for the government. The likelihood and cost of the government needing to make payments will depend on the financial obligations of the SOE under the PPP contract, and also on the overall financial position of the SOE. This type of assessment also applies to PPPs undertaken by subnational governments, considering the constitutional arrangement of each country and political realities. Subnational governments need to manage their own fiscal commitments, but national governments should not disregard monitoring the aggregate fiscal commitments of the country. Regardless of the degree of solidarity between different levels of government (and of the direct cost of possible rescue efforts), excessive direct commitments and excessive risk exposure by subnational governments will have macroeconomic impacts, and they will have fiscal consequences. Careful monitoring of subnational expenditure and risk will be critical in preventing "free-riding" behavior that may jeopardize national fiscal sustainability. (The role of a macroeconomic forecasting entity is outlined in Table 1.)
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11 Aliona Cebotari (2008), "Contingent Liabilities: Issues and Practice," IMF Working Paper WP/08/245.
12 International Monetary Fund (2012), "Fiscal Transparency, Accountability, and Risk," August, IMF's Policy Paper; see the Fiscal Transparency webpage, http://www.imf.org/external/np/exr/consult/2012/FAD/.