4.3.2 Reporting and Disclosing PPP Fiscal Commitments

Each government needs to determine whether and when PPP commitments should be recognized-that is, formally recorded in financial statements as liabilities. As previously noted, one attraction of PPPs is the notion of getting investment financed (by the private sector) without immediately increasing reported government spending and debt. This perception sometimes creates a bias in favor of PPPs and can lead to the selection of projects that may be better candidates for traditional public procurement. This bias is also closely related to the way governments measure their spending and debt.

Determining whether and when PPP commitments should be recognized is particularly important since it defines whether the liabilities count towards government debt management limits or targets. There are international standards for public accounting and statistics relating to PPP commitments specifically and contingent liabilities more broadly, namely: International Public Sector Accounting Standards (IPSAS) - Standard 32; the IMF's Government Finance Statistics Manual - GFSM (IMF 2001 and November 2012 draft); the IMF 2011 Guide on Public Sector Debt Statistics (PSDS 2011); and Eurostat Rulings (see Table 4 for some of these standards). IPSAS 32 provides a framework for accounting for and reporting PPP transactions in a government's accounts that considerably reduces the bias in favor of PPPs. (For more detail, see Cebotari 2008; Hemming 2006; and Funke et al. 201313). While relevant international accounting standards were recently published, few countries have yet adopted these standards in practice, and country approaches to this question vary widely. Funke et al. (2013) looks in detail at this question, noting that "reported spending and debt in the short run […] is increasingly done in accrual-based fiscal data, which often treat PPPs as government projects, even though from a legal perspective they are undertaken by a private company. This means that the government treats investment in the PPP project as public investment and records the PPP asset on its own balance sheet, along with a corresponding liability." Where PPP liabilities

Source: Aliona Cebotari (2008), "Contingent Liabilities: Issues and Practice," IMF Working Paper WP/08/245.

are treated as public debt, they are likely to be subject to checks and limits accordingly. Nevertheless, the suggestions in this note-and the importance of clearly understanding and carefully managing the fiscal implications of PPPs-apply irrespective of how PPPs are treated in public accounts.

When PPP fiscal commitments are not recognized as part of a government's debt, they should nonetheless be reported alongside information and analysis of public debt. This is important for both internal and external transparency of the government's liability position. Key questions on PPP reporting are what information should be disclosed and where. The IMF Manual on Fiscal Transparency (2007) states that budget documentation should include a statement indicating: the purpose of each contingent liability, its duration, and the intended beneficiaries; and that major contingencies should be quantified where possible. In practice, the type of contingent liabilities disclosed varies across countries; relatively few countries disclose PPP-specific contingent liabilities such as minimum revenue guarantees or exchange rate guarantees.

As noted in Tables 5 and 6, the information reported will likely include a mixture of qualitative and quantitative information on the different types of government commitments to PPPs. For illustration purposes, Tables 4 and 5 show a sample of reporting formats to present both direct and contingent liabilities under PPP projects. These formats suggest providing a description of liabilities under each PPP project and a simple estimate of the value of those liabilities. In the case of long-term payment commitments, such as availability payments, the information reported could include the annual cost and the present value of the payment stream over the contract lifetime. For contingent liabilities, the reported information should include any realized costs, as well as the "maximum" or "worst-case" value, where this can be calculated.

Reporting on PPP fiscal commitments can be included alongside public debt reporting in documentation such as: a Medium-Term Debt Strategy report, budget statement, notes to the national account, special purposes reports, and so on. From a fiscal management viewpoint, PPPs are one item in a government's "fiscal risks matrix" (see Brixi and Schick 1998). As PPP programs develop, governments may consider publishing a specific report on PPP fiscal commitments (such as in Chile, which started by publishing a report on contingent liabilities from minimum revenue guarantees to PPPs and later broadened its disclosure into a wider report that extends beyond PPP contingent liabilities).14

A government should also define how it will treat SOE obligations under PPP contracts in its reporting and accounts. SOE payments guaranteed by the government create an explicit contingent liability that should

be reported alongside other contingent liabilities under the PPP program. If no explicit guarantee has been provided, the government may nonetheless have an implicit obligation to support the SOE in case of financial distress and protect the provision of basic services. However, the latter is a general liability that encompasses all financial obligations of the SOE and not just those under the PPP contract. Publicly reporting on these commitments could risk creating moral hazard in cases in which SOEs and the concessionaries perceive this disclosure as explicit government back-up, affecting the private party's due diligence on the capacity of the SOE to meet its PPP commitments, as but one example. In this case, the clearest approach may be to ensure that governments are aware of the SOEs' PPP commitments and generally strengthen their oversight and visibility of SOE financial performance.

As well as reporting specifically on fiscal commitments under the PPP program, there are wider benefits to disclosing PPP contracts and procurement processes. Disclosure can help PPP programs achieve better value-for-money in several ways. For example, revealing information on the procurement of PPPs can improve governance; furthermore, disclosing information on the performance of PPPs helps users of services understand the levels of service they should receive. Latin American countries publish their PPP contracts, India has recently published a large number of highways contracts, and Australia and Canada disclose significant information on their contracts and projects.15

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13 Richard Hemming and staff team (2006), "PPPs Government Guarantees, and Fiscal Risk," International Monetary Fund; and Katja Funke, Tim Irwin, and Isabel Rial (2013), "Budgeting and Reporting for PPPs," OECD/ ITF Joint Transport Research Centre Discussion Paper 2013/07.

14 Government of Chile (2011), Informe de Pasivos Contingentes 2011 (Contingent Liabilities Report, in Spanish), available at http://www.dipres.gob.cl/572/articles-76644_IPC_2011.pdf. This document also includes some disclosure formats for PPP fiscal commitments.

15 World Bank Institute - WBI (2013), "Disclosure of Project and Contract Information in PPPs." See Table 1 for a summary of country practices on approaches to PPP contract and project disclosure.