Budgeting for direct, ongoing commitments, such as availability payments or annuities, is relatively straightforward since the timing and value of payments are known. The most common and simplest approach is to build the payment requirement into the annual budget allocation of the relevant department. As previously described, the budget department is responsible for checking that a contracting authority has built its PPP commitments into its annual budget request. Actual payments to PPP companies may be made through a centrally controlled account to avoid the risk of delay. In some cases, when payment risk is considered high, escrow accounts may be used (or even required in the contract) to provide assurance that resources are available to meet payments when needed.
However, budgeting for long-term PPP commitments is not straightforward. The recent paper by Funke et al. (2013) discusses three possible solutions: (a) "a medium-term budget framework that treats PPPs in the same way as publicly financed projects and therefore ensures that PPPs require the same approvals in the budget and budget plans as publicly financed investments"; (b) "commitment budgeting, in which the legislature approves not only the government's cash expenditure in the budget year but also its commitments to spend money in later years"; and (c) "a two-stage budgeting process, in which all projects must first be approved in budget planning on the assumption that they will be publicly financed, and only then is a decision made about the method of financing projects deemed affordable in the first stage."
Budgeting for contingent liabilities is also challenging, as the need for, timing, and amount of payments are often not known until the liability is realized. If payments are needed unexpectedly and savings cannot be found within the existing appropriations, the government may need to go to Parliament to request a supplementary appropriation-often a slow and contentious process. Some countries have found various ways to reduce this risk, such as creating additional budget flexibility by including a contingency reserve in the budget that can be used to meet calls on contingent liabilities, or "insuring" against the need for such payments by creating a fund upfront from which contingent liabilities will be paid (as in Colombia)16.
| Table 6: Example of Reporting Format for Contingent Commitments | |||||||
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| Actual payments | Estimated payments over MTEF period | Estimated present value of all future obligations | ||
| PPP project | Description of project | Description of contingent liabilities | Current FY | Budget year | MTEF Y2 | MTEF Y3 | As of current year |
| Toll road A | 100 km toll road linking A to B; 25 year contract dated 201X; Operational from 201Y | • Government bears two ongoing contingent liabilities: • Minimum revenue guarantee • Exchange rate guarantee • In case of contract termination Government has a one off payment commitment of a value between X and Y million, depending on cause of termination. | # | # | # | # | # |
| Toll road B |
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| Toll road C |
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| Total (transport) |
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| Prison A |
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| Hospital A |
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With regards to the latter approach, the credibility of the fund rests on it being capitalized upfront, which can create a high opportunity cost. A critical consideration in this process is the timeliness and coordination by which the debt department provides the budget department with the estimates on contingent liabilities that are expected to materialize in a particular year.
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16 Aliona Cebotari (2008), "Contingent Liabilities: Issues and Practice," IMF Working Paper WP/08/245.