The task of managing fiscal commitments from PPPs is critical for the success of both a PPP transaction and a country's PPP program. As highlighted in the examples discussed from the Asian crisis and more recently the 2008 financial crisis (with examples from Portugal, Spain and the United Kingdom), managing PPP fiscal obligations is critical to the success of a PPP project and the program as a whole. Assessing fiscal commitments during the development stage is not only important from a government point of view, it is also key for a project to achieve financial close. Providing a clear mechanism for managing fiscal commitments improves the credibility of the government in the eyes of its private partners. If this aspect is not addressed and the private party perceives a risk that payments will not be made when due and the cost of this risk is priced into the PPP contract, the advantages of a well-designed risk allocation are undermined accordingly. Additionally, managing these obligations at the implementation stage helps ensure the survival of the project.
Working on PPP transactions, Task Team Leaders/Project Leaders/Transaction Leaders in the World Bank Group encounter different issues outlined in this note and are advised to actively address them and advocate fiscal commitment management to client countries. Task Team Leaders need to ensure that the PPP project due diligence and structuring work incorporates the analysis needed to assess the project fiscal commitments, and that on the basis of this analysis, input from the Ministry of Finance is sought on the fiscal affordability of the project. They also need to advise on the necessary structures to monitor the project's fiscal obligations over the duration of the contract. Box 2 below summarizes the concepts discussed in this note, outlining seven key questions a Task Team Leader needs to resolve as he or she undertakes PPPs in client countries.
Capacity-building activities will reinforce institutional measures. It will be important for governments to acquire hands-on support and medium-term technical advice from specialized experts for the various concerned entities. Support and advice are likely the best form of training and knowledge sharing, providing an opportunity for on-the-job training with actual PPP projects. As the PPP project due diligence starts, a fiscal commitment advisor should be hired to advise on the project and to coach the relevant gatekeeping entities through their respective roles in undertaking the relevant fiscal commitment analysis. In another related mode of capacity building, a consultant is hired to review all (or a subset of) existing PPP project contracts and uncover the fiscal commitments in these deals. This exercise can help familiarize the various entities with fiscal commitment analysis. The function
| Box 2: Key Questions Addressed in This Note a. How can and should public financial management and oversight/gatekeeping agencies-particularly the Ministry of Finance-be involved in the development stage, and later implementation and monitoring, of a PPP project? (Table 1) b. Does the PPP transaction due diligence and structuring clearly incorporate the analysis needed to assess and monitor the project's fiscal commitments? (Table 2) c. Do the gatekeeping agencies undertake the needed assessment and regular monitoring of PPP contracts? (Table 3) d. Does government adequately report on PPP fiscal commitments? (Tables 5 and 6) e. Does the legislative framework (and PPP contract) incorporate provisions to enable management of fiscal commitments? (Section 5) f. Is the client country aware of the imperative of managing PPP fiscal commitments and does the government have the capacity to do it? (Sections 2 and 6) g. Is there an appetite in the country to develop and adopt a holistic framework for managing PPP fiscal commitments? The answers to these questions, in addition to the concepts within this note, can guide Task Team Leaders in making the diagnosis, recommendations, and the related action plans-tailored to the local environment-for improving management of fiscal commitments under PPP projects and programs. |
of assessing fiscal commitments is closely related to the function of managing fiscal commitments (which cannot be outsourced because it requires decision making, not only information-gathering and analysis). Ultimately, assessing fiscal commitments should be conducted in-house as soon as there is enough capacity in government to do so. Involving government teams in a regional network of PPP practitioners and linking them to public sector managers and experts in other countries may also be an option. Large PPP programs create critical mass for organizing PPP workshops, which can combine training and brainstorming activities for an audience of local PPP practitioners.
| Box 3: A Sample of Key Readings on This Topic • World Bank Institute - WBI (2012), "PPP Reference Guide" Version 1.0; (pp. 102112. This document outlines key concepts with regards to fiscal commitment management and provides a wider set of relevant references on the topic. • World Bank Study (Jan 2013), An Operational Framework for Managing Fiscal Commitments from Public-Private Partnerships: The Case of Ghana. This guidance note is largely based on this Ghana study which provides a wider set of citations and references for the country examples and concepts discussed. • Aliona Cebotari (2008), "Contingent Liabilities: Issues and Practice," IMF Working Paper WP/08/245. Washington, DC. This study largely focusses on contingent liabilities in general; however, it includes key insights on those from PPPs. It discusses theoretical and practical issues raised by contingent liabilities, including the rationale for taking them on, how to safeguard against the fiscal risks associated with them, how to account and budget for them, and how to disclose them. Country experiences are used to illustrate ways these issues are addressed in practice and the challenges faced. • Hana Polackova Brixi and Allen Schick, eds. (2002), "Government at Risk," Oxford University Press and the World Bank, New York and Washington, DC. The book provides an analytical framework, operational tools, and cross country case studies of how countries have managed the fiscal risks from contingent liabilities, including PPPs. It also provides recommendations for an institutional framework in government to monitor and manage fiscal risks from contingent liabilities. • International Monetary Fund - IMF (2012), "Fiscal Transparency, Accountability, and Risk." This document considers possible revisions to the Fiscal Transparency Code and Manual, addressing several issues, including PPPs. New standards should ensure that published fiscal reports (i) cover a wider range of public sector institutions; (ii) capture a broader range of direct and contingent assets and liabilities; (iii) recognize a wider range of transactions and flows; (iv) are published in a more timely manner; (v) take a more rigorous approach to fiscal forecasting and risk analysis; and (vi) present forecast and actual fiscal data on a consistent basis. • Katja Funke, Tim Irwin, and Isabel Rial (2013), "Budgeting and Reporting for PPPs," OECD/ITF Joint Transport Research Centre Discussion Paper 2013/07. This study provides a thorough review of practices in budgeting and reporting for PPPs and provides recommendations on these processes. • Tim Irwin and Tanya Mokdad (2009), "Managing Contingent Liabilities in PPPs: Practice in Australia, Chile, and South Africa," World Bank and PPIAF Publication. Acknowledging the decision of governments on whether to assume PPP contingent liabilities and, if so, determining how to value, monitor, and limit them, this report describes how the governments of Australia, Chile, and South Africa have tackled these problems. The report compares a number of issues across all three countries such as: tiers of government undertaking PPPs; nature of PPPs; major contractual contingent liabilities; main central location of PPP expertise; approval, analysis, and reporting on PPPs. • Richard Hemming and staff team (2006), "PPPs Government Guarantees, and Fiscal Risk," IMF Publication - This is one of the key referenced IMF publications on fiscal commitments from PPPs. Chapter 1 provides an overview of some of the issues raised by PPPs, with a particular focus on their fiscal consequences. It also discusses the transfer of risk to the private sector and the challenges involved in assessing who bears PPP risks and the implications of limited risk transfer. Chapter 2 looks more closely at government guarantees, which are used fairly widely to shield the private sector from risk and are a common feature of PPPs. Public disclosure of information about guarantees is a good fiscal transparency practice, but it is unclear how best to reflect in the fiscal accounts the financial impact of fiscal risk associated with guarantees. Chapter 3 looks at the consequences of PPPs and guarantees for debt sustainability, focusing on the appropriate approach to debt sustainability analysis and addressing the uncertainty created by guarantees. Finally, Chapter 4 summarizes and concludes with a list of measures that can maximize the benefits and minimize the fiscal risks associated with the use of PPPs. |