PPP contracts often have financial implications for Governments. Payment commitments under PPP contracts are often long-term, and can be contingent on one or more risks as Box 2.7: Types of Fiscal Commitments to PPPs describes. This can create particular challenges for public financial management, which is generally geared to annual appropriations for expenditure. For this reason, PPP-specific approaches to public financial management have been developed.
Box 2.7: Types of Fiscal Commitments to PPPs Fiscal commitments to PPPs can be regular payments constituting all or part of the remuneration of the private party, a means to share risk, or a combination of the two. Common types of government fiscal commitments to PPPs include the following. Direct liabilities Direct liabilities are payment commitments that are not dependent on the occurrence of an uncertain future event (although there may be some uncertainty regarding the value). Direct liabilities arising from PPP contracts can include: • 'Viability gap' payments-a capital subsidy, which may be phased over construction based on achievement of milestones, or against equity investments • Availability payments-a regular payment or subsidy over the lifetime of the project, usually conditional on the availability of the service or asset at a contractually specified quality. The payment may be adjusted with bonuses or penalties related to performance • Shadow tolls, or output-based payments-a payment or subsidy per unit or user of a service-for example, per kilometer driven on a toll road. Contingent liabilities Contingent liabilities means payment commitments whose occurrence, timing and magnitude depend on some uncertain future event, outside the control of government. Contingent liabilities under PPP contracts can include: • Guarantees on particular risk variables-an agreement to compensate the private party for loss in revenue should a particular risk variable deviate from a contractually specified level. The associated risk is thereby shared between the government and the private party. For example, this could include guarantees on demand remaining above a specified level; or on exchange rates remaining within a certain range • Compensation clauses-for example, a commitment to compensate the private party for damage or loss due to certain, specified, uninsurable force majeure events • Termination payment commitments-a commitment to pay an agreed amount, should the contract be terminated due to default by the public or private party-the amount may depend on the circumstances of default • Debt guarantees or other credit enhancements-a commitment to repay part or all of the debt used to finance a project. The guarantee could cover a specific risk or event. Guarantees are used to provide more security to a lender that their loan will be repaid. Polackova's paper on Government Contingent Liabilities [#206] defines direct and contingent liabilities, and describes the fiscal risks posed by contingent liabilities in general. |
Section 1.3: Infrastructure Challenges and How PPPs Can Help describes some of the problems that commonly arise when the fiscal implications of PPPs are not carefully addressed and managed. Without specific rules to prevent this, PPPs can be used to bypass budget or borrowing limits. Governments also often underestimate the cost of bearing risk under PPPs, which can result in unsustainable levels of exposure to PPP-related risks.
This chapter provides guidance for practitioners on public financial management for PPPs, to help avoid these pitfalls. The following sections describe how governments can:
• Assess the fiscal implications of a proposed PPPP project
• Control aggregate exposure to PPPs
• Budget for fiscal commitments to PPPs
• Reflect fiscal commitments to PPPs in government accounts and reports.
The following resources provide helpful guidance across this range of public financial management issues for PPPs:
• An IMF publication on Public Investment and Public-Private Partnerships [#214] provides a helpful set of articles on public financial management for PPPs, including sections on fiscal risks from PPPs, and on PPP accounting, reporting, and auditing. These are referenced in the relevant sections below
• Funke, Irwin and Rial's paper on Budgeting and Reporting for Public-Private Partnerships [#108] describes how well-defined approaches to accounting, reporting, and budgeting for PPP projects can help ensure PPP decision-making is driven by value for money considerations not accounting quirks
• Posner, Ryu and Tkachenko's report on the budgetary implications of PPPs [#207] examines the issues posed by PPPs for central budget offices-including the impact of PPPs on near and longer term fiscal targets and priorities, current budgetary practices of PPPs, and possible strategies to promote greater consideration of the short and longer term affordability of PPPs given fiscal space and priorities
• A World Bank note on implementing a framework for managing fiscal commitments from PPPs [#292] provides guidance and examples on all these aspects of public financial management for PPPs; a related World Bank study on managing fiscal commitments from PPPs in Ghana [#290] goes into more detailed recommendations, including for example providing template reporting formats.