Direct commitments to PPP include capital subsidies during project construction, as well as ongoing payments such as shadow tolls or availability payments.
When governments provide capital subsidies to PPPs, the payments required are similar to those for traditionally government-procured projects. Because these payments are typically made within the first few years of a project, they can be relatively easily built into annual budgets and medium-term expenditure frameworks. Nonetheless, some governments have introduced particular funds (called Viability Gap Funds) from which such payments will be made. One example of such a fund is in India, as described in Box 2.8.
Box 2.8: Viability Gap Fund in India In July 2005, the Cabinet Committee on Economic Affairs established India's Viability Gap Fund (VGF) program through its approval of the 'Scheme for Financial Support to Public Private Partnerships in Infrastructure'. The program has been very successful. During its first nine years, 42 projects with a total project cost of over US$5 billion and VGF allocation of US$916 million have received final approval, while 178 projects with a total project cost of $17.7 billion and a VGF allocation of $3.4 billion have received in-principle approval. The primary objective of India's VGF program is to attract more private investment in infrastructure by making PPP projects financially viable. Dissecting this primary objective reveals three underlying objectives: • Attracting more private investment to mobilize additional finance and more rapidly meet India's infrastructure needs • Prioritizing PPP projects to improve efficiencies, control timing and cost, and attract private sector expertise • Developing projects through an 'inclusive' approach that does not neglect geographically or economically disadvantaged regions. Critically, knowing that the funding is available encourages firms to bid on India's PPP projects. The resulting keen competition has meant that many projects that the government thought might need a subsidy have in fact been fully privately financed, without a VFG contribution being called on or in some cases with 'negative grants', or upfront payments by the private sector. The scheme is funded by the Government through its budgetary resources, with budget provisions made on an annual basis linked to likely demand for disbursements during the year. In the first year a budgetary provision of US$40 million was made. The scheme also provides for a revolving fund to be kept at the disposal of the Empowered Committee to ensure liquidity of the VGF, and replenished as needed. In any given year, the scheme provides for a cap on the value of projects approved equivalent to ten times the budget provisions for VGF in the annual plan-to ensure continuing liquidity and preventing bunching of disbursement requests as far as possible. This cap can be modified if the Ministry of Finance considers necessary. In practice, the cap has not been binding, and the total VGF support during any year has been based on the estimated requirement for disbursals during the coming year. Source: Department of Economic Affairs, Government of India (2013) Scheme for Support to Public Private Partnerships in Infrastructure [#133] |
Budgeting for long-term direct commitments, such as availability payments, is more challenging. The mismatch between the annual budget appropriation cycle and the multi-year payment commitments exposes the private party to the risk that payments may not be appropriated when due. This problem is not unique to PPPs-many other types of contractual payment commitments may extend beyond the budget year. In many jurisdictions, governments do not introduce any particular budgeting approach for direct, long-term PPP commitments, on the assumption that a responsible legislature will always approve appropriations to meet the government's legally binding payment commitments.
Where appropriations risk is high-typically in systems with a true separation of powers between the legislature and executive-mechanisms to reduce this risk may be warranted. In Brazil at the federal level, Law No.101 of 2000 requires subsidy payments to PPPs to be treated in the same way as debt service payments-that is, they are automatically appropriated. This means that once the subsidy is approved, the appropriations needed are not subject to further legislative approval. Although no federal subsidies have been disbursed yet, this policy should help reduce the likelihood that committed funds are retracted and provides investors with more certainty.
For more on budgeting for direct commitments to PPPs, see the World Bank report on fiscal subsidies for PPPs [#287]. The study presents the appropriations mechanisms for Brazil at the Federal and State levels (pages 15-16), Colombia (page 31), Mexico (page 46), and India (page 59).