A proposed PPP project may be feasible and economically viable, and value for money analysis may show that a PPP is the best way of procuring it. Nonetheless, the procuring government also needs to decide whether the PPP is affordable and fiscally responsible, given its fiscal constraints.
Many governments have entered into PPPs not fully understanding their possible cost. This can create significant fiscal risk for governments (see Section 1.3.1). To avoid this pitfall, governments need to assess fiscal affordability when they appraise a PPP project-so that they do not go to market with projects that they cannot afford.
Fiscal commitments can be either 'direct' or 'contingent'. Direct commitments are those the government knows it will have to make if the PPP project goes ahead-for example, the availability payments for a school PPP. Contingent payments are ones that will only be made if certain events occur-for example, payments that may have to be made under a minimum Traffic guarantee if Traffic levels are below projections on a PPP highway, or even worse compensations in the event of early termination (for more on these concepts, see Box 2.7: Types of Fiscal Commitments to PPPs).
Governments need to assess the likely costs of both types of commitments, as set out below. Once likely fiscal costs are identified, Government needs to assess whether those costs will be affordable. Section 2.4.2: Controlling Aggregate Exposure to PPPs describes how governments can assess the affordability of those commitments. For example, this can include comparing annual cost estimates against the projected budget of the contracting authority, considering the impact on debt sustainability, or introducing specific limits on different types of PPP commitment. A World Bank note on implementing a framework for managing fiscal commitments from PPPs [#292] provides an overview of typical types of fiscal commitments to PPP projects, and how these can be assessed.