Direct fiscal commitments may include up-front capital contributions or regular payments by government such as availability payments or shadow tolls. Box 3.5: Direct Payment Commitments to PPP Projects.
| Box 3.5: Direct Payment Commitments to PPP Projects 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: • Upfront 'viability gap' payments-an up-front capital subsidy (which may be phased over construction, 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. For more on types of payment commitments, see Module 2 of this Reference Guide, Section 4: Public Financial Management for PPPs. |
The nature of the government's direct commitments will be defined during the structuring process described in Section 3.3: Structuring PPP Projects. This highlights the importance of an iterative process between appraisal and structuring. The government needs to have an idea of the level and type of support that will be needed in order to assess fiscal affordability, before investing large amounts in project preparation. Fiscal limits set in appraisal can then inform further structuring efforts, until the project converges on a structure that is both fiscally responsible and attractive to the market. In fact, the value of the direct fiscal commitments is often a key bid variable, as described in Section 3.5: Managing PPP Transactions. This means the fiscal cost cannot finally be known until after the tender process is complete.
During the appraisal stage, the value of the direct fiscal commitments required can be estimated from the project financial model, described in Section 3.2.2: Assessing Commercial Viability. The value of these direct payment commitments is driven by the project costs and any non-government revenues. The value of the direct fiscal contribution required is the difference between the cost of the project (including a commercial return on capital invested) and the revenue the project can expect to earn from non-government sources such as user fees.
The fiscal cost can be measured in different ways:
• Estimated payments in each year-that is, the amount that the government expects to have to pay in each year of the contract, given the most likely project outcomes. This is the most useful measure when considering the budget impact of the project
• Net present value of payments-if the government is committed to a stream of payments over the lifetime of the contract-such as availability payments-it is often also helpful to calculate the net present value of that payment stream. This measure captures the government's total financial commitment to the project, and is often used if incorporating the PPP in financial reporting and analysis (such as debt sustainability analysis) Calculating the net present value of requires choosing an appropriate discount rate-the choice of discount rate to apply when assessing PPP projects has been a subject of much debate, as described below.
In both cases, it is also helpful to estimate how the payments might vary-for example, they may be linked to demand, or be denominated in a foreign currency and so be subject to exchange rate changes. Irwin's paper on fiscal support to PPPs [#160, pages 16-17 and Annex] provides more detail on measuring the cost of different kinds of fiscal support.
Having estimated the cost of direct payment commitments, the government needs to decide if they are affordable. Section 2.4.2: Controlling Aggregate Exposure to PPPs describes how some governments consider the affordability of direct payment commitments under PPPs-for example, this can include projecting current spending levels forward, or introducing specific limits on government payment commitments to PPPs. An OECD publication on PPPs [#194, pages 36-46] provides a helpful overview.