To encourage line ministries and state owned enterprises to procure infrastructure services through PPP, support may be provided to fund project development costs such as the hiring of suitable expert transaction advisors or the provision of budget support like "PPP credits" or capital grants to defray contracting agency costs. Such incentive mechanisms assign a value (implicitly or explicitly) to the benefits to be obtained by the Government and society generally from PPP. Section 5 provides more detailed discussion of Government support for PPP.
The Government needs to decide whether Government support would represent value for money, should it be provided, if so how much, when, by whom and on what conditions. In the Netherlands and South Africa, the amount of direct fiscal support to a project can be as much as 100 per cent of the cost of the project-usually in the form of an availability payment made over the life of the facility. Such high levels of direct fiscal support are common for education and health facilities and Government accommodation PPPs. In India, the Government provides direct fiscal support of up to 40 per cent of cost or the amount needed to make them commercially viable (whichever is less), provided the project is justified on a cost-benefit basis. In contrast, many Government officials believe that PPPs should be largely self-funded, with infrequent and strictly limited use of direct Government support. The unintended consequence of this approach is that opportunities to stretch public funds and increase their impact are lost, time is wasted in preparing projects that never proceed because direct fiscal support is unavailable, yet projects still continue to obtain hidden subsidies through contingent support.
| Box 3.5: Cost of Public Versus Private Capital |
| It is often assumed that public capital is cheaper than private capital, but the two are difficult to compare-the cost of public debt is often (though not always) cheaper than private debt, but the actual cost of public capital should include the hidden risk premium of the implicit guarantee of taxpayers for public debt (the taxpayer risk making the debt cheaper). The equivalent risk premium is already built-in to the cost of private debt. The actual cost of public capital should also include the opportunity cost for the country of using its capital for different purposes. Chile, for example, applies a "social discount rate" when it uses its capital for infrastructure as compared to other sectors that would be less likely to attract private financing Source: Klein, « The risk premium for evaluating public projects », Oxford Review of Economic Policy, vol. 13, no. 4 at 29 (1997). and McKinsey Global institute, "Infrastructure productivity: How to save $1 trillion a year" (January 2013) at 25. |
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| Box 3.6: The Indian PPP Institutional Framework |
| In 2005 the Cabinet Committee on Economic Affairs (CCEA) of India established the procedure for approval of public private partnership (PPP) projects, and the establishment of a Public Private Partnership Approval Committee (PPPAC). The PPPAC is constituted with Secretaries of MoF's Department of Economic Affairs (a DEA), the Planning Commission, MoF' Department of Expenditure, Department of Legal Affairs and the Secretary of the department proposing the project. The DEA Secretary chairs the PPPAC. A PPP cell was established in the DEA and undertakes the appraisal on behalf of the PPPAC, screens identified proposals for funding under the India Infrastructure Project Development Fund (IIPDF) and provides an advisory function to support state cells and municipalities. Source: Dachs, International Benchmark Comparator Report, February 2013. |