5.1 THE FUNDAMENTALS OF PUBLIC SUPPORT
The Government will need to consider carefully which projects to support, how much support to provide, the terms of such support (in particular, incentives to create and how to maximize leverage of private investment) and how to ensure that support is properly managed.
Figure 5.1: Mechanisms to Encourage PPP |
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Public funds should be targeted toward the most strategic, economically viable and feasible projects.
There is a temptation to approach a project assuming that no Government support will be needed, and to only contemplate such support when negotiations with investors and lenders fail without it. However, this results in an ad hoc support package, developed when the Government's negotiating strength is low; achieving maximum leverage and minimum exposure will be even more difficult. Allocation of Government support must be decided and announced before the bid date to maximize benefits for the contracting agency, and avoid perceptions of discrimination by those who would have bid had they known that such support was available.
| Box 5.1: The UK's Erstwhile PFI Credits |
| Until relatively recently, the UK Treasury allocated PFI Credits for both local Government and central level Government departments-a specified amount of funding for a specific project over a period of time beyond that of the immediate budget allocation framework. It allowed the local authority (or department in the case of central Government) certainty as to a revenue stream from the central budget for meeting its obligations under a PPP agreement and provided a strong incentive for departments and local authorities to implement projects as PPPs. The use of PFI credits was heavily criticized for creating significant long-term liabilities for the Government. The program has been abandoned officially. Source: www.treasury.gov.uk/public-private-partnerships (See also Box 5.7). |
It is advisable for Government to consider Government support as a package-funded and contingent-to ensure that maximum leverage and optimal exposure (fiscal risk) is achieved.
The Government needs to be very careful about de-risking debt. To the extent debt is de-risked, incentives on lenders to ensure project success are diminished.
It is tempting to use available public support to simply improve those projects that do not achieve the levels of viability or feasibility required by private investors. To ensure the public support is not wasted on simply compensating private investors for failures in the Government's PPP framework, appropriate investments should be made in improving the framework for PPP in parallel with maximizing the effectiveness of Government support.