Governments, especially in developing countries, find it imperative to provide extensive and generous guarantees in the early stages of their PPP programmes in order to attract private sector participation and financing of infrastructure. According to the World Bank, many developing countries have accepted high fiscal commitments and risks at the early stage of implementation of PPPs.
Government guarantees serve as second-best instruments in the absence of a stable political environment, effective regulatory institutions, independent judicial systems, and an overall competitive climate (Llanto and Soriano, 1997). Thus, a crucial condition for an effective public-private partnership in infrastructure projects is the provision of state guarantees. It has been the expectation of several governments that rapid infrastructure development will promote high economic growth in the future, which would minimise demand for guarantees.
Guarantees and contingent liabilities
Guarantees have been issued to cover several risks, and those which are most commonly retained by Government are as follows:
a) Site availability -- The government guarantees right-of-way (ROW) for the project. Government commits to buy the proposed project site and pass it to the private sector company. In addition, it takes the responsibility to relocate and compensate residents who will be affected by the proposed project.
b) Market risk -- If the buyer of the service is a state utility company, government, the regulator, normally will commit to a minimum off-take contract purchases and prices (take or pay arrangements) from the service provider. These provide a guaranteed market for the PPP projectÃ¢â‚¬â„¢s output (e.g. power, water);
c) Payment Risk -- If the buyer of the service is a state utility company, government guarantees contractual performance;
d) Change in law risk -- Government assures the private sector partners that changes in the legal framework will not be injurious to contractual agreements;
e) Foreign exchange risk -- The government/central bank agrees to provide forward cover for the proponent. This will consist of either: a) making foreign exchange available for the project; or b) arranging for foreign exchange purchase through a forward contract for delivery at a later date during contract period. This resolves currency mismatch problems where project revenues are in domestic currency while debt repayments are in foreign currency. In addition, the inability to charge cost-recovering tariffs for services will result in difficulties of raising sufficient local currency equivalent to foreign currency denominated debt repayments; and
f) Regulatory and political risks -- Regulatory risk assures that the regulatory environment will be predictable, transparent and stable, and that government will not enact and enforce new regulations that will adversely affect the financial viability of the project; that all sector specific regulations will be enacted only in accordance with the concession agreement. Political risks may include changes in law, war, hostilities, belligerence, revolution, insurrection, riot, public disorders, or terrorist act.
Generally, experience has shown that the largest source of contingent liabilities payments in developing countries are guarantee covers for market risks and buyouts in the event of termination (Table 1).
These guarantees impose significant future contingent liabilities on governments. In other words, a government is bound legally to take on obligations if clearly specified uncertain event should happen. Contingent liabilities may be explicit and implicit.
In brief, in the case of explicit contingent liabilities, the contract mentions the specific trigger events/risks which occurrence will crystalise into a liability for government. Implicit contingent liabilities, on the other hand, commit government to obligations despite the absence of a contractual or policy commitment to do so (e.g. provision of relief in the event of uninsured natural disaster or bailing out public utility enterprise).
The conventional budgeting system followed by most governments also contributed to the growth of the contingent liabilities. In such a budgeting framework, guarantees appeared as an off-balance sheet item. This sometimes was deliberately done to avoid infringement of international fiscal restriction treaties -- for example EU Mastricht Treaty and the Stability and Growth Act which impose the following fiscal ceilings on members: budget deficit/GDP of less than 3% and Soverign debt/GDP of less than 60%. Since they did not appear as part of the balance sheet and resource utilisation statements, they were often viewed as a free resource, which motivated governments to issue guarantees liberally in order to attract needed private sector infrastructure investments.
Because the implications of contingent liability risks would be felt in the long-term only, there were no immediate budgetary implications: there was less incentive on the part of governments to be cautious in creating contingent liabilities.
There is the problem of moral hazard. Owing to the high enthusiasm, ambition and haste of governments to extend every support to induce foreign investment, the private sector investor took undue advantage and often insisted on blanket guarantees. Once they could get commitment
of assured good returns, the investor sometimes did not professionally appraise the projects and their risk/return profile. As a result, unviable or uneconomic projects were also taken up for investment, which led to the situation where government sometimes ended up paying the minimum assured returns to the investors from their own budgetary resources.
These countries do not have the appropriate institutional and organisational mechanisms to analyse and report possible fiscal liabilities for individual PPP projects before they are awarded at the feasibility stage. This situation is underpinned by the fact that, globally, there are no comprehensive universal accounting standards existing for the treatment of PPPs in national budgets and international comparable statistics, such as national accounts.
The fiscal implications of contingent liabilities
Government guarantees create contingent liabilities that could spell financial crisis for the government if not properly managed. Ã¢â‚¬Å“Several countries, especially developing countries, went too far launching too many projects too quickly,Ã¢â‚¬Â (Oliveira Cruz et al, 2011) without consolidating PPP know-how in the public sector and applying lessons learned, without the appropriate regulatory framework to guide new contracts and without a structured project and contract management capabilities. As a result, many of these countries accumulated huge liabilities and destabilizing national debts.
Classic examples of the financial implications from contingent liabilities are as follows: (a) In Portugal, following the aggressive and hasty implementation of over one hundred PPP contracts -- predominated by availability payment contracts in a very weak PPP environment during 1999 and 2010 -- PPP liabilities snowballed and contributed to huge public and external debts of Ã¢â€šÂ¬160 billion (93% of GDP) and Ã¢â€šÂ¬405 billion gross (235% of GDP) respectively at the end of 2010. Of the external debt, about Ã¢â€šÂ¬171 billion or 42.2% was PPP-related foreign loans financed through local banks. The net present value of government PPP implicit liabilities alone was estimated at over 14% of GDP or about Ã¢â€šÂ¬26 billion, and about 80% of the PPP liabilities were in the transport sector (IMF 2011);
(b) In Columbia, between 1999 and 2005, contingent liability inflicted debt in respect of several PPP projects incurred by government was as much as US$2.0billion in 2005 according to Irwin (2007);
(c) In Brazil, debts incurred by provincial governments cost the federal government US$19billion in the 1980s and US$55billion in the 1990s, and contributed substantially to its financial crisis in 1998;
(d) Total estimated contingent liabilities incurred by the Philippine government as of 2003 was P1,672 billion (US$30.4billion), (Department of Finance, DOF, Philippines);
(e) Over the past 10 years, Argentina and Mexico have bailed out sub-national governments when the latterÃ¢â‚¬â„¢s deficit or arrears have become unsustainable (World Bank);
f) In the UK, the government incurred implicit contingent guarantee expense of GBP100 million when it had to bail out National Air Traffic Services (NATS), a PFI project following the September 11th attacks which caused airline traffic to fall below forecasts and the company was in danger of not meeting its debt obligations (Md Abu Rashed, 1997).
In response to the spate of contingent liabilities-inflicted debts that occurred in several countries over the past decades, in the article IV consultation (2005), the IMF considered that Ã¢â‚¬Å“private sector involvement in infrastructure investment is welcomeÃ¢â‚¬Â, but recommended that risks should be carefully monitored and any contingent commitments Ã¢â‚¬Å“be recorded with utmost clarity in the documentation accompanying annual budgetsÃ¢â‚¬Â since future payments to private partners Ã¢â‚¬Å“are akin to debtÃ¢â‚¬Â.
It also recommended the need to give high priority to the institutional framework for PPPs -- including safeguard ceilings for annual PPP payments -- so as to limit contingent liabilities and other fiscal risks.
Contingent Liabilities Management Framework
According to Katje Funke et al (2013) government annual payments under government-funded PPP contracts amounts to more than half percent of GDP in some countries. In developing countries, user-funded PPP projects are, usually, very large and government retains the revenue risk. Following low demand which could be as low as 50%, confirmed by several past experiences, government incurs substantial annual payment obligations.
It is imperative to institute an effective centralised contingent liability management framework within the PPP framework as the fiscal obligations created by PPPs have potential to seriously undermine the fiscal sustainability of government budgets and national debt.
A dedicated department needs to be set up within the finance ministry or any other powerful ministry to be responsible for the centralised contingent liability management framework. It should preferably be responsible to the Minister of Finance or the Treasury Minister.
It should be assigned the following responsibilities: a) provide a framework to manage future commitments and develop action plans to implement the framework; b) prepare fiscal management policy including accounting methods, guidelines for risk management, granting guarantees and contingent liabilities based on IMF guiding principles; c) develop Medium Term Expenditure Frameworks for PPP projects; d) provide estimates for all annual allocation and forecast of fiscal burden and potential risks; e) prepare annual disclosure reports based on IMF recommendation on contingent liabilities, guarantees associated with PPP projects including fiscal burdens and potential risk; f) advise government on appropriate actions to implement for achieving fiscal stability and the PPP programme objectives and g) effectively monitor and evaluate PPP project performance and the performance of contingent liabilities, and ensure the implementation of all action plans.
The department should be strictly guided by IMF requirements: 1) Ã¢â‚¬Å“use a method in which government either adopts lease accounting standards or takes into account the level of risk and which party will assume the risk in case of a service or PFI type project (such as Eurostat standards)Ã¢â‚¬Â ; 2) Ã¢â‚¬Å“PPP should be classified as nongovernment if the following 2 conditions are met: (A) i) the private partner bears the construction risk, and (ii) the private partners bears either the availability risks or the demand risk; (B) consider transfer from the private partner to government at the end of the contract period and at what price (Eurostat 2004)Ã¢â‚¬Â; and 3) IMF comprehensive disclosure requirements for PPPs.
Budgeting forms the basis for adopting the IMF recommendations. The Budget Department in the finance ministry should be integrated into the PPP programme. It should be strengthened to effectively perform its functions. The budgeting design process for investment projects should ensure that PPPs are used to support high quality public spending and do not put fiscal sustainability at risk. It underscores the prioritisation of spending and consistency with sustainable public finances.
The principles should guide the PPP budgeting process: a) decisions on investment spending should conform with policy priorities, and the cost benefit analysis method should form the basis of investment decisions; b) Value for Money should be used to make a choice between contesting PPP projects and traditional public financing; c) spending decisions should be consistent with fiscal sustainability on long-term basis.
To ensure that long-term budget affordability drives the investment decision, government may adopt at budget level a) a medium-term budget framework that treats PPP as publicly financed projects. This should be based on accrual accounting principles as in New Zealand; b) commitment budgeting.
This assists in spending appropriations and addressing the affordability issues It also draws attention to the full future costs of all long-term investment projects including PPPs; or c) a two-stage budgeting process. This is used to sieve out undesirable projects and present only pre-approved project as part of the investment programme for inclusion in the budget. It could apply to all investments that extend beyond the horizon of the medium-term forecast and exceed a certain maximum amount.
In addition, there is need to set up debt and risk management departments at the finance ministry. It should be assigned responsibility for the establishment of a debt and risk management office at the Department of Finance, which should monitor contingent liabilities and advise government on appropriate action, among other responsibilities.
Several countries have established centralised contingent liability and fiscal commitment management frameworks for PPPs and national economic programmes following guidelines of the IMF and World Bank. These countries include the Republic of South Korea, India, Brazil, the Philippines, Indonesia, Nigeria and others.
Ghana has followed suit. It has set up the Debt Management Division in the Ministry of Finance. The National PPP policy, section III (Debt Management Division) has provided for the management of direct and contingent liability associated with government guarantees for PPP projects to ensure their fiscal sustainability. It will be responsible for a) Fiscal Impact of PPP projects (to direct or contingent, explicit or implicit) and determine their acceptability, given other national needs; b) government support confirming whether they are appropriate for sovereign guarantees (debt or specific-event) or other kinds of government support.
It is documented that Australia, Chile and South Africa all have well-regarded PPP programmes and none has suffered large losses on PPP-related contingent liabilities (Irwin, T and Tanya Mokdad, 2009). It is therefore advised that other countries can extract valuable experiences from these countries and other international best practices to guide them to develop sound PPP programmes.
Better Framework for the Granting Guarantees
Provision of guarantees need to be planned, executed, monitored and evaluated within an appropriate policy and regulatory framework. It is required that government/Ministry of Finance set up a robust framework. The framework should include the following criteria for the effective granting of guarantees: a) Appropriate Guarantee fees.
A risk-adjusted and market based fees regime should be developed to ensure resource allocation efficiency; b) Annual Guarantee Requirement Plan/Programme. An annual guarantee requirement plan should be developed based on prudent assessment of needs. It should consist of guarantee needs for PPP infrastructure projects and other guarantee programmes of various agencies, especially those that have the nature of sovereign guarantees as well as all indirect guarantees; c) Maintaining Principle of Public Finance Efficiency. Contingent liabilities should compete on equal footing, on budgetary basis with other forms of financial support, such as direct subsidies, tax exemptions, loans and so on to ensure public finance efficiency (Currie and Velandia).
In addition, governments should find creative ways to introduce fall-away clauses relating to performance undertakings in guarantee instruments. Fall-away clauses may be set against given economic indicators, which when they improve to a certain level within a given time-frame will trigger the nullification or reduction of government obligations/specific performance undertakings of the guarantee -- e.g. the credit rating of an economy. Its introduction in certain performance undertakings enables governments to minimise their contingent liability exposure.
For example, a fall-away clause was included in the 1200MW Ilijan Natural Gas Power Plant and San Pascual Cogeneration Power Plant project agreements in relation to the availability payments. The underlying economic indicator was the investment grade rating of the Philippine peso debt as reported by Standard and Poors, or Moody or other internationally recognised rating agencies of comparable standing.
Following two consecutive years of recording an investment grade, the availability fees became redundant. A fall-away clause in respect of foreign currency convertibility in government guarantee can be invoked once the country attains an investment grade in the capital market (Llanto and Soriano 1997).
Another creative way to reduce the demand for a guarantee by the private investor is to introduce minimum Present Value Revenue (PVR) as a basis for award of road concessions as against traditional methods. A classic example where this has been successfully applied is the Route 68 concession in Chile. A key difference between the concession for Route 68 and previous concessions was that Route 68 was awarded on a least-present-value-of- revenue basis, which reduced the concessionaireÃ¢â‚¬â„¢s exposure to demand risk and thus reduced the demand for a guarantee (Engel, Fisher, and Galetovic, 2001).
It is recommended that governments should introduce an explicit exit strategy in its guarantees. This will minimize governmentsÃ¢â‚¬â„¢ risks exposure and potential contingent liability burden. In addition, the duration of a guarantee cover or the period of the government Ã¢â‚¬â€œprivate sector partnership is another area that provides opportunity for thoughtful innovation. Independent Power ProducerÃ¢â‚¬â„¢s (IPP) experience in the power sector seems to show that the lengthier the time period within which the guarantee call be exercised, the more likely it will be exercise by the private sector investor. Clearly, the perception of expected default in this give it high risk profile to attract commensurate high guarantee fee or premium.
In this connection, it is prudent for the finance ministry, the sponsoring and the project proponent to agree on the need for the annual review of the fee to reflect changes in business circumstances and more generally to give the department the flexibility to determine appropriate guarantee fees. By this, a more realistic fee could be earned in favour of government. Infrastructure projects are subject to dynamic market, techno-economic as well as environmental factors which reflect high risks associated with them. Thus, there is need to regularly review project performance and reassess the guarantee cover provided to the project.
Sharing Risk with the Private Sector
Government guarantees to the private investors are intended to minimize the attendant risk of infrastructure projects and thereby encourage their participation. At the same time, governments should ensure that they will be in a position to cover the associated contingent support. It is therefore, important to adopt more effective risk allocation principle that ensure optimum assignment of risks to the parties that should absorb them and minimize component risk through efficient risk management such as insurance or hedging.
Thus, specific risks should be normally be allocated to the party that is best able to manage controllable risks, or best able to insure uncontrollable but insurable risks or best able to bear the financial consequences of uncontrollable and uninsurable risks. This implies that government should cover only project risks that it is able to directly influence or risks which are either uncontrollable or macro-economic and for which insurance or risk hedging products are not available on reasonable commercial terms. One advantage of this is that it will encourage the private partners to seek other efficient risk mitigation instruments such as insurance and hedging thereby reducing government contingent liabilities.
The optimum risk sharing mechanism provided by this principle means that the governments and the private partners may agree on the assignment of component risks in other proactive ways to ensure equity and fairness when possible. For example, a) the governments can agree to guarantee the private partnersÃ¢â‚¬â„¢ debt exposure for a limited period of time; b) it can negotiate and agree with the private partner to graduate percentage of the minimum revenue guarantee support for solicited projects for a maximum period of say 10 years consisting of coverage of up to 75% of the estimated operating revenue during the initial five years and progressive decline in the percentage rates in ensuing years.
To reasonably reduce government contingent liabilities, the risk sharing mechanism should not only transfer risk to parties best able to absorb them but also encourage the private sector to take up more of those risks that can be mitigated by more efficient instruments such as insurance and through hedging. For the insurance sector, the capital market and their interfaces are active participants in the global risk management market.
Prudently, it is necessary to pass the appropriate risks of infrastructure projects to the insurance sector. In addition, a robust and fair risk sharing mechanism will give strong incentive to investors to select projects more carefully and manage them more efficiently. In the past, governments, unknowingly, took on risks that they should have been borne by the private sectors. A more proactive risk allocation mechanism is necessary to prevent perverse incentives that lead to project mismanagement and to avoid moral hazard problems such as less diligent monitoring and fund diversion by the private partner.
PPP fiscal safeguard rules
To encourage good budgeting decisions in line with IMF recommendations, dedicated fiscal rules need to be introduced to ensure that the fiscal implications of PPPs are taken into account. The ceilings are generally guided by: a) covering both the stock and annual flows of PPPs; b) use of an unambiguous measure such as Present Value method to capture the size of the PPP program. Given the availability of a reliable valuation method, ceilings can be broadened to include the expected cost of contingent liabilities.
Other inputs are the medium-term budget framework, debt sustainability analysis and projected contingent liability claims. The rules, normally, set limits on some headline fiscal indicators, for example on public debt or on the fiscal deficit. The PPP ceiling, should, be consistent with affordability in the short-term, medium- and long-term (Katja Funke et al). Some examples of ceilings for PPPs for selected countries are as follows:
United Kingdom: a) On the basis of Ã¢â‚¬Å“the golden ruleÃ¢â‚¬Â and Ã¢â‚¬Å“sustainable investment ruleÃ¢â‚¬Â, public sector net debt as a proportion of GDP will be held over the economic cycle at a stable and prudent level.
Other things being equal, net debt will be maintained below 40% of GDP over the economic cycle; b) Annual payments under PFI unitary charges will be less than 2% of the Treasury departmentÃ¢â‚¬â„¢s total annual resource budgets.
Republic of South Korea: a) To set up a PPP payment allowance rule or ceiling as a fraction of total budget, the government can effectively manage the expected payment for signed PPP contracts under the Medium-Term Expenditure Framework (MTEF); b) The total annual government payment on PPP project should be less than 2% of the total government expenditure; c) the current forecast on PPP project suggests that the figure will reach up to 1.9%.
Brazil: A ceiling on current spending from PPP contracts should be 3 percent of net current revenue and applies to all levels of government (articles 22 and 28 of the PPP law).
El Salvador: The present value of the cumulative amount of quantifiable firm and contingent future payments, net of revenue, assumed under PPPs cannot exceed 5 percent of GDP (Katja Funke et al)
Hungary: In a given budget year, the nominal value of new long-term commitments cannot exceed 3 percent of total state budget revenues. Long-term commitments cover expenditures for investment, renovation, operation and maintenance, service purchase, and rents, including those arising from PPP contracts (HungaryÃ¢â‚¬â„¢s Concession Law 1991).
Peru: According to the Peruvian PPP law, the present value of contingent and non-contingent liabilities in PPP projects cannot exceed 7 percent of the GDP (Katja Funke et al). It is instructive to comment on the results of a study carried out by the Korean government to estimate the fiscal implications of its PPP projects under implementation between 2008 and 2015.
The projected total investments in PPPs during 2005-2015 is W396 trillion (US$333.3billion approximately). Of this 116 Build Transfer Operate, BTO, projects amounted to W338 trillion (US$283.9billion) and Build Transfer Lease, BTL, amounted to W37.6 trillion (US$31.6billion approximately, (Jay-Hyung Kim et al, KDI/ADB 2011). It revealed that the aggregate investment amount of signed and planned PPP project (BTO and BTL) total fiscal commitments would stay within the 2% of GDP guideline.
However, if investment in BTL expands for a decade from 2016 by W10 trillion (US$8.4billion) annually (to bring total BTL investments to W81.6 Trillion (US$68.5billion approximately) the amount of public PPP financing might create difficulties for the government to maintain fiscal stability.
The study concluded that in order for government to secure fiscal stability and soundness, it must implement most needed infrastructure projects for a certain period (for example, 5 years) and pay government disbursements, and continue with the remaining projects, instead of launching additional large-scale PPP projects during a short period of time. (Jay-Hyung Kim et al, KDI/ADB 2011)
The setting up of a well-resourced dedicated Guarantee Fund as part of the PPP framework in developing countries is a strategic action to facilitate effective fiscal management. The Fund could be a wholly owned by government or a PPP arrangement with government investment exit strategy at a future date. It should have the capacity to raise local and foreign funds. Specifically, its sources of funds should include: a) own capital; b) budgetary transfers/allocation; c) fees from guarantee beneficiaries; d) certain percentage of excess toll revenue from toll road private operators; and e) other sources.
It should operate as a single window for appraising, structuring, pricing and providing guarantee for PPP infrastructure as well as reviewing the portfolio on annual basis. Its guarantee operations need to focus on: a) risks associated with government inaction or delay (allocation of land, issuance of permits and licences); b) weak creditworthiness of public sector contracting partners (particularly for off-take arrangements).
In addition, it should be able to establish strategic partnership with international guarantee funds such as the World Bank and others. This should enable it enhance its products to include Partial Risk Guarantee (PRG) product. PRG offers partial mitigation against risk of default resulting from government non-performance against a range of risks including: tariff, regulatory, arbitration, convertibility, transferability etc. These facilities are subject to a sovereign counter-guarantee. Examples of similar institutions are the Infrastructure Guarantee Fund (IGF) of Indonesia and Partnership Guarantor Fund (PGF) of Brazil. PGFÃ¢â‚¬â„¢s assets have an upper limit of about US$3.1billion. Both maintain working arrangements with several international guarantee institutions.
Further, the governments need to engage multilateral development partners such as the World Bank and its sister agencies -- namely the Multilateral International Guarantee Agency (MIGA) and International Finance Corporation (IFC) -- to provide high-end guarantee instruments to supplement those of the domestic institutions. They provide cover for specific project risks that reflect weaknesses (perceived/actual) in the enabling environment for PPPs. The World Bank provides both Partial Credit Guarantees (PCG) and Partial Risk Guarantees (PRG).
A PCG is credit risk coverage with maturities longer than those offered by commercial banks to extend tenors on private debt finance. MIGA, on the other hand, insures against political risks including: transfer restriction, expropriation, war and civil disturbance, breach of contract and non-honouring of sovereign financial obligations. Its guarantees are limited to risks that include international investors as part of the arrangements.
Maintaining a stable macroeconomic environment
A stable macroeconomic regime creates an effective condition to minimise guarantee calls. Prevailing low inflation and interest rates assure more certainty of project cash flows and positive return on investment for the private investor, thereby minimising business risks.
Government should strive to maintain macro-stability and relentlessly implement economic and financial stimulus reforms to promote competition, deepen and expand the financial and capital markets.
This will, in turn, provide incentives for the development of local currency-denominated debt finance including new long-term maturity local debt instruments to be funded by insurance and pension funds. As a result, the maturity mismatch between short-term bank liabilities and long gestation of infrastructure projects that preceded the new environment will be eliminated.
Local currency loans provide natural hedge for domestic revenues for debt servicing to reduce foreign exchange risks. A sustainable macroeconomic environment should earn the economy an internationally acceptable investment grade rating status. The private investors will then be incentivised to participate in infrastructure development with less demand for risk mitigating government guarantees.
Other supplementing measures that can help to significantly improve the PPP environment and minimise risks and thereby improve contingent liability management are as follows:
a) Secure technical support from donors to develop and strengthen departments set up to establish and operationalise contingent liability and fiscal commitment management frameworks for PPPs (accounting, budgeting, monitoring and management of contingent liabilities). This requires capacity building of PPP officials in relevant skill-set (finance, quantitative analysis and strong understanding of infrastructure projects and others);
b) Maintain a transparent, supportive and efficiently functioning legal and regulatory framework for PPPs. Clarify the rights and obligations of each stakeholder involved in PPP projects, safeguard independence of their institutions and operation and ensure accountability. The regulatory framework should be able to build the confidence of the private sector in taking risks and long-term position in the host nationÃ¢â‚¬â„¢s infrastructure development, e.g. enabling the setting of cost-recovering tariffs, stable policies and reliable and efficient judiciary.
c) Develop a structured capacity building program for government officers in both central and local levels. Government may secure funding from international donors to supplement their resources.
d) Prepare, update, improve and disseminate guidelines on PPP procedures and provide PPP manuals for relevant stakeholders such as private sector associations, the construction industry, government agencies, and lenders/capital sponsors.
e) Engage the private sector in a continuing dialogue on how to address relevant issues such as tariff adjustment formula, political risk and how to strengthen PPPs.
Government supports for the private sector investor is an integrated part of a PPP framework. This imposes significant risk on governments and exposes them to potential large fiscal liabilities and national debt. Governments need to effectively plan on long-term basis and manage contingent liabilities and guarantees associated with PPP projects and transparently report information in their budget documents and financial statements as well as on websites, according to IMF recommendations.
For governments to realise maximum benefits from PPPs, much will depend on how they allocate the risks. To increase benefits, governments should assume risk they can control and avoid bearing other risks. This will create strong incentive for the private sector investor to select projects more carefully and manage them more efficiently. In many PPP projects governments have, unknowingly, assumed risks that they should have been borne by the private sectors. While implementing fiscal management plans, governments need to undertake the following simultaneously to achieve systemic impact:
a) Secure technical support from donors to effectively develop and strengthen departments set up to establish and operationalise the contingent liability and fiscal commitment management framework for PPPs. This requires developing the capacity of PPP officials in relevant skill-sets (finance, quantitative analysis and strong understanding of infrastructure projects and others).
b) Maintain a transparent, supportive and efficiently-functioning legal and regulatory framework for PPPs to build the confidence of the private sector investors.
c) Maintain effective institutional and PPP administrative capacity for PPP procurement processes, and management and monitoring of contracts;
d) Introduce an innovative framework for the granting of guarantees such as introducing fall-away clauses; increase use of minimum Present-value of revenue (PVR) award method for road concession;, introducing exit strategy in concession agreements etc; and
e) Develop the financial sector, especially insurance and capital markets, to play an active role in risk management to create a more robust and diversified market for private sector risk mitigation; and
f) Governments extract valuable experiences from international best practices to guide them develop sound PPP programmes including contingent liability management.
Finally, government should strive to maintain macro-stability and relentlessly implement economic and financial stimulus reforms to promote competition, deepen and expand the financial and capital markets. A sustainable macroeconomic environment should earn the economy an internationally acceptable investment grade rating status. The private investors will then be incentivised to participate in infrastructure development with less demand for risk mitigating government guarantees.
by Gideon Gameli Agbemabiese