80057 Operational Note Implementing a Framework for Managing Fiscal Commitments from Public Private Partnerships Operational Note Implementing a Framework for Managing Fiscal Commitments from Public Private Partnerships The Financial and Private Sector Development (FPD) Network— Investment Climate Global Practice Private Participation in Infrastructure and Social Sector Service Line and The World Bank Institute (WBI). Table of Contents Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. What are PPP Fiscal Commitments? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3. Why Does Managing Fiscal Commitments from PPPs Matter? . . . . . . . . . . 7 4. Components of a PPP Fiscal Commitment Management Framework . . . 11 4.1 Roles and Responsibilities for Managing Fiscal Commitments from PPPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.2 Managing Fiscal Commitments—PPP Development Stage. . . . . . . . 17 4.2.1 Identifying and Evaluating Fiscal Commitments to PPPs . . . 17 4.2.2 Assessing Affordability of PPP Fiscal Commitments as an Input to Approval. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.3 Managing Fiscal Commitments—Project Implementation Stage . . . . 24 4.3.1 Monitoring PPP Fiscal Commitments . . . . . . . . . . . . . . . . . . 24 4.3.2 Reporting and Disclosing PPP Fiscal Commitments. . . . . . . . 24 4.3.3 Budgeting for PPP Fiscal Commitments . . . . . . . . . . . . . . . . 28 5. Role of Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 6. Key Messages for Task Team Leaders . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Boxes Box 1: Country Examples of Limits on Fiscal Commitments to PPPs . . . 21 Box 2: Key Questions Addressed in This Note . . . . . . . . . . . . . . . . . . . 34 Box 3: A Sample of Key Readings on This Topic . . . . . . . . . . . . . . . . . 35 Tables Table 1. Related Roles and Responsibilities of Various Government Entities for Managing Fiscal Commitments from PPPs . . . . . . . 14 III Implementing a Framework for Managing Fiscal Commitments from Public Private Partnerships Table 2: Key Analysis on Fiscal Commitments in Due Diligence of PPP Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Table 3: Examples of Key Indicators and Ratios on Affordability Assessment and Risk Exposure from PPPs . . . . . . . . . . . . . . . . 22 Table 4: Summary of Main Requirements for the Recognition and Disclosure of Contingent Liabilities . . . . . . . . . . . . . . . . . . . . . 25 Table 5: Example of Reporting Format for Direct Commitments . . . . . . 27 Table 6: Example of Reporting Format for Contingent Commitments . . . 29 IV Acknowledgments T his note is an initiative developed Mousley (Lead PSD Specialist, FPD, by both the Financial and Private Middle East and North Africa Region– Sector Development (FPD) Net- MNSF1), Helen Martin (Extended Term work—Investment Climate Global Prac- Consultant, Sustainable Development tice Private Participation in Infrastructure Department, Latin America–LCSSD) and and Social Sector (PPI&SS) Service Line— Katharina Gassner (Senior Economist, and the World Bank Institute (WBI). It Investment Climate Infrastructure and presents practical guidance on how to Social Sector Department–CICIS). The implement a framework for managing note was developed under the guid- fiscal commitments from Public-Private ance of Cecile Fruman (Manager, CICIS), Partnerships (PPPs). It draws on specific Clive Harris (Manager, PPP Practice– regional operational experience and on WBI) and Vyjayanti Desai (Senior Pri- WBI’s wider thematic engagement with vate Sector Development Specialist and different partners worldwide. The report Acting Manager, CICIS). provides relevant information and mate- rial to help Task Team Leaders/Project The team thanks peer reviewers Sudar- Leaders/Transaction Leaders in the World shan Gooptu (Sector Manager, Economic Bank Group tackle this topic when work- Policy and Debt Department–PRMED) ing on PPP projects and transactions. and Daniel Alberto Benitez (Senior Econ- omist, Sustainable Development Depart- Drafting of the note was led by Riham ment, Latin America–LCSSD) for their Shendy (author, Senior Economist, FPD, valuable input. Furthermore, the team Africa Region–AFTFP) with contribu- is grateful for additional feedback pro- tions from: Rui Monteiro (Senior PPP vided by other World Bank colleagues Specialist, PPP Practice–WBI), Peter during the review process. V 1. Introduction T his note, “Implementing a Case of Ghana.1 In outlining the concepts Framework for Managing Fiscal and providing more detailed references, Commitments from Public Pri- the note also draws on the PPP Reference vate Partnerships,” provides guidance Guide (World Bank Institute and Public- on managing fiscal risks from Public- Private Infrastructure Advisory Facility)2. Private Partnerships (PPPs) during There is already a relatively well-devel- approval and implementation. The oped body of literature describing PPP note provides practical advice on how project identification and approval and to: consistently identify and assess fiscal institutional structures within government commitments arising from PPPs during such as specialized PPP agencies. This project preparation and implementation; note expands on this literature by outlin- incorporate these into the project approv- ing an operational framework that will in- al process, including budgeting for these tegrate PPPs in the wider assessment and appropriately; and strengthen the mon- management of fiscal commitments. itoring and reporting of fiscal commit- ments over the lifetime of the project. The It is critical to manage PPP fiscal note explains the fiscal commitments that commitments if governments are can arise from PPP projects; why govern- to make good choices about which ments may find it difficult to assess and projects to do as PPPs. Although manage these fiscal commitments and in- there is no universal definition of a PPP, corporate them into project selection; and it is defined here as a long-term con- the key components of an institutional tract between a private party and a gov- framework to manage fiscal commitments ernment agency for providing a public at both the development and implemen- asset or service, in which the private tation stages of a project, including the party bears significant risk and man- roles, responsibilities, and processes for agement responsibility. Governments managing PPP fiscal commitments. Final- should undertake PPPs where this route ly, the note summarizes the key messages offers “value-for-money,” for example, for Task Team Leaders when tackling this through efficiency gains and better proj- agenda, and it provides a subset of main ect governance achieved by bundling readings on the topic. The framework the financing, design, construction, is largely based on the World Bank Study operation, and maintenance of infra- (January 2013): An Operational Frame- structure (a key cost-saving in PPPs) work for Managing Fiscal Commitments and by following fair, competitive, and from Public-Private Partnerships: The transparent procurement processes. 1 http://elibrary.worldbank.org/content/book/9780821398685. 2 http://wbi.worldbank.org/wbi/document/public-private-partnerships-reference-guide-version-10. 1 Implementing a Framework for Managing Fiscal Commitments from Public Private Partnerships Improper assessment of fiscal commit- and structuring work incorporates the ments can bias project selection and analysis needed to assess the project fis- project prioritization and can produce cal commitments, and that on the basis fiscally and operationally unsustainable of this analysis, input from the Minis- PPPs that lead to contract renegotia- try of Finance (or equivalent) is sought tion—to settle disputes, resolve unfore- on the fiscal affordability of the project. seen problems, or compensate the Additionally, it is important to advise concessionaire for changes in project on structures that need to be put in place specifications—jeopardizing expected to monitor the project’s fiscal obligations benefits from the PPPs. over the duration of the contract. While this note outlines a general and generic The primary audiences for this paper framework for managing fiscal commit- are Task Team Leaders/Project Lead- ments from PPPs, each government will ers/Transaction Leaders in the World need to adapt the concepts in this note Bank Group working on PPP projects to its own systems and institutional struc- and transactions. Team Leaders need ture in developing its own PPP fiscal to ensure that the project due diligence commitment framework. 2 2. What are PPP Fiscal Commitments? G overnments’ contributions include guarantees on particular risk to the “partnership” of PPPs variables such as exchange rate, infla- always create different types tion, prices, and traffic, force majeure, of fiscal commitments. PPP con- termination payments, and credit guar- tracts have financial implications and antees, among others. always pose fiscal risks for governments that need to be monitored and man- The nature and extent of fiscal com- aged effectively.3 In the case of direct mitments that governments bear liabilities, the need for payment com- depend on the actual PPP proj- mitments is known, even though there ects they are supporting, as well may be some uncertainty about the as broader market conditions. exact value of the payments. Examples In the 2008 global financial crisis, gov- of direct liabilities include upfront “via- ernments found that new forms of sup- bility gap” payments, in which the gov- port may be needed—under which the ernment makes a capital contribution government bears more risk—to enable to ensure a project that is economically PPP deals to close. A recent note on the desirable but not commercially via- European Union’s PPP market out- ble can proceed; availability payments lines two main avenues being explored in which a regular payment over the life by several countries after the crisis: sov- of the project is conditional on the avail- ereign guarantees applied to project ability of the service or asset; and out- debt or project bonds, and co-lending put-based payments or payments made by the government. Examples of recent per unit of service. For contingent liabili- developments include: sharing interest ties, payment depends on some uncer- rate risk in the Republic of Korea; loan tain future event outside the control guarantee facilities in France and Por- of the government—so the occurrence, tugal; facilities for direct loans to PPPs value, and timing of a payment may in France and the United Kingdom; and all be unknown. Contingent liabilities re-financing risk in Australia.4 Providing 3 For instance, Chile’s financial obligations to concessionaires in future years have an estimated present value of $3.4 billion. Most of the future payment obligations relate to subsidies and agreements to purchase services in concessions with no user fees. The estimated present value of revenue guarantees is lower, at $0.3 billion; see World Bank (2007), “Improving the Management of Concessions: Better Reporting and a New Process for Decision When to Use a Concession.” 4 Philippe Burger, Justin Tyson, Izabela Karpowicz, and Maria Delgado Coelho (2009), “The Effect of the Finan- cial Crisis on PPPs,” IMF Working Paper, WP/09/144; European PPP Expertise Centre–EPEC (2011), “Risk Dis- tribution and Balance Sheet Treatment: Practical Guide”; EPEC (2011), “State Guarantees in PPPs: A Guide to Better Evaluation, Design, Implementation and Management”; and Richard Foster (2010), “Preserving the Integrity of the PPP Model in Victoria, Australia, during the Global Financial Crisis,” World Bank Institute PPP Solutions Note. 3 Implementing a Framework for Managing Fiscal Commitments from Public Private Partnerships government guarantees as PPP sup- always embed implicit fiscal commit- port instruments is not a new phenom- ments; even when government decides enon and has been used since the 1980s not to rescue the project company, pub- in Latin America and East Asia. lic authorities are expected to rescue the project. The extent of implicit risks In addition to the explicit fiscal com- embedded in a PPP structure, the incen- mitments that governments bear tives they generate on the operational under PPPs and that are defined behavior of the PPP project, and the in contracts, these projects also give government’s ability to manage these rise to implicit liabilities. Non-con- risks, are criteria that should be taken tractual obligations that arise from moral into account when deciding to develop obligations or public expectations are a project as a PPP and design its con- considered implicit liabilities. For exam- tractual arrangements accordingly. ple, governments may take on a pay- As a long term project, a PPP will be ment obligation despite the absence (positively and negatively) impacted of a legal commitment to do so when by exogenous change—technological, a project is considered too politically demographic, and commercial— but and socially sensitive to fail (and lead also by government action or inaction, to service interruptions). A “Comfort Let- for example, by changes in public pol- ter” from a minister or other high-level icy and poor execution of government public official to support a PPP project obligations. The government needs proposal is often seen by some creditors to manage the risks that it imposes and investors as equivalent to a sover- on PPP projects. eign or sub-sovereign guarantee (even if it is in reality an implicit contingent The “upstream” due diligence on liability of the central government). PPP selection and design are some Another form of implicit liability arises of the most important determi- from the long duration of PPP contracts nants of a PPP’s fiscal implications. (20 to 30 years or more): over this period If the underlying project does not make unexpected issues almost always arise sense in terms of national policy, socio- that can lead to contract adjustments economic cost-benefit analysis, or the or even renegotiations, which can create improved public service delivery it aims additional fiscal costs. Contract termina- to achieve on the basis of minimum tion (normal or early termination) usu- acceptable service standards, or if the ally creates implicit liabilities—besides PPP is not structured in a way that will compensating the project company (or achieve value-for-money, then a PPP lenders) according to contractual rules, cannot be fiscally responsible even if its public authorities will need to safe- cost is well understood and managed. guard the continuous provision of pub- The primary consideration for embark- lic service, or to decommission facilities ing on a PPP should be improved pub- (that is, terminating public service and lic service delivery rather than financial using the facilities for other purposes, cost minimization. It has been suggested or demolishing them). Governments that the post-Asian crisis realization of should recognize that PPP contracts PPP-related contingent liabilities largely 4 2. What are PPP Fiscal Commitments? resulted from inadequate project design These decisions—choosing a particu- and poor investment decisions.5 lar project, deciding to do that project as a PPP, and deciding how that PPP Lack of proper economic analysis of PPP is structured (including allocating risks projects may create fiscal shocks. PPP and responsibilities and defining pay- projects should be subjected to a sound ment mechanisms)—are also central evaluation of costs and benefits incurred elements of the PPP development pro- by all agents in the society, including cess. For the purposes of this note, the risks. Even after considering risk, the ben- structure of a proposed PPP is assumed efits should outweigh the costs. Without to have been developed following these such evaluation, the sustainability and upstream analyses. This note focuses pri- credibility of a PPP program risks being marily on the “downstream” assessment affected by fiscal surprises, particularly and management of the fiscal implica- by ones that should have been identified tions of a PPP, once these key decisions ex-ante as relevant project risks. have been made. 5 Hana Polackova Brixi (1998), “Government Contingent Liabilities: A Hidden Risk to Fiscal Stability,” Policy Research Working Paper, World Bank; Hana Polackova Brixi and Allen Schick (2002), Government at Risk: Con- tingent Liabilities and Fiscal Risk, World Bank and Oxford University Press, Washington, DC and New York. 5 3. Why Does Managing Fiscal Commitments from PPPs Matter? M anaging fiscal commitments the risk of accumulating significant fiscal under PPPs poses several exposure in the future. challenges. Fiscal commit- ments which are long term—extending PPPs may help identify but also over the lifetime of the PPP contract— may hide true costs of infrastruc- often do not start until several years ture projects. Assessing PPP fiscal after contract signing. Payments for commitments is critical for good project contingent liabilities are by defini- selection and prioritization. Contrary tion uncertain, and they can arise sud- to traditional procurement—in which denly and unexpectedly when a trigger a government agency can start imple- event transpires. By contrast, most gov- menting a project based on an under- ernment budgets are cash based, with valued budget, creating significant a relatively short planning horizon (for sunk costs before the real cost of the example, a -three- or four-year Medium project emerges—PPP procurement Term Expenditure Framework) and fol- requires bidders to do a whole-life low a process designed to be relatively costing of the project before commit- inflexible to “in-year” changes.6 ting to the project’s implementation. Thus, governments can use PPP pro- Because of these challenges, gov- curement to help uncover real proj- ernments can be tempted to under- ect costs before contract close. But take PPPs for the “wrong” reasons. PPPs may also be used as a conve- If fiscal commitments are not clearly nient way to hide costs, presenting acknowledged and managed, PPPs may them as contingent liabilities (explicit be pursued simply to postpone the bud- or implicit). Such hidden costs can bias get impact of public investment, and project selection and project prioriti- to move the associated debt off the gov- zation, and they can also jeopardize ernment balance sheet in a way that long-term fiscal sustainability. PPPs does not take into account the longer- should instead be undertaken in cases term implications for public finances. that can be expected to lead to better This approach can undermine the pos- value-for-money compared to the pub- sible advantages of PPPs and increase lic project. 6 For more on medium-term fiscal frameworks, see Jim Brumby et al (2013 forthcoming), “Medium-term Bud- geting in the Public Sector,” World Bank. 7 Implementing a Framework for Managing Fiscal Commitments from Public Private Partnerships Proper assessment of PPP fiscal risks In the absence of a proper assess- is also relevant to ensure effective ment of traditional (non-PPP) pro- competitive procurement practices. curement projects, several anti-PPP When fiscal risks are not clearly identi- biases may dominate. Adequate assess- fied and addressed by the government, ment of and reporting on PPP fiscal com- bidders may expect to obtain rents from mitments help eliminate a few pro-PPP the government during the construction biases, reducing the incentive for shifting or operational phases through antici- costs to future generations and mitigating pated renegotiation after being awarded the potential threat to fiscal sustainability. the contract (with no competitive pres- However, a poor assessment of tradition- sure by then). Therefore, bidding behav- ally procured projects can create a bias ior may be influenced, with some firms against choosing the PPP route, reducing betting on their ability to influence future the effectiveness and efficiency of proj- government decisions—bidders with ects. Indeed, traditional procurement poor ethical standards will benefit from is a major source of cost overruns. In tra- formal competitive procedures, not nec- ditional procurement, the absence of con- essarily the most efficient firms. In that cerns with long-term maintenance and case, the utmost competitive and trans- operational costs can result in non-opti- parent procurement process will not mization of the cost of the project over solve the issue; formal competitive rules its life and allows for easier strategic mis- will not translate into effective competi- representation of projects through under- tion (in the sense of survival of the best), evaluation of costs and over-estimation but rather into gaming behavior. of revenue. Therefore, a framework for proper assessment of PPP projects should Budgeting appropriately for PPP fis- not disregard the assessment of traditional cal commitments is important for procurement projects. Ideally, the assess- the reputation of a PPP program. ment of traditional procurement should Providing a clear budgeting mechanism be part of a public investment manage- to ensure timely payment of both direct ment framework that establishes a level- and contingent commitments to PPPs playing field for the decision on using improves the credibility of the govern- PPP or traditional procurement. (As pre- ment’s commitments in the eyes of its viously noted, this note will only address private partners. If this is not the case the specific case of PPPs fiscal commit- and the private party perceives a risk ments and their management.) that payments will not be made when due, the cost of this risk will be priced Historic and recent experiences into the PPP contract accordingly and have demonstrated the importance the advantages of a well-designed of managing government fiscal sup- risk allocation undermined. System- port to PPPs and avoiding biased atic budgeting and payment are best decision making between PPP and done as part of the overall framework public procurement routes. In the in government for managing all PPPs midst of the 1997 Asian crisis, several rather than only on a project-by-proj- Asian countries suffered exacerbated ect basis. impacts due to PPP contingent liabilities 8 3. Why Does Managing Fiscal Commitments from PPPs Matter? that transformed into immediate obliga- The above examples reflect instances tions. While the banking sector was the of macroeconomic crisis which are major source of fiscal liabilities in Korea, closely correlated to the performances infrastructure projects added to the fis- of PPP projects. For instance, all PPP cal stress. In Indonesia, concerns have road projects in countries affected been raised regarding the role of the by macroeconomic crisis (Greece, Por- Ministry of Finance, which had the tugal, and Spain recently, and previously chance to intervene in the develop- Malaysia and Mexico) simultaneously ment of a concession only when it was suffered demand challenges (and faced too late to propose major changes with- bankruptcy risk) creating a systemic out serious disruption to the investment risk. The predictability of these events program. Such problems may have been and the extent to which their impact more effectively addressed if the Ministry could be mitigated through a fiscal of Finance had assessed the fiscal obli- commitment framework can be signif- gations of these deals at approval.7 More icantly different from project specific recently and under the current financial and idiosyncratic risks. A careful exam- and economic crisis, a number of Euro- ination of these examples shows that pean countries have faced the reality several projects already suffered from of the fiscal implications of their PPP proj- microeconomic issues—low demand ects. Portugal and Hungary have placed (including projects for which effec- a moratorium on new PPPs and are tive demand, after the ramp-up phase, reviewing existing ones. Portugal’s recent stabilized at 10 percent of expected crisis has been exacerbated by the fact demand) or high cost (for example, that the government had to make large cost overruns arising out of ex-ante payments to PPP companies as a result cost under-evaluation due to strategic of PPP contracts developed in the years misrepresentation of projects in order before the crisis without adequate con- to maximize the chances of approval). sideration of their fiscal implications. In some cases, those issues induced Spain is facing a sequence of PPP toll governments to cancel PPP projects and road operators going bankrupt.8 even PPP programs. 7 Tim Irwin and Tanya Mokdad (2009), “Managing Contingent Liabilities in PPPs: Practice in Australia, Chile, and South Africa,” World Bank and PPIAF Publication; Louis Wells and Rafiq Ahmed (2006), Making Foreign Invest- ment Safe: Property Rights and National Sovereignty, Oxford: Oxford University Press. 8 http://bankwatch.org/public-private-partnerships/background-on-ppps/build-now-pay-heavily-later; Mariana Abrantes de Sousa (2011), “Managing PPPs for budget sustainability: The case of PPPs in Portugal, from prob- lems to solutions,” PPP Lusofonia network; and http://www.claretconsult.com/spaintollroads.html 9 4. Components of a PPP Fiscal Commitment Management Framework T he public financial management Effective and efficient PPP implementa- framework for PPPs is discussed tion requires also institutions and capac- in the World Bank Institute’s PPP ity for assessing PPP projects, procuring Reference Guide, particularly in sec- them, and managing PPP contracts dur- tion 2.4, dealing with fiscal exposure, ing their long life. Without institutions budgeting, and reporting. and effective capacity for assessing proj- ects, PPP fiscal costs (direct and con- This note sets out three key com- tingent, explicit and implicit) will not ponents of a Fiscal Commitment be well identified, and so project selec- Management Framework, which are tion and prioritization may be jeopar- described in turn in the sections below: dized. Without proper procurement, those costs cannot be minimized a. Defining clear roles and responsibil- through competitive pressure. And with- ities within government for manag- out adequate contract management, ing the fiscal commitments of PPPs fiscal costs tend to rise by force of exog- throughout the project cycle; enous change (technological, demo- graphic, and commercial), policy action b. Building the requirement to assess or inaction, and moral hazard or strate- and approve fiscal commitments into gic behavior by the private partner. the PPP development and approval process (PPP development stage); PPP Units have a key role to play in managing fiscal commitments. c. Ensuring fiscal commitments are ade- PPPs require a design and procure- quately managed during PPP project ment approach that significantly differs implementation—by monitoring fis- from the usual approach for four main cal commitments at a project and reasons. They require complex financ- portfolio level, reporting on and dis- ing arrangements, a broad identifica- closing them as part of regular gov- tion and analysis of risks, an output- and ernment financial reporting, and performance-based definition of project budgeting for them as needed (PPP requirements, and a long-term assess- implementation stage). ment of the projects. The natural scarcity of government staff with the required knowledge typically invites governments This Fiscal Commitment Manage- to move scarce “PPP resource people” ment Framework should be part into central teams, known as PPP Units. of a broader PPP governance regime. PPP Units are usually given responsibility 11 Implementing a Framework for Managing Fiscal Commitments from Public Private Partnerships for fostering the PPP agenda—advising At project implementation stage, key on policy, adapting the legal framework, functions are project monitoring and preparing a pipeline of projects, structur- information gathering for regular fiscal ing them, procuring them, even manag- commitment tracking over the life of the ing contracts on behalf of line ministries. project, fiscal commitment reporting and Too much centralization risks weaken- disclosure, budget management and ing the governance regime for PPPs. timely release of funds called for any fis- The inevitable centralization of govern- cal commitment. ment PPP expertise should not imply the full centralization of PPP-related decision Defining institutional responsibili- making. International experience shows ties for managing PPP fiscal commit- that some checks and balances are ments can be complicated, since it needed, particularly when large infra- typically requires input from a range structure investments are at stake. Good of government entities. The primary decision processes require an informed motivation of a contracting authority, debate between several government and any internal advisory function such agencies. For example, some agencies as a PPP unit (depending on the lat- will propose projects, others will select ter’s mandate), is to develop a PPP proj- and prioritize them; some will prepare ect and get the deal done. Ensuring the projects, others will review them. fiscal discipline of a project might not be their primary objective or mandate. Thus, other government entities have 4.1 Roles and Responsibilities an important role in managing the fis- for Managing Fiscal cal exposure and budgetary implications Commitments from PPPs of PPP projects. Due diligence of fiscal commitments needs to be led by the A number of key fiscal commit- entities with prime responsibility for ment management functions need safeguarding the public purse. to be undertaken when developing, awarding, and implementing a PPP Table 1 shows examples of gov- project. During project development, ernment institutions that can these functions include identifying and be involved in undertaking these estimating the cost of all fiscal commit- functions. Although the contract- ments under a proposed project (which, ing authority and its transaction advi- if the contracting authority is a state- sors cannot be primarily responsible owned enterprise (SOE), may include for fiscal commitment management, reviewing overall SOE financial health they nonetheless have important roles and ability to cover the proposed PPP to play, as highlighted in the table. The commitments). Another key function table also highlights the roles of “fiscal at project development is to consider the commitment oversight entities”; in prac- affordability of the fiscal commitments, tice, these functions may be combined in light of budget priorities and con- in a single entity or a team (typically straints as well as from an overall liabil- within the Ministry of Finance), or they ity and macro management viewpoint. may involve input from several different 12 4. Components of a PPP Fiscal Commitment Management Framework departments and agencies. Ultimately, management and budgeting are respon- the PPP decision maker, or approving sibilities of different entities—some body, is responsible for ensuring that mechanism may be needed to manage the inputs from these oversight enti- and synchronize the various recommen- ties are taken into account when decid- dations on the fiscal commitment that ing to approve a PPP. The table is meant are communicated to the PPP approving to be illustrative of the various func- body (such as the Minister of Finance, tions and does not prescribe any spe- a PPP approval committee, Parliament, cific institutional set-up. The structures and so on). Options could include can vary considerably from one country designating one entity as the lead fis- to another, and in practice many coun- cal appraiser responsible for gathering tries do not perform some of these func- inputs from the others, or establishing tions. Ultimately one will need to adjust a committee composed of the differ- the proposed functions to the local envi- ent key entities. The cited World Bank ronment and capacities. For instance, (2007) report on Chile highlights the after the recent financial crisis and fol- challenge of coordination between the lowing advice from the IMF, the Euro- concessions department and the Min- pean Commission, and the European istry of Finance; sometimes the latter’s Central Bank, the central bank in Por- involvement in reviewing the conces- tugal has become involved in assess- sion’s bidding documents might be too ing PPP projects’ fiscal health, and the late in the process to constitute an effec- Ministry of Finance was put in charge tive intervention. The status quo institu- of leading PPP procurement (instead tional setup is believed to create a bias of line ministries).9 In Chile, the deci- towards the use of concessions. sions about guarantees and other finan- cial commitments to concessionaires Estimates of the required govern- are made jointly by the Ministry of Pub- ment support for a PPP project lic Works and Hacienda (the Ministry are commonly developed during of Finance).10 the transaction due diligence stage and should be reviewed at differ- Recommendations on a project’s fis- ent stages of project preparation. cal commitments need to be coordi- The actual level of fiscal commitment nated; also, the entities undertaking will often not be known until the ten- the gatekeeping functions will need der process has been carried out and to provide feedback at various stages the winning bidder selected—particu- of project development. Depending larly when a fiscal commitment such on the institutional structure in a par- as a level of subsidy)—is among the ticular country—for example, if debt bid criteria. Thus a subsequent review 9 Government of Portugal, the European Commission, the European Central Bank, and the International Mon- etary Fund (2011), “Portugal: Memorandum of Understanding on Specific Economic Policy Conditionality,” Section 3.21. 10 World Bank (2007), “Improving the Management of Concessions: Better Reporting and a New Process for Deci- sion When to Use a Concession.” 13 Implementing a Framework for Managing Fiscal Commitments from Public Private Partnerships ;HISL! 9LSH[LK9VSLZHUK9LZWVUZPIPSP[PLZVM=HYPV\Z.V]LYUTLU[,U[P[PLZMVY 4HUHNPUN-PZJHS*VTTP[TLU[ZMYVT777Z .V]LYUTLU[ KLWHY[TLU[VY 9VSLK\YPUN777WYLWHYH[PVU 9VSLK\YPUN777 HNLUJ` 9VSL HWWYV]HS PTWSLTLU[H[PVU 7YVQLJ[4HUHNLTLU[-\UJ[PVUZ  *VU[YHJ[PUN ‹ *VU[YHJ[PUNH\[OVYP[PLZ ‹ 7YLWHYLZ[OLPUP[PHSLJVUVTPJ ‹ 4VUP[VYZ[OLWYVQLJ[ (\[OVYP[`TH` TH`ILNV]LYUTLU[ HWWYHPZHSVMLHJOWYVQLJ[ ‹ 9LN\SHYS`VI[HPUZ ILZ\WWVY[LK KLWHY[TLU[ZHNLUJPLZ ‹ 7YLZLU[Z[OLYH[PVUHSLMVY PUMVYTH[PVUULLKLK I`PU[LYUHSHUK SVJHSNV]LYUTLU[VY WYVJ\YPUN[OLWYVQLJ[HZH MYVT[OL777ZWVUZVY VYL_[LYUHS Z[H[LV^ULKLU[LYWYPZLZ 777 MVYÄZJHSJVTTP[TLU[ HK]PZVYZ 0[PZ[OLZPNUH[VY`[V ‹ +L]LSVWZ[OLV\[SPULI\ZPULZZ [YHJRPUNV]LY[OLSPMLVM 777JVU[YHJ[MYVT[OL JHZLMLHZPIPSP[`Z[\KPLZMVY [OLWYVQLJ[ NV]LYUTLU[ZPKL [OL777 ‹ 4VUP[VYZHUKYLZWVUKZ ‹ :VTL[PTLZSPULTPUPZ[YPLZ ‹ :\ITP[ZHKYHM[JVU[YHJ[HUK [VÄZJHSJVTTP[TLU[ KLSLNH[LWYVJ\YLTLU[ [LUKLYY\SLZMVYLHJOWYVQLJ[ YLSH[LKWYVQLJ[YPZRZ YLZWVUZPIPSP[PLZ[VHJLU[YHS ‹ 0KLU[PÄLZHUKLZ[PTH[LZ[OL ‹ 0UJS\KLZÄZJHS WYVJ\YLTLU[HNLUJ` JVZ[VMÄZJHSJVTTP[TLU[ZHZ JVTTP[TLU[ I\[[`WPJHSS`[OL`RLLW WHY[VM[OLWYVQLJ[WYLWHYH[PVU WH`TLU[ZPUI\KNL[ YLZWVUZPIPSP[`MVYWVSPJ` ^P[OZ\WWVY[MYVT[YHUZHJ[PVU YLX\LZ[ZZ\ITP[[LK[V HK]PZVYZ NV]LYUTLU[ ‹ 3LHKZ[OLWYVJ\YLTLU[ WYVJLZZVYJVVWLYH[LZ^P[OH JLU[YHSWYVJ\YLTLU[HNLUJ`  7777YVQLJ[ ‹ ;OLLU[P[`\UP[YLZWVUZPISL ‹ :\WWVY[ZHUKX\HSP[`HZZ\YLZ ‹ 4VUP[VY777 (K]PZVY` MVY777WVSPJ`MVYT\SH[PVU [OLHIV]LWYVJLZZZ\JOHZ WYVNYHTZHUKWYVQLJ[ -\UJ[PVU HUKJVVYKPUH[PVU"[LJOUPJHS YL]PL^VM[LUKLYKVJ\TLU[Z PTWSLTLU[H[PVUPU HZZPZ[HUJLMVY777 ‹ /LSWZKL]LSVWZ[HUKHYK VYKLY[VPTWYV]L WYVQLJ[Z"Z[HUKHYKPaH[PVU JVU[YHJ[\HSJSH\ZLZ Z[HUKHYKJVU[YHJ[\HS HUKKPZZLTPUH[PVUVM HUKV[OLYN\PKHUJL JSH\ZLZHUKV[OLY JVU[YHJ[Z"HUK777 TH[LYPHSUHTLS`VUÄZJHS N\PKHUJLTH[LYPHSZ WYVTV[PVUHUKTHYRL[PUN JVTTP[TLU[Z JVTTVUS`RUV^UHZH 777VYRZ4PUPZ[Y`PU *OPSLVYHZ[HUKHSVUL\UP[ 0UKVULZPH2VYLH9LW (continued on next page) 14 4. 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Washington, DC 20433 This report was developed by the Financial and Private Sector Development (FPD) Network – Investment Climate Global Practice Private Participation in Infrastructure and Social Sector Service Line, and the World Bank Institute (WBI). It presents practical advice to Task Team Leaders/Project Leaders/Transaction Leaders in the World Bank Group on how to implement a framework for managing fiscal commitments from Public- Private Partnerships (PPPs) and draws on specific regional operational experience and on WBI’s wider thematic engagement with different partners worldwide. The note explains the kind of fiscal commitments that can arise from PPP projects and why governments may find it difficult to assess and manage them. It provides guidance on how to: consistently identify and assess fiscal commitments during project preparation and implementation; incorporate these into the project approval process— including budgeting appropriately; and strengthen the monitoring and reporting of fiscal commitments over the lifetime of the project. The note further highlights the key components of an institutional framework including the roles, responsibilities, and processes for managing these fiscal obligations.