Public-Private Partnerships

Fiscal Risk Management

(joint IMF-WB workshop with the government of Indonesia)
(session 3)
Accounting and reporting
IMF Fiscal Transparency Code - PPPs

PRINCIPLE 3.2.4. Public-Private Partnerships

• Obligations under public-private partnerships are

regularly disclosed and actively managed.

Two complementary approaches:

• PPP assets included in government balance sheets
under certain conditions (IPSAS, GFSM2014)
• Asset values, liabilities and financial flows are reflected
in financial statements
• PPP financial implications disclosed in government
budget documents and in notes to government financial
statements
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IPSAS 32 – Service concession

The grantor shall recognize an asset provided by the operator

and an upgrade to an existing asset of the grantor as a
service concession asset if:
a) The grantor controls or regulates what services the operator must provide
with the asset, to whom it must provide them, and at what price; and
b) The grantor controls—through ownership, beneficial entitlement or
otherwise—any significant residual interest in the asset at the end of the
term of the arrangement.

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GFSM 2014 – Ownership of PPP assets

• The economic owner of the assets related to a PPP is

determined by assessing which unit bears the majority of the
risks and which unit is expected to receive a majority of the
rewards of the asset.
• The factors that need to be considered in assessing economic
ownership of PPP-related assets include those associated with
acquiring the asset and those associated with using the asset.
• The relative importance of each factor is likely to vary with each
PPP.
• The provisions of each PPP arrangement must be evaluated to
decide which unit is the economic owner.

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IMF Fiscal Transparency Code

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Colombia – PPP forecasts in MTFF

• Colombia’s MTFF forecasts PPP-related costs over 30 years

• Future costs are related to the annual ceiling
– 0.4 percent of GDP
• The forecast includes both firm obligations and expected
payments for risks assumed by the government.
• MTFF also presents project-level information on the
contingent liabilities from PPPs
– And expected profile of contributions to the contingency fund, for meeting
obligations arising from PPPs

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Colombia – Disclosure of PPP costs

Source: Colombia MTFF 2016 8

PRESENTATION BY GoIDN

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Managing PPP fiscal risks
Contractual risks are not the only ones

1st PPP model 2nd PPP model 3rd PPP model

Risk
Public Private Public Private Public Private
partner partner partner partner partner partner

Construction Partial X X X
Demand X X X
Toll level X X X
Land X X X (manages)
Environmental licensing X X X (manages)
Taxes X X X
Exchange rate X X Partial Partial X
Financing X X X

Force majeure (insurable) X X X

Force majeure (uninsurable) X X X

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The role of implicit PPP fiscal risks

• PPP contracts allow for reducing explicitly the project’s

fiscal cost by increasing its fiscal risks
o Strategic misrepresentation; “optimism bias”

• The increase in fiscal risk may be explicit or implicit,

for instance:
→Demand/revenue guarantees
→Protection against exchange rate volatility
→Incompleteness, opening the door for renegotiation
→Commercially non-viable business model, leading to renegotiation
→Politically non-viable conditions, leading to renegotiation
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Correlation among PPP fiscal risks

• Some risks affecting PPPs come from macroeconomic

variables (e.g. exchange rate, economic growth rate)
--> When there is a macroeconomic shock, typically ALL
PPP projects are somehow affected
• In countries with large PPP programs, the size and
quality of the PPP portfolio may affect macroeconomic
variables (e.g. via threats to fiscal sustainability)
• So, fiscal risks tend to be correlated, and therefore fiscal
risk management should look at the whole portfolio
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Portugal: The 2011 crisis and PPPs UTAP

2011 debt crisis – strong fiscal sustainability concerns about PPP

▪ 2012 State budget – PPP sector “do nothing” scenario unsustainable
from a contract lifecycle perspective
2015 gross financial commitment
≈ 2,100 million ≈ 1.5% of GDP

Health sector Motorways

Security Railways
Million Euros

Total outstanding gross

payments ≈ €37b
Source: OE2012, Ministry of Finance

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A generic “gateway process”

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South Africa

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South Africa

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South Africa

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South Africa

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2012 PPP regime reform in Portugal UTAP
DL 86/2003 PPP regime arrangements DL 111/2012 PPP regime arrangements
PPP project proposal + structure
Leadership assumed
PPP project proposal by MoF
Work developed by
▪ Preliminary studies ▪
through UTAP along the line ministry teams
Preliminary studies
▪ Strategic studies ▪ Reasoned PPP proposal
▪ Cost-Benefit Analysis (CBA)
Work developed by
line ministry teams
project lifecycle
▪ Tender documents “Project team”
preparation ▪ Strategic studies
▪ Draft legal documents ▪ Cost-Benefit Analysis (CBA)
MoF leadership:
▪ Value for Money analysis, PSC
▪ 3 UTAP
“Follow-up commission” Parity of ministries: ▪ Fiscal affordability analysis
▪ 2 line ministry
▪ Analyze and further develop ▪ 1 President ▪ Tender documents
previous documents/studies ▪ 2 line ministry preparation
▪ Value for Money analysis, PSC ▪ 2 MoF ▪ Draft legal documents

“Tender commission” “Tender jury”

▪ Evaluation of bids
▪ Shortlist of bidders
▪ Negotiation phase
▪ Award proposal to ministries
Contract management
▪ Budget and fiscal follow-up
Parity of ministries: ▪ Evaluation of bids MoF leadership:
▪ 1 President
Project structuring and
▪ Shortlist of bidders ▪ 3 UTAP
▪ 2 line ministry ▪ Negotiation phase ▪ 2 line ministry
appraisal: leadership assumed
▪ 2 MoF ▪ Award proposal to ministries
by the MoF through UTAP
MoF leadership:
Contract management MoF leadership:
▪ Parpública, SGPS ▪ UTAP
▪ Budget and fiscal follow-up
▪ DGTF

PPP sector reform in Portugal – Fernando Crespo Diu 20

PRESENTATION BY GoIDN

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Fiscal risk matrices
 Fiscal risk matrix
Direct liabilities
Explicit • Foreign and domestic
sovereign debt
liabilities
• Budget expenditures, both
(Legal in the current fiscal year and
obligation, no
those legally binding over
choice)
the long term (civil servant
salaries and pensions, plus
poorly recorded long-term
contracts)
Implicit • Future public pensions if
not required by law
liabilities
• Social security schemes if
(Expectations not required by law
– political
decision) • Future health care finan-
cing if not required by law
• Future recurrent cost of
public investments
Indirect liabilities
• Guarantees for borrowing and obligations of sub-
national governments and SOEs.
• Guarantees for trade and exchange rate risks
• Guarantees for private investments and PPPs
• State insurance schemes (deposit insurance, private
pension funds, crop insurance, flood insurance, war-
risk insurance)
• Unexpected compensation in legal cases related to
disparate claims.
• Defaults of sub-national governments and SOEs on
nonguaranteed debt and other obligations
• Liability clean-up in entities being privatized
• Bank failures (support beyond state insurance)
• Failures of nonguaranteed pension funds, or other
social security funds
• Environmental recovery, natural disaster relief
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• Rescuing failed concessionaires instead of projects
 Fiscal risk matrix
Direct liabilities
Explicit • Foreign and domestic
sovereign debt
liabilities
• Budget expenditures, both
(Legal in the current fiscal year and
obligation, no
those legally binding over
choice)
the long term (civil servant
salaries and pensions, plus
poorly recorded long-term
contracts)
Implicit • Future public pensions if
not required by law
liabilities
• Social security schemes if
(Expectations not required by law
– political
decision) • Future health care finan-
cing if not required by law
• Future recurrent cost of
public investments
Indirect liabilities
• Guarantees for borrowing and obligations of sub-
national governments and SOEs.
• Guarantees for trade and exchange rate risks
• Guarantees for private investments and PPPs
• State insurance schemes (deposit insurance, private
pension funds, crop insurance, flood insurance, war-
risk insurance)
• Unexpected compensation in legal cases related to
disparate claims.
• Defaults of sub-national governments and SOEs on
nonguaranteed debt and other obligations
• Liability clean-up in entities being privatized
• Bank failures (support beyond state insurance)
• Failures of nonguaranteed pension funds, or other
social security funds
• Environmental recovery, natural disaster relief
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• Rescuing failed concessionaires instead of projects
PPP contingent liabilities:
SOEs and subnational governments
• SOEs as contracting authorities or concessionaires
→ Fiscal transparency: disclosure of liabilities
→ Government provides implicit guarantees (free-riding)

• SOEs as customers and/or co-funders

→ Liabilities in “take-or-pay” contracts

• Subnational governments as contracting authorities

→ Government provides implicit guarantees (free-riding)
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PFRAM risk classification
PFRAM risk rating

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PFRAM heatmap
PRESENTATION BY GoIDN

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PPP fiscal risk realization/prevention
RISK: The Public RISKS
1 GOVERNANCE Investment Management framework
may not have been strong enough to guarantee that
this is a priority project

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RISK: The Public Investment Management framework
may not have been strong enough to guarantee that
this is a priority project

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RISK: The Public Investment Management framework
may not have been strong enough to guarantee that
this project should be a PPP

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 1 GOVERNANCE
RISK: The MOF RISKS
may not be able to effectively manage
fiscal risks arising from this project

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1 GOVERNANCE
RISK: RISKS as a whole may not be able to
The government
effectively manage this project

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RISK:
1 Poor disclosure
GOVERNANCE RISKS of project and contract
information may create public concerns regarding the
governance of the project/contract

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RISK: Government's additional fiscal costs
arising from possible construction delays
due to untimely availability of land

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 2 CONSTRUCTION
RISK: RISKS
Project cancellation or
government compensation
due to lack of land

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2 CONSTRUCTION
RISK: GovernmentRISKS paying for relocation of people
and/or activities and possible project delays

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2 CONSTRUCTION
RISK: GovernmentRISKS costs arising from environmental or
archeological issues and from compensation for project
delays

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2RISK:
CONSTRUCTION RISKSpartner may not be able to cope with
The private
cost of geological issues

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2 CONSTRUCTION
RISK: RISKS
The government pays compensation for project
delays due to delayed licensing

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2 CONSTRUCTION
RISK: RISKS
The government pays compensation to the
private partner for inherent defects

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RISK: The government pays compensation for changes
in design and scope

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RISK: The private partner may not be able to cope with
significant construction cost overruns

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3 DEMAND
RISK: RISKS
Facing insufficient demand for services--when
the government can influence demand--may lead to
project failure

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RISK: Facing insufficient demand for services--when demand
is market determined--may lead to project failure

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3 DEMAND
RISK: RISKS
Facing demand much higher than the cap
included in the contract

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3 DEMAND
RISK: RISKS
Project collapse due to demand much higher
than originally expected

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4 OPERATIONAL
RISK: TechnicalAND PERFORMANCE
innovation RISKS
may create explicit and
implicit fiscal risks for the government

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4 OPERATIONAL
RISK: TechnicalAND PERFORMANCE
innovation RISKS
may create explicit and
implicit fiscal risks for the government

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4 OPERATIONAL
RISK: TechnicalAND PERFORMANCE
innovation RISKS
may create explicit and
implicit fiscal risks for the government

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RISK: The private partner is unable
to obtain finance for project
implementation

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RISK:
5 The private
FINANCIAL RISKS partner unable to cope with excess
volatility in nominal exchange rate

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 6 FORCE
RISK: The MAJEURE
government paying compensation,
adjusting or even terminating the contract due
to force majeure events

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8 CHANGE
RISK: The IN LAW
government is paying compensation,
adjusting or even terminating the contract due to
changes in law

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RISK:
10 Opening an uncontrolled renegotiation process,
RENEGOTIATION
under information asymmetry and no competitive pressure

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RISK: EnteringTERMINATION
11 CONTRACT in early termination process without clear
knowledge of their consequences and procedures

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 Thank you for your
attention and participation!