- Richard Hemming, Gerd Schwartz, and Bernardin Akitoby
- Published Date:
- March 2007
As used in this Economic Issue, the term public-private partnership (PPP) refers to arrangements in which the private sector supplies infrastructure assets and services traditionally provided by governments. PPPs can be established through concessions and operating leases. They can be created for a wide range of social and economic infrastructure projects but, so far, have been used mainly for transportation infrastructure (such as highways, bridges, and tunnels) and “accommodation” projects (such as hospitals, schools, and prisons).
Available on the IMF Web site at www.imf.org/external/np/fad/2004/pifp/eng/index.htm and www.imf.org/external/np/fad/2004/pifp/eng/031204.htm, respectively.
The study, “Government Guarantees and Fiscal Risk,” is available on the IMF’s Web site at www.imf.org/external/np/pp/eng/2005/040105c.htm.
“Public-Private Partnerships, Government Guarantees, and Fiscal Risk” was prepared by an IMF staff team led by Richard Hemming. For more information, see the IMF Web site at www.imf.org/external/pubs/cat/longres.cfm?sk=18587.
However, the existence of infrastructure bottlenecks also frequently reflects inappropriate public pricing decisions that result in poor cost recovery and waste.
Underpricing for the use of public assets (for example, port fees, landing fees, and road user charges) or key inputs (such as domestic fuel, electricity, and water) as well as undercollection of existing fees and user charges have contributed to over-consumption and infrastructure bottlenecks in many of the pilot countries.
In principle, it would be desirable to include the estimated impact of additional infrastructure spending on growth in the assessment of medium-term public debt sustainability, but it was not possible to obtain such estimates for most of the pilot countries.
However, even countries with a long tradition of public investment planning, such as Brazil, tend to give a higher priority to new projects, often for political reasons.
The nine criteria were grouped under four areas of performance as follows: managerial independence—(1) pricing and (2) employment policies; relations with the government—(3) subsidies and transfers and (4) regulatory and tax regimes; financial conditions—(5) profitability and (6) creditworthiness; and governance structure—(7) stock listing, (8) outside audits and annual reports, and (9) shareholders’ rights. A PE was considered commercially run if it met criteria (1)–(4) and at least one each of criteria (5)–(6) and (7)–(9). For more details see “Public Investment and Fiscal Policy” at www.imf.org/external/np/fad/2004/pifp/eng/index.htm.
However, if the retained earnings of PEs excluded from fiscal targets were making significant positive contributions to the government’s fiscal position, the government may have to tighten its fiscal stance to ensure fiscal sustainability. This may well be the case in some Latin American countries where, for example, national oil companies account for a sizable share of the consolidated public sector’s primary surplus but for little of its debt.
A fundamental difference between PPPs (private finance) and standard public procurement (public finance) is the structure of the contracts involved, as shown in Figure 1. Whereas, with public finance, debt is incurred by the government, it is incurred by the private sector under a PPP. The government, in turn, has a long-term service contract with the private sector that specifies its payment obligations and other responsibilities vis-à-vis the private sector. In a few cases, the government may have no direct payment obligations (for example, for a toll road), but in most cases, it has direct obligations (for example, availability payments and shadow tolls). In addition, it usually has explicit or implicit contingent obligations.
To compare the cost of the two payment streams, the government needs to calculate the present values of these streams, taking into account the time value of money and any relevant differences in the degree of risk associated with the two payment streams.
Government guarantees are a common feature of PPP contracts and other purchase arrangements between the government and the private sector. A government guarantee legally binds the issuing government to take on an obligation should a clearly specified uncertain event materialize. Thus, for example, a government that provides a loan guarantee to a private sector entity with which it has entered into a PPP may have to repay the loan (taken by that entity to finance the project) if the entity defaults.
It should also be noted that the need for guarantees may diminish over time. As a country accumulates experience with PPPs and strengthens its policy framework, and, as the uncertainties surrounding the use of PPPs are reduced, it may be possible to transfer more risk to the private sector.
Contingent liabilities are costs that the government will have to pay if a particular event occurs. They are therefore not yet recognized as liabilities. In addition to guarantees, such obligations arise mainly from government insurance schemes, including deposit, pension, war-risk, crop and flood insurance, but they can also be the result of warranties and indemnities provided by the government, and outstanding and potential legal action against the government.
The Economic Issues Series
Growth in East Asia: What We Can and What We Cannot Infer. Michael Sarel. 1996.
Does the Exchange Rate Regime Matter for Inflation and Growth? Atish R. Ghosh, Anne-Marie Gulde, Jonathan D. Ostry, and Holger Wolf. 1996.
Confronting Budget Deficits. 1996.
Fiscal Reforms That Work. C. John McDermott and Robert F. Wescott. 1996.
Transformations to Open Market Operations: Developing Economies and Emerging Markets. Stephen H. Axilrod. 1996.
Why Worry About Corruption? Paolo Mauro. 1997.
Sterilizing Capital Inflows. Jang-Yung Lee. 1997.
Why Is China Growing So Fast? Zuliu Hu and Mohsin S. Khan. 1997.
Protecting Bank Deposits. Gillian G. Garcia. 1997.
Deindustrialization—Its Causes and Implications. Robert Rowthorn and Ramana Ramaswamy. 1997.
Does Globalization Lower Wages and Export Jobs? Matthew J. Slaughter and Phillip Swagel. 1997.
Roads to Nowhere: How Corruption in Public Investment Hurts Growth. Vito Tanzi and Hamid Davoodi. 1998.
Fixed or Flexible? Getting the Exchange Rate Right in the 1990s. Francesco Caramazza and Jahangir Aziz. 1998.
Lessons from Systemic Bank Restructuring. Claudia Dziobek and Ceyla Pazarbaşioğlu. 1998.
Inflation Targeting as a Framework for Monetary Policy. Guy Debelle, Paul Masson, Miguel Savastano, and Sunil Sharma. 1998.
Should Equity Be a Goal of Economic Policy? IMF Fiscal Affairs Department. 1998.
Liberalizing Capital Movements: Some Analytical Issues. Barry Eichengreen, Michael Mussa, Giovanni Dell’Ariccia, Enrica Detragiache, Gian Maria Milesi-Ferretti, and Andrew Tweedie. 1999.
Privatization in Transition Countries: Lessons of the First Decade. Oleh Havrylyshyn and Donal McGettigan. 1999.
Hedge Funds: What Do We Really Know? Barry Eichengreen and Donald Mathieson. 1999.
Job Creation: Why Some Countries Do Better. Pietro Garibaldi and Paolo Mauro. 2000.
Improving Governance and Fighting Corruption in the Baltic and CIS Countries: The Role of the IMF. Thomas Wolf and Emine Gürgen. 2000.
The Challenge of Predicting Economic Crises. Andrew Berg and Catherine Pattillo. 2000.
Promoting Growth in Sub-Saharan Africa: Learning What Works. Anupam Basu, Evangelos A. Calamitsis, and Dhaneshwar Ghura. 2000.
Full Dollarization: The Pros and Cons. Andrew Berg and Eduardo Borensztein. 2000.
Controlling Pollution Using Taxes and Tradable Permits. John Norregaard and Valérie Reppelin-Hill. 2000.
Rural Poverty in Developing Countries: Implications for Public Policy. Mahmood Hasan Khan. 2001.
Tax Policy for Developing Countries. Vito Tanzi and Howell Zee. 2001.
Moral Hazard: Does IMF Financing Encourage Imprudence by Borrowers and Lenders? Timothy Lane and Steven Phillips. 2002.
The Pension Puzzle: Prerequisites and Policy Choices in Pension Design. Nicholas Barr. 2002.
Hiding in the Shadows: The Growth of the Underground Economy. Friedrich Schneider with Dominik Enste. 2002.
Corporate Sector Restructuring: The Role of Government in Times of Crisis. Mark R. Stone. 2002.
Should Financial Sector Regulators Be Independent? Marc Quintyn and Michael W. Taylor. 2004.
Educating Children in Poor Countries. Arye L. Hillman and Eva Jenkner. 2004.
Can Debt Relief Boost Growth in Poor Countries? Benedict Clements, Rina Bhattacharya, and Toan Quoc Nguyen. 2005.
Financial Reform: What Shakes It? What Shapes It? Abdul Abiad and Ashoka Mody. 2005.
Preserving Financial Stability. Garry J. Schinasi. 2005.
Integrating Poor Countries into the World Trading System. 2006.
Moving to a Flexible Exchange Rate: How, When, and How Fast? Rupa Duttagupta, Gilda Fernandez, and Cem Karacadag. 2005.
Accountability Arrangements for Financial Sector Regulators. Eva Hüpkes, Marc Quintyn, and Michael W. Taylor. 2006.
Public Investment and Public-Private Partnerships. Bernardin Akitoby, Richard Hemming, and Gerd Schwartz. 2007.
Bernardin Akitoby is a Senior Economist in the Expenditure Policy Division of the IMF’s Fiscal Affairs Department. Prior to joining the IMF, he worked in the World Bank’s Research Department.
Richard Hemming is Deputy Director of the IMF’s Fiscal Affairs Department. Prior to joining the IMF, he worked as a university lecturer in the United Kingdom and Australia, as a researcher at the Institute for Fiscal Studies in London, and with the OECD in Paris.
Gerd Schwartz is Chief of the Expenditure Policy Division of the IMF’s Fiscal Affairs Department. Prior to joining the IMF, he worked for the European Investment Bank and the Inter-American Development Bank.