Over the past three decades, public spending on infrastructure, as a share of GDP, has been on the decline worldwide. Although the link between infrastructure investment and economic growth is not yet fully understood, the quality of infrastructure clearly affects a country's productivity, competitiveness in export markets, and ability to attract foreign investment. This EI explores the following questions: Should countries increase public investment in infrastructure? If the answer is yes, how can they do so in a fiscally responsible manner? Are public-private partnerships a viable alternative?


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).


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

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.