Front Matter Page

Fiscal Affairs Department

Public-Private Partnerships in the Caribbean Region

Reaping the Benefits While Managing Fiscal Risks

Maximilien Queyranne, Wendell Daal, and Katja Funke

Front Matter Page

Copyright ©2019 International Monetary Fund

Cataloging-in-Publication Data

IMF Library

Names: Queyranne, Maximilien. | Daal, Wendell. | Funke, Katja. | International Monetary Fund. Fiscal Affairs Department, issuing body. | International Monetary Fund, publisher.

Title: Public-private partnerships in the Caribbean region : reaping the benefits while managing fiscal risks / Maximilien Queyranne, Wendell Daal, and Katja Funke.

Other titles: Reaping the benefits while managing fiscal risks.

Description: [Washington, DC] : International Monetary Fund, [2019]. | At head of title: Fiscal Affairs Department. | Includes bibliographical references.

Identifiers: ISBN 9781498307062 (paper)

Subjects: LCSH: Public-private sector cooperation–Caribbean Area. | Financial risk management–Caribbean Area. | Fiscal policy–Caribbean Area.

Classification: LCC HD2961.Q49 2019

Contents

• Glossary

• Acknowledgments

• Executive Summary

• Introduction

• 1. Challenges to Infrastructure Development in the Caribbean Region

  • Infrastructure Developments in the Caribbean

  • Obstacles for Improving Infrastructure in the Caribbean Region

• 2. Public-Private Partnerships Can Help Improve Infrastructure in the Caribbean Region, but Come with Challenges

  • Public-Private Partnerships Can Contribute to Addressing Infrastructure Bottlenecks

  • However, Public-Private Partnerships Have Proven Difficult to Implement in the Region

  • Public-Private Partnerships Have Long-Term Implications on Public Finances

  • Public-Private Partnerships Can Generate Large Fiscal Risks to the Government

• 3. Addressing Public-Private Partnership Challenges and Better Managing Fiscal Risks in the Region

  • Integrating Public Investment Management and Budgeting of Capital Spending

  • Dealing with Unsolicited Proposals to Ensure Competition in the Caribbean Region

  • Strengthening Legal Provisions for Public-Private Partnerships

  • Building Institutions for Managing Public-Private Partnerships

  • Managing Fiscal Risks

• 4. Concluding Remarks

• Appendix I. Natural Hazards Impacting Caribbean Region, 1988–2012

• Appendix II. Survey Results

• References

• Boxes

  • Box 1. Jamaica Sangster International Airport Public-Private Partnership

  • Box 2. How will Climate Change Affect the Caribbean Region?

  • Box 3. Public Sector Role in the Airline Sector in the Caribbean

  • Box 4. Jamaica Highway 2000 Public-Private Partnership Project

  • Box 5. Public-Private Partnership Financing versus Funding

  • Box 6. Comparison of Public and Private Financing Costs in Infrastructure Projects

  • Box 7. The Fiscal Impact of Public-Private Partnerships–The Example of Portugal

  • Box 8. Managing Unsolicited Proposals

  • Box 9. A Regional Public-Private Partnership Unit in the Caribbean

  • Box 10. The PPP Fiscal Risk Assessment Model (PFRAM)

  • Box 11. PPP Fiscal Risk Assessment Model Assessment: Barbados Solid Waste Management Facility

  • Box 12. International Accounting and Statistical Standards for Public-Private Partnerships

  • Box 13. Challenges Associated with Implementation of Accrual Accounting

  • Box 14. International Experience of Limits for Government Exposure to Public-Private Partnerships

  • Box 15. Sharing Contractual Risks in Public-Private Partnerships to Minimize Fiscal Costs and Risks

  • Box 16. Fiscal Risk Matrix of Jamaica Highway 2000–Phase I

• Figures

  • Figure 1. Public and Private Investment Trends

  • Figure 2. Caribbean Countries: Investment, 2010–15

  • Figure 3. Caribbean Countries: Investment, 2005–09

  • Figure 4. Private Partnerships Investment and Capital Stock

  • Figure 5. Public Capital Stock per Capita, 2015

  • Figure 6. Access to Infrastructure

  • Figure 7. Caribbean Region: Infrastructure Quality Indicators

  • Figure 8. Caribbean Countries: Fiscal Situation, 2007–18

  • Figure 9. Nominal Public Capital Stock and Gross Debt

  • Figure 10. Caribbean Countries: Total Bilateral Development Aid

  • Figure 11. The Caribbean Region Susceptibility to Natural Disaster

  • Figure 12. Caribbean PPP Pipeline, 2019

  • Figure 13. Cash-flow Implications of Executing a Government-funded Project through a PPP or through Traditional Proccurement

  • Figure 14. United Kingdom: Total Government Payments for all Public-Private Partnerships Projects as of March 2014

  • Figure 15. Public-Private Partnerships in Public Investment Management–Practice in the Caribbean Countries

  • Figure 16. Integration of Public Investment Projects in the Budget Process

  • Figure 17. Public-Private Partnerships in Budget Documents–Practice in the Caribbean Countries

  • Figure 18. Decision-making Powers in Public Investment and Public-Private Partnership Process–Practice in the Caribbean Countries

  • Figure 19. Framework for Managing Fiscal Risks from Public-Private Partnerships

  • Figure 20. Reporting Practices for Public-Private Partnerships in the Caribbean Countries

  • Figure 21. Impact of Public-Private Partnership Project on Government Finances

  • Figure 22. Cash Flows of the PPP Private Project Company

• Tables

  • Table 1. Total Cost of Highway 2000

  • Table 2. Standard Gateway Process for Public Investment Projects, including Public-Private Partnerships

  • Table 3. Assessing Fiscal Costs and Risks from Public-Private Partnerships

  • Table 4. Risk Matrix for Highway 2000

  • Appendix Table 1. Natural Hazards Impacting Caribbean Region, 1988–012

  • Appendix Table 2. Survey Results

Glossary

Acknowledgments

This paper is the culmination of a three-year project in the Caribbean region to support countries in better managing the fiscal impact of public-private partnerships. It draws on findings from three workshops organized in the region during 2014 to 2017, which brought together representatives from 14 countries and staff from the International Monetary Fund (IMF), the IMF’s Caribbean Regional Technical Assistance Center (CARTAC), the Caribbean Development Bank (CDB), the World Bank, and the Public-Private Infrastructure Advisory Facility.

This departmental paper was prepared by a team of the IMF’s Fiscal Affairs Department (FAD), comprising Maximilien Queyranne (lead), Wendell Daal, and Katja Funke. Contributors also include S. Brian Samuel (CDB), Celeste Kubasta, and Bruce Stacey (both resident advisors in the CARTAC). Devin D’Angelo provided excellent research support. Geneviève Verdier and Rui Monteiro reviewed this paper.

The authors are grateful to Gerd Schwartz, deputy director of the Fiscal Affairs Department, for his valuable comments and support.

The authors’ views as expressed in this paper do not necessarily reflect the views of the IMF, its Executive Board, or IMF management. Errors and omissions are the authors’ sole responsibility.

The work leading to this paper benefitted from financial support from the government of Canada, as well as financing provided to CARTAC from its 22 regional member countries and development partners (that is, Canada, the United Kingdom, the European Union, the Netherlands, Mexico, and the CDB).

Executive Summary

Raising economic well-being in the Caribbean relies on strengthening economic growth and resilience, including by improving both access to and the quality of infrastructure. The member countries of CARTAC,¹ hereafter Caribbean countries, have made substantial progress in developing their infrastructure. The region’s overall quality of and access to infrastructure are broadly better than in other comparable regions, except for critical infrastructure for the tourism industry, such as air transport and ports. Over the past decade though, the rate of both public and private fixed assets accumulation has slowed down in Caribbean countries on average.

Caribbean countries face significant challenges for developing infrastructure. Most Caribbean countries are small states with little potential for achieving economies of scale in infrastructure investment. At the same time, most Caribbean countries have graduated to upper-middle- and high-income status and, thus, have limited access to concessional financing. They also have shallow domestic financial markets, limited access to global capital markets, and, often, high public debt burdens. Finally, Caribbean countries are prone to costly and frequent natural disasters and are rather exposed to the effects of climate change, creating uncertainties for long-term investment in infrastructure while requiring additional investment and innovative technology solutions to make infrastructure more resilient.

Public-private partnerships (PPPs) can be an attractive option for developing infrastructure but come with important challenges. PPPs are long-term arrangements where the private sector finances and supplies infrastructure assets and services that are traditionally provided by the government. In principle, PPPs can crowd in much-needed foreign private investment and generate efficiency gains for the government. But PPPs do not provide public infrastructure for free: they are a complex form of public procurement and all financing will need to be repaid over time. In theory, PPPs only generate value for the public sector if the efficiency gains realized outweigh the higher costs of private-sector financing and other costs associated with managing the complex PPP arrangements. In practice, developing infrastructure projects through PPPs has proven difficult in Caribbean countries, as the projects are often too small to attract global investors and governments lack capacity and funding to manage project development. As a result, the use of PPPs has declined in the region over the past decade.

This paper argues for integrating PPPs into public investment management processes and strengthening mitigation of fiscal risks to help Caribbean countries address their infrastructure needs. Based on a review of selected infrastructure projects undertaken and findings from a survey on PPP management practices, it provides a comprehensive legal, institutional, and public financial management framework for managing PPPs, with a focus on mitigating and properly reporting fiscal costs and risks. It builds on extensive technical support provided by the IMF on PPPs and various IMF publications on the fiscal management of PPPs.

PPPs entail potentially large fiscal costs and risks. In a PPP, the private partner usually finances the upfront investment costs, which reduces the short-term lumpiness of traditionally procured public investment. The government may also contribute to the financing of a PPP, for example through equity injections in the project company or different types of subsidies. Subsequently, paying for the provision of public infrastructure and related services is either the responsibility of the government or the users. Government-funded PPPs create firm commitments that may limit budget flexibility and endanger fiscal sustainability. Similarly, user-funded PPPs may generate (explicit or implicit) contingent liabilities for the government.

PPPs are best governed by legal provisions that are an integral part of the broader legal framework. A legal framework for private participation in public-sector projects reduces fiscal risks. Yet most Caribbean countries do not have such legal provisions. Hence, there is a need to clarify the rules governing the relationship between the public and private sectors; integrate PPPs into public investment management frameworks; empower ministries of finance to check budget affordability of infrastructure projects (including PPPs); and define accounting and reporting standards to ensure transparency. Those rules should be carefully embedded in the existing legal frameworks to avoid creating a separate track for PPPs.

PPP selection and management should be fully integrated into overall public investment processes, including budget processes. Currently, most Caribbean countries handle PPPs on a parallel track, separate from other public investments and outside the budget. In contrast, best practice suggests that all projects should be subject to the same screening and evaluation processes, leaving aside the method of procurement, so that priority projects can be selected on a level playing field. Competitive bidding and good project evaluation, including for unsolicited proposals, are key to ensure value for money. This means that all public investment projects, including PPPs, should be integrated into the budget cycle to ensure fiscal affordability.

International experience suggests that a structured “gateway” process with a strong role for the minister of finance is critical for safeguarding public finances. Ministries of finance should establish a gateway process for all public investment projects, including PPPs, to limit fiscal risks, and be able to stop or suspend a project at any stage if it proves unaffordable. To avoid conflicts of interest, this function should preferably be separated from PPP support functions, that is a PPP unit that supports project development.

Transparency on the fiscal implications of PPPs is key for strengthening government accountability and improving the management of fiscal costs and risks from PPPs. To this end, transparent accounting and reporting would be critical to eliminate any bias in favor of PPPs and to reveal their full fiscal impact. Under international accounting and reporting standards, most PPPs would be considered on the governments’ balance sheet. Few Caribbean countries currently apply this approach. Until this approach is fully implemented, governments should report long-term fiscal implications of PPPs on the budget deficit and public debt.

Understanding the fiscal implications of PPPs also requires comprehensive fiscal risk assessments that include risks arising from potential natural disasters and climate change. Few Caribbean countries have a framework in place to manage the fiscal impact of PPPs. The decision to enter into a PPP project should include an assessment of its long-term fiscal costs and risks. Governments can use the joint IMF-World Bank PPP Fiscal Risk Assessment Model (PFRAM) to assess the long-term fiscal implications and fiscal risks of PPP projects. Governments in the Caribbean region should also develop national policy frameworks for managing risks from natural disasters and better integrate risks arising from climate change into PPP design.

Once the risks are clearly understood, governments should decide on how best to mitigate and manage them. In Caribbean countries, PPP contracts have often tilted risks toward governments; in the future, governments may wish to transfer to or share more risks with the private partners. In addition, governments need to monitor risks actively throughout the lifetime of a PPP project. Governments could also limit their PPP exposure by adopting ceilings on the stock and flows of PPP commitments. PPP projects for which the fiscal risks are not well understood or cannot be managed should not be undertaken.