Title Page
Fiscal Affairs Department
Mastering the Risky Business of Public-Private Partnerships in Infrastructure
Prepared by a staff team led by Manal Fouad and Chishiro Matsumoto, and comprising Rui Monteiro, Isabel Rial, and Ozlem Aydin Sakrak
INTERNATIONAL MONETARY FUND
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Copyright ©2021 International Monetary Fund
Cataloging-in-Publication Data IMF Library
Names: Fouad, Manal. | Matsumoto, Chishiro. | Monteiro, Rui S. | Rial, Isabel. | Aydin Sakrak, Ozlem. | International Monetary Fund. Fiscal Affairs Department, issuing body. | International Monetary Fund, publisher.
Title: Mastering the risky business of public-private partnerships in infrastructure / prepared by a staff team led by Manal Fouad and Chishiro Matsumoto, and comprising Rui Monteiro, Isabel Rial, and Ozlem Aydin Sakrak.
Other titles: International Monetary Fund. Fiscal Affairs Department (Series).
Description: Washington, DC : International Monetary Fund, 2021. | Departmental paper series. | Includes bibliographical references.
Identifiers: ISBN 9781513576565
Subjects: LCSH: Public-private sector cooperation. | Infrastructure (Economics). | Risk management. Classification: LCC HD3871.F68 2021
The Departmental Paper Series presents research by IMF staff on issues of broad regional or cross-country interest. The views expressed in this paper are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Contents
Acknowledgments
Executive Summary
1. Introduction
2. The Case for Public-Private Partnerships
3. Challenges with PPP Procurement
4. Fiscal Illusions and Fiscal Risks
Fiscal Illusion Caused by PPPs
Fiscal Risks Originating in PPP Contracts
Fiscal Risks Originating in Poor PPP Governance
5. Managing PPP Fiscal Risks
A Gateway Process for PPP Preparation and Procurement
A PPP Fiscal Risk Management Function in the Ministry of Finance
PPP Fiscal Transparency
A Clear and Consistent Legal PPP Framework
References
Boxes
Box 1. Main Characteristics of Public-Private Partnerships
Box 2. PPP Asset Recognition Criteria: Control vs. Risks and Rewards Approaches
Box 3. Occurrence of Explicit Fiscal Risks
Box 4. Contractual Risk Allocation
Box 5. The Fiscal Cost of Implicit Contingent Liabilities
Box 6. Optimism Bias in Infrastructure: Optimistic Cost Expectations
Box 7. Renegotiation in Practice
Box 8. Examples of Risks of Unsolicited Proposals
Box 9. Fiscal Illusion and Fiscal Sustainability
Box 10. Fiscal Risks Originating in Subnational Governments and Public Corporations
Box 11. Examples of Gateway Processes for Controlling PPPs Liabilities and Risks
Box 12. PPP Fiscal Risk Assessment Model
Box 13. Limits to Government Exposure to PPPs
Box 14. IMF’s Fiscal Transparency Evaluation: Good Practice in Reporting on PPPs
Box 15. Examples on Reporting PPPs by the Public Sector
Box 16. Examples of Standardization of PPP Contractual Provisions
Tables
Table 1. From Project Risk to Fiscal Risks
Table 2. Fiscal Costs and Fiscal Risks from PPPs
Table 3. A Generic Gateway Process for Managing PPPs
Acknowledgments
This departmental paper was prepared by a team led by Manal Fouad and Chishiro Matsumoto and comprising Rui Monteiro, Isabel Rial, and Ozlem Aydin Sakrak. An early version of the paper was prepared for the G20 Infrastructure Working Group in 2020 and has benefited from comments from member countries as well as staff of the European Investment Bank, World Bank, Asian Development Bank, European Bank for Reconstruction and Development, Infrastructure Canada, and Eurostat.
The authors are grateful to Gerd Schwartz for his very helpful leadership and inputs to an early draft and to Paolo Mauro for his overall guidance. We are grateful to Khaled Eltokhy, Sasha Pitrof, Thibault Vermeulen, and Sureni Weerathunga for data provision and editorial support.
The authors would also like to thank Juan Toro and Carolina Renteria a well as many IMF colleagues for their useful comments and inputs: David Bailey, Tim Callen, Rupa Duttagupta, Si Guo, Anna Ivanova, Sohei Kaihatsu, Kenichiro Kashiwase, Emmanouil Kitsios, Peter Lindner, Arturo Navarro, Mia Pineda, John Ralyea, Brett Rayner, Edgardo Ruggiero, Hoda Selim, Alejandro Simone, Ron Snipeliski, Phil Stokoe, Geneviève Verdier, Sébastien Walker, and Cindy Xu.
The authors’ views as expressed in this paper do not necessarily reflect the views of the IMF Fiscal Affairs Department. As always, all errors and mistakes in this paper are the authors’ sole responsibility.
Executive Summary
Investment in infrastructure can be a driving force in the economic recovery from the COVID-19 pandemic. Investment needs were large before the pandemic and have been made more urgent by the need to ensure quality delivery of basic public services such as health and education, create jobs, foster inclusive growth, and facilitate economic transformation with greener and more resilient infrastructure and accessible digital platforms. Public resources alone will unlikely meet the demand, and the private sector will be called on to supplement the public sector to reach investment objectives.
Public-private partnerships (PPPs) bring a promise of efficiency when carefully designed and managed to avoid creating unnecessary fiscal risks. When applied to the right projects, well-designed and properly implemented PPPs can benefit governments in many ways. They can mobilize additional sources of funds, bring private-sector management capacity, and create incentives to deliver and maintain better-quality infrastructure. They may also allow governments to identify project costs more transparently and focus on outputs and performance levels. PPPs usually bring higher financing costs, require more complex tendering and careful contract management, and expose governments to significant fiscal risks. These risks—that is, the possibility of deviations in outturns compared to the projected fiscal position of government—are linked to not only contractually accepted risks, but also potential change during the long contractual term. Enjoying PPP benefits requires governments to carefully manage the PPP processes, including fiscal risk management considering their long-term nature and the complexity of risk-allocation agreements.
The long-term nature of PPPs and the different time-profile of government cashflows generate an illusion of additional fiscal space. The illusion comes from the elimination of short-term budget outflows in exchange for future payments or foregone income from user fees. It is magnified when off-budget and off-balance sheet accounting practices make it difficult to perceive the full extent of liabilities incurred with PPPs. It is also compounded when governments adopt non-integrated, parallel project-assessment and development processes that prevent a level playing field for project approval. Fully understanding the sources of PPP fiscal risks is crucial to ensure that PPPs are implemented only when they are efficient and affordable and that fiscal stability is not jeopardized by excessive liabilities.
Engaging in PPPs will always imply accepting some fiscal risks. With PPPs being long-term agreements, risks are compounded by the need to manage a contractual relationship over a long period and the often poorly perceived fiscal risks. The government is always ultimately responsible for the provision of infrastructure services—even in well-designed PPP contracts that are expected to be paid for by users.
PPP contracts can also create implicit fiscal risks when they are poorly designed, particularly when a government signs a PPP contract for a project with no financial sustainability. Optimism bias and political interference in the estimation of project costs and revenues, repeated renegotiations of PPP contracts, and the acceptance of unsolicited proposals create additional fiscal risks and challenges for governments. Poor infrastructure governance is also a major source of fiscal risks, particularly weaknesses in project selection and in assessing the adequacy of PPP procurement for each project.
The challenges caused by the pandemic prompt a rethink of the scale and composition of infrastructure needs and of the best options to address them. Governments must identify and distinguish short-term needs from those that will be sustained and therefore can be addressed under long-term contracts. For the latter, PPPs can bring private-sector innovation to create long-term robust solutions that address those long-term needs. Under the right conditions, PPPs can be used to reinforce public provision of infrastructure assets and services, including in key strategic sectors such as health systems, water and sewerage, low-carbon technologies, and transport services.
Adequate PPP fiscal management will continue to be crucial in the post-COVID-19 world. Governments should build the institutions and capacities required to manage the fiscal implications of PPPs. A strong infrastructure governance framework calls for establishing a gateway process governing the preparation and procurement of PPP projects, in which the Ministry of Finance has the power to stop or suspend a project at any stage of the project cycle if it is deemed fiscally unaffordable or carrying excessive fiscal risk. A proactive fiscal risk management function to identify, estimate, and manage fiscal costs and risks from PPPs should be set up in the Ministry of Finance. Likewise, governments should improve their budgeting, accounting, and reporting standards and practices to ensure fiscal transparency in this area. Finally, a clear, consistent, and enabling legal framework for PPPs is a prerequisite for effective fiscal risk management.