Looking to improve PPP fiscal management and challenge the status quo?
The World Bank has released a comprehensive guideline to help you do just that!
Hossein Nourzad, PhD, CP3P Accredited Trainer
Governments have misconceptions about Public-Private Partnership (PPP), such as the belief that PPP is a cost-free way to deliver infrastructure. As a result, some countries, especially those with low-income or fragile economies, have not given enough attention to fiscal sustainability and have failed to manage the fiscal implications of PPP projects systematically. This has led to uncertainty about the ultimate costs of such projects, including fiscal commitments and contingent liabilities (FCCL) resulting from crises like COVID-19. Therefore, it is crucial for countries to prepare themselves to support new investments intelligently to promote a sustainable post-COVID-19 recovery while addressing existing FCCL.
To help countries improve their fiscal risk management and treatment of FCCL arising from PPP projects, the World Bank has recently published a report titled ‘Managing the Fiscal Implications of Public-Private Partnerships in a Sustainable and Resilient Manner.’ The report is based on case studies from various countries, including Peru, Turkey, Jordan, the Philippines, Australia, Chile, Georgia, Pakistan, South Africa, and Kenya. Its goal is to propose principles for designing a fiscal management framework that enhances medium-to-long-term fiscal sustainability and resilience in response to crises, especially the COVID-19 pandemic, for World Bank client countries.
The World Bank study provides several valuable lessons that countries can use to improve the implementation of a proper fiscal framework. The main lessons include implementing:
(i) A cohesive and consistent FCCL framework is essential and should be integrated and harmonized with the overall PPP framework. It is not solely the responsibility of the ministry of finance, but a collective effort from all relevant government agencies. This includes developing balanced rules and decision criteria throughout the PPP life cycle to ensure long-term sustainability and resilience.
(ii) Sufficient capacity building is necessary for effective implementation of the FCCL framework. Simply developing guidelines, rules, and regulations is not enough if government officials lack the understanding of how to apply them. Therefore, there should be comprehensive training and on-the-job assistance for all relevant governmental agencies involved in PPPs, not limited to the ministry of finance.
(iii) Balanced political leadership is crucial for the success of PPP projects. Long-term sustainability, bankability, value for money, and affordability should be prioritized over solely accelerating infrastructure investments and addressing public needs. Sensible and rational strategic plans should be followed for comprehensive and sustainable design and implementation of a PPP program, including the FCCL framework
(iv) A practical and realistic approach: To avoid the complexities of quantifying value for money or contingent liabilities, countries often rely on sophisticated stochastic methodologies and tools, which can be challenging for officials to understand and apply. Instead, a practical and effective approach would be to use simpler analytical tools that facilitate informed decision-making based on qualitative considerations.
(v) Structured risk management: While FCCL frameworks can help governments anticipate financial contingencies and respond in a coordinated and structured manner, they cannot eliminate the fiscal implications of external shocks. To address this, it is crucial to establish a fiscal risk management system with the necessary procedures and resources to enable prompt and transparent action.
The study also proposes fiscal policy principles for the four main FCCL components: analysis, control, budgeting, and reporting.
In the analysis component, it is important to identify and quantify fiscal commitments related to PPPs. This can be achieved through methodological guidance and proper tools, such as the Fiscal Risk Assessment Model.
The control component involves assessing affordability as an input to approval. To achieve this, a central budget authority, such as the Ministry of Finance, should evaluate fiscal impacts throughout the PPP life cycle. Additionally, there should be a regulatory requirement to assess value for money in a guided and consistent manner, and an authorized ceiling should be established as a reference for PPP affordability.
The budget component focuses on mechanisms in place to plan and ensure funding. This includes having sufficient and planned funding available for both direct and contingent liabilities.
Finally, the report component involves accounting, monitoring, and disclosure. This includes using appropriate accounting standards, such as International Public Sector Accounting, to document fiscal commitments. A consolidated report should be provided that encompasses all PPP projects and their fiscal commitments, and regulatory and value for money audits should be conducted by supreme audit entities to confirm reliability and compliance of fiscal exposure. Additionally, fiscal rules for PPPs should be applied to all levels of government to control and avoid unwarranted sub-sovereign fiscal exposure.
To promote the sustainability and resilience of Public-Private Partnership projects, it is important to implement balanced and realistic approaches, harmonized and integrated frameworks, and ensure that sufficient and skilled resources are available. Readers who wish to gain further insight into this topic are encouraged to consult the World Bank’s recent publication, ‘A Compendium of Good Practices on Managing the Fiscal Implications of Public Private Partnerships in a Sustainable and Resilient Manner.‘ This publication consists of two volumes: Volume I provides an overview and context of the main findings from a series of case studies that assessed the PPP fiscal risk management framework in select countries, while Volume II contains the detailed case studies on which Volume I is based.