Ready to Challenge the Status Quo in PPP Fiscal Management?

The World Bank Gives You a Wonderful Guideline!

Hossein Nourzad, PhD, CP3P Accredited Trainer

Common misconceptions about Public-Private Partnership, including the perception that PPP is a free mean for delivering infrastructure, misled some governments from proper attention to fiscal sustainability, especially in low income and fragile economies. Due to their lack of systematic fiscal implication managements, the real ultimate costs of PPP projects, including fiscal commitments and contingent liabilities (FCCL) caused by crises like COVID-19, are unclear for their government. Therefore, in addition to addressing the existing FCCL, countries should get ready to intelligently support new investments to boost a sustainable post-COVID-19 recovery.

Recently, the World Bank released a report, titled ‘Managing the Fiscal Implications of Public-Private Partnerships in A Sustainable and Resilient Manner’, to help countries improve their fiscal risk management and treatment of FCCL arising from the PPP projects. The report was developed based on multiple case studies from different countries, including Peru, Turkey, Jordan, Philippines, Australia, Chile, Georgia, Pakistan, South Africa, and Kenya. The aim of the study was to propose principles that are necessary to design a fiscal management framework which enhances medium-to-long-term fiscal sustainability and resilience in response to crises, in particular the COVID-19 pandemic, for the World Bank client countries.

The WB study presents a few important lessons that can be learned by the countries to enhance the implementation of a proper fiscal framework. The major lessons learned include operationalizing:

(i) An integrated and harmonized framework: When designing the FCCL framework, it is critical for all involved government agencies to understand the importance of harmony with the overall PPP framework. Although the FCCL might be considered as an inclusive responsibility of the ministry of finance, it is an integral part of the overall framework, which should be developed as a cohesive and consistent set of balanced rules and decision criteria throughout the PPP life cycle.

(ii) Sufficient capacity building: Theoretical development of guidelines, rules and regulations will not add value for countries in practice if the government officials lack enough understanding of how to apply these elements of the framework. Therefore, it is necessary to plan for sufficient training and on-the-job assistance for a period of time to enhance their PPP-related knowledge and skills. The capacity building should not be limited to ministry of finance officials, and should include all relevant governmental agencies involved in the identification, development, tendering and implementation of PPPs.

(iii) Balanced political leadership: Long-term sustainability, bankability, value for money, and affordability are among the most important principles that should be the basis of political leadership. It means that political leaders should avoid pursuing PPPs solely for the purpose of accelerating infrastructure investments and addressing public needs. Instead, sensible and rational strategic plans should be followed for comprehensive and sustainable design and implementation of a PPP program, including the FCCL framework.

(iv) Realistic practical approach: When it comes to quantification of value for money or contingent liabilities, countries tend to define sophisticated stochastic methodologies and tools, neglecting the need for trained officials to understand and apply them. To address this problem, it is more practical and effective to initially use less sophisticated analytical tools, that are easier to understand and to apply, to support decision-making procedures with the appropriate reasoned analysis, i.e., qualitative considerations.

(v) Structured risk management: Even the best available FCCL frameworks cannot substantially reduce the fiscal implications of exogenous shocks. These frameworks can help governments predict financial contingencies and respond in a coordinated and structured manner, with a clear understanding of the fiscal implications. Therefore, it is important to establish the fiscal risk management based on necessary procedures and resources to act promptly in a transparent and accountable manner.

The study also provides some fiscal policy principles to be used as the key measures during the main four FCCL components including analysis, control, budgeting and reporting, as follows:

1. Analysis: i.e., identifying and quantifying fiscal commitments
   1. A methodological guidance for comprehensive, consistent, and accurate appraisal of PPP fiscal impacts.
   2. Proper tools (e.g., Fiscal Risk Assessment Model) to assess the potential fiscal costs and risks.
2. Control: i.e., assessing affordability as an input to approval
   1. A central budget authority (e.g., the Ministry of Finance) to evaluate fiscal impacts throughout the PPP life cycle.
   2. A regulatory requirement to assess value for money in a guided and consistent manner.
   3. A duly authorized ceiling, in terms of an overall liability limit, as a reference for PPP affordability.
3. Budget: i.e., mechanisms in place to plan and ensure funding
   1. Sufficient and planned funding available for direct liabilities.
   2. Sufficient and planned funding available for contingent liabilities.
4. Report: i.e., accounting, monitoring and disclosure
   1. Appropriate accounting standards (e.g., International Public Sector Accounting) to adequately account and document fiscal commitments.
   2. A consolidated report encompassing all PPP projects and their fiscal commitments appropriately disclosed to relevant stakeholders to facilitate oversight of the PPP program.
   3. Regulatory and VfM audits by supreme audit entities to confirm reliability and compliance of fiscal exposure.
   4. Fiscal rules for PPPs applied to all levels of government, to control and avoid unwarranted sub-sovereign fiscal exposure.

All in all, harmonized and integrated frameworks added to balanced and realistic approaches, as well as sufficient and skilled resources can foster sustainability and resilience of Public-Private Partnership projects. For more in-depth knowledge, readers are referred to the World Bank recent publication, ‘A Compendium of Good Practices on Managing the Fiscal Implications of Public Private Partnerships in a Sustainable and Resilient Manner’. Volume I of the publication highlights and contextualizes the main findings from a set of case studies that assessed the PPP fiscal risk management framework in select countries. Volume II contains the detailed case studies on which Volume I is based.