## Executive Summary ## Source details **Canonical URL:** [Executive Summary](https://www.imf.org/-/media/files/publications/dp/2019/english/pppcrrbmfrea.pdf) ## Other formats - [Markdown version](/-/media/files/publications/dp/2019/english/pppcrrbmfrea.pdf.md) - [Structured JSON version](/-/media/files/publications/dp/2019/english/pppcrrbmfrea.pdf.json) --- ### Introduction and project background - Three-year project in the Caribbean region to support countries in better managing the fiscal impact of public-private partnerships. - Workshops organized in the region during 2014 to 2017, bringing 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. - Departmental paper prepared by a team of the IMF’s Fiscal Affairs Department (FAD): Maximilien Queyranne (lead), Wendell Daal, and Katja Funke. Contributors include S. Brian Samuel (CDB), Celeste Kubasta, and Bruce Stacey (resident advisors in CARTAC). Devin D’Angelo provided research support. Geneviève Verdier and Rui Monteiro reviewed the paper. - Financial support: government of Canada and financing provided to CARTAC from its 22 regional member countries and development partners. ### Key findings on infrastructure in the Caribbean region - Strengthening economic growth and resilience requires improving both access to and the quality of 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 (air transport and ports). - Over the past decade the rate of both public and private fixed assets accumulation has slowed down in Caribbean countries on average. - Specific constraints to infrastructure development: - Most countries are small states with limited potential for economies of scale in infrastructure investment. - Most countries have graduated to upper-middle- and high-income status and thus have limited access to concessional financing. - Shallow domestic financial markets and limited access to global capital markets are common. - Many countries have high public debt burdens. - The region is prone to costly and frequent natural disasters and is exposed to the effects of climate change, creating uncertainty for long-term investment and requiring additional investment and innovative solutions for resilience. ### Public-Private Partnerships (PPPs): potential and practical challenges - PPP definition: 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. - Important qualifications and practical challenges: - PPPs are a complex form of public procurement and all financing will need to be repaid over time. - PPPs only generate value for the public sector if efficiency gains outweigh higher private-sector financing costs and other PPP management costs. - In practice, PPPs have proven difficult to implement in the Caribbean: 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. ### Fiscal implications and risks from PPPs - PPPs entail potentially large fiscal costs and risks: - The private partner usually finances the upfront investment costs, which reduces the short-term lumpiness of traditionally procured public investment. - Governments may contribute to PPP financing through equity injections or different types of subsidies. - Subsequent payments for infrastructure and services are either the responsibility of the government or the users. - Government-funded PPPs create firm commitments that may limit budget flexibility and endanger fiscal sustainability. - User-funded PPPs may generate explicit or implicit contingent liabilities for the government. - PPPs have long-term implications on public finances and can generate large fiscal risks if not properly managed and reported. ### Policy recommendations and good-practice framework - Integrate PPPs into public investment management and budgeting of capital spending: - PPP selection and management should be fully integrated into overall public investment processes, including budget processes, rather than handled on a parallel track outside the budget. - All projects should be subject to the same screening and evaluation processes, irrespective of procurement method, to ensure priority projects are selected on a level playing field. - Establish a structured gateway process with a strong role for the minister of finance: - Ministries of finance should establish a gateway process for all public investment projects, including PPPs, to limit fiscal risks and have the power to stop or suspend a project at any stage if unaffordable. - To avoid conflicts of interest, the gateway/affordability function should preferably be separated from PPP support functions (that is, a PPP unit that supports project development). - Strengthen legal provisions and institutional arrangements: - Legal provisions for private participation in public-sector projects reduce fiscal risks; most Caribbean countries do not currently have such legal provisions. - Clarify rules governing the public–private relationship, integrate PPPs into public investment management frameworks, empower ministries of finance to check budget affordability, and define accounting and reporting standards to ensure transparency. - Embed PPP rules within existing legal frameworks to avoid creating a separate track for PPPs. - Improve transparency, accounting, and reporting: - Transparent accounting and reporting are 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 government’s balance sheet; few Caribbean countries currently apply this approach. - Until full implementation, governments should report long-term fiscal implications of PPPs on the budget deficit and public debt. - Conduct comprehensive fiscal risk assessments, including natural disaster and climate-change risks: - Few Caribbean countries have a framework to manage the fiscal impact of PPPs. - Decisions to enter PPP projects should include assessment of long-term fiscal costs and risks. - Governments can use the joint IMF-World Bank PPP Fiscal Risk Assessment Model (PFRAM) to assess long-term fiscal implications and fiscal risks of PPP projects. - Develop national policy frameworks for managing risks from natural disasters and better integrate climate-change risks into PPP design. - Mitigate and actively manage risks over the project lifetime: - Shift or share more risks with private partners where feasible; in the past, PPP contracts in the region often tilted risks toward governments. - Monitor risks actively throughout the lifetime of a PPP project. - Consider adopting ceilings on the stock and flows of PPP commitments to limit government exposure. - Avoid PPP projects for which fiscal risks are not well understood or cannot be managed. ### Structure of the paper - Chapter 1: Stocktaking of infrastructure development in Caribbean countries relative to comparable regions and discussion of challenges limiting infrastructure provision. - Chapter 2: Analysis of how PPPs can help address infrastructure needs in the region and the potential risks associated with them. - Chapter 3: Recommendations on how Caribbean countries can address PPP-related challenges and improve management of fiscal risks from PPPs. - Chapter 4: Conclusions. *Source: Executive Summary of "PUBLIC-PRIVATE PARTNERSHIPS IN THE CARIBBEAN REGION" (IMF departmental paper).* ### Executive Summary ������������������������������������������������������������������������������������������������������ ### Executive Summary ### Introduction and project background - 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. - The work drew 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. - The 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 include S. Brian Samuel (CDB), Celeste Kubasta, and Bruce Stacey (resident advisors in CARTAC). Devin D’Angelo provided research support. Geneviève Verdier and Rui Monteiro reviewed the paper. - 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. ### Key findings on infrastructure in the Caribbean region - 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. - 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 the rate of both public and private fixed assets accumulation has slowed down in Caribbean countries on average. - Caribbean countries face specific constraints to infrastructure development: - Most countries are small states with limited potential for economies of scale in infrastructure investment. - Most countries have graduated to upper-middle- and high-income status and thus have limited access to concessional financing. - Shallow domestic financial markets and limited access to global capital markets are common. - Many countries have high public debt burdens. - The region is prone to costly and frequent natural disasters and is exposed to the effects of climate change, creating uncertainty for long-term investment and requiring additional investment and innovative solutions for resilience. ### Public-Private Partnerships (PPPs): potential and practical 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. - Important qualifications and practical challenges: - PPPs are a complex form of public procurement and all financing will need to be repaid over time. - PPPs only generate value for the public sector if efficiency gains outweigh higher private-sector financing costs and other PPP management costs. - In practice, PPPs have proven difficult to implement in the Caribbean: 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. ### Fiscal implications and risks from PPPs - PPPs entail potentially large fiscal costs and risks: - The private partner usually finances the upfront investment costs, which reduces the short-term lumpiness of traditionally procured public investment. - Governments may contribute to PPP financing through equity injections or different types of subsidies. - Subsequent payments for infrastructure and services are either the responsibility of the government or the users. - Government-funded PPPs create firm commitments that may limit budget flexibility and endanger fiscal sustainability. - User-funded PPPs may generate explicit or implicit contingent liabilities for the government. - PPPs have long-term implications on public finances and can generate large fiscal risks if not properly managed and reported. ### Policy recommendations and good-practice framework - Integrate PPPs into public investment management and budgeting of capital spending: - PPP selection and management should be fully integrated into overall public investment processes, including budget processes, rather than handled on a parallel track outside the budget. - All projects should be subject to the same screening and evaluation processes, irrespective of procurement method, to ensure priority projects are selected on a level playing field. - Establish a structured gateway process with a strong role for the minister of finance: - Ministries of finance should establish a gateway process for all public investment projects, including PPPs, to limit fiscal risks and have the power to stop or suspend a project at any stage if unaffordable. - To avoid conflicts of interest, the gateway/affordability function should preferably be separated from PPP support functions (that is, a PPP unit that supports project development). - Strengthen legal provisions and institutional arrangements: - Legal provisions for private participation in public-sector projects reduce fiscal risks; most Caribbean countries do not currently have such legal provisions. - Clarify rules governing the public–private relationship, integrate PPPs into public investment management frameworks, empower ministries of finance to check budget affordability, and define accounting and reporting standards to ensure transparency. - Embed PPP rules within existing legal frameworks to avoid creating a separate track for PPPs. - Improve transparency, accounting, and reporting: - Transparent accounting and reporting are 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 government’s balance sheet; few Caribbean countries currently apply this approach. - Until full implementation, governments should report long-term fiscal implications of PPPs on the budget deficit and public debt. - Conduct comprehensive fiscal risk assessments, including natural disaster and climate-change risks: - Few Caribbean countries have a framework to manage the fiscal impact of PPPs. - Decisions to enter PPP projects should include assessment of long-term fiscal costs and risks. - Governments can use the joint IMF-World Bank PPP Fiscal Risk Assessment Model (PFRAM) to assess long-term fiscal implications and fiscal risks of PPP projects. - Develop national policy frameworks for managing risks from natural disasters and better integrate climate-change risks into PPP design. - Mitigate and actively manage risks over the project lifetime: - Shift or share more risks with private partners where feasible; in the past, PPP contracts in the region often tilted risks toward governments. - Monitor risks actively throughout the lifetime of a PPP project. - Consider adopting ceilings on the stock and flows of PPP commitments to limit government exposure. - Avoid PPP projects for which fiscal risks are not well understood or cannot be managed. ### Structure of the paper - Chapter 1: Stocktaking of infrastructure development in Caribbean countries relative to comparable regions and discussion of challenges limiting infrastructure provision. - Chapter 2: Analysis of how PPPs can help address infrastructure needs in the region and the potential risks associated with them. - Chapter 3: Recommendations on how Caribbean countries can address PPP-related challenges and improve management of fiscal risks from PPPs. - Chapter 4: Conclusions. *Source: Executive Summary of "PUBLIC-PRIVATE PARTNERSHIPS IN THE CARIBBEAN REGION" (IMF departmental paper).* ### Introduction ### Introduction ### Overview - Presents common challenges faced by Caribbean countries in improving infrastructure access and quality. - Analyzes and benchmarks economic developments and infrastructure indicators for members of the Caribbean Regional Technical Assistance Center (hereafter Caribbean countries) against the group of small states in the Pacific and sub-Sahara African (SSA) region. - Comparator groups: Pacific (Fiji, Kiribati, Maldives, Marshall Islands, Micronesia, Palau, Samoa, Solomon Islands, Timor-Leste, Tonga, Tuvalu, Vanuatu); SSA (Cabo Verde, Comoros, Mauritius, São Tomé and Príncipe, Seychelles, Swaziland). IMF definition of small states referenced. ### Investment Trends - Total investment (as a share of GDP) started to decline after a period of strong growth following the global financial crisis and economic downturn. - Most countries had a lower level of total investment during 2010 to 2015 relative to 2005 to 2009, except: Haiti, the Bahamas, Dominica, and Guyana. - Regional comparisons: - Pacific: total investment-to-GDP ratio lower than Caribbean but on a broadly steadier path. - SSA peers: investment trended upwards from 2003 before leveling off. - Private investment: - Over the last three decades, private investment has been twice as high as public sector investment and largely above levels reached among comparator groups. - Private sector investment in almost all Caribbean countries trended down in the last decade, driving the decline in total investment. - Only Barbados, Bahamas, Dominica, and Guyana increased private investment during 2010–2015. - Private sector investment picked up more recently but remains well below its 1999 peak. - Public investment: - Governments temporarily and partially offset private investment decline with marginal increases initially. - From 2008, countries curtailed capital spending in response to deteriorating public finances. - Public sector investment decelerated from about 10 percent of GDP in 2005 to about 6½ percent of GDP in 2015. - Almost two-thirds of Caribbean countries scaled down public investment; exceptions: Barbados, Grenada, Belize, St. Kitts and Nevis, St. Lucia. ### Public-Private Partnerships (PPPs) - PPP definition: a project governed by a long-term contract between a government and a company. The company makes an investment in an asset and, using that asset and perhaps other assets made available by the government, provides services to the government or the public. The company is usually private and typically established specifically for the project. Government retains some responsibility for service quality and bears some attendant risks. At the end of the contract, control of the asset typically reverts to the government. - PPPs exclude simple joint ventures, sale of public assets or public company shares (privatization), and arrangements where the private partner is not required to finance investment. - PPPs have been extensively used in some Caribbean countries but have not significantly contributed to public investment since the global financial crisis. - Historical use: - First half of the 1990s: PPPs used for large-scale infrastructure in electricity, transport, water and sanitation. - Caribbean countries have on average the highest PPP capital stock as a share of GDP relative to Pacific and African peers. - PPP investment has been declining since 2005 to levels below peer countries in SSA; PPP investment did not offset declining public investment over the past decade. - Country experience: - Jamaica implemented large PPP projects (example cited: Sangster International Airport) and mobilized private investment via PPPs. - Most countries have less experience in negotiating and implementing PPPs. - Airport sector: most airports publicly owned and operated; functioning airport PPPs in Jamaica and the Bahamas only. - Airport expansion projects in Antigua and Barbuda, St. Vincent and the Grenadines, and Guyana are publicly funded and operated. - Private participation in Caribbean airports challenged by industry practice of at least one million passengers per year. - Note: PPPs can also consist of a joint venture company partly owned by a public authority and partly by a private company or private investors (example: Old Harbor Combined Cycle Power Station project signed in 2017 in Jamaica as an institutional PPP). - Reporting: PPPs are typically not properly reported in fiscal data in countries with cash-based accounting, as most Caribbean countries do. ### Infrastructure Provision - Despite decline in public investment, public capital stock per capita in the Caribbean remains relatively high on average (2011 PPP$-adjusted per capita). - Public capital stock per capita (selected values, 2015, 2011 PPP$-adjusted, thousands): - Trinidad and Tobago: 60.0 - Bahamas, The: 27.2 - Barbados: 18.7 - Dominica: 17.1 - St. Lucia: 16.3 - St. Kitts and Nevis: 15.8 - Caribbean average and other country values vary between 1.6 and 42.5 (full distribution shown in source). - Access to economic vs social infrastructure: - Economic infrastructure (roads, electricity production) has improved substantially and Caribbean countries have on average outperformed SSA and Pacific peers. - Social infrastructure (education and public health) lags: Caribbean has fallen behind Pacific region and is on par with SSA comparators. - Access to treated water is almost universal in the Caribbean and Pacific, and to a lesser extent in Africa. - Infrastructure quality: - Overall infrastructure quality has somewhat declined in the Caribbean and is perceived as lower than SSA comparators on average. - By component: - Air transportation and ports: Caribbean on par with African peers, better than Pacific peers. - Only Barbados, and to a lesser extent Jamaica and Trinidad and Tobago, score above the average in other regions. - Haiti significantly behind on almost all indicators for quality of infrastructure. ### Obstacles for Improving Infrastructure in the Caribbean Region - Key constraints: - Comparatively high fiscal deficits limit budget room to increase public investment. - High public indebtedness, shallow domestic financial markets, and limited concessional support restrict access to long-term financing. - Small country size makes it difficult to achieve economies of scale in infrastructure investment. - Vulnerability to natural disasters and climate change increases the risk profile of long-term infrastructure investment. ### Limited Fiscal Space - Average fiscal deficit for Caribbean countries: about 3 percent of GDP (aggregate fiscal situation worse than Pacific and African peers). - Since 2010, Caribbean countries experienced a worsening in aggregate fiscal balance. - Higher debt service relative to peers, limiting fiscal space—particularly in Dominica, Belize, Jamaica, St. Kitts and Nevis. - High public debt: - Average debt levels remain high at about 75 percent of GDP. - Diversity in debt burdens: some countries below 60 percent of GDP; others above 100 percent of GDP. - High sovereign risk assigned by markets reduces access to international financing. ### Financing Constraints - Domestic financial markets: - Financial sectors large relative to regional economy: total assets averaging 320 percent of GDP. - Financial sectors not geared toward infrastructure investment; dominated by banks with shorter lending horizons relative to infrastructure investment. - Insurance sector large in some countries but not substantially financing local infrastructure due to underdeveloped local capital markets. - Credit unions mainly provide consumer and mortgage loans. - Offshore banking sectors geared toward international clients and do not provide domestic financing. - Limited access to global capital markets: - International investors reluctant to take on small country exposure due to economic volatility, high indebtedness, and administrative costs for small transactions. - Illiquid domestic debt markets constrain financing for both public and private infrastructure investment. - External debt financing growing in some countries (Trinidad and Tobago, Barbados) but practically nonexistent in others. - Concessional financing and ODA: - Most Caribbean countries have become less successful in accessing international development assistance as aid preferences shifted toward low-income and post-conflict countries. - Haiti is the largest recipient of ODA in the Caribbean, receiving 80 to 90 percent of total aid disbursement to the region. - Total bilateral flows to Caribbean countries (excluding Haiti) declined substantially since 2009, reaching very low levels in recent years. - With the exception of Barbados and Trinidad and Tobago (which received no ODA), Caribbean countries currently receive ODA ranging between 0.1 percent and [value truncated in source]. *Source: pppcrrbmfrea - Introduction* ### 4.9 percent of their gross national income, with Haiti at the upper end, fol- ### PUBLIC-PRIVATE PARTNERSHIPS IN THE CARIBBEAN REGION ### Development Assistance and Aid Reliance - Haiti: 4.9 percent of gross national income. - Dominica and St. Kitts and Nevis: 4 percent of gross national income. - Belize: 3.3 percent of gross national income. - St. Kitts and Nevis (duplicate listing context): 3.2 percent of gross national income. - Other Caribbean countries: medium to low end of the aid spectrum. - Pacific island small states have been more reliant on development assistance than Caribbean countries (IMF 2013b). ### Small Size Constraints on Infrastructure Investment - Most Caribbean countries are characterized as small states based on population size, limiting potential for economies of scale in infrastructure investment. - Effects of lack of economies of scale: - Limits institutional capacity because of fixed costs. - Raises the average cost of the public sector for small states. - Results in the under-provision of some public goods and services. - Consequence: limited scope to generate sufficient return to cover fixed costs of investment given small market size. ### Vulnerability to Natural Disasters and Climate Change — Regional Exposure and Historical Losses - Average annual economic cost of disasters during 1990 to 2014: about 2.5 percent of GDP for the region. - This is six times higher than in other countries. - This is about ½ percentage point of GDP higher than in other small countries (Figure 11) (IMF 2016). - Frequency of natural disasters: - Reached an all-time high in the 2000s. - Level reached in the first half of 2010s is comparable to earlier decades (1960s and 1970s) and is on its way to reach the levels of the 1980s and 1990s. - Probability of being struck by a hurricane in any given year: - Jamaica and the Bahamas: more than 20 percent. - Most other Caribbean countries: probability higher than 10 percent. ### Projected Economic Cost of Climate Change and Sectoral Infrastructure Impacts - Economic cost of climate change for Caribbean countries associated with one-meter sea-level rise (SLR) by 2080: about 8 percent of GDP per year (IMF 2016). - Infrastructure and sectoral impacts: - Coastal infrastructure and ecosystems: SLRs and more intensive and frequent tropical storms could destroy buildings, roads, airports, hotels, marinas, and other facilities in the tourism sector; erosion of beaches threatens tourism-dependent countries. - Transport systems: Intense rainfalls can cause flash floods and landslides, destroying bridges and road infrastructure and leading to high repair costs. - Port activities: More intensive tropical storms, combined with SLRs, could affect port activities, raise shipping costs, reduce trade, and hamper cruise tourism. - Energy services: SLR-related intensive tropical storms and high winds could damage pipelines, power transmission, and distribution lines, resulting in power shortages. ### Risks to Private Investment and PPPs from Natural Hazards and Climate Change - Natural disasters and climate change may discourage private investors or force governments to become the insurer of last resort (Public-Private Infrastructure Advisory Facility 2016). - Impacts on infrastructure and PPPs: - Adverse effects on physical infrastructure, increased capital and operating expenditures, service disruptions and income losses, and increased insurance costs (World Bank 2016a). - Climate risks are generally not considered or allocated to a specific party in typical PPP contracts (Public-Private Infrastructure Advisory Facility 2016). - Result: private companies may be reluctant to invest in large infrastructure projects given significant uncertainties; governments may act as insurer of last resort to ensure availability and continuity of infrastructure services if climate-related risks materialize. ### Case Example: Jamaica — Sangster International Airport PPP - Background: - 2003: Government of Jamaica (GOJ) handed over Sangster International Airport in Montego Bay to the Vancouver Airport Services Consortium under a 30-year concession agreement. - The concession agreement called for $180 million in new capital investment and development of the full commercial potential of the airport. - Outcomes in first 15 years: - Major expansions and improvements in quality of service. - Passenger traffic grew by about 25 percent, to reach 4.3 million passengers by 2017. - Total revenues increased by more than four-fold, driven primarily by increases in non-aeronautical (commercial) revenues. - Subsequent developments: - In 2018, halfway into the 30-year concession, the consortium expanded and modernized the airport. - Phase one: rebuilding of the check-in area, customs, immigration, and car park and drop-off areas. - Phase two (under development): runway extension to accommodate long-haul aircraft. - Fiscal impact: - GOJ incurred limited costs for project preparation, did not contribute to investment costs, and did not provide guarantees to its private partner. - GOJ received significant annual concession fees from its private partner. - Source: Caribbean Development Bank (2014). ### Climate Risks Summary and Projections - Key climate risks for the Caribbean region: - Extreme temperatures: Global warming projected to result in more frequent and more intense episodes of extreme heat and more frequent episodes of droughts. - Sea-level rise (SLR): Projections for SLR range from an average of 0.38 meters to 1.14 meters. - SLR will likely increase risk of storm surges, persistent flooding, and coastal erosion. - More severe and frequent tropical storms: By 2100, tropical storms making landfall could inflict damages up to 77 percent higher than today, with an impact of up to 42 percent higher even when storms do not make landfall. - Implication: climate change is likely to exacerbate the region's exposures to natural hazards and increase risks to infrastructure, livelihoods, and tourism. *Source: https://www.imf.org/-/media/files/publications/dp/2019/english/pppcrrbmfrea.pdf* ### Box 2. How will Climate Change Affect the Caribbean Region? ### Box 2. How will Climate Change Affect the Caribbean Region? ### Public-Private Partnerships (PPPs) as a tool - In early 2019, a total of 31 PPP projects were in various stages of development, in renewable energy, transport, and water and sanitation. - Total investment costs are estimated at about $2.5 billion, with the energy sector representing about $1 billion and the transport and water and sanitation sectors $500 million, respectively. - Most projects were at the concept stage; only 4 of the 31 projects had progressed to the tender stage. - Project financing in a PPP is typically organized by the private partner through equity injection and debt. ### Potential benefits of well‑designed PPPs - More integrated technical design: - Public entity and private partner jointly optimize construction based on service to be provided. - Experience of some advanced countries shows technical gains can represent 15 to 20 percent of the cost of the work. - Internalizing coordination costs and technical difficulties: - Private partner’s incentive to reach operational phase promotes delivery on budget and on time and reduces public-sector interference during construction. - Maximizing revenue from users: - Private firms better positioned to manage commercial revenues under contracting authority constraints. - Optimizing maintenance and operation: - Equipment, maintenance, and upgrades are taken into account from the study stage; PPP structure ringfences resources for operation and maintenance. - Transferring risks to the private partner: - PPPs enable governments to transfer more risks (feasibility, construction, maintenance, operation) than traditional procurement, provided the government selects qualified private partners. ### Constraints and implementation challenges in the Caribbean - Limited project size: - Average PPP project size in the Caribbean is under $100 million, making many projects below global players’ radar. - Example of success at small scale: Nevis has two functioning PPPs (a wind farm and a bulk water project) with a population of about 12,000 people. - Lack of technical capacity within governments: - Governments often launch PPP transactions too early, leaving major unknowns and risks; projects can languish for years. - Insufficient risk assessment and excessive risk allocation to the public sector: - Governments frequently assume significant fiscal risks, including support/subsidies in early operation years; example: Jamaica’s Highway 2000 toll road—net cash returns to the government not currently expected until well into the second half of the 30-year concession. - Lack of sectoral reforms to attract private investors: - In electricity, tariffs are often well below cost recovery, creating uncertainties for independent power producers. - Lack of funding for project advisors: - Adequate external preparatory work can equal 5 to 10 percent of capital costs; many small economies lack budgetary capacity to fund such advisory support. ### Fiscal implications and long‑term risks - PPPs are financing mechanisms that must be repaid; they do not provide free funding. - Typical PPP financing structure: - Debt often above 70 percent of total project financing; equity comprises the remainder. - Government support: - Governments may provide additional equity, guarantees, or investment subsidies; survey indicates half of Caribbean countries have provided project financing to PPPs, mostly as capital grants (including free provision of assets). - Cash‑flow profile differences: - Traditional public procurement: large cash outflows during construction; limited outflows during operation (maintenance and service costs). - Typical PPP: little or no payments during construction; investment, maintenance, and operation costs recovered through payments by government and/or users during operation—this delay in cash outflows can make PPPs attractive in the short term for cash‑basis budgets. - Short‑term illusion of fiscal space: - PPPs can create the appearance of budget relief in the construction phase while committing future budgets to long‑term payments. - Firm fiscal commitments from PPPs may limit budget flexibility and endanger fiscal sustainability if used to bypass budgetary controls. - Example cited: obligations from UK PPPs peaked in the early 2010s and were not expected to decline until the mid-2020s. - Cautionary comparison: a Caribbean country signing multiple PPPs could face budget pressures similar to other international experiences. ### Contingent liabilities and business‑model risks - Explicit contingent liabilities: - Loan or minimum revenue guarantees, or compensation for force majeure events. - Survey: four Caribbean countries have already provided government guarantees, including minimum revenue guarantees. - Example: Barbados solid waste management facility came with a minimum revenue guarantee equivalent to 5 percent of GDP. - Implicit contingent liabilities: - Lower than expected residual asset value or lower than expected quality/quantity of service may prompt the government to bear costs to ensure service provision. - Common sources of fiscal risk: - Underestimation of costs and overly optimistic revenue forecasts. - Cost overruns (specification changes, exchange‑rate or input price fluctuations) often absorbed by government. - Systematic overestimation of demand and revenues is a key risk to PPP business models; governments often provide minimum revenue guarantees to cover such risks. - Cost of private financing: - In the United Kingdom, the cost of capital for PPPs was between 2 and 3.75 percentage points higher than for government‑funded projects, and 3.5 to 7 percentage points higher for user‑funded projects. ### Governance, transparency, and crowding out - PPPs implemented outside the public investment program and budget process: - In the survey, 9 of 14 Caribbean countries confirmed PPPs are handled outside the public investment program. - Off‑budget PPP commitments can crowd out other high‑priority spending and reduce alignment of public resources with policy priorities. - Governance risks: - Confidentiality clauses and frequent renegotiations reduce transparency and increase discretion. - Survey assessment areas (gaps identified across these seven areas): 1. Institutional and legal framework 2. Framework for government support to PPPs 3. Framework for managing fiscal risks 4. Budgeting framework 5. Accounting framework 6. Statistical framework 7. Transparency and disclosure - Participating countries in the survey included: Anguilla, Antigua and Barbuda, Barbados, British Virgin Islands, Curacao, Dominica, Grenada, Guyana, Haiti, Jamaica, St. Lucia, St. Vincent and the Grenadines, St. Kitts and Nevis (which responded separately), Surinam, and Turks and Caicos. *Source: IMF staff and Caribbean Development Bank materials as presented in the supplied content.* ### Box 3. Public Sector Role in the Airline Sector in the Caribbean ### Box 3. Public Sector Role in the Airline Sector in the Caribbean ### Project overview and implementation - The Jamaica Highway 2000 project, with a total cost of $1.3 billion, remains the largest public-private partnership implemented in the English-speaking Caribbean. - Implemented in two phases: - Phase 1 (East-West Highway): PPP awarded to a French company through an international tender in 2001. - Phase 2 (North-South Link): Originated from an unsolicited proposal from a Chinese company in 2011; a 50-year concession was later awarded to the Chinese company. - North-South Link specifics: - Financed the $600 million highway and obtained the right to develop 1,200 acres of government lands adjacent to the highway for commercial activities. - Completed in 2016 and has significantly reduced travel time by eliminating natural choke points. ### Economic and social impacts - East-West Highway benefits: - About 65,000 drivers per day benefit from reduced congestion around Kingston. - Spurred new economic activities outside Kingston in satellite towns like May Pen, including several new housing developments since opening. - Anecdotal evidence of city dwellers opting to live in rural areas and commuting to Kingston, relieving pressure on Kingston’s social and physical infrastructure. - Enabled tourism benefits for the capital as city tours to hotel and cruise ship guests on the north coast became feasible. ### Government financial contribution and cash flow outcomes - Government of Jamaica (GOJ) contributions and outcomes: - GOJ contributed $487 million into Highway 2000, or 37 percent of the total project cost, although $120 million will be reimbursed over the long term by the Chinese company for work on the Mount Rosser Bypass. - Specific GOJ expenditures noted: - $20 million to finance detailed geotechnical investigations, engineering studies and designs, traffic forecasts, economic feasibility studies, and social and environmental impact assessments leading to tender stage. - $99 million equity injection for the East-West Highway, financed through Jamaica’s first inflation-linked bonds issued by the National Roads Operating and Construction Company (NROCC) on local and international markets in 2002. - Additional expenditures include construction works, project development, interest payments and toll subsidies, and advances to NROCC to cover debt servicing. - Bond cost detail: - Up to the end of 2015 the effective cost of these bonds was approximately 15.5 percent in Jamaica dollars and 7.8 percent in USD, which compares favorably with the 9.375 percent US Bonds which were issued by NROCC in 2011. - Toll revenue and cash flow forecasts: - To date NROCC has not received cash returns from its toll road investments. - On the East-West Highway, NROCC should receive 50 percent of Free Cash Flows (that is, after deducting all operating and capital costs and debt service). - Current forecasts are for free cash flows to commence only in 2023. - With revenues from highway operations not expected for the foreseeable future, the GOJ must subsidize charges on NROCC’s debt service. - Interest charges in 2015 amounted to $37 million and should remain at this level over the foreseeable future. ### Table 1 (as presented) - Table 1. Total Cost of Highway 2000 (Millions of US dollars) - East-West Highway (Phase 1) - North-South Link (Phase 2) - Indirect Costs (Both phases) - Total Cost (Both phases) - Government of Jamaica - Equity injection - 9999 - Capital expenditure - 120120 - Admin., Interest and Subsidy - 184184 - Grantor changes - 4141 - Land purchases - 4444 - Government Contribution99120268487 - Private investors - Equity injection - 27144171 - Project debt - 198456654 - Private Company Contribution225600825 - Total Project Cost3247202681312 - Sources listed in table: National Roads Operating and Construction Company; and Ministry of Finance, Debt Management Branch. ### Financing versus funding: definitions and implications - Distinction emphasized: - Financing: The private partner brings in financing (equity and debt) needed to finance the investment. Government support can be provided via guarantees, subsidies, equity injections, or tax exemptions. - Funding: The private partner does not fund the infrastructure or service; funding must come from either the government (taxpayers) or users (through fees). Funding may be: - From government: (a) government fixed or variable payments during operation (fees for service or availability payments) or (b) contributing financing or fixed assets. - From users: user fee for service (for example, a toll). - Funding arrangements can be a mix of government and user funding and often involve fee-adjustment mechanisms and minimum revenue guarantees. ### Project company borrowing, risk spreads, and refinancing dynamics - Typical borrowing and risk profile: - The project company is usually the borrower and raises a loan without recourse against its shareholders; shareholders’ risk limited to the amount of capital and shareholder loans. - Borrowing rate reflects maximum risk during project life and depends on contract quality and risk allocation between government and project company. - Spread measures the difference in risk for a lender between lending to the government and lending to a project company. - Interest rate and spread examples: - Projects deemed low risk, particularly extensions of existing projects, benefit from reduced spread compared to government borrowing (150 to 250 basis points). - United Kingdom example: cost of private debt for PPPs (7 to 8 percent) is approximately double that of government debt (3 to 4 percent) (National Audit Office 2015). - During construction, spread may reach 600 basis points because lender’s risk is maximized. - Refinancing: - At end of construction, construction risk disappears and enterprises generally refinance at a lower rate. - Refinancing may occur at end of construction or after the buildup period (2 to 10 years after construction). - Compared to the initial rate, refinancing rate may be 200 to 300 basis points lower. - The distribution of financial benefits from refinancing operations between the government and project company should be arranged at contract signing. ### International experience and fiscal risks: Portugal case - Portugal PPP program outcomes and fiscal impact: - Cumulative investment through PPPs estimated at about 9 percent of GDP in 2012 and present value of central government’s recorded financial commitments at about 14 percent of GDP. - PPPs used extensively to finance transport infrastructure and hospitals; motorways PPPs resulted in an oversized and expensive network with one of the highest kilometer per million inhabitants in Europe. - Estradas de Portugal, a fully state-owned enterprise, was kept outside the general government perimeter; special purpose vehicles for PPPs were not consolidated in Estradas de Portugal balance sheet, leading to on-budget spending being more than four times lower than off-budget commitments in the transport sector in 2008. - Following the financial crisis, PPPs entered serious financial difficulties, Estradas de Portugal and most of its PPPs were reclassified within general government, contributing to a large increase in public debt. - Public debt increased by around 15 percent of GDP due to reclassification of state-owned enterprises (including Estradas de Portugal) and PPPs between 2009 and 2014. - PPP availability payments peaked at 0.9 percent of GDP in 2016 and are expected to plateau until 2022, before slowly declining as a share of GDP. - Policy-relevant lesson: off-budget treatment of PPPs and related special purpose vehicles can mask fiscal commitments and lead to large contingent liabilities that may materialize in a downturn. *Source: Caribbean Development Bank 2017a; National Roads Operating and Construction Company; Ministry of Finance, Debt Management Branch; World Bank 2017; IMF staff; National Audit Office 2015.* ### Box 7. The Fiscal Impact of Public-Private Partnerships—The Example of Portugal ### Box 7. The Fiscal Impact of Public-Private Partnerships—The Example of Portugal ### Integrating Public Investment Management and Budgeting of Capital Spending - PPPs should be fully integrated into public investment management (PIM) and the budget process so that all public investment projects compete on a level playing field regardless of procurement method. - Findings from the regional survey: - All Caribbean countries have a medium-term plan for public investment. - Only five countries include PPPs in the medium-term framework and in budget documents. - Only one-third of Caribbean countries include in their budget information on project costs expected to materialize outside the MTBF or on the total cost of long-term investment projects. - Only five countries in the region approve multiannual commitments in the budget process. - Recommended practices: - Subject all project proposals to standard appraisal methods, including prescreening, prefeasibility study, and feasibility study. - Link public investment decisions to the budget cycle and parliamentary approval; include multiannual investment costs in the MTBF. - Maintain a government database with actual and forecast fiscal implications (annual expenditures and revenues) over the project implementation period. - Present annual and lifetime fiscal costs and fiscal risks of ongoing and newly proposed investment projects in a dedicated part of the budget documents. - Use commitment appropriations covering the lifetime cost of investment projects to enable parliamentary approval of future-budget resource allocations. ### Dealing with Unsolicited Proposals (USPs) - Characteristics and risks: - USPs are common in the Caribbean; private entities frequently approach government agencies with proposals without an explicit request. - Potential benefits: can generate innovative solutions and overcome early-stage assessment challenges. - Risks: exacerbate lack of technical capacity to evaluate/prepare/procure/implement PPPs; complicate fiscal planning; may avoid competition and enable corrupt practices; associated with high cost and poor outcomes when negotiated directly. - Recommended controls: - Subject USPs to mandatory competitive bidding and thorough government due diligence. - Require proponents to present detailed studies and subject them to independent evaluation. - Apply guidelines for managing unsolicited proposals (see Box 8 in source). ### Strengthening Legal Provisions for PPPs - Current practice: - In over 60 percent of Caribbean countries, PPPs are not covered by the existing legal framework. - Only St. Lucia and Turks and Caicos have specific PPP laws. - Legal features that help manage fiscal risks (eight key features): - Provide a clear definition of PPPs and scope of application. - Require evaluation and prioritization of all public investment projects, including PPPs, within the government’s overall investment strategy, MTBF, and budget cycle. - Define roles and responsibilities of all public and private entities involved, including explicit role of the minister of finance. - Prescribe transparent competitive procurement mechanisms and clarify treatment of unsolicited proposals. - Define content of PPP contracts and provide model contractual provisions (for example, force majeure). - Provide guidelines for renegotiation and termination, including dispute resolution mechanisms (arbitration, court resolution, adjudication, expert determination). - State the manner and extent of government support for PPPs. - Include clear procedures for accounting and reporting long-term investment projects and PPP-related operations in government accounts; embed aggregate public sector exposure limits to PPP operations if reporting practices do not ensure full recognition of fiscal impact. ### Building Institutions for Managing PPPs: Gateway Process and Institutional Framework - Gateway process (minister of finance role): - A structured gateway process should empower the minister of finance to stop or suspend a project at any stage (appraisal, procurement method assessment, tendering, contract award, renegotiation, termination). - Minister of finance should be able to check budget affordability at early project phases and have veto power over contract renegotiation and termination. - The gateway process should apply to all public investment projects (traditional and PPPs) from all levels of government to ensure a level playing field. - Standard gateway phases (roles summarized): - Phase 1 (Prefeasibility): Line ministry prepares prefeasibility; infrastructure team advises; MoF reviews and provides GateWay 1 opinion on viability/affordability. - Phase 2 (Feasibility): Line ministry prepares feasibility; infrastructure team advises; MoF reviews and GateWay 2 approval for inclusion in pipeline. - Phase 2’ (Assessment of procurement method): Line ministry prepares PPP-vs-traditional assessment; infrastructure team advises; MoF confirms value of PPP and GateWay 2’ approves procurement as PPP. - Phase 3 (Resource allocation/budgeting): Line ministry prioritizes and proposes in budget; infrastructure team reviews; MoF includes projects in draft budget—GateWay 3 for budget inclusion and legislative approval of multiannual projects. - Phase 4 (Tendering): Line ministry prepares tender documents; infrastructure team supports; MoF assesses fiscal implications—GateWay 4 approves tendering method. - Phase 5 (Bidding, negotiation, contract signing): Line ministry assesses bids and signs contracts; infrastructure team supports; MoF assesses fiscal implications—GateWay 5 approves contract if affordable and value-adding as PPP. - Phase 6 (Construction and Operation): Line ministry monitors implementation; infrastructure team advises and may renegotiate; MoF monitors budget implications and GateWay 6 approves renegotiation if affordable and still value-adding. - Institutional findings and recommendations: - Only six countries have a PPP unit or PPP team that regroups staff from different departments: Haiti, Jamaica, Saint Lucia, Trinidad, Turks and Caicos, Grenada. - In some countries the PPP unit signs off fiscal risks before project approval (Grenada and Saint Lucia), creating potential conflicts of interest. Jamaica segregates promotion and fiscal oversight functions. - Most Caribbean countries do not give the minister of finance a gateway role: survey results show cabinet or high-level steering committee responsible for decision making in 70 percent of cases and minister of finance can veto PPPs inconsistent with budget affordability or debt sustainability in only 20 percent of cases. - Recommended institutional changes: - Develop an integrated gateway process for all public investment projects. - Clearly identify the entity in the ministry of finance responsible for the control function, distinct from the PPP promotion/centers of excellence. - Integrate PPP management into PIM; expand PPP units into infrastructure units where appropriate or rely on regional infrastructure units. ### Managing Fiscal Risks from PPPs: Identify, Assess, Report, Mitigate - Overview of fiscal risk management steps (Figure 19): - Identify: establish context and identify risk areas. - Assess and prioritize: quantify risks (P × I), scenario analysis, sensitivity analysis. - Report: gather/analyze information and produce a fiscal risk statement. - Mitigate and manage: direct controls, ceilings or caps, regulate, risk transfer/sharing/insurance. - Current regional practice and gaps: - Three-quarters of countries do not manage fiscal risks from PPPs through an integrated fiscal risk management framework or a PPP-specific framework. - Only about 30 percent of countries consider PPP-related debt in their debt sustainability assessment. - In more than half of the countries there is no entity responsible for signing off on the risks before a new PPP contract is signed. - Tools and techniques: - The IMF–World Bank PPP Fiscal Risk Assessment Model (PFRAM): - Quantifies long-term fiscal implications and contingent liabilities of PPP projects; can show impact on government deficit and debt over project lifetime. - A new version is being developed to analyze portfolios of PPP projects and consolidate fiscal implications. - Provides a risk matrix covering 11 classes of risk; captures allocation, likelihood, impact, and mitigation measures. - Quantification approaches: - Maximum exposure (face value) — reflected in PFRAM results when likelihood is not considered. - Expected fiscal exposure (weighted by likelihood) — requires adjusting PFRAM results and may use probabilistic analysis or scenario analysis. - Methods include scenario analysis, probabilistic/stochastic simulations, and option-valuation techniques; choice depends on data availability and technical capacity. - Recommended sequencing: - Start with simple, transparent reporting on PPPs to build capacity. - Use scenario analysis as a practical starting point; reserve probabilistic techniques for when sufficient data exist. - Reporting, accounting, and auditing: - International standards: - IPSAS 32 (service concession arrangements) and GFSM 2014 guide whether PPPs appear on government balance sheet depending on control and economic ownership criteria. - On-balance-sheet recognition eliminates bias toward PPPs by aligning fiscal treatment with traditionally procured projects. - Regional status: - Less than 15 percent of Caribbean countries applied accrual accounting standards. - Seven countries have implemented GFSM 2014 in the region, but only three produce a government balance sheet. - Only three countries report accounting for PPPs in both fiscal deficit and public debt: Barbados, Jamaica, Turks and Caicos. - Information on fiscal risks is available in only three countries. - PPPs are generally not required to be audited by the supreme audit institution; only three countries have had audits of PPP projects. - Interim and transparency measures: - When full accrual/IPSAS/GFSM implementation is not feasible, include PPP-related liabilities in government debt reporting and provide detailed firm and contingent PPP cost information in budget documents and financial reports. - Publish fiscal risk statements that include PPP-related liabilities (example comparators: Georgia, the Philippines). - Mitigation and management options: - Limit PPP exposure through ceilings or caps on total debt, total investment value under PPPs, annual PPP expenditure, or government support (guarantees). Only two Caribbean countries (Jamaica, Turks and Caicos) have binding ceilings for total volume of PPPs. - Assign risks to the party best equipped to manage them (government for political risks; private sector for construction risks); use insurance where possible and affordable. - Use PFRAM’s risk matrix to identify hard-to-quantify risks and guidance on mitigation; monitor that private partners actively manage risks assigned to them to avoid implicit fiscalization. - Recognize that well-structured contracts, active supervision, enforcement, and sufficient internal or outsourced capacity are critical to limit fiscal exposure; external advisors often required but costly and their costs must be factored into project estimates. *Source: IMF staff (content as provided from the cited IMF chapter).* ### Box 16 presents an illustrative fiscal risks matrix for the Jamaica High- ### Box 16 — Illustrative fiscal risks matrix and resiliency planning for Jamaica Highway 2000 / Regional PPP fiscal-risk guidance ### Climate and disaster resiliency in PPPs - Resiliency planning is needed to ensure that uncertainties about future climate impacts are incorporated in today’s investment decision in the Caribbean region (Public-Private Infrastructure Advisory Facility 2016). - Given the long lifespan of most infrastructure, governments and the private sector must incorporate comprehensive resiliency into design, construction, financing, and operation and maintenance of all future infrastructure projects—whether procured through traditional procurement or PPPs. - Options to increase infrastructure resiliency include engineering options, technological and ecosystem-based options, and institutional arrangements. - Risks associated with natural disasters and climate change could be shared and innovative insurance mechanisms used to reduce government exposure. - At project identification, governments must, in addition to assessing revenue sources and affordability, undertake a broad assessment of risks arising from potential natural disasters and climate change; failure to do so may have financial implications for both private and public sectors. - Parametric insurance can be used to account for country-specific exposure by paying out in the event of a natural disaster that exceeds a prespecified severity (Alleyne and others 2017). - Encouraging the private partner to insure itself and ensuring public assets are insured could help reduce exposure. - Disaster risk insurance and related hedging tools help protect governments from the economic burden of disasters and increase capacity to respond (Alleyne and others 2017). - Note: Small Caribbean countries may face high costs because their insurance markets are underdeveloped (Alleyne and others 2017). ### PPP legal and policy frameworks: climate and force majeure - Some countries in the region already include force majeure clauses in PPP policy frameworks, typically including “Act of God” events (extreme climate events such as natural disasters). - Existing frameworks generally do not capture the frequency and magnitude of damage associated with the impact of climate change—a more permanent feature. - PPP frameworks in the region should include explicit clauses on climate change and explicit references to making projects resilient to changing climatic conditions. - Governments in the Caribbean region should develop national adaptation policy frameworks for managing risks from natural disasters, including for PPPs (Public-Private Infrastructure Advisory Facility 2016). ### Managing unsolicited proposals (Box 8): six guiding principles - Public interest: A USP project must align with national infrastructure priorities and meet a real societal and economic need. - Value for money: USP projects should be structured as PPPs only if expected to generate greater value for money under PPP delivery than under traditional public procurement. - Affordability: Governments must understand the impact on public finances, including whether firm fiscal commitments are affordable and whether fiscal risks are contained and manageable. - Fair market pricing: PPP contracts resulting from USPs should reflect market prices, avoid excessive private returns, and include appropriate risk allocation. - Transparency and accountability: Governments should disclose all relevant project information to allay stakeholder concerns. - Alignment of PPP and USP procedures: Align PPP and USP policies to increase stakeholder support, enhance market interest, and ensure consistency in public decision-making. ### Regional PPP support and capacity building (Box 9) - A PPP regional support mechanism (RSM) was established in 2015 at the Caribbean Development Bank (CDB), supported by World Bank, Public-Private Infrastructure Advisory Facility, Inter-American Development Bank, and Multilateral Investment Fund. - RSM support areas: - Capacity building: “PPP Boot Camps” trained 46 regional government officials; RSM participated in IMF regional workshops on Fiscal Risks in PPPs. - Policy development: Assisted five countries in adopting PPP policies: the Bahamas, Belize, Guyana, St. Lucia, and Trinidad and Tobago. - Project development: Caribbean PPP helpdesk provided early stage support to eight PPP projects. - Caribbean PPP Toolkit: An open online knowledge source with guidance notes, case studies, and sample documents tailored to the Caribbean environment. - Moving forward, emphasis should be on project development to create a pipeline of bankable projects; CDB plans a regional PPP unit to provide technical assistance and advisory services to attract investment. ### The PPP Fiscal Risk Assessment Model (PFRAM) (Box 10) - PFRAM is an Excel-based analytical tool to quantify macrofiscal implications of PPP projects and follows a four-step decision tree: - Who initiates the project? Fiscal impacts vary depending on the public entity responsible (central or local government, state-owned enterprises). - Who controls the asset? Standardized questions inform whether government control implies on-balance-sheet treatment and impacts fiscal indicators. - Who ultimately pays for the asset? Three funding alternatives: (1) government pays using public funds (periodic payments); (2) private sector collects fees directly from users (tolls); (3) combination of (1) and (2). - Does the government provide additional support to the private partner? Includes guarantees (debt and minimum revenues), equity injections, tax amnesties, etc. - PFRAM outputs (automatically generated after data entry): - Project cash flows over whole life cycle. - Fiscal tables and charts on a cash and accrual basis (government cash statement, income statement, balance sheet). - Debt sustainability analyses with and without the PPP project. - Sensitivity analyses of main fiscal aggregates to changes in macroeconomic and project-specific parameters. - Outputs can be compared to country-specific reporting standards to evaluate conformity with best practices. ### PFRAM application: Barbados solid waste management PPP (Box 11) - In 2009 Barbados signed a 20-year build, own, operate, and transfer agreement for a solid waste management facility; GoB provided land; private partner invested in site improvements and equipment and runs the site. - GoB agreed to pay a tipping fee per ton of acceptable waste, adjusted by price index, and guaranteed minimum monthly and annual tonnage. - PFRAM assessment required additional inputs beyond the contract; some inputs were derived from other sources (Inter-American Development Bank study; transfer value in contract; assumed operation and maintenance costs; financing split assumptions; financing cost industry and risk assumptions). - Key quantitative findings from the PFRAM assessment: - Expected impact of the project on overall government finances was relatively small with an increase in the overall debt level of less than 1.5 percent of GDP at any given time of the project lifecycle. - The contingent liability from the revenue guarantee amounted to about 5 percent of GDP at the beginning of the project. - PFRAM limitations: not all risks can be modeled; upside risks include compost sales revenues and carbon credit sales (benefiting government); downside risks include unforeseen surge in demand for waste disposal and higher amounts of nonacceptable waste which would raise government costs. ### Accounting and statistical treatment of PPPs (Box 12) - IPSAS 32: - Prescribes that PPP asset, liability, and their costs and revenues are recorded on government accounts if the PPP asset is regarded as a public asset. - A PPP asset is public if the public entity controls the asset (government controls or regulates services, access, and price) and controls any significant residual interest at the end of the arrangement. - Under IPSAS 32 most PPPs would be treated on-balance sheet; fiscal implications of PPPs are similar to traditional procurement once asset treated on-balance sheet. - Government Financial Statistics Manual 2014: - If the government bears most of the project’s risks and rewards related to the asset, PPPs are included in fiscal deficit and gross debt. - Assessment considers a complete risk matrix including acquisition risks (design and construction) and usage risks (supply, demand, availability, residual value, obsolescence). - Government-funded PPPs are mostly treated the same as under IPSAS 32; treatment of user-funded PPPs is less clear and requires detailed risk allocation assessment. - National practices should ensure consistent on- or off-balance-sheet treatment even if not fully aligned with international standards to safeguard consistency and transparency. ### Challenges implementing accrual accounting (Box 13) - Move to accrual accounting modernizes Treasury/accountant general functions; weaknesses likely to delay implementation include: - Staff capacity: limited professionally trained staff in ministry of finance, Treasury/accountant general’s office, and line ministries; large capacity-building efforts needed. - Timely financial statements: some countries lack audited financial statements from the previous year; delays often due to Treasury functions—unreconciled below-the-line accounts, unreconciled revenues and cash deposits, and expenditure arrears. - Consolidated reporting: many financial statements cover the consolidated bank account only and omit significant activities outside that account; scope must expand to central government and eventually whole public sector. - Balance sheet: accruals require incorporating additional asset and liability classes; initial coverage often via disclosure notes with a detailed transition plan coordinated across government. - Chart of accounts: cash-basis charts need updating; some countries have prepared Government Financial Statistics Manual–compliant charts but implementation is stalled due to need to reconfigure financial management information systems. ### Managing PPP fiscal exposure: ceilings and measurement - Ceilings should cover both stock and annual flow of PPPs: - A flow ceiling on annual PPP-related payments helps ensure budget affordability on an annual basis. - A stock ceiling on overall PPP program size helps limit government exposure and prevent circumvention of the flow ceiling (for example, by pushing payments further into the future at higher fiscal cost). - The PPP program size should be measured by an unambiguous measure that captures fiscal risks as far as feasible (for example, capital investment under contracts or sum of known government obligations and a simple measure of contingent liabilities). - Assessment of maximum PPP program size should be guided by the medium-term budget framework and a debt sustainability analysis, incorporating government payments under PPP contracts and contingent claim scenarios. - Example of a statutory ceiling: - United Kingdom: Payments in PPPs are limited to £70 billion over the five-year term of the current parliament, or £14 billion a year on average. *Source: IMF staff and sources cited within the excerpt.* ### 0.8 percent of the GDP of the first year of the Parliament. In addition, some PPPs in ### Box 14. International Experience of Limits for Government Exposure to Public-Private Partnerships ### Country Examples of Limits on Government Exposure - United Kingdom: some PPPs are treated as on balance sheet in the measure of the debt that is subject to fiscal targets. - Hungary: The Public Finance Act limits the nominal value of new long-term commitments to 3 percent of total state budget revenues in any given budget year. - India: The State of Karnataka limits the stock of guarantees at the beginning of the financial year to 80 percent of the government’s revenue two years before. - Brazil: The PPP law sets a ceiling on current spending from PPP contracts of 1 percent of net current revenue applicable to all levels of government. New subnational PPP commitments cannot be guaranteed by the federal government if (1) existing commitments already amount to 5 percent of net current revenue or (2) the new contract would entail commitments more than 5 percent of net revenues at any time during the forthcoming 10 years. - Peru: The net present value of the government’s explicit spending and guarantees in PPPs is limited to 12 percent of GDP; the limit also takes account of revenue the government may derive from revenue-sharing arrangements in concessions. - El Salvador: Similar limit set at 3 percent of GDP. - Honduras: Similar limit set at 5 percent of GDP. - Other approaches: Some governments set limits on total government debt and government-guaranteed debt, which include government explicit guarantees on PPPs. Examples include Indonesia, Jordan, Poland. Turkey sets similar limits on guarantees and on-lending in the coming year in each year’s budget. ### Key Finding - International practice varies: explicit PPP exposure ceilings (percent of GDP or revenue), ceilings on PPP-related current spending, and broader debt/guarantee limits that capture PPP exposure. *Source: IMF staff.* --- ### Box 15. Sharing Contractual Risks in Public-Private Partnerships to Minimize Fiscal Costs and Risks ### Risk Allocation Principles - Investors and lenders price risk based on the risk distribution matrix between parties; government must accept some risks or pay more to transfer risks to the private party. - Good project preparation and detailed studies (e.g., geological, revenue estimates) reduce uncertainties and lower the premium on risk transfer. - The only method to reduce the cost of the premium is to have the risk borne by the party that is better able to manage it at the lowest cost. ### Four Main Risk Categories - External risks to both partners: - Examples: inflation risk, interest rate risk, major technological change. - Mitigation: swaps for interest rate risk; private partner insurance where available. - Risks associated with tasks under the public authority’s responsibility: - Examples: land acquisition, rights-of-way, environmental and social consequences, unilateral public authority decisions (early termination), changes in law, governance risks. - Mitigation: government prepares and acts early; typically compensates private partner if risks materialize. - Risks associated with the private partner’s tasks: - Examples: studies, construction work, service performance, maintenance, operation. - Mitigation: public authority selects qualified private partners with needed capacities. - Risks that are often shared: - Examples: revenue risk for user-funded PPPs, licenses required to start construction, cost of supplying raw materials, financing cost. *Source: IMF staff.* --- ### Box 16. Fiscal Risk Matrix of Jamaica Highway 2000—Phase I ### Summary Assessment - The PFRAM risk matrix guided assessment after the project was in operation; most risks did not materialize and were assessed as having a low likelihood. - Risk allocation in the PPP contract was partly public, partly private, and partly shared; allocation aligned largely with common practice. - Two risks were rated “medium” likelihood and medium potential fiscal impact with no mitigating measures in place: Financial risk and Renegotiation risk — both suggested as high priority for action. - The financial risk materialized during implementation and required government intervention: after commercial closure the private party faced financing delays and the government assisted with raising initial financing. ### Table 4. Risk Matrix for Highway 2000 — Key entries (selection) - 1 Governance risks — Allocation: Public; Likelihood: Low; Impact: Medium; Risk Rating: Low; Mitigation Strategy: NO; Priority Action: Medium priority - 2 Construction risks — Allocation: Shared; Likelihood: Low; Impact: Medium; Risk Rating: Low; Mitigation Strategy: YES; Priority Action: Low priority - 3 Demand risks — Allocation: Private; Likelihood: Low; Impact: Low; Risk Rating: Irrelevant; Mitigation Strategy: YES; Priority Action: NO action required - 5 Financial risks — Allocation: Shared; Likelihood: Medium; Impact: Medium; Risk Rating: Medium; Mitigation Strategy: NO; Priority Action: High priority - 10 Renegotiation — Allocation: Public; Likelihood: Medium; Impact: Medium; Risk Rating: Medium; Mitigation Strategy: NO; Priority Action: High priority *Sources: Jamaican authorities; and IMF staff.* --- ### Concluding Remarks — PPPs in the Caribbean Region ### Current situation and infrastructure needs - Access to infrastructure in Caribbean countries is high relative to comparator countries in Asia and Africa and has improved substantially in almost all sectors; however, the quality of existing infrastructure has suffered in recent years. - High-quality infrastructure is critical for promoting the tourism industry, a key sector to catalyze economic growth in the region. ### Role and risks of PPPs - PPPs can help address financing constraints by crowding in foreign financing and increasing efficiency through private sector cooperation. - Key caveat: PPPs do not provide infrastructure or services for free — fiscal costs fall on government or users. - Firm fiscal commitments from PPPs may limit budget flexibility and jeopardize fiscal sustainability if PPPs are used to bypass budgetary controls and fiscal constraints. - PPPs implemented outside budget processes can crowd out other high-priority spending and create contingent liabilities even when long-term commitments are considered. ### Prerequisites and public financial management features to reap PPP benefits without jeopardizing fiscal sustainability - (1) A high-quality public investment process ensuring projects are properly assessed and selected according to government policy priorities. - (2) All public investment projects, including PPPs, handled through the same project process to ensure a level playing field. - (3) Full integration of the public investment process with the budget process to ensure decisions are taken in the context of the country’s fiscal framework. - (4) A competitive procurement process for all public investment projects, including unsolicited proposals. - (5) A legal framework that assigns clear roles and responsibilities. - (6) An institutional framework that empowers the minister responsible for public finances to stop projects that are not affordable. - (7) A comprehensive risk management framework. - (8) Transparent accounting and reporting arrangements providing information on the long-term implications of all investment projects, including PPPs. ### Observations on regional practices and reforms - Many Caribbean countries have relatively well developed public investment management, but PPPs are often handled in a parallel process and not covered under this framework. - In most countries, multiyear commitments for long-term projects do not exist and fiscal implications of such projects are not properly reflected in budget documents. - In several countries, the minister of finance lacks the power to stop an unaffordable PPP project. - Many countries do not have a framework for assessing and managing fiscal risks; only some frameworks include PPPs. - Most countries use cash or modified cash accounting and do not publish sufficient additional information to provide a clear picture of fiscal implications of ongoing PPP projects. - Public finance management reforms are underway in several countries with IMF and Caribbean Regional Technical Assistance Center support; several countries plan or are in the process of introducing accrual accounting standards. - Examples of recent reforms: The Bahamas recently approved a fiscal responsibility law; Barbados is preparing a new public finance management law. - Interest in fiscal risk management increased after recent natural disasters; IMF and Caribbean Regional Technical Assistance Center have intensified capacity-building efforts. --- ### Appendix I. Natural Hazards Impacting Caribbean Region, 1988–2012 — Selected entries - Hurricane Gilbert, 1988 — Category 5 — Estimated Cost: US$ 1.1 billion, 65% of GDP — Country: Jamaica - Hurricane Hugo, 1989 — Category 5 — Estimated Cost: US$ 3.6 billion, 200% of GDP for Montserrat — Countries: Antigua and Barbuda, St. Kitts and Nevis, Montserrat, British Virgin Islands - Tropical storm Debby, 1994 — Estimated Cost: US$ 79 million, 18% of GDP — Country: St. Lucia - Hurricanes Iris/Marilyn/Luis, 1995 — Iris (cat. 3–4), Marylin (cat 1), Luis (cat. 3) — Estimated Cost: US$ 700 million — Countries: Anguilla, Antigua and Barbuda, Dominica, Montserrat, St. Kitts and Nevis - Hurricane Georges, 1998 — Category 3 — Estimated Cost: US$ 450 million (not including Dominica) — Countries: Antigua and Barbuda, Dominica, St. Kitts and Nevis - Hurricane Tomas, 2010 — Category 2 — Estimated Cost: US$ 336 million, 43% of GDP (St. Lucia); US$ 49.2 million, 10.5% of GDP (St. Vincent and the Grenadines) - Earthquake, 2010 — 7.3 Richter scale — Estimated Cost: US$ 8 billion — Country: Haiti *Source: Caribbean Development Bank.* --- ### Appendix II. Survey Results — Selected institutional findings (aggregate counts) - Total number of replies on survey (table sections imply varying totals up to 15 respondents). - I. Institutional and Legal Framework: - Does your country have a specific law for PPPs? — Yes: 2; No: 14 - At what stage(s) does the Ministry of Finance intervene in the PPP process? Project selection: Yes: 8; No: 6. Tender preparation: Yes: 7; No: 5. Contract negotiation: Yes: 8; No: 4. Contract renegotiations: Yes: 8; No: 4. Change in scope (contract extension): Yes: 8; No: 4. - Do PPP rules give the Minister of Finance veto power on affordability or debt sustainability? — Yes: 4; No: 9. - Is there a PPP unit? — Yes: 5; No: 11. - Is there a cabinet/high-level steering committee for decision making at key milestones? — Yes: 13; No: 3. - II. Framework for Government Support to PPPs: - Are there clear criteria for assessing budget affordability? — Yes: 11; No: 5. - For assessing debt sustainability? — Yes: 10; No: 6. - For assessing value-for-money? — Yes: 5; No: 9. - For assessing fiscal risks? — Yes: 5; No: 10. - Are there clear criteria for instruments the government can use? Providing grants: Yes: 11; No: 3. Providing loans: Yes: 12; No: 3. Providing equity: Yes: 5; No: 6. Government guarantees: Yes: 8; No: 5. Availability payments: Yes: 4; No: 7. - Are there caps on direct funding/financing support? — Yes: 4; No: 9. - Is there a separate fund/budget account supporting PPP commitments? — Yes: 1; No: 14. - Has the government financially supported any PPPs? — Yes: 8; No: 7. Instruments used (selected): Grants: Yes: 6; Loans: Yes: 4; Equity: Yes: 1; Government guarantees: Yes: 4; Availability payments: Yes: 2. - III. Framework for Managing Fiscal Risks: - Is there a law/regulation/policy that mandates assessment/measurement/monitoring/management of fiscal risks? — Yes: 6; No: 10. - If yes, formats reported include Law and Regulation and Policy across respondents (aggregate counts vary by format). *Note: Appendix II contains detailed country-by-country survey tables.* *Source: IMF staff.* ### Appendix II. ### Appendix II. ### Integration of PPPs in Fiscal Risk Management - Question 12: "Are PPPs integrated in the overall fiscal risks management framework?" — aggregate responses: Ye s / No (aggregate counts not explicitly summarized). - Question 13: "If no, is there a separate framework for managing fiscal risks related to PPPs?" — responses shown as No across surveyed jurisdictions (aggregate counts not explicitly summarized). - Question 14: "Do you quantify the impact of PPPs on debt sustainability?" — aggregate visible responses: Ye s / No (aggregate counts not explicitly summarized). - Question 15: "Does any entity have the responsibility of signing-off fiscal risks before project approval?" — aggregated counts shown as Ye s: 7, No: 7. - If yes, which entity has sign-off responsibility (Question 15.1–15.5): - 15.1 Budget office — Ye s: 4, No: 0 - 15.2 PPP unit — Ye s: 3, No: 1 - 15.3 Debt management office — Ye s: 5, No: 1 - 15.4 Economic planning office (or similar) — Ye s: 3, No: 2 - 15.5 Contracting agencies — Ye s: 1, No: 2 - Question 16: "Does the framework include an assessment of fiscal risks at the key project stages?" — aggregate stage responses: - 16.1 Project selection — Ye s: 7, No: 5 - 16.2 Tender preparation — Ye s: 5, No: 4 - 16.3 Contract negotiation — Ye s: 7, No: 2 - 16.4 Contract renegotiations — Ye s: 7, No: 2 - 16.5 Change in scope (contract extension) — Ye s: 8, No: 1 ### Budgeting Framework for PPPs - Question 17: "Is there a medium-term plan for government wide public investment and infrastructure priorities?" — Ye s: 15, No: 0. - 17.1 "Are PPPs integrated in this medium-term plan?" — Ye s: 5, No: 9; other responses include: - "Yes, but only loosely" - "Yes, priorities or financially viable" - 17.2 "Does the plan take into account budgetary constraints?" — mixed categorical responses recorded (examples preserved verbatim): - "Yes, priorities or financially viable" - "Yes, but only loosely" - "No" - Question 18: "Is there a medium-term budget framework that projects resources and expenditures over a period of three to five years or more?" — Ye s: 15, No: 1. - Question 19: "Do budget documents include full information on public investment projects and PPPs, including over 3 to 5 years?" — Ye s: 5, No: 11. - Question 20: "Does the parliament approve multiannual commitments as part of the budget process?" — Ye s: 5, No: 10. - Question 21: "Do recurring government payments, such as payments relating to PPPs, require annual legislative approval?" — Ye s: 7, No: 4. - Question 22: "Is there any type of binding ceilings for the total volume of PPPs, either on the total stock of PPPs or on the annual expenditure on PPPs specified in law or regulations?" — Ye s: 2, No: 11. - If yes: - 22.1 Ceiling on total volume of PPP contracts (stock) — Ye s: 1, No: 6 - 22.2 Ceiling on total annual expenditure under PPPs (flow) — Ye s: 0, No: 7 ### Accounting Framework for PPPs - Question 23: "What kind of accounting standards are used for central government accounting?" — responses recorded across Cash, Modified cash, Accruals; aggregate counts: Modified cash: 7, Cash: 6, Accruals: 2. - 23.1 "If in accruals, which standard are you applying?" — IPSAS standards: 2, Other accruals standards: 1. - Question 24: "Are you producing a government balance sheet?" — Ye s: 9, No: 6. - 24.1 "If yes, are PPP assets and liabilities accounted for on the government balance sheet?" — Ye s: 3, No: 5. - Question 25: "For accounting for PPPs, which criterion are you applying to PPPs?" — responses include "Economic control", "Majority of risks born by the government", "Other" with aggregate counts shown as 0, 2, 2 respectively. - Question 26: "Are the following PPPs on balance sheet?" - 26.1 Government funded PPPs — Ye s: 4, No: 7. - 26.2 User funded PPPs — Ye s: 1, No: 9. - Question 27: "Does the framework clearly enunciate the treatment of fiscal risks arising from state-owned enterprise PPPs?" — Ye s: 4, No: 6. - If yes: - 27.1 For subnational level — Ye s: 1, No: 2 - 27.2 For state-owned enterprise — Ye s: 4, No: 1 - Question 28: "Is the information on fiscal risks available in the public domain?" — Ye s: 4, No: 8. - 28.1 "If yes, how is it published?" — recorded forms include "In the form of a Fiscal Risk Statement", "As part of the annual debt statement", "As part of BD/note to BS", "As part of DBS", and other formats; counts per format shown (examples preserved): 2, DBS, As part BD/note to BS, In the form of a Fiscal Risk Statement. - Question 29: "Is there provisioning for unexpected losses arising from contingent liabilities in the form of a readily accessible account in the budget or a fund such as a contingency fund or a specially created fund?" — Ye s: 4, No: 9. ### Statistical Framework for PPPs - Question 30: "Which statistical standards are you using for the public sector?" — responses include GFSM 2010–2014 and GFSM 1986; aggregate counts shown as 3 and 7 in the table header context. - Question 31: "Are you producing the government balance sheet?" — Ye s: 5, No: 6. - 31.1 "If yes, are PPPs included?" — Ye s: 2, No: 3. - Question 32: "Are PPPs accounted for in the following headline fiscal indicators?" - 32.1 Fiscal deficit — Ye s: 3, No: 6. - 32.2 Public debt — Ye s: 3, No: 6. ### Transparency and Disclosure - Question 33: "Are PPPs required to be audited by the supreme audit institution?" — Ye s: 4, No: 8. - Question 34: "Does the supreme audit institution publish the findings?" — Ye s: 6, No: 5. - Question 35: "Does the supreme audit institution have adequate capacity and skills to undertake PPP audits?" — Ye s: 3, No: 5. - Question 36: "Have there been prior audits of PPP projects?" — Ye s: 3, No: 6. - Question 37: "What are the audits focusing on? [multiple answers possible]" — aggregate counts: - 37.1 Financial audits — Ye s: 6, No: 1. - 37.2 Performance audits — Ye s: 5, No: 1. - 37.3 Forensic audits — Ye s: 2, No: 3. - Question 38: "Is there a proactive disclosure/transparency law and/or policy?" — Ye s: 3, No: 5. - If yes: - 38.1 "Does it cover PPPs?" — Ye s: 2, No: 2. - 38.2 "Is it fully implemented?" — Ye s: 1, No: 3. *Source: IMF regional survey on PPP practices (Appendix II).* --- _Source: https://www.imf.org/-/media/files/publications/dp/2019/english/pppcrrbmfrea.pdf_