## mrbpppiea ## Source details **Canonical URL:** [mrbpppiea](https://www.imf.org/-/media/files/publications/dp/2021/english/mrbpppiea.pdf) ## Other formats - [Markdown version](/-/media/files/publications/dp/2021/english/mrbpppiea.pdf.md) - [Structured JSON version](/-/media/files/publications/dp/2021/english/mrbpppiea.pdf.json) --- ### Executive Summary — Infrastructure needs and PPP role - Investment in infrastructure can drive economic recovery from the COVID-19 pandemic; needs were large pre-pandemic and have become more urgent to ensure basic public services, create jobs, foster inclusive growth, and enable greener, resilient, and digital infrastructure. - Public resources alone will unlikely meet demand; private sector must supplement public investment. - PPPs may play a role in post-COVID-19 recovery in sectors such as health systems, water and sewerage, low-carbon technologies, transport services, and digital infrastructure. ### Executive Summary — Benefits, trade-offs, and fiscal illusion - Potential benefits of well-designed PPPs: - Mobilize additional sources of funds. - Bring private-sector management capacity and incentives for higher-quality infrastructure. - Allow governments to focus on outputs/performance and potentially identify project costs more transparently. - Key trade-offs and costs: - PPPs usually bring higher financing costs. - Require more complex tendering and careful contract management. - Expose governments to significant fiscal risks linked to long contractual terms. - Fiscal illusion: - Long-term PPP cashflow profiles can create an illusion of additional fiscal space by eliminating short-term budget outflows in exchange for future payments or foregone user-fee income. - Off-budget and off-balance sheet accounting magnify the illusion. - Parallel, non-integrated project-assessment and development processes compound fiscal illusion. ### Executive Summary — Sources of fiscal risk and policy priorities - Main fiscal risk sources: - Contractual risks explicitly accepted in PPP contracts. - Implicit contingent liabilities from poorly designed contracts or unsustainable projects. - Governance shortcomings in project selection, procurement, and capacity. - Behavioral/political factors: optimism bias, political interference, frequent renegotiations, unsolicited proposals. - Post-COVID-19 reassessment actions: - Adjust investment plans to new needs; distinguish short-term needs from long-term PPP-suitable needs. - Reassess government risk tolerance; strengthen communication with private developers. - Review existing appraised project pipelines and PPP suitability. - Consider new PPP contractual structures tailored to changed risk appetites. - Implementation priorities: - Build institutions and capacities to manage long-term fiscal implications. - Integrate public investment management and PPP appraisal within one framework. - Use PPPs selectively where private incentives improve value for money and service quality. *Source: Executive Summary of IMF departmental paper "Mastering the Risky Business of PPPs in Infrastructure" (Executive Summary section).* ### Introduction — Benefits and conditions for PPP success - Benefits of PPPs: - Credible guarantee of on-schedule implementation; relieve pressure on overstretched public finances; deliver whole-life-costing and maintenance incentives; mobilize additional funds without upfront government capital outlay (but create long-term government commitments). - Effective implementation due to (1) whole-project financing agreed in advance, (2) private partner incentives to complete construction to recover costs, and (3) comprehensive bidder costing at tender. - Limits and prerequisites: - Private finance does not by itself reduce the funding gap; success requires a credible funding plan per project and a consistent infrastructure funding policy. - Unrealistic expectations of PPPs solving funding shortfalls have caused fiscal burdens in cases such as Vasco da Gama bridge, Johannesburg–Pretoria highway, Skye bridge, and South Korea highways. ### Introduction — Risk allocation, project risks, and bundling - Risk allocation principle: allocate to private partner risks it can manage better to reduce fiscal risks for government, but long-term contracts introduce exposure to economic, technological, demographic, and preference changes. - Common construction risks (explicit fiscal risk if private partner cannot cope): land/resettlement, urban licensing, environmental risks, geology, design errors, cost of inputs, force majeure. - Common operation risks (explicit fiscal risk when private partner cannot cope or public partner pressured): demand, regulation of user fees, maintenance, changes in law, force majeure, renegotiation (renegotiation often increases costs and risks borne by public partner). - Procurement and bundling: - Separate contracts for design, construction, equipment, maintenance reduce single-vendor dependency but increase government management burden. - Bundling into a single PPP contract reduces government management burden but requires long-term contracts and private finance to be efficient—dependent on competitive tendering and effective contract management with KPIs and enforceable penalties. - Asset maintenance and contract duration: - PPPs typically long-term (often 25 years or more) to encompass maintenance and preserve incentives for service performance. ### Introduction — Funding models and legal classification - Funding models: - Government-funded: availability payments or payments per volume. - User-funded: users pay fees; government may subsidize or guarantee debt/revenue. - Hybrids of the two are common. - PPP definition: long-term contract where a company invests in an asset to provide services and must satisfy performance criteria; at contract end, asset usufruct typically reverts to government. ### Box 1 — Main characteristics, fiscal illusion, and contractual contingent liabilities - Financing and administrative costs: - PPP financing costs usually higher than traditional public investment due to private-sector access to higher-cost financing and project-specific financial risk; higher costs can be justified by superior management and service quality. - PPPs require specialized, often costly, tendering and contract management; mitigation includes contract standardization and central PPP expertise. - Fiscal illusion mechanisms: - Cash accounting and asset recognition that treat PPP assets as “private” can hide liabilities and create perception of “infrastructure for free”. - IPSAS 32 and whole-project-cycle analysis reduce but do not fully eliminate fiscal illusion if PPPs are treated as private assets. - Contractual and contingent liabilities examples to watch for: - Minimum revenue guarantees, exchange-rate coverage, debt guarantees, compensation for input-price variations, early termination compensation, legal disputes, and asset condition at termination. - Behavioral and governance risks: - Optimism bias (underestimated costs, overestimated revenues), frequent renegotiation favoring private operators, and unsolicited proposals that bypass competition increase fiscal and governance risks. - PPPs by subnational governments or public corporations increase central-government implicit liabilities via moral hazard and capacity constraints. ### Box 2 — Asset recognition: control vs. risks-and-rewards - Recognition approaches: - IPSAS-32 (2011) control approach: asset included in government accounts when public partner controls utilization, users, and payments. - GFSM 2014 / SNA 2008 risks-and-rewards approach: asset included if public partner bears majority of risks and rewards (economic owner). - Practical divergence: - Control approach easier to apply and tends to classify most PPP assets as public. - Risks-and-rewards approach can be manipulated via narrow risk assessment and has led to exclusion bias in some jurisdictions (notably Eurostat guidance). - Contingent liabilities management: - Contingent liabilities can be optimal for risks better managed by government but must be assessed by probability and fiscal impact. - Key triggers: minimum revenue guarantees; termination events (bankruptcy, underperformance, nationalization, extreme force majeure). - Country practices include close monitoring during construction, PPP fiscal-risk teams in finance ministries, and specific legal/administrative provisions to manage termination and operation continuity. - Demand risk and remuneration: - When demand risk is high, availability-payment structures conditional on performance indicators can be preferable to user-revenue risk transfer. - Social risks: remunerating by utilization can create perverse incentives (example: PPP prisons); best practice often favors availability-based payments. ### Box 2 — Empirical evidence on cost and revenue biases - Cost overrun evidence (traditional public projects): - Flyvbjerg (2003): 24 percent cost overrun in roads and 40 percent in railways (sample of 1,603 projects, 17 countries). - Sovacool, Gilbert, and Nugent (2014): average 66 percent cost overrun in 401 energy projects; 71 percent for hydroelectric dams; 117 percent for nuclear reactors. - Notable anecdotes: Big Dig (Boston) 478 percent cost overrun; Forrest Highway (Australia) final cost more than five times initial promises. - PPP cost uncertainty: - PPPs tend to lower measured cost overruns at contract stage due to financier due diligence and robust tender estimates: - Duffield, Raisbeck, and Ming Xu (2008) in Australia: 25 PPP projects had 4.3 percent cost overruns from contractual commitment to final outcome; 42 traditional projects had 11.4 percent. - Counterexamples exist (Eurotunnel ~100 percent overrun). - Conclusion: PPPs are not consistently cheaper, but contracting-stage cost estimates are generally more reliable. - Revenue optimism examples and fiscal calls: - Minimum revenue guarantees have been called in projects such as Evergreen light rail, Busan metro, Gautrain; Spain’s Radiales highways had demand at about 20 to 30 percent of initial expectations leading to government asset purchases. - Mexico bought highway concessionaire assets in 1997 taking about $7.7 billion in debt. - Mitigation requires independent due diligence and conservative demand forecasting. ### Box 2 — Renegotiation and unsolicited proposals - Renegotiation patterns: - Frequent and costly renegotiations common (Chile, Colombia, India examples); renegotiations often favor operators due to information asymmetry and political pressure. - Colombia experienced about one renegotiation per year per road contract with renegotiation volume trebling before caps were imposed. - India faced a mid-2010s wave of arbitrations affecting roughly 100 road contracts. - Unsolicited proposals: - World Bank (2018) and country cases show unsolicited proposals often delay projects and frequently do not deliver infrastructure (examples: roads in Ghana; hydro dams in Albania; airports in the Philippines). - Responses include disallowing unsolicited proposals or applying strict legal frameworks and independent review (examples: State of Victoria, Commonwealth of Virginia, South Africa). - Korea revised its framework to disallow minimum revenue guarantees for unsolicited proposals after adverse outcomes. ### Box 2 — Cross-governmental risks and examples - Subnational/public corporation PPPs can create central-government implicit liabilities: - Turkey: central government guarantee executed for Izmit Su A.S. disbursing more than $2 billion until 2014. - Korea Yongin Rapid Transit arbitration required compensation of 453 billion won (about 40 percent of the city’s annual budget). - Portugal, Brazil, South Africa, and others faced central-government bailouts or support tied to subnational PPPs. - Power-purchase agreements and take-or-pay schemes by public corporations can create undisclosed overexposure, pressuring central budgets as supply increases. ### Box 10 — Gateway process and MoF fiscal risk function - Fiscal illusion mitigation: - Treat PPPs equivalently to traditional public procurement under accrual accounting and statistics so both increase deficit and debt during construction. - Gateway process design: - Ministry of Finance (MoF) should be empowered to stop/suspend projects at any stage if fiscally unaffordable or excessively risky. - MoF should review early-stage pre-feasibility/feasibility, budget inclusion, call-for-tender documentation, contract before signing, and any contract changes during construction/operation. - Generic gateway phases include Phase 1 Pre-feasibility, Phase 2 Feasibility, Phase 3 Budget preparation, Phase 4 Call for tender, Phase 5 Tender and contract definition, Phase 6 Construction and operation (see detailed tasks per phase). - PPP fiscal risk management function in MoF: - Centralized, proactive unit with legal mandate and technical skills; PFRAM 2.0 is a recommended analytical resource. - Assess individual projects and overall PPP portfolio; apply whole-life-cycle and portfolio approaches given risk correlations with macro variables (GDP, inflation, nominal exchange rate). - Implementation options: specialized units or existing departments; governance trade-off between thoroughness and operational speed. - Examples of aggregate limits: - UK: PPP-related payments limited to £70 billion across a five-year period from fiscal year 2015–16 (£14 billion a year on average), amounting to 0.8 percent of the GDP in the first year of the limit. - Brazil: federal PPP law ceilings on current spending from PPPs initially 1 percent of net current revenue (2004), raised to 3 percent (2009) and 5 percent (2012); new subnational PPP commitments cannot be guaranteed by federal government if existing commitments already 5 percent of net current revenue or if new contract would exceed 5 percent of net revenues during forthcoming 10 years. - China: PPP fiscal liabilities allocated from local government budgets shall not exceed 10 percent of annual expenditure; if liabilities exceed 10 percent, no new PPP project can enter Project Management Database. - Peru: limit on present value of total fiscal commitments to PPPs (excluding governmental finance entities) shall not exceed 12 percent of GDP; Presidential decree can revise this every three years. - State of Karnataka, India: limit stock of guarantees at beginning of financial year to 80 percent of government’s revenue two years before. - Periodic review examples: - Portugal canceled high-speed rail program in 2011 during fiscal crisis. - France replaced PFI with PF2 and later abandoned PF2; audits led to legal bans on PPP procurement for hospitals in some cases. - Indonesia relaunching highway PPP program on improved model; Colombia periodically updates contractual risk allocation matrices. ### Box 10 — Transparency, legal framework, and good practices - PPP fiscal transparency recommendations: - Ensure PPPs affect deficit and debt measures like traditional procurement; integrate PPPs into budget process and medium-term frameworks. - Under accrual accounting, include PPP assets and corresponding liabilities on government balance sheet per IPSAS-32 and GFSM 2014 guidance to eliminate fiscal illusion. - Publish baseline forecasts of government payments/receipts under PPPs with long-term fiscal projections (examples: Portugal and the United Kingdom publish forecasts up to 2060). - Disclose sovereign guarantee stocks and assess likelihood of calls (examples: Chile reports and analyses guarantee risks; Colombia discloses contingent liabilities in medium-term fiscal framework reports). - Legal framework design: - Ensure legislative consistency across PPP norms, public investment management, procurement, budgetary framework, and governance norms. - Adopt contract standardization to improve efficiency and transparency; standard clauses should cover performance monitoring, change orders, force majeure, change in law, dispute resolution, refinancing, termination, and hand-back rules, including temporary emergency regimes. - Prohibit or tightly regulate unsolicited proposals; if allowed, require independent review and open competitive tendering. - Provide MoF/Finance Minister clear legal mandates and authority to manage fiscal costs/risks (approval rights for project selection, draft contracts, deviations, award, and renegotiation) and require information provision from entities and SOEs. - Country gateway safeguards: - South Africa: four-stage gateway with central oversight and approval responsibilities for local government PPPs. - Portugal: UTAP (MoF PPP unit) reviews PPPs; Finance Minister approves stages and must be involved in renegotiations. - France: requirement to prepare fiscal impact and fiscal risk evaluation over lifecycle (évaluation de la soutenabilité budgétaire—ESB) with Budget Department review and veto power. ### Box 11 — PFRAM 2.0, limits, reporting, and standardization - PFRAM 2.0: - Developed by IMF and World Bank; launched in April 2016. - Analytical tool to assess potential fiscal costs/risks from PPP projects and portfolios (up to 30 projects), perform scenario analysis (GDP, inflation, nominal exchange rate), and compare contract structures and funding options. - Available in English, Spanish, and French with a user manual; does not substitute for complete project financial assessment. - Limits on PPP exposures: - Limits should use unambiguous measures of fiscal exposure and be guided by medium-term frameworks and debt sustainability analysis. - Examples of flow limits and stocks provided (UK, Brazil, China, Peru, State of Karnataka). - Reporting, budgeting, and accounting practices: - Principle: PPP-related nonfinancial assets should be recognized equally across budget, financial statements, and government statistics; treat underlying asset as public asset to reflect fiscal impact. - Budgeting practices: - Address challenges of future/contingent PPP costs by integrating PPPs into MTBFs and using contingency lines or contingency funds. - Examples: State of Victoria (budget capitalization at outset), Colombia (contingency fund cash transfer upon PPP signing), Chile (budget line for guarantee costs). - Accounting: - IPSAS-32 (2011) sets accrual criteria—most PPPs treated as on-balance-sheet under IPSAS-32. - Many countries aligned national standards to IPSAS-32 (Australia, New Zealand, United Kingdom, Turkey). - GFS and national accounts: - GFSM 2014 / SNA 2008 criteria may differ from IPSAS-32, causing different implementations; Eurostat rule-based approach historically led many PPPs off-balance-sheet. - Reporting innovations: - Chile: expanded annual contingent liabilities report since 2016. - Portugal: UTAP publishes quarterly PPP data including time profile of expected future payments for existing portfolio. - Philippines: annual Fiscal Risk Statement covering PPP contingent liabilities. - China: National PPP Integrated Information Platform requires project registration and public disclosure. - Standardization: - Countries with standardized PPP contracts/provisions: South Africa, South Korea, United Kingdom, India (model concession agreements for ports). *Source: IMF Infrastructure Governance.* ### Executive Summary ������������������������������������������������������������������������������������������������������ ### Executive Summary ### Infrastructure needs and the role of PPPs - Investment in infrastructure can be a driving force in the economic recovery from the COVID-19 pandemic. - Investment needs were large before the pandemic and have been made more urgent by the need to ensure quality delivery of basic public services such as health and education, create jobs, foster inclusive growth, and facilitate economic transformation with greener and more resilient infrastructure and accessible digital platforms. - Public resources alone will unlikely meet the demand; the private sector will be called on to supplement the public sector to reach investment objectives. - PPPs may play a role in post-COVID-19 recovery, including in key strategic sectors such as health systems, water and sewerage, low-carbon technologies, transport services, and digital infrastructure. ### Benefits and inherent trade-offs of PPPs - Potential benefits of well-designed and properly implemented PPPs: - Mobilize additional sources of funds. - Bring private-sector management capacity and incentives to deliver and maintain higher-quality infrastructure. - Allow governments to focus on outputs and performance levels and potentially identify project costs more transparently. - Key trade-offs and costs: - PPPs usually bring higher financing costs. - Require more complex tendering and careful contract management. - Expose governments to significant fiscal risks linked to contractually accepted risks and changes over long contractual terms. ### Fiscal illusion associated with PPPs - The long-term nature of PPPs and different time-profile of government cashflows generate an illusion of additional fiscal space. - The illusion arises from elimination of short-term budget outflows in exchange for future payments or foregone income from user fees. - The illusion is magnified when off-budget and off-balance sheet accounting practices make it difficult to perceive the full extent of liabilities incurred with PPPs. - Non-integrated, parallel project-assessment and development processes can prevent a level playing field for project approval and compound fiscal illusion. ### Main sources of fiscal risk from PPPs - Fiscal risks originate from multiple sources: - Contractual risks: risks explicitly accepted in PPP contracts that may materialize over long terms. - Implicit contingent liabilities: risks created by poorly designed contracts, projects without financial sustainability, or promises that lead to future government payments. - Governance shortcomings: weaknesses in project selection, project development, procurement assessment, and public-sector capacity. - Behavioral and political factors: optimism bias in project cost and revenue estimates, political interference, repeated contract renegotiations, and acceptance of unsolicited proposals. - Governments remain ultimately responsible for provision of infrastructure services even where PPPs are intended to be user-paid. ### Fiscal implications and the need for reassessment - The pandemic requires reassessing the scale and composition of infrastructure needs, distinguishing short-term needs from long-term needs suitable for PPPs. - Specific actions for the post-COVID-19 context: - Adjust investment plans to new infrastructure needs. - Reassess governments’ risk tolerance. - Strengthen communication with private developers to adjust investment plans and risk-sharing strategies. - Review existing pipeline of appraised projects and ascertain the PPP option. - Consider new PPP contractual structures to accommodate changes in government and private-sector risk appetite. - Reassessing the existing pipeline of appraised infrastructure projects, or developing one if it does not exist, should be a priority during the post-COVID-19 recovery. ### Managing PPP fiscal risks — institutional and policy recommendations - Core elements governments should implement: - Establish a gateway process governing preparation and procurement of PPP projects, with the Ministry of Finance empowered to stop or suspend projects at any stage if fiscally unaffordable or excessively risky. - Set up a proactive fiscal risk management function in the Ministry of Finance to identify, estimate, and manage fiscal costs and risks from PPPs. - Improve budgeting, accounting, and reporting standards and practices to ensure PPP fiscal transparency. - Develop a clear, consistent, and enabling legal PPP framework as a prerequisite for effective fiscal risk management. - Rationale: - Adequate PPP fiscal management is crucial to maintain fiscal responsibility and debt sustainability and to ensure efficient use of scarce public resources. - Strong infrastructure governance institutions are required because PPPs are long-term, complex, and involve sunk costs and location-specific uncertainties. ### Implementation priorities for policymakers - Prioritize building institutions and capacities required to manage long-term fiscal implications of PPPs. - Integrate public investment management and PPP appraisal within a unified framework to avoid parallel, non-comparable project assessment tracks. - Use PPPs selectively for projects where private-sector incentives and expertise genuinely improve value for money and service quality, not as a tool primarily to avoid short-term budgetary costs. *Source: Executive Summary of IMF departmental paper "Mastering the Risky Business of PPPs in Infrastructure" (Executive Summary section).* ### Introduction ### mrbpppiea - Introduction ### Benefits of PPPs - PPPs typically present a credible guarantee of implementation according to schedule. - PPPs help relieve pressure on overstretched public finances and contribute to overcoming borrowing constraints. - PPPs help deliver better quality infrastructure with a whole-life-costing approach. - PPPs help preserve the value and quality of infrastructure through adequate asset maintenance. - PPPs can mobilize additional sources of funds when governments face constraints on access to credit, increasing fiscal space in the short-term as no upfront capital outlay is required; however, governments face a long-term financial commitment given that any additional investment will need to be paid back. - A major benefit: effective implementation of complex infrastructure projects due to (1) financing of the whole project agreed in advance, (2) private partner needing to complete construction to start recovering costs, and (3) bidding for the whole project inducing complete and careful costing. ### Conditions for PPP success and limits of private finance - Using PPPs to reduce the financing gap is conditional on measures to reduce the funding gap. - Private finance cannot in itself reduce the funding gap; the private partner brings financing with the expectation that the project will be funded, over time, by users and/or taxpayers. - PPP success requires: - a credible funding plan for each project, and - a consistent infrastructure funding policy. - Unrealistic expectations that PPPs would solve funding issues have led to fiscal risks and significant fiscal burdens in several cases: Vasco da Gama bridge (toll reductions), Johannesburg–Pretoria highway and Skye bridge (toll abolition), and South Korea highways (user-funded projects later funded by taxpayers). ### Risk allocation, fiscal risks, and long-term exposure - PPPs transfer immediate responsibility for project development and implementation to a private entity via long-term contracts, allowing the private partner to assume major project risks such as design, construction, maintenance, and operational risk. - A well-structured PPP allocates to the private partner the risks it can manage better than the public partner, reducing project risks that affect the fiscal position of government (“fiscal risks”). - Long-term contracts create new fiscal risks linked to economic, technological, demographic, or preference change; these changes may affect government directly or the financial sustainability for the private partner and, consequently, government. - A single PPP contract can make project costs more transparent and provide a better link between fiscal costs and public service delivery, helping identify cost overruns. ### Common project risks and typical contractual allocation (from Table 1) - Risks during construction: - Land issues and resettlement — Risk typically shared or fully allocated to public partner; Explicit fiscal risk? Yes, when private partner cannot cope with risk - Urban and other local licensing — Risk typically allocated to private partner; Explicit fiscal risk? Yes, when private partner cannot cope with risk - Environmental risks — Risk typically shared or fully allocated to one or the other partner; Explicit fiscal risk? Yes, when private partner cannot cope with risk - Geology and other construction risks — Risks typically allocated to private partner; Explicit fiscal risk? Yes, when private partner cannot cope with risk - Project design errors — Allocated to private partner; Explicit fiscal risk? Yes, when private partner cannot cope with risk - Cost of inputs — Risks typically allocated to private partner; Explicit fiscal risk? Yes, when private partner cannot cope with risk - Force majeure — Risk typically shared or fully allocated to public partner; Explicit fiscal risk? Yes, when private partner cannot cope with risk - Risks during operation: - Demand issues — Varies widely: allocated to one party or the other, or shared; Explicit fiscal risk? Yes, when private partner cannot cope with risk - Regulation of user fees — Allocated to public partner; Explicit fiscal risk? Yes, when public partner is under pressure - Maintenance and operational costs — Allocated to private partner; Explicit fiscal risk? Yes, when private partner cannot cope with risk - Policy change — Allocated to public partner; Explicit fiscal risk? (not applicable) - Changes in law — Allocated to one or the other partner, depending on change type; Explicit fiscal risk? Yes, when private partner cannot cope with risk - Force majeure — Risk typically shared or fully allocated to public partner; Explicit fiscal risk? Yes, when private partner cannot cope with risk - Renegotiation — — — Yes, public partner tends to accept higher costs and risks ### Procurement design, bundling, and incentives - Good procurement practice usually calls for separate contracts for different aspects (detailed design, construction of different assets, equipment provision, maintenance, operation). - Traditional procurement with separate contracts can be challenging due to project management demands; poor management often results in change orders, costly renegotiation, additional contracts, cost overruns, implementation delays, and poor service quality. - Bundling all project activities into a single PPP contract reduces the management burden for government but requires long-term contracts and private finance to be efficient. - Efficiency of a bundled PPP depends on: - a long-term contract that commits the private partner to future performance, and - private finance providing “money at stake” — opportunity for profit from good delivery and risk of losses from penalties for under-performance. - A well-structured PPP requires: - competitive tendering of the PPP contract, allowing expected savings from private management to reduce government cost or increase revenue, and - adequate management of the contract by authorities to ensure output and performance requirements are assessed and contractual penalties enforced. - PPPs shift procurement focus from detailed inputs to service delivery through output- and performance-based contracts defined by key performance indicators, linking project cost directly to performance levels to address efficiency in public investment. ### Asset maintenance and contract duration - PPPs create incentives and financial plans that reserve funds for adequate maintenance, protecting the value of public assets over the contract term. - Infrastructure PPPs are always long-term (often 25 years or more) to encompass infrastructure maintenance (and sometimes operation) and keep the PPP company responsible for contractually agreed service performance. ### Types and defining features of PPPs - Definition: A PPP is a project governed by a long-term contract between a government and a company, in which the company makes an investment in an asset and uses it to provide services to the government or the public, while usually being required to satisfy a set of performance criteria. - Typical services and infrastructures: roads, railways, schools, hospitals, prisons, ports, or airports. - The PPP contract is always a single contract for the design, construction/rehabilitation, and maintenance of the asset, sometimes including its operation. - The company signing the PPP contract (PPP company / private partner / PPP operator / PPP concessionaire / concessionaire) is typically established specifically for the PPP and is usually a private company bringing private capital and bearing significant risk and management responsibility; government remains ultimately responsible for service quality and bears some risks; at contract end, full usufruct of the asset typically reverts to government. - Funding models: - Government-funded — government pays for services by predetermined payments over the term of the contract: availability payments or payments per volume of services provided. - User-funded — users pay fees for services; government may still subsidize the investment or guarantee the company’s debt or revenue. - Various combinations of these two funding arrangements are possible. - Legal distinctions across countries (some call government-funded projects “PPP” and user-funded projects “concession” or “privatized projects”) are not material here; all such projects are classified as PPPs if they share the characteristics above. *Source: mrbpppiea - Introduction* ### Box 1. Main Characteristics of Public-Private Partnerships ### Box 1. Main Characteristics of Public-Private Partnerships ### Key characteristics and challenges of PPPs - PPPs financing costs are usually higher than those for financing traditional public investment because (1) private firms usually lack government’s access to sources of low-cost financing, and (2) financial risk depends on the specific risk of a project and a firm, while government can pool risks from many projects and support from its taxpayers. - Higher financing costs can be justified if private participation delivers superior project management, risk management, and high-quality service to end-users. - Financing costs may be unnecessarily high if the contract allocates risks to the private partner that it cannot manage or if tenders fail to include requirements on financial qualification of bidders. - PPPs require more complex and costly administration in tendering and contract management: - Screening PPP projects, choosing the appropriate PPP structure, and drafting contracts require specialized knowledge and significant costs. - Tender management is complex and sensitive because bidders face high bidding costs. - Contract management over the full life of the contract is complex and costly; mitigation options include contract standardization and central provision of PPP expertise. - PPPs create significant fiscal risks linked to potential change during the long contractual term (natural disasters, war, technological change, demographic change, user preferences, changes in executive/legislative/judicial actions, policy or legislation changes, project-specific decisions or inaction). - Fiscal risks differ from traditionally procured projects by the breadth of their potential fiscal impact (for example, natural disasters may require buying back assets and terminating PPP contracts). ### Fiscal illusion: why PPPs can distort fiscal decision-making - Fiscal illusion arises because the impact of PPPs on government cash balances differs substantially from traditional public procurement: - In traditional procurement, government finances, builds, and operates assets with immediate effects on budgets, public debt, and public-sector balance sheets. - In PPPs, private partner typically finances and builds the asset; public-sector compensation often occurs later (via public payments or foregone user fee revenue), creating a perception of “infrastructure for free.” - For PPPs requiring public sector payments, fiscal illusion is diluted after construction once regular payments reduce public cash balances; for user-fee PPPs, fiscal illusion may be permanent if future public cash flows and foregone revenues are not anticipated. - Introducing accrual accounting and whole-project-cycle analysis helps but does not eliminate fiscal illusion if PPPs are regarded as private assets. - PPPs have three main sources of fiscal illusion: - Budgeting and accounting practices that allow infrastructure expansion without immediate impact on deficits or debt (cash accounting issues; reference to IPSAS 32 standards). - Asset recognition criteria that may classify PPP infrastructure as “private” rather than “public” assets despite public control or economic ownership. - Limited assessment of fiscal risks by public sector contracting agencies. ### Budgeting, accounting, and asset recognition issues - Under cash accounting, fiscal impact can ignore liabilities accrued during construction and along the way (contrary to IPSAS 32 standards); good practice is to consider the whole project cycle and both assets and public liabilities (explicit and implicit). - In net present value terms, absent efficiency gains from PPPs, the fiscal impact is basically the same regardless of procurement method. - Governments may classify PPP infrastructure as “private” assets due to private-sector legal rights during the PPP term; however, private financing should not be confused with private ownership. - A recommended first step to address fiscal illusion is to classify PPPs as public assets when the public sector retains some degree of control; such assets should be included in public balance sheets as defined in the IPSAS-32 accounting standard. ### Fiscal risks originating in PPP contracts - PPP contracts create firm liabilities (availability payments, acquisition of services, subsidies, up-front capital payments, etc.) and a range of contingent liabilities triggered by future events. - Contingent liabilities may be scattered across contract clauses, annexes, or appendices and include: - Minimum revenue guarantees - Coverage of exchange rate volatility - Debt guarantees - Compensation for variations in price of critical construction inputs - Early termination compensation (buying back assets, compensating investors, assuming debt) - Legal disputes and asset condition at termination - Contracts must stipulate financial consequences of early termination; even well-structured contracts necessarily allocate some risks to the public partner, creating contingent liabilities. - Implicit contingent liabilities arise when projects lack financial sustainability or when governments face public pressure to maintain services or rescue private partners—these liabilities are not legally binding but often materialize in practice (moral hazard). - Examples of contingent-cost drivers include power purchase agreements (PPAs) that create payment obligations when state-owned entities guarantee minimum consumption. ### Behavioral and governance risks - PPPs are particularly exposed to optimism bias and political interference: - Optimism bias leads to underestimating costs and overestimating revenues, inducing governments to provide guarantees expecting a low likelihood of calls. - Optimism bias creates explicit and implicit fiscal risks that are difficult to quantify beyond worst-case scenarios. - Contract renegotiations are common and often start in the first few years; renegotiation tends to favor private operators and reduce PPP efficiency due to information asymmetry, lack of competition, and weak government bargaining power. - Unsolicited proposals typically do not accelerate delivery and create fiscal risk and governance issues; they often prevent competition and deviate projects from strategic priorities. - Treating PPPs off-budget or creating parallel approval/management processes reduces budgetary discipline and legislative oversight, increasing fiscal risks and enabling resource diversion to less-priority projects. - PPPs implemented by subnational governments or public corporations increase risks due to limited central oversight, potential for shifting liabilities upward, and moral hazard. - Fiscal risks are aggravated when public corporations are major PPP shareholders or when projects are financed by public financial corporations, as perceived rescues reduce efficiency incentives. - Inadequate skills and capabilities in public agencies implementing and managing PPPs expose governments to additional risks; PPPs require dedicated management teams, sectoral governance aligned with regulatory frameworks, and contract amendments that preserve original incentives. ### Asset recognition approaches in public sector accounting and statistics - IPSAS (IPSAS 32, Service Concession Agreements: Grantor, 2011) uses the “control approach”: PPP assets are public assets and included in government accounts if the public partner controls them (ability to define utilization, who can use them, and how much is paid). - Government Finance Statistics Manual (GFSM 2014), aligned with SNA 2008, uses the “risks and rewards approach”: PPP assets are included in government accounts if the public partner bears the majority of risks and reaps the majority of rewards (public partner as “economic owner”). - In substance the control and risks-and-rewards approaches are similar, but implementation differences can lead to different classification outcomes: - The control approach is easier to apply and normally classifies most PPP assets as public infrastructure. - The risks and rewards approach is more prone to manipulation if risks assessment is narrow or partial. - Practical implication: when the public sector can define use, users, and pricing, it likely bears significant fiscal risks (explicit and implicit), especially for strategic assets (roads, airports, dams, railways), and classification should reflect economic reality. *Source: Box 1. Main Characteristics of Public-Private Partnerships, mrbpppiea - Box 1. Main Characteristics of Public-Private Partnerships.* ### Box 2. PPP Asset Recognition Criteria: Control vs. Risks and Rewards Approaches ### Box 2. PPP Asset Recognition Criteria: Control vs. Risks and Rewards Approaches ### Recognition framework and implementation challenges - The System of National Accounts 2008 sets principles for the risks and rewards approach but "does not provide enough guidance on how to implement the risks and rewards approach in practice," leaving countries to define what is the "majority" of risks in PPPs. - Eurostat's Manual on Government Deficit and Debt and the Guide for the Statistical Treatment of PPPs provide practical, rule-based guidance in Europe; this focus on a limited number of risks and preconditions has: - Led countries to exclude most PPPs from the government’s accounts. - Introduced a bias to exclude PPPs from statistics. - Generated an incentive to structure PPP contracts to circumvent Eurostat rules. ### When contingent liabilities are appropriate and how to manage them - Government contingent liabilities can be optimal for risks that government can better manage than the private partner; they should be: - Carefully assessed in the context of fiscal risk management. - Assessed by identifying the probability of occurrence and fiscal impact of each contingency. - Common contingent liability triggers include: - Minimum revenue guarantees. - Early termination events: concessionaire bankruptcy, concessionaire underperformance, nationalization, extreme force majeure. - Operational guidance and country practices: - Termination during construction is complex (assessment of value of completed works and completion plans); some countries monitor construction closely (example: PIMMAC in Korea). - Termination during operation requires preventing service disruption—often via availability of a management team until a new concession is tendered. - Some countries with large PPP portfolios created PPP fiscal risks management teams in the Ministry of Finance to work with line ministries and contract managers and to implement active measures reducing probability of fiscal risks. - Illustrative cases: - Several highway PPPs went bankrupt in Spain in the 2010s, forcing government asset purchases. - Marão Tunnel concession in Portugal was terminated in 2013 for prolonged interruption of construction. - Belize renationalized water and electricity concessions in the early 2010s. - London Olympics Olympic Village required government financial support when the public-private venture could not raise enough funds; the Village served 24,000 athletes. - New Delhi PPP concessionaire installing the metro line to the airport claimed defective construction of an elevated platform and used a contract clause to force early termination. - Portugal changed legal framework after environmental authority decisions imposed significant fiscal costs on PPP highways, requiring environmental approval prior to call for tender for PPPs. ### Demand risk, performance incentives, and social considerations - Demand-risk transfer creates incentives for high performance but can be inappropriate or too costly when demand risk is high; in extreme cases risk transfers back to government (for example when the concessionaire goes bankrupt due to revenue scarcity). - Alternative performance remuneration: - Availability payments conditional on a battery of performance indicators can be preferable when demand risk is unsuitable to transfer. - Social risks and perverse incentives: - Demand-driven remuneration can create undesired incentives where demand growth is not socially desirable (example: PPP prisons). Best practice is to remunerate by cell availability, not cell occupancy. - Example of perverse outcome: "Kids for Cash" scandal in Luzerne county, Pennsylvania, United States, where judges received kickbacks for sending juveniles to prison because local private prison was paid according to number of inmates. - Good practice of availability-based remuneration has been adopted in many PPP prisons worldwide, including the United Kingdom, Spain, Brazil, Chile, and Uruguay. ### Common sources of fiscal risk and notable historical examples - Tolls, user fees, and unrealistic business models often generate fiscal risk when users cannot afford fees or governments cannot politically sustain them: - Portugal paid compensation to lower tolls for cross-Tagus bridges in Lisbon after an electoral promise implied contract renegotiation. - South Africa paid compensation to delay toll implementation in PPP roads because of public reaction. - Scotland bought Skye Bridge to eliminate tolls after devolution led to a policy change. - South Korea lowered tolls and paid compensation on several PPP highways when citizens objected to minimum-revenue compensation on low-demand roads. - Spain provided finance to Madrid "radiales" highways before buying assets due to unrealistic traffic forecasts. - Mexico bought assets of highway PPP concessionaires in 1997 taking about $7.7 billion in debt. - Long-term contracts may suffer from technological, commercial, and demographic change: - UK British Army PPP for worldwide telecommunications required costly renegotiation for technological evolution. - Local government information systems under UK PFI faced issues leading Parliament to recommend not using private finance initiative in that area. - Scotland bought back Inverness Airport because contract-prescribed fees prevented development of low-cost travel. ### Cost and revenue optimism biases; empirical evidence and implications - Cost overrun evidence for traditional public projects (selected findings): - Flyvbjerg (2003): 24 percent cost overrun in roads and 40 percent in railways in a sample of 1,603 projects from 17 countries. - Sovacool, Gilbert, and Nugent (2014): average 66 percent cost overrun in 401 energy projects, reaching 71 percent for hydroelectric dams and 117 percent for nuclear reactors. - Notable anecdotes: Big Dig (Boston) with 478 percent cost overrun; Forrest Highway (Australia) with final cost more than five times initial promises. - PPPs and cost uncertainty: - PPP projects typically reduce cost overrun due to due-diligence by financiers, robust bidder estimates at tender, and reduced scope-change space. - Duffield, Raisbeck, and Ming Xu (2008) in Australia: 25 PPP projects faced 4.3 percent cost overruns measured from contractual commitment to final outcome, while 42 traditionally procured projects had 11.4 percent cost overrun. - Examples of PPPs with no cost overrun: Vasco da Gama Bridge (EU 900 million, 11-km PPP bridge over the Tagus in Lisbon); Sydney’s Cross City Tunnel. - Counterexamples exist: Eurotunnel had roughly 100 percent cost overrun but survived without government stepping in. - Conclusion: evidence does not show PPPs are cheaper, only that cost estimates at contracting are generally more reliable. - Revenue optimism and fiscal realization: - Optimism bias in demand forecasts amplifies fiscal illusion when project costs are expected to be covered by user revenue. - Fertagus rail project in Portugal initially announced "at no cost for government" while concessionaire had a minimum revenue guarantee which later was called. - Minimum revenue guarantees have been called in multiple projects (examples: Evergreen light rail and Busan metro line in Korea, Gautrain in South Africa; Chile and Colombia during recessions). - Spain's Radiales highways faced demand levels of about 20 to 30 percent of initial expectations, forcing government to buy assets in a multibillion euro operation. - Ciudad Real Airport (a EUR 1 billion privately financed initiative) went bankrupt and affected a regional credit union that needed government support. - Some projects (e.g., Sydney Cross City Tunnel) avoided fiscal costs despite demand problems. - Mitigation requires good due diligence and independent review of demand forecasts. ### Renegotiation, unsolicited proposals, and governance responses - Renegotiation frequency and costs: - Renegotiations are common; Chile has had excessive renegotiation despite good frameworks. - Colombia experienced roughly one renegotiation per year per road contract, with the volume of renegotiation trebling; government capped amendments as a percentage of original investment value. - India’s initially low renegotiation rate later led to a mid-2010s wave of arbitrations with roughly 100 road contracts in arbitration at a single point. - Renegotiations initiated under pressure, without robust teams or strategy, create costs and additional fiscal risks. - Operators may initiate opportunistic renegotiation when public pressure or political value can be leveraged (for example, inaugurations during electoral campaigns). - Unsolicited proposals: - Evidence (World Bank (2018) and country cases) shows unsolicited PPP proposals often create significant delays and frequently do not deliver infrastructure. - Instances of signed but undelivered unsolicited PPP contracts: roads in Ghana, hydroelectric dams in Albania, airports in the Philippines. - Country responses: - Some governments disallow unsolicited proposals. - Others require strict legal frameworks, rigorous scrutiny, and government-led contract drafting (examples in practice: State of Victoria (Australia), Commonwealth of Virginia (United States), South Africa). - Korea had accepted many unsolicited proposals (many in transportation) and provided minimum-revenue guarantees and higher tolls on those highways, causing traffic diversion and fiscal compensation; Korea later changed its legal framework to no longer allow minimum revenue guarantees to unsolicited proposals. ### Cross-governmental and implicit fiscal risks - PPP risks borne by subnational governments or public corporations can create implicit liabilities for central governments through moral hazard and capacity constraints: - Turkey: central government guaranteed take-or-pay municipal commitment to Izmit Su A.S.; after lower-than-expected demand the Treasury executed the guarantee, disbursing more than $2 billion until 2014. - Korea Yongin Rapid Transit (2010): arbitration ruled Yongin city government should pay compensation amounting to 453 billion won, about 40 percent of the city’s annual budget; low demand later required the city to pay compensation under minimum revenue guarantee and seek central government support. - Brazil (2010): new 298-bed PPP hospital in Subúrbio led the municipality to close two nearby health centers, causing the state government to pay compensation due to changed demand mix. - Portugal (2011): central government bailed out Madeira regional government, which had procured highway PPPs it could not afford. - South Africa: contingent liabilities on PPP highway between Pretoria and Johannesburg forced National Treasury to provide additional financial support to SANRAL. - Power-purchase agreements and take-or-pay schemes signed by public corporations can create overexposure if undisclosed and unscrutinized, leading to over-optimistic demand expectations and pressure on central government as supply increases. *Source: Authors.* ### Box 10. Fiscal Risks Originating in Subnational Governments and Public Corporations ### Box 10. Fiscal Risks Originating in Subnational Governments and Public Corporations ### Fiscal Illusion and Fiscal Risks - Fiscal illusion arises when investment through PPPs does not increase the government’s deficit and debt during construction (for example, roads, schools), creating an incentive to use PPPs irrespective of associated fiscal costs, risks, or overall efficiency. - To avoid fiscal illusion, PPPs should be treated equivalently to traditional public procurement in budgetary and accounting treatment so that both increase deficit and debt during construction under accrual accounting and statistics. ### A Gateway Process for PPP Preparation and Procurement - The Ministry of Finance (MoF) should be able to stop or suspend a project at any stage of the project cycle if deemed fiscally unaffordable or if it exposes government to excessive risks through a gateway process. - The MoF role should include early-stage evaluation (for example, pre-feasibility and feasibility) rather than only endorsing final procurement decisions, because political momentum at awarding phase limits the MoF’s capacity to halt inefficient or unaffordable projects. - Gateway processes minimize fiscal illusion and promote public investment efficiency by requiring due-diligence and approvals at sequential “gates” and by ensuring PPPs compete with other investment projects in a level playing field. - Benefits of MoF early and repeated review include containment of optimism bias, enhanced accountability, and more robust projects and contracts. ### Table 3. A Generic Gateway Process for Managing PPPs - Phase in infrastructure project cycle — Gateway — Tasks of the MoF before approval/rejection of projects, including PPPs: - Phase 1: Pre-feasibility studies — Provide opinion about project - Review of pre-feasibility analysis; preliminary assessment of fiscal costs and risks, and of impact on budget sustainability and efficiency - Phase 2: Feasibility studies — Approve/reject project - Review of studies, namely the socio-economic evaluation and the justification of the option for PPP procurement; re-assessment of fiscal costs and risks, and of impact on budget sustainability and efficiency - Phase 3: Budget preparation — Approve/reject project to be included in budget proposal - Projects selected in line with budget envelope, policy priorities, and medium-term fiscal framework - Phase 4: Call for tender — Approve/reject call-for-tender - Review of draft contract and other call-for-tender documentation; re-assessment of fiscal costs and risks, and of impact on budget sustainability and efficiency - Phase 5: Tender and contract definition — Approve/reject contract - Review of contract before signing; re-assessment of fiscal costs and risks, and of impact on budget sustainability and efficiency - Phase 6: Construction and operation — Approve/reject contract changes - Management of the fiscal costs and risks of the infrastructure portfolio; before any addendum or contract renegotiation, assessment of its impact on budget sustainability and efficiency ### A PPP Fiscal Risk Management Function in the Ministry of Finance - Objective: move from ad hoc reactive behavior toward PPPs to proactive, systematic identification, estimation, and management of fiscal costs and risks from PPPs, including vetoing projects or contracts with excessive costs or risks. - Key design principles and steps: - Fiscal costs and risks from PPPs should be centrally managed by the MoF with a clear legal mandate and technical skills; the PPP Fiscal Risk Assessment Model (PFRAM 2.0) is a resource for assessing PPP impact on overall fiscal space. - Other IMF resources include the Debt Sustainability Analysis framework (LIC-DSF and MAC-DSA) and the Fiscal Space Analysis. - Implementation options within the MoF: specialized units (for example, PPP units, investment units, fiscal risk units) or assignment to existing departments (for example, budget department, debt management office). - Trade-off: gateway thoroughness versus need for swift implementation; investments in capacity building required to avoid excessive bureaucracy. - Start risk management at early stages and apply a whole lifecycle approach (planning, allocation of funds, implementation). Examples: - Ireland: National Planning Framework supported by a 10-year capital plan; capital plan for social housing enhances interdepartmental coordination. - Denmark and Germany: include in budgets a contingency margin for infrastructure projects including PPPs. - MoF should assess not only individual PPP projects but the overall PPP portfolio because fiscal risks tend to be correlated among projects and with macroeconomic variables (for example, GDP, nominal exchange rate). - Aggregate limits can be useful where PPPs are not fully integrated into the budget cycle or medium-term fiscal framework. Country approaches: - Caps on annual government payments to PPPs: Brazil, Colombia, Hungary. - Limits on the stock of government commitments in PPPs: El Salvador, Honduras, Peru. - Limits on the flow of new commitments affecting the medium-term fiscal framework: Finland, France. - Limits on the value of government guarantees granted to PPPs: Cambodia. - Periodic reviews of PPP efficiency and affordability are critical; country experiences: - Portugal canceled high-speed rail program in 2011 during a fiscal crisis. - France replaced PFI with PF2 and later abandoned it; audit reports led to hospitals being legally forbidden to procure PPPs. - Indonesia is relaunching a highway PPP program based on an improved model. - Colombia periodically reviews and updates PPP contractual provisions; most recent contracts follow the fourth improved contractual risk allocation matrix. - Governance note: When a PPP unit sits in the MoF while also promoting PPPs, conflict-of-interest concerns suggest a separate department should undertake fiscal risk management. ### PPP Fiscal Transparency - Transparent reporting practices anchored in budgeting and accounting standards are essential to manage fiscal risks and minimize fiscal illusion. - Recommended actions to improve management of fiscal costs and risks from PPPs: - Ensure PPPs have the same effect on the most prominent measures of deficit and debt as traditional public procurement to avoid bias from budgetary, accounting, or statistical treatment. - Budget perspective: fully integrate PPPs in the budget process and medium-term budgetary framework; appropriate total project costs at time of budget approval regardless of procurement route; cash appropriations cover only projects procured traditionally. - Accrual accounting and statistical perspective: classify the asset built or purchased through PPP contracts on the government balance sheet by including an asset and a corresponding liability of the same value. This treatment eliminates fiscal illusion. The International Public Sector Accounting Standard on “Service Concession Agreements” (IPSAS32), the Government Finance Statistics Manual 2014, and the Government Finance Statistics Guidelines 2011 provide related guidance. - Publish baseline forecasts of government payments and receipts under PPPs along with long-term fiscal projections, identifying them explicitly. Examples: - Portugal and the United Kingdom publish forecasted annual PPP payments for up to 2060. - Georgia and the Philippines include PPP information in fiscal risk statements accompanying budget documents. - Turkey includes PPP information as part of debt management reports. - Disclose the stock of sovereign guarantees to PPPs and assess the likelihood of them being called. Examples: - Chile reports and analyses risks of guarantees provided to user-funded PPPs in its annual report on contingent liabilities. - Colombia discloses contingent liabilities in PPPs in its annual report on the medium-term fiscal framework. ### A Clear and Consistent Legal PPP Framework - A sound legal framework should set principles and norms for project selection, contract preparation, competitive procurement, and management of fiscal costs and risks across the PPP project cycle while reassuring the private sector that contracts will be honored. - Recommended legal design actions: - Ensure legislative consistency across PPP norms, public investment management legislation, public procurement legislation, budgetary framework laws, and transparency and governance norms to avoid legal uncertainty that raises fiscal costs and risks. - Introduce contract standardization (after initial PPP experience) to improve efficiency, reduce transaction costs, and increase transparency. Standardized provisions are most relevant for clauses on performance monitoring, performance-related penalty schemes, change orders, force majeure, change in law, reporting requirements, dispute resolution mechanisms, refinancing, termination events, and hand-back of assets. Standard provisions should include temporary emergency regimes (for example, timeline adjustments and suspension of penalties in force majeure events) and be reassessed over time. - Incorporate a well-defined rationale for procurement through PPPs in the legal framework, complemented by clear sectoral strategies or a national public investment strategy to develop a shared vision with private investors. - Consider prohibiting unsolicited proposals or apply a strict assessment regime; if accepted, good practices include independent review, government control of project development and contract design, and open competitive tendering. Examples of jurisdictions and guidance: South Africa, the Commonwealth of Virginia (United States), State of Victoria (Australia), and World Bank (2018) findings. - Provide the MoF and the Finance Minister with a clear legal mandate on PPPs, explicit authority to manage fiscal costs and risks (including approval/nihil obstat rights for project selection, draft contracts, deviations from standard clauses, contract award, and renegotiation), and legal authority to require necessary information from government entities and state-owned enterprises. ### Country Examples of Gateway Safeguards and Practices - South Africa: National Treasury requires four stages or gateways: (1) feasibility stage; (2) tender documents (tender rules and draft contract); (3) bid evaluation; and (4) approval of the final contract terms. Central government has oversight and approval responsibilities for PPPs developed in local governments. - Portugal: UTAP (a PPP unit within the Ministry of Finance) reviews PPPs and the Finance Minister must approve at several stages; project development is led by a steering committee including UTAP members; UTAP reviews tender documents before Minister approves call for tender; Minister authorizes the respective line minister to sign the PPP contract after UTAP review; any renegotiation requires UTAP involvement and Finance Minister approval. - France: All public authorities preparing a PPP (marché de partenariat) are required to prepare an assessment of the fiscal impact and fiscal risks over the lifecycle (évaluation de la soutenabilité budgétaire—ESB). The Budget Department defines the methodological framework and reviews each ESB report; if insufficient fiscal sustainability is demonstrated, the Budget Department can stop the process and prevent procurement or signature of the contract. *Sources: Code de la Commande Publique; EPEC (2014); and South Africa Public-Private Partnership Manual;* ### Box 11. Examples of Gateway Processes for Controlling PPP Liabilities and Risk ### Box 11. Examples of Gateway Processes for Controlling PPP Liabilities and Risk ### PPP Fiscal Risk Assessment Model (PFRAM 2.0) - PFRAM 2.0 developed by the IMF and the World Bank; launched in April 2016. - Purpose: analytical tool for assessing potential fiscal costs and risks arising from PPP projects. - Use cases: IMF and World Bank technical assistance and by country authorities—mainly PPP units in ministries of finance—to estimate fiscal costs and risks arising from typical PPP contracts in line with international accounting and statistical standards. - Limitations: cannot substitute for a complete project financial assessment. - Capabilities: - Helps budgetary authorities understand sources and potential fiscal impact of different risks materializing (for example, demand slowdown, currency appreciation, contract termination). - Analyze specific PPP projects and/or a combined portfolio of up to 30 projects, at different stages of the project cycle. - Perform scenario analysis and estimate impact on individual projects, a subset of projects, or the entire portfolio of changes in key macroeconomic variables such as GDP, inflation, or nominal exchange rate. - Assess a PPP project idea and compare potential fiscal costs and risks from different contract structures and funding options. - Availability: English, Spanish, and French versions with a user manual including exercises. - Source attribution in text: Source: IMF Infrastructure Governance. ### Limits on PPP portfolios and exposures - Rationale: limiting the size of the PPP portfolio can help manage fiscal risks and safeguard public finances, especially where legal, regulatory, and institutional frameworks are weak or developing. - Design guidance: - Limits should be measured using an unambiguous measure that captures overall fiscal exposure so they can be credible and verified by independent experts. - No single rule of thumb for level of limits; assessment should be guided by the medium-term budget framework and debt sustainability analysis. - Analyses should incorporate PPP-related fiscal commitments, expected government payments, and sensitivity analysis of likelihood of risks materializing under various scenarios (for example, guarantees, contract termination). - Examples of limits on PPP-related flows: - United Kingdom: PPP-related payments limited to £70 billion across a five-year period from fiscal year 2015–16 (£14 billion a year on average). This amounts to 0.8 percent of the GDP in the first year that parliament introduced this limit. - Brazil: 2004 federal PPP law initially sets a ceiling on current spending from PPP contracts of 1 percent of net current revenue, applicable to all levels of government; raised in 2009 to 3 percent and in 2012 to 5 percent. 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 in excess of 5 percent of net revenues at any time during the forthcoming 10 years. - China: PPP fiscal liabilities allocated from the budget of any local government shall not exceed 10 percent of its annual expenditure—and when those liabilities account for more than 10 percent, no new PPP project can enter the Project Management Database. - Examples of limits on PPP-related stocks: - Peru: limit on the present value of the total fiscal commitments to PPPs (excluding governmental finance entities), which shall not exceed 12 percent of GDP. Every three years, the President may, with the endorsement of the Ministry of the Economy and Finance, issue a decree to revise this limit. - State of Karnataka, India: limits the stock of guarantees at the beginning of the financial year to 80 percent of the government’s revenue two years before. - Sources cited in box: Brazil’s Federal PPP Law (BR 2004a, Law 11079); China, Implementation Opinions on Promoting Regulated Development of PPPs; NAO (2018); and Peru Legislative Decree No. 410–2015-EF (PE 2015). ### Reporting, budgeting, and accounting practices for PPPs - Three reporting frameworks: government budget, financial statements, and government financial statistics. Ideally these rely on an integrated financial information system for consistent PPP fiscal impact estimation. - Principle: PPP-related nonfinancial assets should be equally recognized across the three frameworks; underlying nonfinancial asset in a PPP contract should be regarded as a public asset for PPPs to impact government accounts. - Budgeting challenges: - PPP-related costs may occur in the future or be contingent on specific events, making them hard to manage in annual budget cycles. - Medium-term budget frameworks (MTBF) often cover only three to four years, while PPP fiscal commitments can extend beyond that. - Cash-basis budgets do not reflect future government commitments during construction phases where government payments are not required. - Some user-funded PPPs may never be budgeted for because they do not require cash appropriations during their lifecycle. - Budgets should reflect contingent liabilities (for example, guarantees) through mechanisms such as budgetary contingency lines and contingent liabilities funds. - Examples of budgeting good practices: - State of Victoria, Australia: a department considering a PPP must first seek approval for the budget capital spending as if the project received public funds; if procured as PPP, required budget cash appropriations are planned at a second stage depending on project cycle and funding type. - Colombia: implementing agencies must make a cash transfer to a contingency fund when a PPP project is signed; transfer equals expected cost of programs including any guarantees provided—making acceptance of a contingent liability have an immediate budget impact. - Chile: Ministry of Finance assesses cost of PPP-related guarantees (for example, minimum revenue guarantee) and creates a budget line for those guarantees. - Accounting standards: - IPSAS-32 “Service Concession Arrangements: The Grantor” introduced in 2011 defines when PPP assets and liabilities should be recognized on the government’s balance sheet under accrual standards. - Under IPSAS-32 asset recognition criteria, most PPPs are treated as belonging to the government and thus recorded “on-balance sheet.” - Many countries have adjusted national accounting standards to comply with IPSAS-32: Australia and New Zealand closely aligned; United Kingdom publishes Whole of Government Accounts using IFRS broadly aligned to IPSAS and classifies nearly all PFI/PPP assets as “on-balance sheet” for financial accounting; Turkey has recently aligned national accounting standards to IPSAS-32 with implementation likely to classify a large number of PPPs “on-balance sheet.” - Government Finance Statistics (GFS) and national accounts: - IMF’s Government Finance Statistics Manual (GFSM 2014), in line with System of National Accounts (SNA 2008), sets criteria for classifying PPP assets and liabilities in government statistics. - Asset recognition criteria differ between IPSAS-32 (control approach) and SNA 2008 (risks and rewards approach), producing different practical implementations across countries. - Eurostat uses a rules-based approach for comparability across member countries; historically Eurostat guidelines have led many PPPs to be recorded off-balance sheet. - Example: United Kingdom—most PPPs are included in Whole of Government Accounts but the majority are reported as off-balance sheet under Eurostat guidelines, affecting measures such as PSND and PSNB. - Other reporting innovations: - Chile: annual contingent liabilities report expanded since 2016 to include broader contingent liabilities and better estimates of probability of contingencies materializing. - Portugal: Ministry of Finance (UTAP) publishes quarterly data on PPPs, including time profile of expected future payments for existing PPP portfolio. - Philippines: publishes an annual Fiscal Risk Statement covering exposure to macroeconomic risks and contingent liabilities associated with PPPs. - China: National PPP Integrated Information Platform requires registration of each PPP project; basic information and procurement information disclosed via the Platform and Government Procurement Center website. ### Standardization and contract practices - Several countries developed standardized PPP contracts or provisions for different infrastructure types: - South Africa: National Treasury published Standardized PPP Provisions. - South Korea: Standard Concession Agreement for Build-Transfer-Operate Road (BTO) Projects. - United Kingdom: guidance on the Standardization of PFI and PF2 Contracts. - India: model concession contracts for several transport sectors, e.g., Model Concession Agreement (MCA) for Port Sector PPP projects. - Sources cited: India Model Concession Agreement for Private Sector Projects in Major Ports; Korea Standard RFPs for Build-Transfer-Operate PPP Projects; South Africa National Treasury Standardised PPP Provisions; and UK Standardisation of PF2 Contracts. *Source: IMF Infrastructure Governance.* --- _Source: https://www.imf.org/-/media/files/publications/dp/2021/english/mrbpppiea.pdf_