## howtonote1804 - Introduction

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---

### Definition and key characteristics of PPPs
- 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, using that asset and perhaps other assets made available by the government, provides services to the government or the public.
- Typical features:
  - A long term (often 25 years or more);
  - A single contract for design, construction, maintenance, and operation;
  - Private financing and execution;
  - Performance-linked remuneration for services; and
  - Risk sharing between government and the private partner.
- The company is usually private, but may be state owned, and is typically established specifically for the purpose of the PPP.
- At the end of the contract, control of the asset typically reverts to the government.

### Types of PPPs and historical context
- Two broad funding groups:
  - Government funded — government pays by predetermined payments over the term of the contract for making the asset available (availability payments) or payments per volume of services provided.
  - User funded — users pay fees for the services (often called concessions). The government may still subsidize the investment or guarantee the company’s debt or revenue.
- Historical notes:
  - Concessions used in the 19th century for railways (with government-guaranteed returns).
  - Concessions declined mid-20th century and returned in the 1990s (including toll-road concessions in France, Spain, Chile, Mexico).
  - Early 1990s: UK pioneered government-funded PPPs under the Private Finance Initiative.
  - 1990s power-sector investments in Asia used structures similar to government-funded PPPs (independent power producers under power-purchase agreements, sometimes backed by government guarantees).

### Challenges for fiscal management
- Efficiency concerns:
  - Whether PPPs offer a better deal than traditional public investments is controversial; the note does not resolve this question.
  - Governments usually pay less to borrow than private companies, but this advantage can be offset by the cost of risk bearing.
  - PPPs may ease introduction of user fees.
- Budgetary circumvention:
  - PPPs can be used to undertake investment without initially reporting new spending or debt.
  - In government-funded PPPs, governments may not pay until the asset is constructed and the service delivered.
  - In user-funded PPPs, governments may forgo user-fee revenue and may face calls on guarantees.
- Fiscal risk exposure:
  - User-funded but government-guaranteed PPPs create uncertain government spending; guarantee calls can require large outlays.
  - PPPs can undermine effectiveness of deficit and debt limits by circumventing traditional reporting.
- Inflexibility and shock absorption:
  - Government-funded PPPs require promise to pay fixed amounts for long periods (for as long as 30 years, or longer), reducing fiscal flexibility.
  - PPPs make it harder to absorb fiscal shocks in ways similar to government debt.
- Quantified fiscal risk evidence:
  - Survey of 80 advanced and emerging market economies: average fiscal cost of PPP-related contingent liabilities that crystallized during 1990–2014 was about 1.2 percent of GDP, while the maximum cost was 2 percent of GDP.
  - The survey identified at least eight major episodes where costs were considered macrorelevant.

### Identifying the costs of PPPs (common cost channels)
- Types of fiscal costs and contingent liabilities:
  - Capital subsidies (for example, viability-gap payments);
  - Availability payments;
  - Volume-based payments for services (for example, shadow tolls or subsidies);
  - Tax incentives;
  - Payments related to risks assumed by the government (for example, revenue, exchange-rate, and interest-rate guarantees);
  - Payments related to regulatory risks, early termination, and extraordinary events;
  - Payments arising from debt guarantees;
  - Costs from renegotiations, disputes, and implicit guarantees (for example, in financially distressed projects).
- Systematic approach to identification:
  - Create a database of existing projects recording purpose, contracting agency, the PPP company and its owners, the investment expected under the contract and each amendment, and timeline (dates of contract tendering, signature, financial closure, construction commencement, operational commencement, and termination).
  - Scrutinize contracts to identify (potential) obligations — examine contractual formulas for government payments, guarantee-like clauses, revenue-sharing agreements, termination clauses, and possible lender repayment obligations; consult lawyers and experts as needed.
  - Peruse PPP laws to understand which risks the government may bear; review tax laws for tax incentives.
  - Identify other potential pressure points that could induce additional government spending (for example, renegotiations, political pressures to bail out distressed concessionaires, or pressures to prevent user-fee increases).
  - Disclose contracts for external scrutiny (subject to permissible omissions) so stakeholders can analyze and flag problems.

### Estimating costs and exposures
- Main tasks for the ministry of finance:
  - Establish the baseline: expected payments by the government net of expected receipts (for example, concession fees, revenue-sharing). Baseline estimates should have a horizon as long as the PPP contracts.
  - Recognize tendency for costs to be underestimated and revenue to be overestimated in both PPPs and traditional projects.
  - Estimate the government’s exposure to risk (the most the government could be required to pay):
    - If the government guaranteed company debt only, the most it could pay is the amount of the guaranteed borrowing.
    - If the government gave a revenue guarantee, the most it could pay is the amount it would owe if the company had no revenue.
  - Estimate scenario-based costs that fall short of the worst case if appropriate.
  - If risks appear significant, estimate variability of net payments and the present value of obligations taking account of the cost of risk bearing (example: Chilean government practice).
  - Use historical realization of risks (differences between forecast and actual outcomes) to inform future risk estimates when PPP programs have past experience.
  - Compute the present discounted value of payments the government is contractually obliged to make for PPPs where the government is the customer.
  - Estimate PPP-related liability the government would recognize on its balance sheet under International Public Sector Accounting Standards (IPSAS) or similar rules.
  - Tools: PPP Fiscal Risk Assessment Model (PFRAM) can be used to compute present values and analyze allocation of risks.

### Controlling costs and risks — institutional and procedural measures
- General principle:
  - Obligations should be assumed only when justified by prospective benefits and when the government is not already overcommitted. Once assumed, obligations and risks need monitoring and mitigation.
  - Pay special attention when contracting agencies lack PPP experience and when fiscal metrics make PPPs appear artificially inexpensive.
- Recommended institutional steps:
  - Establish a gateway process managed by the ministry of finance:
    - Contracting agencies should not be allowed to offer guarantee-like arrangements or enter large multiannual commitments without prior review and approval by the ministry of finance.
    - The ministry should review proposed PPPs at several stages of a “gateway process.”
    - First review should occur before projects have built up political momentum that makes them hard to stop.
    - Before large contracts are implemented, they should be approved by the council of ministers and, depending on legal framework, possibly the legislature.
    - Rules requiring review and prior approval should also apply to renegotiation.
  - Develop a framework for risk sharing:
    - As a general principle, the government should bear only those risks that it controls, or at least strongly influences.
    - If the government feels obliged to bear risks that others should bear, establish clear rules and limits.

### Example: Chilean practice for assessing PPP contingent liabilities
- Measures published:
  - The government’s maximum payments in present values—both nominal and in percent of GDP—from each of the 25-odd current projects (this measure assumes the worst-case scenario of no traffic).
  - The expected (that is, probability-weighted) value of the payments in each of the next 20 years.
  - The 5th and the 95th percentile of the distribution of payments over the same period.
  - The present value of the expected payments net of expected revenue sharing for each of the projects, in both nominal terms and percent of GDP.
- Modeling approach:
  - A model combining a mathematical representation of contractual terms that may require payments by or to the government and a stochastic model of traffic revenue that makes assumptions about expected growth rates, volatilities, and correlations.
  - Analysis includes historical data on the evolution of costs from such guarantees and annexes a comprehensive list of all PPP concessions to provide a measure of the size of the PPP portfolio.

*Prepared by Tim Irwin, Samah Mazraani, and Sandeep Saxena; benefited from comments listed in the source document.*

### Box 1 — Risk allocation, authority, and limits on commitments
- Risk allocation and contract design:
  - Government can seek partial guarantees where it faces risks it cannot control (for example, traffic levels or a floating exchange rate).
  - Making contract length variable can reduce need for guarantees (Engel, Fischer, and Galetovic 2001, 2014).
  - A good legal framework, PPP laws, or standardized contracts can set out the risks the government will normally bear.
  - Unsolicited proposals should usually be rejected.
- Authority to pay and lines of accountability:
  - Possible arrangements to ensure legal authority for guarantee payments:
    - Using budgetary contingency lines.
    - Using standing appropriations.
    - Using supplementary budgets.
    - Writing guarantees to allow payments to be made with a delay sufficient to include them in the next year’s budget.
  - Clear lines of accountability:
    - Central review of major commitments combined with decentralization of smaller decisions and contract monitoring.
    - Contracting agencies must have primary responsibility for management of risks related to their work and sufficient autonomy to do a good job.
- Limits on commitments (three options):
  1. PPP-specific limits:
     - Global limits on size of PPP programs applying to annual government spending or the stock of commitments.
     - Examples and exact limits cited:
       - Brazil: law limits total annual federal government payments to PPP companies to 1 percent of the government’s revenue and limits each subnational government’s payments to 5 percent of that government’s revenue.
       - Colombia: government is required to limit its annual PPP-related payments to 0.4 percent of GDP.
       - Peru: law limits the value of the government’s outstanding obligations to 7 percent of GDP.
       - United Kingdom: the executive has set a limit on PPP spending, expressed in pounds, over the medium term.
       - El Salvador and Honduras: similar rules have been introduced.
       - Cambodia: government limits the value of guarantees it will grant (example context: government-guaranteed power-purchase agreements).
  2. Limits on commitments (budgeting for commitments, not only cash):
     - Used in Finland and France: budget not only for cash spent in the fiscal year but also for commitments made during the year. A global limit on commitments helps ensure multiyear commitments are affordable and allows trade-offs between PPPs and traditional public investments.
  3. Ordinary budget limits with new accounting:
     - Example: New Zealand budgets according to accounting rules that treat (many) PPPs as public projects, so PPPs have roughly the same effect on the budget deficit and debt as traditional public investment.

### Box 1 — Measurement tools, disclosure practices, and accounting
- Measurement tools and risk assessment:
  - The IMF and World Bank developed the PPP Fiscal Risk Assessment Model (PFRAM) to quantify fiscal costs and risks of PPPs. The PFRAM:
    - (1) estimates the project’s impact on deficit and debt (under both cash and accrual accounting) and on contingent liabilities;
    - (2) provides sensitivity analysis of key fiscal aggregates to changes in macroeconomic and project-specific parameters (for example, GDP growth, inflation, exchange rate, and project termination);
    - (3) identifies the main fiscal risks, evaluating their likelihood and impact and discussing mitigation measures.
  - The PFRAM estimates fiscal impact in line with IPSAS 32 based on a five-step decision-tree:
    - Who initiates the project? Central government, local government, or a state-owned enterprise?
    - Who controls the asset, whether through ownership, beneficial entitlement, or otherwise?
    - Who ultimately pays for the asset? Government, users, or a combination of the two?
    - How are payments determined? Are they fixed or do they vary with inflation and other variables?
    - Does the government provide additional support to the private partner—for example, subsidies, debt guarantees, minimum-revenue guarantees, equity injections?
  - The PFRAM includes a detailed assessment of project-specific risks, summarized in a risk matrix. It considers 11 main risks (with 52 subcomponents) related to governance, construction, demand, performance, financing, force majeure, material adverse government actions, changes in law, rebalancing of the contract’s financial equilibrium, renegotiation, and project termination.
- Disclosure practices and examples:
  - Baseline forecasts of the government’s payments and receipts under PPPs can be published and should be included in long-term fiscal projections, as recommended in the IMF’s Fiscal Transparency Code (IMF 2014a).
    - Example disclosures:
      - Portuguese Ministry of Finance report includes a table showing projected payments in PPPs by year until 2042 in each of four sectors: roads, railways, health, and security.
      - United Kingdom: Treasury published spreadsheets showing forecast payments by year and contract until 2060.
  - Fiscal risks created by PPPs can be disclosed in statements of fiscal risk and similar documents. Guarantees should be reported and the possibility of their being called analyzed. Spending commitments and their effect on the government’s ability to absorb fiscal shocks should also be discussed.
  - Country examples:
    - Chile: reports analyses of the risks of guarantees given to concessionaires in an annual report on contingent liabilities.
    - Colombia: discloses its contingent liabilities in PPPs in its annual report on the medium-term fiscal framework.
    - Philippines: PPPs are discussed in risk statements published by the Philippines Development Budget Coordination Committee (2015).
    - Tax incentives can be listed in reports on tax expenditures.
  - Colombia’s practice highlighted:
    - Colombia’s annual medium-term fiscal framework publishes a forecast of PPP-related costs over a 30-year horizon (the legally permissible maximum term of the contracts).
    - The forecast shows how future costs are expected to relate to the annual ceiling (0.4 percent of GDP), and the space available for additional projects.
    - The forecast includes both firm obligations as well as expected payments for the risks assumed by the government.
    - The fiscal framework also presents project-level information on the contingent liabilities from PPPs and the expected profile of contributions to the contingency fund, which the government maintains for meeting obligations arising from contingent liabilities.
- Accounting treatment and fiscal rules:
  - The most powerful way of controlling costs and risks created by PPPs is to ensure PPPs have the same effect on the most prominent measures of debt and deficit as traditional investments with equal cost.
  - In accrual accounts and statistics, this is achieved by putting assets constructed in PPPs on the government’s balance sheet (even if the government is not the asset’s legal owner) and recognizing a corresponding liability, initially of equal value.
  - IPSAS 32 places on the government’s balance sheet any PPP in which, roughly speaking, the government controls the service and controls the asset at the end of the contract (IPSASB 2011).
  - Statistical manuals put PPPs on the government’s balance sheet if the government is deemed the economic owner of the project’s assets, whether or not it is the legal owner.
  - In cash accounts, a similar result can be achieved by treating the private partner as part of the government for accounting purposes: the PPP company’s spending would be counted as government spending in calculating the deficit, and the company’s debt would be counted as public debt.

### Key policy implications and conclusions
- Where infrastructure bottlenecks constrain economic activity, there is a case for more public investment, whether traditionally financed or via PPPs.
- In the early years of a PPP program, promoting PPPs can encourage innovation and overcome inertia, especially if PPPs are undertaken alongside traditionally financed projects to allow independent empirical assessment.
- In the long term, PPPs create problems for fiscal management if government accounts create the illusion that they are much less expensive than traditional public investment.
- To use PPPs well, governments need to strengthen infrastructure governance and introduce measures—including budgeting and accounting reforms—to control their costs.

*Source: Box 1. Measurement and Disclosure of Revenue Guarantees in Chile, How to Control the Fiscal Costs of Public-Private Partnerships, Fiscal Affairs Department, International Monetary Fund | August 2018.*

### Introduction

### howtonote1804 - Introduction

### Definition and key characteristics of PPPs
- A PPP as defined here 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, using that asset and perhaps other assets made available by the government, provides services to the government or the public.
- Typical features:
  - A long term (often 25 years or more);
  - A single contract for design, construction, maintenance, and operation;
  - Private financing and execution;
  - Performance-linked remuneration for services; and
  - Risk sharing between government and the private partner.
- The company is usually private, but may be state owned, and is typically established specifically for the purpose of the PPP.
- At the end of the contract, control of the asset typically reverts to the government.

### Types of PPPs and historical context
- Two broad funding groups:
  - Government funded — government pays by predetermined payments over the term of the contract for making the asset available (availability payments) or payments per volume of services provided.
  - User funded — users pay fees for the services (often called concessions). The government may still subsidize the investment or guarantee the company’s debt or revenue.
- Historical notes:
  - Concessions used in the 19th century for railways (with government-guaranteed returns).
  - Concessions declined mid-20th century and returned in the 1990s (including toll-road concessions in France, Spain, Chile, Mexico).
  - Early 1990s: UK pioneered government-funded PPPs under the Private Finance Initiative.
  - 1990s power-sector investments in Asia used structures similar to government-funded PPPs (independent power producers under power-purchase agreements, sometimes backed by government guarantees).

### Challenges for fiscal management
- Efficiency concerns:
  - Whether PPPs offer a better deal than traditional public investments is controversial; the note does not resolve this question.
  - Governments usually pay less to borrow than private companies, but this advantage can be offset by the cost of risk bearing.
  - PPPs may ease introduction of user fees.
- Budgetary circumvention:
  - PPPs can be used to undertake investment without initially reporting new spending or debt.
  - In government-funded PPPs, governments may not pay until the asset is constructed and the service delivered.
  - In user-funded PPPs, governments may forgo user-fee revenue and may face calls on guarantees.
- Fiscal risk exposure:
  - User-funded but government-guaranteed PPPs create uncertain government spending; guarantee calls can require large outlays.
  - PPPs can undermine effectiveness of deficit and debt limits by circumventing traditional reporting.
- Inflexibility and shock absorption:
  - Government-funded PPPs require promise to pay fixed amounts for long periods (for as long as 30 years, or longer), reducing fiscal flexibility.
  - PPPs make it harder to absorb fiscal shocks in ways similar to government debt.
- Quantified fiscal risk evidence:
  - Survey of 80 advanced and emerging market economies: average fiscal cost of PPP-related contingent liabilities that crystallized during 1990–2014 was about 1.2 percent of GDP, while the maximum cost was 2 percent of GDP.
  - The survey identified at least eight major episodes where costs were considered macrorelevant.

### Identifying the costs of PPPs (common cost channels)
- Types of fiscal costs and contingent liabilities:
  - Capital subsidies (for example, viability-gap payments);
  - Availability payments;
  - Volume-based payments for services (for example, shadow tolls or subsidies);
  - Tax incentives;
  - Payments related to risks assumed by the government (for example, revenue, exchange-rate, and interest-rate guarantees);
  - Payments related to regulatory risks, early termination, and extraordinary events;
  - Payments arising from debt guarantees;
  - Costs from renegotiations, disputes, and implicit guarantees (for example, in financially distressed projects).
- Systematic approach to identification:
  - Create a database of existing projects recording purpose, contracting agency, the PPP company and its owners, the investment expected under the contract and each amendment, and timeline (dates of contract tendering, signature, financial closure, construction commencement, operational commencement, and termination).
  - Scrutinize contracts to identify (potential) obligations — examine contractual formulas for government payments, guarantee-like clauses, revenue-sharing agreements, termination clauses, and possible lender repayment obligations; consult lawyers and experts as needed.
  - Peruse PPP laws to understand which risks the government may bear; review tax laws for tax incentives.
  - Identify other potential pressure points that could induce additional government spending (for example, renegotiations, political pressures to bail out distressed concessionaires, or pressures to prevent user-fee increases).
  - Disclose contracts for external scrutiny (subject to permissible omissions) so stakeholders can analyze and flag problems.

### Estimating costs and exposures
- Main tasks for the ministry of finance:
  - Establish the baseline: expected payments by the government net of expected receipts (for example, concession fees, revenue-sharing). Baseline estimates should have a horizon as long as the PPP contracts.
  - Recognize tendency for costs to be underestimated and revenue to be overestimated in both PPPs and traditional projects.
  - Estimate the government’s exposure to risk (the most the government could be required to pay):
    - If the government guaranteed company debt only, the most it could pay is the amount of the guaranteed borrowing.
    - If the government gave a revenue guarantee, the most it could pay is the amount it would owe if the company had no revenue.
  - Estimate scenario-based costs that fall short of the worst case if appropriate.
  - If risks appear significant, estimate variability of net payments and the present value of obligations taking account of the cost of risk bearing (example: Chilean government practice).
  - Use historical realization of risks (differences between forecast and actual outcomes) to inform future risk estimates when PPP programs have past experience.
  - Compute the present discounted value of payments the government is contractually obliged to make for PPPs where the government is the customer.
  - Estimate PPP-related liability the government would recognize on its balance sheet under International Public Sector Accounting Standards (IPSAS) or similar rules.
  - Tools: PPP Fiscal Risk Assessment Model (PFRAM) can be used to compute present values and analyze allocation of risks.

### Controlling costs and risks — institutional and procedural measures
- General principle:
  - Obligations should be assumed only when justified by prospective benefits and when the government is not already overcommitted. Once assumed, obligations and risks need monitoring and mitigation.
  - Pay special attention when contracting agencies lack PPP experience and when fiscal metrics make PPPs appear artificially inexpensive.
- Recommended institutional steps:
  - Establish a gateway process managed by the ministry of finance:
    - Contracting agencies should not be allowed to offer guarantee-like arrangements or enter large multiannual commitments without prior review and approval by the ministry of finance.
    - The ministry should review proposed PPPs at several stages of a “gateway process.”
    - First review should occur before projects have built up political momentum that makes them hard to stop.
    - Before large contracts are implemented, they should be approved by the council of ministers and, depending on legal framework, possibly the legislature.
    - Rules requiring review and prior approval should also apply to renegotiation.
  - Develop a framework for risk sharing:
    - As a general principle, the government should bear only those risks that it controls, or at least strongly influences.
    - If the government feels obliged to bear risks that others should bear, establish clear rules and limits.

### Example: Chilean practice for assessing PPP contingent liabilities
- The Chilean government publishes an annual statement of contingent liabilities that discusses risks from revenue guarantees to public works concessions and presents several measures:
  - The government’s maximum payments in present values—both nominal and in percent of GDP—from each of the 25-odd current projects (this measure assumes the worst-case scenario of no traffic).
  - The expected (that is, probability-weighted) value of the payments in each of the next 20 years.
  - The 5th and the 95th percentile of the distribution of payments over the same period.
  - The present value of the expected payments net of expected revenue sharing for each of the projects, in both nominal terms and percent of GDP.
- Modeling approach:
  - A model combining a mathematical representation of contractual terms that may require payments by or to the government and a stochastic model of traffic revenue that makes assumptions about expected growth rates, volatilities, and correlations.
  - Analysis includes historical data on the evolution of costs from such guarantees and annexes a comprehensive list of all PPP concessions to provide a measure of the size of the PPP portfolio.

*Prepared by Tim Irwin, Samah Mazraani, and Sandeep Saxena; benefited from comments listed in the source document.*

### Box 1. Measurement and Disclosure of Revenue Guarantees in Chile

### Box 1. Measurement and Disclosure of Revenue Guarantees in Chile

### Risk allocation and contract design
- Where the government faces risks over which it has little control (for example, those related to traffic levels or a floating exchange rate), it can seek to share the risk with the PPP company by providing only partial guarantees.
- Making the length of the contract variable can reduce the need for guarantees (Engel, Fischer, and Galetovic 2001, 2014).
- A good legal framework can make it easier for the government to bear the right risks. PPP laws or standardized contracts can be used to set out the risks that the government will normally bear.
- Unsolicited proposals should usually be rejected.

### Authority to pay and lines of accountability
- The government needs to ensure it has the legal authority to make required guarantee payments in a timely manner. Possible arrangements include:
  - Using budgetary contingency lines.
  - Using standing appropriations.
  - Using supplementary budgets.
  - Writing guarantees to allow payments to be made with a delay sufficient to include them in the next year’s budget.
- Clear lines of accountability must be established:
  - Central review of major commitments should be combined with decentralization of smaller decisions and contract monitoring.
  - Contracting agencies must have primary responsibility for management of the risks related to their work, including the contracts they let, and must be given enough autonomy to do a good job.

### Limits on commitments (three options)
1. PPP-specific limits
   - Some countries create a global limit on the size of PPP programs. The limit can apply to annual government spending or to the stock of the government’s commitments.
   - Examples and exact limits cited:
     - Brazil: law limits total annual federal government payments to PPP companies to 1 percent of the government’s revenue and limits each subnational government’s payments to 5 percent of that government’s revenue.
     - Colombia: government is required to limit its annual PPP-related payments to 0.4 percent of GDP.
     - Peru: law limits the value of the government’s outstanding obligations to 7 percent of GDP.
     - United Kingdom: the executive has set a limit on PPP spending, expressed in pounds, over the medium term.
     - El Salvador and Honduras: similar rules have been introduced.
     - Cambodia: government limits the value of guarantees it will grant (example context: government-guaranteed power-purchase agreements).
2. Limits on commitments (budgeting for commitments, not only cash)
   - Used in Finland and France: budget not only for cash spent in the fiscal year but also for commitments made during the year. A global limit on commitments helps ensure multiyear commitments are affordable and allows trade-offs between PPPs and traditional public investments.
3. Ordinary budget limits with new accounting
   - Example: New Zealand budgets according to accounting rules that treat (many) PPPs as public projects, so PPPs have roughly the same effect on the budget deficit and debt as traditional public investment.

### Measurement tools and risk assessment
- The IMF, in collaboration with the World Bank, developed the PPP Fiscal Risk Assessment Model (PFRAM) to quantify the fiscal costs and risks of PPPs. The PFRAM provides a structured approach to gathering contractual information to:
  - (1) estimate the project’s impact on deficit and debt (under both cash and accrual accounting) and on contingent liabilities;
  - (2) provide sensitivity analysis of key fiscal aggregates to changes in macroeconomic and project-specific parameters (for example, GDP growth, inflation, exchange rate, and project termination);
  - (3) identify the main fiscal risks, evaluating their likelihood and impact and discussing mitigation measures.
- The PFRAM estimates fiscal impact in line with International Public Sector Accounting Standards (IPSAS) 32 based on a five-step decision-tree:
  - Who initiates the project? Central government, local government, or a state-owned enterprise?
  - Who controls the asset, whether through ownership, beneficial entitlement, or otherwise?
  - Who ultimately pays for the asset? Government, users, or a combination of the two?
  - How are payments determined? Are they fixed or do they vary with inflation and other variables?
  - Does the government provide additional support to the private partner—for example, subsidies, debt guarantees, minimum-revenue guarantees, equity injections?
- The PFRAM includes a detailed assessment of project-specific risks, summarized in a risk matrix. It considers 11 main risks (with 52 subcomponents) related to governance, construction, demand, performance, financing, force majeure, material adverse government actions, changes in law, rebalancing of the contract’s financial equilibrium, renegotiation, and project termination.

### Disclosure practices and examples (Chile and others)
- Baseline forecasts of the government’s payments and receipts under PPPs can be published and should be included, explicitly or implicitly, in any long-term fiscal projections, as recommended in the IMF’s Fiscal Transparency Code (IMF 2014a).
  - Example disclosures:
    - Portuguese Ministry of Finance report includes a table showing projected payments in PPPs by year until 2042 in each of four sectors: roads, railways, health, and security.
    - United Kingdom: Treasury published spreadsheets showing forecast payments by year and contract until 2060.
- The fiscal risks created by PPPs can be disclosed in statements of fiscal risk and similar documents. Guarantees should be reported and the possibility of their being called analyzed. Spending commitments and their effect on the government’s ability to absorb fiscal shocks should also be discussed.
- Country examples:
  - Chile: the Chilean government reports analyses of the risks of the guarantees it has given to concessionaires in an annual report on contingent liabilities (Chilean Budget Department 2015, section III.1).
  - Colombia: discloses its contingent liabilities in PPPs in its annual report on the medium-term fiscal framework (Colombian Ministry of Finance and Public Credit 2016, section 7.4).
  - Philippines: PPPs are discussed in the risk statements published by the Philippines Development Budget Coordination Committee (2015).
  - Tax incentives can be listed in reports on tax expenditures.
- Colombia’s practice highlighted:
  - Colombia’s annual medium-term fiscal framework publishes a forecast of PPP-related costs over a 30-year horizon (the legally permissible maximum term of the contracts).
  - The forecast shows how future costs are expected to relate to the annual ceiling (0.4 percent of GDP), and the space available for additional projects.
  - The forecast includes both firm obligations as well as expected payments for the risks assumed by the government.
  - The fiscal framework also presents project-level information on the contingent liabilities from PPPs and the expected profile of contributions to the contingency fund, which the government maintains for meeting obligations arising from contingent liabilities.

### Accounting treatment and fiscal rules
- The most powerful way of controlling costs and risks created by PPPs is to ensure that PPPs have the same effect on the most prominent measures of debt and deficit as traditional investments with equal cost.
- In accrual accounts and statistics, this is achieved by putting assets constructed in PPPs on the government’s balance sheet (even if the government is not the asset’s legal owner) and recognizing a corresponding liability, initially of equal value. This typically ensures PPPs affect the deficit in the same way as traditional public investments.
- IPSAS 32 places on the government’s balance sheet any PPP in which, roughly speaking, the government controls the service and controls the asset at the end of the contract (IPSASB 2011).
- Statistical manuals (System of National Accounts 2008; Public Sector Debt Statistics guide; Government Finance Statistics Manual 2014) put PPPs on the government’s balance sheet if the government is deemed the economic owner of the project’s assets, whether or not it is the legal owner.
- In cash accounts, a similar result can be achieved by treating the private partner as part of the government for accounting purposes: the PPP company’s spending would be counted as government spending in calculating the deficit, and the company’s debt would be counted as public debt for accounting purposes.

### Key policy implications and conclusions
- Where infrastructure bottlenecks constrain economic activity, there is a case for more public investment, whether traditionally financed or via PPPs.
- In the early years of a PPP program, promoting PPPs can encourage innovation and overcome inertia, especially if PPPs are undertaken alongside traditionally financed projects to allow independent empirical assessment.
- In the long term, PPPs create problems for fiscal management if government accounts create the illusion that they are much less expensive than traditional public investment.
- To use PPPs well, governments need to strengthen infrastructure governance and introduce measures—including budgeting and accounting reforms—to control their costs.

*Source: Box 1. Measurement and Disclosure of Revenue Guarantees in Chile, How to Control the Fiscal Costs of Public-Private Partnerships, Fiscal Affairs Department, International Monetary Fund | August 2018.*

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_Source: https://www.imf.org/-/media/files/publications/howtonotes/howtonote1804.pdf_