Mastering the Risky Business of Public-Private Partnerships in Infrastructure
Departmental Papers, May 10, 2021
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Bibliographic details
- Authors: Manal Fouad, Isabel Rial
- Published: May 10, 2021
- Series: Departmental Papers
- DOI: https://doi.org/10.5089/9781513576565.087
Summary
- Investment in infrastructure can be a driving force of the economic recovery in the aftermath of the COVID-19 pandemic in the context of shrinking fiscal space.
- Public-private partnerships (PPP) bring a promise of efficiency when carefully designed and managed, to avoid creating unnecessary fiscal risks.
- Fiscal illusions prevent an understanding of the sources of fiscal risks, which arise in all infrastructure projects and present specific characteristics in PPPs that need to be addressed.
- PPP contracts are affected by implicit fiscal risks when they are poorly designed, particularly when a government signs a PPP contract for a project with no financial sustainability.
- The paper reviews the advantages and inconveniences of PPPs, discusses the fiscal illusions affecting them, identifies a diversity of fiscal risks, and presents the essentials of PPP fiscal risk management.
Key findings on PPP advantages and inconveniences
- PPPs can offer efficiency gains if carefully designed and managed.
- Poorly designed PPPs create implicit fiscal risks, especially for projects lacking financial sustainability.
- Fiscal risks in PPPs have specific characteristics distinct from traditional public infrastructure projects.
Fiscal illusions affecting PPPs
- Fiscal illusions impede a proper understanding of sources of fiscal risk in infrastructure projects.
- These illusions can lead to underestimation or misrecognition of contingent liabilities and long-term fiscal commitments associated with PPP contracts.
Diversity of fiscal risks identified
- Fiscal risks arise in all infrastructure projects; PPPs introduce specific risk profiles that must be identified and managed.
- Implicit fiscal risks include those stemming from contracts for financially unsustainable projects and from poor contract design.
Essentials of PPP fiscal risk management (policy implications)
- Careful design and management of PPP contracts to avoid unnecessary fiscal risks.
- Identification and explicit treatment of contingent liabilities and implicit fiscal obligations linked to PPPs.
- Recognition that fiscal risk management is central to realizing PPP efficiency benefits without compromising fiscal sustainability.
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