Government Financial Support and PPPs

David Duarte Arancibia dda@dipres.cl Head of Contingent Liabilities and PPPs Ministry of Finance - Chile

Why a PPP requires fiscal support?

Because the PPP project is not attractive for the private sector
An economic infrastructure is not profitable enough Government is the purchaser of the services

Because involve high risk

The private sector is not willing to bear The private sector requires an high risk premium

Ways for fiscal support

Funds Equity Direct payments (subsidies, shadow tolls, availabilities payments) Contingent Guaranties (debt, exchange rates, interest rates, revenues, commodity price, etc) Insurances Indemnities (cost overruns, revenue shortfall)

Ways for fiscal support

Other ways for government support State of law Financial markets regulations Low country risk Promoting private initiatives

Fiscal support has to be

Correctly designed Efficient Effective Sustainable

Designing
Correct project selection
Project has a positive CBA Procurement maximize VfM

Every fiscal support has an specific objective

Be sure that guaranties are not used to replace fiscal payments Temptation exist, because guaranties are no reflected on traditional account systems

Is not possible (or it is very expensive) to provide by the private counterpart

Guaranties, many times do not allow to financial markets to make a accurate risk assessment

Designing
Use estimated values (not expected)
Hopefully estimations should be done or reviewed by an independent area of government

Take in account correlations

GDP/Traffic GDP/Interest rates Traffic/Cost

Has to create correct incentives or at least not perverse incentives

Risk or risk cost (at least a part) has to be allocated at the side that can manage it

Efficiency
Projects with high risk requires higher risk premium High risk premium are expressed into high prices
Higher tolls or higher government payments

Wrong decisions are not affordable by the private sector but for the government, the patrimonial cost is divided between taxpayers Tolls represents a bigger fraction of the taxpayers income than the potential cost for the government of bear the risk In this case is efficient to allocate the risk at the government side Be sure that risk allocation is based in economic efficiency, not by accounting issues (Eurostat)

Effective
A country is in a better fiscal position if it do grant a guaranties than if it not do that In some cases guaranties has no effect in the private sector assessment of the project Private sector develop better/efficient ways to bear a risk Charge a fee for the guaranties is a way to encourage to the private counterpart to make an accurate assessment of the need

Sustainable
Government has to be able to afford the cost Stocks of commitments has to be monitored Cash flows has to be estimated
Contingent liabilities are difficult to be estimated Techniques as Montecarlo or Black-Scholes are very useful

All information has to be disseminated

Most of fiscal commitments involved in a PPP are off the balance Subsidies are not debt, the payments commitments has to be published Contingent commitments has to be include (estimated payments, VaR analysis, models used, etc)

Sustainable
Contracts has to be transparent by public opinion
Performance reports has to be available

Level of commitments has to be congruent with the fiscal planning

Investment trough PPPs is off budget, so is not constrained for fiscal rules Additional rules are required, specific for PPP investment Long term planning (more than 4 years)

Permanent involvement of the MoF in the projects and programs (check & balance)
PPP agency should not be allocated at the MoF

Recommendations to avoid fiscal surprises

Correct project selection (CBA, VfM) Realistic times Good base studies Specialized advisory Permanent supervision Transparency (contracts, agreements, fiscal commitments, etc) Disseminate information Contingent liabilities management Assess risk transfer Make sound economic decisions

Government Financial Support and PPPs

David Duarte Arancibia dda@dipres.cl Head of Contingent Liabilities and PPPs Ministry of Finance - Chile