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Establishing a PPP Framework

21.8.1 Types of Fiscal Commitment to PPPs

Fiscal commitments to PPPs can be payments for services, capital contributions, or subsidies to reduce costs for users, or a means to share risk. The wide range of fiscal commitments can usefully be divided into the following categories.

  • Direct liabilities: known payments that must be made if the PPP proceeds (although there may be some uncertainty regarding the value). Direct liabilities arising from PPP contracts can include:

o Upfront "viability gap” payments – an up-front capital subsidy (often paid out as construction progresses);

o Availability payments – a regular payment over the life of the project, usually conditional on the availability of the service or asset at a contractually specified quality. The payment may be adjusted with bonuses or penalties related to performance; and

o Shadow tolls or output-based payments – a payment or subsidy per unit or user of a service. For example, per vehicle kilometre driven on a PPP highway. See box 2.17.

  • Contingent liabilities: payment commitments whose occurrence, timing and magnitude depend on some uncertain future event, outside the control of government. Contingent liabilities under PPP contracts can include:

o Guarantees on particular risk variables – an agreement to compensate the private party for loss in revenues should a particular risk variable deviate from a contractually specified level. The associated risk is thereby shared between the government and the private party. For example, this could include guarantees on demand remaining above a specified level (as in a take-or-pay contract), or on exchange rates remaining within a certain range;

o Compensation clauses – for example, a commitment to compensate the private party for damage or loss due to certain, specified, uninsurable force majeure events;

o Termination payment commitments – a commitment to pay an agreed amount should the contract expire or is terminated due to default by the public or private party. The amount may depend on the circumstances of default; and

o Debt guarantees or other credit enhancements – a commitment to repay part or all of the debt used to finance a project in the event that the private borrower does not repay it. The guarantee could cover a specific risk or event. Guarantees are used to provide security to a lender that the loan will be repaid.

  • Liabilities of government owned off-takers: if a commercial but government owned entity (such as a power or water utility) contracts with a private generator or bulk water supplier, there are two levels of liability.

o The liability of the government-owned entity. This must be recorded by the entity in question and may be consolidated into whole-of-government financial reporting in some cases; and

o Central government liabilities to make good if the government-owned off-taker defaults (this may be an explicit or implicit contingent obligations).

 

Box 2.17: Fiscal Risk in Minimum Traffic Guarantees

Minimum traffic guarantees are sometimes agreed to by governments to limit the downside traffic risk for investors. Such guarantees compensate the concessionaire if traffic or revenue falls below a specified minimum level.

There are a number of different forms the guarantee can take.

· Cash compensation if revenue falls below the minimum level.

· An extension of the concession term in the event traffic falls below minimum levels.

· Cash compensation and a maximum traffic ceiling above which all revenues are transferred to the government.

· Standby government loans to support traffic and revenue risk.

It is not unusual for such guarantees to be called on. If users are sensitive to price fluctuations, and there are a high number of free alternative routes, economic downturns can be reasonably expected to affect road traffic. For example, during the 2008 Global Financial Crisis, Iberia’s (Spain) toll traffic volumes in 2013 were 30-35 percent lower than 2007 levels.

Source: Fisher and Babbar (n.d.) Private Financing of Toll Roads. World Bank; Infrastructure Journal.

 

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