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Establishing a PPP Framework

21.8.4 Budgeting for Fiscal Commitments

Budgeting for PPPs involves making sure that money is appropriated and available to pay for whatever cost the government has agreed to bear under its PPP projects. Because such costs may be contingent or occur in the future, PPP budgeting can be hard to manage in traditional annual budget cycles. Nevertheless, credible and practical budgeting approaches are needed for good public financial management, and to assure private partners that they will be paid.

Budgeting for direct commitments to PPPs

Direct commitments to PPPs include upfront payments (payments during construction usually built as grants), as well as ongoing payments such as shadow tolls or availability payments in government-pays PPPs or hybrid projects.

When governments provide upfront or grant payments to PPPs, the payments required are similar to those for traditionally government procured projects. Because these payments are typically made within the first few years of a project, they can be relatively easily built into annual budgets and medium-term expenditure frameworks. Nonetheless, some governments have introduced funds (known as Viability Gap Funds) from which such payments will be made. One example of such a fund is in India, as described in box 2.19.

BOX 2.19: Viability Gap Fund in India

In July 2005, the Cabinet Committee on Economic Affairs established India’s Viability Gap Fund program through its approval of the Scheme for Financial Support to Public Private Partnerships in Infrastructure.

The program has been successful. Twenty-three PPP projects with a total investment of $3.5 billion have received subsidies or Viability Gap Funding (VGF). An additional 43 projects are under review or have received in principle approval.

The primary objective of India’s VGF program is to attract more private investment in infrastructure by making PPP projects financially viable. Dissecting this primary objective reveals three underlying objectives.

  • Attracting more private investment to mobilize additional finance and more rapidly meet India’s infrastructure needs;
  • Prioritizing PPP projects to improve efficiencies, control timing and cost, and attract private sector expertise; and
  • Developing projects through an “inclusive” approach that does not neglect geographically or economically disadvantaged regions.

Critically, knowing that the funding is available encourages firms to bid on India’s PPP projects. The resulting keen competition has meant that many projects that the government thought might need a subsidy have in fact been fully privately financed without the necessity of a VFG contribution.

How are funds appropriated in the budget?

An appropriation from the state budget of about $335 million was used to capitalize India’s VGF program.[133] Rather than being disbursed in that year, the appropriation was set aside as a dedicated fund to be managed by the Ministry of Finance. It is expected that additional funds will be allocated to the VGF program through further annual appropriations once the initial capital is spent.

VGF for projects in India’s National Highway Development Program is appropriated separately. Starting in 2006, a portion of road user tax revenue in the Central Road Fund has been earmarked for Viability Gap Funding. The amount of funds earmarked for VGF is determined annually by the Planning Commission with input from the Ministry of Finance and the Ministry of Shipping, Road Transport, and Highways.

Source: Castalia (2011) Report to the World Bank Institute Subsidy Funding Mechanisms for Public Private Partnerships in Latin America.

Budgeting for long-term direct commitments, such as availability payments, is more challenging. The mismatch between the annual budget appropriation cycle and the multi-year payment commitments exposes the private party to the risk that payments may not be appropriated when due. This problem is not unique to PPPs. Indeed many other types of contractual payment commitments may extend beyond the budget year.[134] In many jurisdictions, governments do not introduce any particular budgeting approach for direct, long-term PPP commitments. This is done on the assumption that a responsible legislature will always approve appropriations to meet the government’s legally binding payment commitments.

Where appropriations risk is high typically in systems with a true separation of powers between the legislature and executive mechanisms to reduce this risk may be warranted. In Brazil at the federal level, Law No. 101 of 2000 requires subsidy payments to PPPs to be treated in the same way as debt service payments, that is, they are automatically appropriated.[135] This means that once the subsidy is approved, the appropriations needed are not subject to further legislative approval.

Budgeting for contingent liabilities in PPPs

Budgeting for contingent liabilities can be particularly challenging because payments may become due unexpectedly. If savings cannot be found within the existing appropriations, the government may need to go back to the legislature to request a supplementary appropriation, often a difficult and contentious affair.

To overcome these difficulties, governments may introduce particular mechanisms for budgeting for contingent liabilities under PPP projects. There are two ways to do this.

  • The first option is to create additional budget flexibility.[136] This can include creating a contingency line in the budget from which unexpected payments can be made. A contingency line could be specific to a particular liability – for example, those that are considered relatively higher risk, or cover a range of contingent liabilities. Alternatively, some countries allow spending in excess of the budget without need for additional approval in certain defined circumstances; and
  • The second option is to create a contingent liability fund.[137] A contingent liability fund (or guarantee fund) is an account (which may be within or external to the government’s accounts) to which transfers are made in advance, and from which payments for realized contingent liabilities will be made when due.

If designed appropriately, creating a fund can help control the government’s fiscal commitments to PPPs as well as provide a clear budgeting mechanism, thereby improving credibility. In Indonesia, the intention is that the government will no longer bear any contingent liabilities under its PPP projects. These will be borne by the Indonesia Infrastructure Guarantee Fund (IIGF). Contingent liabilities will only be assumed following a careful assessment of the risk by IIGF’s management. In the state of São Paulo in Brazil, the contingent liabilities under PPP projects have been borne by the São Paulo Partnerships Corporation (Companhia Paulista de Parcerias – CPP) since the PPP law 11688 was passed in 2004.

An advantage of contingent liability funds is that they can avoid the timing issues that arise if funds must be appropriated through the budget process in order to meet a contingent liability. A need for additional appropriations can significantly delay payment, resulting in liquidity issues for the private sector. Contingent liability funds can reduce risk for bidders, which in turn reduces costs for the public sector. Box 2.20 describes these examples of contingent liability funds.

BOX 2.20: Contingent Liability Funds for PPPs

  • Colombia: To manage contingent liabilities arising from guarantees offered to toll road concessionaires, Colombia assesses the fiscal impact of guarantees before these are granted and sets aside funds to cover the expected payments from the guarantees[138]. A Government Entities Contingent Liabilities Fund, established in 1998, has a special account that is managed by La Previsora, a trust company. The fund receives contributions from the government entities, the national budget, and the returns generated with its resources. The government entities carry out the contingent liabilities valuation which is then approved by the Public Credit Divisions of the Ministry of Finance. Once the PPP is approved and implemented, the division carries out ongoing assessments of the value of the associated contingent liabilities;[139]
  • São Paulo, Brazil: In the State of São Paulo, the São Paulo Partnerships Corporation (Companhia Paulista de Parcerias – CPP) was established in 2004 using resources from the sale of the government’s stake in State Owned Enterprises [#17, Articles 12-23]. Among its other roles, the CPP provides fiduciary guarantees to PPP projects.[140] The CPP is managed by a Directorate of up to three members selected by the Governor of the State, a Management Council comprised of up to five members selected by the Governor of the State, and a fiscal council. The CPP is an independent legal entity. A Castalia and World Bank Institution (WBI) review of Subsidy Funds for PPPs in Latin America and Caribbean (LAC)[141] provides more background about the CPP; and
  • Indonesia: The Indonesia Infrastructure Guarantee Fund, or the IIGF, is a state owned enterprise established by government regulation and the Ministry of Finance Decree in 2009. As one of the fiscal tools of the government, the IIGF is supervised by the Ministry of Finance. The IIGF’s mandate is to provide guarantees for infrastructure projects under PPP schemes. The fund operates as a single window for appraising, structuring, and providing guarantees for PPP infrastructure projects. The single window provides certainty because it ensures a consistent policy for appraising guarantees, as well as a single process for claims. This introduces transparency and consistency in the process, which is critical for market confidence. The IIGF provides guarantees against specific risks in a variety of sectors, including power, water, toll roads, railways, bridges, and ports.[142]

 

 

[133] Ministry of Finance (2006) Economic Survey, 2005-06. Government of India.

[134] Leases for government buildings are an obvious example.

[135] Lei Complementar No. 101 (2000) Articles 29, 30, and 32.

[136] As described in Cebotari (2008) Contingent Liabilities: Issues and Practice.

[137] Ibid.

[138] Castalia (2009) Benchmarking Indonesia's PPP Program.

[139] Congress of Colombia (1998) Law 448 (on managing contingent liabilities of government entities), Articles 3-8.

[140] Governor of the State of Sao Paulo (2004) State Decree 48.867, Article 15.

[141] Castalia & WBI (2011) Subsidy Funding Mechanisms for Public Private Partnerships in Latin America.

[142] More information about the IIGF is available on its website: http://www.iigf.co.id/Website/Home.aspx

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