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International Monetary Fund

and services that have traditionally been provided by the public sector. The most common form of PPP is one where the government enters into a long-term contract with a private partner to supply specified services, and the private partner is responsible for designing, building, financing, and operating the assets required to delivered these services. The private operator will typically own the PPP asset while operating it, but there is usually provision for the asset to be transferred to the government when the operating contract ends. Advantages of PPPs. A

Mr. M. Cangiano, Mr. Barry Anderson, Mr. Max Alier, Murray Petrie, and Mr. Richard Hemming

profits. Typically, the private operator owns the PPP asset while operating it under a DBFO scheme, and the asset is transferred to the government at the end of the operating contract, usually for less than its true residual value (and often at zero or a small, nominal cost). In this case, a PPP is often referred to as a build-operate-transfer (BOT) or build-own-operate-transfer (BOOT) scheme. The term PPP is sometimes used to describe a wider range of arrangements. In particular, some PPPs exclude functions that characterize DBFO schemes. Most common in this respect

Mr. M. Cangiano, Mr. Barry Anderson, Mr. Max Alier, Murray Petrie, and Mr. Richard Hemming

Abstract

Public-private partnerships (PPPs) refer to arrangements under which the private sector supplies infrastructure assets and infrastructure-based services that traditionally have been provided by the government. PPPs are used for a wide range of economic and social infrastructure projects, but they are used mainly to build and operate roads, bridges and tunnels, light rail networks, airports and air traffic control systems, prisons, water and sanitation plants, hospitals, schools, and public buildings. PPPs offer benefits similar to those offered by privatization, which is the sale of government-owned enterprises or assets. By the late 1990s, when privatization was losing much of its earlier momentum, PPPs began to be widely seen as a means of obtaining private sector capital and management expertise for infrastructure investment. After a modest start, a wave of PPPs is now beginning to sweep the world. This Special Issue paper provides an overview of some of the issues raised by PPPs, with a particular focus on their fiscal consequences. It also looks at government guarantees, which are used fairly widely to shield the private sector from risk and are a common feature of PPPs. And it examines the consequences of PPPs and guarantees for debt sustainability. The paper concludes with a list of measures that can maximize the benefits and minimize the fiscal risks associated with the use of PPPs. Various appendices augment the discussion by examining country experiences with PPPs, summarizing the statistical reporting framework used to discuss fiscal accounting and reporting, explaining accounting for risk transfer, examining how guarantees are modeled and estimated in Chile, and summarizing international accounting and reporting standards for contingent liabilities.

Mr. M. Cangiano, Mr. Barry Anderson, Mr. Max Alier, Murray Petrie, and Mr. Richard Hemming

Abstract

PPPs often involve the use of government guarantees, which are a form of government intervention intended to reduce the financial costs of risks faced by the private sector and/or by other public sector entities, should they materialize. The use of government guarantees in PPPs and elsewhere raises some important issues related to the apportionment of risk, fiscal transparency, incentives, and governance, among others. This chapter describes and discusses these issues, but first, it clarifies some terminology.

Mr. M. Cangiano, Mr. Barry Anderson, Mr. Max Alier, Murray Petrie, and Mr. Richard Hemming

Abstract

PPPs involve private sector supply of infrastructure assets and services that have traditionally been provided by the government. An infusion of private capital and management can ease fiscal constraints on infrastructure investment and increase efficiency. In recognition of these advantages, PPPs are taking off around the world: there are well-established programs in a number of countries, and less developed programs or a good deal of interest in many others.

Mr. M. Cangiano, Mr. Barry Anderson, Mr. Max Alier, Murray Petrie, and Mr. Richard Hemming

Abstract

This chapter looks at the consequences of PPPs and guarantees for debt sustainability, focusing on the appropriate approach to debt sustainability analysis and the uncertainty created by guarantees.

Ms. Manal Fouad, Chishiro Matsumoto, Rui Monteiro, Isabel Rial, and Ozlem Aydin Sakrak
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. But fiscal illusions prevent an understanding the sources of fiscal risks, which arise in all infrastructure projects, and that in PPPs present specific characteristics that need to be addressed. PPP contracts are also 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. This 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.
Chishiro Matsumoto, Rui Monteiro, Isabel Rial, and Ozlem Aydin Sakrak

only “gain time” during construction but need to pay during operation. Similarly, for PPPs that are based on user fees, short-term budget savings during construction are equal, in net present value terms, to the user fees foregone by the public sector during operation. Yet, introducing accrual accounting and looking at the whole project cycle would not eliminate fiscal illusion if ultimately PPPs are regarded as private assets. Fiscal illusion in PPPs can also arise from failing to recognize PPP assets as public infrastructure. Governments may classify PPP

Mr. Bernardin Akitoby, Mr. Gerd Schwartz, and Mr. Richard Hemming

contingent payments or receipts (such as guarantees, shadow tolls, profit-sharing arrangements, and events triggering contract renegotiation), with the payments and receipts valued to the extent feasible; Amount and terms of financing and other support for PPPs provided through government on-lending or via public financial institutions and other entities (such as special purpose vehicles (SPVs)) owned or controlled by government; and How the project affects the reported fiscal balance and public debt, whether PPP assets are recognized as assets on the

Chishiro Matsumoto, Rui Monteiro, Isabel Rial, and Ozlem Aydin Sakrak

Clear and Consistent Legal PPP Framework References Boxes Box 1. Main Characteristics of Public-Private Partnerships Box 2. PPP Asset Recognition Criteria: Control vs. Risks and Rewards Approaches Box 3. Occurrence of Explicit Fiscal Risks Box 4. Contractual Risk Allocation Box 5. The Fiscal Cost of Implicit Contingent Liabilities Box 6. Optimism Bias in Infrastructure: Optimistic Cost Expectations Box 7. Renegotiation in Practice Box 8. Examples of Risks of Unsolicited Proposals Box 9. Fiscal Illusion and Fiscal Sustainability Box 10