Addressing Infrastructure Challenges and Managing Fiscal Risks from PPPs

Corbacho Posted by Gerd Schwartz, Ana Corbacho, and Katja Funke (all IMF staff)

Governments face important challenges to upgrade public infrastructure and improve the delivery of public services. As in other regions of the world, countries in the European Union (EU) and several non-EU economies in Europe have been facing strong demands to strengthen the quality of public infrastructure to accelerate economic development and income convergence. At the same time, tight budget constraints have raised incentives to rely on private sector resources to supply infrastructure. In this context, public-private partnerships (PPPs) are being used more and more as an alternative to traditional public procurement. While this has created new business opportunities for the private sector, it has also given rise to new fiscal, macroeconomic, and reputational risks for governments.

How then should governments address these infrastructure challenges and manage associated risks? Edited by Gerd Schwartz, Ana Corbacho, and Katja Funke Public investment and Public-Private Partnerships: Addressing Infrastructure Challenges and Managing Fiscal Risks brings together the perspectives of academics, practitioners, and members of several international organizations. It is based on the proceedings from a high-level international seminar for government officials, which was organized jointly by the Fiscal Affairs Department of the IMF, the Hungarian Ministry of Finance, and the International Center for Economic Growth, European Center (ICEG-EC), and with some financial support from the European Investment Bank.

The book is organized around four main themes:

Important common principles run throughout the book. First, considerable public investment is needed in all EU member states, but particularly in the new member states. Second, the impact of public investment on economic growth depends crucially on the quantity and quality of the initial capital stock, the quality of the investment project itself, and macroeconomic and fiscal sustainability considerations. Third, PPPs can be a valid alternative to traditional public procurement if they offer value for money. PPPs should not, however, be used to circumvent budgetary spending limits by pushing investment off budget. Also, PPPs do not alleviate the government’s intertemporal budget constraint, except to the extent that they facilitate the mobilization of resources through user fees and promote efficiency gains. The latter have to be large enough to compensate for the typically higher borrowing costs of private sector partners and the higher transaction costs involved in complex PPP contracts. Fourth, appropriate risk sharing is crucial for promoting efficiency gains and ensuring value for money. Governments should thus resist the temptation to tailor risk sharing agreements so as to shift PPPs off balance sheet, as this would lead to inappropriate contract design, increase renegotiation incidence, and reduce benefits from PPPs.

A strong enabling legal and institutional environment is needed to handle the complexities of PPPs. This entails several important elements. For instance, there has to be adequate and multidisciplinary capacity in the public sector to assess PPP projects, manage the tendering process, and accompany the implementation phase. Also, there has to be a dedicated institutional structure in place to deal with PPPs, including an appropriate gateway process managed by the ministry of finance that grants the finance minister veto power at different stages of the PPP cycle. Finally, fiscal costs and risks have to be assessed. They have to be transparently disclosed in budget documentation and fully taken into consideration in fiscal and debt sustainability assessments.