Ready for the rainy day: How sound fiscal management can build PPP resilience

Around the world, countries increasingly use public-private partnerships (PPPs) to accelerate investment in much-needed infrastructure. While PPPs provide an important tool for governments, PPPs are also sensitive to economic ups and downs as the COVID-19 pandemic demonstrated with a 52% drop in investments committed following the economic slowdown in 2019 and numerous operational PPPs facing financial distress.

The recent World Bank study Managing the Fiscal Implications of PPPs in a Sustainable and Resilient Manner found that with government support and ability to adapt to crisis, PPPs are able to endure. The study covers 10 countries with mature PPP markets: Australia (Victoria), Chili, Peru, Georgia, Jordan, Kenya, Pakistan (Sindh), the Philippines, Türkiye, and South Africa.

The pandemic had similar impacts across businesses including disruptions to global supply chains, reduced economic activity, and with lockdowns—lower usage of roads and airports. This study did demonstrate, however, that the impact of crises differed depending on the sector where the PPP is established and how the PPP is used and structured. Economic infrastructure is impacted differently than social infrastructure. Where demand dropped for airports and roads, demand increased for health care facilities, and schools which were faced with a sudden need to introduce online facilities to accommodate remote teaching.

Such adverse impacts imply a need for government support to PPP programs, similar to privately led economic sectors. This support was deemed necessary even if it resulted in increased assumption of financial commitments by governments in many countries. A sound procedural framework, however, can help anticipate support schemes to manage PPPs through crises. Such a framework provides a clear mechanism to ensure that such support is provided in an organized, transparent, affordable, and justified manner.

Given that the provision of critical public services is at stake, the study highlights that governments are to be discouraged from relying on unplanned renegotiations to attain a speedy solution. Instead, they are encouraged to have unambiguous contractual provisions in place to address the impact of materially adverse government actions.

The study also recommends that governments build capacity and resilience to fiscal shocks and consider all the fiscal risks and mitigation measures during the project preparation and approval phases, including the capacity to work remotely for continuing the preparatory activities. The case studies underlying this work show this requires a sound fiscal management approach to PPPs, also referred to as a Fiscal Commitment and Contingent Liabilities (FCCL) framework.

The pillars of an FCCL framework should have in place the necessary rules, institutional responsibilities, and decision criteria to manage the fiscal implications prior to and during implementation of a PPP by applying the main FCCL principles for analyzing, controlling, budgeting, and monitoring of fiscal implications.

Where most countries in the study already adopted the regulatory context to manage such support schemes, many struggle to implement the necessary principles. Capacity constraints, government priorities, misconceptions, and overly complex mechanisms are common grounds for failing to implement a sound FCCL framework.

Key takeaways from this study are:

An FCCL framework must be an integral part of the overall PPP framework
Capacity building is key to operationalization of FCCL management
Political leadership must emphasize fiscal management
Sophistication should be balanced with practicality
FCCL frameworks do not reduce fiscal impact from exogenous shocks, but will strengthen control and mitigation of these fiscal risks

There are many lessons we can learn from crises, and as the world faces climate change, political instability, and price hikes, we need to anticipate and prepare to manage the unexpected. A sound and practical FCCL framework can help manage the fiscal risks from PPPs and sustain their benefits for better and more resilient infrastructure projects.

Daria Yurlova, Carlos Raul Leon Gomez, and Roland Akafia developed the case studies. David Duarte, Elena Timusheva, and Mikel Tejada Ibanez led this initiative.

Disclaimer: The content of this blog does not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, staff or the governments it represents. The World Bank Group does not guarantee the accuracy of the data, findings, or analysis in this post.

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