Government Financial Support and Ppps

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    GovernmentFinancial Support

    and PPPsDavid Duarte Arancibia [email protected]

    Head of Contingent Liabilities and PPPs

    Ministry of Finance - Chile

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    Why a PPP requires fiscal

    support?

    Because the PPP project is not attractive for the private sector An economic infrastructure is not profitable enough

    Government is the purchaser of the services

    Because involve high risk

    The private sector is not willing to bear

    The private sector requires an high risk premium

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    Ways for fiscal supportFunds

    Equity

    Direct payments (subsidies, shadow tolls, availabilities

    payments)

    Contingent

    Guaranties (debt, exchange rates, interest rates, revenues,

    commodity price, etc)

    Insurances

    Indemnities (cost overruns, revenue shortfall)

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    Ways for fiscal supportOther ways for government support

    State of lawFinancial markets regulations

    Low country risk

    Promoting private initiatives

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    Fiscal support has to be Correctly designed

    Efficient Effective

    Sustainable

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    Designing Correct project selection

    Project has a positive CBA Procurement maximize VfM

    Every fiscal support has an specific objective

    Be sure that guaranties are not used to replace fiscal payments

    Temptation exist, because guaranties are no reflected ontraditional account systems

    Is not possible (or it is very expensive) to provide by the

    private counterpart

    Guaranties, many times do not allow to financial markets to

    make a accurate risk assessment

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    Designing

    Use estimated values (not expected) Hopefully estimations should be done or reviewed by an

    independent area of government

    Take in account correlations

    GDP/Traffic GDP/Interest rates

    Traffic/Cost

    Has to create correct incentives or at least not perverse

    incentives

    Risk or risk cost (at least a part) has to be allocated at the side

    that can manage it

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    Efficiency Projects with high risk requires higher risk premium

    High risk premium are expressed into high prices Higher tolls or higher government payments

    Wrong decisions are not affordable by the private sector but

    for the government, the patrimonial cost is divided between

    taxpayers Tolls represents a bigger fraction of the taxpayers income

    than the potential cost for the government of bear the risk

    In this case is efficient to allocate the risk at the government

    side

    Be sure that risk allocation is based in economic efficiency,

    not by accounting issues (Eurostat)

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    Effective

    A country is in a better fiscal position if it do grant aguaranties than if it not do that

    In some cases guaranties has no effect in the private sector

    assessment of the project

    Private sector develop better/efficient ways to bear a risk

    Charge a fee for the guaranties is a way to encourage to the

    private counterpart to make an accurate assessment of the

    need

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    Sustainable Government has to be able to afford the cost

    Stocks of commitments has to be monitored Cash flows has to be estimated

    Contingent liabilities are difficult to be estimated

    Techniques as Montecarlo or Black-Scholes are very useful

    All information has to be disseminated

    Most of fiscal commitments involved in a PPP are off the balance

    Subsidies are not debt, the payments commitments has to be

    published

    Contingent commitments has to be include (estimated payments,

    VaR analysis, models used, etc)

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    Sustainable Contracts has to be transparent by public opinion

    Performance reports has to be available Level of commitments has to be congruent with the fiscal

    planning

    Investment trough PPPs is off budget, so is not constrained for

    fiscal rules Additional rules are required, specific for PPP investment

    Long term planning (more than 4 years)

    Permanent involvement of the MoF in the projects and

    programs (check & balance) PPP agency should not be allocated at the MoF

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    Recommendations to avoid

    fiscal surprises Correct project selection (CBA, VfM)

    Realistic times Good base studies

    Specialized advisory

    Permanent supervision

    Transparency (contracts, agreements, fiscal commitments,

    etc)

    Disseminate information

    Contingent liabilities management Assess risk transfer

    Make sound economic decisions

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    GovernmentFinancial Support

    and PPPsDavid Duarte Arancibia [email protected]

    Head of Contingent Liabilities and PPPsMinistry of Finance - Chile