Government of Uganda National... · PPPs have the potential to reduce life cycle costs and risk to the Government and to ... screening, prioritization, development, procurement, implementation

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Government of Uganda

PPP FISCAL COMMITMENTS AND

CONTINGENT LIABILITY (FCCL)

MANAGEMENT FRAMEWORK

DRAFT

[April] 2019

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Acronyms and Abbreviations

CA - Contracting Authority

DB – Directorate of Budget

DCM - Directorate of Debt & Cash Policy

DEA – Directorate of Economic Affairs

FCCL – Fiscal Commitments and Contingient Liabilitiesy

GOU - Government of Uganda

GDP - Gross Domestic Product

IAS - International Accounting Standards

MFPED – Minsitry of Finance, Planning and Economic Development

PFM - Public Finance Management

PPP - Public Private Partnerships

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Table of Contents

1. INTRODUCTION .......................................................................................................................... 4

1.1. Regulatory Framework .................................................................................................................. 4

1.2. Application of FCCL Management Framework ........................................................................ 7

2. FISCAL COMMITMENTS FROM PPPS ................................................................................... 8

3. MANAGEMENT OF FISCAL COMMITMENTS .................................................................. 11

4. MANAGEMENT OF FISCAL COMMITMENTS DURING PROJECT

DEVELOPMENT .......................................................................................................................... 16

4.1 Identification and Assessment of fiscal commitments and fiscal risks ............................. 16

4.2 Analysis of Affordability ............................................................................................................ 24

4.3 Approval and Accepting .............................................................................................................. 26


IMPLEMENTATION ................................................................................................................... 27

5.1 Budgeting and paying .................................................................................................................. 27

5.2 Monitoring ..................................................................................................................................... 27

5.3 Reporting and Disclosing............................................................................................................ 28

5.4 Accounting ..................................................................................................................................... 30

6. ANNEXURE ................................................................................................................................... 32

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1. INTRODUCTION

The objective of this Fiscal Commitments and Contingent Liabilities (FCCL) Management

Framework is to provide a methodological tool for public officials of the Ministry of

Finance, Planning and Economic Development of Uganda (MFPED), the PPP Unit, and

Contracting Authorities (CA) at both the national and local government level, to assess

and manage fiscal commitments and contingent liabilities arising from public-private

partnership (PPP) projects.

Additionally, the following tools have been developed to facilitate the implementation of

this Framework:

- “PPP Fiscal Commitments Model – Uganda Portfolio” (Spreadsheet), and the

Model Manual.

- “PPP Fiscal Commitments Summary – Uganda Portfolio” (Spreadsheet), as a

complementary tool to the “PPP FCCL Model– Uganda Portfolio”.

- “Stochastic Model PPP” (Spreadsheet), and Note on Stochastic Analysis.

1.1. Regulatory Framework

The Public Private Partnerships (PPP) Act received Presidential Assent on August 5th,

2015 and provides the legal and regulatory framework for the participation of the private

sector in the design, construction, maintenance and operation of infrastructure or services

through PPP agreements.

The Government of Uganda hopes to procure projects through the PPP model because

PPPs have the potential to reduce life cycle costs and risk to the Government and to

introduce private sector expertise, operational efficiency, technology, and innovation. In

turn, this can produce an accelerated pipeline of better-quality infrastructure and service

delivery, provided that risk allocation between the Government and the private party is

appropriate.

However, even with appropriate risk allocation, the public sectors’ contributions to the

“partnership” of PPPs inevitably give rise to liabilities for the Government. In this regard,

Uganda aspires to a fiscally responsible implementation of its PPP programme and in so

doing, has developed this Fiscal Commitments and Contingent Liabilities (FCCL)

Management Framework to ensure that these liabilities are identified and managed

through all stages of a PPP project i.e. from inception to operations phase. See Table 1 on

the relevant provisions in the Uganda PPP Act 2015.

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Table 1: Relevant provisions in the PPP Act, 2015

Functions of the PPP Committee (Section 7)

“(k) ensure approval of, and fiscal accountability in the management of, financial and any other

form of support granted by the Government in the implementation of projects under this Act;”

Functions of the PPP Unit (Section 11)

“(2) In the performance of its functions under subsection (1), the Unit shall –

(e) develop an open, transparent, efficient and equitable process for managing the identification,

screening, prioritization, development, procurement, implementation and monitoring of

projects, and ensure that the process is applied consistently to all projects;

(g) collate, analyse and disseminate information including data on the contingent liabilities of

the Government in relation to a project;

(k) review and assess requests for Government support in relation to a project and advise the

Committee on the support that should be accorded in relation to the project;

(p) monitor contingent liabilities and accounting and budgetary issues related to public private

partnerships with the relevant offices within the Ministry;”

Functions of accounting officer (Section 13)

“(2) An accounting officer shall not enter into an agreement that in any way binds the

contracting authority to a future financial commitment or which results in a contingent

liability, except where the future financial commitment or contingent liability is authorised by

Parliament in the budget of the contracting authority.”

Feasibility study (Section 22)

“(2) The feasibility study shall –

(e) describe in specific terms – (i) any envisaged future contingent liability;

(f) demonstrate that the project shall – (i) be affordable to the contracting authority;

(i) indicate any envisaged future contingent liability.”

Procurement of public private partnerships (Section 23)

“(4) Where a project is to be financed by a contracting authority, the contracting authority shall,

prior to procuring a private party, obtain written confirmation from the Minister that the

financing required shall be available for implementation of the project.”

Evaluation of bids (Section 25)

“(2) After the evaluation of the bids, the contracting authority shall submit a report of the

evaluation to the Committee, and the report shall indicate –

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(a) how the criteria of affordability, value for money …… were applied in the evaluation of the

bids;”

Public private partnership agreement (Section 26)

“(1) The Cabinet shall prescribe the value of an agreement for which the approval of Cabinet is

required before an agreement is signed by an Accounting Officer.

(4) An agreement shall be forwarded to Cabinet for approval where the Accounting Officer

confirms that –

(a) the best evaluated bid meets the requirement of affordability, value for money and substantial

technical, operational and financial risk transfer;

(6) An agreement shall among others provide for the following-

(o) the payment of compensation and the reparation of any loss or damage caused where the

contracting authority or the private party violates its contractual obligations;

(p) the grounds for termination of the agreement and the consequences of this termination;

(9) The Cabinet shall not approve an amendment, or variation to a project agreement under

subsection (8) unless the variation or amendment is necessary for –

(b) the project to continue to be affordable, where such amendment, variation or waiver has a

financial implication;”

Role of Accountant General (Section 28)

“(3) The Accountant General shall prescribe accounting and financial reporting rules to be

adopted for public private partnerships”.

Establishment of a Project Development Facilitation Fund. (Section 29)

“(2) The moneys received into the Fund shall only be applied to –

(c) provide a source of liquidity to meet any contingent liabilities arising from a project.”

Unsolicited proposals (Section 34)

“(5) Where a contracting authority accepts an unsolicited proposal, the contracting authority

shall evaluate the unsolicited proposal and assess –

(d) an assessment of whether the proposed cost of the project is realistic, affordable and

justifiable;”

The application of the FCCL Management Framework addresses the provisions of the

PPP Act 2015 mentioned in the Table 1 above and various other Ugandan laws. The

provisions under Article 159 of the Ugandan Constitution; sections 5, 11, 16, 18, 36 and

39 of the Public Finance Management Act 2015; and section 13 of the Budget Act 2001 will

be applicable to the management of FCCLs.

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1.2. Application of FCCL Management Framework

The FCCL Management Framework is part of the Ugandan PPP guidelines and should

be used for all PPP projects submitted for consideration and approval under the PPP Act,

2015. All PPP projects executed before the commencement of the PPP guidelines will be

reviewed for FCCL for the purpose of collecting and consolidating FCCL information as

required.

The FCCL Management Framework is a dynamic document that will be refined and

revised periodically as the PPP programme evolves:

It first looks at how PPPs give rise to fiscal commitments - both direct liabilities

and contingent liabilities and defines both - Section 2

Section 3 provides an overview of the management of fiscal commitments across

the PPP project development cycle

Section 4 details the process to be adopted for managing FCCLs during the project

development stage, and

Section 5 details the process to be adopted for managing FCCLs during the project

implementation stage.

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2. FISCAL COMMITMENTS FROM PPPS

While PPPs can offer benefits from a budgetary perspective, PPP agreements have fiscal

implications for Government that must be managed effectively. PPPs are not “cost free”

to a Government. PPPs can provide new or alternative sources of finance from the private

sector which can help to meet the infrastructure gap and the available public funds for

infrastructure can be spread over a longer period of time, but in the long term the

Government still has to repay the private party for his investment. Under a PPP

arrangement, the Government almost always bears some risk or provides some financial

support that gives rise to an on-going fiscal commitment - either an actual direct liability

or a contingent liability. In addition, Government will also bear some fiscal risks.

Fiscal Commitments:

A direct liability takes the form of a defined and quantified undertaking to pay or

carry a funding obligation for a feature, phase or item in a PPP project essential to

its development, operation or completion. Its salient characteristic is that the

occurrence of the payment obligation is known, although uncertainty may remain

as to the size. Examples of such direct liabilities include:

(i) supplying the land needed for the project;

(ii) upfront “viability gap” payments, in which the Government makes a

capital contribution to ensure a project that is economically desirable but

commercially unattractive can proceed;

(iii) annuity or availability payments in which a regular unitary payment

over the life of a project is conditional on the availability of the service or

asset;

(iv) out-put-based payments or payments made per unit or user of a service.

A contingent liability, on the other hand, is an obligation that arises from a

particular discrete but uncertain future event (i.e. one that may or may not occur)

that is outside the control of the Government. For contingent liabilities, the

occurrence (trigger event), value, and timing of a payment may all be unknown or

cannot be definitively determined. Such liabilities include:

(i) guarantees on specific risk variables e.g. exchange rate, inflation, prices

and traffic;

(ii) force majeure;

(iii) termination payments; and

(iv) credit guarantees, among others.

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These types of commitments are explicitly set in the PPP agreements. However, fiscal

commitments can come from implicit sources as well. For example, a Letter of Support

(LOS) for a specific project may be considered a type of guarantee for some stakeholders.

Also, political or social sensitive projects may be expected to be rescued by Government

if financial distress occur.

Additionally, increase of existing obligations or creation of new obligations may arise

from contract adjustments and renegotiations. They may, for example, modify

significantly the costs of the projects, and the payments to be made by Government.

Section 26(9) of the PPP Act 2015 states that Cabinet shall not approve an amendment or

variation to a Project Agreement unless (amongst others) the amendment is necessary for

the project to continue to be affordable, where such amendment, variation or waiver had

a financial implication or is necessary for the project to continue to provide value for

money. This obligates the accounting officer, PPP Unit and the DCM to assess the

financial implications of any amendment and variation of the project agreement to ensure

that the project continues to be affordable.

Even when direct liabilities can often be considered more predictable than contingent

liabilities, this is not always the case. Direct liabilities can also include uncertain

components within its structure. For example, the project agreement of a toll road project

may include a service payment defined as an annual payment to be made by the

Government to the concessionaire in function of availability characteristics. This service

payment can change in function of inflation, exchange rate, local interest rate, change of

scope, increase of road size, and other components. This shows that direct liabilities can

have a significant amount of uncertainty for Government.

Fiscal risks

Fiscal Risks are factors that cause fiscal outcomes to deviate from expectations or

forecasts. They arise from the realization of contingent liabilities - obligations triggered

by an uncertain event, and from the realization of macroeconomic shocks, or other

unpredictable variables. Hence, contingent liabilities are, by definition, fiscal risks. Direct

liabilities may be subject to fiscal risks when they may change because of uncertain

parameters. Within the context of PPP agreements, we need to pay attention to other

sources of fiscal risks than those embedded in direct or contingent liabilities.

Other sources of fiscal risk are those channeled through provisions – controlled by the

Government– of the PPP agreement. For example, an extension of the project scope –

allowed in the PPP agreement and subject to consent of the Government– that modifies

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the costs of the project to the Government. Other sources of fiscal risk are outside the

scope of liabilities to be paid by the Government to the private partners. For instance, a

reduction of user-based revenues used by the Government to fund a project. This

reduction does not affect the liabilities of the Government owned to the concessionaire

(that may be fixed and independent of user-revenues performance) but it does have a

fiscal impact.

Uncertainty, or more precisely, unpredictable outcomes is what will make the estimation

and management of fiscal commitments more challenging.

Table 2: Examples of PPP fiscal commitments for Government for PPP projects in

Uganda

Project Fiscal commitment Other fiscal risks

Direct liability Contingent liability

Kampala-Jinja Expressway (2018) (PPP)

- Upfront capital subsidy - Resettlement and Land - Availability payments indexed to changes in inflation and foreign exchange rates.

-GOU subsidy to UNRA to cover gap toll-revenues and availability payments - Termination payment in case of default of concessionaire, or default of contracting authority, or force majeure.

- Change of scope that modifies the service payment. - Toll-revenue - Renegotiation

Bujagali (2008) (PPP)

- Resettlement and Land - Interconnection infrastructure (Contracting authority)

- Guarantee over committed payments acquired by UETCL via PPA. - Termination payment in case of default of concessionaire, or contracting authority, or force majeure.

- Hydrology - Renegotiation

Overall, it is important to note that Government commitments to PPPs are materially

different to Government debt and require a different management approach. When a

Government borrows, it uses the borrowed funds and the Government is obliged to repay

the debt regardless of how well the borrowed funds are used. In contrast, Government

liabilities to PPPs are in the nature of payments for services delivered. Payments are

linked to the performance of the service provider.

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3. MANAGEMENT OF FISCAL COMMITMENTS

The management of fiscal commitments is carried out in two stages: 1) PPP Project

Development Stage (explained in Section 4); and 2) PPP Project Implementation Stage

(explained in Section 5).

A two-stage structure of FCCL Management Framework (development and

implementation) is proposed. Managing and controlling liabilities takes place in all

phases of PPP development, approval, and implementation processes. The functions to

be undertaken are shown in the context of the broader PPP project development and

implementation process:

Figure 1: Functional Components of Managing Liabilities

Figure 1: Functional Components of Managing Liabilities

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While within the Ministry of Finance, Planning and Economic Development the primary

FCCL oversight is role assigned to the Directorate of Debt & Cash Policy (DCM), the

governance and institutional framework, including the specific functions that need to be

undertaken to manage direct and contingent liabilities during the PPP project lifecycle, is

shared as follows:

Table 3: Specific functions, roles and responsibilities of various institutions in

managing direct and contingent liabilities during a PPP project life cycle

Function Objectives Role/ Responsibility

Identifying

and assessing

fiscal

commitments

and fiscal risks

To identify fiscal commitments

within the project structure,

develop a project structure that

will be bankable and ensure that

the risks the Government will

bear are consistent with good

risk allocation principles, borne

at the lowest cost and with

minimal fiscal impact.

Contracting Authorities:

Project feasibility studies and

implementation plans.

Development of Risk Register

and Fiscal Commitment

Registers.

Analysis of

Affordability

To inform decision making when

the project is structured and

approved, and provide a basis

for monitoring and budgeting for

liabilities.


CAs must determine whether

the project is aligned with its

internal budget constraints.

DCM, PPP Unit, and multi-

department review team from

MFPED (including DB and

DEA) formed to recommend

the project to the Minister:

Fiscal risk assessments and

other tools for analysing

liabilities. Review team

analyses fiscal commitments

and contingent liabilities before

submission to the PPP

Committee for approval.

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Approving To ensure the use of Government

resources in the form of liabilities

is focused on policy priorities;

represents value for money; and

is consistent with good fiscal

management.

PPP Committee:

Central approval to ensure that

PPPs are focused on the

Government’s policy

priorities, represents value for

money, and are consistent with

good fiscal management.

Minister of Finance:

Written approval must be

obtained from the Minister of

Finance where a project is to be

financed by a contracting

authority.

Accepting To clarify the Government’s

commitment to its liability

obligations, and to ensure the

executed contract is consistent

with earlier analysis and

approval


Involves the Contracting

Authority executing formal

instruments such as project

agreements, issuing letters of

support or performance

undertakings with the

purpose of guaranteeing that

they will honor its obligations

and commitments.

Cabinet:

Cabinet approval is required if

a PPP is above a certain

threshold. 1

Parliament:

If the PPP involves borrowing

by Government, the loan

documents must be approved

by Parliament. (Section 36(5)

1 As at 1 March 2019, the value has not yet been prescribed.

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PFM Act, Article 159(2)

Constitution of Uganda)

Budgeting and

paying

To ensure resources are available

to make payments promptly

when required, improving

credibility and clarity as to how

costs of liabilities will be borne,

and mitigating the fiscal impact.


Establish a well-defined system

for budgeting and paying for

liabilities at the individual

Contracting Authority level.

Directorate of Budget (DB):

Establish a well-defined system

for budgeting and paying for

liabilities on a holistic

Government level to ensure the

Government has the resources

available to meet its obligations

and mitigate the fiscal or

budgetary impact of contingent

liabilities.

Monitoring To provide information needed

to disclose, act on emerging

issues, reduce the likelihood or

cost of contingent liabilities

realizing and, if necessary,

budget for liabilities

Contracting Authorities,

DCM, PPP Unit:

To help Government track its

exposure to fiscal risk from

year to year, actively manage

exposure to contingent

liabilities, and improve its

ability to take action to reduce

the cost or likelihood of an

event triggering a payment

occurring should risks emerge.

Reporting and

Disclosing

To improve accountability for

decision makers, and increase

transparency of the

Government’s commitments to

Permanent Secretary/

Secretary to the Treasury:

Reporting on exposure to

liabilities through the budget

and Government

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third parties (such as credit

agencies and lenders).

accounts to increase

transparency and improve the

accuracy and completeness of

information available to

external parties. (Section 11 and

Section 16 PFM Act)

DCM:

Publish information on all

fiscal commitments and

contingent liabilities in its

applicable reports.

CAs:

Reporting on exposure to

liabilities through the CA

accounts.

Accounting To improve accountability for

decision makers and increase

transparency of the

Government’s commitments to

third parties (such as lenders and

credit agencies)

Accountant General:

shall prescribe accounting and

reporting rules to be adopted

for PPPs

An adequate identification and assessment of fiscal commitments and risks during the

project development stage will allow the Government to take good decisions regarding

the financial structure, risk allocation, and approval of the project.

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DEVELOPMENT

The project development stage covers all the steps taken to design, evaluate, and tender

the project. The FCCL Management Framework for the project development stage has

two main elements:

(1) the identification and assessment of fiscal commitments and risks

(explained in Section 4.1); and

(2) the assessment of affordability (explained in Section 4.2).

Both activities will help contracting authorities to take well-informed decisions over the

project.

4.1 Identification and Assessment of fiscal commitments and fiscal risks

The first step to assessing fiscal commitments and other potential fiscal risks is for

Contracting Authorities to identify and assess them within the project structure.

Identifying and assessing fiscal implications of a PPP agreement involves identification

and allocation of risks of the project, definition of payment mechanism, obligations and

rights of parties, etc. In practice, the base information needed shall be found in the risk

analysis and risk matrix within feasibility studies. Contracting Authorities therefore need

to ensure that identification and assessment of fiscal commitments and risks is a task

specified in the terms of reference for the Transaction Advisor. For active projects, these

would be found in the project agreements, letters of support, guarantee instruments, etc.

Advice from experts will also be required regarding all aspects of the project’s specific

sector (i.e. water and sanitation, transport, energy, etc.) and project’s specific financial

structure.

PPP Agreements, Letters of Support and other explicit Government support provide the

fiscal commitments (direct and contingent). These documents will contain provisions for

the payment mechanism to the private party and any allowed adjustments to availability

payments, tariff-based payments etc.; guarantees and trigger conditions, and termination

payments.

The process of identification and assessment of fiscal commitments and fiscal risks is

undertaken in the following three steps:

(1) Analysis of project’s risk matrix using a Fiscal Risk Register and a Summary Risk

Profile;

(2) Identification of fiscal commitments using a Fiscal Commitments Register; and

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(3) Assessment of fiscal commitments and fiscal risks.

The annexure to this FCCL Management Framework includes a solved example of

requirements under steps 1 and 2 above.

(1) The first step involves the analysis by the Contracting Authority of the project’s

risk matrix using a Fiscal Risk Register.

The Project Fiscal Risk Register will allow the Government to identify risks and any

corresponding mitigation and monitoring measures (explained in Section 5.2) for risky

liabilities. For instance, if Government is required to pay a termination payment in case

of default of the concessionaire, the fiscal risk matrix in the Project Risk Register shall

contain mitigation actions to mitigate risk of default and monitoring actions to anticipate

a potential default.

Moreover, the project agreement may not contain explicitly all risks and their effects on

the Government budget. For instance, a Government may take revenue risk and pay to

the concessionaire an availability payment. In this case, the contract will include the

characteristics of the availability payment but not the effects of, for instance, real demand

falling below expectations. Therefore, the Fiscal Risk Register complements the project

agreement in identifying fiscal commitments and fiscal risks.

It must be noted that a typical project risk matrix is typically focused on the consequences

and mitigation measures of risks over the private partner. A different matrix, a fiscal risk

matrix, shall be developed by an expert and must be focused on the effects and mitigation

measures over the government partner. Inputs to develop this matrix are the risk

allocation matrix elaborated for the feasibility study, the finance structure documents, the

PPP agreement, etc. Table 4 shows an example of the Fiscal Risk Register that consolidates

step 1. It shall contain only risks that are allocated partially or totally to the Government.

The Fiscal Risk Register contains description of the risk, allocation, cost, likelihood and

fiscal impact, and Government mitigation actions. As the objective we are pursuing is to

assess fiscal impact, columns entitled “Cost”, “Likelihood/Fiscal impact”, and

“Government mitigation actions” of the Risk Register must be populated only when the

risk is allocated totally or partially to the Government. All these aspects shall be done

with help of a project’s expert adviser.

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Table 4: Project Fiscal Risk Register

Risk Description Allocation Cost

Likelihood

/ Fiscal

Impact (*)

Government

mitigation

measures

Project X

Risk A -

Private / Central

Government /

State-owned

enterprise / Local

authority

Estimated

cost

Qualitative

estimate of

likelihood

of

occurrence

(eg. Very

high/

Medium)

Measures to be

done by

Government to

mitigate the risk

Risk B - - - - -

(*) According to analysis of risk, historic information, and expert judgment, likelihood and impact,

each may be Low, Medium, or High.

The Contracting Authority has to identify risks that are with the Government/

Contracting authority and briefly describe the nature of the risk. Provide the name of the

agency to whom the risk is allocated to. The risk can also be shared. The column on cost

is the fiscal impact of the risk materializing.

Two sets of information need to be provided in the column Likelihood/ Fiscal impact.

Likelihood refers to the probability of the risk materializing. It is based on analysis of the

risk, historic information and expert judgement. The likelihood is categorized into bands

of Very low to Low, Medium, High, and Very High.

Fiscal impact is the impact of the estimated cost of risk on the Government budget or

GDP. Similar to likelihood, the fiscal impact is categorized into bands of Very low to Low,

Medium, High, and Very High.

An example of the information included in this column is ‘Very High/ Medium’, implying

that the risk has a very high likelihood of occurring and it has a medium fiscal impact.

The following table can be used as a guide for grading on likelihood and fiscal impact.

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Table 5: Guide for grading likelihood and fiscal impact

Likelihood of risk event Fiscal impact on Government

Very Low to

Low

Remote likelihood

Strong mitigation measures in place

Negligible impact on Government

budget

Low reputational risk

Medium Likely chance

Past occurrence (country/ region)

Risk mitigation may not be sufficient

Between __% to __% of GDP or

Government budget

Some reputational risk

High High likely chance

Past occurrence (country/ region)

Risk mitigation may not be sufficient

Between __% to __% of GDP or

government budget

Substantial reputational risk

Very High Very high likely chance

Recurrent occurrence (country/

region)

No risk mitigation measures in place

Above __% of GDP or government

budget

Impact cascading to other sectors

The last column of the Risk Register, “Government mitigation measures” is directly

related to the column “Monitoring Information: Fiscal Commitments and Fiscal Risks” of

Table 9 of the Monitoring Section 5.2 of this FCCL Management Framework. Therefore,

consistency between both columns shall be checked. These measures are important to

formulate management responses and actions to reduce and control the identified risks.

The benefits of managing risk appropriately are: to facilitate informed and systematic

decision making, minimise consequences of risks, and give an improved understanding

of the project’s risks.

The following are some suggested types of mitigation measures by the Government:

• Preventive measures: To limit the possibility of an undesirable outcome. Some

examples are: insurances, partial guarantees (such as those provided by financial

institutions to mitigate the risk of public entity failing to perform its financial

obligations), financial instruments (to mitigate financial risks, such as interest rate,

exchange rate, commodity prices) and cap-provisions.

• Corrective measures: To correct undesirable outcomes. For instance, a

contingency plan in case of natural disasters, or in case of in case of termination of

contract.

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• Detective measures: To identify occasions of undesirable outcomes. Here we find

all monitoring activities and reports. For example, if Government provides a

termination payment in case of default of contracting authority, it shall monitor

financial performance and compliance of obligations of contracting authority.

In addition to the Fiscal Risk Register, it is recommended that the Contracting Authority

also create a summary of the risk profile for each project. This summary, as shown below,

will allow the Government to compare the different risks in terms of impact and

likelihood. The information in the column likelihood and fiscal impact in Table 4 is used

to map the risk to the appropriate cells in the summary risk profile. The fiscal risks to the

right-hand side of the risk tolerance line are the ones that will have a significant fiscal

impact on the Government.

Figure 2: Summary of risk profile

(2) The second step is for the Contracting Authority to identify and register direct and

contingent commitments in a Fiscal Commitments Register.

Fiscal Commitments and Contingent Liabilities shall be consolidated in the following

Fiscal Commitments Register, shown in Table 6. The Fiscal Commitments Register

contains the type of liability, description of adjustment factors and trigger events, and the

location of the information (which will depend on the stage of the project).

Very Low -

LowMedum High Very High

Very Low -

Low

Medum

High

Very High

Fiscal Impact

Likelihood

Risk tolerance line

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Table 6: Fiscal Commitments Register

Fiscal

Commitment

Type of fiscal

commitment (direct/

contingent)/Definition

Adjustment

factors/Trigger

events

Location

Project X

Payment 1

Direct

Explain payment

concept, periodicity,

and form of calculation

Detail

adjustment

factors and

trigger events if

apply

Specific location where

this information was

taken (Feasibility

Study, PPP Agreement,

Letter of Support, etc.)

- Payment 2

Contingent

Explain payment

concept, periodicity,

and form of calculation

Payment 3 - - -

The Contracting Authority will list all payment liabilities – direct and contingent in the

table above. The payments will need to be described in detail viz. – type of payment,

payment due dates, its form of calculation etc. The column on adjustment factors/ trigger

events includes features for adjusting the payments in case of direct payments and trigger

events for contingent liabilities. The Contracting Authority may use additional sheets

cross referenced to this table the required details cannot be accommodated in this table.

In the case of a road project serviced by availability payments – the adjustment factors

for direct payment could include inflation, foreign exchange rate fluctuation,

compensation for overloaded vehicles plying on the road, etc. And if tolls are collected

by the Contracting Authority for supporting the availability payments, then the shortfall

in toll revenue vis-à-vis the availability payment due may trigger the payment guarantee

mechanism.

(3) The third step is the actual assessment of the fiscal commitments and fiscal risks

itself.

Table 7 provides guidelines on what measures and methodologies Contracting

Authorities and MFPED can use for the assessment of fiscal commitments and fiscal risks

for PPP projects. Those fiscal commitments and risk that cannot be assessed

quantitatively shall be assessed qualitatively using information from Fiscal Risk Register

(Table 4), and the Summary Risk Profile (Figure 2).

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Table 7: Methodologies for assessment and analysis of fiscal commitments and fiscal

risks

Fiscal commitment Estimate

Methodology

adopted for

estimating the fiscal

commitment

Direct Liabilities

Upfront payment

- Annual cost over

life of project

- Present value of

payment stream for

the period of

agreement

-

Availability payment -

Availability payment adjusted

permanently by macroeconomic

parameters

- Scenario analysis

- Stochastic analysis

Availability payment adjusted by

contingent events

- Scenario analysis

- Qualitative analysis

of likelihood of

reaching trigger

values


Contingent liabilities

Revenue guarantee

- Estimated annual

cost over life of

project

- Estimated present

value of payment

stream for the period

of agreement

- Scenario analysis


of likelihood of

reaching trigger

values


Debt guarantee

Guarantee over annual payment by

state-owned enterprise, local or

subnational Government

- Estimated annual

cost over life of

project

- Estimated present

value of payment

stream for the period

of agreement

Termination payment - Maximum value


of likelihood of

reaching trigger

values

23

Other fiscal risks

- - Maximum value


of likelihood


Upfront payments and availability payments that do not have any linkages to any risk

factors are simple to compute. Their value and timing during the project term are certain.

Scenario and stochastic analysis are used when timing and value of payments is

uncertain.

Scenario analysis involves calculating the fiscal impact to the Government under

different scenarios by making assumptions regarding the outcome of events or variables

that affect the value of the contingent liability and calculating the cost given those

assumptions. Usually, fiscal impact is computed for a risk under the categories like – Best

case, Likely case and Worst case scenarios and the values are multiplied with the

probabilities of these scenarios occurring, to arrive at an expected fiscal impact of the risk

event occurring.

Stochastic analysis is a class of computational algorithms that rely on repeated random

sampling to obtain a range of possible outcomes and the probabilities they will occur for

any choice of event or action. In this analysis, input parameters are considered as

variables that change according to an assigned probability distribution function. Through

numerical equations the causal relationship between the output parameters and the input

variables is established. Thereafter, random sampling is done to obtain an estimate of loss

with each value of risk variable. Usually, several repetitions are done to arrive at loss

estimates at different levels of confidence.

The assessment/ analysis/ quantification mentioned above can be done using the

following spreadsheet models that form part of the FCCL Management Framework.

These tools allow the users to calculate direct and contingent liabilities, and provides cash

flow and Government accounting statements:

- PPP FCCL Model - Uganda Portfolio:

o The “PPP FCCL Financial Model Manual” provides a step-by-step guidance on

how the spreadsheet model “PPP FCCL Model – Uganda Portfolio.xlsm”

operates

- Stochastic Analysis:

24

o The “Stochastic Analysis” spreadsheet allows to make estimations with

stochastic analysis (Monte Carlo simulation). This is explained in the “Note on

Stochastic Analysis”.

- Termination Payment:

o The “Termination Payment” spreadsheet allows to calculate termination

payments.

4.2 Analysis of Affordability

With the estimations of fiscal costs, the Government must now check if the project is

affordable. The three common instruments used to check affordability are:

(1) Comparing annual cost estimates against the Contracting Authority projected

budget;

(2) Assessing the impact on debt sustainability; and

(3) Introducing limits on PPP commitments.

(1) Compare Cost Estimates against the projected budget

The first instrument entails the Contracting Authority checking whether the project is

aligned with its internal budget constraints and priorities. Verifying that the fiscal

commitments are affordable within the Contracting Authority budget is the primary step.

This is achieved by just assessing if the commitments allow the contracting authority to

achieve their fiscal targets or surplus. Also, the affordability analysis must also be

consistent with the overall liability and fiscal risk management of the Directorate of

Budget.

(2) Debt Sustainability

Fiscal commitments from PPPs are considered debt-like obligations. Hence, the

Directorate of Debt & Cash Policy may consider the consistency of treatment of such

obligations within the overall Government liabilities and fiscal management framework.

PPP commitments could be included in debt measures to determine a project’s impact on

overall debt sustainability.

The Department of Macro-Economic Policy within the Directorate of Economic Affairs

undertakes debt sustainability analysis and publishes an annual Debt Sustainability

Report. The Debt Sustainability Report uses a consistent macroeconomic framework to

25

assess Uganda’s current and future debt levels, as well as the country’s ability to meet its

debt obligations and any risks and vulnerabilities that might arise.

(3) Limits or Thresholds

Finally, some Governments adopt specific limits or thresholds on direct fiscal

commitments of PPPs. The objective is to avoid tying up too much of the budget (within

a specific sector or at aggregated level) in long-term payments. At this point, however,

such limits are usually not needed in the early stages of PPP programmes such as

Uganda. This could be later developed as the magnitude and potential of the programme

increases.

This next Table 8 shows the types of affordability indicators proposed in this FCCL

Management Framework that Government could use as the PPP programme develops:

Table 8: Affordability indicators

Fiscal

commitment Cost

Indicator of fiscal affordability

(Including projections over PPP

agreement length-beyond medium-term

horizon)

Direct

liabilities

- Estimated Annual

payments

- NPV

- Cost as percentage of ministry or sector

agency, and national annual revenue /

deficit-surplus budget

- Cost as percentage of national public

debt

- Cost as percentage of GDP

Guarantees

- Estimated annual

payment, or expected

average payment

- NPV

(Base/Downside cases)




- Cost as percentage of contingency line

- Cost as percentage of public debt


Termination

payment

- Estimated worst-case

payment or expected

average payment

- NPV

- Cost as percentage of national budget



26

Other fiscal

risk

- Estimated worst-case

payment or expected

average payment

- NPV

(Base/Downside cases)






4.3 Approval and Accepting

Under Section 23(4) of the PPP Act, where a project is to be financed by a Contracting

Authority, the Contracting Authority shall, prior to procuring a private party, obtain

written confirmation from the Minister of Finance that the financing required shall be

available for the implementation of the Project. In practice, this recommendation will be

provided by a multi-departmental review team established for each individual project

including DCM, PPP Unit, DB and DEA, who will review the relevant documentation

and give advice to the Minister. The PPP Committee approves the project based on the

recommendations of the review team and other considerations with respect to socio-

economic benefits, value for money and affordability.

The FCCLs in the project gets accepted after the Contracting Authority signs the PPP

agreement with the private party. The PPP Act specifies the process to be followed and

the approvals to be obtained prior to signing the PPP agreement.

27


IMPLEMENTATION

The project implementation stage covers all the steps taken to budget, make payments,

monitor, report, disclose and account for FCCLs.

5.1 Budgeting and paying

Budgeting for direct payments is done through an annual budget allocation of the

Contracting Authority. The Contracting Authority has to build in its direct fiscal

commitments into its annual budget request. Actual payments to the private party can

also be made to a centrally controlled account to avoid delays. Some PPP agreements may

require escrow accounts to provide assurance that resources are available to meet

payments when needed.

Paying for contingent liabilities as they occur may require appropriations from exiting

allocations or through approvals for supplementary appropriations. Governments can

create contingency reserve in the budget to meet calls on contingent liabilities. The key

consideration in the process is the timeliness and coordination by which DCM and CA

provides information to the DB with the estimates on contingent liabilities that are

expected to materialize in a particular year.

5.2 Monitoring

Managing fiscal commitments entails monitoring, reporting and budgeting of PPP

projects, both at individual project level and at portfolio programme level. Adequate

monitoring and disclosure of fiscal commitments and risks will allow the Government to

prevent undesirable events from occurring, mitigate their impact, and making informed

decisions during the operation phase.

This stage will require gathering project financial parameters, risks and performance, and

country macroeconomic information, and any other input that may affect fiscal

commitments and fiscal risks. The objective will be to ensure that updated information is

reported at the right time to the relevant gatekeeping entities, in line with Section 27(2)

of the PPP Act that obligates each CA to submit periodic reports on the project agreement

implementation to the Minister of Finance.

Each commitment or fiscal risks must have specific information, such as financial and

accounting ratios and indicators, to monitor the evolution along the entire length of

28

contract. This next Table 9 highlights what minimum information shall be collected and

registered by the CAs in each PPP project:

Table 9: Monitoring Information: Fiscal Commitments and Fiscal Risks

Fiscal Commitment

Required

information /

Periodicity

Entity who

must send

information

Obligation to

submit

information set

at:

(PPP

Agreement,

Letter of

Support, etc.)

Follow-up of

mitigation

activities of

Risk Register

Project X

Direct Liabilities

Payment 1 - - - -

Payment 2 - - - -

Contingent Liabilities

Payment 1 - - - -

Payment 2 - - - -

Other fiscal risks

Risk A - - - -

5.3 Reporting and Disclosing

The Government of Uganda needs to account for and report on their fiscal commitments

of PPP agreements. MFPED shall keep a centralised register of fiscal commitments of PPP

transactions at national or local government level. Proper reporting incentivises the

Government to scrutinise its own financial position. Also, making reports available to

other parties, such as lenders, rating agencies, PPP stakeholders, and the public, enables

them to make informed opinions on the Government’s PPP fiscal management and

performance.

For internal and external transparency of the financial effects of PPPs on Government’s

position, fiscal commitments shall be reported. Also, it is recommended that, given the

fiscal commitments may have debt-like effects on public finances, they are subject to

similar checks and limits to debt obligations.

29

Table 10 shows the suggested information to be reported on direct and contingent

liabilities. Description shall include: description of the liability, estimate of the value of

the liability, annual cost and present value (for direct liabilities), and maximum exposure

(for contingent liabilities). This reporting shall be included in medium-term budget

reports and debt strategy reports.

Specifically, the Directorate of Debt & Cash Policy shall publish information on all fiscal

commitments and contingent liabilities including as a section in the “Report on Public

Debt, Guarantees, Other Financial Liabilities and Grants”, Report on Treasury Operations

(TOP), the Debt Statistical Bulletins and any other reports as may be required under the

Public Finance Management Act, 2015. For public disclosure purposes, it is recommended

to disclose the stream of annual payments and net present value of all payments of direct

liabilities per project, as per the disclosure policy adopted by the Government. It is also

recommended to publish maximum exposure for those contingent liabilities which

probability or occurrence is considered low (such as for instance termination payments).

For the case of guarantees, it is recommended either (1) to disclose the stream of annual

payments and net present value of all payments per project if the information used for its

estimation is reliable, or (2) maximum exposure of aggregated payments. The next Table

10 shows a sample of reporting format to present direct and contingent liabilities by

project.

Table 10: Reporting Sample of Fiscal Commitments by project

PPP

project Direct liabilities

Annual payments value for 3-year

budget

Present

value of

all

payments

2019 2020 2021 2019

Project 1

Direct liabilities:

- Annuity

payment.

Indexed quarterly

by inflation.

Project 2

Direct liabilities:

- Annuity

payment.

Indexed quarterly

by inflation.

30

PPP

project

Contingent

liabilities

Estimated annual payments value

for 3-year budget

Present

Value of

Maximum

exposure 2019 2020 2021

Project 1

- Revenue

Guarantee

- Termination

payment

In case of default

of contracting

authority

Project 2

- Termination

payment

In case of default

of contracting

authority

It must be noted that estimations of liabilities (Table 7) and follow-up activities (last

column Table 9) must be updated in an ongoing basis. Estimates should be updated at

least during the following project milestones:

Approval by Budgetary department

After Feasibility Study

Before signing

After signing

After financial closure

During construction years (they are the riskiest years)

During operation (checking on financial performance of firm)

5.4 Accounting

Under Section 28(3) of the PPP Act, the Accountant General shall prescribe accounting

and reporting rules to be adopted for PPPs. Government of Uganda, and the Accountant

General in particular, needs to decide whether and when fiscal commitments should be

recognised in financial statements through creation of public assets, liabilities or

expenses. This is important because fiscal responsibility is usually examined in relation

to thresholds over Government’s liabilities and expenditures. It must be taken into

account that adequate accounting and reporting tackle the perception bias that PPPs

31

attract immediate private financing without increasing Government spending and debt.

Determining how PPP commitments are to be recognised is important as it defines

whether such liabilities count toward debt management limits. International public-

sector accounting standards, such as IPSAS 32, and international government financial

reporting and statistics guidelines, such as IMF’s Government Finance Statistics Manual

(2014), and IMF’s Guide on Public Sector Debt Statistics (2013) provide a framework for

accounting and statistics of PPP transactions.

IPSAS 32 defines when PPP assets and liabilities should be recognised, assuming

Government is following accrual accounting standards (as opposed to cash accounting

standards). Assets and liabilities appear in Government’s balance sheet, if: (1) the

Government controls or regulates the services the operators must provide through a PPP

agreement, and (2) the Government control any residual interest in the asset at the end of

the project agreement. Under this FCCL Management Framework, the assets provided

by the concessionaire are recognised, as well as its correspondent liabilities, either if the

assets are funded by users-tariffs or by Government. Regarding contingent liabilities,

IPSAS 19 states that the expected cost of a contingent obligation should be recognised

only if: (1) it is more likely than not (50%) that the event will occur; and (2) the amount of

the obligation can be measured with sufficient reliability. The model “PPP Fiscal

Commitments Model - Uganda Portfolio.xlsm” contains Government’s financial

statements considering IPSAS 32 approach and accrual accounting.

The model “PPP FCCL Model - Uganda Portfolio.xlsm” also generates cash flow

estimations. It contains stream of payment of direct liabilities (e.g. availability payments),

and revenue and debt guarantees.

32

6. ANNEXURE

The following is an example of a fiscal risk register (table 4), summary of risk profile

(figure 2) and fiscal commitments register (table 6) of the FCCL Management Framework.

The example presents a sample of entries for a road PPP project developed on a Design

Build Finance Operate Transfer model. The private partner will be paid availability

payments during the period of operations towards the recovery of its investment in the

project, subject to meeting output performance requirements. This example is not an

exhaustive list for a project.

Fiscal Risk Register

33

Summary Risk Profile

34

Fiscal Commitments Register

Fiscal

Commitment

Type of fiscal

commitment (direct/

contingent)/Definition

Adjustment

factors/Trigger events Location

Project – XYZ Road Project

Land

acquisition

and

Resettlement

Direct

Paid in installments

during land acquisition

before the signing of

contract

Estimate based on

initial assessment.

Likely to increase

after detailed social

assessment

Initial social assessment

Chapter 7, section 3,

summary of land

acquisition and

resettlement costs

Availability

payments

Direct

Paid quarterly for 27

years after

commencement of

operations of the

project

Payments are indexed

to inflation, foreign

exchange rates.

The adjustment will

be ascertained vis-à-

vis the base index and

the current index

published by the

Central Bank of

Uganda.

Feasibility study report

and payment terms

from the draft term

sheet

Termination

payments

Contingent

Will be paid in event of

termination. GOU

default will result in

compensation for Debt

due and compensation

for equity. Private

partner default will

result in payout of only

debt due

Linked to termination

of PPP agreement due

to default of the GOU

or Private Party

Draft term sheet –

section 24

Feasibility study –

financial model

termination costs

Documents

Government of Uganda National... · PPPs have the potential to reduce life cycle costs and risk to the Government and to ... screening, prioritization, development, procurement, implementation