The Macroeconomics and Governance Division of the Economic Commission for Africa (ECA) on Tuesday held an Experts’ Group Meeting (EGM) to review and validate the draft study on “Fiscal Risks in PPPs: A Benchmark Study on Africa.”
In attendance were representatives of PPP Units, the World Bank, academia, and the private sector, with the objective of identifying key evidence-based policy messages and recommendations.
PPPs as an innovative financing instrument for infrastructure and development, have the potential to generate both public and private return, and they are increasingly being implemented by countries in Africa including in South Africa, Nigeria and Morocco. PPPs can help leverage private investment through risk-sharing between the public and private sectors.
They help bring capital, technology and expertise to projects, resulting in more efficient service delivery and ultimately lower costs to the taxpayer. Thus, leveraging the effective and efficient strengths of the public and private sectors is intended as a key factor, for the utilization of PPPs to finance infrastructure and development.
The success of PPPs is influenced by a range of factors, given their nature as inherently risk sharing agreements. Using a PPP can reduce the fiscal cost of a project if it causes the project to have lower costs or higher revenues. However, PPPs require that governments assume contingent liabilities related to, for example, early contract termination, debt, and revenue guarantees.
PPPs can generate large fiscal risks to the Government related to direct costs and contingent liabilities (explicit and implicit), constraining availability of options for development finance. PPPs pose risks particularly for cash strapped governments that may be trying to meet fiscal targets.
In place of up-front capital investments, PPPs use annual instalments from revenue budgets to pay for infrastructure, so governments do not need to directly take loans. However, governments do often need to provide loan guarantees for the private sector, which can also add to contingent public debt commitments. Fiscal risks can be potentially large and include contingent liabilities for the government; threatened integrity of budget and planning process; and complicated maintaining of fiscal discipline and good governance.
Given there is no single definition of PPPs, experts agreed that Africa should define and determine the PPPs that are relevant to its context, with a focus of reaching its development objectives, in support of Agendas 2030 and 2063. This is a place for development planning.
Additionally, the definition of PPPs should focus on who is paying for the service, whether it is the government or the user. Caution should be taken in determining the PPPs of choice because when PPPs are structured poorly, Governments face challenges. Thus Countries should only go down the PPP path, when they have the discipline and commitment to do it in a manner that mitigates risk taking into consideration the duration of the project.
There are three types of fiscal risks including general economic risk, specific fiscal risk, and structural institutional risk. But the government guarantee risk is the biggest because it has bearing on the balance sheet on the government.
Based on his work at the Africa Legal Support Facility, Mr. Ben Donovan of Covington and Burling LLP emphasized that “there exists inconsistency in accounting standards of various countries on the Continent, yet these are important for determining the nature of contingent liabilities”.
PPPs are very context specific and it is important to understand the development process of a country, on a case by case basis, to better ascertain the risks they are, or may be facing. Best practices on managing fiscal risks also exist on the continent. Putting aside the economic risks that the country is facing right now, the institutional structure of South Africa with Approvals I, II, and III is a good example.
Nigeria was also able to successfully utilize a sectoral law to concession the Nigeria Seaports and the Power Sector and the Telecom sector. The key is in the simplification of the PPP process customizable in individual countries, in order to ensure that they are able to achieve their intended aims, while also providing stability to government.
Fiscal risks are also a political issue, with many difficulties involved. Governments are usually bound for decades, and this is linked to their credit worthiness and the role of asymmetric information. There exist instruments that can be used to insure and mitigate risks, and which could be leveraged given that there is a cost to PPPs. The World Bank’s MIGA is such an example. But in order to enhance bankability by influencing lenders and financiers, Governments need to be empowered to undertake due diligence to determine adequate risks and demand the range of available insurance instruments to manage them, beyond the expected offering of sovereign guarantees. Ms. Imeh Okon, Senior Special Assistant to the President of Nigeria on Infrastructure in the Office of the Vice President, urged for more work to be done on the political economy of implementing PPPs.
Additionally, there exist discrepancies in national level and global databases on the stock of PPPs on the Continent, experts called for the increased standardization and harmonization of Continent-wide data noting related difficulties, alongside the use of the case-study approach that can provide in-depth and context specific information on the nature of fiscal risks.
“It is very clear that practical expertise, provided by the range of stakeholders is important in our understanding of, and ultimately competency in advising and capacitating Member States to mitigate risks in PPPs,” stated Ms. Eunice Ajambo Economic Affairs Officer and the Focal Point of the Study.
In his concluding remarks, Mr. Joe Atta-Mensah Principal Policy Advisor at the ECA and the Chair of the meeting commended the experts for sharing their experiences as the knowledge on PPPs would go a long way in supporting the Continent in achieving its development objectives.