Should the public sector guarantee private sector financing for PPPs?

The World Bank PSD blog raises the question of whether Governments should provide guarantees for private financing of PPP projects

The answer:  NOT if they can avoid it ...
Such payment guarantees, availabity payments and shorter tenors are a natural response to the increased creditor risk aversion.  They should be seen as a necessary evil, and should be used very sparingly and carefully.
The financial crisis and subsequent credit crunch has greatly reduced the options available to governments regarding PPPs. The reason is very simple: There is no longer enough money available for long-term private infrastructure investment. However, this is seen as a temporary situation, as the rationale for PPPs remains as strong as ever.

...In the meantime, governments in many countries are in the middle of procuring large PPPs and therefore in need of solutions to the temporary dislocation in credit markets. More and more governments have been turning to public sector guarantees of private sector loans for PPP projects as a way to overcome shortfalls in available financing.

Will taxpayers get their money’s worth from these guarantees? One past example suggests the answer could be “yes.” In 1994,  Korea launched the Infrastructure Credit Guarantee Fund (KICGF) to facilitate private participation in infrastructure. In response to the Asian financial crisis in 1998 Korea provided even more support for its PPP policy, and one of world’s largest and most successful PPP programs was launched as a result.

According to the IMF:

The [Korean] government announced a fiscal stimulus package in response to the financial crisis with more than 15 percent of the envisaged investment to be carried out through PPPs. The package is accompanied by measures to reduce financial burdens on PPPs, smooth interest rate changes, and shorten project implementation. The measures introduce:
(i) lower equity capital requirements on concessionaires (5–10 percent);
 (ii) for large-scale projects, higher ceilings on guarantees provided by the Infrastructure Credit Guarantee Fund (50 percent);
(iii) help in changing equity investors for some projects;
(iv) compensation for the preparation of proposals to encourage more vigorous competition during bidding;
(v) sharing of interest rate risks with concessionaires;
(vi) compensation for the excess changes in base interest rates through grading of risks at the time of the concession agreement; and
(vi) shorter periods for readjusting benchmark bond yields.

And it seems that Korea was quite happy about using this type of instrument even in financially difficult times.

Will other countries be able to manage these instruments with the same care and rigor?

Mariana Abrantes de Sousa, Portugal, 29-Março-2010