Managing PPPs for Budget Sustainability

Managing PPPs for Budget Sustainability
The case of PPPs in Portugal, from problems to solutions

Mariana Abrantes de Sousa, PPP Lusofonia, Portugal

September 2011     

Abstract

Considering that Portugal is currently suffering one of the most severe financial crisis in its history, this paper examines to what extent PPPs have contributed to Portugal’s external debt problems and evaluates how Portugal’s PPP contracts can be managed in order to contribute to the necessary solution.  Although the interests of the various PPP Stakeholders are acknowledged, the focus is on the Government as the public partner, from a sovereign risk and taxpayer perspective. The paper shows how countries like Portugal with large PPP programmes but fragmented PPP institutions and   inadequate budget practices can be exposed to greater fiscal risks, leading to the accumulation of excessive PPP liabilities which later contribute to public sovereign debt problems. 

... ... ...

 5  PPPs as part of the solution

Portugal’s current Economic Adjustment Programme focuses special attention on PPPs, with a freeze on new tenders until a full review of the portfolio is carried out by March 2012, in order to quantify the fiscal risks in each PPP contract and in the PPP portfolio overall, and to assess the scope for renegotiating some PPP contracts so as to reduce government liabilities and also to define annual ceilings on new PPP liabilities (IMF Update 1-September-2011).  An assessment of the 30 most significant PPP contracts is underway (August 2011).

In its response to the IMF and the EU, the Portuguese Government agreed to forego contracting any new PPPs at the national, regional or local level until it takes measures to:

·       Enhance monitoring and control of capital expenditure decisions with the implementation of a public investment information system

·       Set indicative expenditure ceilings and a medium-term budget framework for the 2012 Budget

·       Revise   the Budget Framework Law (LEO)

·       Publish a comprehensive report on fiscal risks as part of the annual budget, consistent with international best practices, including all PPPs

The Adjustment agreement also calls for strengthening of the management of PPPs including the project selection, assessment, approval and tendering, the contract monitoring framework and reporting standards, all under supervision of the Ministry of Finance and in consultation with EC and IMF staff by end-2012. 

The solution to the debt crisis includes deleveraging the Government, the public sector, the banks and the country as a whole, so PPPs must become part of that deleveraging.  Some of the measures   include:

       i.            Increasing user fees in order to reduce reliance on the over-burdened Portuguese taxpayer, such as the introduction of tolls in the former SCUT shadow toll roads. Since Portugal has no through transit traffic, affordability and willingness to pay are real constraints, resulting in traffic diversion.

      ii.          Extending the concession periods could help to reduce the annual payments, but this would require finding a new, non-commercial, source of very long term funding since it is simply not available in the market.  One solution would be for the EIB to release bank guarantees on all projects which have reached completion.  Another initiative would be to create an EU-wide official infrastructure investment fund along the model of the Infrastructure Crisis Facility created in 2009 to help projects nearing financial close in developing countries. 

     iii.          Cancelling marginal projects and problematic contracts that have been subject to too many renegotiations, and which may present the greatest fiscal risks over the next 20-30 years. Contract resolution or buy-back possibilities are complex and will vary project by project, but should be carefully investigated and executed.

    iv.          Restricting bilateral renegotiations of PPPs as much as possible⁹, ensuring that all rebalancings are subject to the intervention or review by an independent third party as in the case of arbitration.  Publication of all contractual changes and their budget impact is essential in order to demonstrate that the Concedent is not caving in to unjustifiable concessionaire and bank claims. Rigour and transparency are key in order to recover credibility. Although some PPP contracts are considered armoured (blindados) in favour of the concessionaire, it is possible to enforce penalties and remedies in cases of non-compliance.

      v.          Implementing and enforcing the annual budget limit for new and existing PPP liabilities, as required by the Budget Framework Law since 2001, so that PPP projects and the resulting PPP liabilities are subject to the same budget discipline and procedures as any other public investment and direct public debt. 

     vi.          Creating and maintaining  a Central PPP Agency in the Finance Ministry with executive rather than merely advisory powers, to monitor and manage the financial aspects the PPP portfolio as a whole and the resulting PPP liabilities, in much the same way as the Ministry manages the public debt.

   vii.          Creating and maintaining PPP units in each of the sector ministries to assume the permanent role of Concedent in all phases of PPP projects.  Ensuring that the Net Present Value of all PPP liabilities, revised annually, are including in each department’s annual budget, alongside the traditional capital investments.  Monitoring and setting caps on the total PPP liabilities per ministry. 

In conclusion, the major lesson learned from the Portuguese PPP experience is that countries which exclude and exempt PPPs from the normal budgetary discipline, procedures and constraints do so at their peril, since these complex, opaque and very long term contracts carry greater fiscal risks than traditional procurement, and require more, not less, scrutiny, monitoring and limits.  It is critical to collect PPP contract monitoring data and publish further studies in order to promote transparency and protect the long term interest of the taxpayers. 

See article published in the LIQ Latin American Infrastructure Quarterly 
 http://www.liquarterly.com/issue3.htm.  or http://www.scribd.com/doc/106671246/Abrantes-Managing-PPPs-for-Budget-Sustainability-SET2011-v7-1f 
Enviar mensagem para ppplusofonia...gmail.com para obter artigo completo