ISLAMABAD: Finance Ministry has uploaded guidelines regarding fiscal commitments and contingent liabilities (FCCL) for federal Public-Private Partnership (PPP) projects with the objectives to enhance the quality, cost-effectiveness, and timely provision of public infrastructure in the country.
The ministry stated that the need for having robust FCCL guidelines primarily focus on managing long-term fiscal cost in PPPs, including direct and contingent liabilities that extend throughout a project’s lifespan.
Pakistan has several PPP projects under development, such as infrastructure ventures, toll road projects, and healthcare facilities, where managing fiscal costs and contingent liabilities are crucial for sustainable implementation.
Given the evolving PPP market in Pakistan, it is essential to establish FCCL guidelines that ensure the basic management of fiscal commitments without hindering the development of the PPP market.
By doing so, Pakistan can optimise the advantages of private sector participation while maintaining fiscal sustainability and achieving long-term infrastructure development goals.
The purpose of these guidelines is therefore to propose an operational framework for managing fiscal obligations arising from Federal PPPs in Pakistan, with a four-pronged process, namely; (i) analysis which includes identifying and quantifying fiscal commitments, methodological guidance in place to quantify fiscal impact, tools are in place to assess fiscal impact; (ii) control with assessing fiscal affordability as input to approval, VIM is considered to warrant fiscal commitments, PPP portfolio is well within the limit of fiscal affordability as percentage of GDP; (iii) budget, with Ensuring funding is available for fiscal commitments, mechanisms are in place to ensure funding is available for contingent liabilities, and (iv) report that fiscal commitments are adequately accounted for and documented in a consolidated manner, periodic reporting is made under fiscal risk statement (FRS), debt sustainability analysis (DSA), bi-annual debt bulletins and Medium-Term Budgetary Frameworks (MTBF).
Furthermore, these guidelines also aim to provide consistent identification and assessment of PPP FCCLs at four key transaction points, namely; (i) at the time of feasibility– submission of the Project Qualification Proposal (PQP); (ii) prior to tender launch-submission of the Project Proposal; (iii) prior to signing the PPP agreement and; (iv) during the implementation phase. Overall, the FCCL guidelines anchor three key components, which are interlinked and mutually reinforcing.
Under these guidelines, clear roles and responsibilities for managing fiscal costs throughout the project cycle have been established.
This includes identifying the key stakeholders, such as the Implementing Agency (IA), Risk Management Unit (RMU), Public-Private Partnership Authority (P3A), Ministry of Planning Development and Special Initiatives (MOPD&SI), Budget Wing and other relevant wings of the Finance Division to ensure effective coordination.
The fiscal implications of a PPP are thoroughly presented to and reviewed by relevant approving bodies such as the P3A Board, Central Development Working Party (CDWP) and Executive Committee of the National Economic Council (ECNEC) before entering a contract.
The FCCL guidelines predominantly focus on delineating how the Risk Management Unit (RMU) undertakes the responsibility of evaluating and managing the impact of PPP projects on the government’s fiscal resources.
The PPPs offer a dual advantage of alternative financing sources and potential efficiency gains for infrastructure development. By engaging private sector investment, the burden on public funding can be spread over an extended period, allowing for accelerated expansion of infrastructure services within existing fiscal constraints.
Furthermore, the involvement of the private sector introduces efficiency gains by bundling financing, design and construction, operation and maintenance responsibilities in one contract.
The GOP’s contribution to PPP partnerships under viability gap funding (VGF), either through combination of grants, equity commitments, debt contributions etc or through guarantees will result in direct or indirect fiscal commitments.
Under direct liabilities upfront payment viability: The government provides an up-front capital contribution to the PPP contractor (which may be phased over construction or against equity investments, but only over the initial years—that is, the construction phase—of the project lifetime).
Associated works; The government undertakes works that will contribute to the project, such as feeder roads (for a toll road) or dredging (for a port) or purely an upfront land acquisition cost.
This type of support is typically one time and does not give rise to an ongoing commitment.
Ongoing annually or availability payment: The government provides a fixed, ongoing subsidy, paid (typically quarterly) over the lifetime of the project, and often not starting until the construction phase is complete.
This payment may be conditional on the availability of the service or asset at a contractually specified quality.
The value of the payments is usually a key financial bid criterion in the tender process to select the private contractor. Shadow tolls: The government provides a subsidy per unit or user of a service—for example, per kilometer driven on a toll road.
The unit value of such a subsidy would typically be the financial bid criterion. Contingent liabilities: The government compensates the private party for loss in revenue should a particular risk variable deviate from a contractually specified level.
The associated risk is thereby shared between the government and the private party. For instance, this could include guarantees on the demand remaining above a specified level, or within a specified range, exchange rates remaining within a specified range, tariffs being allowed to follow a specified formula (where tariffs are set or approved by a government entity.
Copyright Business Recorder, 2024
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