Managing Potential Fiscal Liabilities of PPP Projects

Transcription

1 Managing Potential Fiscal Liabilities of PPP Projects Youngsob YOO Deputy Director, PPP Policy Division Ministry of Strategy and Finance Prepared by Kang-Soo KIM Executive Director, PIMAC, KDI 22 Jan 2015 PIMAC

2 Background Public Private- Partnership (PPP) imposes an obligation on the Public (governments) by definition Financial commitment in the form of payment, guarantee, subsidy, etc. Risk (demand (revenue), foreign exchange, termination liabilities..) bearing produces obligations like guarantees Tax incentives Early Termination Payment Land Acquisition Government Financial Support and Risk Sharing Measure Minimum Revenue Guarantee ( ) Construction Subsidy Risk Sharing 2

3 Background Why do governments bear the risks? To proceed and get the project done To apply the best way of allocating risks Why do the risks arise more often than they should? Any fiscal costs come due only if particular events occur and involve no immediate cost to the government. Governments are facing incentives to ignore long-term consequences of projects and to absorb risks that the private sector could/ should bear Capacities are not adequate to analyze possible risks and to manage the PPP related liabilities 3

4 Background Effects of the Transport Project implementation on Re-election 0.95 Success rate of Reelection ,000 3,500 5,000 6,500 8,000 9,500 Total Cost of Transport Projects Implemented in a constituency (100 million KRW) 17th NA 18th NA 4th Local 5th Local Source: Hojun Lee and Jaehoon Kim (2013) 4

5 Background Why is fiscal management for PPPs is important? To prevent their misuse and to enhance efficiency. Not to bypass expenditure controls and ensure that full life-costs of PPPs projects To prevent the substantial fiscal consequences. PPPs may have been a significant source of (un)expected increases in governments debt and contingent liabilities. To make PPP system long term sustainable The fiscal burden (specially from MRGs) has been criticized by politicians, mass media, and civil society. Without persuading critical taxpayers, PPPs with the long term fiscal risk cannot be sustainable. 5

6 Background How to manage the fiscal liabilities of PPP projects? Key Factors for managing Potential Fiscal Liabilities of PPP Projects Recognition and Analysis of Potential Fiscal Liabilities at the up-front stage Approval of the PPPs ( Who and How?) Accounting and Reporting of Potential Fiscal Liabilities Setting a Fiscal Rule (or regulation) for PPPs 6

7 Background Source: KDI, Major Indicators of Korean Economy (November, 2014) 7

8 Korea s PPPs in Figures Both the concession-type (BTO) and the service purchase-type (BTL) projects are implemented in Korea PPP Projects by Procurement Scheme (As of Jan. 2014) Procurement Scheme Unit: One hundred million KRW Number of Project Total Project Cost Average % % Project Cost BTO % 679, % 3,364 Concessiontype BOO % 12, % 1,760 BOT % 6, % 1,645 Subtotal % 698, % 6,769 service purchase-type BTL % 286, % 666 Total % 984, % 1,532 8

9 Korea s PPPs in Figures BTO BTL (As of December 2013) Facilities Number of Project % Total investment % Road % 38, % Train % 13, % Port % 6, % Environment % 4, % Airport % % Garage % % IT % % Culture % % Univ % % Sub-total % 64, % Education % 8, % Environment % 6, % Military % 5, % Train % 4, % University % % Culture % % IT % % Social Welfare % % Mixed use % % Science center % % Sub-total % 26, % 9

10 Korea s PPPs in Figures 10 < PPP related gov t expenditures FY2010~FY2013 > Classification FY2010 FY2011 FY2012 FY2013 PPP related gov t expenditures(a) BTO - Land Acquisition - Construction Subsidy - MRG BTL - Lease - Operation Cost - Land Acquisition Cost, etc (trillion KRW) Net Budget Expenditure(B) PPP expenditure ratio(%, A/B)

11 Up front budget Recognition and Analysis (1); Unified Framework Solicited project Unsolicited Project Competent Authority Selection of PPP Project Submission of Project Proposal Private Sector Competent Authority Competent Authority Review by PIMAC VFM Test VFM Test PIMAC Competent Authority Designation as the PPP Project Notification of Project Implementation Competent Authority Proponent Unified framework helps Announcement of RFPs Competent Authority not to bypass expenditure controls and ensure that full life-costs Evaluation and Selection of preferred Bidder and Negitiation Competent Authority of PPPs projects are taken into account at project approval stage!! Construction and Operation Concessionaire Fiscal regulation for project assessment with the same methods applied to Conventional Procurement is important to manage fiscal liabilities!! 11

12 Up Front Budget Recognition and Analysis (2); Scope of a VFM Test Phase 1: Feasibility study (Decision to Invest) The cost- benefit analysis is conducted to determine feasibility of the project from a national economy perspective. Phase 2: Value for Money Assessment (Decision on PFI) The government payment of PSC (Public Sector Comparator) is compared against that of PFI (Private Finance Initiative) to assess whether the PFI achieves VFM. Budget recognition for all financial commitments, however, no risk or contingent liabilities estimation Phase 3: Formulation of PFI alternatives Based on the results of phase 2, an appropriate PFI alternatives are formulated The level of project cost, user fee, subsidy scale, etc. are suggested from the government. 12

13 Up Front Budget Recognition and Analysis (3) ; Optimism Bias Optimism Bias in Traffic Forecasting Distribution of Traffic Forecasting Errors 13

14 Up Front Budget Recognition and Analysis(4) ; Excessive Fiscal burden ; MRG (1999~2009) Among operating 633 PPP projects as of end of 2012, 39 projects generated MRG payments. The payment is increasing from 2008 (366.3 billion won) and expected to be the highest at 2020 ( billion won) Forecasting Fiscal Burden from MRG 14

15 Up Front Budget Recognition and Analysis (5) ; Preventing Optimism Bias in Traffic Forecast The role and function Traffic Forecast Review Committee - Reflection of Outside View to Prevent Optimism Bias in Traffic Forecast - To review the over-estimation possibility on the result of traffic forecast based on the expert's insight and experience, and the empirical results presented in a similar project case Review Committee Members Experts with experienced and professional expertise in order to review independently with balanced position and express own opinion Equivalent or higher level of profess or Senior Fellow with having equivalent expertise and insight 15

16 Approval and Reporting ; To Ensure Fiscal Sustainability Budget Authorization for PPPs by National Assembly and PRC National Assembly Approves aggregate ceiling on annual total amounts of PPP project (BTL) PRC (PPP Review Committee) Approves major PPP projects and monitors their implementation process step by step. Reviews and approves the expenditures and contingent liabilities. Recognition for the Long-Term Budget affordability Adopting Accrual basis accounting for PPP projects, instead of cash basis accounting Incorporation into Medium-term expenditure framework (MTEF) 16

17 Approval and Reporting ; To Ensure Fiscal Sustainability BTL Payment for FY 2006~ FY 2013 (100 million KRW) Class Central Local (supported by Central) 94 1,299 3,468 5,204 1,291 3,131 5,928 7,969 7,222 9,096 10,162 11,308 계 94 1,299 3,468 5,204 8,513 12,227 16,090 19,277 Note: 1) Central government payment only (excluding payments by the local governments) 2) Individual statistics from central and local government payments for 2006~2009 not available 17

18 Approval and Reporting ; To Ensure Fiscal Sustainability < Estimated Government Payment for BTL projects 2014~2018 > (100million KRW) Classification Total Lease 5,830 6,730 7,840 8,164 8,159 36,724 Central Operation Cost 890 1,032 1,218 1,307 1,344 5,792 Subtotal 6,720 7,762 9,059 9,472 9,503 42,515 Local (supported by Central) Lease 3,772 3,945 4,042 4,133 4,133 20,025 Operation Cost Subtotal 3,772 3,945 4,042 4,133 4,133 20,025 Total 10,492 11,707 13,100 13,604 13,636 62,540 Note: 1) Central government payment only (excluding payments by the local governments) 2) For the approved BTL projects as of June

19 Fiscal Rule ; To Ensure Fiscal Sustainability Budgetary Limits ; 2% limit rule for PPP Annual government payment PPP should be limited to less than 2% of total annual government expenditure Payments for PPPs / Net Government expenditure PPP government payment: lease payment for BTL, land acquisition for BTO, construction subsidy, and MRG (Trillion KRW) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Net Gov. Expenditure(A) PPP Expenditure(B) BTO * MRG BTL Ratio(%, A/B)

20 Final Remarks (Adequate) Risk sharing for PPPs is a key requirement for the implementation Public Private- Partnership (PPP) impose an obligation on Public (governments) by definition Construction and operating risks are typically borne by the private sector, whereas the political, exchange rate, force majeure risks are generally borne by the public sector Fiscal implications of PPPs should be properly accounted for and reported To prevent their misuse and to enhance efficiency To prevent the substantial fiscal consequences. To make PPP system long term sustainable 20

21 Final Remarks To manage fiscal liabilities and burden, it is important to Recognize and Analyze Potential Fiscal Liabilities at the up-front stage Account and Report Potential Fiscal Liabilities Setting a Fiscal Rule (or regulation) for PPPs (For sustainable PPPs in Korea) the fiscal management for PPPs is strengthened by (1) Establishing an Unified Framework for Budgeting ; It helps not to bypass expenditure controls, It ensures that full life-costs of PPPs projects are taken into account at project approval stage Though budget for all financial commitments is recognized, however, risks or contingent liabilities are not fully estimated due to the lack of capacities. 21

22 Final Remarks (For sustainable PPPs in Korea) the fiscal management for PPPs is strengthened by (2) Establishing Multistage scrutiny system for approval and disclosing;. National Assembly : Approves aggregate ceiling on annual total amounts of PPP projects (BTL) PRC (PPP Review Committee) ; Reviews and approves the expenditures and contingent liabilities. Adoption of Accrual basis accounting including PPP projects, instead of cash basis accounting Incorporating (Future) Payment for PPPs into Medium-term expenditure framework (MTEF) for recognition of the Long-Term Budget affordability 22

23 Final Remarks (For sustainable PPPs in Korea) the fiscal management for PPPs is strengthened by (3) Setting a Safeguard ceiling for PPPs ; Aggregate fiscal commitment limited to a sustainable level for maintaining fiscal soundness and stability. Annual government payment : 2% of total government budget expenditure PPP investment : 10% to 15% of total public investment FY95- FY00 FY02 FY04 FY06 FY08 FY10 FY11 FY12 Total SOC Investment Government Investment (A) PPP Investment (B) B / A (%)

24 Thank you