2011/FMP/CON/017 Session 6 PPP Fiscal Risk Management - The Implementation Submitted by: Indonesia Conference on the Framework and Options for Public and Private Financing of Infrastructure Washington, D.C., United States 22-23 June 2011
PPP Fiscal Risk Management the implementation Freddy R. Saragih Head of Center for Fiscal Risk Management Fiscal Policy Office Ministry of Finance of Indonesia
Fiscal Risk Government fiscal risk matrix Explicit Government liability created by a law or contract Implicit A political obligation of government that reflects public and interest-group pressures Direct Obligation in any even Government Debt Longstanding and popular social spending that government could, in theory, cut. Contingent Obligation if a particular event occurs Government Guarantees Obligation to bail out banks that are too big to fail Source : Government at Risk: Contingent Liabilities and Fiscal Risks, 2002. Government has to deal with fiscal risks under transparent and accountable management of fiscal to ensure the sustainability. 2
Infrastructure Development Financial crisis in the late 1990s caused the investment of infrastructure fell down from more than 6 percent of GDP, or about USD15 billion/year, to 2 percent of GDP and most of that is spent on maintenance. To recover the economic situation, PPP scheme is the reasonable option in developing infrastructure for more efficient and effective government spending. Projection of infrastructure investment needed in 2010-2014 USD214 Bio USD 140 Bio USD74 Bio USD74 Bio PPP Scheme is expected to cover around 50% of total private funding needed Total Funding Needed Gov t Budget + SOE Funding Gap Private *) Source: Bappenas, 2010 3
PPP Scheme Raises Government Risks Since 2005, GOI has committed to support the infrastructure development by the PPP scheme. To implement the PPP scheme, private investors need government guarantees to ensure their investment in infrastructure projects. The provision of government guarantees create fiscal risks. Guarantee, provided by government support letter (conventional guarantee), negatively influences the fiscal sustainability. Coverage Risk Exposure Form of Guarantee Impact to Gov. Budget Legal basis Conventional Guarantee blanket immeasurable support letter direct (probable cause a sudden shock) no-regulation Ideal Guarantee Specific risks measurable guarantee agreement indirect - none (ring fence mechanism) by regulation (transparent and accountable) 4
How to Manage the Risks? The fiscal risks can be faced by the transparent and accountable management, such as: The allocation of project risks between government and private party should be done properly; p The risks which allocated to the government have to be managed and be measured to prevent fiscal shock in the future; Government allocates reserve fund to maintain the fiscal sustainability; The contingent liabilities are reported in fiscal risk statement. 5
Guarantee Fund as a Fiscal Instrument The Indonesia Infrastructure Guarantee Fund (IIGF) has been established as an instrument in managing fiscal risks. Transparent and Accountable Risk Management Appraising and structuring process (including risk allocation) of the PPP project are more professional, consistent, and independent; Risk coverage is stated in the form of agreement between IIGF and project company (investor); The project risks are measured accurately; IIGF Providing ring fence to the Government balance sheet because the guarantee claim will be paid by the IIGF first; Public, especially private investor and lender, will be easier to access the information of guarantee mechanism and the exposure of the liabilities; Government does not have to reserve fund to ensure the fiscal sustainability. IIGF could leverage their capacity and capability by cooperation and partnership with multilateral agency and other institutions. 6
Illustration on Ring Fence Mechanism Without IIGF With IIGF Gov. Budget Contingent Liability 1 Gov. Budget Capital Ring injection Fencing 2 1 Guarantee IIGF Contingent Liability 3 Guarantee 2 Project Company Project Company 7
Skema Penjaminan dalam Proyek CJPP A sample of IIGF business model in power sector - for f 2 2x1000 1000 MW Central C t l Java J Power P Pl Plantt (CJPP) Minister of Finance 2 Guarantee Agreement Private Investors 1 3 Recourse Agreement Recourse Agreement PLN 8 3 PPA
Center for Fiscal Risk Management Fiscal Policy Office Ministry of Finance of Indonesia RM Notohamiprodjo Building, floor 4 th Jl. Dr. Wahidin No. 1, Jakarta 10710