Public interventions of ASEAN Member States
Public interventions can play an important role in facilitating private infrastructure investments where risks create a substantial barrier to private investments, or where the PPP model is still underdeveloped or in its initial stages. Public interventions can constitute direct financial commitments (such as subsidies, grants, equity investment and debt) or indirect commitments (such as guarantees).
Public interventions are particularly useful where the project does not achieve bankability or commercial viability, or is constrained by risks that private stakeholders are not willing or able to bear. Direct commitments can lead to more stable and reliable cash flows, and indirect commitments transfer risks to the public side, thereby increasing private investors’ willingness to participate in PPP projects.
Financial expenditures and the contingent liabilities of direct and indirect commitments should be closely audited and monitored, to ensure the government’s fiscal sustainability. The instruments’ effectiveness, regarding costs and benefits, should also be assessed. There should be a certain level of risk sharing when transferring risk from private to public stakeholders, and could be complemented by revenue sharing arrangements.
The database provides an overview of the types of public interventions able to support private infrastructure investments and exports. Investors and lenders should directly contact the respective government bodies for more specific information.
Direct Financial Support
This can includes subsidies, grants, equity investment and debt, and is particularly useful when the project does not achieve bankability, commercial viability or is constrained by risks that private stakeholders are not willing or able to bear. Other forms of public support could include land acquisition and the provision of assets. More information on direct financial support can be found here.
Public guarantees transfer risks from private investors and lenders to the public side. By limiting demand and political risks, amongst other things, they can increase the willingness of investors to participate in PPP projects, and can act as credit enhancers. They can provide important incentives in economies with high perceived risks or with a limited track record of successful PPP projects.
Contingent liabilities should be closely audited and monitored by governments to ensure fiscal sustainability. Governments might wish to establish specialist teams, for example in debt management departments. These teams would monitor and manage fiscal risks arising from contingent liabilities in PPPs. The risk transfer to the public side could be compensated by revenue sharing arrangements.
Ultimately, guarantees should be phased out over time to ensure an appropriate risk allocation and to limit government’s contingent liabilities.
Examples of public guarantees include:
- Off-take purchaser obligations like take-or-pay or availability payments schemes. Availability payments transfer the demand risk to the off-taker, typically a governmental agency or state-owned agency.
- Minimum traffic/revenue guarantees, which compensate the project company if traffic or revenue falls below a defined minimum threshold.
- Guarantees for commodity pricing e.g. through pass-through contracts which transfer the risk of fluctuating prices of input goods from the project company to the off-taker by linking the input prices of the supply contract with the off-take prices.
- Guarantees of permitted tariffs (and tariff increases)
- Guarantee against expropriation and nationalization (without an appropriate compensation)
- Termination payments which are a common part of PPP projects and which enable governments to terminate the contract prematurely following default of the PPP company. The compensation often reflects the value of the terminated contract or of the assets.
- Guarantee against adverse changes of laws and regulations which reduce revenue streams or the asset value
- Guarantee of free currency transfer, exchange rates, interest rates, refinancing and convertibility of local currency
- Guarantees of loans and debt: through loan guarantees, the government guarantees lenders that they will service their debt if the SPV fails to honour their debt obligations. The government might also guarantee to assume the debt obligations of the PPP company should the PPP contract be terminated.
- Refinancing guarantees: in take-out financing, the government ensures available debt at a given interest rate at a certain date in the future. This guarantee is relevant due to the more frequently used “mini-perm” financing to fund the construction phase.
- Guarantees against cost overruns
- Guarantees against non-payment by state entities
- Sub-sovereign Creditworthiness Guarantees to enhance the creditworthiness of a sub-national entity
Other Public Interventions
One of the major stumbling blocks for PPPs is the considerable cost and time needed to properly develop projects. In particular, the costs for specialist transaction advisers might meet strong resistance from government budgeting and expenditure control, and might sometimes be deemed unaffordable in developing economies. High quality advisory services are, however, critical for the successful development of PPP projects and might reduce public sector expenditures during the project implementation.
In order to address this issue, governments in the ASEAN region established Project Development Funds or Facilities (PDFs). These provide funding for transaction advisers and other project development costs. They may be involved in the standardisation of methodology or documentation, its dissemination or monitoring of the implementation of good practices. They should provide support for the early phases of project selection, feasibility studies and designing the financial and commercial structure for the project.
Governments could establish financial intermediaries to ease access to financing for private infrastructure investments. Examples of such financial intermediaries include National Development Banks, Infrastructure Funds, ECAs and Multilateral Agencies. More information on these can be found here.