ISABELANA 1

Public-Private Partnerships in the Caribbean Region : Reaping the Benefits while Managing Fiscal Risks

Author/Editor:Maximilien Queyranne ; Wendell Daal ; Katja FunkePublication Date:May 8, 2019

 Summary:To provide policymakers in the Caribbean with a governance framework for improving infrastructure through Public-Private Partnerships (PPPs), while limiting their fiscal costs and risks for the government. And to showcase Canada support to FAD technical assistance in the region and FAD collaboration with CARTAC and the Caribbean Development

BankSeries:Departmental Paper No.19/07

Caribbean Regional Technical Assistance Center (CARTAC) Financial management information systems Financial statistics Fiscal risk National income Public investments Public-private partnership Real sector
ENGLISH
Publication Date:May 8, 2019ISBN/ISSN:9781498307062/2616-5333

Stock No:PPPCRRBMFREAPrice:$25.00

Academic Rate:$25.00)Format:PaperPages:103

Please address any questions about this title to publications@imf.org

Executive Summary

Raising economic well-being in the Caribbean relies on strengthening economic growth and resilience, including by improving both access to and the quality of infrastructure. The member countries of CARTAC, hereafter Caribbean countries, have made substantial progress in developing their infrastructure. The region’s overall quality of and access to infrastructure are broadly better than in other comparable regions, except for critical infrastructure for the tourism industry, such as air transport and ports.

Over the past decade though, the rate of both public and private fixed assets accumulation has slowed down in Caribbean countries on average. Caribbean countries face significant challenges for developing infrastructure. Most Caribbean countries are small states with little potential for achieving economies of scale in infrastructure investment. At the same time, most Caribbean countries have graduated to upper-middle- and high-income status and, thus, have limited access to concessional financing. They also have shallow domestic financial markets, limited access to global capital markets, and, often, high public debt burdens.

Finally, Caribbean countries are prone to costly and frequent natural disasters and are rather exposed to the effects of climate change, creating uncertainties for long-term investment in infrastructure while requiring additional investment and innovative technology solutions to make infrastructure more resilient.

Public-private partnerships (PPPs) can be an attractive option for developing infrastructure but come with important challenges. PPPs are long-term arrangements where the private sector finances and supplies infrastructure Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Curaçao, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, Trinidad and Tobago, and Turks and Caicos.

Data is not available for Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Curaçao, Montserrat, and Turks and Caicos.

Executive Summary: assets and services that are traditionally provided by the government. In principle, PPPs can crowd in much-needed foreign private investment and generate efficiency gains for the government.

But PPPs do not provide public infrastructure for free: they are a complex form of public procurement and all financing will need to be repaid over time. In theory, PPPs only generate value for the public sector if the efficiency gains realized outweigh the higher costs of private-sector financing and other costs associated with managing the complex PPP arrangements.

In practice, developing infrastructure projects through PPPs has proven difficult in Caribbean countries, as the projects are often too small to attract global investors and governments lack capacity and funding to manage project development.

As a result, the use of PPPs has declined in the region over the past decade. This paper argues for integrating PPPs into public investment management processes and strengthening mitigation of fiscal risks to help Caribbean countries address their infrastructure needs.

Based on a review of selected infrastructure projects undertaken and findings from a survey on PPP management practices, it provides a comprehensive legal, institutional, and public financial management framework for managing PPPs, with a focus on mitigating and properly reporting fiscal costs and risks.

It builds on extensive technical support provided by the IMF on PPPs and various IMF publications on the fiscal management of PPPs. PPPs entail potentially large fiscal costs and risks.

In a PPP, the private partner usually finances the upfront investment costs, which reduces the short-term lumpiness of traditionally procured public investment. The government may also contribute to the financing of a PPP, for example through equity injections in the project company or different types of subsidies.

Subsequently, paying for the provision of public infrastructure and related services is either the responsibility of the government or the users. Government-funded PPPs create firm commitments that may limit budget flexibility and endanger fiscal sustainability. Similarly, user-funded PPPs may generate (explicit or implicit) contingent liabilities for the government.

• PPPs are best governed by legal provisions that are an integral part of the broader legal framework. A legal framework for private participation in public-sector projects reduces fiscal risks. Yet most Caribbean countries do not have such legal provisions.
• Hence, there is a need to clarify the rules governing the relationship between the public and private sectors; integrate PPPs into public investment management frameworks;
• empower ministries of finance to check budget affordability of infrastructure projects (including PPPs); and
• define accounting and reporting standards to ensure transparency.

Those rules should be carefully embedded in the existing legal frameworks to avoid creating a separate track for PPPs, Public-Private Partnerships in the Caribbean Region.   PPP selection and management should be fully integrated into overall public investment processes, including budget processes.

Currently, most Caribbean countries handle PPPs on a parallel track, separate from other public investments and outside the budget. In contrast, best practice suggests that all projects should be subject to the same screening and evaluation processes, leaving aside the method of procurement, so that priority projects can be selected on a level playing field.

Competitive bidding and good project evaluation, including for unsolicited proposals, are key to ensure value for money. This means that all public investment projects, including PPPs, should be integrated into the budget cycle to ensure fiscal affordability.

International experience suggests that a structured “gateway” process with a strong role for the minister of finance is critical for safeguarding public finances. Ministries of finance should establish a gateway process for all public investment projects, including PPPs, to limit fiscal risks, and be able to stop or suspend a project at any stage if it proves unaffordable.  To avoid conflicts of interest, this function should preferably be separated from PPP support functions, that is a PPP unit that supports project development.

Transparency on the fiscal implications of PPPs is key for strengthening government accountability and improving the management of fiscal costs and risks from PPPs. To this end, transparent accounting and reporting would be critical to eliminate any bias in favor of PPPs and to reveal their full fiscal impact. Under international accounting and reporting standards, most PPPs would be considered on the governments’  balance sheet.

Few Caribbean countries currently apply this approach. Until this approach is fully implemented, governments should report long-term fiscal implications of PPPs on the budget deficit and public debt. Understanding the fiscal implications of PPPs also requires comprehensive fiscal risk assessments that include risks arising from potential natural disasters and climate change.

Few Caribbean countries have a framework in place to manage the fiscal impact of PPPs. The decision to enter into a PPP project should include an assessment of its long-term fiscal costs and risks. Governments can use the joint IMF-World Bank PPP Fiscal Risk Assessment Model (PFRAM) to assess the long-term fiscal implications and fiscal risks of PPP projects.

Governments in the Caribbean region should also develop national policy frameworks for managing risks from natural disasters and better integrate risks arising from climate change into PPP design. Once the risks are clearly understood, governments should decide on how best to mitigate and manage them.

• In Caribbean countries, PPP contracts have often tilted risks toward governments; in the future, governments may wish to transfer to or share more risks with the private partners.
• In addition, governments need to monitor risks actively throughout the lifetime of Executive Summary  a PPP project.
• Governments could also limit their PPP exposure by adopting ceilings on the stock and flows of PPP commitments.
• PPP projects for which the fiscal risks are not well understood or cannot be managed should not be undertaken.

This paper reviewed the current economic situation and infrastructure investment needs of Caribbean countries. Access to infrastructure in the Caribbean countries is high relative to comparator countries in Asia and Africa, and has improved substantially in almost all sectors. However, the quality of existing infrastructure in the region has suffered in recent years.

High-quality infrastructure is a critical condition for promoting the tourism industry, a key sector to catalyze economic growth in the region. The potential contribution of public-private partnerships (PPPs) to addressing the infrastructure needs were discussed.

Large-scale public investment in infrastructure in most Caribbean countries is hindered by limited access to financing. In addition, public investment in most of these countries is constrained by limited fiscal space.

By crowding in foreign financing and increasing efficiency by cooperating with the private sector, PPPs can bring potential benefits to the Caribbean region. Fiscal costs and risks coming with PPPs have been highlighted.

In contrast to a common misunderstanding of the nature and benefits of PPPs, they do not provide public infrastructure or public services for free. Paying for the provision of public infrastructure and services associated with a PPP asset is either the responsibility of the government or users.

• Firm fiscal commitments from PPPs may limit budget flexibility and endanger fiscal sustainability if PPPs are used to bypass budgetary controls and fiscal constraints.
• In addition, PPPs implemented in parallel to the public investment program and outside the budget process may crowd out other high-priority spending.
• Furthermore, PPPs create contingent liabilities, even if the long-term firm fiscal commitments are considered in the decision and budget process.
• The paper has also showed that benefits from PPPs can only be realized if these risks are properly managed.

Concluding Remarks 

Features of a public financial management framework have been outlined to reap the benefits of PPPs in the region without jeopardizing fiscal sustainability.

PPPs are just an alternative method for procuring public infrastructure, and they should only be used if they are more efficient than traditional public procurement.

A few prerequisites for achieving efficiency gains and protecting public finances when using PPPs were discussed and include:

1. a high-quality public investment process that ensures that all public investment projects are properly assessed and selected according to the government’s policy priorities;
2. handling all public investment projects, including PPPs through the same project process to ensure a level playing field for all infrastructure projects;
3. full integration of the public investment process with the budget process to ensure that public investment decisions are taken in the context of the country’s fiscal framework;
4. a competitive procurement process for all public investment projects, including for unsolicited proposals;
5. a legal framework that assigns clear roles and responsibilities;
6. an institutional framework that empowers the minister responsible for public finances to stop all projects that are not affordable;
7. a comprehensive risk management framework; and
8. transparent accounting and reporting arrangements providing information on the long-term implications of all investment projects, including PPPs.

Countries expanding their PPP portfolios can strengthen public financial management. Benchmarking current practices in the region against the suggested prerequisites shows that public investment management is relatively well developed in many countries in the region.

However, PPPs are handled in a parallel process and thus not covered under this public investment management framework. In most countries, multiyear commitments for long-term projects do not exist and information on the fiscal implications of such projects are not properly reflected in the budget documents.

In several countries, the minister of finance does not have the power to stop a PPP project if it is not affordable. Furthermore, many countries do not have a framework for assessing and managing fiscal risks, and only some countries that have such a framework include PPPs.

Also, most countries use cash or modified cash accounting and do not publish sufficient additional information to provide a clear picture on the fiscal implications of ongoing PPP projects. Public finance management reforms are already under way in several countries in the region, with IMF and Caribbean Regional Technical Assistance Center support.

Several countries plan or are in the process of introducing accrual accounting standards, under which a project has largely the same fiscal implications whether it is implemented through a PPP or through traditional procurement.

Several countries, including the Bahamas, which have recently approved a fiscal responsibility law, and Barbados, which is Public-Private Partnerships in the Caribbean Region  preparing a new public finance management law, are working on improving public financial management, including public investment management, and the management of and reporting on fiscal risks.

Interest in the management of fiscal risks gained momentum after recent natural disasters, and the IMF and Caribbean Regional Technical Assistance Center have intensified their capacity-building efforts in this area.

Germany /Latin America and Caribbean conference

Over 20 foreign ministers from Latin America and the Caribbean converged on Berlin, as Germany revitalizes lagging diplomatic and trade ties with the region.

Germany has taken steps in recent months to deepen ties with Latin American countries, emphasizing Germany’s “shared values” with the region.

The conference agenda included talks on improving trade and business, cooperation on developing stronger legal institutions, tacking climate change issues, along with expert panels covering science and technology.

The Foreign Ministry said “Latin America is one of the world’s most strongly democratic regions. We are seizing the initiative to reinvigorate and inject fresh impetus into our relations. We want to join forces on the world stage in our efforts to promote democracy, human rights and fair rules. We want to help expand our foundation of shared values.”

1,000 guests included Siemens CEO Joe Kaeser, who discussed business relations, and the UN human rights commissioner, Michelle Bachelet, who discussed women’s rights.

Focus on women’s rights

A new women’s network called “Unidas” officially founded at the conference, which is supported by the German Foreign Ministry in cooperation with the UN, emphasizes equal opportunity for women in Latin American and Caribbean countries. The network will foster preventative measures and increase dialogue on women’s rights issues in political and civil society spheres in Latin American countries.

“Participation, equal opportunities and equal rights are at the heart of democratic societies. There can be no justice without equality.” said the Foreign Ministry.

“Fourteen of the 25 countries around the world with the highest murder rates for women are located in Latin America.

“Together, we can stand up for more democracy, human rights and fair rules,” he added.

Maas made his first visit to the region as foreign minister at the end of April, visiting Mexico, Colombia and Brazil.

Improving business ties in Latin America

German businesses like Siemens and Volkswagen have been active for decades in Central and South America, although trade ties with the region are not impressive.

Imports and exports between Germany and Mexico totaled around €21.7 billion ($24.2 billion) in 2018, according to Germany’s Federal Statistical Office. That puts Mexico 24th overall, behind far smaller countries like Norway, Slovakia and Ireland.

Germany’s next-largest Latin American trade partner is Brazil, with a 2018 trade total of €16.8 billion — sandwiched between South Africa and Portugal in 29th place.

Germany wants to increase investment in Latin America to counter China’s heavy investment in the region. According to the China-Lusophone brief, a Brazilian economic monitoring website, Chinese investment in Brazil across 251 projects was announced or confirmed from 2003 to 2017, with a total worth of more than $123 billion.

Part of the Foreign Ministry’s economic strategy for Latin America is to streamline cooperation with government institutions and reduce bureaucratic hurdles, along with building upon existing economic cooperation. Germany’s largest carmaker, Volkswagen, operates four factories in Brazil. Half of its new passenger car sales were in Brazil and the company had a 15% share of the Brazilian car market in 2018.

Venezuela absent

Amid the political crisis, Venezuela’s Foreign Minister Jorge Arreaza was not on the guest list.

Read more: German foreign minister pledges support for Venezuelan opposition while in Colombia

Germany has sided with opposition leader Juan Guaido during political unrest under embattled President Maduro.

Democracy and China top German agenda in Brazil diplomatic visit
Foreign Minister Heiko Maas will discuss human rights with Brazil’s President Jair Bolsonaro before heading to Colombia, where millions of Venezuelans have fled. China also looms over the Latin America trip. (30.04.2019)

German foreign minister pledges support for Venezuelan opposition while in Colombia
Heiko Maas has promised support for Colombia and the Venezuelan opposition during a Latin America trip. On a three-state visit he has met with Brazilian leaders to talk about co-operation between the two countries. (01.05.2019)

China: Latin America’s dangerous new friend
China is throwing its weight – and money – around in Latin America. It plans to spend $250 billion in the region over the next decade – but this cash comes with strings attached and could do more harm than good. (15.01.2015)

DW’s editors send out a selection of the day’s hard news and quality feature journalism. You can sign up to receive it directly here.

 

IMF Executive Directors Conclude Visit to Panama

A group of Directors from the 24-member Executive Board  of the International Monetary Fund (IMF) comprising Mr. Sami Geadah, Mr. Zhongxia Jin, Mr. Maher Mouminah, Mr. Thomas Ostros, Mr. Alexandre Tombini, and Mr. Piotr Trabinski visited Panama from May 13-15. At the end of their visit, the Executive Directors issued the following statement:

“The International Monetary Fund and Panama have enjoyed long and fruitful cooperation. Our visit to Panama was an opportunity to strengthen this relationship and learn firsthand about the significant economic achievements and the authorities’ policies to continue improving the country’s economy, the challenges it faces and the way in which the Fund can contribute. We had the honor to meet with President Juan Carlos Varela Rodriguez, Finance and Economy Minister Eyda Varela de Chinchilla, other senior officials as well as members of the financial and banking community, and representatives of the private sector.

“Panama’s model as a regional trade, logistics, and financial center, has positioned the country as one of the most dynamic economies in Latin America. Its strong fundamentals reflect good policy frameworks, open trade, high investment, the emergence of a vibrant service sector, and the expansion of the Panama Canal. Looking ahead, continued fiscal discipline and sustained efforts to enhance Anti-money laundering and combatting the financing of terrorism and tax transparency will solidify the country’s positive economic prospects.

“The Fund has worked with Panama through the provision of technical assistance and capacity development to strengthen the authorities’ supervisory capacity and to modernize revenue administration and oversight. Going forward, we expect to continue strengthening our excellent cooperative relation.

“We would like to thank the authorities and the people of Panama for their warm welcome and open dialogue.”

(IMF Communications Department)