Public Debt Management with emphasis on PPP 1 Ministry of Finance 08 th Dec 2014

Outline  What PPPs are  Motivation for PPPs  Enabling legislations  Impact of PPP on Debt…  Conclusion 2

What PPPs are  PRIVATE PARTY PROVIDES A PUBLIC SERVICE (PROJECT) AND ASSUMES SUBSTANTIAL, FINANCIAL TECHNICAL AND OPERATIONAL RISK IN THE PROJECT  PPPs CAN BE BUT NOT LIMITED TO: –Built Operate and Transfer - BOT –Management Contract –Operations Contract –Concession Contract – Design, Build, Finance, Operate & Maintain –Equity – Trade Sale (Majority Or Minority Stake)  PPPs cannot be: –Tenders –Privatisation 3

Motivation for PPPs  Growing need for infrastructure project financing against limited fiscal space, no need for government to incur borrowing.  Debt is on the project company, (Risk only on equity and contingent liability)  Public Sector can harness the expertise and efficiency which private sector can bring through PPP  Opportunity to leverage private investment for the benefit of public services  Transfer or risk sharing  Improvement in service delivery 4

Enabling legislations Legal and Policy framework –State Finance Act, 1991 Sec 36 (Guarantees) Sec 29 (Debt) –Policy PPP policy Debt Management Strategy –PPP Bill (under discussion) Bill distributed for comments CCL and Parliament 5

PPP projects - relevance of affordability checks  Projects involving upfront public expenditure usually pass through a structured budget deliberation and approval process, including check on adequacy of public funds  Since PPPs do not involve public funds for upfront capital or in the short term, such project approvals do not automatically go through such budgeting control measures  However, PPP contracts in most cases would create financial obligations for the government. These could be in the form of: –Direct obligations (annuity payments) or –Contingent liabilities (like guarantees with respect to specific risk factors, termination payments or debt guarantees) 6

MoF / Debt Management Point of View… Given the possible fiscal implications that PPP projects could have  In case of known / committed government obligations: need to ensure that projects are affordable (through due assessments and approval processes)  In order to manage the impact of contingent liabilities: –Assessment potential government liabilities –Clear project documentation (including PPP / concession agreement) –Adequately management of fiscal commitments during PPP project implementation 7

Contingent liability  Government issues guarantees in cases where: there is clear intervention rationale; »Promoting economic growth »Promoting economic empowerment »Creating job opportunities »Promoting regional and rural development »Promoting health or social welfare Overall, the project is in the national interest 8

Types of contingent liabilities  Termination payment commitments: –In typical PPP structures payments become due from govt. at the end of concession period (as underlying asset is handed over to govt.) or in case of termination of contract –Payments due could vary depending on timing and reason for termination  Guarantees for specified risk events: –In case of a PPP, the government may provide risk guarantees, such as demand / traffic risk or exchange rate risks 9

Terms and Conditions of issuing contingent liabilities (Guarantees)  Fees & Levies future cost on taxpayers, therefore a annual 0.5% levy will apply. Depending on nature of project, the Minister could have discretion to waive the annual levy.  Loan coverage Government Guarantees will only cover up to 80%, The government liability reduces from the first loan repayment.  Eligible use of funds Funds should only be used for valid business development purposes such as establishing a new business, financing a project, acquiring or expanding an existing business, or improving efficiency. 10

Current Status of GRN contingent liabilities and Debt 11

Current Status of GRN contingent liabilities and Debt  Explicit contingent liabilities are outright debt hence limited to 10% of GDP  Current contingent liabilities stood at N$5 billion or 4% of GDP  Though far below the benchmark, there are projects in pipeline like; Power generation projects Rail upgrading projects Air ports upgrade Mass housing development projects 12

Conclusion  GRN is reaching its maximum limits as per debt sustainability indicators in terms debt level  PPPs will be an alternative financing tool for GRN to continue consolidating on its infrastructure development  Although PPP is welcomed, it has an embedded fiscal risk that needs to be evaluated, assessed and monitored to mitigate impact on public debt  From GRN perspective, it becomes difficult to implement PPPs in the absence of enabling Act, hence the drafting of PPP Bill 13

Thank You 14