A guidebook on public-private partnership in infrastructure

Performance guarantee: 
The main purpose of the types of support discussed so far 
is to make projects commercially viable. However, the government may also 
consider other forms of support for PPP projects to attract private investment and 
enhance investors’ confidence. An important one among such supports is sovereign 
guarantees. These guarantees include performance guarantees, and guarantees 
against adverse acts of the governments such as acquisition without adequate 
compensation. The performance guarantees relate to the honouring of the 
commitments of the contracting authority, as provided for in the contract agreement, 
by the government.

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A Guidebook on Public-Private Partnership in Infrastructure 
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The Implications for any government support, particularly liabilities on the 
government (direct and indirect) need to be carefully assessed before agreeing to 
any such support. 
G. RESPONSIBILITIES OF AND LIABILITIES ON GOVERNMENT 
Besides usual responsibilities in regulatory and legal affairs and in policy and 
administrative matters, the government may be involved in a PPP project in many 
other ways. The involvement may be through assets ownership, equity participation, 
subordinate debt financing, risk sharing and provision of various incentives including 
loan guarantees for sub-sovereign and non-sovereign borrowings. These types of 
involvement require the government to bear direct and contingent liabilities, which 
can be both explicit and implicit.
Explicit direct liabilities are those which are recognized by law or as 
mentioned in a contract agreement, for example, the fixed periodic payments that 
are made in a PFI type of project, a grant or an agreed level of subsidy to a project. 
They arise in any event and are therefore certain. Contingent liabilities, on the other 
hand, are obligations if a particular event such as default of a guaranteed loan 
occurs. Therefore, they are uncertain in nature and difficult to predict. 
Often guarantees are used to pursue policy objectives in support of priority 
infrastructure projects and governments may provide loan guarantees to cover some 
or all of the risk of repayment. Guarantees can be extremely valuable in reducing the 
financing cost of a project and can substantially reduce the risk of loan default. 
Guarantees, however, may impose cost to the government. Such a cost is not 
explicit but may be real. Many governments (for example, in Canada) have 
established procedures for providing loan guarantees to create reserves and channel 
funds through transparent means to ensure that costs of guarantees are evident to 
the decision-makers from the outset. 
The government also bears certain implicit direct and contingent liabilities 
including those for which there may not be any direct financial involvement. Implicit 
liabilities may arise owing to public expectations and pressure of interest groups. 
Implicit direct costs include any future recurrent costs, such as for contract 
management and infrastructure maintenance. Implicit contingent liabilities also 
include default of a sub-sovereign and public and private entity on non-guaranteed 
loans and other liabilities, such as environmental damage, buyout, bailout, and 
default of the central bank on its obligations to allow repatriation of capital and profit.
The direct and contingent liabilities (explicit or implicit) have important 
implications for fiscal management in government. The underlying fiscal costs of 
PPPs that may arise in the medium and short term would require provision of 
substantial public financing in the budget. Therefore, there is a necessity to estimate 

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A Guidebook on Public-Private Partnership in Infrastructure
 
 

the likely direct and contingent liabilities in future before approvals of PPP projects 

by the government are considered
29
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