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Government of Uganda
PPP FISCAL COMMITMENTS AND
CONTINGENT LIABILITY (FCCL)
MANAGEMENT FRAMEWORK
DRAFT
[April] 2019
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Acronyms and Abbreviations
CA - Contracting Authority
DB – Directorate of Budget
DCM - Directorate of Debt & Cash Policy
DEA – Directorate of Economic Affairs
FCCL – Fiscal Commitments and Contingient Liabilitiesy
GOU - Government of Uganda
GDP - Gross Domestic Product
IAS - International Accounting Standards
MFPED – Minsitry of Finance, Planning and Economic Development
PFM - Public Finance Management
PPP - Public Private Partnerships
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Table of Contents
1. INTRODUCTION .......................................................................................................................... 4
1.1. Regulatory Framework .................................................................................................................. 4
1.2. Application of FCCL Management Framework ........................................................................ 7
2. FISCAL COMMITMENTS FROM PPPS ................................................................................... 8
3. MANAGEMENT OF FISCAL COMMITMENTS .................................................................. 11
4. MANAGEMENT OF FISCAL COMMITMENTS DURING PROJECT
DEVELOPMENT .......................................................................................................................... 16
4.1 Identification and Assessment of fiscal commitments and fiscal risks ............................. 16
4.2 Analysis of Affordability ............................................................................................................ 24
4.3 Approval and Accepting .............................................................................................................. 26
5. MANAGEMENT OF FISCAL COMMITMENTS DURING PROJECT
IMPLEMENTATION ................................................................................................................... 27
5.1 Budgeting and paying .................................................................................................................. 27
5.2 Monitoring ..................................................................................................................................... 27
5.3 Reporting and Disclosing............................................................................................................ 28
5.4 Accounting ..................................................................................................................................... 30
6. ANNEXURE ................................................................................................................................... 32
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1. INTRODUCTION
The objective of this Fiscal Commitments and Contingent Liabilities (FCCL) Management
Framework is to provide a methodological tool for public officials of the Ministry of
Finance, Planning and Economic Development of Uganda (MFPED), the PPP Unit, and
Contracting Authorities (CA) at both the national and local government level, to assess
and manage fiscal commitments and contingent liabilities arising from public-private
partnership (PPP) projects.
Additionally, the following tools have been developed to facilitate the implementation of
this Framework:
- “PPP Fiscal Commitments Model – Uganda Portfolio” (Spreadsheet), and the
Model Manual.
- “PPP Fiscal Commitments Summary – Uganda Portfolio” (Spreadsheet), as a
complementary tool to the “PPP FCCL Model– Uganda Portfolio”.
- “Stochastic Model PPP” (Spreadsheet), and Note on Stochastic Analysis.
1.1. Regulatory Framework
The Public Private Partnerships (PPP) Act received Presidential Assent on August 5th,
2015 and provides the legal and regulatory framework for the participation of the private
sector in the design, construction, maintenance and operation of infrastructure or services
through PPP agreements.
The Government of Uganda hopes to procure projects through the PPP model because
PPPs have the potential to reduce life cycle costs and risk to the Government and to
introduce private sector expertise, operational efficiency, technology, and innovation. In
turn, this can produce an accelerated pipeline of better-quality infrastructure and service
delivery, provided that risk allocation between the Government and the private party is
appropriate.
However, even with appropriate risk allocation, the public sectors’ contributions to the
“partnership” of PPPs inevitably give rise to liabilities for the Government. In this regard,
Uganda aspires to a fiscally responsible implementation of its PPP programme and in so
doing, has developed this Fiscal Commitments and Contingent Liabilities (FCCL)
Management Framework to ensure that these liabilities are identified and managed
through all stages of a PPP project i.e. from inception to operations phase. See Table 1 on
the relevant provisions in the Uganda PPP Act 2015.
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Table 1: Relevant provisions in the PPP Act, 2015
Functions of the PPP Committee (Section 7)
“(k) ensure approval of, and fiscal accountability in the management of, financial and any other
form of support granted by the Government in the implementation of projects under this Act;”
Functions of the PPP Unit (Section 11)
“(2) In the performance of its functions under subsection (1), the Unit shall –
(e) develop an open, transparent, efficient and equitable process for managing the identification,
screening, prioritization, development, procurement, implementation and monitoring of
projects, and ensure that the process is applied consistently to all projects;
(g) collate, analyse and disseminate information including data on the contingent liabilities of
the Government in relation to a project;
(k) review and assess requests for Government support in relation to a project and advise the
Committee on the support that should be accorded in relation to the project;
(p) monitor contingent liabilities and accounting and budgetary issues related to public private
partnerships with the relevant offices within the Ministry;”
Functions of accounting officer (Section 13)
“(2) An accounting officer shall not enter into an agreement that in any way binds the
contracting authority to a future financial commitment or which results in a contingent
liability, except where the future financial commitment or contingent liability is authorised by
Parliament in the budget of the contracting authority.”
Feasibility study (Section 22)
“(2) The feasibility study shall –
(e) describe in specific terms – (i) any envisaged future contingent liability;
(f) demonstrate that the project shall – (i) be affordable to the contracting authority;
(i) indicate any envisaged future contingent liability.”
Procurement of public private partnerships (Section 23)
“(4) Where a project is to be financed by a contracting authority, the contracting authority shall,
prior to procuring a private party, obtain written confirmation from the Minister that the
financing required shall be available for implementation of the project.”
Evaluation of bids (Section 25)
“(2) After the evaluation of the bids, the contracting authority shall submit a report of the
evaluation to the Committee, and the report shall indicate –
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(a) how the criteria of affordability, value for money …… were applied in the evaluation of the
bids;”
Public private partnership agreement (Section 26)
“(1) The Cabinet shall prescribe the value of an agreement for which the approval of Cabinet is
required before an agreement is signed by an Accounting Officer.
(4) An agreement shall be forwarded to Cabinet for approval where the Accounting Officer
confirms that –
(a) the best evaluated bid meets the requirement of affordability, value for money and substantial
technical, operational and financial risk transfer;
(6) An agreement shall among others provide for the following-
(o) the payment of compensation and the reparation of any loss or damage caused where the
contracting authority or the private party violates its contractual obligations;
(p) the grounds for termination of the agreement and the consequences of this termination;
(9) The Cabinet shall not approve an amendment, or variation to a project agreement under
subsection (8) unless the variation or amendment is necessary for –
(b) the project to continue to be affordable, where such amendment, variation or waiver has a
financial implication;”
Role of Accountant General (Section 28)
“(3) The Accountant General shall prescribe accounting and financial reporting rules to be
adopted for public private partnerships”.
Establishment of a Project Development Facilitation Fund. (Section 29)
“(2) The moneys received into the Fund shall only be applied to –
(c) provide a source of liquidity to meet any contingent liabilities arising from a project.”
Unsolicited proposals (Section 34)
“(5) Where a contracting authority accepts an unsolicited proposal, the contracting authority
shall evaluate the unsolicited proposal and assess –
(d) an assessment of whether the proposed cost of the project is realistic, affordable and
justifiable;”
The application of the FCCL Management Framework addresses the provisions of the
PPP Act 2015 mentioned in the Table 1 above and various other Ugandan laws. The
provisions under Article 159 of the Ugandan Constitution; sections 5, 11, 16, 18, 36 and
39 of the Public Finance Management Act 2015; and section 13 of the Budget Act 2001 will
be applicable to the management of FCCLs.
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1.2. Application of FCCL Management Framework
The FCCL Management Framework is part of the Ugandan PPP guidelines and should
be used for all PPP projects submitted for consideration and approval under the PPP Act,
2015. All PPP projects executed before the commencement of the PPP guidelines will be
reviewed for FCCL for the purpose of collecting and consolidating FCCL information as
required.
The FCCL Management Framework is a dynamic document that will be refined and
revised periodically as the PPP programme evolves:
It first looks at how PPPs give rise to fiscal commitments - both direct liabilities
and contingent liabilities and defines both - Section 2
Section 3 provides an overview of the management of fiscal commitments across
the PPP project development cycle
Section 4 details the process to be adopted for managing FCCLs during the project
development stage, and
Section 5 details the process to be adopted for managing FCCLs during the project
implementation stage.
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2. FISCAL COMMITMENTS FROM PPPS
While PPPs can offer benefits from a budgetary perspective, PPP agreements have fiscal
implications for Government that must be managed effectively. PPPs are not “cost free”
to a Government. PPPs can provide new or alternative sources of finance from the private
sector which can help to meet the infrastructure gap and the available public funds for
infrastructure can be spread over a longer period of time, but in the long term the
Government still has to repay the private party for his investment. Under a PPP
arrangement, the Government almost always bears some risk or provides some financial
support that gives rise to an on-going fiscal commitment - either an actual direct liability
or a contingent liability. In addition, Government will also bear some fiscal risks.
Fiscal Commitments:
A direct liability takes the form of a defined and quantified undertaking to pay or
carry a funding obligation for a feature, phase or item in a PPP project essential to
its development, operation or completion. Its salient characteristic is that the
occurrence of the payment obligation is known, although uncertainty may remain
as to the size. Examples of such direct liabilities include:
(i) supplying the land needed for the project;
(ii) upfront “viability gap” payments, in which the Government makes a
capital contribution to ensure a project that is economically desirable but
commercially unattractive can proceed;
(iii) annuity or availability payments in which a regular unitary payment
over the life of a project is conditional on the availability of the service or
asset;
(iv) out-put-based payments or payments made per unit or user of a service.
A contingent liability, on the other hand, is an obligation that arises from a
particular discrete but uncertain future event (i.e. one that may or may not occur)
that is outside the control of the Government. For contingent liabilities, the
occurrence (trigger event), value, and timing of a payment may all be unknown or
cannot be definitively determined. Such liabilities include:
(i) guarantees on specific risk variables e.g. exchange rate, inflation, prices
and traffic;
(ii) force majeure;
(iii) termination payments; and
(iv) credit guarantees, among others.
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These types of commitments are explicitly set in the PPP agreements. However, fiscal
commitments can come from implicit sources as well. For example, a Letter of Support
(LOS) for a specific project may be considered a type of guarantee for some stakeholders.
Also, political or social sensitive projects may be expected to be rescued by Government
if financial distress occur.
Additionally, increase of existing obligations or creation of new obligations may arise
from contract adjustments and renegotiations. They may, for example, modify
significantly the costs of the projects, and the payments to be made by Government.
Section 26(9) of the PPP Act 2015 states that Cabinet shall not approve an amendment or
variation to a Project Agreement unless (amongst others) the amendment is necessary for
the project to continue to be affordable, where such amendment, variation or waiver had
a financial implication or is necessary for the project to continue to provide value for
money. This obligates the accounting officer, PPP Unit and the DCM to assess the
financial implications of any amendment and variation of the project agreement to ensure
that the project continues to be affordable.
Even when direct liabilities can often be considered more predictable than contingent
liabilities, this is not always the case. Direct liabilities can also include uncertain
components within its structure. For example, the project agreement of a toll road project
may include a service payment defined as an annual payment to be made by the
Government to the concessionaire in function of availability characteristics. This service
payment can change in function of inflation, exchange rate, local interest rate, change of
scope, increase of road size, and other components. This shows that direct liabilities can
have a significant amount of uncertainty for Government.
Fiscal risks
Fiscal Risks are factors that cause fiscal outcomes to deviate from expectations or
forecasts. They arise from the realization of contingent liabilities - obligations triggered
by an uncertain event, and from the realization of macroeconomic shocks, or other
unpredictable variables. Hence, contingent liabilities are, by definition, fiscal risks. Direct
liabilities may be subject to fiscal risks when they may change because of uncertain
parameters. Within the context of PPP agreements, we need to pay attention to other
sources of fiscal risks than those embedded in direct or contingent liabilities.
Other sources of fiscal risk are those channeled through provisions – controlled by the
Government– of the PPP agreement. For example, an extension of the project scope –
allowed in the PPP agreement and subject to consent of the Government– that modifies
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the costs of the project to the Government. Other sources of fiscal risk are outside the
scope of liabilities to be paid by the Government to the private partners. For instance, a
reduction of user-based revenues used by the Government to fund a project. This
reduction does not affect the liabilities of the Government owned to the concessionaire
(that may be fixed and independent of user-revenues performance) but it does have a
fiscal impact.
Uncertainty, or more precisely, unpredictable outcomes is what will make the estimation
and management of fiscal commitments more challenging.
Table 2: Examples of PPP fiscal commitments for Government for PPP projects in
Uganda
Project Fiscal commitment Other fiscal risks
Direct liability Contingent liability
Kampala-Jinja Expressway (2018) (PPP)
- Upfront capital subsidy - Resettlement and Land - Availability payments indexed to changes in inflation and foreign exchange rates.
-GOU subsidy to UNRA to cover gap toll-revenues and availability payments - Termination payment in case of default of concessionaire, or default of contracting authority, or force majeure.
- Change of scope that modifies the service payment. - Toll-revenue - Renegotiation
Bujagali (2008) (PPP)
- Resettlement and Land - Interconnection infrastructure (Contracting authority)
- Guarantee over committed payments acquired by UETCL via PPA. - Termination payment in case of default of concessionaire, or contracting authority, or force majeure.
- Hydrology - Renegotiation
Overall, it is important to note that Government commitments to PPPs are materially
different to Government debt and require a different management approach. When a
Government borrows, it uses the borrowed funds and the Government is obliged to repay
the debt regardless of how well the borrowed funds are used. In contrast, Government
liabilities to PPPs are in the nature of payments for services delivered. Payments are
linked to the performance of the service provider.
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3. MANAGEMENT OF FISCAL COMMITMENTS
The management of fiscal commitments is carried out in two stages: 1) PPP Project
Development Stage (explained in Section 4); and 2) PPP Project Implementation Stage
(explained in Section 5).
A two-stage structure of FCCL Management Framework (development and
implementation) is proposed. Managing and controlling liabilities takes place in all
phases of PPP development, approval, and implementation processes. The functions to
be undertaken are shown in the context of the broader PPP project development and
implementation process:
Figure 1: Functional Components of Managing Liabilities
Figure 1: Functional Components of Managing Liabilities
PP
P P
roje
ct
Dev
elo
pm
ent
PP
P P
roje
ct Im
ple
men
tati
on
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While within the Ministry of Finance, Planning and Economic Development the primary
FCCL oversight is role assigned to the Directorate of Debt & Cash Policy (DCM), the
governance and institutional framework, including the specific functions that need to be
undertaken to manage direct and contingent liabilities during the PPP project lifecycle, is
shared as follows:
Table 3: Specific functions, roles and responsibilities of various institutions in
managing direct and contingent liabilities during a PPP project life cycle
Function Objectives Role/ Responsibility
Identifying
and assessing
fiscal
commitments
and fiscal risks
To identify fiscal commitments
within the project structure,
develop a project structure that
will be bankable and ensure that
the risks the Government will
bear are consistent with good
risk allocation principles, borne
at the lowest cost and with
minimal fiscal impact.
Contracting Authorities:
Project feasibility studies and
implementation plans.
Development of Risk Register
and Fiscal Commitment
Registers.
Analysis of
Affordability
To inform decision making when
the project is structured and
approved, and provide a basis
for monitoring and budgeting for
liabilities.
Contracting Authorities:
CAs must determine whether
the project is aligned with its
internal budget constraints.
DCM, PPP Unit, and multi-
department review team from
MFPED (including DB and
DEA) formed to recommend
the project to the Minister:
Fiscal risk assessments and
other tools for analysing
liabilities. Review team
analyses fiscal commitments
and contingent liabilities before
submission to the PPP
Committee for approval.
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Function Objectives Role/ Responsibility
Approving To ensure the use of Government
resources in the form of liabilities
is focused on policy priorities;
represents value for money; and
is consistent with good fiscal
management.
PPP Committee:
Central approval to ensure that
PPPs are focused on the
Government’s policy
priorities, represents value for
money, and are consistent with
good fiscal management.
Minister of Finance:
Written approval must be
obtained from the Minister of
Finance where a project is to be
financed by a contracting
authority.
Accepting To clarify the Government’s
commitment to its liability
obligations, and to ensure the
executed contract is consistent
with earlier analysis and
approval
Contracting Authorities:
Involves the Contracting
Authority executing formal
instruments such as project
agreements, issuing letters of
support or performance
undertakings with the
purpose of guaranteeing that
they will honor its obligations
and commitments.
Cabinet:
Cabinet approval is required if
a PPP is above a certain
threshold. 1
Parliament:
If the PPP involves borrowing
by Government, the loan
documents must be approved
by Parliament. (Section 36(5)
1 As at 1 March 2019, the value has not yet been prescribed.
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Function Objectives Role/ Responsibility
PFM Act, Article 159(2)
Constitution of Uganda)
Budgeting and
paying
To ensure resources are available
to make payments promptly
when required, improving
credibility and clarity as to how
costs of liabilities will be borne,
and mitigating the fiscal impact.
Contracting Authorities:
Establish a well-defined system
for budgeting and paying for
liabilities at the individual
Contracting Authority level.
Directorate of Budget (DB):
Establish a well-defined system
for budgeting and paying for
liabilities on a holistic
Government level to ensure the
Government has the resources
available to meet its obligations
and mitigate the fiscal or
budgetary impact of contingent
liabilities.
Monitoring To provide information needed
to disclose, act on emerging
issues, reduce the likelihood or
cost of contingent liabilities
realizing and, if necessary,
budget for liabilities
Contracting Authorities,
DCM, PPP Unit:
To help Government track its
exposure to fiscal risk from
year to year, actively manage
exposure to contingent
liabilities, and improve its
ability to take action to reduce
the cost or likelihood of an
event triggering a payment
occurring should risks emerge.
Reporting and
Disclosing
To improve accountability for
decision makers, and increase
transparency of the
Government’s commitments to
Permanent Secretary/
Secretary to the Treasury:
Reporting on exposure to
liabilities through the budget
and Government
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Function Objectives Role/ Responsibility
third parties (such as credit
agencies and lenders).
accounts to increase
transparency and improve the
accuracy and completeness of
information available to
external parties. (Section 11 and
Section 16 PFM Act)
DCM:
Publish information on all
fiscal commitments and
contingent liabilities in its
applicable reports.
CAs:
Reporting on exposure to
liabilities through the CA
accounts.
Accounting To improve accountability for
decision makers and increase
transparency of the
Government’s commitments to
third parties (such as lenders and
credit agencies)
Accountant General:
shall prescribe accounting and
reporting rules to be adopted
for PPPs
An adequate identification and assessment of fiscal commitments and risks during the
project development stage will allow the Government to take good decisions regarding
the financial structure, risk allocation, and approval of the project.
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4. MANAGEMENT OF FISCAL COMMITMENTS DURING PROJECT
DEVELOPMENT
The project development stage covers all the steps taken to design, evaluate, and tender
the project. The FCCL Management Framework for the project development stage has
two main elements:
(1) the identification and assessment of fiscal commitments and risks
(explained in Section 4.1); and
(2) the assessment of affordability (explained in Section 4.2).
Both activities will help contracting authorities to take well-informed decisions over the
project.
4.1 Identification and Assessment of fiscal commitments and fiscal risks
The first step to assessing fiscal commitments and other potential fiscal risks is for
Contracting Authorities to identify and assess them within the project structure.
Identifying and assessing fiscal implications of a PPP agreement involves identification
and allocation of risks of the project, definition of payment mechanism, obligations and
rights of parties, etc. In practice, the base information needed shall be found in the risk
analysis and risk matrix within feasibility studies. Contracting Authorities therefore need
to ensure that identification and assessment of fiscal commitments and risks is a task
specified in the terms of reference for the Transaction Advisor. For active projects, these
would be found in the project agreements, letters of support, guarantee instruments, etc.
Advice from experts will also be required regarding all aspects of the project’s specific
sector (i.e. water and sanitation, transport, energy, etc.) and project’s specific financial
structure.
PPP Agreements, Letters of Support and other explicit Government support provide the
fiscal commitments (direct and contingent). These documents will contain provisions for
the payment mechanism to the private party and any allowed adjustments to availability
payments, tariff-based payments etc.; guarantees and trigger conditions, and termination
payments.
The process of identification and assessment of fiscal commitments and fiscal risks is
undertaken in the following three steps:
(1) Analysis of project’s risk matrix using a Fiscal Risk Register and a Summary Risk
Profile;
(2) Identification of fiscal commitments using a Fiscal Commitments Register; and
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(3) Assessment of fiscal commitments and fiscal risks.
The annexure to this FCCL Management Framework includes a solved example of
requirements under steps 1 and 2 above.
(1) The first step involves the analysis by the Contracting Authority of the project’s
risk matrix using a Fiscal Risk Register.
The Project Fiscal Risk Register will allow the Government to identify risks and any
corresponding mitigation and monitoring measures (explained in Section 5.2) for risky
liabilities. For instance, if Government is required to pay a termination payment in case
of default of the concessionaire, the fiscal risk matrix in the Project Risk Register shall
contain mitigation actions to mitigate risk of default and monitoring actions to anticipate
a potential default.
Moreover, the project agreement may not contain explicitly all risks and their effects on
the Government budget. For instance, a Government may take revenue risk and pay to
the concessionaire an availability payment. In this case, the contract will include the
characteristics of the availability payment but not the effects of, for instance, real demand
falling below expectations. Therefore, the Fiscal Risk Register complements the project
agreement in identifying fiscal commitments and fiscal risks.
It must be noted that a typical project risk matrix is typically focused on the consequences
and mitigation measures of risks over the private partner. A different matrix, a fiscal risk
matrix, shall be developed by an expert and must be focused on the effects and mitigation
measures over the government partner. Inputs to develop this matrix are the risk
allocation matrix elaborated for the feasibility study, the finance structure documents, the
PPP agreement, etc. Table 4 shows an example of the Fiscal Risk Register that consolidates
step 1. It shall contain only risks that are allocated partially or totally to the Government.
The Fiscal Risk Register contains description of the risk, allocation, cost, likelihood and
fiscal impact, and Government mitigation actions. As the objective we are pursuing is to
assess fiscal impact, columns entitled “Cost”, “Likelihood/Fiscal impact”, and
“Government mitigation actions” of the Risk Register must be populated only when the
risk is allocated totally or partially to the Government. All these aspects shall be done
with help of a project’s expert adviser.
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Table 4: Project Fiscal Risk Register
Risk Description Allocation Cost
Likelihood
/ Fiscal
Impact (*)
Government
mitigation
measures
Project X
Risk A -
Private / Central
Government /
State-owned
enterprise / Local
authority
Estimated
cost
Qualitative
estimate of
likelihood
of
occurrence
(eg. Very
high/
Medium)
Measures to be
done by
Government to
mitigate the risk
Risk B - - - - -
(*) According to analysis of risk, historic information, and expert judgment, likelihood and impact,
each may be Low, Medium, or High.
The Contracting Authority has to identify risks that are with the Government/
Contracting authority and briefly describe the nature of the risk. Provide the name of the
agency to whom the risk is allocated to. The risk can also be shared. The column on cost
is the fiscal impact of the risk materializing.
Two sets of information need to be provided in the column Likelihood/ Fiscal impact.
Likelihood refers to the probability of the risk materializing. It is based on analysis of the
risk, historic information and expert judgement. The likelihood is categorized into bands
of Very low to Low, Medium, High, and Very High.
Fiscal impact is the impact of the estimated cost of risk on the Government budget or
GDP. Similar to likelihood, the fiscal impact is categorized into bands of Very low to Low,
Medium, High, and Very High.
An example of the information included in this column is ‘Very High/ Medium’, implying
that the risk has a very high likelihood of occurring and it has a medium fiscal impact.
The following table can be used as a guide for grading on likelihood and fiscal impact.
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Table 5: Guide for grading likelihood and fiscal impact
Likelihood of risk event Fiscal impact on Government
Very Low to
Low
Remote likelihood
Strong mitigation measures in place
Negligible impact on Government
budget
Low reputational risk
Medium Likely chance
Past occurrence (country/ region)
Risk mitigation may not be sufficient
Between __% to __% of GDP or
Government budget
Some reputational risk
High High likely chance
Past occurrence (country/ region)
Risk mitigation may not be sufficient
Between __% to __% of GDP or
government budget
Substantial reputational risk
Very High Very high likely chance
Recurrent occurrence (country/
region)
No risk mitigation measures in place
Above __% of GDP or government
budget
Impact cascading to other sectors
The last column of the Risk Register, “Government mitigation measures” is directly
related to the column “Monitoring Information: Fiscal Commitments and Fiscal Risks” of
Table 9 of the Monitoring Section 5.2 of this FCCL Management Framework. Therefore,
consistency between both columns shall be checked. These measures are important to
formulate management responses and actions to reduce and control the identified risks.
The benefits of managing risk appropriately are: to facilitate informed and systematic
decision making, minimise consequences of risks, and give an improved understanding
of the project’s risks.
The following are some suggested types of mitigation measures by the Government:
• Preventive measures: To limit the possibility of an undesirable outcome. Some
examples are: insurances, partial guarantees (such as those provided by financial
institutions to mitigate the risk of public entity failing to perform its financial
obligations), financial instruments (to mitigate financial risks, such as interest rate,
exchange rate, commodity prices) and cap-provisions.
• Corrective measures: To correct undesirable outcomes. For instance, a
contingency plan in case of natural disasters, or in case of in case of termination of
contract.
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• Detective measures: To identify occasions of undesirable outcomes. Here we find
all monitoring activities and reports. For example, if Government provides a
termination payment in case of default of contracting authority, it shall monitor
financial performance and compliance of obligations of contracting authority.
In addition to the Fiscal Risk Register, it is recommended that the Contracting Authority
also create a summary of the risk profile for each project. This summary, as shown below,
will allow the Government to compare the different risks in terms of impact and
likelihood. The information in the column likelihood and fiscal impact in Table 4 is used
to map the risk to the appropriate cells in the summary risk profile. The fiscal risks to the
right-hand side of the risk tolerance line are the ones that will have a significant fiscal
impact on the Government.
Figure 2: Summary of risk profile
(2) The second step is for the Contracting Authority to identify and register direct and
contingent commitments in a Fiscal Commitments Register.
Fiscal Commitments and Contingent Liabilities shall be consolidated in the following
Fiscal Commitments Register, shown in Table 6. The Fiscal Commitments Register
contains the type of liability, description of adjustment factors and trigger events, and the
location of the information (which will depend on the stage of the project).
Very Low -
LowMedum High Very High
Very Low -
Low
Medum
High
Very High
Fiscal Impact
Likelihood
Risk tolerance line
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Table 6: Fiscal Commitments Register
Fiscal
Commitment
Type of fiscal
commitment (direct/
contingent)/Definition
Adjustment
factors/Trigger
events
Location
Project X
Payment 1
Direct
Explain payment
concept, periodicity,
and form of calculation
Detail
adjustment
factors and
trigger events if
apply
Specific location where
this information was
taken (Feasibility
Study, PPP Agreement,
Letter of Support, etc.)
- Payment 2
Contingent
Explain payment
concept, periodicity,
and form of calculation
Payment 3 - - -
The Contracting Authority will list all payment liabilities – direct and contingent in the
table above. The payments will need to be described in detail viz. – type of payment,
payment due dates, its form of calculation etc. The column on adjustment factors/ trigger
events includes features for adjusting the payments in case of direct payments and trigger
events for contingent liabilities. The Contracting Authority may use additional sheets
cross referenced to this table the required details cannot be accommodated in this table.
In the case of a road project serviced by availability payments – the adjustment factors
for direct payment could include inflation, foreign exchange rate fluctuation,
compensation for overloaded vehicles plying on the road, etc. And if tolls are collected
by the Contracting Authority for supporting the availability payments, then the shortfall
in toll revenue vis-à-vis the availability payment due may trigger the payment guarantee
mechanism.
(3) The third step is the actual assessment of the fiscal commitments and fiscal risks
itself.
Table 7 provides guidelines on what measures and methodologies Contracting
Authorities and MFPED can use for the assessment of fiscal commitments and fiscal risks
for PPP projects. Those fiscal commitments and risk that cannot be assessed
quantitatively shall be assessed qualitatively using information from Fiscal Risk Register
(Table 4), and the Summary Risk Profile (Figure 2).
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Table 7: Methodologies for assessment and analysis of fiscal commitments and fiscal
risks
Fiscal commitment Estimate
Methodology
adopted for
estimating the fiscal
commitment
Direct Liabilities
Upfront payment
- Annual cost over
life of project
- Present value of
payment stream for
the period of
agreement
-
Availability payment -
Availability payment adjusted
permanently by macroeconomic
parameters
- Scenario analysis
- Stochastic analysis
Availability payment adjusted by
contingent events
- Scenario analysis
- Qualitative analysis
of likelihood of
reaching trigger
values
- Stochastic analysis
Contingent liabilities
Revenue guarantee
- Estimated annual
cost over life of
project
- Estimated present
value of payment
stream for the period
of agreement
- Scenario analysis
- Qualitative analysis
of likelihood of
reaching trigger
values
- Stochastic analysis
Debt guarantee
Guarantee over annual payment by
state-owned enterprise, local or
subnational Government
- Estimated annual
cost over life of
project
- Estimated present
value of payment
stream for the period
of agreement
Termination payment - Maximum value
- Qualitative analysis
of likelihood of
reaching trigger
values
23
Other fiscal risks
- - Maximum value
- Qualitative analysis
of likelihood
- Stochastic analysis
Upfront payments and availability payments that do not have any linkages to any risk
factors are simple to compute. Their value and timing during the project term are certain.
Scenario and stochastic analysis are used when timing and value of payments is
uncertain.
Scenario analysis involves calculating the fiscal impact to the Government under
different scenarios by making assumptions regarding the outcome of events or variables
that affect the value of the contingent liability and calculating the cost given those
assumptions. Usually, fiscal impact is computed for a risk under the categories like – Best
case, Likely case and Worst case scenarios and the values are multiplied with the
probabilities of these scenarios occurring, to arrive at an expected fiscal impact of the risk
event occurring.
Stochastic analysis is a class of computational algorithms that rely on repeated random
sampling to obtain a range of possible outcomes and the probabilities they will occur for
any choice of event or action. In this analysis, input parameters are considered as
variables that change according to an assigned probability distribution function. Through
numerical equations the causal relationship between the output parameters and the input
variables is established. Thereafter, random sampling is done to obtain an estimate of loss
with each value of risk variable. Usually, several repetitions are done to arrive at loss
estimates at different levels of confidence.
The assessment/ analysis/ quantification mentioned above can be done using the
following spreadsheet models that form part of the FCCL Management Framework.
These tools allow the users to calculate direct and contingent liabilities, and provides cash
flow and Government accounting statements:
- PPP FCCL Model - Uganda Portfolio:
o The “PPP FCCL Financial Model Manual” provides a step-by-step guidance on
how the spreadsheet model “PPP FCCL Model – Uganda Portfolio.xlsm”
operates
- Stochastic Analysis:
24
o The “Stochastic Analysis” spreadsheet allows to make estimations with
stochastic analysis (Monte Carlo simulation). This is explained in the “Note on
Stochastic Analysis”.
- Termination Payment:
o The “Termination Payment” spreadsheet allows to calculate termination
payments.
4.2 Analysis of Affordability
With the estimations of fiscal costs, the Government must now check if the project is
affordable. The three common instruments used to check affordability are:
(1) Comparing annual cost estimates against the Contracting Authority projected
budget;
(2) Assessing the impact on debt sustainability; and
(3) Introducing limits on PPP commitments.
(1) Compare Cost Estimates against the projected budget
The first instrument entails the Contracting Authority checking whether the project is
aligned with its internal budget constraints and priorities. Verifying that the fiscal
commitments are affordable within the Contracting Authority budget is the primary step.
This is achieved by just assessing if the commitments allow the contracting authority to
achieve their fiscal targets or surplus. Also, the affordability analysis must also be
consistent with the overall liability and fiscal risk management of the Directorate of
Budget.
(2) Debt Sustainability
Fiscal commitments from PPPs are considered debt-like obligations. Hence, the
Directorate of Debt & Cash Policy may consider the consistency of treatment of such
obligations within the overall Government liabilities and fiscal management framework.
PPP commitments could be included in debt measures to determine a project’s impact on
overall debt sustainability.
The Department of Macro-Economic Policy within the Directorate of Economic Affairs
undertakes debt sustainability analysis and publishes an annual Debt Sustainability
Report. The Debt Sustainability Report uses a consistent macroeconomic framework to
25
assess Uganda’s current and future debt levels, as well as the country’s ability to meet its
debt obligations and any risks and vulnerabilities that might arise.
(3) Limits or Thresholds
Finally, some Governments adopt specific limits or thresholds on direct fiscal
commitments of PPPs. The objective is to avoid tying up too much of the budget (within
a specific sector or at aggregated level) in long-term payments. At this point, however,
such limits are usually not needed in the early stages of PPP programmes such as
Uganda. This could be later developed as the magnitude and potential of the programme
increases.
This next Table 8 shows the types of affordability indicators proposed in this FCCL
Management Framework that Government could use as the PPP programme develops:
Table 8: Affordability indicators
Fiscal
commitment Cost
Indicator of fiscal affordability
(Including projections over PPP
agreement length-beyond medium-term
horizon)
Direct
liabilities
- Estimated Annual
payments
- NPV
- Cost as percentage of ministry or sector
agency, and national annual revenue /
deficit-surplus budget
- Cost as percentage of national public
debt
- Cost as percentage of GDP
Guarantees
- Estimated annual
payment, or expected
average payment
- NPV
(Base/Downside cases)
- Cost as percentage of ministry or sector
agency, and national annual revenue /
deficit-surplus budget
- Cost as percentage of contingency line
- Cost as percentage of public debt
- Cost as percentage of GDP
Termination
payment
- Estimated worst-case
payment or expected
average payment
- NPV
- Cost as percentage of national budget
- Cost as percentage of contingency line
- Cost as percentage of GDP
26
Other fiscal
risk
- Estimated worst-case
payment or expected
average payment
- NPV
(Base/Downside cases)
- Cost as percentage of ministry or sector
agency, and national annual revenue /
deficit-surplus budget
- Cost as percentage of contingency line
- Cost as percentage of GDP
4.3 Approval and Accepting
Under Section 23(4) of the PPP Act, where a project is to be financed by a Contracting
Authority, the Contracting Authority shall, prior to procuring a private party, obtain
written confirmation from the Minister of Finance that the financing required shall be
available for the implementation of the Project. In practice, this recommendation will be
provided by a multi-departmental review team established for each individual project
including DCM, PPP Unit, DB and DEA, who will review the relevant documentation
and give advice to the Minister. The PPP Committee approves the project based on the
recommendations of the review team and other considerations with respect to socio-
economic benefits, value for money and affordability.
The FCCLs in the project gets accepted after the Contracting Authority signs the PPP
agreement with the private party. The PPP Act specifies the process to be followed and
the approvals to be obtained prior to signing the PPP agreement.
27
5. MANAGEMENT OF FISCAL COMMITMENTS DURING PROJECT
IMPLEMENTATION
The project implementation stage covers all the steps taken to budget, make payments,
monitor, report, disclose and account for FCCLs.
5.1 Budgeting and paying
Budgeting for direct payments is done through an annual budget allocation of the
Contracting Authority. The Contracting Authority has to build in its direct fiscal
commitments into its annual budget request. Actual payments to the private party can
also be made to a centrally controlled account to avoid delays. Some PPP agreements may
require escrow accounts to provide assurance that resources are available to meet
payments when needed.
Paying for contingent liabilities as they occur may require appropriations from exiting
allocations or through approvals for supplementary appropriations. Governments can
create contingency reserve in the budget to meet calls on contingent liabilities. The key
consideration in the process is the timeliness and coordination by which DCM and CA
provides information to the DB with the estimates on contingent liabilities that are
expected to materialize in a particular year.
5.2 Monitoring
Managing fiscal commitments entails monitoring, reporting and budgeting of PPP
projects, both at individual project level and at portfolio programme level. Adequate
monitoring and disclosure of fiscal commitments and risks will allow the Government to
prevent undesirable events from occurring, mitigate their impact, and making informed
decisions during the operation phase.
This stage will require gathering project financial parameters, risks and performance, and
country macroeconomic information, and any other input that may affect fiscal
commitments and fiscal risks. The objective will be to ensure that updated information is
reported at the right time to the relevant gatekeeping entities, in line with Section 27(2)
of the PPP Act that obligates each CA to submit periodic reports on the project agreement
implementation to the Minister of Finance.
Each commitment or fiscal risks must have specific information, such as financial and
accounting ratios and indicators, to monitor the evolution along the entire length of
28
contract. This next Table 9 highlights what minimum information shall be collected and
registered by the CAs in each PPP project:
Table 9: Monitoring Information: Fiscal Commitments and Fiscal Risks
Fiscal Commitment
Required
information /
Periodicity
Entity who
must send
information
Obligation to
submit
information set
at:
(PPP
Agreement,
Letter of
Support, etc.)
Follow-up of
mitigation
activities of
Risk Register
Project X
Direct Liabilities
Payment 1 - - - -
Payment 2 - - - -
Contingent Liabilities
Payment 1 - - - -
Payment 2 - - - -
Other fiscal risks
Risk A - - - -
5.3 Reporting and Disclosing
The Government of Uganda needs to account for and report on their fiscal commitments
of PPP agreements. MFPED shall keep a centralised register of fiscal commitments of PPP
transactions at national or local government level. Proper reporting incentivises the
Government to scrutinise its own financial position. Also, making reports available to
other parties, such as lenders, rating agencies, PPP stakeholders, and the public, enables
them to make informed opinions on the Government’s PPP fiscal management and
performance.
For internal and external transparency of the financial effects of PPPs on Government’s
position, fiscal commitments shall be reported. Also, it is recommended that, given the
fiscal commitments may have debt-like effects on public finances, they are subject to
similar checks and limits to debt obligations.
29
Table 10 shows the suggested information to be reported on direct and contingent
liabilities. Description shall include: description of the liability, estimate of the value of
the liability, annual cost and present value (for direct liabilities), and maximum exposure
(for contingent liabilities). This reporting shall be included in medium-term budget
reports and debt strategy reports.
Specifically, the Directorate of Debt & Cash Policy shall publish information on all fiscal
commitments and contingent liabilities including as a section in the “Report on Public
Debt, Guarantees, Other Financial Liabilities and Grants”, Report on Treasury Operations
(TOP), the Debt Statistical Bulletins and any other reports as may be required under the
Public Finance Management Act, 2015. For public disclosure purposes, it is recommended
to disclose the stream of annual payments and net present value of all payments of direct
liabilities per project, as per the disclosure policy adopted by the Government. It is also
recommended to publish maximum exposure for those contingent liabilities which
probability or occurrence is considered low (such as for instance termination payments).
For the case of guarantees, it is recommended either (1) to disclose the stream of annual
payments and net present value of all payments per project if the information used for its
estimation is reliable, or (2) maximum exposure of aggregated payments. The next Table
10 shows a sample of reporting format to present direct and contingent liabilities by
project.
Table 10: Reporting Sample of Fiscal Commitments by project
PPP
project Direct liabilities
Annual payments value for 3-year
budget
Present
value of
all
payments
2019 2020 2021 2019
Project 1
Direct liabilities:
- Annuity
payment.
Indexed quarterly
by inflation.
Project 2
Direct liabilities:
- Annuity
payment.
Indexed quarterly
by inflation.
30
PPP
project
Contingent
liabilities
Estimated annual payments value
for 3-year budget
Present
Value of
Maximum
exposure 2019 2020 2021
Project 1
- Revenue
Guarantee
- Termination
payment
In case of default
of contracting
authority
Project 2
- Termination
payment
In case of default
of contracting
authority
It must be noted that estimations of liabilities (Table 7) and follow-up activities (last
column Table 9) must be updated in an ongoing basis. Estimates should be updated at
least during the following project milestones:
Approval by Budgetary department
After Feasibility Study
Before signing
After signing
After financial closure
During construction years (they are the riskiest years)
During operation (checking on financial performance of firm)
5.4 Accounting
Under Section 28(3) of the PPP Act, the Accountant General shall prescribe accounting
and reporting rules to be adopted for PPPs. Government of Uganda, and the Accountant
General in particular, needs to decide whether and when fiscal commitments should be
recognised in financial statements through creation of public assets, liabilities or
expenses. This is important because fiscal responsibility is usually examined in relation
to thresholds over Government’s liabilities and expenditures. It must be taken into
account that adequate accounting and reporting tackle the perception bias that PPPs
31
attract immediate private financing without increasing Government spending and debt.
Determining how PPP commitments are to be recognised is important as it defines
whether such liabilities count toward debt management limits. International public-
sector accounting standards, such as IPSAS 32, and international government financial
reporting and statistics guidelines, such as IMF’s Government Finance Statistics Manual
(2014), and IMF’s Guide on Public Sector Debt Statistics (2013) provide a framework for
accounting and statistics of PPP transactions.
IPSAS 32 defines when PPP assets and liabilities should be recognised, assuming
Government is following accrual accounting standards (as opposed to cash accounting
standards). Assets and liabilities appear in Government’s balance sheet, if: (1) the
Government controls or regulates the services the operators must provide through a PPP
agreement, and (2) the Government control any residual interest in the asset at the end of
the project agreement. Under this FCCL Management Framework, the assets provided
by the concessionaire are recognised, as well as its correspondent liabilities, either if the
assets are funded by users-tariffs or by Government. Regarding contingent liabilities,
IPSAS 19 states that the expected cost of a contingent obligation should be recognised
only if: (1) it is more likely than not (50%) that the event will occur; and (2) the amount of
the obligation can be measured with sufficient reliability. The model “PPP Fiscal
Commitments Model - Uganda Portfolio.xlsm” contains Government’s financial
statements considering IPSAS 32 approach and accrual accounting.
The model “PPP FCCL Model - Uganda Portfolio.xlsm” also generates cash flow
estimations. It contains stream of payment of direct liabilities (e.g. availability payments),
and revenue and debt guarantees.
32
6. ANNEXURE
The following is an example of a fiscal risk register (table 4), summary of risk profile
(figure 2) and fiscal commitments register (table 6) of the FCCL Management Framework.
The example presents a sample of entries for a road PPP project developed on a Design
Build Finance Operate Transfer model. The private partner will be paid availability
payments during the period of operations towards the recovery of its investment in the
project, subject to meeting output performance requirements. This example is not an
exhaustive list for a project.
Fiscal Risk Register
33
Summary Risk Profile
34
Fiscal Commitments Register
Fiscal
Commitment
Type of fiscal
commitment (direct/
contingent)/Definition
Adjustment
factors/Trigger events Location
Project – XYZ Road Project
Land
acquisition
and
Resettlement
Direct
Paid in installments
during land acquisition
before the signing of
contract
Estimate based on
initial assessment.
Likely to increase
after detailed social
assessment
Initial social assessment
Chapter 7, section 3,
summary of land
acquisition and
resettlement costs
Availability
payments
Direct
Paid quarterly for 27
years after
commencement of
operations of the
project
Payments are indexed
to inflation, foreign
exchange rates.
The adjustment will
be ascertained vis-à-
vis the base index and
the current index
published by the
Central Bank of
Uganda.
Feasibility study report
and payment terms
from the draft term
sheet
Termination
payments
Contingent
Will be paid in event of
termination. GOU
default will result in
compensation for Debt
due and compensation
for equity. Private
partner default will
result in payout of only
debt due
Linked to termination
of PPP agreement due
to default of the GOU
or Private Party
Draft term sheet –
section 24
Feasibility study –
financial model
termination costs