Fiscal policy is the use of government spending and taxation to influence the economy.
Governments typically use fiscal policy to promote strong and sustainable growth and reduce poverty. Governments can create subsidies, taxing the public and giving the money to an industry, or tariffs, adding taxes to foreign products to lift prices and make domestic products more appealing.
The first is to enable financing of a project that would not be able to receive financing in the absence of the guarantee. Sometimes projects that have many positive economic and social benefits nonetheless have perceived risks that the private sector will not accept without a guarantee (for example, supply of electricity in rural areas). A guarantee is one way to allow the government to capture the benefits of such projects, which may not otherwise be implemented.
In short, government guarantees can:
- Enable a PPP project to receive commercial financing when it would not have done so without the guarantee;
- Increase competition in bidding for the opportunity to execute a project by lowering the project’s risk profile, thereby expanding the investors’ base;
- Increase the amount of financing available to the project;
- Lengthen the tenor of financing;
- Reduce the cost of the project’s financing.