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Public Investment and Public-Private PartnershipsAddressing Infrastructure Challenges and Managing Fiscal Risks

Edited byGerd Schwartz, Ana Corbacho, and Katja Funke

© International Monetary Fund 2008

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Library of Congress Cataloging-in-Publication DataPublic investment and public-private partnerships : addressing infrastructure challenges and managing fiscal risks / edited by Gerd Schwartz, Ana Corbacho, and Katja Funke. p. cm. Includes bibliographical references and index.

1. Public investments. 2. Public-private sector cooperation. 3. Infrastructure (Economics) I. Schwartz, Gerd. II. Corbacho, Ana. III. Funke, Katja.HC79.P83P828 2008332.67'252—dc22 2008015893

10 9 8 7 6 5 4 3 2 117 16 15 14 13 12 11 10 09 08

Softcover reprint of the hardcover 1st edition 2008 978-0-230-20133-0

ISBN 978-1-349-29944-7 ISBN 978-0-230-59399-2 (eBook)DOI 10.1057/9780230593992

Contents

List of Figures, Tables, and Boxes viiList of Abbreviations xNotes on the Contributors xiiiPreface xxivForeword by Teresa Ter-Minassian xxvi

Introduction by Gerd Schwartz, Ana Corbacho and Katja Funke 1

Part One. Public Investment and Fiscal Policy in Europe

1. Public Capital and Economic Growth: Key Issues for Europe 11Jakob de Haan, Ward Romp, and Jan-Egbert Sturm

2. A Primer on Public Investment in Europe 21Eric Perée and Timo Välilä

3. Challenges for Public Investment in New EU Member States 36Anton Jevcák and Filip Keereman

4. Budgeting of Public Investments 61Eivind Tandberg

Comments on Part One 77Christophe KampsComments on Part One 80Christoph Rosenberg

Part Two. Fiscal Risks from PPPs

5. PPPs and Fiscal Risks: Should Governments Worry? 85Ana Corbacho and Gerd Schwartz

6. Controlling Spending Commitments in PPPs 105Timothy Irwin

7. PPPs and Fiscal Risks: Experience of Portugal 118Rui S. Monteiro

Comments on Part Two 132Gábor P. KissComments on Part Two 136Marko Mršnik

vi Public Investment and Public-Private Partnerships

Part Three. The Institutional Environment for PPPs

8. The OECD Principles for Private Sector Participation in Infrastructure 143Hans Christiansen

9. Legal Regimes for PPPs in Central and Eastern Europe 162 Alexei Zverev10. Combining PPP with EU Grants 173

Hugh Goldsmith11. Managing PFI Projects in the United Kingdom 187

Edward Farquharson12. Negotiating and Renegotiating PPPs and Concessions 197

Luis A. Andres and J. Luis GuaschComments on Part Three 228Daniel Bergvall

Part Four. PPP Accounting, Reporting, and Auditing

13. PPPs: Some Accounting and Reporting Issues 235Richard Hemming

14. IPSASB: Service Concession Arrangements 245Mike Hathorn

15. Accounting for PPPs: The Eurostat Approach 256Philippe de Rougemont

16. Framework for PPP Audits in the United Kingdom 269Patricia Leahy

17. PPP Audits in Portugal 279Francisco Machado

18. Hungary’s Audit Experience with PPPs 285Gusztáv Báger

Comments on Part Four 295Kálmán SeregélyesComments on Part Four 297Juan Ramallo Massanet

Index 299

List of Figures, Tables, and Boxes

List of fi gures

1.1 Share of government net capital stock in total net capital stock 141.2 Government gross fi xed capital formation in the EU25 152.1 Gross fi xed capital formation by the general government in EU

countries (GDP-weighted averages), 1970–2005 222.2 Gross fi xed capital formation of the general government: less

volatile EU8 countries 242.3 Gross fi xed capital formation of the general government: more

volatile EU8 countries 252.4 Public capital less public debt 272.5 Signed value of PPP contracts (stock) and public investment (fl ow),

period averages 292.6 Public investment with and without PPPs in the UK 302.7 Composition of public investment in groups of EU countries

(GDP-weighted), average 2000–05 322.8 Composition of public investment in EU8, average 2000–05 333.1 Road infrastructure, 2002 403.2 Total gross fi xed capital formation, average 2002–06 413.3 Investment by general government, average 2002–06 433.4 Functional composition of public investment, average 2001–05 443.5 Knowledge economy readiness, 2004–05 453.6 Public expenditure on education, average 1999–2003 453.7 Public expenditure on R&D, average 2001–05 463.8 Stylized debt dynamics with a golden rule 503.9 Public investment in new member states between 2001

and 2006 513.10 General government defi cit and public investment,

average 2002–06 523.11 Cross-country relationship between public and private

investment in the new member states 543.12 EU transfers to the 12 new member states under the 2004–06

and 2007–13 fi nancial perspectives 553.13 Absorption rate of structural funds, 2000(4)–07(6) 563.14 Cross-country relationship between net infl ows of EU transfers

and public investment in the EU15, country averages 1986–2005 575.1 Procurement options and private sector participation 86

viii Public Investment and Public-Private Partnerships

5.2 Contracts under traditional public procurement and PPPs: a comparison 87

6.1 Comparing public and private fi nance 1089.1 Compliance/conformity with international concessions standards

and principles 1649.2 Quality of concessions laws: levels of compliance in core areas of

concessions legislation in Estonia, Latvia, and Lithuania, 2005 1659.3 Effectiveness of concessions laws in the EBRD’s countries of

operations 1699.4 Effectiveness of concessions laws in Hungary and Montenegro 17010.1 PPP-grant support models 17911.1 Deal pipeline by department 18811.2 Did the last user satisfaction assessment fi nd that services were

being delivered to an acceptable standard? 19012.1a Evolution of private participation in electricity distribution 20112.1b Evolution of private participation in fi xed telecommunications 20212.1c Evolution of private participation in water distribution 20312.2 Controlling for time trends: an illustration 20612.3 Fiscal capture of benefi ts, in 1999 US$ billions 21012.4a Increase in household earnings from access to infrastructure

public services 21112.4b Increase in household earnings from access to market through

rehabilitated rural roads, in annual US$ 21212.5 Percentage who disagree with the privatizations 22314.1 Design-build-fi nance-operate PPP arrangement 24614.2 Examples of PPP arrangements 24716.1 Life cycle of PPP deals 27016.2 Length of tendering for PFI projects unrelated to project size 27316.3 Typical organizational structure of a project highlighting

services subject to market testing 275

List of tables

3.1 Average total gross fi xed capital formation by asset type (percent of GDP) 42

4.1 Integrated budget management and investment planning processes 69

5.1 Essential and non-essential features of different procurement options 86

5.2 The gateway process in South Africa 9610.1 Drivers of value for money in PPPs 17710.2 Potential impact of EU grants 181

12.1 Summary of impacts on performance variables 20912.2 Renegotiation incidence and average time until renegotiation,

1988–2001 21412.3 Contract award processes for concessions in Latin America and

the Caribbean by sector, mid-1980s to 2000 21512.4 Percentage of concessions renegotiated according to competitive

or non-competitive process excluding the telecommunications sector, by type of process 216

12.5 Who initiated the renegotiation? (percentage of total requests) 21612.6 Who initiated the renegotiation conditioned on regulatory

regime? (percentage of total requests) 21612.7 Contract features and the incidence of renegotiated concessions

in Latin America and the Caribbean, mid-1980s to 2000 21712.8 Common outcomes of the renegotiation process 22014.1 Anticipated schedule for IPSASB project on PPPs 25416.1 Issues in using the matrix approach 27116.2 Results of the projects that value tested services 27718.1 Main data of PPP projects, 2007–10 28918.2 Assessment of motorway projects 292

List of boxes

3.1 Lessons from Irish and Portuguese convergence for public investment 47

5.1 Examples of fi scal risks and PPPs: country experiences 905.2 Examples of the institutional setup for PPPs in selected countries 955.3 Disclosure requirements for PPPs and guarantees 988.1 The OECD principles for private sector participation in

infrastructure 14511.1 PFI Operational Taskforce 19213.1 Disclosure requirements for PPPs 24013.2 Disclosure requirements for guarantees 242

List of Figures, Tables, and Boxes ix

List of Abbreviations

4ps Local government’s project delivery specialistAKA Alföld Koncessziós Autópálya (Hungarian Motorway Concession)BOO Build-own-operateBOT Build-operate-transferBOT Balance of TradeBSA Budapest Sports ArenaBSA Business Services AssociationCEB Council of Europe Development BankCEPR Center for Economic Policy ResearchCESifo Munich Society for the Promotion of Economic ResearchCBA Cost-benefi t analysisCIS Commonwealth of Independent StatesCIRET Centre for International Research on Economic Tendency Surveys CMFB Committee of Monetary, Financial, and Balance of Payments

StatisticsCOFOG Classifi cation of the Function of GovernmentCPI Corruption Perceptions Index (Transparency International)DAS Statement of AssuranceDB Design-buildDBFO Design-build-fi nance-operateDG ECFIN Directorate-General for Economic and Financial Affairs DG REGIO Directorate-General for Regional PolicyDSA Debt sustainability analysisEAFRD European Agricultural Fund for Rural DevelopmentEAGGF European Agricultural Guidance and Guarantee FundEBFs Extra-budgetary fundsEBRD European Bank for Reconstruction and DevelopmentEC European CommissionECA European Court of AuditorsECFIN Economic and Financial Affairs Directorate-GeneralECORYS Research and consulting institute headquartered in the

NetherlandsEDP Excessive Defi cit ProcedureEFF European Fisheries FundEFTA European Free Trade AssociationEIB European Investment BankEMU European Economic and Monetary Union

x

EPD Expenditure Policy Division (IMF)ERDF European Regional Development FundESA European System of Accounts ESF European Social FundETH Swiss Federal Institute of Technology, ZurichEU European UnionFAD Fiscal Affairs Department (IMF)FERTAGUS Cross-Tagus Suburban Rail Passenger ServiceFIFG Finance Instrument for Fisheries GuidanceGAAP Generally accepted accounting principlesGFSM Government Finance Statistics ManualIASB International Accounting Standards BoardIBRD International Bank for Reconstruction and Development (part of

the World Bank)ICEG-EC International Center for Economic Growth – European CenterIFAC International Federation of AccountantsIfo Institute for Economic Research, MunichIFRIC International Financial Reporting Interpretations CommitteeIFRS International Financial Reporting StandardsILO International Labor Organization (United Nations)IMD International Institute for Management DevelopmentIMF International Monetary FundINTOSAI Professional Organization of Supreme Audit InstitutionsIPSAS International Public Sector Accounting StandardsIPSASB International Public Sector Accounting Standards BoardISPA Instrument for Structural Policies for Pre-AccessionJASPERS Joint Assistance to Support Projects in European RegionsJESSICA Joint European Support for Sustainable Investment in City AreasKOF Swiss Economics Institute at ETH, ZurichKPMG Klynveld, Peat, Marwick, GoerdelerLIFT Local Improvement Finance TrustLIS Legal Indicator SurveyMENA Middle East and North AfricaMGDD Manual on Government Defi cit and DebtMIGA Multilateral Investment Guarantee Agency (part of the World

Bank)MNB Magyar Nemzeti Bank (Hungarian Central Bank)MOF Ministry of fi nanceMTBF Medium-term budget frameworkMTEF Medium-term expenditure frameworkNACE General Industrial Classifi cation of Economic ActivitiesNAO National Audit Offi ce (United Kingdom)

List of Abbreviations xi

xii Public Investment and Public-Private Partnerships

NEPAD New Partnership for Africa’s DevelopmentNGOs Non-Government OrganizationsNHS National Health ServiceNMS New member statesNSS National standards settersOECD Organization for Economic Cooperation and DevelopmentOGC Offi ce of Government CommerceOJEU Offi cial Journal of the European UnionOMS Old member statesPFI Private Finance InitiativePHARE Poland and Hungary Assistance for the Restructuring of the

EconomyPISA Program for International Student AssessmentPPIAF Public Private Infrastructure Advisory FacilityPPPs Public-private partnershipsPSC Public sector comparatorPwC PricewaterhouseCoopersP5 Five pillars of Portuguese audit systemR&D Research and developmentSAI Supreme Audit Institution SAO State Audit Offi ce (Hungary)SAPARD Special Accession Programme for Agriculture and Rural

DevelopmentSEE South-Eastern EuropeSGP Stability and Growth PactSNA System of National AccountsSPPPP (SP4) Special purpose public-private partnershipSPV Special purpose vehicleTC Tribunal de Contas (Portuguese Court of Auditors)TENs Trans European NetworksUN United NationsUNCITRAL United Nations Commission on International Trade LawUNIDO United Nations Industrial Development OrganizationVAR Vector Auto-RegressionVfM Value for money

Notes on the Contributors

Luis Alberto Andres, Economist, World BankLuis A. Andres is Infrastructure Economist in the Sustainable Development Department for the Latin America and the Caribbean Region of the World Bank. His work at the World Bank involves both analytical and advisory services, as well as economic inputs, with a focus on infrastructure, mainly in the water and energy sectors, impact evaluation, and empirical microeconomics. He has worked with numerous Latin American governments on issues of infrastructure and impact evaluation. Before joining the World Bank, he was Chief of Advisors for the Secretary of Fiscal and Social Equity for the Government of Argentina, as well as holding other top positions in the Chief of Cabinet of Ministries and the Ministry of Economy. He holds a Ph.D. in Economics from the University of Chicago (USA).

Gusztáv Báger, Director General, State Audit Offi ce, HungaryGusztáv Báger is Professor of Economics at the Pázmány Péter Catholic University (Hungary) and Director General of the Research and Development Institute of the State Audit Offi ce. He was Director General in the Ministry of Finance responsible for the international fi nancial institutions and, up to 1996, for the European Union and the OECD as well. He represented Hungary as Alternate Governor for the World Bank’s MIGA. He was a representative of the Hungarian Government in the National Committee of the SAPRI Project—Structural Adjustment Participatory Review Initiative, which is being conducted jointly with members of NGOs, the World Bank, and representatives of governments in ten countries to analyze the economic and social impact of the Structural Adjustment Loans of the World Bank. In this project, Central Europe was represented by Hungary. He has been National Coordinator of the European Union’s ACE Programme since 2000. He was also a member of the Ethical Council of the Republic. He is a founding member of the International Triffi n Foundation (an independent organization of members and institutions of the academic, governmental, banking, and business communities all over the world) and, since 1996, has been President of the Robert Triffi n-Szirák Foundation in Hungary.

Daniel Bergvall, Project Manager, OECDDaniel Bergvall has a Masters degree in Economics from Linköping University (Sweden), and has held different posts at the Swedish Ministry of Finance, Ministry of Foreign Affairs, and National Statistical Offi ce. He was with the Budgeting and Public Expenditures Division of the OECD during 2005–08,

xiii

xiv Public Investment and Public-Private Partnerships

where he worked primarily on reviewing member and non-member countries’ budget processes, fi scal relations across levels of government, and public-private partnerships (PPPs). He has since returned to the Budget Department of the Swedish Ministry of Finance.

Hans Christiansen, Senior Economist, OECDHans Christiansen is a senior economist in the Corporate Affairs Division of the OECD Directorate on Financial and Enterprise Affairs. He joined the division after previous postings in the OECD Investment Division, the Financial Affairs Division and the Economics Directorate. Prior to joining the OECD, he worked for the Bank for International Settlements in Switzerland. Mr Christiansen’s current responsibilities include corporate governance and privatization. Until recently he conducted and oversaw OECD work in the areas of foreign direct investment and economic development, international-investor participation in infrastructure and served as the editor in charge of OECD International Investment Perspectives.A Danish national, he holds a postgraduate degree in Political Economics from the University of Copenhagen (Denmark).

Ana Corbacho, Senior Economist, International Monetary FundAna Corbacho is a senior economist in the Western Hemisphere Department of the IMF. While this book was being prepared, she was an economist in the Fiscal Affairs Department. In her career at the IMF, she has worked primarily in emerging markets in Latin America and Eastern Europe, and has done research on various fi scal and macroeconomic issues, including education policy and growth, poverty and income distribution, fi scal institutions, and more recently public investment and PPPs. She holds a BA in economics from Universidad de San Andres in Buenos Aires (Argentina) and a Ph.D. in economics from Columbia University in the City of New York (USA). Prior to her graduate studies in the USA, she worked as an economist for the Central Bank of Argentina.

Jakob de Haan, Professor, University of GroningenJakob de Haan is Professor of Political Economy, University of Groningen (the Netherlands). He is also Scientifi c Director of SOM, the graduate school and research institute of the faculty of Economics and Business of the University of Groningen. He graduated from the University of Groningen, where he also obtained his Ph.D. He has published extensively on issues such as public debt, monetary policy, central bank independence, political and economic freedom, and European integration. He is a member of the editorial board of Public Choice,editor of the European Journal of Political Economy, and has been President of the European Public Choice Society. Mr de Haan has been Visiting Professor at the Freie Universität Berlin (2003/04), the Kiel Institute (2002), and the University of Munich (1999).

Philippe de Rougemont, Economist, EurostatPhilippe de Rougemont studied Mathematics and Physics (Engineer preparation—Lycée du Parc, Lyon, France) and Political Sciences (IPS—Grenoble, France), and holds an M.Phil. in International Economics and Finance (Paris IX Dauphine, France). He worked for the Banque de France in the area of fi nancial accounts before being seconded to the European Central Bank, then the IMF, and afterwards Eurostat, each time in the area of government fi nance statistics. At the IMF’s Statistics Department, he was moderator of the Electronic Discussion Group on pension accounting (SNA Review) and represented the government fi nance statistics interest in methodological working groups, including the Task Force on Harmonization of Public Sector Accounting Standards. Currently, he is an economist for the Eurostat National and European Accounts Directorate (Public Finance Unit), where he is in charge of horizontal and methodologi-cal EDP (Excessive Defi cit Procedure) statistical surveillance. He also chairs or acts as secretary in various task forces (quarterly fi nancial accounts for general government, military, SNA Review, IMF/Eurostat convergence, and MGDD Editorial Committee).

Edward Farquharson, Project Director, Partnerships UKEdward Farquharson coordinates Partnerships UK’s international work and this has involved working with a number of governments, recently in Latin America, the EU and Asia in establishing the frameworks, institutions and processes for their PPP programs. He has a background of over 20 years in debt and private equity fi nance in infrastructure businesses in the UK, Asia, Latin America, and Africa. This included ten years with CDC Capital Partners (both in London and, before that, in southern Africa) where he led the infrastructure team responsible for developing an equity and debt portfolio of road, rail, airport, and port projects in emerging markets. Prior to CDC, Mr Farquharson was involved in developing limited-recourse project fi nancings at Morgan Grenfell, including the Dartford Crossing project (one of the fi rst UK PPPs). He was also based for a period in Brazil where he established Morgan Grenfell’s São Paulo-based business. Mr Farquharson has an MBA from Manchester Business School (UK) and is an alumnus of London Business School (UK) and INSEAD (France). He also has a degree in Philosophy, Politics and Economics from Oxford University (UK).

Katja Funke, Economist, International Monetary FundKatja Funke is an economist in the Fiscal Affairs Department of the IMF. In her career at the IMF, she has worked primarily in developing countries in Central Asia and the Caribbean. Prior to joining the IMF, she was an economist in the Fiscal Policies Division and the External Developments Division at the European Central Bank. Her main research focus is on fi scal policy and balance of payments issues in the European Economic and Monetary Union. She holds a Ph.D. (Dr.

Notes on the Contributors xv

xvi Public Investment and Public-Private Partnerships

rer. pol.) and an MBA (Diplomkauffrau) from the WHU—Otto Beisheim School of Management (Germany).

Hugh Goldsmith, PPP Coordinator, European Investment BankHugh Goldsmith graduated in Civil Engineering and obtained a Masters in Economics from Birkbeck College, London (UK). After a career in international consultancy and research, he joined the European Investment Bank in 1997. He is a specialist in project appraisal and PPPs and has contributed to the appraisal and monitoring of more than 50 such projects fi nanced by the European Investment Bank in Western and Eastern Europe, the Mediterranean, Africa, Asia, and Latin America. He has given technical advice to the European Commission on a number of projects co-fi nanced with EU regional development funds. His present role as PPP Coordinator within the Projects Directorate involves horizontal responsibilities for PPP policy and appraisal methodology. Since 2006, he has worked with JASPERS on several tasks related to PPP projects and programs in new EU member states and contributed to PPP-related work for IMF technical assistance missions.

Jose Luis Guasch, Senior Advisor, World Bank A Spanish national, J. Luis Guasch is currently Senior Regional Advisor in the Latin America and Caribbean Region of the World Bank, responsible for competi-tiveness, regulation, infrastructure, innovation, and technological development. He has also been Professor of Economics at the University of California, San Diego (USA) since 1980. He holds a Ph.D. in Economics from Stanford University (USA). He has written extensively in leading economic journals. His most recent books include: (i) Managing the Regulatory Process: Design, Concepts, Issues and the Latin America and Caribbean Story; (ii) The Challenge of Designing and Implementing Effective Regulation: A Normative Approach and an Empirical Evaluation; (iii) LaborMarkets: The Unfi nished Reform in Latin America and Caribbean; (iv) Closing the Gap in Education and Technology in Latin America; and (v) Granting and Renegotiating Concessions: Doing it Right.

Mike Hathorn, Chair, International Public Sector Accounting Standards BoardMike Hathorn became Chair of the International Public Sector Accounting Standards Board (IPSASB) in January 2007. He has been a member of the IPSASB since 1999 and served as deputy chairman from November 2003 to December 2006. He was nominated by the Institute of Chartered Accountants of Scotland. Mr Hathorn has more than 35 years of public and private sector experience and has served in numerous leadership capacities. He is a senior partner with Moore Stephens LLP, where he leads the United Kingdom Public Sector Team. He is Chair of the Moore Stephens Europe Technical Committee and the Moore

Stephens International Technical Committee. From 2005 to 2006, Mr Hathorn served as President of the Institute of Chartered Accountants of Scotland. He has also served as a member of the UK Accounting Standards Board’s Public Sector and Not-for-Profi t Committee since 1994. In addition, he is an expert advisor to the European Commission Accounting Standards Advisory Working Party and to the United Nations Accrual Accounting Steering Committee. Mr Hathorn qualifi ed as Chartered Accountant with the Institute of Chartered Accountants of Scotland in 1972. He became a member of the Chartered Institute of Public Finance and Accountancy in 1993.

Richard Hemming, Deputy Director, International Monetary FundRichard Hemming, Deputy Director of the IMF’s Fiscal Affairs Department, is a British national who has worked at the IMF for more than 20 years. He has a BA, M.Sc., and Ph.D. from the Universities of Sussex and Stirling (UK). In addition to the Fiscal Affairs Department, he has worked in the Asia and Pacifi c Department and spent two years as the IMF’s senior resident representative in India. Mr Hemming has recently been involved in work on fi scal sustainability, fi scal vulnerability and fi nancial crises, fi scal responsibility frameworks (including transparency and rules), fi scal accounting and reporting, public investment, and PPPs. Prior to joining the IMF, Mr Hemming was a university lecturer in the United Kingdom and Australia, was a researcher at the Institute for Fiscal Studies in London, and worked at the OECD in Paris. Mr Hemming is the author of Poverty and Incentives: The Economics of Social Security (Oxford University Press), edited The Determinants of National Saving (with Franco Modigliani, Macmillan), and has published articles on tax, social security, public expenditure, and other fi scal issues in the Review of Economic Studies, the Economic Journal, the Journal of Public Economics, and elsewhere.

Timothy Irwin, Senior Economist, World BankTimothy Irwin is in the Finance, Economics, and Urban Department of the World Bank. His work focuses on fi scal aspects of infrastructure provision, including PPPs. He has previously worked at the New Zealand Treasury and at LECG, an economics and fi nance consultancy. He has an MPA from Princeton University (USA).

Anton Jevcák, Desk Offi cer, EU CommissionAnton Jevcák received a Bachelor’s degree in Management at the Comenius University in Bratislava (Slovak Republic) in 1998 and was awarded a Master of Science in Economics from the University of Southern Denmark in 2001. Afterwards he worked as a trainee at the Economic Commission for Europe at the United Nations in Switzerland in 2001 and at the European Parliament in Luxembourg in 2002. Between June 2003 and August 2005, he was employed as

Notes on the Contributors xvii

xviii Public Investment and Public-Private Partnerships

a research assistant at the University of Dortmund (Germany). From September 2005, he has been working as a Slovak desk offi cer at the European Commission in Brussels (Belgium).

Christophe Kamps, Senior Economist, European Central Bank Christophe Kamps is a senior economist in the Fiscal Policies Division of the European Central Bank, where he is currently monitoring fi scal policies in EU countries. His research focuses on the dynamic macroeconomic effects of fi scal policy. Prior to joining the European Central Bank, he was an economist at the Kiel Institute for the World Economy (Germany). He also worked as a consultant for the European Investment Bank and the IMF, where he was involved in projects on the macroeconomic effects of public capital in OECD countries. He graduated from the University of Paris—Dauphine (France) and the University of Cologne (Germany) and holds a Ph.D. in economics from the University of Kiel (Germany).

Filip Keereman, Head of Unit, EU CommissionFilip Keereman studied economics at the Catholic University of Leuven (Belgium), obtained an MBA at the University of Chicago (USA), and holds a Ph.D. from the European University Institute in Florence (Italy). He joined the research department of Kredietbank (now KBC) in 1984. As an offi cial of the European Commission since 1986, he has dealt with the liberalization of capital movements, monetary integration, economic forecasts, and fi scal policy. Currently, he is the head of the unit responsible for the national economies of the Czech Republic, Poland, Romania, and the Slovak Republic in the Directorate-General for Economic and Financial Affairs. He has published on fi nancial integration and forecast accuracy.

Gábor P. Kiss, Principal Economist, Central Bank of HungaryGábor P. Kiss graduated from Budapest University of Economics (Hungary), where he obtained his MA in 1986. In 1997, he completed a postgraduate course on the European Union at École Nationale d’Administration (France). Currently, he holds a position as Principal Economist in the Economics Department of the Central Bank of Hungary (MNB). He is the Managing Editor of the MNB Bulletin. Previously he held a number of positions at the MNB—Senior Economist in the Economics and Research Department (1995–2001), Senior Economist in the Statistical Department (1994–95), Senior Economist in the Monetary Policy Department (1989–94) and Economist in the Credit Policy Department (1986–89).

Patricia Leahy, Director, National Audit Offi ce, United KingdomPatricia Leahy joined the National Audit Office in 1996 after a career in government, industry, and investment banking. She started her career as a fast-

stream administrator in the UK Treasury and then worked for the Chairman of Glaxo. She joined Rothschilds to work on UK and overseas privatization and moved to Schroders where she mainly focused on privatization and capital markets activity. At the National Audit Offi ce she has directed a range of privatization and PPP studies on subjects such as the Wider Markets Initiative, the LIFT initiative for improving primary care services and facilities, the London Underground PPP, Network Rail’s new structure, and the PPP for the National Air Traffi c Service.

Francisco Machado, Auditor, Court of Auditors, Portugal Francisco Machado is an economist with a postgraduate degree in corporate finance. After having been employed in the areas of finance and general management in the private sector, Mr Machado has worked in the Direcção-Geral do Tribunal de Contas (the General Directorate of the Portuguese Court of Accounts) since 1996, auditing major defense investment programs and logistics. Lately, he has been specializing in PPP audits, as well as in regulation.

Rui Sousa Monteiro, Senior Economist, Parpública S.A.Rui S. Monteiro, Senior Economist at Parpública S.A. (Portugal)—the state fi rm that acts as PPP knowledge center and PPP advisor to the fi nance minister—is both a researcher and practitioner in PPPs. He is currently in charge of research on PPPs in the PPP Division of Parpública S.A., which was created in 2003. Since joining Parpública S.A. in 2000, he has been involved in the design of several major rail, tram, highway and health PPP contracts and public tenders. He served on several committees responsible for the appraisal of specifi c proposals for PPPs, and is currently serving on the Tender Boards for the PPP hospital contracts (including the provision of clinical services) being tendered. As an economist, he puts strong emphasis on the use of incentive contracts and competitive schemes. Prior to joining Parpública S.A. he lectured in Development Economics at Universidade Nova de Lisboa (Portugal) and did applied research on fi scal matters and on large public projects (urban renewal, public infrastructure).

Marko Mršnik, Economist, EU CommissionMarko Mršnik graduated from the University of Ljubljana (Slovenia) and received his MA from the College of Europe, where he subsequently worked as an academic assistant before joining the European Investment Bank as a consultant. When the work on this book was undertaken, Mr Mršnik was in the unit for Public Finances of the Euro Area and the EU unit of the Directorate-General of Economic and Financial Affairs (DG ECFIN) in the European Commission. He was involved in the analysis of economic and budgetary developments in the euro area and the EU member states, in particular within the EU’s framework for budgetary surveillance, especially in the recently acceded member states and in the area of

Notes on the Contributors xix

xx Public Investment and Public-Private Partnerships

the long-term sustainability of public fi nances, on which he has also published. He currently works at Standard & Poor’s Sovereign Rating Services.

Eric Perée, Associate Director, European Investment BankEric Perée studied economics at the University of Liège (Belgium), the Catholic University of Louvain, Louvain-La-Neuve (Belgium), and the European University Institute, Florence (Italy). He joined the European Investment Bank in 1989 where he is currently Head of Economic and Financial Studies. His areas of expertise include European economic integration, fi nancial markets and banking management, and risk management.

Juan Ramallo Massanet, Member of the Court, European Court of AuditorsJuan Ramallo Massanet has been a Member of the European Court of Auditors since March 2006. He is in charge of the audit of the EU’s Own Resources. Ramallo Massanet holds a Doctorate in Law from Complutense University, Madrid (Spain). Before he joined the European Court of Auditors, he was Professor of Financial and Tax Law at the Autonomous University of Madrid (Spain) from 1989 to 2005. He was a Member of the Spanish Parliament (1982–89), as well as Dean of the Faculty of Law (1978–80) and Vice-Rector (1980–82) of the University of the Balearic Islands (Spain).

Ward Romp, Researcher, University of AmsterdamWard Romp is a postdoctoral researcher at the Faculty of Economics and Business, University of Amsterdam (the Netherlands). He graduated in February 2007 from the University of Groningen, where his Ph.D. thesis was entitled “Essays on Dynamic Macroeconomics: The Role of Demographics and Public Capital.” His current research projects focus on the impact of aging and macroeconomic uncertainty on pension systems.

Christoph B. Rosenberg, Senior Resident Representative, International Monetary FundChristoph B. Rosenberg is the head of the IMF’s regional offi ce for Central Europe and the Baltics (since February 2005), supporting the IMF’s surveillance in the region, particularly with respect to framing and executing plans for euro adoption. In his career at the IMF, he has worked on several emerging market and transition countries. Before joining the IMF, he was a lecturer at the University of Regensburg, Germany, and a freelance journalist for various German newspapers and business magazines. He holds a Ph.D. (Dr. rer. pol.) from the University of Regensburg (Germany), and an MA (Economics) from Vanderbilt University (USA; Fulbright Scholar).

Gerd Schwartz, Assistant Director, International Monetary FundGerd Schwartz is Advisor to the IMF’s Deputy Managing Director in the Offi ce of the Managing Director. He was Division Chief of the Expenditure Policy Division of the IMF’s Fiscal Affairs Department during 2004–07, where he managed the division’s policy development work and managed technical assistance provision to IMF member countries on public expenditure policy issues, including on public investment policies and fi scal aspects of PPPs. Before joining the IMF, he worked for the Inter-American Development Bank and the European Investment Bank. Mr Schwartz has published on various fi scal and monetary policy issues, particularly on public expenditure policies and reform in emerging market and transition economies. He has studied at the University of Cologne (Germany) and the Freie Universität Berlin (Germany), and holds MA and Ph.D. degrees in economics from the State University of New York at Albany (USA).

Kálmán Seregélyes, Deputy Director General, Ministry of Finance of the Republic of HungaryAfter fi nishing his studies at the Budapest University of Economics and Public Administration (Hungary), Mr Seregélyes started to work in the Hungarian Ministry of Finance in the Directorate for Fiscal Policy and Financial Affairs. During the three and a half years spent there, he was responsible for monitoring and analyzing fi scal risks mainly related to contingent liabilities. At the same time, he was involved in the value for money and the statistical assessment of PPP projects. In January 2006, he moved within the ministry and now works as Deputy Director General in the Department for Sectoral Development and Finance. His responsibilities still include analyzing various aspects of PPPs, especially the fi nancing side. He was involved in restructuring the motorway fi nancing system, which was aimed at setting up a PPP structure. Mr Seregélyes is a member of the PPP Inter-Ministerial Committee, which is responsible for coordinating and controlling PPPs within the public administration.

Jan-Egbert Sturm, Professor, Eidgenössische Technische Hochschule ZurichJan-Egbert Sturm (Ph.D. University of Groningen, 1997) is Professor of Applied Macroeconomics as well as Director of the KOF Swiss Economic Institute at the Eidgenössische Technische Hochschule Zurich. He was a researcher at the University of Groningen (the Netherlands) until 2001, and Visiting Professor at the School of Business, Bond University, Gold Coast (Australia), 2000 and 2005. As Head of the Department for Economic Forecasting and Financial Markets at the Ifo Institute for Economic Research (Germany), he was also Professor of Economics at the University of Munich (Germany) at the Center for Economic Studies (CES), 2001–03. He held the Chair of Monetary Economics in Open Economies at the University of Konstanz (Germany), 2003–05. In his research,

Notes on the Contributors xxi

xxii Public Investment and Public-Private Partnerships

Mr Sturm relies heavily on empirical methods and statistics, concentrating on monetary economics, and macroeconomics as well as political economy, and with a special interest in fi elds that are closely related to practical and current problems. His applied studies have focused on, for example, economic growth and central bank policy. He has published several books and contributed articles to various anthologies and internationally renowned journals. Since 2001, he has been a member of the CESifo Research Network and since 2003 Research Professor at the Ifo Institute. In 2006, he was appointed member of the user advisory council of the Ifo Institute. In 2005, he was appointed to the European Economic Advisory Group of the CESifo. In early 2007, he became President of the Centre for International Research on Economic Tendency Surveys (CIRET).

Eivind Tandberg, Regional Advisor South East Europe, International Monetary FundEivind Tandberg is the IMF’s regional Public Financial Management Advisor for South East Europe. He is located at the Center of Excellence of Finance in Ljubljana, and provides advice to the governments of Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Montenegro, Moldova, Romania, Serbia, Kosovo, and Slovenia. Prior to this assignment, Mr Tandberg was Deputy Division Chief in the Fiscal Affairs Department of the IMF, and worked on improving fi scal institutions and budget management in IMF member countries. In this position he also provided advice on fi scal reforms to a number of governments in different parts of the world, including Afghanistan, Armenia, Azerbaijan, Belarus, Brazil, Bulgaria, Chad, China, Jordan, Kazakhstan, Mali, Mexico, Mongolia, Russia, Ukraine, and Uzbekistan. From 1998 to 2000, Mr Tandberg was a resident budget advisor to the government of Bulgaria. From 1996 to 1998 he was an advisor and task team leader for the Prototype Carbon Fund in the World Bank. From 1986 to 1996 he held successive positions in the Norwegian Ministry of Finance, leaving the service as Deputy Director General of the Budget Department. Mr Tandberg is a graduate of the Norwegian School of Economics and Business Administration in Bergen (Norway).

Teresa Ter-Minassian, Director, International Monetary FundMrs Ter-Minassian holds degrees in Law from the University of Rome (Italy) and in Economics from Harvard University (USA). From 1967 to 1978, she was on the staff of the Central Bank of Italy, part of the time on secondment to the IMF. In the IMF, she was for eight years Chief of the Southern European Division in the European Department (which covered Italy, Spain, and Portugal, among other countries). In this capacity, she negotiated the 1983 IMF Stand-By Agreement with Portugal. From 1988 to 1996, she held the position of Deputy Director of the Fiscal Affairs Department of the IMF. In 1990, she headed the IMF Task Force for the joint study of the Soviet economy, commissioned to the

IMF, IBRD, OECD and European Bank for Reconstruction and Development by the G7. Between 1997 and 2000, as Deputy Director of the Western Hemisphere Department, she headed the negotiations of the IMF programs with Brazil and Argentina, and oversaw the department’s work on various other countries in the region. Mrs Ter-Minassian was appointed Director of the Fiscal Affairs Department effective January 2, 2001. Her areas of principal interest and expertise include macroeconomic analysis, fi scal policy, budget management and intergovernmen-tal fi scal relations. She has published several papers in these areas and edited a book entitled Fiscal Federalism in Theory and Practice.

Timo Välilä, Senior Economist, European Investment BankTimo Välilä holds a Ph.D. degree in economics from the School of Economics and Commercial Law at Gothenburg University (Sweden). During 1996–2003 he worked for the IMF both in Washington, D.C., and in Moscow. He joined the Economic and Financial Studies Division of the European Investment Bank in 2003 and has since focused on topics related to public investment, industrial policy, and fi scal federalism.

Alexei Zverev, Senior Counsel, European Bank for Reconstruction and DevelopmentPrior to joining the European Bank for Reconstruction and Development (EBRD), Mr Zverev engaged in private practice, fi rst in Russia and then in London and Paris, with a major international law fi rm. Since 1996, he has been Counsel and then Senior Counsel in the Offi ce of the General Counsel, EBRD, London. His responsibilities at the EBRD include advising on PPP/concessions legislative and regulatory advisory projects throughout Central and Eastern Europe and the former Soviet Union, and also supervising law reform in Russia. His recent undertakings include leadership of EBRD project teams for: PPP/concession law reform in Lithuania, Slovenia, Latvia, Hungary, Czech Republic, Kazakhstan, Ukraine; assessment of quality of concession laws throughout the 29 countries of the region; the development of the Russian Corporate Governance Code and the CIS Model Laws on Securities Market and on Investor Protection. He has also contributed to the drafting of the UNCITRAL Model Legislative Provisions on Privately Financed Infrastructure Projects, approved by the United Nations Commission in 2003, and is actively involved in the PPP legal working group of the United Nations Economic Commission for Europe and in the activities of the PPP Alliance.

Notes on the Contributors xxiii

Preface

This book grew out of a seminar on “Strengthening Public Investment and Managing Fiscal Risks from Public-Private Partnerships” that took place in Budapest during March 7–8, 2007. The seminar was jointly organized and sponsored by the International Monetary Fund, the Hungarian Ministry of Finance, and the International Center for Economic Growth, European Center (ICEG-EC). The idea for this book resulted from several factors: a signifi cantly oversubscribed event that forced us to decline a large number of applicants owing to capacity constraints, the high quality of the contributions by the various presenters, and, fi nally, the excellent discussions that took place.

The seminar was made possible by a number of wonderful colleagues to whom we are very grateful. At the Hungarian Ministry of Finance, State Secretary Andrea Markó enthusiastically supported the seminar idea from the outset and, together with her team, particularly Kálmán Seregélyes and Orsolya Nagy, helped to bring the event to Budapest and arrange for the Hungarian Ministry of Finance to sponsor a seminar luncheon. At ICEG-EC, Pál Gáspár and his staff, in particular Tamás Borkó, Emese Frecot, and Mária Thuma, did an outstanding job in managing all the logistics for the event. We would also like to thank the Hungarian National Bank (MNB)—especially György Szapáry—for providing a fi rst-class venue for the seminar, and Christoph Rosenberg for putting us in touch with ICEG-EC. A special thank you is also due to our colleagues at the European Investment Bank (EIB)—particularly Tom Barrett and Chris Hurst—who facilitated EIB sponsorship of the seminar dinner in the Club of the Hungarian Academy of Sciences.

Finally, we would like to express our sincere gratitude to our colleagues at the IMF’s Fiscal Affairs Department (FAD) without whom neither the seminar nor this book would have been possible. In particular, we would like to thank Teresa Ter-Minassian, the Director of FAD, for supporting the idea for the Budapest seminar, and Richard Hemming for making available the necessary fi nancial resources and providing us with good advice along the way. In producing this book, we relied extensively on our retired colleague David Driscoll for his fi ne editing skills and Erica Stephan for “a pair of fresh eyes” to do the fi nal proofreading. Finally, several of our colleagues in the Expenditure Policy Division (EPD) contributed much of the necessary and often tedious legwork for this project, while other colleagues “kept our backs free” as needed, to allow us to focus on putting together the seminar and the book. From EPD, we would especially like to mention Jessica Kowalski, who helped in both organizing the seminar and

xxiv

formatting the manuscript for the book, and Victoria Gunnarsson and Qiang (Larry) Cui, who assisted us in tying up the many loose ends that appeared at different stages of the overall project. A big thank you to all our FAD colleagues in EPD and other divisions for supporting this project.

Gerd Schwartz, Ana Corbacho, and Katja FunkeWashington, D.C.

December 2007

Preface xxv

ForewordTeresa Ter-Minassian

The last several years have seen an increasing focus on the need to upgrade public investment, improve the delivery of public infrastructure services, and, in this context, explore new options for partnering with the private sector. While this focus has created important new business opportunities for the private sector, it has also given rise to new challenges for the public sector. Clearly, having suffi cient “fi scal space” for key public expenditure programs that support economic growth and development, including public investment, is essential, even in a context of tight government budgets. However, public investment, like other spending, has to be carried out within sustainable fi scal and macroeconomic frameworks. It also has to be accompanied by efforts to strengthen the effi ciency of such spending and to manage the signifi cant fi scal risks that come from exploring new options for delivering infrastructure services, including via greater private sector participation. In the Fiscal Affairs Department of the International Monetary Fund, we have been focusing intensively on these issues over the last few years, not only in our research and development work, but also through a number of outreach activities in the context of regional seminars in different parts of the world.

Against this background, the Fiscal Affairs Department, jointly with the Hungarian Ministry of Finance and the International Center for Economic Growth, European Center (ICEG-EC), and with some fi nancial support from the European Investment Bank, hosted a two-day seminar on Strengthening Public Investment and Managing Fiscal Risks from Public-Private Partnerships (PPPs). The seminar took place during March 7–8, 2007 at the building of the Hungarian National Bank in Budapest, Hungary. It was attended by senior government offi cials from across Europe and representatives from international organizations and academia. What made this seminar different from other events that focus on investment and PPPs was that it looked at issues exclusively from a public sector perspective. As such, it provided an important forum to exchange and discuss ideas among public policymakers.

The seminar had two main parts. The fi rst part was devoted to analyzing and discussing public investment issues, including the macroeconomic and institutional setting for public investment, as well as the fi scal and budget frameworks in which public investment decisions are made. It also touched upon the role of support instruments from the European Union in this context. The second part focused on PPPs, including the role of PPPs in developing public infra-

xxvi

structure, institutional and legal requirements for capitalizing on private sector expertise and managing fi scal risks from PPPs, fi scal accounting and reporting issues, and the experiences with PPP audits from different countries.

We were highly impressed by the quality of the background papers, and thought that both the papers and discussions that took place at the seminar were of great interest and importance to a wider audience—in both the public and private sectors—across Europe and the rest of the world. It is therefore with great pleasure that I introduce the seminar proceedings compiled in this volume, and recommend them as essential reading for anyone interested in the economic aspects of strengthening public investment and managing fi scal risks arising from PPPs.

Foreword xxvii