TOWARDS AN INTEGRATED GOVERNANCE FRAMEWORK FOR INFRASTRUCTURE Ian Hawkesworth Head, PPP and Capital Budgeting Budgeting and Public Expenditures Division Public Governance and Territorial Development Directorate OECD 2014 Meeting of Asian Senior Budget Officials December 18-19, 2014 Bangkok, Thailand
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Towards an integrated governance framework for infrastructure - Ian Hawkesworth, OECD
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TOWARDS AN INTEGRATED GOVERNANCE FRAMEWORK FOR INFRASTRUCTURE
Ian Hawkesworth Head, PPP and Capital Budgeting Budgeting and Public Expenditures Division Public Governance and Territorial Development Directorate OECD
2014 Meeting of Asian Senior Budget Officials December 18-19, 2014 Bangkok, Thailand
1. There is a need for infrastructure. 2. We need to make sure that it is affordable and
Value for Money. 3. Infrastructure investments can be tricky. 4. PPP governance frameworks have taught us lessons
we can build on. 5. There are many additional infrastructure delivery
options we should consider. 6. An analytical and pragmatic framework can help
deliver more value from infrastructure investment. 7. Regardless of modality - the fiscal risks still need to
be managed
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Agenda
THERE IS A NEED FOR INFRASTRUCTURE
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Infrastructure and competitiveness go hand-in-hand…
Figure 1. Competitiveness and quality of overall infrastructure
Source: World Economic Forum 4
Presenter
Presentation Notes
In a highly connected world, effective infrastructure networks are crucial to the efficient delivery of produce and goods from sources of production to the major centres of population and industry – both within countries and, increasingly, internationally. They are equally important for the safe and reliable movement of people to work, educational, social, sporting and leisure activities, wherever those activities may be. As it is therefore vital to international competitiveness, development of quality infrastructure should be a real priority in all countries (Figure). Despite its importance, infrastructure, in fact, does not always receive the investment priority one would expect. In recent decades, governments have tended to accord priority to short-term issues and expenditures expected to produce better short-term returns, more easily recognised in short election cycles. As a result, they have often failed to deliver infrastructure of sufficient quality and capacity to satisfy the future needs of their economies and the social needs of their people. A continuation of these trends could easily lead to under-investment in trade-related export and import infrastructure, which could compromise the future growth and development of national economies
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Public infrastructure has declined significantly as a share of output over the past three decades in both advanced and developing countries
Note: Percent of GDP, PPP weighted. IMF Fiscal Monitor, September 2014
And global infrastructure needs are increasing
Source: Standard and Poor’s; Burnett Robin (2014), “Global Infrastructure: How to Fill A $500 Billion Hole”, Presentation at the OECD’s 7th Annual Meeting of Senior PPP Officials, Paris, February 17 2014 6
Presenter
Presentation Notes
There is a great challenge with regards to identifying precise numbers of PPPs due to variances in definitions and data collection techniques. Data suggests that there is a yearly investment deficit of 3.4 trillion over the next 16 years (depending on the assumed investment rate), with the bulk split evenly between the US, EU, and China. ASEAN needs – 60 billion over the next 10 years.
WE NEED TO MAKE SURE THAT INFRASTRUCTURE
IS AFFORDABLE AND VALUE FOR MONEY
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• Make the most efficient use possible of limited financial resources
• Focus on the areas of greatest need for society • Choose the optimal mode of delivery and
governance framework • Make effective use of private sector participation
when appropriate • Ensure that projects are delivered and operated as
efficiently as possible over their lifetime
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i.e. It is the responsibility of decision makers to …
INFRASTRUCTURE INVESTMENTS CAN BE
TRICKY
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• are a capacity challenge for governments, including the ability to identify, plan, procure and manage such projects.
• contain risks and uncertainty that can be difficult to identify, measure and manage.
• may be subject to optimism bias from the concerned stakeholders undermining VfM and affordability.
• May be vulnerable to waste, corruption and other dangers. • can be politically controversial and good projects may be
derailed by a lack of consensus. • Reach across jurisdictions so that coordination across
levels of government and within government is necessary, but can be difficult.
• Some projects may be implemented for the wrong reasons such as off budget treatment of PPPs.
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Experience shows that infrastructure projects …
PPP GOVERNANCE FRAMEWORKS HAVE
TAUGHT US LESSONS WE CAN BUILD ON
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How do PPPs perform relative to traditional infrastructure procurement?
PPPs can be an infrastructure solution because …
Better than TIPs
The same as TIPs
Worse than TIPs
Not enough data
Timeliness e.g. being completed on-time/according to projected deadline
14 1 0 2
Construction cost e.g. projects completed on or under expected budget
12 2 0 3
Operating cost e.g. projects operate on or under expected budget
7 3 1 5
Quality of the finished project e.g. projects comply with code, innovations, etc.
10 3 0 4
Transaction costs 4 1 7 4
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PPPs outperform TIP on timeliness, construction cost and quality but transaction costs are higher.
Source: OECD (2013)
Presenter
Presentation Notes
According to Table 3 PPPs outperform TIPs with regards to timeliness, construction cost, operating cost and quality of the finished project. PPPs perform worse than TIP with regards to transaction costs. However, as discussed below, the picture is a less positive for PPPs with regards to operating costs.
But PPPs are only part of the answer …
Source: P. Burger & I. Hawkesworth. ‘Capital Budgeting and Procurement Practices’. OECD (2013)
For the 2011 fiscal year, what percentage of public sector infrastructure investment flow (total asset value, public and private
components included) took place through PPPs?
Australia >10% - 15% Korea >5% - 10% Austria No PPPs Luxembourg >5% - 10% Canada >1% - 3% Mexico >15%
Czech Republic >0% - 1%
New Zealand >1% - 3% Norway >3% - 5%
Estonia No PPPs South Africa >3% - 5% Finland >10% - 15% Spain >3% - 5% Germany >3% - 5% Sweden No PPPs Hungary No PPPs Switzerland No PPPs Italy >1% - 3% UK 15%
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Presenter
Presentation Notes
Eighteen countries have enough information to state the percentage that PPPs constitute of public sector infrastructure investment (total asset value, public plus private components included). Of these eighteen, five report that they do not have any PPPs. Of the remainder, eight report PPPs to constitute 5% or less of public sector infrastructure investment (se Figure 7). Table 1 contains the information with reference to specific countries. The UK tops the list with the percentage of public sector infrastructure investment that takes place through PPPs exceeding 15%. The survey was conducted during the period June-August 2012. The questionnaire was sent to senior officials in the central budgetary authorities and related institutions. All 34 OECD countries were included, as well as two OECD enhanced engagement countries (Brazil and South Africa). Of the total 36 countries approached, 23 responded. The countries that responded are: Australia, Austria, Brazil, Canada, the Czech Republic, Estonia, Finland, Germany, Hungary, Italy, Japan, Korea, Luxemburg, Mexico, the Netherlands, New Zealand, Norway, Slovakia, South Africa, Spain, Sweden, Switzerland and the UK.
The 2012 OECD Principles for Public Governance of PPPs
• 12 Principles, three overarching headlines: 1. Set up a strong Institutional framework 2. Maximise value for money 3. Integrate PPPs into the budgetary process to
ensure affordability
You need a good governance framework to ensure VfM & affordability
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Presenter
Presentation Notes
This will be debated in detail by a number of eminent experts, which I wont compete with in these introductory remarks
THERE ARE MANY INFRASTRUCTURE
DELIVERY OPTIONS WE SHOULD CONSIDER
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There are many infrastructure delivery options – but which one is most appropriate?
Traditional Public
Procurement
Direct Provision
SOE’s
PPPs Regulated
Privatisation
Full Privatisation
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Presenter
Presentation Notes
Different shapes for different modes of public infrastructure provision: Direct provision Direct provision of infrastructure involves the government taking responsibility for all aspects of infrastructure delivery including financing, construction and subsequent service delivery. This mode affords the government a maximum level of control over the infrastructure asset. Traditional public procurement In the traditional public procurement mode, a government body contracts with private partners to provide infrastructure-based goods and services. The government will contract separately for the design, construction, operation and maintenance of infrastructure assets. Contracts are allocated using competitive tender processes in order to obtain the optimal bundle of quality features and price. State-owned enterprises Infrastructure, particularly in network industries such as water, transport and electricity is often provided by state-owned enterprises (SOEs) that are owned (fully or partially) by the government. The government may relinquish infrastructure investment decisions to an SOE if the latter is able to raise finance independently. This may be an efficient mechanism for delivery of infrastructure if the SOE can be ‘corporatised’ through separating the ownership and control functions, and subjecting the entity to commercial pressures. Public-Private Partnerships Public-private partnerships (PPPs ) involve private investors financing and managing the construction of an infrastructure asset, which they then operate and maintain for a long period, often extending to 20 or 30 years. In return, the private partner receives a stream of payments to cover the capital expense as well as the operating and maintenance costs. This payment stream may be derived from the national budget, users fees or a combination of the two. While private firms are responsible for financing, constructing and operating the infrastructure assets, governments retain control over project selection. Privatisation When conditions for a competitive market exist in a particular sector, private firms subject to the discipline of market forces may provide the most efficient mechanism for the provision of infrastructure. In this mode of infrastructure delivery, private firms are not only responsible for the financing and delivery of infrastructure, but they also make investment decisions relating to which infrastructure assets to build. However, in the presence of market failures governments can influence investment decisions and firm behaviour through regulation. �
AN ANALYTICAL AND PRAGMATIC FRAMEWORK CAN HELP DELIVER MORE
VALUE FROM INFRASTRUCTURE
INVESTMENT
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An Integrated Framework for the Governance of Infrastructure
• Starts from the premise that the careful scrutiny we are subjecting PPPs to could be used for all infrastructure delivery choices.
• Designed to identify ways to optimise infrastructure investment decisions – Insufficient attention given to choice of delivery mode – often driven by
expediency and habit – Decisions relating to mode of delivery should be based on objective criteria
and consider the full range of available options
• An integrated three-tier framework for infrastructure delivery and related governance arrangements • Sectoral criteria • Country criteria • Project criteria
• A work in Progress 18
The Integrated Framework
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Sector characteristics
Optimal sector approach
Country circumstances
Fit-for-purpose sector approach
Private firms make investment decisions
SOE makes investment decision
Government makes investment decisions
Privatisation Corporatisation
Project characteristics
PPPs Traditional procurement
Infrastructure planning & Sector strategy
Project planning
Presenter
Presentation Notes
I will not go into great detail with this framework due to time constraints, but this decision tree gives you the general idea of what we are proposing Based on overall national priorities, we suggest governments should apply two filter first (in the red circle): Determine the optimal sector approach based on the economics characteristics and the state of play in a sector Determine the domestic approach based on in particular the political economy and ‘facts on the ground’ in the country. These two elements should give reveal a ‘fit for purpose’ approach that would guide a government as to whether to pursue the infrastructure investment via privatisation, SOE or government procurement. If the government procurement option is chosen particular project characteristics should determine whether the PPP or traditional public procurement route should be chosen.
Develop a strategy based on …
Sectoral objectives, including • Improving quality of services
• Improving access to infrastructure
• Improving efficiency
• Reducing the need for government subsidies
• Promoting innovation
• Speed of delivery
Sectoral characteristics, including • Extent of Market Failures
• Potential for competition
• Non-excludability
• Network effects
• Equity Considerations
• Environmental, land Issues
• National Security
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Develop a strategy based on …
Country circumstances:
• Political Economy (distribution of resources within an economy)