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
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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
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)
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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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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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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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
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)
• Institutions (e.g. rule of law, enabling legislation, dispute resolution mechanisms)
• Government capacities (implementation) • Private Sector Capacities (e.g. skills, competitive environment,
credible threat of entry, level playing field, national treatment) • Openness to Foreign Investment (the extent of limitations and
obstacles to FDI in infrastructure ) • …
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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
Choose a Delivery Mode based on …
• Size and Profile of Investment (big ticket item, long term/short term, bundling synergies)
• Revenue Sources (budget, users, both, land value capture)
• Extent to which output and quality is “contractable” (defined, measured, monitored)
• Level of Uncertainty (Economy, Demand, Technology – high uncertainty )
• Identify, price and allocation of Risk
• … 23
OECD Relevant Policy Guidelines
Direct Provision
OECD Principles for Budgetary Governance
Traditional Procurement
OECD Principles for Integrity in Public Procurement
OECD Principles for Private Sector Participation in Infrastructure
State-Owned Enterprises
OECD Guidelines on Corporate Governance of State-Owned Enterprises
Public-Private Partnerships
OECD Principles for the Public Governance of Public-Private Partnerships
Privatization
OECD Recommendation on the Structural Separation of Regulated Industries
Regulation and regulators
Recommendation on Regulatory Policy and Governance
Co-ordination across levels of Government
Recommendation on Effective Public Investment Across Levels of Government
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REGARDLESS OF MODALITY – FISCAL RISKS
NEED TO BE MANAGED
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• The sum of project risk is constant, but the identification, pricing and allocation varies with choice of modality.
• In theory, the greater the private sector role, the less residual risk is carried by the public side.
• But this assumption must be carefully examined: risks need to be identified, priced and allocated.
• Will key asset providers be allowed to go bankrupt? • Handling these issues should be a fundamental part of the project
preparation process and the ordinary budget process. • Affordability risks and optimism bias can be handled via obligatory
estimate multipliers, reserves. • Transparency about obligations and contingent liabilities should be
an explicit part of the public financial legal framework. • The public sector must address its capacity for risk assessment.
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Fiscal risks
Summary – We should subject our infrastructure delivery
options to the same level of scrutiny which we do PPPs.
– The new OECD Framework aims to help countries identify ways to optimise their infrastructure decisions.
– It provides an opportunity to assess a country’s infrastructure portfolio in an analytical and timely manner.
– It integrates a sectoral, a country and a project approach to infrastructure delivery, and the governance of such delivery.
– Fiscal risks need to be faced, regardless of modality – A work in progress … you comments are
welcome! 27