TOWARDS AN INTEGRATED

GOVERNANCE FRAMEWORK FOR

INFRASTRUCTURE – BUILDING

ON PPP LESSONS

Ian HAWKESWORTH Head, PPP and Capital Budgeting Budgeting and Public Expenditures Division Public Governance and Territorial Development Directorate, OECD

7th OECD-MENA Senior Budget Officials Meeting Abu-Dhabi, UAE, 10-11 December 2014

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.

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Agenda

THERE IS A NEED FOR INFRASTRUCTURE

3

Infrastructure and competitiveness go

hand-in-hand…

Figure 1. Competitiveness and quality of overall infrastructure

Source: World Economic Forum 4

Government investment as a share of total government expenditures

…but declining investment has been

observed

Source: OECD (2013), Government at a Glance 2013

0

5

10

15

20

25

Kor

ea

Pol

and

Mex

ico

Esto

nia

Au

stra

lia

Can

ada

Luxe

mbo

urg

Cze

ch R

epu

blic

Japa

n

No

rway

Slo

ven

ia

New

Ze

alan

d

Swit

zerl

and

Net

herl

ands

Turk

ey

OEC

D

Swed

en

Spai

n

Hun

gary

Slo

vak

Rep

ublic

Fran

ce

Uni

ted

Stat

es

Ire

lan

d

Por

tuga

l

Fin

land

Uni

ted

King

do

m

Isra

el

Ital

y

Ice

lan

d

Den

mar

k

Ger

man

y

Bel

giu

m

Gre

ece

Au

stri

a

Rus

sian

Fe

dera

tio

n

% 2011 2009 2001

5

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

• …

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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

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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.

– A work in progress … you comments are welcome!

– A preliminary concept paper will be printed in the KDI book coming out of the recent infrastructure conference

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