THE TRANSFER OF PUBLIC INFRASTRUCTURE AND EQUIPMENT IN THE DECENTRALIZATION PROCESS n May 29-30,...

THE TRANSFER OF PUBLIC INFRASTRUCTURE AND EQUIPMENT IN THE DECENTRALIZATION PROCESS

May 29-30, 2006Mita Conference Hall

Tokyo, Japan

Bernard Bizet Professor ESSEC – Paris - France

[email protected]

Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 2

Infrastructures in LDC and emerging countries

Trends and potential answers Investment in infrastructures Instruments and process of

transfer Methodology for a successful

transfer

Parts written in brown color correspond with the comments presented during the session


Infrastructures in emerging countries

Emerging countries as well as developed countries have benefited from:

– co-development of infrastructure– state interventionism (pivotal

function)

Most emerging countries are experiencing a need for reform of their present state.

Their economies do not start from scratch, which is one of the bases of the development theory

LDC and emerging countries are entering a post-development stage with a highly significant number of projects and equipment constructions which are

– decentralized,– de-concentrated,– multi-processed, – exclusive

LDC and emerging countries: dual need for competitiveness with

1) high level services and production, and

1) basic infrastructure implementation.

LDC and emerging countries have to develop their economy on a local / regional basis



The current proposed solutions implicate financial constraints and may be supplemented by new economic forces and powerful demographic resources

One of the resulting gaps leads to the creation of new technology and managerial capacities with restricted access for selected populations

1. Is it an expression of a looming new economic model?

2. Is a deep split to occur in the social system based upon the level of infrastructure?

Infrastructures become an instrument of selection instead of equalization and territory unification

Structural disequilibriumDeveloping countries vs. LDC

Demography acts as resource and demand

How to reduce the gap: double and simultaneous challenges for LDC?



The resulting “option” between the model of improvement and the new model of investment may

i) structure the future management and the extension of cities from physical and social points of view

ii) leads to a stabilization of the evolutionary processes of inner city vs. suburbs

But this “option” i) questions the notion of inter-city

competition for development ii) has a different impact than that of the

classic economic model, i.e. it acts -or opposes- as a redistributive and integrating instrument with strong social coherence functions

Managerial activity may require the largest part of the municipal/regional budget

Two policies and two models for development infrastructures at local level

Inner city infrastructures support inter-city competition

Priority for investments in infrastructures

Extension Creation Transfer

“Inner” city

“Outer” city


Trends

Multinational private bidders for public infrastructures are interested in various new markets of infrastructures and services, in addition to basic infrastructures. For instance

i) Concentration of firms in the telecommunication and media sectors

ii) Transportation and supply chain improvement

iii) Activities resulting from the decentralization of administration

Private firms penetrate the market through i) heavy investment in infrastructureii) the distribution activity for final users

and clients

Various kinds of geographic concentration Competition between firms within

saturated markets: merging of large firms (investment and management) occurs in the northern hemisphere

Renovation of infrastructures and managerial needs: privatization occurs in Central European countries

Strong / urgent urban demand with new equipment and management: network investment occurs in Asia and Eastern Asia

Everywhere, the implementation of infrastructures in a short space of time and of satisfactory quality is complicated by the lack of

local labor capacity, local qualified worker resources, skilled managers, local control and accounting structures


Assessment and management

Most emerging countries have implemented an administered economy in which the State acts through discretionary decisions

i) mainly by controlling the budgeted expenses and

ii) less by managing its financial investment in infrastructures.

But the budget is just half of the picture: i) Little or nothing is done about economic

impactii) Little control on post investment and

performance

There is no continuous or looping audit between expenses and rewards applied to

i) project evaluation, ii) maintenance and iii) operational management Accounting is a fundamental instrument in policy

design

The state, region, and municipality are not able to apply cost/benefit techniques with a sound knowledge of their assets

i) They prefer to adapt their decision frameworks to arbitration and political choices

ii) The budget is used as an instrument for administrative control and not as an instrument for technical and financial decision-making

Who is the final decision-maker?

The “mayor’s dilemma” : voters vs. rationale

Current opposition between arbitration and technical plus financial rationality


Privatization and legal contingencies

Privatization is thus seen as the main / unique possibility of:

- - clarifying management policies - - challenging central control with an

anticipatory decision-making process- - terminating the juxtaposition of

decentralization and de-concentration policies on the same areas.

Privatization is also seen as a major way of wiping fiscal deficits.

However, the investors are exposed to - a high level of risk because of the lack of cost/benefit information, - ignorance of the asset value and often, - the ambiguity of the legal property situation.

Accordingly, investors require a high level of allowance for risk

Legal frameworks: deep complexity, but global improvement with:

i) - extension of administration’s responsibility

ii) - better property protection, for instance through: public acquisition + expropriation + transfer = security in ownership

iii) - better judicial capacity: increase in number and qualification of the judicial personnel, computerization of the administration, decentralization of courts

• - a more understanding attitude of the banks with regard to “public” properties and infrastructures

• - global improvement of laws and decrees


Decentralization, transfer of infrastructure and public interest todayThe link between the public services and

the general interest was elaborated at the end of the19th century with consideration of three components:

i) the public service itself, ii) the public institution / the legal entity iii) the public enterprise

It considered three principles: i) equal preference for the users, ii) continuity in service production, iii) mutability and adaptability to the

public sector

The general interest i) is an evolutionary concept ii) is contingent upon local/historical

appreciation

Initial hierarchy State -> Region -> Local

Public Essential (national) equipment

Infrastructure with economic and social multiplier effects

Equipment of proximity Out of the private sector

Intermediate bodies (public private)

Concession PPP

Mixed economy Management contract Concession, PPP

Service contractManagement contract Concession, PPP

Private Concession PPPPrivatization

Concession PPPPrivatization

Concession PPPPrivatization


Investment in infrastructuresAt the beginning of the 19th century,

the capacity of a private firm to benefit from the public service mission status was dependent on some basic rules:

i) its budget should be balanced ii) no subsidy is needed, except after

acceptance by the local authorities iii) the service is financed by billing

the users

This didn't survive the “network era” i) railways, electricity, gas, telephone,

water distribution, etc. ii) at the end of the 19th century, the

need for investment capital was too extensive to be supported by private firms

iii) the State should intervene not only as regulator but also as an operator.

Today, it seems that the investment capacity in private capital is huge on a world scale. Is this true? For how long (transfer contracts are often 30 years long)?

At the present time, the lending rate is low. What will happen if this rate increases suddenly? A fast adaptation process in public investment appears questionable.

A current question is to define in which circumstances, when and how deep the State should i) terminate, ii) decentralize, iii) transfer its management functions.

Matrix of new tech. vs. basic infrastructures competition

New tech infrastructures

Basic infrastructure

Risk level

Expected return

Duration of investment


Privatization of public infrastructures (developing countries) 1990 – 1999

Telecom $ 249 billionEnergy $ 192 billionTransport $ 106 billionWater $ 31 billionSource: World Bank

Two categories of activities: the private market is attracted by

i) implementing new tech infrastructures with added value at the moment of their implementation

ii) a share of the household income through the service and management of the infrastructures

Particular questions for LDCs and decentralization policies

What does “first necessity” mean for the infrastructure activity:

Communication <-> business need?or

Energy / transport <-> production and employment?or

Water <-> from survival need to no limit in consumption?

How does the private sector react?

Is the private and final client able to arbitrate?


Transfer vs. non-transfer :towards new infrastructures

For instance, one of the present questions is to know how and when information technology or health infrastructures will call for public investment.

The economic impact of potential investment in information infrastructures and public networks is not clear.

On the one hand, the overall financing has not yet been satisfied by the private market in these sectors.

On the other hand, the public sector has not yet been solicited to act as a lever in a countercyclical policy.

Should the state keep this role in case of a deep economic recession?

Should the role be attributed to the region or the megapolis institutions?


Precondition before transfer / decentralization of public infrastructures (1)

As preconditions before transfer of public infrastructures, a three-stage process is recommended before starting negotiation procedures.

1 Preparation for competitive bidding i) The nature and extent of the demand

(local, regional, national)ii) The concerned infrastructureiii) The main steps in the implementation and

the scheduleiv) The costs involved –estimatesv) The other acceptable optionsvi) The local employment expectationsvii) The decision framework

A precise preliminary study is imperative

A case-by-case procedure using a standardized process is needed (national and regional comparison capacity)

Is the cost of data acquisition to be supported by the public authorities?

i) How to finance it?ii) How to define the contract terms

of data acquisition? Should the preparatory step for data

acquisition be financially borne by the contracting authority (public)?

Privatization doesn’t implicate all public assets. But it suggests a capacity of transfer related to existing infrastructures.

– How to identify the infrastructure and equipment “stock”: roads, hospitals, state buildings?

– Identification is a specific task. It calls for a preliminary definition of infrastructures and of public properties.

This takes years and requires considerable money and skills

This identification methodology varies with each country.



2 Comparative information

Widespread information of the transfer procedure includes

i) general decentralization or transfer objectives (position of the public authorities)

ii) technical description of the infrastructure to be transferred

iii) human resources at local, regional, and national levels

iv) risk evaluation v) financing and fiscal frameworkvi) return expectations and incentives.

Decentralization or transfer of infrastructures is often justified by a lack of human expertise

Most of the time one difficulty is to know what to do with the existing jobs and employment contracts, or instance training, redundancy, externalization

Employment attitude is often the key point during negotiations

Public financing can be added into the final agreement



3 Conduct of the transfer / transaction of public infrastructures

A precise evaluation grid is used at this stage. However, this framework can be restricted to a simple guideline for negotiation.

Usually the evaluation and transaction emphasizes:

i) performance and technologyii) environmental protection and

improvement issuesiii) social impact with local empowerment

and employmentiv) financial constraints expressed in the

final dealv) legal and fiscal situations

A restricted number of “bidders” should be considered after step 2.

Sometimes they are too numerous.Sometimes they are too few. In this case the process should be declared unsuccessful

A detailed procedure is needed in the selection process. Too often, this point leads to confrontations with damaging consequences.


Privatization, decentralization and deregulation

In most cases, privatization and decentralization encounter similar difficulties in finding appropriate justification for deregulation (see above public interest)

On the one hand, the dual process of privatization and decentralization involves authorities of all levels (local, regional, national, international)

On the other hand, deregulation of public services is seen as a safe way of transferring public infrastructures

In addition, this may be linked to the quest for fiscal autonomy from the local authorities.

The aggregate “Privatization, Decentralization and Deregulation” emphasizes the question of equalization and harmonization of the decision framework between economic and public players

The question of the “transfer of debts” requires the analysis of

1. - ending fiscal duties 2. - re-negotiation with the banks3. - the global need for accounting data


Legal framework, Transfer and Consequences

Contractand specificity

Direct state / local government control

Management contracting

Leasehold Concession LRO

Lease – Rehabilitate - Operate

BOT

Build - Operate – Transfer

BOOT

Build - Own-Operate – Transfer

BOOP

Build – Own-Operate – Privatization

Ownership public public public private private private private private

Duration immediate to 5 years

immediate to 7 years

short to 20 years

7 to 50 years

10 to 30 years

10 to 30 years

10 to 30 years

10 to 50 years

Management public private private private private private private private

Financing public public private private private private private private

Fiscal duties none or public private private private private private private private

Risk exposure

reducedpublic

reduced public

private private (and reduced public)

private private private private


Preliminary information before decentralization or transfer

Contractand specificity

Direct state / local government control

Management contract

Leasehold Concession LRO

Lease – Rehabilitate - Operate

BOT

Build - Operate – Transfer

BOOT

Build - Own-Operate – Transfer

BOOP

Build – Own-Operate – Privatization

Accounting no no yes yes yes yes yes yes

Legal framework constraint

strong strong strong strong limited limited limited limited

Direct financing

no no yes yes yes yes yes yes

Rewards public public Public and private

private private private private private

Bank involvement with low rate

No use no use possible yes yes yes yes yes


Rewards, decentralization and transfer authorities

Legal framework

Cost imputation Risk allocation Decentralization and transfer authorities

Rewards from the public sector

Public contract

Additional cost for public sector

Risk supported by public sector- Realization - Budget balance

State

Rewards from public sector

Shared cost for public sector

Risk supported by private sector- Realization- Output

State Region

Rewards from the final user

Concession Delegation PPP

Cost for private investors and final user

Risk supported by the private sector- Realization- Output- Market capacity and demand

StateRegionLocal


Choice criteria for concession vs. PPP before and after decentralization or transfer

Before decentralization or transfer After decentralization or transfer

Positive factors Negative factors Positive factors Negative factors

ConcessionDelegation

Good predictability on financing and on conditions of return Incentive for a good quality in technology investment

Changes might be expensiveDifficulty with new technology implementationNo control of the moving social factors in the contract

Protection against changes in policyStability in employment

Contract rigidity Contract should be applicable immediately as well as over the long termNo control of the moving social factors in the contract

Public Private Structures

Improvement of infrastructure and equipment during the life of the contract

Prior risk evaluation is difficultPotential instability with the market / client on payment capacity

Flexibility on each part of the contract with better overall profitImprovement of infrastructure and equipment during the life of the contractAccurate accounting

Long period of investment mobilization


Weak points in transfer of infrastructures

The transfer of infrastructures brings specific obligations with strong financial exposure to regional and local levels as well as to private “bidders”

Weak points in transfer of infrastructures Transaction expenses Threshold costs – costs of

procurement process vs. potential benefit

Management expenses (monitoring, penalties, auditing)

Financial market instability and refinancing

Long-term contract

The transfer procedure reduces and negates the positive impact of using the private sector

with a high-cost fee for the risk transfer (public to private), while only a part of this risk is transferred

with often a higher cost of capital than with the public procedure of financing


Methodology for a successful transfer of infrastructures

A clear and sound legal framework Pre-existent texts and laws should be

present. Avoid a “case-by-case” procedure

Enforceability means reduction in costs for the private sector

Project profitability and public interest Profitability is a basis of competition

and success in transfer Public interest is the starting and final

condition of the transfer

Levels of mutual understanding and knowledge in management of transferred infrastructure

Awareness by the public sector of private management

Awareness by the private sector of public interest constraints

Bidder capacity in managing a public infrastructure

Investment feasibility Duration of the lease of the loan and

of the investment Anticipated payment possibility for

the government and payment risk Expected revenues for the

government


References Bizet, Bernard. 2002. “Deconcentration vs. Decentralization of Administration: a Center–Periphery

Dilemma”, Canadian Journal of Regional Science, Autumn Bizet, Bernard. 2006. “State Real Property Management in France”. In Kaganova, Olga, McKellar, James.

2006. “Managing Government Assets – International Experiences” . Washington, DC: The Urban Institute. Finger, Matthias. 2002. “La privatisation de l’eau: quelles options politiques?”. Louvain, Mimeo. Foster, Vivien. 2000. “Measuring the Impact of Energy Reform; Practical Options”. Viewpoint 210.

Washington: World Bank. Jasedric, Alejandro. 2000. “Promoting Private Investment in Rural Electrification” Viewpoint 214.

Washington: World Bank. Kaganova, Olga, McKellar, James. 2006. “Managing Government Assets – International Experiences” .

Washington, DC: The Urban Institute. Lafitte, Michel. 2006. “Les partenariats Public-Privé”. Paris: Revue Banque Édition. OECD, 1999. “Performing Contracting: Lessons from Performance Contracting and Framework for Public

Performance Contracting”. Paris: PUMA/PAC(99)2 Organisation Internationale du Travail, 2001. “L’impact de la décentralisation et de la privatisation sur les

services municipaux”. Genève: programme des actions sectorielles. Rapold, Dora, Swiss Agency For Developement and Cooperation. 2001. “Guide de Decentralization”.

Berne: Directorate SDC. Ruet, Joël. 2002. “Redéfinir le Rôle de l’État en utilisant le privé: le cas de l’Inde”. Paris: Sociétal.

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