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Transcript of 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
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
Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 3
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
Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 4
Infrastructures in emerging countries
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?
Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 5
Infrastructures in emerging countries
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
Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 6
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
Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 7
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
Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 8
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
Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 9
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
Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 10
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
Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 11
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 of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 12
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?
Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 13
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.
Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 14
Precondition before transfer / decentralization of public infrastructures (2)
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
Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 15
Precondition before transfer / decentralization of public infrastructures (3)
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.
Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 16
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
Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 17
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
Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 18
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
Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 19
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
Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 20
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
Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 21
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
Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 22
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
Transfer of Infrastructures & Decentralization Bernard Bizet ESSEC-Paris [email protected] 23
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.