Download Presentation (Foster)

Infrastructure Session
PEAM Course 2005
Vivien Foster, IEF
Outline
 Distinguishing features
 Stylized facts
 Funding sources
 Budgetary boundaries
 Budgetary mechanisms
I. Distinguishing Features
Capital intensive
 Infrastructure services are highly capital
intensive
 Capital costs as percentage total
– Power: G (35-75%), T(90%), D(70%), Total (63%)
– Telecom: 25-45%
– Water: 65%
Long lead times
 Infrastructure investments are based on
long term planning decisions (5-30 yrs)
 Large lumpy investments are required
on an occasional basis
 Investment projects have long lead
times of several years (1-5 yrs)
 Investment costs may be hard to predict
due to local idiosyncrasies
Long asset lives
 Infrastructure assets have very long
lives
 Typical asset lives by sector are as
follows.
– Power: Overall average (25-30)
– Telecom: Fixed (15), Mobile (10), Internet (5)
– Water: Civil (20-40)
High maintenance
 Infrastructure assets have substantial
maintenance needs
 Expressed as percentage replacement
cost per year they are
– 2% for electricity generation, roads
– 3% for water, sewerage
– 8% for fixed, mobile telephone lines
 Inadequate maintenance leads to
exponential rehabilitation requirements
Fiscal consequences
 For all of these reasons, ill-suited to
unpredictable annual budgetary cycle
 Moreover, particularly vulnerable to
budgetary downturns
–
–
–
–
Politically soft target for budget cuts
Maintenance less attractive than investment
Even investments can always be deferred
Long lived assets delay hour of reckoning
The maintenance dilemma
Very
Good
100
90
-Filling Cracks
Good
80
70
-Geotextile and Strengthening
Fair
60
-Reconstruction of the Surface
-Reconstruction of the partial base course
50
Poor
40
30
-Complete Reconstruction
Very
Poor
20
10
0
0
2
4
6
8
10
12
14
16
18
20
22
24
26
If maintenance on a 20 year road is not done by the end of the 12th
year. It starts to deteriorate eight times faster than in the early years
II. Stylized Facts
LAC: falling public investment
Public Investment in Infrastructure
Selected Latin American Countries, 1980-98
6.0%
As percentage of GDP
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
ARG
BRA
CHL
COL
Source: Easterly, Calderón and Serven, 2003
MEX
PER
LAC: falling total investment
Total Investment in Infrastructure
Selected Latin American Countries, 1980-98
9.0%
8.0%
As percentage of GDP
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
ARG
BRA
CHL
Source: Easterly, Calderón and Serven, 2003
COL
MEX
PER
Composition by sector
Percentage infrastructure spending
100%
90%
80%
70%
Communications
60%
Transport
50%
Water
40%
Energy
30%
20%
10%
0%
Argentina
Colombia
Source: Argentina PER, 2003 & Colombia REDI, 2004
Percentage infrastructure spending
Composition by jurisdiction
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Sub-national
(inc. SOE)
National
Argentina
Colombia
Source: Argentina PER, 2003 & Colombia REDI, 2004
Decentralization
Central
Regional
Local
Water
Occasionally
Sometimes
Frequently
Transport
Primary
roads
Generation,
transmission
Secondary
roads
Sometimes
distribution
Tertiary
roads
Sometimes
distribution
Energy
Telecom
Local and
long distance
Sometimes
local
Turkey: mapping institutions
National Coverage
State Economic Enterprises
Communicatio
ns
Energy
Transport
 All Fixed Telephony and
some Cellular Services
 Postal Services
 Electricity generation,
transmission and distribution
 Gas Distribution
 Oil processing and
distribution
 Railways Operation
 Ports Operation
 Airlines Transportation
Roads
Sanitation
Central Government
`
Municipalities
 Construction of
hydropower plants
 Construction of
Railways, Ports and
Airports
 Airports Operation
 Construction and
maintenance of major
intercity express ways

Water
Sub-national Coverage
Irrigation

Village/rural roads
 Major urban water
supply and treatment
projects
 Drinking water supply
for rural areas
 Public transportation
 Building and operation of
passenger and freight
terminals
 Construction and
maintenance of urban (intracity) roads
 Urban water supply
 Drainage
 Solid waste collection and
disposal
 Sanitation
III. Funding sources
Diversity of sources
 Infrastructure services present a wide
range of financing mechanisms
 Sources of funding are as follows
– Fiscal transfers
– User fees
– Cross-subsidies
– Quality
Extent of fiscal support
Power sector
Bosnia Herzegovina
%
Under- Under- System
GDP pricing collection losses
1.3
95%
5%
0%
Bulgaria
3.0
87%
13%
0%
Azerbaijan
5.9
46%
48%
6%
Macedonia
6.5
71%
10%
19%
Kyrgyz R.
10.1
34%
17%
49%
Uzbekistan
12.1
69%
12%
19%
Tajikistan
19.1
87%
4%
9%
Source: Ebinger, forthcoming
Te
le
co
m
Ag
ua
Source: REDI Colombia, 2004
G
as
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Tr
an
sp
or
te
El
ec
tri
cid
ad
Porcentaje de inversion
Colombia: funding source
Generacion
interna
Transferencias
fiscales
Historic under-pricing
Ratio of revenue to costs
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Telecoms
Source: WDR 1994
Gas
Power
Water
Historic inefficiency
US$ billions annually
200
200
150
100
123
50
55
0
Subsidies through
mispricing
Source: WDR 1994
Costs of technical
inefficiency
Public investment
Cost recovery: water
Median tariff
Degree of cost recovery
US$/m3
Nil
8%
Partial
O&M
42%
Partial
capital
50%
HIC
0.96
UMIC
0.35
39%
22%
39%
LMIC
0.22
37%
41%
22%
LIC
0.09
88%
9%
3%
Global
0.35
40%
30%
30%
Source: Foster & Yepes, forthcoming
Cost recovery: electricity
Median tariff
Degree of cost recovery
US$/kWh
Nil
0%
Partial
O&M
17%
Partial
capital
83%
HIC
0.11
UMIC
0.06
0%
71%
29%
LMIC
0.05
27%
50%
23%
LIC
0.05
31%
44%
25%
Global
0.07
15%
44%
41%
Source: Foster & Yepes, forthcoming
Who really gets the subsidy?
government subsidy
inefficiency
UTILITY
tariffs below
cost
inadequate
quality of
service
utility workers
customers
coping
costs
alternative providers
In Hyderabad (India), employees capture 40% of the subsidy, and
consumers 60%, half of which they spend on alternative providers
What distributional incidence?
Omega indicator
Water
Electricity
subsidies subsidies
Consumption based
0.56
0.57
Other
welfare
programs
1.00
Geographical targeting
1.07
1.10
1.33
Means testing
1.63
1.28
1.55
Self-selection
1.84

1.89
Source: Komives et al., forthcoming
IV. Budgetary Boundaries
Budgetary boundaries
 Infrastructure has a tendency to creep
off the budget for both good and bad
reasons
 There are a number of mechanisms
through which this takes place
– Extra-budgetary funds (fuel tax, USL)
– State Owned Enterprises
– Public Private Partnerships
Earmarked funds
 Loved by sectoralistsprovide a stable
source of financing in sectors without
possibility of user fees, isolated from
budgetary and political interference
 Loathed by macroeconomistsreduce
budgetary flexibility and optimization of public
resources, often lead to poor governance,
lack of transparency
Tot al energy and t ransport subsidies ($m)
Argentina: exploding funds
2000
Special
Funds
Transport
1800
1600
1400
Special
Funds
Energy
1200
1000
800
National
Budget
Transport
600
400
200
0
1999
2000
Source: Argentina PER, 2003
2001
2002
2003
National
Budget
Energy
Argentina: weak governance
Legal basis
International
Argentina
best practice
transport fund
Established by law Established and
modified by decree
Governance
Autonomous userrepresented board
Accountability Published
accounts, audits
Controlled directly
by Min Econ
Internal public
sector controls
Resource
allocation
Under continual
modification
Transparent,
stable guidelines
Argentina: vicious circles
1930/49
National Roads Fund established
funded through levy on diesel
Post 2000
Creation of new
Diesel Fund to
finance road
infrastructure
1950/69
Levy modified to
tax rate and
Federal Roads
Council created
1970/99
Road funds diverted to general budget,
change in allocation of diesel tax
State Owned Enterprises
 Often represent a large percentage of public
investment in infrastructure
 May or may not be consolidated into fiscal
accounts
 May be net contributors or drains on the
public purse
 Operate in restricted environments that limit
their autonomy and commercial orientation
 Management may be guided by
macroeconomic concerns
LAC: importance of SOE
22%
44%
Local
government
34%
Source: REDI Colombia, 2004
Central
government
Public
enterprises
Contribution to public surplus/deficit (% GDP)
-0.1
-0.2
-0.3
Source: REDI Colombia, 2004
Ecopetrol
ISAGEN
ISA
EPM
ESSA
Huila
Corelca
Telecom
ETB
Emcali
Colombia: drains vs. cash cows
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Colombia: government bailouts
Mechanism
Period
Transfer utility debts to central govt 1991/97
Refinancing and debt forgiveness
1992
Transfer of dividends across SOEs 1994/96
Payment of guarantees for credits
Payment of debts owed by govt
Payment of liquidation costs
1998
2001
2002/03
Capital injection to privatized SOEs 2002/03
Total
1991/03
Source: REDI Colombia, 2004
Value
(US$m)
1,538
600
41
200
104
28
45
2,556
Peru: restrictions on SOEs
 Restrictions
 Consequences
– Budgets subject to
– Higher costs
approval (labor cap)
– Lower profitability
– Dividend targets set to
– Sub-optimal gearing
meet surplus
– Limited investment
– Strong unionization,
political limits on lay-offs
– Public regulations on
• Investment
• Procurement
• Employees
Public Private Partnerships
 Significant potential for PPPs, but varies
substantially across sectors
 Key criterion for judging whether extrabudgetary is extent of risk transfer
 However, unless 100% risks can be
transferred contingent liabilities remain
 Complex fiscal accounting issues arise
regarding the treatment of
– Contingent liabilities
– Private investment
– Committed future public subsidies
LAC: private relative to total
Ecuador
Colombia
Brazil
Mexico
Bolivia
Chile
Peru
Argentina
Venezuela
0%
20%
40%
60%
Private investment as % total
Source: Calderon, Easterly and Serven, 2003
80%
100%
Private investment as percentage total
LAC: private relative to total
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Telecom
Power
Transport
Source: Calderon, Easterly and Serven, 2003
Water
Colombia: fiscal costs of PPP
Pre
2004
Post
2004
Electricity generation PPA 1,900 1,100
Estimated
As %
total
invested
3,000
90%
First generation toll roads
300
150
450
45%
Telecom Joint Ventures
136
800+
936+
25%
6


Na.
El Dorado second runway
Total
Source: REDI Colombia, 2004
2,342 2,050
4,386+
Colombia: new policy
 New policy guidelines on risk allocation
between public and private partners
 Mandatory estimation of contingent liabilities
using Monte Carlo (continuously updated)
 Required payments to cover liability are
‘smoothed out’ into a Deposit Plan
 Deposits are made from budget to
Contingency Fund in individual accounts
 Aggregate estimates reported annually to
parliament (infrastructure >0.5% GDP)
V. Budgetary mechanisms
Budgetary challenges
 Project selectiondeficiencies in technical
capacity for project evaluation, plus political
attraction of ‘white elephants’
 Multi-year planninglong term projects
required multi-year budget envelope to
assure execution
 Implementation bottleneckscomplex
procurement plus unforeseen delays make it
difficult to execute budget
 Institutional complexitycomplicates
decision-making process and achievement of
consistency
Peru: project selection
 SNIP
– MinFin unit does (pre-)feasibility studies
– CBA methodology with min. IRR 14%
– Declares viability without prioritization
 Coverage
– 2/3 of projects with regulated exceptions
– Smaller local projects with domestic financing
– Projects supported by Supreme Decree
 Too many projects leads to budget
constraints, delays and declining IRRs
Colombia: future appropriations
2500
US$m 2003
2000
1500
1000
500
0
2
4
0
0
2
6
0
0
2
8
0
0
2
0
1
0
2
2
1
0
2
4
1
0
2
6
1
0
2
8
1
0
2
0
2
0
Central Government
Public E nterprises
Inversion de INVIAS (US$m)
Colombia: low execution
1200
1000
Aprobacion
inicial
800
600
Aprobacion
final
400
200
0
9 5 99 6 99 7 99 8 99 9 00 0 00 1 00 2 00 3
9
1
1
1
1
1
2
2
2
2
Ejecucion
final
Ghana: absorptive capacity
Ghana – Status of Funding Road Development Program, 2002-03
(in US$ millions)
Funding Source
Secured Funds
Commitments
Disbursements
Donor Funds (1)
Road Fund
Consolidated Fund
768.63
149.33
65.46
370.45
149.33
57
149.83
149.33
48.07
Total
983.42
576.78
347.23
Source: Ministry of Roads and Transport. National Roads Maintenance Program, 2003 Review
(1) WB Road experts pointed out that the Ghanaian government is in the process of revising these figures to set an
alternative accounting system for donors funds based on annual disbursements against committed contract for a
particular year
Turkey - Public Financial Programming
Investment Budget
Current CG Budget
Consolidated and Annexed Budget Agencies
May
State Economic Enterprises
MoF, Treasury and SPO
(I)
--> Budget Circular Drafting
June
High Planning Council (Council of Ministers)
(II)
--> Budget Circular Approval
Prime Minister
(III)
--> Budget Call
July
MoF
SPO
--> Current Budget Guide Distribution
--> Investment Preparation Criteria Distribution
Central Government Agencies
--> Current Budget Proposal
August
September
MoF and CG Agencies
SPO and CG Agencies
--> Current Budget Negotiations
--> Investment Budget Negotiations
MoF, Treasury and SPO
--> Aggregate Budget Allocations
October
SEEs
--> Investment Budget Proposal
Treasury
--> Internal technical revision of SEEs
annual programs
Treasury, SEEs, High Audit Board,
Line Ministries, PA
--> Transfers revision
--> Borrowing requirement estimation
Prime Minister and Council of Ministers
November
(VIII)
(IX)
Treasury
--> Principles and Procedures for annual
program implementation by SEEs
President
(X)
(XI)
--> Budget Law
January
(VII)
Treasury, SEEs and SPO
--> Annual Program/Investment Financing Decree Inception
December
(VI)
--> SEE Targets' Actualization
--> Budget Allocation Endorsement
--> Budget Approval
(V)
--> Annual Programs Preparation
High Planning Council (Council of Ministers)
Turkish Grand National Assembly
(IV)
SPO
--> List of Investment Projects as an Annex to the Annual Program Decree
(XII)
Turkey - Public Financial Programming
Investment Budget
Current CG Budget
Consolidated and Annexed Budget Agencies
May
State Economic Enterprises
MoF, Treasury and SPO
(I)
--> Budget Circular Drafting
June
High Planning Council (Council of Ministers)
(II)
--> Budget Circular Approval
Prime Minister
(III)
--> Budget Call
July
MoF
SPO
--> Current Budget Guide Distribution
--> Investment Preparation Criteria Distribution
Central Government Agencies
--> Current Budget Proposal
August
September
MoF and CG Agencies
SPO and CG Agencies
--> Current Budget Negotiations
--> Investment Budget Negotiations
MoF, Treasury and SPO
--> Aggregate Budget Allocations
October
SEEs
--> Investment Budget Proposal
Treasury
--> Internal technical revision of SEEs
annual programs
Treasury, SEEs, High Audit Board,
Line Ministries, PA
--> Transfers revision
--> Borrowing requirement estimation
Prime Minister and Council of Ministers
November
(VIII)
(IX)
Treasury
--> Principles and Procedures for annual
program implementation by SEEs
President
(X)
(XI)
--> Budget Law
January
(VII)
Treasury, SEEs and SPO
--> Annual Program/Investment Financing Decree Inception
December
(VI)
--> SEE Targets' Actualization
--> Budget Allocation Endorsement
--> Budget Approval
(V)
--> Annual Programs Preparation
High Planning Council (Council of Ministers)
Turkish Grand National Assembly
(IV)
SPO
--> List of Investment Projects as an Annex to the Annual Program Decree
(XII)
Turkey - Public Financial Programming
Investment Budget
Current CG Budget
Consolidated and Annexed Budget Agencies
May
State Economic Enterprises
MoF, Treasury and SPO
(I)
--> Budget Circular Drafting
June
High Planning Council (Council of Ministers)
(II)
--> Budget Circular Approval
Prime Minister
(III)
--> Budget Call
July
MoF
SPO
--> Current Budget Guide Distribution
--> Investment Preparation Criteria Distribution
Central Government Agencies
--> Current Budget Proposal
August
September
MoF and CG Agencies
SPO and CG Agencies
--> Current Budget Negotiations
--> Investment Budget Negotiations
MoF, Treasury and SPO
--> Aggregate Budget Allocations
October
SEEs
--> Investment Budget Proposal
Treasury
--> Internal technical revision of SEEs
annual programs
Treasury, SEEs, High Audit Board,
Line Ministries, PA
Prime Minister and Council of Ministers
November
(VIII)
(IX)
Treasury
--> Principles and Procedures for annual
program implementation by SEEs
President
(X)
(XI)
--> Budget Law
January
(VII)
Treasury, SEEs and SPO
--> Transfers revision
--> Borrowing requirement estimation
--> Annual Program/Investment Financing Decree Inception
December
(VI)
--> SEE Targets' Actualization
--> Budget Allocation Endorsement
--> Budget Approval
(V)
--> Annual Programs Preparation
High Planning Council (Council of Ministers)
Turkish Grand National Assembly
(IV)
SPO
--> List of Investment Projects as an Annex to the Annual Program Decree
(XII)
Turkey - Public Financial Programming
Investment Budget
Current CG Budget
Consolidated and Annexed Budget Agencies
May
State Economic Enterprises
MoF, Treasury and SPO
(I)
--> Budget Circular Drafting
June
High Planning Council (Council of Ministers)
(II)
--> Budget Circular Approval
Prime Minister
(III)
--> Budget Call
July
MoF
SPO
--> Current Budget Guide Distribution
--> Investment Preparation Criteria Distribution
Central Government Agencies
--> Current Budget Proposal
August
September
MoF and CG Agencies
SPO and CG Agencies
--> Current Budget Negotiations
--> Investment Budget Negotiations
MoF, Treasury and SPO
--> Aggregate Budget Allocations
October
SEEs
--> Investment Budget Proposal
Treasury
--> Internal technical revision of SEEs
annual programs
Treasury, SEEs, High Audit Board,
Line Ministries, PA
--> Transfers revision
--> Borrowing requirement estimation
Prime Minister and Council of Ministers
November
(VIII)
(IX)
Treasury
--> Principles and Procedures for annual
program implementation by SEEs
President
(X)
(XI)
--> Budget Law
January
(VII)
Treasury, SEEs and SPO
--> Annual Program/Investment Financing Decree Inception
December
(VI)
--> SEE Targets' Actualization
--> Budget Allocation Endorsement
--> Budget Approval
(V)
--> Annual Programs Preparation
High Planning Council (Council of Ministers)
Turkish Grand National Assembly
(IV)
SPO
--> List of Investment Projects as an Annex to the Annual Program Decree
(XII)
Conclusions
 Cost structure of infrastructure services
leads to fiscal complications
 Wide variety of potential funding
sources for infrastructure
 Tendency for infrastructure to be on the
boundaries of the budget
 Infrastructure poses challenges from a
budgetary perspective