infrastructure and fiscal policy specific challenges marianne fay many thanks to vivien foster on...
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Infrastructure and Fiscal PolicySpecific Challenges
Marianne Fay
Many thanks to Vivien Foster on whose 2005 PEAM course presentation this is largely based
Outline
Stylized facts Funding sources Budgetary boundaries Budgetary mechanisms
I. Stylized facts
Infrastructure is “big money”
Stocks Equivalent to about 100% of developing
country GDP Dominated by electricity (45-55%), and
transport (30 to 40%) “cheaper” telecom (5-15% and growing) and
W&S (5 to 15%)
Maintenance: About 2 to 3% of GDP per year
Infrastructure is “big money”
Output: About 6% of GDP for electricity (MICs) The same for telecom & transport? Much smaller for W&S
Expensive when poorly managed
Electricity: Total hidden costs (underpricing; technical and
commercial losses) estimated in ECA at 4% of GDP
In Mexico – untargeted subsidies amount to 1% of GDP
Rail and public transport: historically huge drains on public coffers
Water and sanitation: typically much smaller (0.4% of GDP in ECA)
Much of it, public responsibility
Differences across sectors: Fairly universal trend for privatization
of telecom, air transport, possibly rail More varied with electricity, public
transport Limited potential for roads W&S – complicated…
Distinguishing features
Investment Highly capital intensive (60%+) Long term planning horizons (30 yrs) Infrequent lumpy investments Long lead times (Up to 5yrs) Unpredictable investment costs
Distinguishing features
Maintenance Long asset lives (Up to 30 yrs) High maintenance (2-3% AV) Exponential cost of deferred
maintenance Catch-22
Decision to invest based on estimated rate of return, itself conditioned by whether maintenance occurs
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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
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-Filling Cracks
-Geotextile and Strengthening
-Reconstruction of the Surface-Reconstruction of the partial base course
-Complete Reconstruction
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Lifetime of Pavement (years)
The maintenance dilemma
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 Long lived assets delay hour of reckoning Even investments can always be deferred
The infrastructure public finance paradox
Maintenance and investment are prime candidates for cuts
Subsidies – however poorly targeted - are difficult to eliminate
Some countries spend more on consumption subsidies than on either investment or maintenance…
A complication – no data
No country systematically collects investment data on infrastructure “infrastructure” a broad and vague category –
unlike health and education Poor fit with IMF GFS categories Public investment data notoriously poor – hard
to distinguish from O&M A few valiant efforts (Calderon & Serven;
specific country studies)
The implication – no monitoring
II. Funding sources
Only three possible sources
Tax payers (fiscal transfers) Users:
fees cross-subsidies
Asset depletion: quality non-expansion of service…
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Telecoms Gas Power Water
Ratio of revenue to costs
Source: WDR 1994
Historic under-pricing
Cost recovery: water
Median tariff
US$/m3 Nil At least some O&M
Full O&M and at least some capital
HIC 0.96 8% 42% 50%
UMIC 0.35 39% 22% 39%
LMIC 0.22 37% 41% 22%
LIC 0.09 88% 9% 3%
Global 0.35 40% 30% 30%
Degree of cost recovery
Source: Foster & Yepes, forthcoming
Cost recovery: electricity
Median tariff
US$/kWh Nil At least some O&M
Full O&M and at least
some capital
HIC 0.11 0% 17% 83%
UMIC 0.06 0% 71% 29%
LMIC 0.05 27% 50% 23%
LIC 0.05 31% 44% 25%
Global 0.07 15% 44% 41%
Degree of cost recovery
Source: Foster & Yepes, forthcoming
Who really gets the subsidy?
UTILITY
government subsidy
customersutility workers
alternative providers
inefficiency tariffs below cost
coping costs
inadequate quality of
service
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
subsidiesElectricity subsidies
Other welfare
programs
Consumption based 0.56 0.57 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
III. 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 sectoralistsprovide a stable source of financing in sectors without possibility of user fees, isolated from budgetary and political interference
Loathed by macroeconomistsreduce budgetary flexibility and optimization of public resources, often lead to poor governance, lack of transparency
Argentina: exploding funds
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($
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FundsTransport
SpecialFundsEnergy
NationalBudgetTransport
NationalBudgetEnergy
Source: Argentina PER, 2003
Argentina: weak governanceInternational best practice
Argentina transport fund
Legal basis Established by law Established and modified by decree
Governance Autonomous user-represented board
Controlled directly by Min Econ
Accountability Published accounts, audits
Internal public sector controls
Resource allocation
Transparent, stable guidelines
Under continual modification
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
Colombia: drains vs. cash cows
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Source: REDI Colombia, 2004
Public Private Partnerships Potential for PPPs varies substantially across sectors
Key criterion for judging whether extra-budgetary 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
Source: Calderon, Easterly and Serven, 2003
0% 20% 40% 60% 80% 100%
Venezuela
Argentina
Peru
Chile
Bolivia
Mexico
Brazil
Colombia
Ecuador
Private investment as % total
LAC: private relative to total
0%
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Telecom Power Transport Water
Priv
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inve
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ntag
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Source: Calderon, Easterly and Serven, 2003
Colombia: new policy after $4.4 Bn bailouts
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)
IV. Budgetary mechanisms
Budgetary challenges
Project selectiondeficiencies in technical capacity for project evaluation, plus political attraction of ‘white elephants’
Multi-year planninglong term projects required multi-year budget envelope to assure execution
Implementation bottleneckscomplex procurement plus unforeseen delays [cash budgeting!] make it difficult to execute budget
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: low execution
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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