This file photo from July 21, 2022 shows the headquarters of the Asian Development Bank in the city of Mandaluyong. PHOTO BY MIKE DE JUAN
Today’s discussion still stems from previous articles on public-private partnership (PPP) ideas for local government units (LGUs).
There seems to be a lot the private sector can do to finance LGU projects, but what is preventing investors from investing is something that needs to be addressed.
An expert who feels good about what is happening in countries as they plan and implement public infrastructure investment programs thinks – or at least finds it worth sharing the idea – that there is no infrastructure funding gap. The problem is rather a deficit of infrastructure governance.
He was one of the standout participants in yesterday’s webinar series on quality infrastructure investment from the Asian Development Bank (AfDB) which featured Ian Hawkesworth, Senior Public Sector Specialist of the World Bank.
The information presented in this type of webinar is not intended to be shared externally, by convention. But I think the main ideas developed from these learning events should merit public debate, apart from the fact that, particularly in this case, they are publicly available from the World Bank’s online pages. .
(Disclosure: In addition to writing for The Manila Times, I also work as a country governance consultant for the Asian Development Bank. This allows me to listen, in a way, to some of the learning events that the AfDB organize from time to time.)
In yesterday’s webinar, Hawkesworth presented the World Bank’s Infrastructure Governance Diagnostic Assessment Tool. Like most study tools of this kind where their applicability may depend on certain factors or contexts which may vary depending on the information available, this one is apparently still evolving. I assume that the results of the country studies where the tool has been applied remain subject to further scrutiny, which is why they could not yet be cited.
He suggested that poor infrastructure governance can be a major impediment to good service delivery. Highlights of the presentation include:
1. Infrastructure governance, not scarce funding, is the primary barrier to providing efficient, effective and sustainable infrastructure services to the public.
2. Poor infrastructure governance weakens a government’s ability to: a) conceive a strategic vision that has climate, environmental and social anchors; (b) build a strong pipeline of viable and bankable projects; (c) ensuring coordination within government and across government; d) decide on the appropriate role of the private sector, as well as the role of state-owned or state-controlled companies; e) purchase the asset efficiently, regulate the provision of services; and f) ensuring integrity, consultation, transparency, trust.
3. Poor infrastructure governance has a price.
Citing research, Hawkeswroth said that on average, countries waste around a third (between 30 and 50%) of the money they spend on infrastructure due to inefficiencies.
The loss can exceed 50% in low-income countries. By comparison, efficiency losses in emerging economies average 34%; losses are even lower in advanced economies at 15%.
In 2019, Deputy Ombudsman Cyril Ramos reported that, based on 2017 United Nations Development Program estimates, the Philippines was losing around 20% of annual legal government spending to corruption. For the previous two years (2017 and 2018), he estimated that the government had lost a total of 1.4 trillion pesos to corruption.
The good news is that inefficiencies and unnecessary infrastructure spending can be avoided. More than half of these losses, Hawkesworth argues, could be offset by better infrastructure governance.
An AfDB paper advises governments to address at least four fundamental institutional and governance challenges for PPPs to become a more reliable procurement option for infrastructure development:
1. Effective reforms and development of the legal, regulatory and institutional environment
Prioritizing the creation of an enabling environment distinguishes a strategic approach to PPPs from the more transaction-oriented version, as it further ensures value for money. Legal and regulatory frameworks for PPPs need to be supported by the institutional capacity of agencies involved in planning, environmental and social impact analysis, and fiscal and debt management.
2. National and sectoral infrastructure planning
Consideration of a project in the implementation priority list should stem from a positive cost-benefit analysis. Affordability analysis, based on the life-cycle cost of current and future projects, is essential to select priority projects and to avoid launching new projects that the government cannot deliver within reasonable expectations. for future budgets. A planned approach to PPP development is also fundamental in terms of ownership and alignment with a country’s development priorities. This can save governments from opportunistic schemes often associated with unsolicited projects – those that can be backed by special interests. Similarly, having an institutionalized governance approach can promote value for money throughout the PPP cycle.
PPP is often seen as a free lunch by many politicians attracted by a misperception that it circumvents budget constraints or by the “buy now and pay later” idea. In many jurisdictions, by keeping PPPs off-budget, inadequate budget accounting rules and practices can prolong a government’s long-term commitment to a project without the necessary legislative review or oversight (or transparency), frequently undermining fiscal sustainability.
In addition, PPP or not, much of the fiscal risk in infrastructure projects stems from weaknesses in the early stages of the project cycle, primarily during strategic planning and project appraisal. In the case of PPPs, the consequences are exacerbated given the long-term nature of the additional tax liabilities and risks embedded in the concession contract.
3. Multi-year PPP fiscal risk assessment
Addressing fiscal risks requires policymakers to undertake a comprehensive multi-year assessment of funds available for infrastructure plans and commitments within the medium-term fiscal framework (and respective rolling sector ceilings). They should also understand, assess and manage proposed fiscal risks (explicit and implicit) in PPP proposals from a portfolio perspective.
4. Effectiveness of project preparation
The least effective public investment management institutions in developing countries are those involved in project appraisal and selection, funding maintenance, multi-year budgeting and public assets.
In another paper, the AfDB highlights the essential upstream work that remains to be done to improve risk management. Among the main causes of loss of confidence in PPPs are the approaches taken in contracts, the allocation of risks and the resolution of disputes. More collaborative contractual arrangements, such as standing dispute resolution commissions, and the appropriateness of their use for PPPs in the context of development conditions likely to exist post-Covid-19 should be considered.
We can note that the Philippines still has a lot of work to do to meet these challenges. We can have a strong legal framework for PPPs. But institutional capacity remains a problem. As the national government encourages LGUs to exploit PPP opportunities for infrastructure investment, there is a need to provide LGUs with enough institutional support that they need.