THE TRANSFER OF PUBLIC INFRASTRUCTURE AND EQUIPMENT IN THE DECENTRALIZATION PROCESS

1
THE TRANSFER OF PUBLIC INFRASTRUCTURE AND
EQUIPMENT IN THE DECENTRALIZATION PROCESS

• May 29-30, 2006Mita Conference HallTokyo, Japan
• Bernard Bizet Professor ESSEC Paris - France
• bizet_at_essec.fr

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

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
• high level services and production,
• and
• basic infrastructure implementation.
• LDC and emerging countries have to develop their
  economy on a local / regional basis

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
• Is it an expression of a looming new economic
  model?
• 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 disequilibrium
• Developing countries vs. LDC
• Demography acts as resource and demand
• How to reduce the gap double and simultaneous
  challenges for LDC?

5
Infrastructures in emerging countries

• The resulting option between the model of
  improvement and the new model of investment may
• structure the future management and the extension
  of cities from physical and social points of view
  
• leads to a stabilization of the evolutionary
  processes of inner city vs. suburbs

• But this option
• questions the notion of inter-city competition
  for development
• 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

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
• Concentration of firms in the telecommunication
  and media sectors
• Transportation and supply chain improvement
• Activities resulting from the decentralization of
  administration
• Private firms penetrate the market through
• heavy investment in infrastructure
• 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

7
Assessment and management

• Most emerging countries have implemented an
  administered economy in which the State acts
  through discretionary decisions
• mainly by controlling the budgeted expenses and
• less by managing its financial investment in
  infrastructures.
• But the budget is just half of the picture
• Little or nothing is done about economic impact
• Little control on post investment and performance
• There is no continuous or looping audit between
  expenses and rewards applied to
• project evaluation,
• maintenance and
• 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
• They prefer to adapt their decision frameworks to
  arbitration and political choices
• 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 mayors dilemma voters vs. rationale
• Current opposition between arbitration and
  technical plus financial rationality

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
• - extension of administrations responsibility
• - better property protection, for instance
  through public acquisition expropriation
  transfer security in ownership
• - 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

9
Decentralization, transfer of infrastructure and
public interest today

• The link between the public services and the
  general interest was elaborated at the end of
  the19th century with consideration of three
  components
• the public service itself,
• the public institution / the legal entity
• the public enterprise

• It considered three principles
• equal preference for the users,
• continuity in service production,
• mutability and adaptability to the public sector
• The general interest
• is an evolutionary concept
• is contingent upon local/historical appreciation

10
Investment in infrastructures

• At 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
• its budget should be balanced
• no subsidy is needed, except after acceptance by
  the local authorities
• the service is financed by billing the users
• This didn't survive the network era
• railways, electricity, gas, telephone, water
  distribution, etc.
• at the end of the 19th century, the need for
  investment capital was too extensive to be
  supported by private firms
• 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.

11
Privatization of public infrastructures
(developing countries) 1990 1999

• Telecom 249 billion
• Energy 192 billion
• Transport 106 billion
• Water 31 billion
• Source World Bank
• Two categories of activities the private market
  is attracted by
• implementing new tech infrastructures with added
  value at the moment of their implementation
• 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?

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?

13
Precondition before transfer / decentralization
of public infrastructures (1)

• Is the cost of data acquisition to be supported
  by the public authorities?
• How to finance it?
• 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 doesnt 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.

• As preconditions before transfer of public
  infrastructures, a three-stage process is
  recommended before starting negotiation
  procedures.
• 1 Preparation for competitive bidding
• The nature and extent of the demand (local,
  regional, national)
• The concerned infrastructure
• The main steps in the implementation and the
  schedule
• The costs involved estimates
• The other acceptable options
• The local employment expectations
• 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)

14
Precondition before transfer / decentralization
of public infrastructures (2)

• 2 Comparative information
• Widespread information of the transfer procedure
  includes
• general decentralization or transfer objectives
  (position of the public authorities)
• technical description of the infrastructure to be
  transferred
• human resources at local, regional, and national
  levels
• risk evaluation
• financing and fiscal framework
• 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

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
• performance and technology
• environmental protection and improvement issues
• social impact with local empowerment and
  employment
• financial constraints expressed in the final deal
• 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.

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
• - ending fiscal duties
• - re-negotiation with the banks
• - the global need for accounting data

17
Legal framework, Transfer and Consequences
18
Preliminary information before decentralization
or transfer
19
Rewards, decentralization and transfer authorities
20
Choice criteria for concession vs. PPP before and
after decentralization or transfer
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

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

23
References

• Bizet, Bernard. 2002. Deconcentration vs.
  Decentralization of Administration a
  CenterPeriphery 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
  leau 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.
  Limpact 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 lÉtat en
  utilisant le privé le cas de lInde. Paris
  Sociétal.