Title: THE TRANSFER OF PUBLIC INFRASTRUCTURE AND EQUIPMENT IN THE DECENTRALIZATION PROCESS
1THE 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
3Infrastructures 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
4Infrastructures 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?
5Infrastructures 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
6Trends
- 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
7Assessment 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
8Privatization 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
9Decentralization, 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
10Investment 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.
11Privatization 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?
12Transfer 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?
13Precondition 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)
14Precondition 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
15Precondition 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.
16Privatization, 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
17Legal framework, Transfer and Consequences
18Preliminary information before decentralization
or transfer
19Rewards, decentralization and transfer authorities
20Choice criteria for concession vs. PPP before and
after decentralization or transfer
21Weak 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
22Methodology 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
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