THE discussion today still follows from earlier pieces on public-private partnership (PPP) ideas for local government units (LGUs).
It seems there is much that the private sector can do to fund LGU projects, but what keeps the investors from investing is something that needs to be addressed.
An expert who has a good smell for what goes on in countries as they plan and implement public investment programs for infrastructure thinks — or at least finds it worth sharing the idea — that there is no infrastructure finance gap. The problem rather is an infrastructure governance gap.
This was one of the takeaways participants derived from yesterday's Asian Development Bank (ADB) Quality Infrastructure Investment webinar series that featured Ian Hawkesworth, senior public sector specialist of the World Bank.
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The information presented in this kind of webinars is not meant to be shared externally, as a matter of convention. But I think the main ideas developed from such learning events should merit public discussion, aside from the fact that, particularly in this case, they are publicly accessible from the World Bank's online pages.
(Disclosure: Aside from writing for The Manila Times, I also work as national governance consultant for the Asian Development Bank. This allows me to eavesdrop, sort of, on some of the learning events that the ADB every now and then organizes.)
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 some factors or contexts that may vary, depending on what information is available, this one is apparently still evolving. I suppose the findings for country studies where the tool has been applied remain subject to further vetting, which explains they could not be cited yet.
He suggested that poor infrastructure governance can be a major impediment to good service provision. Highlights of the presentation include:
1. Infrastructure governance, not scarce financing, is the main bottleneck to making efficient, effective, and sustainable infrastructure service available to the public.
2. Poor infrastructure governance weakens a government's ability to: a) design strategic vision that has climate, environmental, social anchors; b) build a sound pipeline of viable and bankable projects; c) coordinate within and across government; d) decide on the appropriate private sector role, as well as role of government-owned or controlled corporations; e) procure the asset effectively, regulate service delivery; and f) ensure integrity, consultation, transparency, trust.
3. Bad infrastructure governance has a price tag.
Citing research, Hawkeswroth said that on average, countries waste about one third (anywhere from 30 up to 50 percent) of the money they spend on infrastructure due to inefficiencies.
The loss can surpass 50 percent in low-income countries. By comparison, efficiency losses in emerging economies average at 34 percent; losses are even lower in advanced economies at 15 percent.
In 2019, Deputy Ombudsman Cyril Ramos reported that based on 2017 United Nations Development Program estimates, the Philippines was losing about 20 percent of the government's legislated annual spending to corruption. For the two preceding years (2017 and 2018) he reckoned that government lost a total of P1.4 trillion to corruption.
The good news is efficiency losses and wasteful spending in infrastructure can be avoided. Over half of these losses, Hawkesworth asserts, could be made up through better infrastructure governance.
An ADB 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 legal, regulatory and institutional environment reforms and development
Prioritizing the creation of an enabling environment distinguishes a strategic approach to PPPs from the more transaction-natured version as this further ensures value for money. PPP legal and regulatory frameworks should be supported by institutional capacity across the agencies involved in the planning, analysis of environmental and social impacts, and fiscal and debt management.
2. National and sectoral infrastructure planning
Consideration of a project in the priority list for implementation should follow 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 starting new projects that government cannot accommodate within reasonable expectations for future budgets. A planned approach to PPP development is also fundamental in terms of ownership and alignment to a country's development priorities. It can save governments from opportunistic schemes often associated with unsolicited projects — those that may be supported by special interests. Likewise, having an institutionalized governance approach can promote value for money across the entire PPP cycle.
PPP is often seen as a free lunch by many politicians lured by a wrong perception that it bypasses fiscal constraints or by the "procure now and pay later" idea. In many jurisdictions, by keeping PPPs off-budget, inadequate fiscal accounting rules and practices can extend a government's long-term commitment in a project without the necessary legislative scrutiny or oversight (or transparency), frequently jeopardizing fiscal sustainability.
Moreover, PPP or not, a large portion of fiscal risks in infrastructure projects originate from weaknesses in the early stages of the project cycle, mainly during strategic planning and project appraisal. In the case of PPPs, consequences are exacerbated given the long-term nature of the additional fiscal commitments and risks locked-in into the concession contract.
3. Multi-year assessment of PPP fiscal risks
The treatment of fiscal risks requires policy makers to undertake a comprehensive multiyear assessment of funds available for infrastructure plans and commitments within the medium-term fiscal framework (and respective rolling sector ceilings). They also must understand, assess, and manage the proposed (explicit and implicit) fiscal risks in PPPs 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 ADB highlights the essential upstream work that is still required to improve risk management. Among the major causes for the loss of confidence in PPPs are the approaches taken in contracts, risk allocation and dispute resolution. More collaborative contractual arrangements, such as standing dispute resolution boards, and the suitability of their use for PPPs in the context of the development conditions that are likely to exist following the Covid-19 should be considered.
We may note that the Philippines still has lots of work to do insofar as addressing those challenges are concerned. We may have a robust legal framework for PPPs. But institutional capacity remains a problem. As the national government encourages the LGUs to tap PPP opportunities for infrastructure investments, there is a need to provide the latter with enough of the institutional support they need.