The transfer of public infrastructure and equipment in the decentralization process may 29-30, 2006 Mita Conference Hall Tokyo, Japan



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THE TRANSFER OF PUBLIC INFRASTRUCTURE AND EQUIPMENT IN THE DECENTRALIZATION PROCESS

  • May 29-30, 2006 Mita Conference Hall Tokyo, Japan

  • Bernard Bizet Professor ESSEC – Paris - France

  • bizet@essec.fr


  • 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



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



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 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



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



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



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



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



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.



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



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.



Precondition before transfer / decentralization of public infrastructures (1)

  • 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)



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.



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



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.



Legal framework, Transfer and Consequences



Preliminary information before decentralization or transfer



Rewards, decentralization and transfer authorities



Choice criteria for concession vs. PPP before and after decentralization or transfer



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



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



References

  • Bizet, Bernard. 2002. “Deconcentration vs. Decentralization of Administration: a Center–Periphery 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 l’eau: 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. “L’impact 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 l’État en utilisant le privé: le cas de l’Inde”. Paris: Sociétal.



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