Investment Planning and Framework for PPPs

Mozambique: Economic Challenges and Opportunities

Justin TysonFiscal Affairs Department, IMF

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Outline

• Public Investment and PPPs

• Prioritizing Investments

– Good projects

• Are PPPs the solution?

• Managing Fiscal Risks– Good laws– Good institutions– Good accounting and reporting

• Challenges for Mozambique

• Concluding Remarks

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Public Investment and PPPs

• How to handle calls for more spending on infrastructure while safeguarding fiscal sustainability and the budget process? Macroeconomic issue

• How to ensure that top priority needs for infrastructure are addressed first? Public investment planning

• To what extent to explore new financing mechanisms for infrastructure (e.g., PPPs, revenue earmarking)?

• How to manage fiscal risks from PPPs?

Key issues for governments

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Prioritizing Investments

• Selecting good projects Common problems in budgeting for public investment

1.Hard to determine public resources for investment

2.Hard to select the most beneficial investment projects

3.Hard to ensure that investment projects have the expected impacts

Prioritizing Investments

1.Determining public resources for investment

• Macro-consistent investment strategy• Consolidated investment plans and budgets (include

external finance, extra-budgetary funds, SOEs)

• Focus on medium and long-term implications of annual budgets

• Establish realistic budget envelope for public investment

• Clarity on which projects should be put forward as candidates for government financing

– Robust strategy and vision on role of government

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Prioritizing Investments

2. Selecting the most beneficial investment projects• Match timing of investment planning and annual budget

process– Often, decisions taken based on preliminary data and

assessment

• Program level assessment – Early assessment, evidence, experience

– Linked to macro consistent strategy (for all levels of government)

– Prioritization across sectors and financing (public, external, PPP)

• Project level assessment– Realistic schedules for assessment and established

procedures

– Develop analytical tools to select/prioritize projects

– Clear and transparent decision criteria for project selection

• In short, a value-for-money approach

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Prioritizing Investments

3. Ensuring that investment projects have the expected impacts• Cost and benefit estimates should be realistic

– Frequent cost changes undermine the expected net value of the project and leading to inefficient selection and implementation

• Budgeting of operation and maintenance costs for existing capital– Key for ability of these investments to produce expected

results

• Certainty for capital budgets during consolidation

• Systematic ex-post evaluation of projects (including externally financed)

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Prioritizing Investments

• Good projects Recommendations– Have a clear, macro-consistent, investment strategy

and budget– Strengthen investment planning and project evaluation

(PPPs can help)– “Bottom-up” sectoral planning should be accompanied

by a oversight agency or ministry that screens and prioritizes

– In many (low-income) countries that have significant external funds available, it is important to strengthen domestic skills

– Establish mechanisms to monitor projects under execution and evaluate them ex-post

– Don’t forget maintenance and rehabilitation of existing infrastructure.

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Are PPPs a solution?

• Increase efficiency? Benefit from private sector expertise; improve timely delivery of quality services; can contribute to better feasibility studies

• Infrastructure “for free”? Tempting, particularly for cash strapped governments trying to meet fiscal targets

• Do they really? Fiscal risks are potentially large:– contingent liabilities for the government– threaten integrity of budget and planning process– complicate maintaining fiscal discipline and good

governance

Why worry? Mistakes can be costly!

Depends…

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• Arrangements where private sector participates in supply of infrastructure assets and services that traditionally fall to government

• Following characteristics usually present:

– Private execution and financing of public investment

– An emphasis on investment and service provision by private sector

– Some degree of risk sharing

– Payment for delivery of agreed quantity and quality of services

Are PPPs a solution?

PPPs are…

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Managing Fiscal Risks

• Effective mitigation of fiscal risk + efficiency gains• Governments can control these factors:

– Good projects (hopefully, from good investment planning)– Good laws– Good institutions– Good fiscal accounting and reporting

• Keep in mind reputation risks: need to get it right from the outset start small and build a reputation...

What determines success for PPPs?

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Managing Fiscal Risks

Good projects based on evidence and experience• major capital investment program

• structure of the service is appropriate

• nature of the assets and services can be costed on long-term basis

• value of the project is sufficiently large to ensure procurement costs are not disproportionate;

• technology and other aspects of the sector are stable

• planning horizons are long-term with confidence that assets and services provided will be used in future

• private sector has the expertise to deliver

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Managing Fiscal Risks

• Good laws Legal and regulatory framework

• Introduce a clear and consistent PPP law and/or harmonize existing laws to provide a consistent legal framework

• Provide incentive-neutral regulations (i.e., decision on procurement route should be made on basis of economic considerations only)

• Integrate PPP proposals and guarantees with budget cycle

• Clarify roles and responsibilities (e.g., across different ministries and levels of government)

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Managing Fiscal Risks

• Good institutions Management and oversight framework • Establish due-diligence/approval process with strong role

of Finance Ministry

• Useful example: explicit “Gateway” processes in South Africa; established procedures in UK and Australia

• Make sure PPPs are done for the right reasons check VfM and fiscal affordability

• Clear separation of PPP promotion and PPP oversight functions

• Strengthen the government’s negotiating position

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• Good fiscal accounting & reporting Achieve full and transparent disclosure of all fiscal risks from PPPs

• Issues to be addressed:• Limit public sector contingent liabilities from

investments that are not on the public sector’s books• Prevent creating budgetary rigidities from pre-

committing spending for hidden liabilities• Create right incentives for risk sharing and for designing

PPPs to achieve VfM• Develop robust fiscal reporting standards• Take PPPs into account in medium-term fiscal scenarios

Managing Fiscal Risks

Challenges for Mozambique

• Investment growing strongly, including PPPs• Mozambique experience with PPPs is mixed, but

not out of line with international experience• Despite prudent strategy to reduce fiscal risks

from PPPs, some challenges remain ahead• Further reforms are needed for:

– Strengthening the institutional and legal framework– Improving the accounting and reporting framework

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Challenges for Mozambique

• Strengthening the institutional framework– Investment planning and assessment is being

enhanced but remains underdeveloped• PPP projects need to fit within the overall public

investment strategy as well as the medium-term macro-fiscal framework

• Role of the MoF in the PPPs oversight process should be enhanced to ensure that all budgetary implications are considered in the decision-making process

– Particularly important for Mozambique, given the participation of public enterprises and autonomous agencies in the PPP process

• Capacity for assessing, negotiating, and monitoring PPP to be strengthened

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Challenges for Mozambique

• Strengthening the legal framework– Mozambique‘s legal framework has been

modernized since early 1990s• Laws provide for fair and transparent procurement and

establish financial management procedures• But, no general statement of government objectives

for PPPs or assignments of roles and responsibilities• Given the prominent role of public enterprises in the

PPP process, referring laws and regulations should be reviewed, clarified, and harmonized with the general legal framework

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Challenges for Mozambique

• Improving accounting and reporting– Mozambique not alone in having a weak

accounting and reporting framework for PPPs• A generally accepted international accounting standard

in this area is still under discussion• However, Mozambique could improve the government’s

overview of fiscal risks by:– Extending coverage of budget and financial reports to

include strategic public enterprises that pose risks for government

– Including in budget documents the stock of active guarantees, past calls, total debt assumed, and reserves established

– Reinforcing reporting and audit requirements for public enterprises 19

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Concluding Remarks

• PPPs can be more efficient than traditional public procurement...but also entail fiscal risks

• These risks are not “theoretical.” Some countries have paid dearly for them

• Governments can take action to manage fiscal risks

• Bottom line: Trouble is likely but not inevitable. Keep in mind reputation risks

• Mozambique followed a prudent strategy to limit fiscal risks from PPPs, but further efforts are warranted

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Thank you!