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Improving the Quality of Public Investment and Public-Private Partnerships

Improving the Quality of Public Investment and Public-Private Partnerships. Brasilia, April 25-27, 2005 The IDB Santa Catarina Road Program: Lessons and Recommendations Juan Benavides Inter-American Development Bank. Contents. Presentation objectives Background Fiscal situation

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Improving the Quality of Public Investment and Public-Private Partnerships

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  1. Improving the Quality of Public Investment and Public-Private Partnerships Brasilia, April 25-27, 2005 The IDB Santa Catarina Road Program:Lessons and Recommendations Juan Benavides Inter-American Development Bank

  2. Contents • Presentation objectives • Background • Fiscal situation • Santa Catarina´s transport system • Program design, implementation and performance • Lessons and remarks

  3. Presentation objectives • Discuss a case study of sub national public roads investment; point out general and specific factors leading to success; and program risks and vulnerabilities Issue: positive features explained mostly by local conditions and IDB Team approach to sector sustainability in Santa Catarina

  4. Presentation objectives • Present a general framework for transportation sector planning Issue: sector sustainability impossible to reach overnight; institutional progress obtained setting in motion a virtuous cycle in which (i) a good project is selected, then (ii) given a feasible financial structure and (iii) sector institutions develop incremental skills that are precisely needed for project’s success

  5. Presentation objectives • Highlight how sector planning and fiscal improvements self-reinforceeach other Issue: fiscal space credibility benefits from better sector planning; sector quality benefits from reduction of redistributive pressures leading to bad project choice

  6. Background

  7. Background

  8. Background Geography • Southern state. Small by Brazilian standards (95,443 km2; 1.12% of Brazil area), subtropical mild weather • Area comparable to Austria, Hungary, Ireland or Portugal; larger than Panama • 560 km of seashore

  9. Background Economy 1 • Population 2000: 5.36 million (3.1% of Brazil) • Contribution to national GDP 2000: 3.8% • GDP 2002: R$ 51.8 billion (US$ 17.7 billion) • GDP per capita 2002: R$ 9,272, equivalent to US$ 3,175

  10. Background Economy 2 • Diversified economy (poultry, 30% of Brazil fruits, grains, automotive parts, ceramics, electronics, pulp and paper, plastics, machinery) • GDP composition: • Agriculture 13.9% • Industry 46.6% • Services 39.5% • Exports: US$ 3 billion (5.1% of Brazil)

  11. Background Development issues • Strong European immigration since 19th century • Urbanization Index (2000): 78.7% • SC HDI (2000): 0.816, ~ Chile and Mexico; Brazil lowest is 0.636 for Maranhão (~ Guatemala) • Rural Gini 0.53; urban Gini 0.56 (national 0.65) • Dramatic gains in rural poverty reduction during 1990s (mostly driven by rapid income growth)

  12. Fiscal situation • After 1988, states are assigned ICMS (a v-a tax) and IPVA (a motor registration tax), shared with municipalities; and receive federal transfers (SPF) • Rigid spending, ~ constant revenues • 1989: first federal bailout to states • Santa Catarina bailout 1: debt equivalent to 2.87% of its 1989 GDP (6.2% of total bailout)

  13. Fiscal situation • 1993: second federal bailout (net debt increased) • Santa Catarina bailout 2: debt amounting to 3.57% of its 1993 GDP (1.61% of total bailout) • 1994: federalization of state bonds • 1995-1997: stabilization led to real expenditures after nominal wage increases in states • Payroll expenditures became almost 80% of net revenues in Southern states

  14. Fiscal situation • 1997 (before election year): third federal bailout (net bonded debt). 20% of restructured debt to be amortized before 1998 with privatization proceeds; 80% at longer matturities and subsidized rate (6%); and debt forgiveness • Santa Catarina bailout 3: debt amounting to 6.54% of its 1997 GDP (1.8% of total bailout)

  15. Fiscal situation • Disposable tax revenues in Santa Catarina: 6.6% of GDP (2000); 18.7% of them federal transfers • DR Santa Catarina: US$ 1,5 billion (2004), appr. • Small primary surplus at state and municipal levels in Brazil since 1999 (2nd phase Plano Real) • No strong redistributive pressures, small state size and improvements in road maintenance (+) • Large public wage expenditure (-)

  16. Santa Catarina´s transport system • Railway: 1,120 km (modest role) • Three sea ports: São Francisco do Sul (14.3 MMt), Itajaí (2.3 MMt) and Imbituba (1.2 MMt) • 21 public airports, 7 private airports • After 1988 states are fully responsible of state roads provision

  17. Santa Catarina´s transport system • 2,270 km federal highways (2,138 paved) in charge of DNER • 6,448 km state roads (3,708 paved) in charge of DER SC • 53,867 km municipal roads (890 km paved) • Paved state roads: 62% in optimal/good state; 15% in poor state (2000)

  18. Santa Catarina´s transport system • Unpaved state roads: 36% in optimal/good state; 24% in poor state (2000) • State road safety in charge of Policía Rodoviaria • No large cities. Traffic levels in most state roads are low or insufficient to think of pure concessions • Geographically balanced production. Ex: textiles and automotive parts in northern SC; ceramics in central SC; sea fishing

  19. Santa Catarina´s transport system • Executing Agency is Departamento de Estradas de Rodagem (DER) created in 1946; 22 offices; 1,439 empl. (2000) • DER is technically qualified. 1998: updated norms and procedures. German design standards adopted • Road quality improvements since 1995 (39% of DER´s budget for maintenance)

  20. Program design, implementation and performance • IDB-SC shared knowledge of problems and solutions • Approach: fund projects linked to institutional uplifts needed for current performance and sustainability • Formal sequence: program objectives and components, project selection, financial dimensioning. Half the story • Role of a sector framework

  21. Program design, implementation and performance • IDB´s track record with SC. Developed common understanding of priorities and Programs´ assembling after 3 phases: • 1980: 1st Feeder Roads Program, 824 km paved • 1985: 2nd Feeder Roads Program, 451 km paved, bridges construction, equipment for DER • 1992: State Road Program, 541 km paved (67% of total paved by DER between 1992-2000)

  22. Program design, implementation and performance • IV Phase Program (2001) designed incorporating lessons of IDB involvement in SC and Brazil: • Fiscal resources available • Technical capacity of Executing Agency • Programs vs. individual projects (need of a long-term sector framework) • Stakeholder participation (“ownership”) • Rehabilitation and improvement works • Total Program cost: US$300 MM • IDB loan 50%, SC 50%

  23. Program design, implementation and performance • Objectives: (i) reduce transport costs; (ii) improve access to municipal centers; (iii) improve safety • Four project selection criteria: • Economic return (HDM-4, the Highway Development and Management System software was applied) • Broad development issues (spatial distribution, generalized access, preservation of public assets) • Access to social services (health and education centers) • User demand (traffic level at least 300 vehicles/day)

  24. Program design, implementation and performance Components Studies US$7 MM Economic feasibility, environmental assessment and engineering design Rehabilitation and improvement US$231 MM Paving 500 high traffic km of unpaved roads US$130.6 MM Recovering 850 km of old paved roads US$85.8 MM Supervision US$11.8 MM Environmental compensation US$2.2 MM

  25. Program design, implementation and performance Components Institutional strengthening US$26 MM Strategic Road Transport Plan (linked to operational decisions in maintenance and safety, and coordination with federal programs) US$2 MM IT and software US$0.5 MM Road safety US$22 MM Dangerous cargo and hazard management Plan US$1 MM Other expenditures US$ 7 MM

  26. Program design, implementation and performance • Early environmental assessments and public consultations • Executing Agency is DER (in other places an external body is needed to set up) • No ex post evaluation of IV phase available • Proxy: IDB Report RE-298 (Oct 2004): ‘Evaluation of Brazil Country Program 1993-2003’

  27. Program design, implementation and performance • Brazil projects: low disbursement performance • Fiscal constraints and counterpart financing • Spending rigidity (vinculaçao) • More analytical work upstream needed (diagnosis and program design) • New infrastructure investment seems low

  28. Program design, implementation and performance • Physical completion of transportation projects is satisfactory • Road maintenance is insufficient at both the federal and state levels • Inefficiencies and misaligned incentives: well-maintained state roads deteriorate from excess traffic induced by poorly kept federal highways

  29. Lessons and remarks On this Program 1 • Satisfactory due to • Local conditions (socioeconomic and fiscal; compact size). Transportation demanded by productive sectors • Qualified technocracy mitigates political-cycle impacts • IDB team and shared knowledge: (i)long-term approach; (ii) clear overall priorities and project selection procedures; (iii) high-value added components: environmental, state road plan, IT, safety

  30. Lessons and remarks On this Program 2 • Caveats • The political economy of fiscal federalism • Indebtedness ratification by state legislature • PPP could be used in SC (DER SC overstaffed) • “Transplantation” of this experience partially replicable; adaptation depends on local factors and skill of public agencies

  31. Lessons and remarks On this Program 3 • Brazil far from being physically integrated. 60% commercial cargo, 90% passengers move through roads built during 60-70s. Low quality by international standards • Insufficient expenditure in infrastructure, slow growth and custo Brasil likely related. But quantification is lacking • Need of sophisticated economic analysis (transport in an open, multi-region economy)

  32. Lessons and remarks A framework for sector sustainability Basic conditionsShort-term measuresAspirations Project yields positive net social surplus Economic evaluation consistent with potential impacts; comparison of alternative solutions Sector plans linked to development policies; balanced maintenance vs. expansion decisions Financial structure conforms to local conditions Choice based on fiscal space, profitability and property rights defense efficacy Effective sector fiscal programming and enabling business climate Sector organization and governance evolving in the right direction Self-enforcing measures needed for project success; mitigation of current weaknesses Institutional achievements self-reinforce over time; maintenance secured

  33. Lessons and remarks • Economic models for transport projects • HDM-4 not bad for incremental analysis. Network externalities, scale economies, geographic reallocation of production; and real options games (the latter for airports and ports) need to be reflected • Financial structure selection • {Civil works, Concession, PPP}: choice depends on (i) project profitability; (ii) contract enforcement by courts; (iii) fiscal space credibility

  34. Lessons and remarks • Interplay between fiscal and sector policies • “White elephants” as inefficient redistribution. More tax revenues and better use of public funds reduce redistributive pressures (other things equal: less bad projects) • Serious sector planning and prioritization give fiscal space credibility • Structured coordination between sector planning and fiscal management is an evolutionary outcome, not necessarily a departure point

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