Investment Planning and Framework for PPPs Mozambique: Economic Challenges and Opportunities

1. Investment Planning and Framework for PPPs Mozambique: Economic Challenges and Opportunities Justin Tyson Fiscal Affairs Department, IMF

2. 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

3. Public Investment and PPPs Key issues for governments • 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?

4. Prioritizing Investments • Selecting good projects Common problems in budgeting for public investment • Hard to determine public resources for investment • Hard to select the most beneficial investment projects • Hard to ensure that investment projects have the expected impacts

5. Prioritizing Investments • 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

6. Prioritizing Investments • 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

7. Prioritizing Investments • 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)

8. 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.

9. Are PPPs a solution? Depends… • 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!

10. Are PPPs a solution? PPPs are… • 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

11. Managing Fiscal Risks What determines success for PPPs? • 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...

12. 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

13. 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)

14. 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

15. Managing Fiscal Risks • 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. Thank you!