Capital Budgeting for Resilient Cities Financing Public Investment Sustainably Kai Kaiser & Min Zhao, Senior Economists, Global Governance Practice City Resilience Program Comprehensive Financial Solutions for City Resilience Conference Bangkok, November 7, 2017
Public Investment Plans Infrastrutcure Budgeting/Financing/ Execution 2
Leveraging medium term capital budgeting to yield a better infrastructure program? Commercial Debt Concessional Debt (Bonds, Banks) Pay as You Go Concessions/PPPs Land Value Capture 3
4 Why & what of capital budgeting 2 Reconciling Top-down …. Bottom-up Benchmarking & Tools Take-aways 6 4
Successful capital budgeting is a balance act requiring short, medium and long term perspectives 5 1 2 3 4 5 6
Capital Budgeting Important subset of public investment management (PIM), linking public investment decision with budgeting, financing, procurement Definition also encompasses all projects were government agencies play a role in the realization of capital projects (e.g., through PPPs or SOEs), either as directly sponsoring or in some way sanctioning authorities Communicates city-level financing strategy to politicians, public and financiers 6 1 2 3 4 5 6
Motivations • Create and sustain priority public infrastructure assets for growth and resilience in an efficient and fiscally sustainable manner • Leverage all available financing opportunities available to a city for fulfilling a coherent program of project needs • Adequately monitor & manage fiscal risks at the city level • Public scrutiny, discipline, and credibility associated with infrastructure spending 7 1 2 3 4 5 6
Examples Ireland China USA Your Cities! Colombia 8 1 2 3 4 5 6
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Agenda 09:00-9:45 Overview / Top-Down Framework 09:45-10:30 Top-Down Perspective Group Exercise 10:30-10:45 Feedback 10:45-11:00 Tea! 11:00-11:15 Bottom-up Framework 11:15-11:45 Bottom-up Perspective Group Exercise 11:45-12:00 Feedback 12:00-12:30 Tools & Takeaways 10
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1. Setting the envelop - Fiscally sound - In line with fiscal rules Top Down 2. Setting the objectives & aligning with development strategy - prioritization - allocative efficiency 3. Sectoral composition of capital investment 4. Exploring innovative financing for infrastructure investment - PPP Bottom-up - Special Purpose Vehicles/Joint Ventures - Government Business Enterprises - Land Value Capture Financing 12 1 2 3 4 5 6
Top-down Bottom-up (Financing) (Priority Projects) 13 1 2 3 4 5 6
1. Setting the envelop - Fiscally sound - In line with fiscal rules Top Down 2. Setting the objectives & aligning with development strategy - prioritization - allocative efficiency 3. Sectoral composition of capital investment 4. Exploring innovative financing for infrastructure investment - PPP Bottom-up - Special Purpose Vehicles/Joint Ventures - Government Business Enterprises - Land Value Capture Financing 14 1 2 3 4 5 6
TOP-Down Exercise MT MTFF-DS DSA: An An Anchor or for Cap Capital Budget eting ng • Responsible capital budgeting requires a forward-looking perspective: Can I afford to finance these capital programs in short and medium-to-long term? Can I repay my debt eventually? Will my debt ratio stabilize at a reasonable level? Will future interest payments crowd out my ability to maintain essential public services? Will I be able to cover my financing needs tomorrow? How sensitive are these conclusions to stronger or weaker than expected macroeconomic or fiscal results? Can these capital projects open up more opportunity for the cities, and improving my fiscal perspective? MTFF-DSA: what capital budgeting strategy is consistent with the city’s development strategy and long-term debt sustainability? 15 1 2 3 4 5 6
What is the MTFF - DSA? 2016 2017 2018 … 2020 … 2025 Macroeconomic forecast Primary fiscal balance Change in net financial assets Interest payments Debt stock Financing need 16 1 2 3 4 5 6
Information: Public Sector Balance Sheet? 17 1 2 3 4 5 6
China Sub-National Capital Budgeting • Very high rates of investment by cities and provinces • High reliance on ”one off” land related revenues, special purpose vehicles and debt financing • Under State Budget Law, national government has tightened avenues for off-budget financing due to fiscal risk concerns • World Bank was asked to support Hunan Province and Dadukuo City 18 1 2 3 4 5 6
Un Under a a WB WB D Develop lopment P Pol olic icy y Operatio ion ( (DPO) p prog ogram am, H Hunan an P Provin ince constructed ed a a Deb ebt S Sustainability ( (DSA) for only p province-level el f finances es t that consolidates the f e finances o of b f budgets ts, L LGFVs, a and P PPPs, linking t this t to an integrated cap apit ital f l fin inancin ing plan lan an and M MTFF. • Hunan Provinces passes almost the entire sum of central transfers down to the local level • It also has significant public investment programs, particularly in roads and rail. • Even under optimistic assumptions on future toll revenues, the DSA revealed former plans for public investment to be unsustainable. Hunan Province therefore made a decision to freeze province-level public • investment at its 2015 level in the MTFF. Hunan Province significantly cut investment in high way, but increased investment in • truck roads and rural roads, with particular focus on improving road networking. • Capital budgeting is now extended from transport in 2015 to 8 sectors in 2017. 19 1 2 3 4 5 6
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Daduko kou Debt bt at e end-20 2015: 15: A A starti ting point for the DS DSA Direct Government Debt: 10.5bn Dasheng liabilities Jianqiao liabilities Comprehensive debt: 23.7bn [after consolidation] 21 1 2 3 4 5 6
Daduko kou District a also so a ado dopted a a medi edium t ter erm s strateg egy f for pub public investment t that i is consis istent w with f fiscal l sustain inabilit ility in t the DSA u under r basel eline ne projec ections ns and a nd a stres ess t test s scena nario. Public investment (billion RMB) 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2014 2015 2016 2017 2018 22 1 2 3 4 5 6
PIM/CB are subsystems; order matters 23 1 2 3 4 5 6
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Fiscal Space Subject to Scenarios Y2 Y1 Y3 25 1 2 3 4 5 6
Own Source Capital Options? Transfers/ LVC - TIF Grants Recurrent Revenues LVC – Concession DevRights al (Project) Concessional Concession LVC - al Recovery (Program) Land Value Capture Capital Program Budget Financing Commercia LVC - l Bank Disposition Lending LVC - Domestic Inkind PPP’s & Bonds Loans & Concessions Bonds PPPs Int Bonds Concession s 1 2 3 4 5 6
PIM is a system: all functions matter Source: The Power of Public Investment Management: Transforming Resources into Assets for Growth (World Bank, 2014). Emphasis is on functionality not form – countries need the eight functions for PIM to be effective with evaluation used to improve functionality over time. 27 1 2 3 4 5 6
Context Matters: Lack of Effective PIM Has Profound Consequences Common Problems Consequences WEAK / INEQUITABLE DEVELOPMENT • Development plans disconnected from actual • Few valuable public assets are created budgets/projects • Citizens lack key public facilities • White elephant projects with little socio- • Stock of decaying infrastructure economic value • Power and water shortages, road and railway accidents, • Lack of pipeline of high-quality projects crowded hospitals, deteriorating HDI • PPP projects that create risk for govt. • “Investment” fails to spark growth and improved social welfare • Projects awarded to unqualified firms • Countercyclical expansion of investments is • Opaque resource-for-infrastructure deals difficult without due safeguards for ensuring good value • And if investment is financed: • Corruption/delays in procurement • by debt – creates a liability • Delays in land/site acquisition • by taxes – burdens citizens and private sector • by finite natural resource extraction – reduces net • Cost escalation, time-overruns wealth • Macroeconomic instability • Contract disputes/ abandoned projects • Political instability Poor quality of completed projects • • Fiscal pressures and risk • Poor operation and maintenance of completed assets • Institutional inertia/ No systemic response to address problems 28 1 2 3 4 5 6
Reconciling Top-Down & Bottom-up: Gatekeeping for Project Pipeline Planning/PIP Pipeline of Fiscal (Medium Term, Sponsored/Sanctioned Annual) Proposals Multi-Year Plans/Proposals Annual Budgeting 29 1 2 3 4 5 6
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