Challenges and opportunities for the Brazilian PPP Programme GRILO, - PowerPoint PPT Presentation

Public-Private Partnerships: Opportunities and Challenges The Hong Kong Institute of Enginneers Challenges and opportunities for the Brazilian PPP Programme GRILO, Leonardo (1); HARDCASTLE, Cliff (2) (1) Ph.D. Candidate, Escola Politecnica da Universidade de Sao Paulo, currently at the School of the Built and Natural Environment (BNE) (2) Ph.D., Dean, School of the Built and Natural Environment (BNE) February 2005 Unive rsida d de Sã o Pa olo B R A S I L

Economical and institutional issues � Brazil is South America’s leading in terms of land area, population and economic activity � conditions for sustainable economic growth have been settled � to consolidate this favorable prospect it is necessary to: � increase foreign trade, reduce external vulnerability � raise investments levels � increase investments in infrastructure Unive rsida d de Sã o Pa olo B R A S I L

Economical and institutional issues � Labour government perspective (Mantega, 2004) � Investments in infrastructure avoid bottlenecks � Government would not have enough funding for all necessary investments � Private sector is an essential partner � PPPs are mechanisms to attract private sector participation in infrastructure � Specific law was recently approved Unive rsida d de Sã o Pa olo B R A S I L

Economical and institutional issues � Brazil was able to improve its public finance since 2002 � positive current account, primary surplus and trade balance contribute to recoup market confidence � government has continued fiscal efforts, and institutional and structural reforms in areas such as social security, tax system and bankruptcy law � however, some issues can compromise the Brazilian sustainable growth and the attraction of long term investments in the coming years Unive rsida d de Sã o Pa olo B R A S I L

Brazil’s competitiveness index (World Economic Forum, 2003) Macroeconomic environment Public institutions Population rank 5 Judicial independence 45 GDP per capital rank 47 Property rights 44 Interest rate 80 Irregular payments in public facilities 42 Inflation 56 Irregular payments in imports and exports 48 Government surplus 51 Informal sector 64 Government expenditure 48 Prevalence of illegal political donations 66 Investment rate 68 Microeconomic competitiveness Growth ranking 59 Cost of importing foreign equipment 75 National savings ranking 69 Quality of public schools 58 Country credit risk ranking 54 Efficiency of the tax system 77 Quality of business environment rank 36 Average tariff rate 70 Public institutions Number of procedures to start a business 67 Corruption subindex rank 46 Other indicators Organized crime 58 Disparity in healthcare quality 72 Irregular payments in tax collections 51 Business costs of crime and violence 63 Unive rsida d de Sã o Pa olo B R A S I L

Challenges for the Brazilian PPP Programme � the success of the Brazilian PPP Programme will require advances in the following areas: � ongoing fiscal effort: potential of using the PPP as a means of off-balance sheet financing as to affect the public sector debt without impacting the fiscal position; � legal framework: the government recently approved a law to regulate the adoption of PPP in Brazil (Law n. 11.079/2004), which was welcomed by the private sector; Unive rsida d de Sã o Pa olo B R A S I L

Challenges for the Brazilian PPP Programme � institutional reform: new design for regulatory bodies, incentives to cooperation between agencies and the private sector, measures to simplify environmental approvals, etc.; � regulation: establish a framework to insulate regulatory agencies from short-term political pressures, govern the role of the regulatory bodies and competition agencies; � political: reduce government’s discretion so as to insulate regulatory bodies from short-term pressures; Unive rsida d de Sã o Pa olo B R A S I L

Challenges for the Brazilian PPP Programme � governance, transparency and probity: the programme needs to have solid governance to enhance its credibility. More broadly, transparency and probity can reduce concerns over corruption; � capital market: developing capital markets may encourage the entry of domestic pension funds, the availability of long-term local currency bonds and hedging, and the adoption of alternative funding schemes; Unive rsida d de Sã o Pa olo B R A S I L

Challenges for the Brazilian PPP Programme � guarantees: raising funds for PPP projects requires guarantees and other forms of credit enhancement, which reinforces the importance of a proper legal framework; � efficient public expenditure: underlying the need to deliver infrastructure projects is society’s expectation of efficient public expenditure; � selection of projects: public resources are likely to be scarce in developing countries. This means that the public sector may need to be highly selective about which potentially desirable project can go ahead; Unive rsida d de Sã o Pa olo B R A S I L

Challenges for the Brazilian PPP Programme � value for money demonstration: the assessment of value for money in PPP projects differs considerably from the prevailing practice. PPPs can enhance the quality of public investment, but it is necessary to develop frameworks to select projects that can generate broad social return and, in this subset, those that could be developed through PPP; � procurement: the procurement of PPPs is usually complex and involves high transaction costs, which reinforce the need of standardized contracts and specialized bodies to support departments during the procurement of the projects; Unive rsida d de Sã o Pa olo B R A S I L

Challenges for the Brazilian PPP Programme � effective risk management: poor risk management can have effects stretching some way into the future. Accounting issues ( off-balance sheet treatment approach ) can inhibit an effective risk allocation and compromise VfM delivery in PPP projects. Unive rsida d de Sã o Pa olo B R A S I L

Final considerations � the fiscal adjustment has remarkably restricted investments in infrastructure in Brazil � Brazilian economy is recovering sensibly after the second half of 2003, but economic growth can be compromised by the lack of investments � PPPs represent an alternative to raise funds for public services and infrastructure � The Brazilian programme may clearly benefit from previous experiences, but its success requires some challenges to be overcome Unive rsida d de Sã o Pa olo B R A S I L

Final considerations � PPP may attract investments, induce the adoption of a whole life-cycle approach and innovations in technology, project management and funding structures � Adversely, the high procurement costs of PPPs may impact competition and restrict the involvement of SMEs � previous experience has shown that it PPP is not suitable for every type of project � Ideally, PPP should be elected when it could effectively deliver value for money, which may be demonstrated through comprehensive economical and social valuations Unive rsida d de Sã o Pa olo B R A S I L

Acknowledgement � CAPES (sponsor of the research project) � School of the Build and Natural Environment - BNE � Escola Politecnica da Universidade de Sao Paulo � Prof. Peter Edwards, Royal Melbourne Institute of Technology (RMIT) Unive rsida d de Sã o Pa olo B R A S I L