Front Matter

Front Matter

Ana Corbacho, Katja Funke, and Gerd Schwartz
Published Date:
July 2008
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    © International Monetary Fund 2008

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    Library of Congress Cataloging-in-Publication Data

    Public investment and public-private partnerships: addressing infrastructure challenges and managing fiscal risks / edited by Gerd Schwartz, Ana Corbacho, and Katja Funke.

    • p. cm.

    Includes bibliographical references and index.

    ISBN 0-230-20133-4 (alk. paper)

    1. Public investments. 2. Public-private sector cooperation. 3. Infrastructure (Economics) I. Schwartz, Gerd. II. Corbacho, Ana. III. Funke, Katja.

    HC79.P83P828 2008



    10 9 8 7 6 5 4 3 2

    17 16 15 14 13 12 11 10 09 08

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    List of Abbreviations


    Local government’s project delivery specialist


    Alföld Koncessziós Autópálya (Hungarian Motorway Concession)






    Balance of Trade


    Budapest Sports Arena


    Business Services Association


    Council of Europe Development Bank


    Center for Economic Policy Research


    Munich Society for the Promotion of Economic Research


    Cost-benefit analysis


    Commonwealth of Independent States


    Centre for International Research on Economic Tendency Surveys


    Committee of Monetary, Financial, and Balance of Payments Statistics


    Classification of the Function of Government


    Corruption Perceptions Index (Transparency International)


    Statement of Assurance






    Directorate-General for Economic and Financial Affairs


    Directorate-General for Regional Policy


    Debt sustainability analysis


    European Agricultural Fund for Rural Development


    European Agricultural Guidance and Guarantee Fund


    Extra-budgetary funds


    European Bank for Reconstruction and Development


    European Commission


    European Court of Auditors


    Economic and Financial Affairs Directorate-General


    Research and consulting institute headquartered in the Netherlands


    Excessive Deficit Procedure


    European Fisheries Fund


    European Free Trade Association


    European Investment Bank


    European Economic and Monetary Union


    Expenditure Policy Division (IMF)


    European Regional Development Fund


    European System of Accounts


    European Social Fund


    Swiss Federal Institute of Technology, Zurich


    European Union


    Fiscal Affairs Department (IMF)


    Cross-Tagus Suburban Rail Passenger Service


    Finance Instrument for Fisheries Guidance


    Generally accepted accounting principles


    Government Finance Statistics Manual


    International Accounting Standards Board


    International Bank for Reconstruction and Development (part of the World Bank)


    International Center for Economic Growth - European Center


    International Federation of Accountants


    Institute for Economic Research, Munich


    International Financial Reporting Interpretations Committee


    International Financial Reporting Standards


    International Labor Organization (United Nations)


    International Institute for Management Development


    International Monetary Fund


    Professional Organization of Supreme Audit Institutions


    International Public Sector Accounting Standards


    International Public Sector Accounting Standards Board


    Instrument for Structural Policies for Pre-Accession


    Joint Assistance to Support Projects in European Regions


    Joint European Support for Sustainable Investment in City Areas


    Swiss Economics Institute at ETH, Zurich


    Klynveld, Peat, Marwick, Goerdeler


    Local Improvement Finance Trust


    Legal Indicator Survey


    Middle East and North Africa


    Manual on Government Deficit and Debt


    Multilateral Investment Guarantee Agency (part of the World Bank)


    Magyar Nemzeti Bank (Hungarian Central Bank)


    Ministry of finance


    Medium-term budget framework


    Medium-term expenditure framework


    General Industrial Classification of Economic Activities


    National Audit Office (United Kingdom)


    New Partnership for Africa’s Development


    Non-Government Organizations


    National Health Service


    New member states


    National standards setters


    Organization for Economic Cooperation and Development


    Office of Government Commerce


    Official Journal of the European Union


    Old member states


    Private Finance Initiative


    Poland and Hungary Assistance for the Restructuring of the Economy


    Program for International Student Assessment


    Public Private Infrastructure Advisory Facility


    Public-private partnerships


    Public sector comparator




    Five pillars of Portuguese audit system


    Research and development


    Supreme Audit Institution


    State Audit Office (Hungary)


    Special Accession Programme for Agriculture and Rural Development


    South-Eastern Europe


    Stability and Growth Pact


    System of National Accounts

    SPPPP (SP4)

    Special purpose public-private partnership


    Special purpose vehicle


    Tribunal de Contas (Portuguese Court of Auditors)


    Trans European Networks


    United Nations


    United Nations Commission on International Trade Law


    United Nations Industrial Development Organization


    Vector Auto-Regression


    Value for money

    Notes on the Contributors

    Luis Alberto Andres, Economist, World Bank

    Luis A. Andres is Infrastructure Economist in the Sustainable Development Department for the Latin America and the Caribbean Region of the World Bank. His work at the World Bank involves both analytical and advisory services, as well as economic inputs, with a focus on infrastructure, mainly in the water and energy sectors, impact evaluation, and empirical microeconomics. He has worked with numerous Latin American governments on issues of infrastructure and impact evaluation. Before joining the World Bank, he was Chief of Advisors for the Secretary of Fiscal and Social Equity for the Government of Argentina, as well as holding other top positions in the Chief of Cabinet of Ministries and the Ministry of Economy. He holds a Ph.D. in Economics from the University of Chicago (USA).

    Gusztáv Báger, Director General, State Audit Office, Hungary

    Gusztáv Báger is Professor of Economics at the Pázmány Péter Catholic University (Hungary) and Director General of the Research and Development Institute of the State Audit Office. He was Director General in the Ministry of Finance responsible for the international financial institutions and, up to 1996, for the European Union and the OECD as well. He represented Hungary as Alternate Governor for the World Bank’s MIGA. He was a representative of the Hungarian Government in the National Committee of the SAPRI Project—Structural Adjustment Participatory Review Initiative, which is being conducted jointly with members of NGOs, the World Bank, and representatives of governments in ten countries to analyze the economic and social impact of the Structural Adjustment Loans of the World Bank. In this project, Central Europe was represented by Hungary. He has been National Coordinator of the European Union’s ACE Programme since 2000. He was also a member of the Ethical Council of the Republic. He is a founding member of the International Triffin Foundation (an independent organization of members and institutions of the academic, governmental, banking, and business communities all over the world) and, since 1996, has been President of the Robert Triffin-Szirák Foundation in Hungary.

    Daniel Bergvall, Project Manager, OECD

    Daniel Bergvall has a Masters degree in Economics from Linköping University (Sweden), and has held different posts at the Swedish Ministry of Finance, Ministry of Foreign Affairs, and National Statistical Office. He was with the Budgeting and Public Expenditures Division of the OECD during 2005–08, where he worked primarily on reviewing member and non-member countries’ budget processes, fiscal relations across levels of government, and public-private partnerships (PPPs). He has since returned to the Budget Department of the Swedish Ministry of Finance.

    Hans Christiansen, Senior Economist, OECD

    Hans Christiansen is a senior economist in the Corporate Affairs Division of the OECD Directorate on Financial and Enterprise Affairs. He joined the division after previous postings in the OECD Investment Division, the Financial Affairs Division and the Economics Directorate. Prior to joining the OECD, he worked for the Bank for International Settlements in Switzerland. Mr Christiansen’s current responsibilities include corporate governance and privatization. Until recently he conducted and oversaw OECD work in the areas of foreign direct investment and economic development, international-investor participation in infrastructure and served as the editor in charge of OECD International Investment Perspectives. A Danish national, he holds a postgraduate degree in Political Economics from the University of Copenhagen (Denmark).

    Ana Corbacho, Senior Economist, International Monetary Fund

    Ana Corbacho is a senior economist in the Western Hemisphere Department of the IMF. While this book was being prepared, she was an economist in the Fiscal Affairs Department. In her career at the IMF, she has worked primarily in emerging markets in Latin America and Eastern Europe, and has done research on various fiscal and macroeconomic issues, including education policy and growth, poverty and income distribution, fiscal institutions, and more recently public investment and PPPs. She holds a BA in economics from Universidad de San Andres in Buenos Aires (Argentina) and a Ph.D. in economics from Columbia University in the City of New York (USA). Prior to her graduate studies in the USA, she worked as an economist for the Central Bank of Argentina.

    Jakob de Haan, Professor, University of Groningen

    Jakob de Haan is Professor of Political Economy, University of Groningen (the Netherlands). He is also Scientific Director of SOM, the graduate school and research institute of the faculty of Economics and Business of the University of Groningen. He graduated from the University of Groningen, where he also obtained his Ph.D. He has published extensively on issues such as public debt, monetary policy, central bank independence, political and economic freedom, and European integration. He is a member of the editorial board of Public Choice, editor of the European Journal of Political Economy, and has been President of the European Public Choice Society. Mr de Haan has been Visiting Professor at the Freie Universität Berlin (2003/04), the Kiel Institute (2002), and the University of Munich (1999).

    Philippe de Rougemont, Economist, Eurostat

    Philippe de Rougemont studied Mathematics and Physics (Engineer preparation—Lycée du Parc, Lyon, France) and Political Sciences (IPS—Grenoble, France), and holds an M.Phil. in International Economics and Finance (Paris IX Dauphine, France). He worked for the Banque de France in the area of financial accounts before being seconded to the European Central Bank, then the IMF, and afterwards Eurostat, each time in the area of government finance statistics. At the IMF’s Statistics Department, he was moderator of the Electronic Discussion Group on pension accounting (SNA Review) and represented the government finance statistics interest in methodological working groups, including the Task Force on Harmonization of Public Sector Accounting Standards. Currently, he is an economist for the Eurostat National and European Accounts Directorate (Public Finance Unit), where he is in charge of horizontal and methodological EDP (Excessive Deficit Procedure) statistical surveillance. He also chairs or acts as secretary in various task forces (quarterly financial accounts for general government, military, SNA Review, IMF/Eurostat convergence, and MGDD Editorial Committee).

    Edward Farquharson, Project Director, Partnerships UK

    Edward Farquharson coordinates Partnerships UK’s international work and this has involved working with a number of governments, recently in Latin America, the EU and Asia in establishing the frameworks, institutions and processes for their PPP programs. He has a background of over 20 years in debt and private equity finance in infrastructure businesses in the UK, Asia, Latin America, and Africa. This included ten years with CDC Capital Partners (both in London and, before that, in southern Africa) where he led the infrastructure team responsible for developing an equity and debt portfolio of road, rail, airport, and port projects in emerging markets. Prior to CDC, Mr Farquharson was involved in developing limited-recourse project financings at Morgan Grenfell, including the Dartford Crossing project (one of the first UK PPPs). He was also based for a period in Brazil where he established Morgan Grenfell’s São Paulo-based business. Mr Farquharson has an MBA from Manchester Business School (UK) and is an alumnus of London Business School (UK) and INSEAD (France). He also has a degree in Philosophy, Politics and Economics from Oxford University (UK).

    Katja Funke, Economist, International Monetary Fund

    Katja Funke is an economist in the Fiscal Affairs Department of the IMF. In her career at the IMF, she has worked primarily in developing countries in Central Asia and the Caribbean. Prior to joining the IMF, she was an economist in the Fiscal Policies Division and the External Developments Division at the European Central Bank. Her main research focus is on fiscal policy and balance of payments issues in the European Economic and Monetary Union. She holds a Ph.D. (Dr. rer. pol.) and an MBA (Diplomkauffrau) from the WHU—Otto Beisheim School of Management (Germany).

    Hugh Goldsmith, PPP Coordinator, European Investment Bank

    Hugh Goldsmith graduated in Civil Engineering and obtained a Masters in Economics from Birkbeck College, London (UK). After a career in international consultancy and research, he joined the European Investment Bank in 1997. He is a specialist in project appraisal and PPPs and has contributed to the appraisal and monitoring of more than 50 such projects financed by the European Investment Bank in Western and Eastern Europe, the Mediterranean, Africa, Asia, and Latin America. He has given technical advice to the European Commission on a number of projects co-financed with EU regional development funds. His present role as PPP Coordinator within the Projects Directorate involves horizontal responsibilities for PPP policy and appraisal methodology. Since 2006, he has worked with JASPERS on several tasks related to PPP projects and programs in new EU member states and contributed to PPP-related work for IMF technical assistance missions.

    Jose Luis Guasch, Senior Advisor, World Bank

    A Spanish national, J. Luis Guasch is currently Senior Regional Advisor in the Latin America and Caribbean Region of the World Bank, responsible for competitiveness, regulation, infrastructure, innovation, and technological development. He has also been Professor of Economics at the University of California, San Diego (USA) since 1980. He holds a Ph.D. in Economics from Stanford University (USA). He has written extensively in leading economic journals. His most recent books include: (i) Managing the Regulatory Process: Design, Concepts, Issues and the Latin America and Caribbean Story; (ii) The Challenge of Designing and Implementing Effective Regulation: A Normative Approach and an Empirical Evaluation; (iii) Labor Markets: The Unfinished Reform in Latin America and Caribbean; (iv) Closing the Gap in Education and Technology in Latin America; and (v) Granting and Renegotiating Concessions: Doing it Right.

    Mike Hathorn, Chair, International Public Sector Accounting Standards Board

    Mike Hathorn became Chair of the International Public Sector Accounting Standards Board (IPSASB) in January 2007. He has been a member of the IPSASB since 1999 and served as deputy chairman from November 2003 to December 2006. He was nominated by the Institute of Chartered Accountants of Scotland. Mr Hathorn has more than 35 years of public and private sector experience and has served in numerous leadership capacities. He is a senior partner with Moore Stephens LLP, where he leads the United Kingdom Public Sector Team. He is Chair of the Moore Stephens Europe Technical Committee and the Moore Stephens International Technical Committee. From 2005 to 2006, Mr Hathorn served as President of the Institute of Chartered Accountants of Scotland. He has also served as a member of the UK Accounting Standards Board’s Public Sector and Not-for-Profit Committee since 1994. In addition, he is an expert advisor to the European Commission Accounting Standards Advisory Working Party and to the United Nations Accrual Accounting Steering Committee. Mr Hathorn qualified as Chartered Accountant with the Institute of Chartered Accountants of Scotland in 1972. He became a member of the Chartered Institute of Public Finance and Accountancy in 1993.

    Richard Hemming, Deputy Director, International Monetary Fund

    Richard Hemming, Deputy Director of the IMF’s Fiscal Affairs Department, is a British national who has worked at the IMF for more than 20 years. He has a BA, M.Sc., and Ph.D. from the Universities of Sussex and Stirling (UK). In addition to the Fiscal Affairs Department, he has worked in the Asia and Pacific Department and spent two years as the IMF’s senior resident representative in India. Mr Hemming has recently been involved in work on fiscal sustainability, fiscal vulnerability and financial crises, fiscal responsibility frameworks (including transparency and rules), fiscal accounting and reporting, public investment, and PPPs. Prior to joining the IMF, Mr Hemming was a university lecturer in the United Kingdom and Australia, was a researcher at the Institute for Fiscal Studies in London, and worked at the OECD in Paris. Mr Hemming is the author of Poverty and Incentives: The Economics of Social Security (Oxford University Press), edited The Determinants of National Saving (with Franco Modigliani, Macmillan), and has published articles on tax, social security, public expenditure, and other fiscal issues in the Review of Economic Studies, the Economic Journal, the Journal of Public Economics, and elsewhere.

    Timothy Irwin, Senior Economist, World Bank

    Timothy Irwin is in the Finance, Economics, and Urban Department of the World Bank. His work focuses on fiscal aspects of infrastructure provision, including PPPs. He has previously worked at the New Zealand Treasury and at LECG, an economics and finance consultancy. He has an MPA from Princeton University (USA).

    Anton Jevčák, Desk Officer, EU Commission

    Anton Jevčák received a Bachelor’s degree in Management at the Comenius University in Bratislava (Slovak Republic) in 1998 and was awarded a Master of Science in Economics from the University of Southern Denmark in 2001. Afterwards he worked as a trainee at the Economic Commission for Europe at the United Nations in Switzerland in 2001 and at the European Parliament in Luxembourg in 2002. Between June 2003 and August 2005, he was employed as a research assistant at the University of Dortmund (Germany). From September 2005, he has been working as a Slovak desk officer at the European Commission in Brussels (Belgium).

    Christophe Kamps, Senior Economist, European Central Bank

    Christophe Kamps is a senior economist in the Fiscal Policies Division of the European Central Bank, where he is currently monitoring fiscal policies in EU countries. His research focuses on the dynamic macroeconomic effects of fiscal policy. Prior to joining the European Central Bank, he was an economist at the Kiel Institute for the World Economy (Germany). He also worked as a consultant for the European Investment Bank and the IMF, where he was involved in projects on the macroeconomic effects of public capital in OECD countries. He graduated from the University of Paris—Dauphine (France) and the University of Cologne (Germany) and holds a Ph.D. in economics from the University of Kiel (Germany).

    Filip Keereman, Head of Unit, EU Commission

    Filip Keereman studied economics at the Catholic University of Leuven (Belgium), obtained an MBA at the University of Chicago (USA), and holds a Ph.D. from the European University Institute in Florence (Italy). He joined the research department of Kredietbank (now KBC) in 1984. As an official of the European Commission since 1986, he has dealt with the liberalization of capital movements, monetary integration, economic forecasts, and fiscal policy. Currently, he is the head of the unit responsible for the national economies of the Czech Republic, Poland, Romania, and the Slovak Republic in the Directorate-General for Economic and Financial Affairs. He has published on financial integration and forecast accuracy.

    Gábor P. Kiss, Principal Economist, Central Bank of Hungary

    Gábor P. Kiss graduated from Budapest University of Economics (Hungary), where he obtained his MA in 1986. In 1997, he completed a postgraduate course on the European Union at École Nationale d’Administration (France). Currently, he holds a position as Principal Economist in the Economics Department of the Central Bank of Hungary (MNB). He is the Managing Editor of the MNB Bulletin. Previously he held a number of positions at the MNB—Senior Economist in the Economics and Research Department (1995–2001), Senior Economist in the Statistical Department (1994–95), Senior Economist in the Monetary Policy Department (1989–94) and Economist in the Credit Policy Department (1986–89).

    Patricia Leahy, Director, National Audit Office, United Kingdom

    Patricia Leahy joined the National Audit Office in 1996 after a career in government, industry, and investment banking. She started her career as a faststream administrator in the UK Treasury and then worked for the Chairman of Glaxo. She joined Rothschilds to work on UK and overseas privatization and moved to Schroders where she mainly focused on privatization and capital markets activity. At the National Audit Office she has directed a range of privatization and PPP studies on subjects such as the Wider Markets Initiative, the LIFT initiative for improving primary care services and facilities, the London Underground PPP, Network Rail’s new structure, and the PPP for the National Air Traffic Service.

    Francisco Machado, Auditor, Court of Auditors, Portugal

    Francisco Machado is an economist with a postgraduate degree in corporate finance. After having been employed in the areas of finance and general management in the private sector, Mr Machado has worked in the Direcção-Geral do Tribunal de Contas (the General Directorate of the Portuguese Court of Accounts) since 1996, auditing major defense investment programs and logistics. Lately, he has been specializing in PPP audits, as well as in regulation.

    Rui Sousa Monteiro, Senior Economist, Parpública S.A.

    Rui S. Monteiro, Senior Economist at Parpública S.A. (Portugal)—the state firm that acts as PPP knowledge center and PPP advisor to the finance minister—is both a researcher and practitioner in PPPs. He is currently in charge of research on PPPs in the PPP Division of Parpública S.A., which was created in 2003. Since joining Parpública S.A. in 2000, he has been involved in the design of several major rail, tram, highway and health PPP contracts and public tenders. He served on several committees responsible for the appraisal of specific proposals for PPPs, and is currently serving on the Tender Boards for the PPP hospital contracts (including the provision of clinical services) being tendered. As an economist, he puts strong emphasis on the use of incentive contracts and competitive schemes. Prior to joining Parpública S.A. he lectured in Development Economics at Universidade Nova de Lisboa (Portugal) and did applied research on fiscal matters and on large public projects (urban renewal, public infrastructure).

    Marko Mršnik, Economist, EU Commission

    Marko Mršnik graduated from the University of Ljubljana (Slovenia) and received his MA from the College of Europe, where he subsequently worked as an academic assistant before joining the European Investment Bank as a consultant. When the work on this book was undertaken, Mr Mršnik was in the unit for Public Finances of the Euro Area and the EU unit of the Directorate-General of Economic and Financial Affairs (DG ECFIN) in the European Commission. He was involved in the analysis of economic and budgetary developments in the euro area and the EU member states, in particular within the EU’s framework for budgetary surveillance, especially in the recently acceded member states and in the area of the long-term sustainability of public finances, on which he has also published. He currently works at Standard & Poor’s Sovereign Rating Services.

    Eric Perée, Associate Director, European Investment Bank

    Eric Perée studied economics at the University of Liège (Belgium), the Catholic University of Louvain, Louvain-La-Neuve (Belgium), and the European University Institute, Florence (Italy). He joined the European Investment Bank in 1989 where he is currently Head of Economic and Financial Studies. His areas of expertise include European economic integration, financial markets and banking management, and risk management.

    Juan Ramallo Massanet, Member of the Court, European Court of Auditors

    Juan Ramallo Massanet has been a Member of the European Court of Auditors since March 2006. He is in charge of the audit of the EU’s Own Resources. Ramallo Massanet holds a Doctorate in Law from Complutense University, Madrid (Spain). Before he joined the European Court of Auditors, he was Professor of Financial and Tax Law at the Autonomous University of Madrid (Spain) from 1989 to 2005. He was a Member of the Spanish Parliament (1982–89), as well as Dean of the Faculty of Law (1978–80) and Vice-Rector (1980–82) of the University of the Balearic Islands (Spain).

    Ward Romp, Researcher, University of Amsterdam

    Ward Romp is a postdoctoral researcher at the Faculty of Economics and Business, University of Amsterdam (the Netherlands). He graduated in February 2007 from the University of Groningen, where his Ph.D. thesis was entitled “Essays on Dynamic Macroeconomics: The Role of Demographics and Public Capital.” His current research projects focus on the impact of aging and macroeconomic uncertainty on pension systems.

    Christoph B. Rosenberg, Senior Resident Representative, International Monetary Fund

    Christoph B. Rosenberg is the head of the IMF’s regional office for Central Europe and the Baltics (since February 2005), supporting the IMF’s surveillance in the region, particularly with respect to framing and executing plans for euro adoption. In his career at the IMF, he has worked on several emerging market and transition countries. Before joining the IMF, he was a lecturer at the University of Regensburg, Germany, and a freelance journalist for various German newspapers and business magazines. He holds a Ph.D. (Dr. rer. pol.) from the University of Regensburg (Germany), and an MA (Economics) from Vanderbilt University (USA; Fulbright Scholar).

    Gerd Schwartz, Assistant Director, International Monetary Fund

    Gerd Schwartz is Advisor to the IMF’s Deputy Managing Director in the Office of the Managing Director. He was Division Chief of the Expenditure Policy Division of the IMF’s Fiscal Affairs Department during 2004–07, where he managed the division’s policy development work and managed technical assistance provision to IMF member countries on public expenditure policy issues, including on public investment policies and fiscal aspects of PPPs. Before joining the IMF, he worked for the Inter-American Development Bank and the European Investment Bank. Mr Schwartz has published on various fiscal and monetary policy issues, particularly on public expenditure policies and reform in emerging market and transition economies. He has studied at the University of Cologne (Germany) and the Freie Universität Berlin (Germany), and holds MA and Ph.D. degrees in economics from the State University of New York at Albany (USA).

    Kálmán Seregélyes, Deputy Director General, Ministry of Finance of the Republic of Hungary

    After finishing his studies at the Budapest University of Economics and Public Administration (Hungary), Mr Seregélyes started to work in the Hungarian Ministry of Finance in the Directorate for Fiscal Policy and Financial Affairs. During the three and a half years spent there, he was responsible for monitoring and analyzing fiscal risks mainly related to contingent liabilities. At the same time, he was involved in the value for money and the statistical assessment of PPP projects. In January 2006, he moved within the ministry and now works as Deputy Director General in the Department for Sectoral Development and Finance. His responsibilities still include analyzing various aspects of PPPs, especially the financing side. He was involved in restructuring the motorway financing system, which was aimed at setting up a PPP structure. Mr Seregélyes is a member of the PPP Inter-Ministerial Committee, which is responsible for coordinating and controlling PPPs within the public administration.

    Jan-Egbert Sturm, Professor, Eidgenössische Technische Hochschule Zurich

    Jan-Egbert Sturm (Ph.D. University of Groningen, 1997) is Professor of Applied Macroeconomics as well as Director of the KOF Swiss Economic Institute at the Eidgenössische Technische Hochschule Zurich. He was a researcher at the University of Groningen (the Netherlands) until 2001, and Visiting Professor at the School of Business, Bond University, Gold Coast (Australia), 2000 and 2005. As Head of the Department for Economic Forecasting and Financial Markets at the Ifo Institute for Economic Research (Germany), he was also Professor of Economics at the University of Munich (Germany) at the Center for Economic Studies (CES), 2001–03. He held the Chair of Monetary Economics in Open Economies at the University of Konstanz (Germany), 2003–05. In his research, Mr Sturm relies heavily on empirical methods and statistics, concentrating on monetary economics, and macroeconomics as well as political economy, and with a special interest in fields that are closely related to practical and current problems. His applied studies have focused on, for example, economic growth and central bank policy. He has published several books and contributed articles to various anthologies and internationally renowned journals. Since 2001, he has been a member of the CESifo Research Network and since 2003 Research Professor at the Ifo Institute. In 2006, he was appointed member of the user advisory council of the Ifo Institute. In 2005, he was appointed to the European Economic Advisory Group of the CESifo. In early 2007, he became President of the Centre for International Research on Economic Tendency Surveys (CIRET).

    Eivind Tandberg, Regional Advisor South East Europe, International Monetary Fund

    Eivind Tandberg is the IMF’s regional Public Financial Management Advisor for South East Europe. He is located at the Center of Excellence of Finance in Ljubljana, and provides advice to the governments of Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Montenegro, Moldova, Romania, Serbia, Kosovo, and Slovenia. Prior to this assignment, Mr Tandberg was Deputy Division Chief in the Fiscal Affairs Department of the IMF, and worked on improving fiscal institutions and budget management in IMF member countries. In this position he also provided advice on fiscal reforms to a number of governments in different parts of the world, including Afghanistan, Armenia, Azerbaijan, Belarus, Brazil, Bulgaria, Chad, China, Jordan, Kazakhstan, Mali, Mexico, Mongolia, Russia, Ukraine, and Uzbekistan. From 1998 to 2000, Mr Tandberg was a resident budget advisor to the government of Bulgaria. From 1996 to 1998 he was an advisor and task team leader for the Prototype Carbon Fund in the World Bank. From 1986 to 1996 he held successive positions in the Norwegian Ministry of Finance, leaving the service as Deputy Director General of the Budget Department. Mr Tandberg is a graduate of the Norwegian School of Economics and Business Administration in Bergen (Norway).

    Teresa Ter-Minassian, Director, International Monetary Fund

    Mrs Ter-Minassian holds degrees in Law from the University of Rome (Italy) and in Economics from Harvard University (USA). From 1967 to 1978, she was on the staff of the Central Bank of Italy, part of the time on secondment to the IMF. In the IMF, she was for eight years Chief of the Southern European Division in the European Department (which covered Italy, Spain, and Portugal, among other countries). In this capacity, she negotiated the 1983 IMF Stand-By Agreement with Portugal. From 1988 to 1996, she held the position of Deputy Director of the Fiscal Affairs Department of the IMF. In 1990, she headed the IMF Task Force for the joint study of the Soviet economy, commissioned to the IMF, IBRD, OECD and European Bank for Reconstruction and Development by the G7. Between 1997 and 2000, as Deputy Director of the Western Hemisphere Department, she headed the negotiations of the IMF programs with Brazil and Argentina, and oversaw the department’s work on various other countries in the region. Mrs Ter-Minassian was appointed Director of the Fiscal Affairs Department effective January 2, 2001. Her areas of principal interest and expertise include macroeconomic analysis, fiscal policy, budget management and intergovernmental fiscal relations. She has published several papers in these areas and edited a book entitled Fiscal Federalism in Theory and Practice.

    Timo Välilä, Senior Economist, European Investment Bank

    Timo Välilä holds a Ph.D. degree in economics from the School of Economics and Commercial Law at Gothenburg University (Sweden). During 1996–2003 he worked for the IMF both in Washington, D.C., and in Moscow. He joined the Economic and Financial Studies Division of the European Investment Bank in 2003 and has since focused on topics related to public investment, industrial policy, and fiscal federalism.

    Alexei Zverev, Senior Counsel, European Bank for Reconstruction and Development

    Prior to joining the European Bank for Reconstruction and Development (EBRD), Mr Zverev engaged in private practice, first in Russia and then in London and Paris, with a major international law firm. Since 1996, he has been Counsel and then Senior Counsel in the Office of the General Counsel, EBRD, London. His responsibilities at the EBRD include advising on PPP/concessions legislative and regulatory advisory projects throughout Central and Eastern Europe and the former Soviet Union, and also supervising law reform in Russia. His recent undertakings include leadership of EBRD project teams for: PPP/concession law reform in Lithuania, Slovenia, Latvia, Hungary, Czech Republic, Kazakhstan, Ukraine; assessment of quality of concession laws throughout the 29 countries of the region; the development of the Russian Corporate Governance Code and the CIS Model Laws on Securities Market and on Investor Protection. He has also contributed to the drafting of the UNCITRAL Model Legislative Provisions on Privately Financed Infrastructure Projects, approved by the United Nations Commission in 2003, and is actively involved in the PPP legal working group of the United Nations Economic Commission for Europe and in the activities of the PPP Alliance.


    This book grew out of a seminar on “Strengthening Public Investment and Managing Fiscal Risks from Public-Private Partnerships” that took place in Budapest during March 7–8, 2007. The seminar was jointly organized and sponsored by the International Monetary Fund, the Hungarian Ministry of Finance, and the International Center for Economic Growth, European Center (ICEG-EC). The idea for this book resulted from several factors: a significantly oversubscribed event that forced us to decline a large number of applicants owing to capacity constraints, the high quality of the contributions by the various presenters, and, finally, the excellent discussions that took place.

    The seminar was made possible by a number of wonderful colleagues to whom we are very grateful. At the Hungarian Ministry of Finance, State Secretary Andrea Markó enthusiastically supported the seminar idea from the outset and, together with her team, particularly Kálmán Seregélyes and Orsolya Nagy, helped to bring the event to Budapest and arrange for the Hungarian Ministry of Finance to sponsor a seminar luncheon. At ICEG-EC, Pál Gáspár and his staff, in particular Tamás Borkó, Emese Frecot, and Mária Thuma, did an outstanding job in managing all the logistics for the event. We would also like to thank the Hungarian National Bank (MNB)—especially György Szapáry—for providing a first-class venue for the seminar, and Christoph Rosenberg for putting us in touch with ICEG-EC. A special thank you is also due to our colleagues at the European Investment Bank (EIB)—particularly Tom Barrett and Chris Hurst—who facilitated EIB sponsorship of the seminar dinner in the Club of the Hungarian Academy of Sciences.

    Finally, we would like to express our sincere gratitude to our colleagues at the IMF’s Fiscal Affairs Department (FAD) without whom neither the seminar nor this book would have been possible. In particular, we would like to thank Teresa Ter-Minassian, the Director of FAD, for supporting the idea for the Budapest seminar, and Richard Hemming for making available the necessary financial resources and providing us with good advice along the way. In producing this book, we relied extensively on our retired colleague David Driscoll for his fine editing skills and Erica Stephan for “a pair of fresh eyes” to do the final proofreading. Finally, several of our colleagues in the Expenditure Policy Division (EPD) contributed much of the necessary and often tedious legwork for this project, while other colleagues “kept our backs free” as needed, to allow us to focus on putting together the seminar and the book. From EPD, we would especially like to mention Jessica Kowalski, who helped in both organizing the seminar and formatting the manuscript for the book, and Victoria Gunnarsson and Qiang (Larry) Cui, who assisted us in tying up the many loose ends that appeared at different stages of the overall project. A big thank you to all our FAD colleagues in EPD and other divisions for supporting this project.

    Gerd Schwartz, Ana Corbacho, and Katja Funke

    Washington, D.C.

    December 2007


    Teresa Ter-Minassian

    The last several years have seen an increasing focus on the need to upgrade public investment, improve the delivery of public infrastructure services, and, in this context, explore new options for partnering with the private sector. While this focus has created important new business opportunities for the private sector, it has also given rise to new challenges for the public sector. Clearly, having sufficient “fiscal space” for key public expenditure programs that support economic growth and development, including public investment, is essential, even in a context of tight government budgets. However, public investment, like other spending, has to be carried out within sustainable fiscal and macroeconomic frameworks. It also has to be accompanied by efforts to strengthen the efficiency of such spending and to manage the significant fiscal risks that come from exploring new options for delivering infrastructure services, including via greater private sector participation. In the Fiscal Affairs Department of the International Monetary Fund, we have been focusing intensively on these issues over the last few years, not only in our research and development work, but also through a number of outreach activities in the context of regional seminars in different parts of the world.

    Against this background, the Fiscal Affairs Department, jointly with the Hungarian Ministry of Finance and the International Center for Economic Growth, European Center (ICEG-EC), and with some financial support from the European Investment Bank, hosted a two-day seminar on Strengthening Public Investment and Managing Fiscal Risks from Public-Private Partnerships (PPPs). The seminar took place during March 7–8, 2007 at the building of the Hungarian National Bank in Budapest, Hungary. It was attended by senior government officials from across Europe and representatives from international organizations and academia. What made this seminar different from other events that focus on investment and PPPs was that it looked at issues exclusively from a public sector perspective. As such, it provided an important forum to exchange and discuss ideas among public policymakers.

    The seminar had two main parts. The first part was devoted to analyzing and discussing public investment issues, including the macroeconomic and institutional setting for public investment, as well as the fiscal and budget frameworks in which public investment decisions are made. It also touched upon the role of support instruments from the European Union in this context. The second part focused on PPPs, including the role of PPPs in developing public infrastructure, institutional and legal requirements for capitalizing on private sector expertise and managing fiscal risks from PPPs, fiscal accounting and reporting issues, and the experiences with PPP audits from different countries.

    We were highly impressed by the quality of the background papers, and thought that both the papers and discussions that took place at the seminar were of great interest and importance to a wider audience—in both the public and private sectors—across Europe and the rest of the world. It is therefore with great pleasure that I introduce the seminar proceedings compiled in this volume, and recommend them as essential reading for anyone interested in the economic aspects of strengthening public investment and managing fiscal risks arising from PPPs.


    Gerd Schwartz, Ana Corbacho, and Katja Funke

    Upgrading public infrastructure and improving the delivery of public services are important challenges for all governments. Many countries—including the new member states of the European Union (EU) and several of the non-EU economies in Europe—have been facing particularly strong demands for increasing the quality of public infrastructure to improve competitiveness and accelerate economic development. At the same time, tight budget constraints have often forced governments to seek out new options for supplying public infrastructure, including by relying more on private sector resources. In this context, public-private partnerships (PPPs) are frequently being considered as an alternative to traditional public procurement to realize a wide range of infrastructure investments while achieving better value for money (VfM). However, PPPs generate significant fiscal, macroeconomic, and reputational risks for governments, including by creating large contingent liabilities that may have adverse implications for government budgets and for fiscal and macroeconomic sustainability.

    How then should governments address these infrastructure challenges and manage associated fiscal and macroeconomic risks? This book discusses the key issues that arise in this context. The first part of the book provides the overall setting for the discussion, elaborating on the relationship between public investment and economic growth; recent trends in public investment spending in Europe; and options for improving the budgeting process and enhancing the efficiency of investment spending. The second part focuses on fiscal risks from PPPs: what are these risks and why should governments worry about them; what are the salient features of an efficient institutional framework to manage these risks; and what have country experiences been? The third part analyzes specific aspects of the institutional environment needed to handle PPPs. In particular, it sets out good principles for private sector participation in infrastructure; elaborates on legal regimes and on potential financing arrangements; and assesses experiences from various European and Latin American economies. The fourth and final part of the book is devoted to some often overlooked elements that are needed for the successful implementation of PPPs, including best standards for PPP accounting, reporting, and auditing.

    The first part of the book focuses in particular on the important linkages that exist between achieving fiscal and macroeconomic sustainability and selecting and implementing priority public investment projects. Chapter 1 summarizes the recent empirical literature on the relationship between public capital and economic growth. It emphasizes several facts: (i) public capital generally has a significant (albeit not necessarily very large) growth-enhancing effect that differs across countries, regions, and sectors and is non-linear due to its network character; (ii) there is evidence of reverse causality running from higher growth to higher demand for infrastructure; (iii) the growth-enhancing impact of investment will crucially depend on whether it helps to alleviate real economic bottlenecks; and (iv) maintenance and efficient use of existing infrastructure may often be more important than building new infrastructure.

    How has all this played out in Europe? This is analyzed in Chapter 2, which discusses various recent trends and developments regarding public investment expenditure in EU member states, assesses the impact of EU regulations, and reviews the impact of PPPs on public investment expenditure. Accordingly, public investment has generally been trending downward in the old EU member states (bar the cohesion countries) and has been volatile in the new EU member states. The downward trend is attributable to fiscal adjustment necessitated by long periods of unsustainable fiscal policies rather than to the fiscal rules of the Stability and Growth Pact or the emergence of off-budget financing mechanisms such as PPPs. As public budgets are likely to remain the most important source of infrastructure finance in the future, achieving adequate levels of public investment will require safeguarding budgetary space for these undertakings, which in turn puts the spotlight on the need to achieve efficiency for all components of public spending.

    But, as already alluded to in Chapter 1, different types of public investment may have very different economic impacts. These are analyzed in more detail in Chapter 3, which looks at public investment patterns in the new EU member states, and particularly the challenges for public investment in the catching-up process. The chapter suggests that EU accession per se, with its stricter budgetary rules, did not have an adverse impact on public investment in the new member states. Also, public fixed capital stocks have already sufficiently caught up with levels in the old member states to enable profitable private investments, thereby easing somewhat the pressure on governments to invest. However, public investment is a dynamic process that changes over time. To sustain higher growth rates after the necessary initial build-up of physical infrastructure, the chapter argues that the new EU member states will eventually need to shift more investment into knowledge generation.

    Still, all public investments need to be managed well to have their desired economic impact. Chapter 4 provides guidance in this respect by setting out an overall framework for good management of public investment projects, including PPPs. As best practice is not always achievable, the chapter also describes a minimum set of features for a public investment framework, including a decisionmaking process that is based on a consolidated budget (even in the case of foreign-financed projects), a public investment agency (to develop guidelines for project design and cost-benefit analysis, review project proposals, and reject those that are inadequate), and full disclosure of future operating costs and their financing for all investment projects. Chapter 4 also emphasizes the need for close coordination of decisions regarding PPPs with the budget and full disclosure of PPP-related fiscal implications in budget documents.

    The second part of the book focuses on PPPs, their advantages in realizing public investment, the fiscal risks they entail, and policy options for managing these risks. Chapter 5 points out that, compared to traditional public procurement, cooperation with the private sector through PPPs can offer increased efficiency, better quality, and lower-cost services, that is, better VfM. However, PPPs come with significant fiscal risks and governments need to address these risks proactively. In this context, the chapter outlines strategies for strengthening investment planning systems, the legal and institutional framework, and the accounting and reporting rules that would help to manage fiscal risks from PPPs. While PPPs should not be used to circumvent budgetary and spending controls, the chapter finds that current Eurostat accounting rules for PPPs provide incentives for governments to do just that, thus creating a moral hazard problem. The chapter then goes on to propose options for limiting the moral hazard problem in practice.

    Chapter 6 is more optimistic in arguing that, whether or not governments report and disclose fiscal risks correctly, they usually are motivated to understand and control the expenditure commitments they undertake in PPPs. The chapter provides some concrete steps that would help governments to do so, including establishing a framework for comparing the cost of PPP commitments with the cost of publicly financed projects; incorporating expenditure commitments in fiscal monitoring, accounting and reporting; strengthening procedural controls on commitments by giving the minister of finance an oversight function within the PPP process; and imposing ex ante limits on PPP commitments.

    Drawing on the experience of Portugal, Chapter 7 provides concrete examples of fiscal risks from PPPs and how they have been addressed. The chapter shows that Portugal, which was one of the first EU economies to use PPPs, has enjoyed sizeable success in terms of rapid development of infrastructure but has also experienced significant budgetary problems as a result. This suggests that the potential fiscal risks of PPPs were significantly underestimated initially. Much of the subsequent development of the institutional framework, including the gateway process for PPPs, was in response to the materialization of such fiscal risks. The upshot of this chapter is that, by establishing a solid institutional framework from the very outset, countries that are just now entering into PPPs can prevent many of the initial problems that Portugal encountered.

    But what should a PPP framework look like? The third part of the book elaborates on specific aspects. Chapter 8 outlines the OECD principles for private sector participation in infrastructure. These principles are designed to assist governments seeking private sector involvement in infrastructure to attract investment and mobilize private sector resources; they can also be used as a self-assessment tool, particularly for governments with little or no experience with private sector involvement in public investment. A key underlying principle is that the decision to involve the private sector has to be guided by an assessment of the relative long-term costs and benefits and availability of finance, taking into account the pricing of risks transferred to the private operators and prudent fiscal treatment of risks remaining in the public domain. The principles also point out, however, that the success of private involvement in infrastructure depends on public acceptance and on the capacities at all levels of government to implement agreed projects. The chapter provides some further pointers on this and other issues.

    Every institutional framework also has important legal dimensions. Chapter 9 looks at existing legal regimes for concessions in transition economies that are members of the EBRD and compares them against best international practice. Since the legal environment for concessions is vital to the implementation of many types of PPPs, the chapter reviews specific core areas of the legal regime, such as the definitions and scope of the concessions law, the rules governing the selection of the concessionaire, the availability of security instruments and state support, and the rules on the settlement of disputes. Overall, the chapter suggests that the legal regimes for concessions in transition countries leave scope for improvement, and that the majority of countries need to make significant progress in this area if they wish to implement complex PPPs effectively. But even when laws are “on the books,” there may often be an implementation gap. In this context, the chapter provides the results of a legal indicator survey that assesses how well existing frameworks are applied in practice.

    Against the background of the large role of EU grants for infrastructure financing in the new EU member states, Chapter 10 assesses how EU grants could potentially be combined with PPPs, focusing in particular on the fiscal risks associated with EU grant co-financing. While there is a clear EU policy commitment to allow or even encourage PPP-EU grant blending, the chapter contends that it is still too early to say whether EU funding rules can be followed successfully while realizing the potential advantages that PPPs offer over traditional procurement methods.

    The United Kingdom (UK) has often been cited as an example of successful implementation of PPPs. However, a key question is whether and to what extent the UK experience could be replicated elsewhere. The review of the UK experience with managing its Private Finance Initiative (PFI), presented in Chapter 11, allows some tentative conclusions. Implementing a successful PPP program requires a dedicated and sophisticated public sector apparatus that is fully geared toward achieving VfM. Such an apparatus has been affordable in the UK due to the large scale of the PFI with 550 projects already in operation and 200 more in the pipeline until 2010. But it remains to be seen whether smaller countries with fewer potential projects would be able to put in place a full-scale apparatus geared toward achieving VfM or whether VfM itself could be obtained even in principle, given that much of the UK success derives from project standardization and bundling similar projects to achieve economies of scale.

    Chapter 12 provides some further insights by looking at actual country experiences with negotiating and renegotiating PPPs and concession contracts. Based on the experience of Latin American economies, the chapter highlights the detrimental effects for VfM of contract renegotiation and the importance of proper regulatory and contract design, as well as implementation. Importantly, the chapter warns that, if not controlled early on, contract renegotiation can easily become the norm rather than the exception. Renegotiation can easily reduce the potential overall efficiency gains and benefits of PPPs, and shift financial surplus appropriations to the PPP operator. The chapter suggests that governments should more readily reject opportunistic requests for renegotiation and allow some concessions to fail. Still, the chapter acknowledges that governments have had a hard time adopting such a strategy as there are political costs to concession failures. All this goes again to emphasize the importance of having solid institutional, legal, and regulatory frameworks in place from the very outset. This also helps governments avoid being pressured into agreeing to suboptimal economic outcomes.

    The fourth and last part of the book focuses on the accounting, reporting, and auditing of PPPs. Currently, internationally accepted accounting and reporting standards for PPPs do not exist and only a few countries follow adequate auditing procedures. Such standards and procedures would, however, help to promote transparency, including on the fiscal consequences of PPPs, and enable governments to manage better the fiscal risks.

    Chapter 13 argues that, to reflect economic rather than legal ownership of PPP assets, a new approach for PPP accounting and reporting that is more sensitive to the degree of risk sharing is needed. Since accounting bodies may not stipulate such an approach, transparency could be enhanced by supplementary disclosure of information on PPPs and related guarantees, and by inclusion of PPP-related obligations in debt sustainability assessments. Chapter 14 agrees that more work is needed on developing International Public Sector Accounting Standards (IPSAS) for PPPs, and reflects upon the current state of the debate in the accounting profession. It highlights the key themes of a consultation paper that explores the relevant aspects of service concession arrangements for accounting purposes. Chapter 15 recognizes that the PPP area is quickly emerging as the most pressing challenge to the statistical reporting of fiscal data, to such an extent that it may put the comparability of fiscal statistics across EU member states materially at risk.

    While the Eurostat criteria for classifying PPP assets as belonging either to the government or to the private sector were initially thought to be rather strict, they have not prevented that a large number of PPPs were moved off the government balance sheet, even when significant risks remained with the government. This may result in a situation where assets are no longer reported on either private or public sector balance sheets. These various chapters concur that the final word on accounting for PPPs is still outstanding. In the interim, countries would do well to follow existing best practice examples in this area, aiming to enhance transparency and the quality of policy analysis of the fiscal implications of PPPs.

    The last three chapters of the book look at auditing experiences in three EU economies: the UK, Portugal, and Hungary. The Portuguese experience (Chapter 17) may be particularly interesting for many other economies of similar size, given Portugal’s fairly rich history with PPPs. Portuguese audit reports show that most PPPs resulted in the private partners claiming additional funds from the state due to contractual changes imposed by the state, execution delays that the private partners attributed to the state, and inappropriate demand forecasts. But even the UK experience (Chapter 16) suggests that avoidable problems like insufficient project preparation and poor process management have not been uncommon. In addition, the UK experience shows that PPPs come with high fixed costs that are often underestimated. For example, the cost of professional (consulting) advice for projects was on average 75 percent higher than budgeted for by the public partner at the outset of the project. The Hungarian audit experience (Chapter 18) is also relevant in this context. Specifically, the Hungarian audit reports highlight inadequate risk sharing between public and private partners, inappropriate profit guarantees provided to the private sector, and the absence of adequate termination clauses in PPP contracts. The audit of the M5 motorway, for example, showed that both the operating risks and the responsibility for ensuring profit generation were fully borne by the state. Much of this may be attributed to inexperience of the public partner in handling the higher degree of complexity entailed by PPP contracts.

    In summing up, there are some important elements of consensus that run throughout this book. The following seem particularly important. First, considerable public investment is needed in all EU member states, but particularly in the new member states. Second, the impact of public investment on economic growth depends crucially on the quantity and quality of the initial capital stock, the quality of the investment project itself, and on overall macroeconomic and fiscal sustainability considerations. Third, PPPs can be an alternative to traditional public procurement if they offer VfM. PPPs should not, however, be used to circumvent budgetary spending limits by pushing investment off budget. Also, PPPs do not alleviate the government’s intertemporal budget constraint, except to the extent that they facilitate the mobilization of resources through user fees and promote efficiency gains. The latter have to be large enough to compensate for the typically higher borrowing costs of private sector partners and the higher transaction costs involved in complex PPP contracts. Fourth, appropriate risk sharing is crucial for promoting efficiency gains and ensuring VfM. Governments should resist the temptation to tailor risk-sharing agreements so as to shift PPPs off balance sheet, as this could lead to inappropriate contract design, increased renegotiation incidence, and reduced VfM.

    Given the complexity of PPPs, there is a need for a strong enabling legal and institutional environment, which includes several important elements. There has to be adequate and multidisciplinary capacity in the public sector to assess prospective PPP projects, manage the tendering process, and accompany the implementation phase. Also, there has to be a dedicated institutional structure in place to deal with PPPs, including an appropriate gateway process that is managed by the ministry of finance and gives the finance minister veto power at different stages of the PPP cycle. Finally, all future fiscal costs and risks have to be assessed. Also, they have to be transparently disclosed in budget documentation and fully taken into consideration in fiscal and debt sustainability assessments.

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