Decentralization and Central Coordination

Mauricio Portugal RibeiroHead of the Brazilian Government PPP Unit

PPPI Days 2006

Washington, DC, June 6-8

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Horizontal Decentralization

Decentralization among agencies of a certain level of Government

Central PPP Unit • Public enterprise or PPP (PUK model)

• As part of the Ministry of Planning or of the Ministry of Finance

Decentralized approach – the Brazilian case• Development of projects, award of contracts, monitoring - Sector Line

Ministries

• Provide technical assistance to Government agencies, oversees the project development and procurement specially in the pilot projects - Ministry of Planning PPP Unit

• Evaluates the fiscal impact of each project and oversees the compliance with the fiscal responsibility act requirements – The Treasury

• The Federal Government PPP program is managed by CGP, a council in which the Ministers of Planning, Finance and the President Chief of Staff sit

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Vertical Decentralization

Decentralization among Central (or Federal), State and Local Government

• It is a legal and many times a Constitutional matter

• The law attribute to a certain Government entity the responsibility to provide public utilities in a given sector

• For an instance, in the case of Brazil:• Gas distribution - member States• Energy transmission and generation – Federal Government• Local transportation (bus) – Local Government

• The Government can provide it directly, creating a public enterprise or under PPP arrangements

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Main Challenges created by Decentralization

Uniform legal and institutional framework

Sector planning and project development

Capacity building

Project selection for PPP

Risk management

Financial strength of Regional/Municipal governments

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Creating Uniform Legal/Institutional Framework

Uniform legal/institutional frameworks

Creation of a PPP market requires knowledge and confidence in the legal and institutional framework to implement PPP

It also reduces transactions costs

Means to create uniform legal/institutional frameworks

Federal Government has by law the power to issue standards on PPP

Federal Government • make available model laws (acts, decrees etc), contracts or

provisions for State or Local Governments • provide assistance in the use of these models

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Sector planning and project development

The main PPP program difficulty for many developing countries

• Lack of capacity to adequately plan the investments in each sector and to develop projects

• As a result, lack of trustable information on the projects

Historical roots: during the privatization process of the 90’s

• No special strategy was adopted to maintain senior planning officers in the Government

• Lost many of the senior officers to privatized companies and to regulatory agencies

This problem affects all levels of Government: the question is what can the Federal Government do to help State/Local Governments that are facing this problem?

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Recruitment and training of the Government officials

Main concern is the recruitment and training of the Government officials

The Brazilian Federal Government obtained a donation from IADB (FUMIN) of U$ 2,5 million

• among other things to invest in training of the PPP staff of Federal, State and Local Government

• to provide assistance on the creation of State/Local legal and institutional framework to implement PPP

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Recruitment and training of the Government officials

Main concern is the recruitment and training of the Government officials

On the focus of the training• In some countries might be the case that Local/State

Governments• Have expertise to manage the procurement of public works

• Focus of the training in this case must be in:• creating culture of service output specification• developing financial and legal expertise

How to avoid losing the trained personnel

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Developing model projects in each sector

Reasons Access to international best practices and adaptation to the domestic context

Models can be reproduced in other projects

Reduces transaction costs and tends to enhance the quality of the project documents

Learning by doing aspect of PPP projects

Specially important if there is Underdevelopment of the domestic consultancy market which affects all levels of

Government

Poor consultancy procurement practices and rules (use of price as the main criterion)

Historic underinvestment by the public sector in project development

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Developing model projects in each sector

Attempts to solve it

Brazilian Federal Government has entered in agreements with multilateral organizations (IFC and CAF) to obtain technical assistance to develop projects

Brazilian Federal Government is considering the creation of a fund to be managed by a multilateral organization to fund project development of Federal, State and Local Governments

The challenge in the medium term is to Have a model project in each strategic sector that can be reproduced

Enhance the public sector consultancy procurement and monitoring expertise• Development of model terms of reference and contracts for consultancy works by the

Federal Government to States and Local Governments is an option

Have a real project pipeline, which allows the consultancy firms to invest in creating expertise and provide higher quality service

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Definition of the minimum scale that offsets the transaction costs involved in a PPP In Brazil

• To be procured as a PPP, a project have to involve minimum of investment (PV) of R$20 million (approximately U$8m)

• technical matter that have political unfoldments• Discussion on unconstitutionality of the minimum investment limit

Minimum scale maybe a condition for the Federal Government to support a Local/State PPP project

Scale can be obtained by bundle of projects (ex. the British Schools of the Future project)

Project Selection

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Fiscal responsibility requirements may limit the capacity of State/Local Government to enter in large PPP contracts

In Brazil, the PPP law limits annual expenses with PPP payments in 1% of the entity current net revenues

Financial support of the Federal Government to make certain projects viable (coordination issue)

Fiscal Responsibility

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Credit rating of State/Local Government may not be enough

Possibility of Federal Government to backstop State/Local Government

The concern with the incentives

Financial Strength