improving the quality of public investment and public-private partnerships brasilia, april 25-27,...

Improving the Quality of Public Investment and Public-Private Partnerships

Brasilia, April 25-27, 2005

The IDB Santa Catarina Road Program:The IDB Santa Catarina Road Program:Lessons and RecommendationsLessons and Recommendations

Juan BenavidesInter-American Development Bank

Contents

• Presentation objectives• Background• Fiscal situation• Santa Catarina´s transport system • Program design, implementation and performance• Lessons and remarks

Presentation objectives

1. Discuss a case study of sub national public roads investment; point out general and specific factors leading to success; and program risks and vulnerabilities

Issue: positive features explained mostly by local conditions and IDB Team approach to sector

sustainability in Santa Catarina


2. Present a general framework for transportation sector planning

Issue: sector sustainability impossible to reach overnight; institutional progress obtained setting in motion a virtuous cycle in which (i) a good project is selected, then (ii) given a feasible financial structure and (iii) sector institutions develop incremental skills that are precisely needed for project’s success


3. Highlight how sector planning and fiscal improvements self-reinforce each other

Issue: fiscal space credibility benefits from better sector planning; sector quality benefits from reduction of redistributive pressures leading to bad project choice

Background

Background

GeographyGeography • Southern state. Small by Brazilian standards

(95,443 km2; 1.12% of Brazil area), subtropical mild weather

• Area comparable to Austria, Hungary, Ireland or Portugal; larger than Panama

• 560 km of seashore

Background

Economy 1 Economy 1 • Population 2000: 5.36 million (3.1% of Brazil)• Contribution to national GDP 2000: 3.8%• GDP 2002: R$ 51.8 billion (US$ 17.7 billion)• GDP per capita 2002: R$ 9,272, equivalent to US$

3,175

Background

Economy 2 Economy 2 • Diversified economy (poultry, 30% of Brazil

fruits, grains, automotive parts, ceramics, electronics, pulp and paper, plastics, machinery)

• GDP composition: – Agriculture 13.9%– Industry 46.6%– Services 39.5%

• Exports: US$ 3 billion (5.1% of Brazil)

Background

Development issues Development issues • Strong European immigration since 19th century • Urbanization Index (2000): 78.7% • SC HDI (2000): 0.816, ~ Chile and Mexico; Brazil

lowest is 0.636 for Maranhão (~ Guatemala) • Rural Gini 0.53; urban Gini 0.56 (national 0.65) • Dramatic gains in rural poverty reduction during

1990s (mostly driven by rapid income growth)

Fiscal situation

• After 1988, states are assigned ICMS (a v-a tax) and IPVA (a motor registration tax), shared with municipalities; and receive federal transfers (SPF)

• Rigid spending, ~ constant revenues• 1989: first federal bailout to states• Santa Catarina bailout 1: debt equivalent to 2.87%

of its 1989 GDP (6.2% of total bailout)

Fiscal situation

• 1993: second federal bailout (net debt increased)• Santa Catarina bailout 2: debt amounting to 3.57%

of its 1993 GDP (1.61% of total bailout)• 1994: federalization of state bonds• 1995-1997: stabilization led to real expenditures

after nominal wage increases in states• Payroll expenditures became almost 80% of net

revenues in Southern states

Fiscal situation

• 1997 (before election year): third federal bailout (net bonded debt). 20% of restructured debt to be amortized before 1998 with privatization proceeds; 80% at longer matturities and subsidized rate (6%); and debt forgiveness

• Santa Catarina bailout 3: debt amounting to 6.54% of its 1997 GDP (1.8% of total bailout)

Fiscal situation

• Disposable tax revenues in Santa Catarina: 6.6% of GDP (2000); 18.7% of them federal transfers

• DR Santa Catarina: US$ 1,5 billion (2004), appr.• Small primary surplus at state and municipal

levels in Brazil since 1999 (2nd phase Plano Real) • No strong redistributive pressures, small state size

and improvements in road maintenance (+)• Large public wage expenditure (-)

Santa Catarina´s transport system

• Railway: 1,120 km (modest role)• Three sea ports: São Francisco do Sul (14.3 MMt),

Itajaí (2.3 MMt) and Imbituba (1.2 MMt)• 21 public airports, 7 private airports • After 1988 states are fully responsible of state

roads provision


• 2,270 km federal highways (2,138 paved) in charge of DNER

• 6,448 km state roads (3,708 paved) in charge of DER SC

• 53,867 km municipal roads (890 km paved)• Paved state roads: 62% in optimal/good state; 15%

in poor state (2000)


• Unpaved state roads: 36% in optimal/good state; 24% in poor state (2000)

• State road safety in charge of Policía Rodoviaria• No large cities. Traffic levels in most state roads

are low or insufficient to think of pure concessions• Geographically balanced production. Ex: textiles

and automotive parts in northern SC; ceramics in central SC; sea fishing


• Executing Agency is Departamento de Estradas de Rodagem (DER) created in 1946; 22 offices; 1,439 empl. (2000)

• DER is technically qualified. 1998: updated norms and procedures. German design standards adopted

• Road quality improvements since 1995 (39% of DER´s budget for maintenance)

Program design, implementation and performance

• IDB-SC shared knowledge of problems and solutions

• Approach: fund projects linked to institutional uplifts needed for current performance and sustainability

• Formal sequence: program objectives and components, project selection, financial dimensioning. Half the story

• Role of a sector framework


• IDB´s track record with SC. Developed common understanding of priorities and Programs´ assembling after 3 phases:– 1980: 1st Feeder Roads Program, 824 km paved

– 1985: 2nd Feeder Roads Program, 451 km paved, bridges construction, equipment for DER

– 1992: State Road Program, 541 km paved (67% of total paved by DER between 1992-2000)


• IV Phase Program (2001) designed incorporating lessons of IDB involvement in SC and Brazil:– Fiscal resources available– Technical capacity of Executing Agency– Programs vs. individual projects (need of a long-term

sector framework) – Stakeholder participation (“ownership”)

• Rehabilitation and improvement works• Total Program cost: US$300 MM• IDB loan 50%, SC 50%


• Objectives: (i) reduce transport costs; (ii) improve access to municipal centers; (iii) improve safety

• Four project selection criteria:– Economic return (HDM-4, the Highway Development

and Management System software was applied)

– Broad development issues (spatial distribution, generalized access, preservation of public assets)

– Access to social services (health and education centers)

– User demand (traffic level at least 300 vehicles/day)


ComponentsComponents

Studies US$7 MMEconomic feasibility, environmental assessment and engineering

design

Rehabilitation and improvement US$231 MMPaving 500 high traffic km of unpaved roads US$130.6 MM

Recovering 850 km of old paved roads US$85.8 MM

Supervision US$11.8 MM

Environmental compensation US$2.2 MM


ComponentsComponents

Institutional strengthening US$26 MMStrategic Road Transport Plan (linked to operational decisions in maintenance and safety, and coordination with federal programs)

US$2 MM

IT and software US$0.5 MM

Road safety US$22 MM

Dangerous cargo and hazard management Plan US$1 MM

Other expenditures US$ 7 MM


• Early environmental assessments and public consultations

• Executing Agency is DER (in other places an external body is needed to set up)

• No ex post evaluation of IV phase available• Proxy: IDB Report RE-298 (Oct 2004):

‘Evaluation of Brazil Country Program 1993-2003’


• Brazil projects: low disbursement performance• Fiscal constraints and counterpart financing• Spending rigidity (vinculaçao)• More analytical work upstream needed (diagnosis

and program design) • New infrastructure investment seems low


• Physical completion of transportation projects is satisfactory

• Road maintenance is insufficient at both the federal and state levels

• Inefficiencies and misaligned incentives: well-maintained state roads deteriorate from excess traffic induced by poorly kept federal highways

Lessons and remarks

On this Program 1On this Program 1• Satisfactory due to

– Local conditions (socioeconomic and fiscal; compact size). Transportation demanded by productive sectors

– Qualified technocracy mitigates political-cycle impacts

– IDB team and shared knowledge: (i) long-term approach; (ii) clear overall priorities and project selection procedures; (iii) high-value added components: environmental, state road plan, IT, safety

Lessons and remarks

On this Program 2On this Program 2• Caveats

– The political economy of fiscal federalism

– Indebtedness ratification by state legislature

– PPP could be used in SC (DER SC overstaffed)

– “Transplantation” of this experience partially replicable; adaptation depends on local factors and skill of public agencies

Lessons and remarks

On this Program 3 On this Program 3 • Brazil far from being physically integrated. 60%

commercial cargo, 90% passengers move through roads built during 60-70s. Low quality by international standards

• Insufficient expenditure in infrastructure, slow growth and custo Brasil likely related. But quantification is lacking

• Need of sophisticated economic analysis (transport in an open, multi-region economy)

Lessons and remarks A framework for sector sustainabilityA framework for sector sustainability

Project yields positive net social surplus

Economic evaluation consistent with potential impacts; comparison of alternative solutions

Financial structure conforms to local conditions

Choice based on fiscal space, profitability and property rights defense efficacy

Sector plans linked to development policies; balanced maintenance vs. expansion decisions

Effective sector fiscal programming and enabling business climate

Sector organization and governance evolving in the right direction

Self-enforcing measures needed for project success; mitigation of current weaknesses

Institutional achievements self-reinforce over time; maintenance secured

Basic conditions Short-term measures Aspirations

Lessons and remarks

• Economic models for transport projects– HDM-4 not bad for incremental analysis. Network

externalities, scale economies, geographic reallocation of production; and real options games (the latter for airports and ports) need to be reflected

• Financial structure selection– {Civil works, Concession, PPP}: choice depends on

(i) project profitability; (ii) contract enforcement by courts; (iii) fiscal space credibility

Lessons and remarks

• Interplay between fiscal and sector policies– “White elephants” as inefficient redistribution. More

tax revenues and better use of public funds reduce redistributive pressures (other things equal: less bad projects)

– Serious sector planning and prioritization give fiscal space credibility

– Structured coordination between sector planning and fiscal management is an evolutionary outcome, not necessarily a departure point

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