Capital Budgeting for Resilient Cities Financing Public Investment - PowerPoint PPT Presentation

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