This presentation was made by Duncan Kernohan, European Bank for Reconstruction and Development, at the 4th OECD Forum on Governance of Infrastructure held in Paris, on 17 April 2019
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Ensuring affordability, economic viability and fiscal sustainability - Duncan Kernohan, European Bank for Reconstruction and Development
1. 4th OECD Forum on Governance of Infrastructure
Session 1: Ensuring the affordability, economic viability, and
fiscal sustainability of infrastructure projects
Duncan Kernohan
Principle Infrastructure Economist, EBRD
Paris, 17 April 2019
PUBLIC
2. The EBRD
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The EBRD was founded in 1991 to support the transition of the former Soviet countries into market
orientated economies. Since inception the Bank has invested around EUR 130 billion across over
5,000 projects. The EBRD has three founding principles which distinguish it from other commercial
and development banks โ Sound Banking, Additionality and the promotion of economic Transition.
Additionality - requirement that Bank activities do not displace commercial finance
which might be available.
Sound Banking - requirement that all project lending is priced on commercial terms
according to risk.
Transition - requirement that all projects promote the transition of the Country of
Operation to a sustainable market focussed economy.
Competitive
Well-
Governed
Integrated Green Resilient Inclusive
All of the banks projects must pursue objectives related to the six โTransition qualitiesโ:
EBRD founding principles:
3. Responsibility of Min Finance
Ensuring economic viability, affordability and
fiscal sustainability
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Economic viability
๏ง The economic case for the
project - the overall benefits
and costs to society, as a
whole - regardless of the
distribution.
Affordability
๏ง The ability of stakeholders to
pay to fund the delivery of the
infrastructure - taking account
of economic, political and
social constraints.
Fiscal sustainability
๏ง The capacity of the overall
public sector to manage its
investment liabilities (both
core and โhiddenโ) within its
budget constraint.
๏ง Projects can be economically viable, but unaffordable considering available budgets and stakeholders
willingness to pay. The strategic and equity case are also important issues.
๏ง Affordability is mainly a distributional issue โ can project costs be distributed across stakeholders in a
economic and fair manner โ given available funding mechanisms and subject to financial, economic, social
and political constraints.
๏ง Fiscal sustainability is the โaffordabilityโ of the infrastructure pipeline to the public sector.
๏ง Economic viability and affordability are primarily sectoral issues โ but cross sector coordination and
consolidation is required to provide overall prioritisation and management against fiscal constraints.
๏ง Issues can also be considered at a national / department or city level.
Project business case, focus on funding and affordability
Responsibility of the regulatory / sponsoring department
Portfolio assessment
4. Infrastructure โ the cycle of decline
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Adverse market structure:
- Legacy institutional set-
up inadequate for the new
economic context
- Lack of competition /
capacity reduces
efficiency
Under-funding:
- Low user tariffs
- Insufficient and untimely
subsidies
Lack of commercial focus:
- Deficient management
practices
- Poor operational
efficiency
- Weak budget constraints
Low quality services:
- Declining or stagnating
quality of service
- Low user willingness to
pay
Lack of finance:
- No financing for
investments and
operations
EBRD investment seeks to reverse the
cycle by providing finance โ tied to
conditional policy reforms and
capacity building.
๏ง Project loan with transition related
conditions
๏ง Grant subsidies where appropriate
๏ง Technical Cooperation
๏ง Sector reform plans
๏ง Tariff reform
covenants
๏ง Tax and
funding
reforms
๏ง Capacity building
๏ง Setting budget
constraints through
Public Service
Contracts
๏ง Focus on asset
management
๏ง Technical and
Implementation
support
๏ง Project preparation
5. Wider policy and reform priorities
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๏ง Sector reforms to maximise
efficiency through private
competition and improved
public sector capacity
๏ง Structured and consistent
cost-benefit analysis and
prioritisation both within and
across sectors
๏ง Assessment of project risk,
optimism bias and wider
potential liabilities associated
with new projects
๏ง Project monitoring to ensure
risks and cost escalation is
managed
๏ง Balancing of new
investment with asset
management and
maintenance
๏ง Understanding and
management of supply chain
capacity
๏ง Identification and
engagement with key
beneficiaries and stakeholders
to understand constraints
๏ง Effective evidence and
principle based negotiation
between groups over how costs
and benefits should be
distributed
๏ง Balancing cost recovery
across groups and over time
๏ง Cross subsidy โ must be
subject to economic principles
๏ง Distributional analysis
safeguards and mitigation
๏ง Transparency and effective
management of public
subsidies through Public
Service Contracts
๏ง Increased commercialisation
and diversification of financing
and funding sources
๏ง Tax and value capture
mechanisms to recoup public
investment
๏ง Balance between national
and municipal financing
๏ง Cross sectoral coordination of
infrastructure investments
priorities and recognition of
โhiddenโ liabilities
๏ง Selection of procurement
models to maximise value
๏ง Appropriate delegation of risk
between private and public
stakeholders
๏ง Use of public sector
comparator to ensure value for
money
๏ง Careful use of grant finance
Economic viability Affordability Fiscal sustainability