By PATRICK MABUZA SOUTH AFRICAN ECONOMIC REGULATORS CONFERENCE Institutional Arrangements Necessary for Private Sector Investment in Infrastructure August 2012

2 Introduction Institutional requirements Regulations and private sector participation in infrastructure projects Good vs poor regulation Institutional framework for private sector participation in infrastructure projects Development of the SA institutional framework for PPPs Outline

3  Why institutional requirements?  Infrastructure projects are characterized by: o Large sunk costs o Low mobility o Area specificity o High risks of opportunistic behavior (Ex-post inefficiencies) o Incompleteness of contracts  All the above increase risks for the investor Introduction

Institutional requirements 4  Institutional requirements for the private sector include: o Strong legal system o Well developed domestic debt market o Less corrupt economic environments o Stable and reliable political institutions o Stable economic and financial conditions o Well established regulatory environment

Legal environment 5  The private sector relies heavily on contracts which in turn are dependent on the legal system.  The legal environment includes laws governing: o Contracts o Contract enforcement o Property rights o Respect of the rule of law  Uncertainty in the legal system may result in high project risks and transaction costs

A well developed domestic debt market 6  Funding projects from domestic sources has economic merits: o A well developed domestic debt market increases access to finance, especially for small firms o It encourages competition for the infrastructure market o It provides long-term debt maturities o Reduces reliance on foreign capital markets

Less corrupt economic environment 7  Corrupt economies experiences low private investment o It reduces the productivity of public expenditure o Distorts the allocation of resources o Lowers private investment o It raises uncertainty and increase the costs of investment o May trigger political instability etc.

Strong political institutions 8  Countries with weak political institutions are more likely to result in war, civil strife or ethnic tension, and difficult for foreign firms to repatriate profits  Weak political institutions may; o Increase project transaction costs and risks o Result in arbitrary changes to investment policies o Result in expropriation of assets

Stable economic environment 9  Countries that want to attract private sector investment in infrastructure must develop strong economic and financial institutions. This may include; o S table macroeconomic system o Market size o Integrity of the monetary and financial system o Reform of the fiscal system

Stable and predictable regulatory environ-- 10  Countries with well established regulatory institutions tend to experience a high volume of infrastructure investment  A good regulatory system is the one that: o Has a sound, transparent and honest infrastructure investment procedures o Enables the regulated entity to raise finance for investment at an acceptable costs o Provide efficiency in operation, pricing, and investment and innovation o Adheres to regulatory principles to avoid regulatory uncertainty

Regulatory principles 11  Regulatory principles include:  Effectiveness and targeting: focus on regulatory problem it has been established to address  Transparency: regulations must be designed in a transparent manner to facilitate learning and sharing of information within industry  Proportionality: intervention be proportional to the problem. Regulators should intervene when necessary  Consistency and predictability: regulatory processes and decisions should be applied consistently across regulated parties in similar circumstances  Accountability: regulators must be accountable to their decisions and subjected to public scrutiny.

Regulation and private sector participation in infrastructure provision 12  Successful implementation of PPPs depends to a large extent, on sound regulatory framework  The objective of the framework should be to: o Reduce opportunistic tendencies o Align the interests of the parties involved o Achieve a balance between economic efficiency and social equity o Assure the private sector that the regulatory system includes protection from: Expropriation, arbitration of commercial disputes and respect of contract agreements.

Good vs. bad regulation of PPPs 13 Good regulationProblem with poor regulation Acts as a buffer against political interference in pricing decisions Over regulation can restrain economic growth Improves access and affordability of services to the poor Too much compliance requirements may increase costs to the regulated entity Improves service qualityMay distort market signals Reduces ex-post inefficienciesCan turn viable projects to be financial unviable Introduces competitionMight tied up resources on complicated restructuring instead of investing them

Institutional framework for private sector participation in infrastructure 14  The framework should includes: o Political commitment and good governance o Development of an appropriate legal framework o Development of project expertise within the public sector o Refinement of project appraisal and prioritization criteria o Reforms on public sector procurement requirements

The Development of the SA PPP institutional framework 15 DateActionPurpose 1997 Cabinet approved the appointment of an interdepartmental task team To develop policy, legislation, and institutional reforms to enable the use of PPPs 1999 Public Finance Management Act (PFMA) was enacted To create a good governance structure for the procurement of goods and services including PPPs by the public sector Mid 2000PPP unit was formed To create policy and regulatory framework for PPPs 2004 Regulation 16 of the PFMA was issued To regulate PPPs at both national and provincial level to ensure that such projects are transparent, equitable, and fair 2004PPP manual was issued To guide both governments departments and provinces through PPP project life cycle 2005Municipal PPP regulation was issued in terms of the Municipal Finance management Act of 2003 It defines the elements of a municipal PPP and set out the stages and approval it will have to go through

Private and public sector views about SA institutional framework 16 TopicPrivate sector Implementing Agencies Government Agencies responsible for PPP policy Legal environment - Rules for procuring PPPs are broadly acceptable at the national and provincial level, but better suited for higher value transactions and more developed PPP markets - PPP unit micro-manage transactions - BEE/SMME thresholds included in PPP guidelines are not necessarily in line with sector charter - Rules do not work at the municipal level - Treasury or other legal rules for procuring PPPs are too demanding and confusing - Rules for procuring PPPs are good, but there is a need to streamline for smaller value projects - PPP unit has already developed, and will develop more, streamlined processes for smaller value projects, or projects in more familiar sectors (example, small cap, ecotourism projects) Role of the PPP unit PPP unit does too much regulation, and too little promotion and facilitation of PPPs within implementation agencies PPP unit spends as much time as it can promoting and facilitating PPPs

PPPs by sector and sphere of government 17 SectorNationalProvincialMunicipalitiesTotal Real estate0055 Prison1001 Transport1001 Health IT2002 Office accommodation Education0101 Nature93012 Tourism0358 Communication1012 Energy1102 Water/waste management Total

Tank you 18