Fiscal space: Reconciling fiscal policy and infrastructure investment Timothy Irwin Infrastructure Economics and Finance PEAM Course, 22 March 2005

2 Trade offs between tariffs and investment are inevitable (holding taxes constant) Water Power Cost recovery

3 Cash flows from a typical infrastructure project can be bad for the cash deficit, good for solvency

4 Public investment in infrastructure has declined in Latin America as percentage of GDP

5 Despite increased private investment, total investment has also fallen

6 More developing countries are involving the private sector in infrastructure provision Source: WDR 2005 from PPI database

7 But investment in infrastructure projects with private participation has fallen since the late ‘80s Source: WDR 2005 from PPI database

8 In Latin America, public investment in infrastructure declined with fiscal adjustment

9 And public investment in infrastructure bore a disproportionate share of the burden

10 Infrastructure stocks and economic growth are correlated ( )

11 Infrastructure stocks are also associated with lower income inequality ( )

12 Off-balance-sheet liabilities 1: Long-term purchase agreements (e.g. for power) Public borrowing to finance a power plant Entering into a long-term power- purchase contract Get a power plant without initially having to raise taxes Have an obligation to make debt- service payments whether you need the power or not Have an obligation to make capacity payments whether you need the power or not Have a liability that you have to report in your accounts Have a liability that you might not have to report

13 Off-balance sheet liabilities 2: Guarantees on a hypothetical toll road

14 A possible bad outcome

15 A possible good outcome

16 Frequency distribution of government payments in 2016 (10,000 possible outcomes) Average payment in 2016 is $4.19 million Assume riskfree rate is 5% Approximate value of 2016 component of guarantee is 4.19/(1.05) 11 = $2.45 million Repeat for all years.

17 The Incheon airport expressway

18 The advantage of accrual government accounting: Example from New Zealand Balance-sheet items (30 June 2004)NZ$ billion Assets110.7 Property, plant, and equipment57.9 Electricity assets 6.5 State highways 13.1 Liabilities75.2 Net worth35.5

19 The advantage of recognizing nontraditional liabilities: Napocor’s balance sheet Balance-sheet items (31 December 2002)Trillion pesos Assets1.15 Legally owned plant0.27 Plant procured under PPAs0.45 Liabilities1.15 Long-term debt0.38 PPA liabilities0.60

20 The advantage of recognizing non standard liabilities: US loan guarantees YearWhat happensBudget appropriation account Financing account 1Government guarantees $10 loan for $1 fee; expected discounted cost of future calls is $3 $2-$1 2Guarantee is called and government pays $10 million $0$10

21 If not recognition, disclosure: Value of Chile’s revenue and exchange guarantees (billion pesos) RevenueExchange rate Total Santiago-Los Andes3.1n.a3.1 Camino de la Madera-1.3n.a–1.3 Los Vilos-La Serena … Total

22 Chile continued: Disclosure of expected guarantee cash flows (billion pesos)