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

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

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

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

5. 5 Despite increased private investment, total investment has also fallen

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

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

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

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

10. 10 Infrastructure stocks and economic growth are correlated (1960-2000)

11. 11 Infrastructure stocks are also associated with lower income inequality (1960-2000)

12. 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. 13 Off-balance sheet liabilities 2: Guarantees on a hypothetical toll road

14. 14 A possible bad outcome

15. 15 A possible good outcome

16. 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. 17 The Incheon airport expressway

18. 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. 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. 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. 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 Serena2.33.25.7 … Total128.610.6139.2

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