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By PATRICK MABUZA

SOUTH AFRICAN ECONOMIC REGULATORS CONFERENCE Institutional Arrangements Necessary for Private S ector I nvestment in Infrastructure 21 - 22 August 2012. By PATRICK MABUZA. Outline. Introduction Institutional requirements

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By PATRICK MABUZA

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  1. SOUTH AFRICAN ECONOMIC REGULATORS CONFERENCE Institutional Arrangements Necessary for Private Sector Investment in Infrastructure 21 - 22 August 2012 By PATRICK MABUZA

  2. Outline • 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

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

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

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

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

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

  8. Strong political institutions • 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; • Increase project transaction costs and risks • Result in arbitrary changes to investment policies • Result in expropriation of assets

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

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

  11. Regulatory principles • 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.

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

  13. Good vs. bad regulation of PPPs

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

  15. The Development of the SA PPP institutional framework

  16. Private and public sector views about SA institutional framework

  17. PPPs by sector and sphere of government

  18. Tank you

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