PANAMA 2018 Transparent government: Leveraging private sector partnerships Welcome by Jorge Familiar World Bank Vice President for Latin America and the Caribbean Private investment is key to reducing and Public-Private Partnerships (PPPs). Efforts poverty and promoting shared prosperity. to implement anti-corruption and accountability The public sector alone cannot bridge the gap of initiatives are needed, as well as fighting tax evasion what is needed to finance development. and money laundering. That is why this second edition of the “Cuentas We have seen a transformation in Latin America and Claras” conference, organized by the World Bank the Caribbean region following the major progress Group (WBG), the Organization of American States made in reducing poverty and expanding the middle (OAS), and the Government of Panama, chose class. Now, with less fiscal resources available to “Transparent Government – Leveraging Private satisfy society’s increasing demands, there is zero Sector Partnerships,” as its principal theme. Good tolerance for corruption. This also comes at a time governance and institutions that are accountable, when the dizzying pace of technological advances coupled with citizen participation in the running of has led to the quick distribution of information and the State, can lead to more private investment in the public release of much information that in the key development sectors. past had remain hidden. Success in improving the region’s investment Cuentas Claras provides us an opportunity to climate will be more likely with robust and showcase what is being done in the region in terms of reliable fiscal and financial reporting systems. accountability and efficient public spending through Greater transparency and accountability in the stepped up anticorruption measures. It also allows implementation of public policies will help as well. us to identify the main challenges we face in an environment where growth is still weak and where Many of the countries in the region are already most of the countries face a difficult fiscal situation. making these reforms. The World Bank is supporting them with projects like online government to With these challenges in mind, we are presenting the improve fiscal transparency and procurement Panama Accord, which includes steps to improve systems. the quality and transparency of fiscal and financial information, strengthen accountability, and increase On the other hand, recent cases of corruption that collaboration between governments, the private have come to light in the region show that sector, and civil society. much remains to be done. As such, it is necessary to redouble efforts The World Bank is pleased to count on your to implement best practices to participation, ideas, and commitment to make Latin strengthen corporate governance America and the Caribbean a more transparent and in state-owned enterprises (SOEs) prosperous region. Newsletter Cuentas Claras 1 Questions and Answers with Deborah Wetzel Senior Director, Governance Global Practice, World Bank hat does governance have to do While it is impossible to estimate Deborah Wetzel is the World Bank W with private sector financing? how many billions of dollars Senior Director for Governance. The private and public sectors are lost each year to bribery Prior to this, she served as have sometimes been treated as and other forms of corruption, Country Director for Brazil from separate entities that operate it is clear that every dollar March 2012 to July 2015. Her in isolation from each other, lost to corruption is a dollar expertise includes taxation, public but the two have always been diverted away from the public expenditures, decentralization, intertwined. The private sector good, including efforts to fight public sector reform, and anti- depends on the public sector for poverty, improve health care corruption. Ms. Wetzel has a delivery of public goods, such as and strengthen the quality of Doctorate in Economics from the security, regulation, contract education. Corruption hits the University of Oxford and a Master’s enforcement and a conducive poor the hardest – forcing them from Johns Hopkins University, environment for business. to pay a higher share of their School of Advanced International Conversely, the public sector earnings in bribes and often Studies. She is the author of relies on a prosperous private reducing access to and the quality numerous publications on fiscal sector for revenue mobilization of essential services such as decentralization, public finance, and in the procurement of goods health and education. governance, and sub-national and services. The relationship affairs. between the public and private The most damaging long-term sectors is highly interdependent consequences of corruption, and, if we want to increase however, are the erosion of private investment, we need trust in government and the to focus on both the public and diminished legitimacy of public private sectors. institutions. The restoration of trust between the government, A core objective of governance the private sector, and civil reform moving forward must society is essential for triggering be a focus on the public sector a virtuous cycle that enables risks that may prevent investors longer term, sustainable efforts to from entering a country. By confront corruption. This requires identifying the underlying drivers that governments build systems of the enabling environment for that prevent corruption from private activity – such as greater occurring in the first place, and transparency, improved corporate when corruption does occur, that governance, a strengthened it is sanctioned effectively. We regulatory framework, and can all work together to reduce institutions free of collusion corruption by strengthening and corruption – the goal is to openness and transparency, create an investment-friendly and by working to reduce the environment that attracts private acceptance of corruption in all its sector financing. forms. What do you see as the main How serious is the issue of illicit consequences of government financial flows globally? What corruption and government can be done to address these opacity? flows? 2 The restoration of trust between the government, countries, which are likely to engagement are essential vehicles the private face institutional limitations for ‘quick wins’ to improve the in their ability to detect and institutional environment for sector, and prevent IFFs, and where the private sector financing. The civil society is relative resources lost have benefits of investing in a frequent, larger welfare impacts on the open, and transparent process essential for population. of consultation benefits all stakeholders – with firms more triggering a Addressing IFFs requires confident in the fairness of the virtuous cycle international cooperation and ‘rules of the game’ that protect coordination – and the global the capital they put to work inside that enables community has increasingly a country’s borders. Meanwhile, longer term, mobilized around efforts through citizens are more assured that multilateral initiatives to stem governments are spending with sustainable these flows. These efforts their true interests in mind, and the efforts to include supporting countries public sector is further incentivized in meeting global standards to continue to improve to earn the confront for tax transparency and the votes of their constituents and to exchange of information (e.g., further attract capital from the corruption identifying beneficial ownership private sector. sources, the implementation of exchange of information These potential benefits are only procedures, strengthening tax increased by the rapid pace of treaties) and strengthening the technological change – which By their very nature, IFFs are capacity of countries to identify results from an environment of usually hidden from sight and risky transactions that could be increasing interconnectedness, thus are difficult to measure. vehicles for tax avoidance, tax information sharing, and Global estimates are on the evasion, and illicit flows. strengthened systems for order of magnitude of US$1.0 accountability. The increased trillion to $1.5 trillion a year. What do you see that are quick availability of social media That suggests significant lost wins that willing governments tools and platforms is bringing government revenues, market could take to immediately about a new role for citizens distortions, and increases in improve the investment climate and the private sector for inequality driven by offshore and business environment in pushing accountability and wealth. These problems their countries? transparency for both the public are potentially more severe An increased emphasis on and the private sectors and for for low and middle-income transparency and citizen strengthening responsiveness. Newsletter Cuentas Claras 3 Maximizing finance for development aids growth in Latin America and The Caribbean Luc Grillet, Senior Manager, Central America & Caribbean, IFC D uring the Golden Decade from on transparent 2003 to 2013, the LAC region rules is required. made important social gains, This can help make public fueled by high commodity prices spending more efficient, fiscally and government reforms. Extreme responsible, and accountable. poverty (defined as those living on It can help increase public and less than US$250 a day) was cut private sector investments in to 11.2 percent by 2013 and overall health and education. It can poverty (less than US$4 a day) spark improvements in the dropped to 24.1 percent in 2013 business-enabling environment from 42 percent in 2003. The for companies and regional trade. middle class grew significantly It can promote financial inclusion, and the Gini Index of income especially for micro-, small- and inequality dropped sharply. But medium-sized enterprises (SME) the economic slowdown, which and for the population at the started in 2010 and which bottom of the income pyramid. culminated with a two-year And it can open capital markets recession in the 2015-2016 period, to enable long-term and local placed this social and economic currency funding. All this can help progress at risk. shift government spending to the private sector. In the 2017 to 2018 period, the region has resumed a fragile Building on the “Addis Ababa growth recovery trajectory, Agenda for Action” and the albeit with important country- March 2017 report, “Forward by-country variations. LAC Look: A Vision for the World clearly needs to grow faster, Bank Group in 2030—Progress and in a more sustainable and and Challenges”, the WBG inclusive manner. Key challenges is intensifying efforts to help preventing more sustainable countries with a new approach, growth include persistent named Maximize Finance for challenges such as low regional Development (MFD). This new productivity and competitiveness, systematic strategy requires a lack of access to finance, and the World Bank Group to inefficient infrastructure services. help countries maximize their These obstacles, if not addressed, development resources by will increase the sharp income increasingly drawing on private divide in several middle-income financing and sustainable private countries in the region. sector solutions to provide value for money and meet the highest Neither the public sector nor the socio-environmental and fiscal private sector alone can address responsibility standards. It the challenge of generating keeps scarce public financing inclusive growth. A concerted for those areas where private and coordinated effort based sector engagement is not 4 optimal or available, helping the public sector stay away from unsustainable levels of debt and contingent liabilities. The Maximize Finance for Development approach is also at the core of the “Cuentas Claras 2018 – Transparent Government: Leveraging Private Sector Partnerships” conference. As this conference will highlight, the success of this new approach requires governments to effectively provide public goods, to support an environment that can generate jobs and growth, to address market failures and There are several examples of transmission line which could be to engage citizens in the process where the more systematic replicated in other infrastructure – and to allow for transparent, Maximize Finance for sub-sectors. rules-based societies that Development approach, and further enable private sector having “Cuentas Claras,” have Different WBG entities, leveraging investment. started to bear fruit. Allow me to their respective capabilities, are share one example that relates to working together in Panama Given that countries in the region our gracious conference host, the to support large government have a significant financing Republic of Panama, where WBG investments and attract private gap in development spending, has contributed to the deepening sector investment: using scarce and that development finance of Panama’s integration in public resources with a focus on alone cannot address this gap, the global economy and the de-risking projects and addressing efforts to improve governance by strengthening of its position as a market gaps, prioritizing creating an enabling investment trade and logistics hub, whilst at commer-cial finance, and tapping environment are bound to the same time promoting inclusion into new sources of capital. generate increased levels of and enhancing resilience. As for helping growth become private investment in support of more inclusive, IFC is directing government development goals. In the energy sector, with IFC investment towards SMEs and Efforts to improve the investment support, Panama’s private sector low-income housing segments climate in the region through firms are investing in renewable through established financial enhanced transparency and energy and Central America’s first intermediaries. The World accountability are more likely clean gas-to-power project on the Bank meanwhile is providing to succeed if there are robust Atlantic mouth of the Panama policy loan support to facilitate and reliable fiscal and financial Canal. Meanwhile, public funding, making existing Panamanian reporting regimes. with World Bank support, is policies and social programs financing a comprehensive policy more effective in reaching rural IFC, the WBG’s private sector reform and a national energy and Indigenous Peoples, Afro- arm and the largest global efficiency strategy. In Panama, we descendants and other generally development institution can proudly say that the Maximize poorer segments, including dedicated to the private sector, is Finance for Development approach management of embedded fiscal uniquely positioned to help in this is in high gear and helping and environmental risks. endeavor through its investment improve the fiscal sustainability and advisory operations in the and diversification of the energy I’m confident that this conference region, and help leverage the sector, which is fundamental for will help us draw a roadmap to World Bank’s critical upstream providing reliable, affordable and develop and implement new ways and regulatory work with continuous access to electricity. to improve good governance and governments that can open or IFC is also advising the national transparency and leverage the create markets for incremental power transmission company potential of the Maximize Finance private sector investment. on a PPP approach for its fourth for Development approach. Newsletter Cuentas Claras 5 State-Owned Enterprises: Ways to Overcome the Investment Gap in Latin America and the Caribbean Robert Taliercio, Practice Manager, Governance Global Practice, World Bank T he World Bank Group is redoubling its efforts to help countries mobilize slowdown has put the region’s economic and social challenges in financing for development in LAC, perspective: demands for social which can help the region reduce its progress are high, while trust in annual investment gap, estimated at government is low. US $ 180 billion. To continue supporting economic After six years of economic growth while spurring social progress, contraction, LAC returned to positive governments must invest more in growth – our World Economic Outlook productive assets. The financing report indicates that the region grew challenge is clear: according to WBG 1.1 percent in 2017 and that this year estimates, the region faces an annual it will expand by 1.7 percent. However, investment gap of US$180 billion. to ensure that this new phase of Given the necessity of continuing growth advances and social gains are with ongoing fiscal adjustment maintained, governments must invest policies, and the urgent need for more in productive assets. infrastructure investment, it is obvious that public financing can only Given the need to continue to cover a small share of those needs. balance finances, coupled with Thus, to reduce poverty and promote the urgent need for investment in shared prosperity, the region will have infrastructure, it is obvious that to increase returns from existing public financing is not enough. As approaches to public investment and such, to reduce poverty and promote make selected use of more innovative shared prosperity, the region will approaches to crowd in private have to take better advantage of the financing. In both cases, state-owned current public investment approach enterprises could play an important and select innovative ways to attract role in augmenting productivity, private financing. In both cases, state provided specific conditions are met. enterprises could play a larger role in increasing productivity, provided that In bringing in the private sector the specific conditions are met. to address the investment gap, the region has something of an In this way, countries can analyze advantage: it has the largest stock and manage the need to resort to of active public-private partnership financing from the private sector – (PPP) investments globally (in USD but also comply with fiscal, social, terms and as a share of countries’ and environmental responsibilities GDP), most of which are in Brazil, and conserve scarce resources from Mexico, Chile, and Colombia. LAC also the public sector – for those areas has the second largest number of in which private financing makes National Development Banks (NDBS), less sense. Here the question arises, at 63, second only to Asia with 119. what are the most appropriate roles for state enterprises in maximizing The WBG is redoubling its efforts financing for development? to assist country clients to MFD. This approach helps countries The good news is that after six years analyze and manage the need to of slowdown, the Latin America and draw on private sector financing Caribbean region is back into positive and private sector approaches – economic growth territory. The World meeting fiscal responsibility, social, Bank Group (WBG) estimates that the and environmental standards – to region’s growth reached 1.1 percent conserve scarce public sector in 2017 and is expected expand by resources for sectors where private 1.8 percent in 2018, mainly driven by finance makes less sense. An a recovery in Brazil and Argentina. important related question is: what At the same time, the extended are the most appropriate roles for 6 investment and solving private sector At the same time, SOEs must be coordination failures. SOEs can serve credibly managed to avoid all the as important catalysts for providing well-known risks associated with basic infrastructure and other social the parastatal sector: creation services by removing obstacles and of fiscal risks for governments, facilitating public and private sector financial sector instability, market investments. That is, many countries distortions through anti-competitive need to improve the quality of public policies, and risks of corruption. A services (electricity, public and freight recent survey by PwC found these transportation, etc.) and in many concerns very much on the minds of cases, SOEs provide those services, CEOs: “SOEs globally still have some yet performance is often not up to work to do in winning the trust of acceptable international standards. the private sector. The majority of Reforming SOEs so they can improve CEOs in our ‘pulse’ (83 percent) had service delivery performance is thus concerns that government ownership an integral aspect of MFD. distorts competition to some degree. In addition, 67 percent felt that State financial institutions can for government ownership influences SOEs will only example mobilize private resources for infrastructure investments regulation and enforcement in industry.” From a high-level be able to crowd through risk-sharing schemes by assuming some project risks that the perspective, governments should also take care to limit their presence in private sector private sector is not willing to take. In the case of coordination problems, in the economy to some structurally important sectors so as to not crowd investors in a potential investment opportunity may only be profitable if other out the private sector. developing complementary investments—public SOEs will only be able to crowd or private—are also made at the in private sector investors in countries if they same time. For most firms, making developing countries if they are the combined necessary investments well run and focus on the right are well run and is often beyond the means, scope part of the value chain. This points of expertise, or risk appetite of back to the importance of an SOE focus on the right an individual investor. SOEs can reform agenda. In LAC the first undertake investments that the generation of successful structural part of the value private sector does not undertake due reforms were implemented in Chile, to coordination failures. Colombia, and Peru over the past chain 20 years, while other countries Increasingly, SOEs are seeking are still awaiting reforms, as to enter into PPP and concession are important SOE sectors, such arrangements with private sector as energy. Whether it is dealing entities to improve public service with macroeconomic and fiscal SOEs in maximizing finance for delivery and mobilize financing for impacts, corporate governance and development? infrastructure. In many countries, accountability mechanisms, market state-owned financial institutions discipline and competitive neutrality That SOEs have a potentially (SOFIs) are transitioning from angles, or state-owned financial important role to play in MFD is providing direct loans to fund institution reform, the WBG can apparent, given that they remain infrastructure projects to providing help here. Drawing on its global important economic players around guarantees and credit enhancement expertise in SOE reforms in East the world: recent estimates indicate products to mobilize private savings. Asia, Europe, and Latin America, the that in Organization for Economic However, properly designed PPP WBG can be counted on to assist Cooperation and Development (OECD) agreements and more sophisticated countries in reforming their SOEs so countries SOEs accounted for about financial products require substantial that they become a critical channel 15 percent of GDP, while in transition know-how. for leveraging private funds. countries the share was between 20- 30 percent. Not surprisingly, a recent estimate found that SOEs accounted for 20 percent of investment. SOEs can thus play two key roles in MFD: provision of finance to emerging economies and catalysts for investment in emerging economies. The latter is the focus of this note. While SOEs have underperformed in some cases, well-managed SOEs could have a cascading effect, leveraging additional funds for Newsletter Cuentas Claras 7 Improving government capabilities to procure Infrastructure PPPs and attract private sector investments. Fernanda Ruiz Nunez, Senior Economist, Infrastructure, PPPs, and Guarantees Group, World Bank G overnments around the world Several trends emerge from the have turned to PPPs to design, data collected for the Procuring finance, build, and operate Infrastructure PPPs 2018 report. infrastructure projects. The first one is that the higher While PPPs remain a small the income level of the group, the proportion of the procurement of higher the performance in the infrastructure, they constitute assessed thematic areas. What is an important channel to attract more surprising, however, is that private sector financing into while PPP procurement scores are infrastructure projects. However, relatively high across all income a lack of government capabilities levels, preparation and contract to prepare, procure, and manage management are the areas that such projects constitutes an leave considerable room for important barrier to attracting improvement, regardless of the private sector investments. income levels or region. The Procuring Infrastructure Despite the major trend of Public-Private Partnerships all economies lacking in PPP 2018 report is designed to help preparation and contract governments improve their management, performance still PPP regulatory quality. By varies greatly by region. The benchmarking the regulatory high-income economies of the frameworks of 135 economies OEC), and the Latin American and around the world against Caribbean regions, perform at or internationally recognized good above the average in all thematic practices in procuring PPPs, areas. In contrast, Sub-Saharan this assessment identifies Africa and the East Asia and areas for improvement in the Pacific regions have the lowest preparation, procurement, and average scores. management of PPPs; as well as in the management of unsolicited Despite the importance of an proposals. appropriate consideration of the fiscal implications of PPPs, this Procuring Infrastructure Public- is still not a universal practice. Private Partnerships 2018 aims During the preparation of PPPs, to inform the policy debate and Ministry of Finance approval to the decision making process and ensure fiscal sustainability is help governments, the private not required in 19 percent of the sector, and the international surveyed economies. Moreover, development community better only around one-third of the understand the current regulatory economies have regulations landscape for PPPs. concerning the accounting and/or 8 reporting of PPPs, and even fewer key role in limiting corruption, Making performance have introduced some type of providing legitimacy to PPPs information available to regulatory provision regarding the and helping ensure that only the public increases the budgetary treatment of PPPs. viable and bankable projects accountability of all the are realized. Once again, most stakeholders and is crucial A striking finding is that despite economies adhere to international to promote transparency. the fact that a sound appraisal good practices in terms of However, few economies of a project is crucial to bringing disclosure of information to the make this information public. quality projects to the market, public in the procurement phase, Transparency ensures that the less than one-third of these but do not adopt such disclosure project delivers the expected economies have adopted specific practices during the preparation outcomes and quality services. methodologies that ensure phase and contract management. However, only a small fraction consistency across projects. An Among the assessed economies, (13 percent) of the economies even smaller percentage make it is common practice to publish surveyed allow public access those assessments available online. and make available online the to the system for tracking In turn, the private sector often PPP public procurement notice progress and completion of reports a lack of quality projects and the award notice. However, construction works under a PPP in the pipeline as a constraint to only 48 percent of economies contract. Only 10 percent have investing in infrastructure. publish the PPP contracts during established an online platform the procurement phase, and even for this purpose. Similarly, Transparency, as a focal element fewer (30 percent) publish any only a handful of the procuring of good governance, plays a amendments. See figure below. authorities (14 percent) allow the public to track contract performance through a Figure: Transparency in the PPP project cycle (percent, N = 135) designated online platform PREPARATION STAGE or by posting the updated Assessments published online 22% documentation online. Tender documents published online 60% Standardized PPP contract available 36% Recognizing the need to improve PROCUREMENT STAGE good governance in helping Publish PPP procurement notice 99% to crowd-in private finance PPP procurement notice published online 88% for development, Procuring Infrastructure Public-Private Publish PPP award notice 93% Partnerships 2018 is intended PPP award notice published online 82% to continue to gauge regulatory Publish the PPP contract 48% framework adherence to good PPP contract published online 38% practices in the PPP process. Publish PPP contract amendments 30% That will take place by providing CONTRACT MANAGEMENT STAGE comparable data on the Publish PPP construction information 13% enumerated issues in the 2020 PPP construction information published online 10% edition, which may include a possible expansion to provide Publish PPP performance information 14% a more complete picture of PPP performance information published online 14% transparency for PPPs. Source: Procuring Infrastructure Public-Private Partnerships 2018. Note: PPP = public-privated Partnership. To access the report, blog and explore the country data, please go to: Report: Blog: Explore Country Data: Newsletter Cuentas Claras 9 PANAMA 2018 Transparent government: Leveraging private sector partnerships 10