The technical, legal and financial pillars are the foundation for one state effectively implementing infrastructure public policies.
With this article, the Institute of Public Works – “Instituto de Obras Públicas, IOP” – opens the debate on the efficiency of public administration in planning and implementing infrastructure projects and the public policies involved in this activity. This theme, titled as “The Three Pillars of Infrastructure,” will be addressed through a series of articles, This is the introductory article.
The arguments to be presented are based on recognized studies and on the expertise of professionals from the public sector. Moreover, we take this opportunity to invite other professionals involved with the theme to join the debate.
Infrastructure for growth
Investments in infrastructure are essential to the development of any country. Thus, it is necessary to predict how much to invest and how to invest in order to maintain growth and to increase it.
The recent World Bank publication, Public-Private Partnerships Reference Guide 2.0, on page 34, states that, in regards to developing countries, infrastructure investments have on average losses of 35% due to ineffective public governance.
Such a high percentage of losses resulting from bad governance, allows us to conclude that one of the major challenges to infrastructure deployment lies in the public administration itself. That is, there is demand, there is technology, there is potential for economic return, but the state itself represents a significant obstacle for investments in infrastructure.
When it comes to infrastructure in general, we are referring to problems whose solution derives from the implementation of large-scale works that complement each other and are part of a structural network, which enables the country’s flow of production. That is, infrastructure is not planned as a set of isolated works. The integration of its various sectors is crucial to the effectiveness of infrastructure public policies.
From a technical point of view, one should also point out that the different types of public works in fact have more similarities than disparities. In other words, one can say that public works’ planning, design and implementation follow a similar set of techniques and procedures. One can say that 80% of these techniques are the same for any type of project, so that only 20% will depend on the specific nature of the sector in which this work is planned and implemented. For example, the set of rules and procedures necessary for the planning, designing and implementing a road work project overlaps with 80% of the work of a water infrastructure project, meaning that only 20% differs due to the fact that one project is related to water works and the other to roadworks. (Not necessarily in that proportion, but the key point is to understand that there are more similarities than differences.)
Accordingly, with the technical expertise within public administration, it is possible to have integrated sectoral planning, so that the experience in one sector can benefit others, resulting in productivity gains. It reinforces the idea that the development of a country’s infrastructure is not about investments in isolated works or group of works isolated sectorally. Therefore, an organizational structure and a cultural and institutional change that enables the macro view of investments and the integrated infrastructure planning is important.
The Three Pillars
Imagine a state able to select the project that best meets the demand for infrastructure and the best qualified company to run it; able to contractually establish all the services provided and all the quality and safety conditions to be met, as well as the legal conflict resolution mechanisms; and finally, able to properly allocate funds to meet unforeseen situations, so that infrastructure investments made today do not compromise financially future generations. This situation characterizes the state with a solid foundation for implementing infrastructure public policies, as it is based on the three pillars to be presented: the technical pillar, legal pillar and financial pillar.
- The technical pillar is the function specialized in selecting the best project and the best company to execute it. The “best project” is the one that meets the demand for infrastructure and all quality and safety requirements at the lowest cost, shortest time frame, and least environmental impact. In turn, “best company” refers to one that has the highest level of technical expertise and economic-financial capacity to implement the project. Regarding infrastructure public policies, it is the central pillar, as it ensures effectiveness of the investment. Moreover, the combination of quality-project/capable-company minimizes future risks, avoiding negative impacts on the legal and on the financial pillars.
- The legal pillar is the function specialized in building the contractual agreement between the public and private parties. It also acts as a consultancy body, which helps to evaluate the various legal implications to which the project is subjected. Considering the growing importance of public-private partnerships in the infrastructure deployment process, which involves long-term contracts, the legal pillar also plays an important role. Although the combination of quality-project /capable-company reduces the possibility of legal disputes, the long contractual time frame significantly increases the probability it will occur. Most legal conflicts that occur during the implementation and operation of an infrastructure project are decided on the basis of contractual clauses, hence, the importance of this function.
- The financial pillar is the function specialized in the evaluation of the entire portfolio of infrastructure investments, with a focus on ensuring that the state won’t take risks that could financially compromise future generations. We reaffirm that, even with a quality project and a qualified company, unpredictability still exists, especially when considering the project in the long run. For this reason, it is necessary to maintain and control guarantors’ reserves, so that investments in infrastructure will remain financially sustainable.
It is important to note that there is no hierarchy or subordination between these functions. They are autonomous from a technical point of view and at the same time interdependent. When synergistically operating, these three functions ensure state efficiency in the process of implementing infrastructure investments. We also reiterate the distinct importance of the technical pillar, as it is through quality projects and capable companies that future problems can be prevented, which reduces unnecessary burden on the legal and financial pillars.
In order to enable these functions to coexist with synergy and thus ensure efficient infrastructure delivery to society, an appropriate organizational structure is required so that specialized functions can be assigned to specialized institutions. Countries that were able to create an adequate institutional and legal framework, that enabled synergy between the three infrastructure pillars, more effectively managed the implementation of their infrastructure policies. Consequently, they reached a high level of economic development. In our next articles, we will analyze some successful examples. We will also analyze the status of the three infrastructure pillars in Brazil.
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