## Public Investment Management Assessment — Georgia (cr18306) ## Source details **Canonical URL:** [Public Investment Management Assessment — Georgia (cr18306)](https://www.imf.org/-/media/files/publications/cr/2018/cr18306.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18306.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18306.pdf.json) --- ### Executive summary — context, trends, and efficiency - Government intent: strengthen infrastructure governance by improving PIM and PPPs frameworks. - Public investment trends and composition: - Over the last decade, public investment in Georgia has been similar to the average of emerging market economies (EMEs). - Public investment accounted, on average, for one third of total investment since the mid-2000s. - Public investment peak: 8.6 percent of GDP in 2007. - Recent public investment: about 5.5 percent of GDP (stabilized in recent years). - Total investment increased from 15 percent of GDP in 2009 to above 30 percent of GDP in 2017. - Public capital stock: about 130 percent of GDP in 2000 declining to 90 percent of GDP by 2017. - Off-budget and financing shifts: - Off-budget investment: less than five percent of total public investment in the early 2000s; about one-third of total public investment in 2017. - Investment through PPPs and PPAs rose from an average of 0.5 percent of GDP between 2010–15 to about 2.0 percent of GDP by 2017. - Public corporations’ investment spending rose from around 1 percent of GDP between 2010–15 to 2.4 percent of GDP in 2017. - By 2017, general government accounted for about two thirds of total investment spending; public corporations, PPPs and PPAs contributed the remaining third. - Domestic financing share: rose from 50 to 70 percent of total public investment since 2009; in 2017 domestic financing represented about 70 percent of total financing (compared to average 55 percent between 2009 and 2014). - Planned scaling up under EFF: - On-budget public investment spending: 6.1 percent of GDP in 2017; expected to increase to 8 percent of GDP by 2023. - EFF medium-term projections: deficit declining to 1.3 percent of GDP and gross debt to 40.3 percent of GDP by 2023. - Infrastructure access, quality, and efficiency: - Perception indicators: Georgia compares favorably to EMEs on infrastructure quality but perception deterioration observed since 2014. - Physical measures: better than EMEs in access to treated water; lags in roads, electricity, and education infrastructure. - IMF efficiency estimates: - Efficiency gap (physical indicators): 21 percent for Georgia versus 44 percent average for EMEs. - Efficiency gap (survey/perception): 14 percent for Georgia versus 20 percent average for EMEs. - Interpretation: between 15 to 20 percent of public investment spending did not result in the increase in level or quality of infrastructure achievable by the most efficient country. ### Institutional performance — strengths, weaknesses, and PIMA results - High-level observation: many PIM policies and procedures are either not or only partially aligned with good practices; institutional design ("on paper") often differs from effectiveness ("in practice"). - Strengths (selected): - Fiscal rules provide predictability of funding for public investment. - Nonfinancial assets including depreciation are reported in government consolidated financial statements. - Procurement system: open and transparent; e-procurement in operation enabling monitoring. - Flexible commitment rules and good cash management; no recent payment delays due to lack of funds. - Main weaknesses and high-priority issues: - Strategic planning (Design—Low; Effectiveness—Low): national and sectoral strategies are fragmented, not comprehensive, and focus on new initiatives only. Reform priority: High. - Multiyear budgeting (Design—Medium; Effectiveness—Medium): multiyear capital ceilings not disaggregated; BDD does not effectively guide multi-year capital spending. Reform priority: Medium. - Project appraisal and selection (Design—Low; Effectiveness—Low): no standard appraisal methodology for non-donor-funded projects; new PIM methodology not implemented. Reform priority: High. - Maintenance (Design—Low; Effectiveness—Medium): no standard methodology to estimate or track maintenance funding (roads sector exception). Reform priority: High. - Project implementation and oversight (Design—Low; Effectiveness—Low): weak project management; irregular ex-post audits; portfolio monitoring not systematic; MRDI reallocated 43 percent of its capital budget in 2016. Reform priority: High. - Alternative financing & PPPs (Design—High in law; Effectiveness—Low): PPP Law approved but regulatory framework not completed; limited market competition; fragmented monitoring of PCs; contingent liabilities large. Reform priority: High. - Assets management (Design—Medium; Effectiveness—Medium): assets registered but not revalued; SAO verifies samples. Reform priority: Medium. ### Key fiscal and macro statistics (as reported) - Average annual growth: 3.4 percent in 2015–17. - General government deficit and gross debt stabilized around 3.0 and 45 percent of GDP, respectively. - Fiscal outturns and projections (percent of GDP): - Expenditures: 2014 = 30.2; 2015 = 30.4; 2016 = 30.9; 2017 = 29.9; 2018* = 29.9; 2019* = 29.9; 2020* = 29.4; 2021 = 28.8 - Of which capital: 2014 = 4.6; 2015 = 4.5; 2016 = 4.0; 2017 = 4.1; 2018* = 6.1; 2019* = 6.4; 2020* = 6.7; 2021 = 7.4 - Deficit: 2014 = -2.0; 2015 = -1.1; 2016 = -1.4; 2017 = -0.5; 2018* = -1.3; 2019* = -1.4; 2020* = -1.4; 2021 = -1.3 - Debt: 2014 = 35.4; 2015 = 41.3; 2016 = 44.4; 2017 = 42.9; 2018* = 43.1; 2019* = 42.8; 2020* = 42.4; 2021 = 41.3 - PPPs, PPAs, and contingent liabilities: - Total commitments under PPAs estimated at 1.1 billion USD (7.7 percent of GDP). - Stock of PPPs and PPAs by 2017 estimated at 5.1 percent of GDP (EMEs average: 4.5 percent of GDP). - Estimated project investment exposure (Table 5, percent GDP): Hydro projects subject to PPAs 32.0; Anaklia port 4.5; Gardabani II 1.6; Gardabani I 1.5; Batumi Port 0.6; Tbilisi Airport 0.5; Batumi Container Terminal 0.2; Batumi Airport 0.2; Total 41.1. - Contingent liabilities reported: PCs 20.6% GDP; PPAs 33.7% GDP (as noted in executive summary). - Project funding composition: on average, 60% of projects are domestically funded (noting new PIM methodology not yet implemented). - MRDI project reallocations: 43 percent of MRDI’s capital budget in 2016. ### Project appraisal, discount rates, and donor-funded projects - Domestic non-donor-funded projects: no standard appraisal methodology in practice; many lack rigorous technical, economic and financial analysis. - New PIM framework: approved but not implemented; piloting under way; MoF capacity and resourcing issues; PIM unit functionality unclear. - Discount rate in PIM Methodology: 5 percent real discount rate to be used uniformly; World Bank advised this rate be temporary pending research on appropriate rates. - GNERC WACC benchmark (nominal pre-tax): 16.4 percent. - GNERC WACC inputs (as presented): - Risk-free rate (rf): 12.22 percent - Default spread: 4.16 percent - Return on debt (rd): 12.93 percent - Equity beta (β): 0.8 - Mature market premium: 6.17 percent - Country risk premium: 5.12 percent - Post-tax cost of equity = (rf – default spread) = β * mature market risk + country risk premium = 18.36 percent - Given tax rate 15 percent, pre-tax cost of equity (re) = 21.6 percent - WACC formula applied: 60 percent weighting of debt to rd and 40 percent weighting of equity to re. - Donor-funded project appraisal: donors apply rigorous appraisal but inconsistent assumptions (e.g., discount rates) and not reconciled centrally. ### Project selection, budgeting, and maintenance - Multi-year budgeting and capital project definition: - BDD provides multi-year program ceilings but does not disaggregate current and capital. - Capital projects annex sets four-year spending projections by ministry/program but not all capital projects included. - e-Budget has cost profile functionality beyond four years but ministries underuse it. - Capital project definition thresholds (Order N385): - Construction/rehabilitation: project value GEL 50 Million or more; post-construction term ≥ 5 years. - Software/machinery/equipment (non-military): project value GEL 0.150 Million; post-purchase term ≥ 3 years. - Project selection (Design—Low; Effectiveness—Low): no standardized selection criteria or pipeline for domestically-financed projects; RDF municipal assessments are exception. - Maintenance (Design—Low; Effectiveness—Medium): - Maintenance not separately identified in budget documents except roads. - Roads maintenance: methodology based on international roughness index (IRI); road investments represent around 68 percent of total capital spending in the budget. - No standard methodology for routine/extensive maintenance across sectors; life-cycle and future maintenance costs often not included in new project proposals. ### Procurement, cash management, and implementation monitoring - Procurement (Design—High; Effectiveness—Medium): - e-Procurement (Ge-GP) operational since 2011; more than three-quarters of capital projects procured competitively. - Direct contracting value fell from 48.7 percent in 2013 to 24 percent in 2017. - Average number of bids per open tender low (about 3 in recent years). - Tenders not resulting in signed contracts averaged 29 percent between 2013–16. - Procurement Dispute Review Board (PDRB) not fully independent: Chair plus 3 of 6 members from SPA. - Availability of funding (Design—High; Effectiveness—High): - No instance in several years of payments not being made for budget-funded or IFI-funded projects due to lack of funds. - Cash Management and Forecasting Department prepares daily and monthly forecasts; TSA and e-Treasury coverage expanded in 2015 to municipalities and LEPLs. - In 2017, approximately 48 percent of IFI payments were channeled through the treasury. - Portfolio management and oversight (Design—Medium; Effectiveness—Medium): - Project implementation progress not systematically reported to MoF or line ministers; quarterly reports lack physical progress metrics. - Ex post evaluations do not occur systematically for budget-funded projects; PIM Guidelines include ex post chapter but implementation has not begun. - Capital budget execution rose from 73 percent of initial approved budgets in 2013 to 100 percent in 2016. - Management of project implementation (Design—Low; Effectiveness—Low): - Implementing agencies lack formal implementation plans; no standard project managers; suggested triggers for review absent. - Empirical indicators: SAO found material cost differences in 84 percent of projects completed in 2016; time overruns in 42 percent of projects (33 percent took longer). - Monitoring of public assets (Design—Medium; Effectiveness—Medium): - Assets recorded at historical cost; not revalued; MoF publishes major assets list annually since 2013. - MoF plans to adopt full IPSAS by 2020 with additional transition period of two–three years; e-Treasury upgrade in 2020 will include accounting and asset registration components. ### PIM and PPP legal/regulatory integration, MoF role, and IT systems - PPP Law (2018): comprehensive legal framework with gatekeeping role of MoF, fiscal affordability and value-for-money assessment requirements; not yet operational (requires government decree and methodological guidelines). - Key PPP concerns: - PPP Law operationalization pending; PPP database regulatory decree not approved; limited operational PPP information. - Some PPP exposures large; 72 PPAs met specific criteria (signed agreement, construction permit, financial closure) though additional projects exist under negotiation. - MoF role and responsibilities: - MoF role in assessing economic and social value, affordability, viability and value-for-money not clearly defined in PIM or PPP frameworks. - Recommendation: regulatory framework should clearly state MoF responsibility for assessing viability, affordability and Value for Money, and define concepts and assessment criteria. - Good practice: MoF should have veto power at key decision gateways (selection, procurement method, tendering, contract negotiation, contract changes) or its assessments and recommendations should be published if advisory only. - IT systems and data management: - Core systems: e-Budget (operational 2012), e-Treasury (2010), e-Procurement (2010). - Strengths: broad coverage, integration between e-Budget and e-Treasury, in-house adjustable systems. - Gaps: capital project information not captured accessibly; no integrated asset register or asset condition data; lack of live machine-readable procurement data limits monitoring. - Recommendation: next IT development phase should support data needs across the budget cycle and integrate related systems; introduce live machine-readable data and an API to SPA’s OCDS portal. ### Key recommendations and prioritized actions (selected, with institutional priority and TA) - Strengthen national and sectoral planning: - Update public investment component of national development strategy to include all financing sources, levels of government, and procurement options. Institutional priority: Medium; TA: FAD. - Implement and clarify PIM methodology and MoF role: - Implement new PIM methodology; ensure a dedicated MOF team provides central support for appraisal and maintains methodology. Institutional priority: High; TA: WB supported by FAD. - Approve discount rate methodology reflecting economy’s opportunity cost; undertake research and include in amended decree. Responsible: MOF. - Project appraisal, selection, and pipeline: - Adopt standard appraisal and selection procedures; create and maintain a project pipeline; operationalize PIM selection procedures in budget process. Institutional priority: High; TA: WB/FAD. - Maintenance and lifecycle costing: - Develop standardized methodology for estimating current and capital maintenance needs; ensure life-cycle costing and explicit maintenance budgeting. Institutional priority: High; TA: FAD. - Integrate PIM with PPPs and manage contingent liabilities: - Align PIM with PPP implementing regulation; ensure projects assessed on merits irrespective of procurement/financing mode; strengthen monitoring/disclosure of PCs and PPP contingent liabilities. - Project implementation, monitoring, and ex-post evaluation: - Issue guidelines for project implementation plans and monitoring reports for every investment project; introduce live, machine-readable contract implementation data. Institutional priority: High; TA: FAD / WB / other TA providers. - IT, data sharing, and asset linkage: - Introduce live machine-readable data, develop APIs for procurement data, and link asset registry and accounting data with public investment planning and maintenance budgeting. - Capacity building: - Strengthen MoF staffing and skills in CBA, financial analysis, engineering, project monitoring and accounting; implement capacity-building strategy across MoF and executing agencies. ### Implementation sequencing and coordination risks - Annex I proposed action plan phased across 2018, 2019, 2020, 2021 with specific actions (e.g., approve MOF order, pilot PIM procedures, training, introduction of rolling baselines, e-Budget functionality use). - Coordination risks: - Multiple PIM and PPP reforms underway increase risk of coordination failures. - Clarity on responsibilities across entities involved in PIM implementation is required. - Recommendations linked to structural reforms currently underway are excluded from the action plan. *Source: PREFACE, EXECUTIVE SUMMARY, PIMA assessment, and chapter recommendations, cr18306* ### PREFACE _________________________________________________________________________________________ 6 ### PREFACE _________________________________________________________________________________________ 6 ### Mission and objectives - An FAD mission visited Tbilisi, Georgia, from May 10 to 25, 2018. - Mission team: Isabel Rial (FAD, head), David Gentry (FAD), John Zohrab (FAD regional PFM advisor), Mary Betley (FAD expert), Katja Funke (FAD expert), and Sandro Nozadze (World Bank). - Tasks of the mission: - (i) assess Georgia’s public investment management framework; - (ii) assist the authorities to prepare a reform strategy and prioritized action plan for strengthening the management of public investment; - (iv) recommend follow-up areas of technical assistance that could be provided by FAD or other development partners. - Principal meetings with Georgian authorities and stakeholders included: - Mr. N. Gagua, Mr. G. Kakauridze, Mr. T. Kavlashvili (Deputy Ministers of Finance); - Ms. E. Mikabadze, Mr. R. Mikautadze (Deputy Ministers of Economy and Sustainable Development); - Mr. I. Karseladze, Mr. I. Begiashvili (Deputy Ministers of Regional Development and Infrastructure); - Ms. E. Ghazadze (Deputy Audit General); - Ms. E. Guntsadze (Head of Budget Department) and Mr. P. Aslanikashvili (Acting Head of the Macroeconomic Analysis and Forecasting Department), Ministry of Finance; - Officials from the Government Administration and the Ministry of Education; - Ms. G. Boyreau and Ms. M. Dolidze of the World Bank, and representatives from the donor community. - Acknowledgements: support from Mr. F. Painchaud (IMF Resident Representative) and staff Ms. N. Sharashidze and Ms. K. Danelia; translation assistance from Ms. K. Avaliani. ### Mission deliverables - Assessment of public investment management (PIM) institutions and practices. - Reform strategy and prioritized action plan to strengthen PIM (proposed action plan provided in Annex I). - Recommendations for follow-up technical assistance by FAD or other development partners. ### Executive summary — Context and overall findings - Government intent: strengthen infrastructure governance by improving PIM and PPPs frameworks. - Public investment trends: - Over the last decade, public investment in Georgia has been similar to the average of emerging market economies (EMEs). - Since the mid-2000s, public investment accounted, on average, for one third of total investment. - Public investment peaked at 8.6 percent of GDP in 2007. - Public investment stabilized at about 5.5 percent of GDP in recent years. - Off-budget and financing shifts: - Public infrastructure assets are increasingly procured off-budget through PPPs, PPAs, and public corporations (PCs). - Off-budget investment: less than five percent of total public investment in the early 2000s; about one-third of total public investment in 2017. - Financing shifted toward domestic sources: share of domestically financed investment projects rose from 50 to 70 percent of total public investment since 2009. - Planned scaling up under EFF: - On-budget public investment spending expected to increase from 6.1 percent of GDP in 2017 to 8 percent of GDP by 2023. - Several energy and social infrastructure projects in pipeline expected as PPPs and PPAs (examples in text: power plants, schools). - Infrastructure quality and gaps: - Georgia compares favorably to EMEs in perception of infrastructure quality. - Indicators of quantity and/or access (roads, electricity) point to large bottlenecks. - Estimated efficiency gap of 15–20 percent suggests up to 20 percent of the public capital stock did not achieve its full potential; gap is below that of EMEs. ### Institutional performance — high-level assessment - Overall observation: many PIM policies and procedures are either not or only partially aligned with good practices; performance differs between institutional design (“on paper”) and effectiveness (“in practice”). - Strengths: - Fiscal rules provide predictability of funding for public investment. - During implementation, investment is appropriately funded. - Nonfinancial assets including depreciation are reported in government consolidated financial statements. - Procurement system: open and transparent; e-procurement enables monitoring and tracking of complaints. - Flexible commitment rules and good cash management for domestic and donor funds; no recent payment delays due to lack of funds. - Main weaknesses and high-priority issues: - Strategic planning: - National and sectoral strategies are not comprehensive and only cover new initiatives. - Strategies’ definitions of public investment objectives are not consistent with efficient investment. - Reform priority: High. - Multiyear budgeting: - Multiyear capital ceilings are not identified separately; total construction costs not published beyond BDD framework. - Reform priority: Medium. - Project appraisal and selection: - No standard appraisal methodology for projects not funded by donors. - No standard project selection procedures and no project pipeline in place. - New PIM methodology has not yet been implemented. - Reform priority: High. - Maintenance: - No standard methodology for maintenance requirements or to track maintenance funding (except roads sector has a methodology). - Reform priority: High. - Project implementation and oversight: - Weak project management, lack of implementation plans, no guidance on project adjustments, irregular ex-post audits. - Portfolio management and oversight: physical and financial monitoring not systematic; no ex post reviews; flexible re-allocation led to project reallocations of all types (incl. econ class) representing 43 percent of MRDI’s capital budget in 2016. - Reform priority: High. - Alternative infrastructure financing and PPPs: - Limited competition in most infrastructure markets; fragmented monitoring of PCs. - PPP law approved, but regulatory framework not completed. - Contingent liabilities disclosed with central government budget documents; contingent liabilities of PCs were 20.6% GDP and PPAs 33.7% GDP (as noted in assessment). - Reform priority: High. - Assets management: - Assets registered but without revaluation; SAO verifies ministry asset records on a sample basis. - Reform priority: Medium. ### Summary numerical highlights (as reported) - Public investment peak: 8.6 percent of GDP in 2007. - Recent public investment: about 5.5 percent of GDP. - On-budget public investment spending: 6.1 percent of GDP in 2017; target 8 percent of GDP by 2023. - Off-budget investment shares: - Early 2000s: less than five percent of total public investment. - 2017: about one-third of total public investment. - Domestic financing share rise: from 50 to 70 percent of total public investment since 2009. - Efficiency gap estimate: 15–20 percent (up to 20 percent of public capital stock not achieving full potential). - Project funding composition: on average, 60% of projects are domestically funded (noting the new PIM methodology is not yet implemented). - Contingent liabilities: PCs 20.6% GDP; PPAs 33.7% GDP. - Project reallocations: 43 percent of MRDI’s capital budget in 2016. ### Key recommendations and priorities (summary from Table 0.2) - Strengthen national and sectoral planning: - Improve national and sectoral planning by updating the public investment component of the national development strategy, including all sources of financing, levels of government, and procurement options. - Institutional priority: Medium; TA support: FAD. - Implement and clarify PIM methodology and MOF role: - Issue: new PIM methodology not implemented; economic assumptions of donor-funded projects not reconciled centrally; inconsistent project appraisal discount rates that may not reflect economy’s opportunity cost of capital. - Institutional priority: High for implementation of PIM methodology (detailed actions listed in Table 0.2 and annexes). - Address project appraisal, selection, and pipeline creation: - Adopt standard project appraisal processes and selection procedures; create and maintain a project pipeline. - Institutional priority: High. - Improve maintenance funding methods and tracking: - Establish standard methodology for maintenance requirements and for tracking maintenance funding across sectors. - Institutional priority: High. - Integrate PIM and PPP frameworks: - Ensure PIM improvements are fully integrated with the PPP legal and regulatory framework under preparation to assess projects on merits irrespective of procurement/financing mode. - Institutional priority: High. - Enhance project implementation, monitoring, and ex-post evaluation: - Prepare implementation plans, guidance on adjustments, strengthen project management, and increase regular ex-post reviews and audits. - Institutional priority: High. - Strengthen oversight of off-budget entities and contingent liabilities: - Improve monitoring of PCs, better disclosure and reporting of contingent liabilities, and ensure central reconciliation of project economic assumptions. - Institutional priority: Low-to-Medium in design but Medium-to-High in effectiveness depending on area. ### Coordination risks and next steps - Multiple PIM and PPP reforms underway increase risk of coordination failures. - Clarity on responsibilities across entities involved in PIM implementation is required. - Proposed action plan provided in Annex I; recommendations linked to structural reforms currently underway are excluded from the action plan. *Source: PREFACE and EXECUTIVE SUMMARY, cr18306* ### 2. Improve project appraisal by implementing the new PIM methodology and ensuring that a dedicated team ### 2. Improve project appraisal by implementing the new PIM methodology and ensuring that a dedicated team ### Summary of recommended actions (from the Recommendations table) - 2. Improve project appraisal by implementing the new PIM methodology and ensuring that a dedicated team at the MOF is responsible for providing central support for line ministry project appraisal and for developing and maintaining the project appraisal methodology - Priority: 4 - Implementation type: High - TA support: WB supported by FAD - Issue: The government has not yet decided on the deregulation of the electricity market, it has not yet considered the deregulation of the gas and water markets, and it has not addressed relative prices in land transport use. - 3. Improve competition in major infrastructure markets - Priority: 5 - Implementation type: Structural reform - Issue: The oversight of PCs investment is insufficiently focused - 4. Require PCs to undertake only those investments that comply with their Statements of Corporate Intent and are thereby commercially appropriate for them - Priority: 5 - Implementation type: Structural reform (in progress with support of FAD) - 5. Strengthen multi-year budgeting by improving the clarity and linkages in budget documents of annual and medium-term projections for public investment - Priority: 6 - Implementation type: Medium - TA support: FAD - Issue: The Basic Data and Directions Document (BDD) does not effectively guide multi-year capital spending - 6. Implement mechanisms to prioritize the completion of on-going projects in the budget process - Priority: 8 - Implementation type: Medium - TA support: FAD - Issue: There are no formal mechanisms to give priority to on-going capital projects. Resources for new project could potentially crowd out on-going projects, leading to delays and increased project costs - 7. Develop a standardized methodology for estimating current and capital maintenance needs to be used by spending ministries over the rolling BDD/budget period - Priority: 9 - Implementation type: High - TA support: FAD - Issue: There is currently no standard methodology to determine maintenance requirements or to track maintenance funding systematically. - 8. Operationalize the project selection procedures in the PIM Guidelines/ Manual and incorporate them in the budget process applicable for all public investment projects, regardless of the funding source - Priority: 10 - Implementation type: High - TA support: WB - Issue: The lack of standard project selection procedures and a list of approved projects potentially undermine the link between the PIM process and the budget - 9. Introduce live machine-readable data, develop interface to improve data-sharing among different data users, and introduce contract implementation data in open format - Priority: 11 - Implementation type: Medium - TA support: WB - Issue: The effectiveness of the monitoring system is reduced because of lack of live, retrievable data, particularly for entities outside the government - 10. Strengthen project implementation monitoring by issuing guidelines for implementing agencies to prepare monitoring reports covering all budgeted projects - Priority: 13 - Implementation type: High - TA support: FAD and/or other TA provider - Issue: Project implementation progress is not reported systematically to MOF or related line ministries. - 11. Strengthen project management by issuing guidelines to prepare project implementation plans for every investment project, regardless of financing source - Priority: 14 - Implementation type: High - TA support: FAD and/or other TA provider - Issue: Project managers and procedures in place at implementing agencies, but lack formal implementation plans - 12. Link asset registry and accounting data with public investment planning and maintenance in the budget process - Priority: 15 - Implementation type: Structural reform - Issue: MOF compiles limited information on the physical stock, condition, and value of fixed assets, but this information is not taken into account in planning and budgeting for maintenance, rehabilitation, and new infrastructure needs ### Cross-cutting issues and specific guidance - A. Legal and regulatory framework (Cross cutting, Structural reform, supported by ADB and FAD) - Ensure that all public investment projects are covered by the PIM process - Consider distinguishing between a regular PIM process for larger projects including all Public-Private Partnerships (PPPs), and a simplified procedure for smaller and highly standardized projects - Ensure, through the PIM Guidelines or the PIM Methodology, the alignment of the PIM process with the budget cycle - Review PIM Guidelines and the PIM Methodology to ensure consistency and to make them more user-friendly - Align, through the detailed provisions of the PPP implementing regulation, the PPP process with the PIM process - Clearly define roles and responsibilities for the various stakeholders and ensure consistency across procedures - B. IT systems and data management (Cross cutting, Structural reform) - Ensure that the next phase of IT development supports the data management needs of the budget cycle as a whole. New elements should be actively designed and planned to work systematically and consistently across the related IT systems. - Issue: Information technology systems for PFM are fragmented, and none of them focus on PIM, hindering effective managerial decisions ### Key trends, findings, and statistics on public investment (from the chapter text) - Macroeconomic and fiscal context - Average annual growth amounted to 3.4 percent in 2015–17. - General government deficit and gross debt stabilized around 3.0 and 45 percent of GDP, respectively. - EFF medium-term projections: deficit declining to 1.3 percent of GDP and gross debt to 40.3 percent of GDP by 2023. - General government investment spending is expected to increase from 6.1 percent of GDP in 2017 to 8 percent of the GDP by 2023. - Total investment and public capital stock - Total investment increased from 15 percent of GDP in 2009 to above 30 percent of GDP in 2017. - On average, public investment accounted for about one third of total investment, reaching a peak of 8.6 percent of GDP in 2007 and then stabilizing at 5.5 percent of GDP, on average, in the last three years. - Public capital stock deteriorated from about 130 percent of GDP in 2000 to 90 percent of GDP by 2017. - Fiscal consolidation and composition - General government deficit peaked at 8.8 percent of GDP in 2009 and declined to 1.2 percent of GDP in 2017. - Capital expenditure accounted for about 20 percent of total expenditure since 2005. - Volatility of investment has been reduced by half relative to that observed in the early 2000s. - PPPs, PPAs, and public corporations - Total commitments for government under power purchase agreements (PPAs) estimated at 1.1 billion USD (7.7 percent of GDP). - By 2017, the stock of PPPs and PPAs is estimated at 5.1 percent of GDP (average for EMEs: 4.5 percent of GDP). - Investment through PPPs and PPAs rose from an average of 0.5 percent of GDP between 2010–15 to about 2.0 percent of GDP by 2017. - Public corporations’ investment spending (estimated by capital transfers received from BCG) rose from around 1 percent of GDP between 2010–15 to 2.4 percent of GDP in 2017. - By 2017, general government accounted for about two thirds of total investment spending; public corporations, PPPs and PPAs contributed the remaining third. - Composition by sector - About 60 percent of Georgia’s public investment is devoted to economic infrastructure (e.g., roads, ports, electricity) compared to EMEs average of 46 percent. - Georgia spends less on social infrastructure compared to EMEs. - Financing sources - In 2017, domestic financing represented about 70 percent of total financing, compared to an average of 55 percent between 2009 and 2014. - Foreign concessional loans comprise the bulk of external financing; external grants are marginal. - Access, quality, and efficiency - Perception indicators: Georgia compares favorably to EMEs on infrastructure quality based on World Economic Forum surveys, but perception deterioration observed since 2014 across most subsectors. - Physical measures: Georgia performs better than EMEs in access to treated water but lags in roads, electricity, and education infrastructure. - Electricity sector vulnerabilities: production per capita is lower than comparators; reliance on imported fossil fuels can lead to higher market prices or subsidies. - IMF efficiency estimates: - Efficiency gap using physical indicators of quantity and access: 21 percent for Georgia versus 44 percent average for EMEs. - Efficiency gap using survey indicators of perception of quality: 14 percent for Georgia versus 20 percent average for EMEs. - Interpretation: between 15 to 20 percent of public investment spending did not result in the increase in the level or quality of infrastructure that would have been achieved by the most efficient country (as discussed in the chapter). ### Implementation and monitoring priorities emphasized - Establish a dedicated MOF team to provide central support for line ministry project appraisal and to develop and maintain the project appraisal methodology (Recommendation 2). - Operationalize project selection procedures and integrate them into the budget process for all public investment projects regardless of funding source (Recommendation 8). - Develop and apply standardized methodologies for estimating maintenance needs and tracking maintenance funding (Recommendation 7). - Introduce live, machine-readable contract implementation and project monitoring data, and improve data-sharing interfaces across systems (Recommendation 9). - Issue guidelines to strengthen project implementation monitoring and require project implementation plans and monitoring reports for every investment project (Recommendations 10 and 11). - Link asset registry and accounting data to public investment planning and maintenance budgeting to ensure condition and value of fixed assets inform investments and maintenance (Recommendation 12). *Source: IMF staff chapter text and recommendations as presented in the provided content unit.* ### 15. Given the need to ensure medium-term fiscal sustainability, Georgia’s public ### 15. Given the need to ensure medium-term fiscal sustainability, Georgia’s public ### III. PUBLIC INVESTMENT MANAGEMENT INSTITUTIONS — The PIMA Framework - The IMF developed the Public Investment Management Assessment (PIMA) framework to assess the quality of public investment management, identify strengths and weaknesses of institutions, and provide practical recommendations to strengthen them and increase the efficiency of public investment. - The tool evaluates 15 sets of policies and procedures ("institutions") across the three major stages of the public investment cycle: - Planning of investment levels for all public-sector entities to ensure sustainable levels of public investment; - Allocation of investments to appropriate sectors and projects; - Delivering productive and durable public assets. - For each of the 15 institutions, three indicators are analyzed and scored on a scale determining whether the criterion is met in full, in part, or not met. Each dimension is scored on three aspects: - Institutional design: objective facts indicating that appropriate organizations, policies, rules and procedures are in place. The average score of institutional design of three dimensions provides the institution score (high, medium, or low). - Effectiveness: the degree to which the intended purpose is being achieved or there is a clear impact. The average score of effectiveness of three dimensions provides the effectiveness score for the institution (high, medium, or low). - Reform priority: how important improving the issues contained within the institution are for the specific conditions faced by Georgia. - The following sections provide the detailed assessment for Georgia according to the PIMA framework. ### B. Investment Planning — Overview - Emphasis: Given expanding public investment toward more complex and risky projects, often procured increasingly outside the budget, achieving efficiency in allocation and management of public resources is critical. - The assessment details institutional design and effectiveness scores across investment planning, sectoral planning, and intergovernmental coordination. ### 1. Fiscal Principles or Rules (Design—High; Effectiveness—Medium) Findings: - Fiscal policy in Georgia is guided by: - Economic Liberty Act (ELA), - the government’s national development strategy Georgia 2020, - and the Government Platform 2016-20. - The ELA (adopted 2011, in force 2014) limits: - (i) the ratio of budgetary central government (state) debt to GDP to 60 percent; - (ii) the ratio of the consolidated budget (central and local government) deficit to GDP to 3 percent; - (iii) the ratio of expenses plus the increase in non-financial assets of the consolidated budget to GDP to 30 percent; - (iv) new general state taxes or increases in the top rate of such taxes, to those approved by referendum, with the exception of excises. - Georgia 2020 and the Government Platform prescribe a stable ratio of state debt to GDP of about 40 percent as a medium to long-term target. - The 60 percent state debt to GDP ceiling operationalizes the long-term target, including a buffer of 20 percent of GDP to account for macroeconomic risks. - Current estimates based on standard shocks modelled by the debt sustainability analyses (DSAs) suggest that, within a 10-year time horizon, projected state debt would be unlikely to exceed the 60 percent of GDP ceiling. - A medium-term fiscal framework (MTFF) was introduced in 2004, but implementation falls short of good practices: - The MTFF does not distinguish between recurrent and capital spending, or between ongoing and new capital projects, limiting MTFF’s ability to support predictability in PIM. - A recent FAD technical assistance report highlighted weaknesses in the current fiscal targets and rules: - the expenditure limit is procyclical; - there are gaps in coverage; - there are weaknesses in measurement, reporting, and oversight; - the budgetary process, including its medium-term budget framework (MTBF), is looser than desirable; - limits on taxes reduce revenue flexibility. - Symptoms of expenditure rule under pressure: - aggregate expenditure has been above the ELA limit; and - large deviations between forecast and actual aggregate expenditure. - Priority actions from PIM standpoint: - improve the link between the Basic Data and Directions Document (BDD) and annual budget preparation to support orderly planning of public investment; - focus on: (i) reconciliation and explanation of forecast changes for capital expenditure in successive vintages of Georgia BDD; (ii) distinguish between baseline estimates and new policy initiatives in preparing capital expenditure budgets; (iii) gradually extend the MTBF’s binding nature for capital expenditure. Key statistics from Table 1. Fiscal Outturns and Projections (percent of GDP) - Expenditures: 2014 = 30.2, 2015 = 30.4, 2016 = 30.9, 2017 = 29.9, 2018* = 29.9, 2019* = 29.9, 2020* = 29.4, 2021 = 28.8 - Of which capital: 2014 = 4.6, 2015 = 4.5, 2016 = 4.0, 2017 = 4.1, 2018* = 6.1, 2019* = 6.4, 2020* = 6.7, 2021 = 7.4 - Deficit: 2014 = -2.0, 2015 = -1.1, 2016 = -1.4, 2017 = -0.5, 2018* = -1.3, 2019* = -1.4, 2020* = -1.4, 2021 = -1.3 - Debt: 2014 = 35.4, 2015 = 41.3, 2016 = 44.4, 2017 = 42.9, 2018* = 43.1, 2019* = 42.8, 2020* = 42.4, 2021 = 41.3 Vintages and execution (percent of GDP) - Execution (total expenditure): 2010 = 33.9, 2011 = 30.7, 2012 = 30.6, 2013 = 29.3, 2014 = 30.2, 2015 = 30.4, 2016 = 30.9, 2017 = 29.9 - Ceiling: 30 percent (years shown) - Execution (capital expenditure): 2010 = 6.4, 2011 = 6.1, 2012 = 6.3, 2013 = 4.7, 2014 = 4.6, 2015 = 4.5, 2016 = 4.0, 2017 = 5.0 ### 2. National and Sectoral Plans (Design — Low; Effectiveness — Low) Findings: - Georgia does not have a national public investment strategy or infrastructure plan. - The authorities publish: - three national planning documents, - one set of sector planning documents, - one set of ministerial planning documents. - The three national documents: - Georgia 2020 (prepared 2014; goals for 2017 and 2020), - Government Platform (reform plans for 2016–2020), - Basic Data and Directions Document (BDD) covering fiscal plans for the forthcoming budget year and following three years. - Sector planning documents: about 60 sector strategies. - Ministerial planning documents: one action plan per central government ministry. - Georgia 2020: - economic vision to create foundations for long-term inclusive economic growth and improve welfare; - does not have a separate public investment component; - coverage of projects is limited and ad hoc; mentions projects: East-West Highway, Anaklia port, Georgian section of the Baku-Tbilisi-Kars railway, Kutaisi airport; - includes some key output and outcome indicators (Table 2). - Table 2. Georgia: 2020 Infrastructure Development Targets - Total annual production of electricity (TW*h): Baseline = 9.7; 2017 = 12; 2020 = 14 - Access to electricity (Doing Business rank): Baseline = 50; 2017 = 45; 2020 = 35 - Logistics Performance Index (score): Baseline = 2.77; 2017 = 3.1; 2020 = 3.3 - Roads percentage surfaced: Baseline = 39; 2017 = 42; 2020 = 45 - Georgia 2020 is not costed and does not comprehensively cover public investment or the existing public capital stock; implementation not fully reflected in practice; no updating during its term. - Government Platform: - focused on planned and ongoing reform activities; - generally consistent with Georgia 2020 vision but does not map activities to Georgia 2020 results; - not costed; does not cover public investment distinctly or comprehensively; does not address existing public capital stock; - provides additional details on selected public investment projects (Box 1 lists investments with quantified indicators). - Box 1. Government Platform 2016–20 Infrastructure Investments - Construction of the 800km East -West Highway, with a total cost of USD 3.5 billion USD, to be finalized by 2020 - Almost 360,000 people to be provided with 24 hours a day drinking water by 2020 - 8000km of internet infrastructure to be provided and 90percent of the country’s population to have access to the internet - In 2017 – 2020, at least 500 MW installed capacity to be provided, and an infrastructural investment of 3 billion GEL to be implemented in energy sector - A gas storage project of 210–280 million cubic meters - BDD documents include: Government Platform; expenditure forecasts by ministry for the forecast period; summary of each ministry’s action plan for the forecast period. Action plans include measurable output or outcome indicators and risk assessments, and link strategic goals to costs via action plans. However: - coverage of strategic planning is limited to the state budget; - action plans focus on ministries’ new activities or projects rather than full scope of activities; - they do not have distinct components for public investment and do not directly address existing capital stock under ministries’ management. - Sector strategies: - fragmented; about 60 strategies that do not cover the full scope of government activities and often concern only new activities; - quality of costing varies greatly; some have output/outcome indicators, many do not; - often motivated by donors or to conform with donor approaches; - typically do not have distinct public investment components and do not address existing public capital stock. Policy recommendations (sectoral planning): - Ensure sectoral strategies and ministry action plans are closer linked to the budget process by: - making sectoral strategies consistent with the resource framework of the BDD and annual budget; - updating sectoral strategies regularly; - ensuring internal consistency between sectoral strategies and with the ministry accountability framework. - Make public investment strategic planning a distinct component of national, sector and ministerial strategic planning to: - analyze the public capital stock, not just new public investment; - take advantage of audits of project and portfolio performance so the investment cycle is closed; - create a systematic and comprehensive approach to strategic planning so outcome indicators are comprehensive and focus on economic efficiency and economic growth enhancement of public investment. ### 3. Coordination Between Entities (Design—Medium; Effectiveness—Medium) Findings: - Substantial coordination exists between central government and municipal governments on municipal capital expenditure. - Most capital transfers between central and municipal governments are decided by a special commission under the Ministry of Regional Development and Infrastructure (MRDI) that includes representatives of the Ministry of Finance (MoF). - Commission process: - uses a formula based on population (except Tbilisi and Adjara which comprise about half of the population) to determine annual indicative allocations for capital transfers to each municipality; - notifies municipalities of indicative allocations (not necessarily six months before fiscal year start); - municipalities submit capital projects to the commission for approval within these allocations; - commission approves projects individually and makes transfers on a per-project basis to match contractual payment requirements; - municipalities are notified about expected transfers as soon as projects are approved. - Result: the commission has comprehensive information about central government commitments to fund municipal projects. - Criteria applied by the commission to approve projects are defined by government decree. - No coordination between municipalities and central government on projects funded by municipalities’ own resources. Key statistics from Table 3. Capital Transfers from Central to Municipal Government (GEL million) - Capital transfers approved by the MRDI commission: 2014 = 135.7; 2015 = 174.5; 2016 = 183.0; 2017 = 195.8 - Other capital transfers: 2014 = 81.8; 2015 = 93.0; 2016 = 60.4; 2017 = 21.8 - Total capital transfers: 2014 = 217.5; 2015 = 267.5; 2016 = 243.4; 2017 = 217.8 - Share of total municipal capital expenditure: 2014 = 28 percent; 2015 = 36 percent; 2016 = 33 percent; 2017 = 34 percent Findings on contingent liabilities and public corporations (PCs): - Annual budget documentation discloses information on many contingent liabilities associated with capital projects of PCs. - Although SNGs and PCs have no standard reporting mechanism to central government for contingent liabilities, central government compiles, estimates, and publishes data on contingent liabilities regularly. - State budget documentation includes a table disclosing capital projects of PCs funded by loans from central government and on-lending matching loans from donors; these projects create contingent liabilities for the state if PCs cannot service loans. - Most major capital projects of PCs are funded via this on-lending model. - The Statement of Fiscal Risks (SFR) in annual budget documentation includes: - discussion of magnitudes and risks of the largest projects; - risks of financial distress of PCs which would cause contingent liabilities to the state to materialize; - identification that inefficient and poorly planned investment projects are a major source of financial problems in PCs and related contingent liabilities. Key statistics from Table 4. Net Lending from Central Government to PCs for Capital Expenditure (GEL million) - Central government net lending to PCs for capital expenditure: - 2013 = 180.3 - 2014 = 222.6 - 2015 = 360.0 - 2016 = 422.5 - 2017 = 764.0 - The SFR discloses extensive information on contingent liabilities associated with electricity generation PPPs, including scenario analysis of PPA fiscal risks. It discusses contingent liabilities of large PPPs, notably the Nenskra hydro project and the Gardabani I thermal project. - Information about two large PPPs, the Tbilisi airport and the Anaklia port concession, is not yet disclosed because agreements have not been concluded. *Source: IMF staff based on the PIMA assessment and official data as presented in the provided chapter.* ### 4. Project Appraisal (Design—Low; Effectiveness—Low) ### 4. Project Appraisal (Design—Low; Effectiveness—Low) ### Project appraisal and PIM framework - Capital projects not funded by donors are not subject to a standard methodology or central support for project appraisal. - Donors on average fund around 40 percent of capital expenditure of the general government. - Many non-donor-funded projects lack rigorous technical, economic and financial analysis, including risk assessment. - The authorities have approved a new PIM framework for such projects, developed with the assistance of the World Bank, which should remedy this deficiency. However: - The new PIM framework has not yet been implemented, in part because it requires a significant improvement in the capacity and resource allocations in ministries and at the MoF. - It is not clear that a new PIM unit in the MoF required by the new framework will be established and will be responsible, in respect of all projects, for providing central support for line ministry project appraisal and for developing and maintaining the project appraisal methodology. - The MoF currently intends to distribute the functions envisaged for the PIM unit between the Budget department, the fiscal risks division and a working group. - Piloting of this new PIM framework is under way. ### Discount rate, appropriateness, and GNERC WACC inputs - The newly approved PIM framework includes a 5 percent real discount rate, to be used uniformly for all projects. - The World Bank advised that this rate should only apply on a temporary basis and that research be undertaken to determine a discount rate that is appropriate for Georgia. This analysis has not yet been done. - A 5 percent real discount rate could be too low for Georgia for the foreseeable future and could result in a significant misallocation of capital with negative implications for economic growth. - By comparison, the nominal pre-tax weighted average cost of capital (WACC) used by the Georgian National Energy and Water Supply Regulatory Commission (GNERC) for regulated tariff approval purposes is 16.4 percent. - Inputs into GNERC’s WACC calculation: - Risk-free rate (rf): 12.22 percent (weighted average yield to maturity of 10-year Treasury bonds issued in 2016) - Default spread: 4.16 percent (country default risk from Damodaran, data as at January 2017) - Return on debt (rd): 12.93 percent (weighted average interest rate on loans, more than 5 years, provided in 2016 to the energy sector, data from the National Bank of Georgia) - Equity beta (β): 0.8 (average for comparable countries: Albania, Bulgaria, Croatia, Macedonia, Montenegro, Serbia) - Mature market premium: 6.17 percent (market risk premium average 6.2 percent for 2016 from Damodaran) - Country risk premium: 5.12 percent (country risk premium from Damodaran, data as at January 2017) - Post-tax cost of equity = (rf – default spread) = β * mature market risk + country risk premium = 18.36 percent - Given a tax rate of 15 percent, the pre-tax cost of equity (re) = 21.6 percent - The WACC is derived applying: a 60 percent weighting of debt to rd (return on debt) and a 40 percent weighting of equity to re (return on equity). - Source: MoNE. ### Donor-funded project appraisal - Capital projects funded by donors, which are mostly large, are subject to rigorous technical, economic and financial analysis, including risk assessment. - While appraisal processes are similar across donors, there is not necessarily consistency in key assumptions across donors or projects. - In particular, discount rates differ and market assumptions are not necessarily reconciled with the authorities’ economic forecasts. ### Alternative infrastructure financing and market structure - Regulation of infrastructure companies aims to promote open and competitive markets; PCs should be subject to effective oversight of their investment plans to allow objective pricing of infrastructure outputs. - In Georgia, limited competition and variable incentives for private participation have resulted in investments being made without efficient relative prices, likely distorting capital allocation and negatively affecting economic growth. - Sector-specific observations: - Telecommunications: producers and consumers face market prices; there are no PCs; the public asset (the spectrum) is auctioned transparently; the Georgia National Communications Commission mainly solves disputes. - Electricity: authorities plan progressive deregulation but transition specifics and end-state not decided; current framework prone to inefficient investment: - Consumers face a single price reflecting cross-subsidization between low-cost and high-cost generators, reducing incentives to improve consumption efficiency. - Distribution network provision and trading are bundled, reducing incentives to improve consumption efficiency. - Generators do not face risks of high-cost provision because of cross-subsidization and PPAs arranged by the state. - There are PCs that do not act commercially, taking excessive risks and over-investing. - Gas: deregulation has only just begun to be considered; gas purchase and distribution are monopolized by the government and an SOE; households receive subsidized gas, reducing consumption efficiency incentives. - Water: deregulation not yet considered; pipeline network (natural monopoly) might need full rehabilitation before private operators would find it attractive; until consumers face economic prices, extent of inefficient investment is uncertain. - Transport: no holistic regulatory framework; investment occurs without regard for efficient relative prices between transport modes; rail is losing market share to road, potentially because road transport is not efficiently priced. ### Regulation, GNERC implementation, and PCs - GNERC (established 2007) is an independent regulator for energy and water sectors; there have been implementation issues: - Regulated companies have argued that tariff structures have sometimes been too low to support commercial viability (e.g., Georgia State Electrosystem, United Water Supply Company). - GNERC has sometimes considered that companies have over-invested; its mandate is to approve tariffs that grant a commercial return for the minimum reasonable levels of investment. - GNERC has recently approved significant increases in tariffs, which could indicate better balance between perspectives and improved investment behavior. - The government publishes a consolidated report on the financial performance of significant PCs but does not disclose investment plans systematically. - The SFR included in the annual state budget documentation discusses the financial condition of several large PCs individually but does not systematically focus on investment plans. - Monitoring of PCs is fragmented and not designed to ensure efficient investment: - Large energy-sector PCs are monitored by the Ministry of Economy and Sustainable Development (MOESD). - Most other PCs are monitored by the National Agency for State Property (NASP) under the MOESD. - The Partnership Fund is monitored by the MOESD and MoF. - Other PCs are monitored by line ministries. - The SFR has introduced consolidated monitoring to a degree; it is at an early stage and authorities are considering strengthening the PC monitoring framework. ### Desirable features of PC monitoring (Box 4) - Government should set transparent, quantitative and solely commercial goals for PCs, and hold supervisory boards accountable for achieving them. - Any non-commercial goals should be funded separately by the government under separate and transparent contracts. - PCs should trade competitively and should not enjoy commercial advantages or disadvantages by virtue of public ownership; they should not receive explicit or implicit government guarantees and should be subject to a competitive cost of capital (equity and debt). - PCs should produce and publish Statements of Corporate Intent (SCIs) agreed with the government’s monitoring representative; SCIs should include: - Scope of business, risk limits, expected financial returns, major transactions requiring government approval, and requirements for the production and publication of annual reports that disclose performance against SCIs. - PC supervisory board members should have private sector commercial skills and experience; they should not be government ministers or officials to avoid conflicts of interest and facilitate accountability. - PC monitoring framework should be centralized: - The MoF should be the shareholder of large PCs to avoid diffused monitoring responsibility. - The NASP should be the shareholder of smaller PCs. - Line ministries should not be shareholders of PCs or responsible for their monitoring to avoid conflicts with sectoral public policy responsibilities. - Sources: FAD technical assistance reports, and How to Improve the Financial Oversight of Public Corporations, 2016, IMF. ### PPP legal framework, operationalization, and project exposure (Box 3 and Table 5) - Government Platform 2016–20 summarizes policy on PPPs; parliament has recently approved a PPP Law. - The PPP Law provides a comprehensive legal framework for preparation, selection, and management of PPPs according to good international practice, in almost all respects. - Key features of the PPP Law (Box 3): - Broad coverage in terms of sectors, public institutions, and types of services delivered. - Principle of optimal risk transfer allocation between private and public partners. - Competition and non-discrimination in selection of PPP projects – direct negotiations limited to the energy sector, and apart from national security for publicly initiated projects (i.e., excluding non-solicited proposals). - Requirement for ceilings on PPP exposures. - Requirement for fiscal affordability, fiscal risks and value-for-money assessments. - Gatekeeping role of the MoF. - The PPP Law is not yet operational; operationalization requires a government decree and methodological guidelines. - The PIM framework needs to be aligned with the PPP Law and harmonized with the PPP decree; authorities hope these will be approved by end-2018. - Implementation will face major capacity challenges; the PPP Law requires establishment of a PPP database, but the regulatory decree to operationalize the database has not been approved, so information on PPP operations remains limited. - Current available data on estimated investment costs (Table 5: Project Percent GDP): - Hydro projects subject to PPAs 1/: 32.0 - Anaklia port: 4.5 - Gardabani II: 1.6 - Gardabani I: 1.5 - Batumi Port: 0.6 - Tbilisi Airport: 0.5 - Batumi Container Terminal: 0.2 - Batumi Airport: 0.2 - Total: 41.1 - Source: MoNE, World Bank PPP database and staff estimates. - 1/ Only the 72 PPAs for which: (i) a PPA agreement has been signed; (ii) a construction permit has been issued; and (iii) there has been financial closure. It should be noted that, given current export prices, it would be likely that some of these 72 projects will not proceed. Another 82 PPAs are under negotiation. - Although initial asset values are neither depreciated nor revalued, they give some indication of associated liabilities the state might have to assume if projects experienced financial distress. ### Recommendations (summary from section) - Issue 1: The strategic planning of public investment is fragmented, lacks cohesiveness, only deals with new initiatives, and is limited to only some output and outcome indicators. - Recommendation 1: Improve national and sectoral planning by updating the public investment component of the national development strategy, including all sources of financing, levels of government, and procurement options. - Issue 2: The new PIM methodology has not yet been implemented, and the role of the MoF needs elaboration. Key economic assumptions of donor-funded projects are not reconciled centrally, project appraisal discount rates are inconsistent and do not necessarily reflect the economy’s opportunity cost of capital. - Recommendation 2: Improve project appraisal by implementing the new PIM methodology and ensuring that a dedicated team at the MoF is responsible for providing central support for line ministry project appraisal and for developing and maintaining the project appraisal methodology. - Issue 3: The government has not yet decided on the deregulation of the electricity market, it has not yet considered the deregulation of the gas and water markets, and it has not addressed relative prices in land transport use. - Recommendation 3: Improve competition in major infrastructure markets. - Issue 4: The oversight of PCs investment is insufficiently focused. - Recommendation 4: Require PCs to undertake only those investments that comply with their Statements of Corporate Intent and are thereby commercially appropriate for them. - A detailed action plan is included in Annex I. ### Investment allocation — Multi-year budgeting and capital project definition - Multi-year perspective: - Investment projects are medium-term in nature; effective planning requires budgetary mechanisms that facilitate medium-term budgetary planning and provide predictability of funding over the medium term. - These mechanisms help plan future current spending requirements related to existing projects and improve efficiency of investment spending. - Current practice: - Total multi-year expenditure ceilings are provided to ministries by programs in the BDD document, but these are not disaggregated into current and capital. - The capital projects annex sets out four-year spending projections for capital projects by ministry and program/sub-program. - Using ministry and program codes it is possible to identify acquisition of non-financial assets by ministry and program, but not all capital projects are included in the capital projects annex, making it difficult to assess the full picture by ministry. - The e-Budget system can provide cost profiles of capital projects beyond the four-year period, but in practice ministries do not regularly use this functionality, weakening projections of capital expenditures over time. - Figure 23 (referenced) shows forecasting errors for capital spending. - Definition of capital project used in the capital projects annex to the budget (Box 5): - For construction/rehabilitation projects: projects with a project value of GEL 50 Million or more, with a post-construction term of use of at least 5 years. - For purchases of software, machinery and other equipment (except military technique, weapons and other military equipment): projects with a separate/total project value of GEL 0.150 Million with a post-purchase term of use of at least 3 years. - Projects which do not meet the above criteria but “due to their importance” should be included in annex. - The Order specifies that the cost of the project should contain all expenses linked to project implementation. - Source: Order of the Ministry of Finance of Georgia N385 “On the Approval of Methodology of Creation of Program Budgeting.” - Medium-term BDD process weakness: - At the start of the budget process, spending ministries begin calculations from a zero base each year and focus primarily on the coming budget year, undermining the rolling medium-term framework and the effectiveness of capital budgetary planning over the medium term. *IMF staff assessment as presented in the source PDF.* ### 48. Effective public investment management requires comprehensive information on ### 48. Effective public investment management requires comprehensive information on capital spending, regardless of how the investments are financed. ### Budget comprehensiveness and disclosure - Budget documentation integrates capital and current budgets and presents aggregates by ministry and program in Chapter VI of the budget document. - Capital spending by budgetary central government (including externally-financed spending) is undertaken through the budget; expenditures by PCs' own resources, some LEPLs' own resources, by Partnership Fund, and PPPs are not included in the main budget presentation and are not subject to separate Parliament authorization. - The FRS includes considerable information about PCs including the Partnerships Fund and PPP. - Capital investment by the Partnership Fund is equivalent to 20 percent of total capital appropriations in the budget. - Capital spending authorized outside the budget process undermines comparable analysis and priority-setting; greater capture of this information would support better fiscal management. ### Budgeting for investment (Design – Medium; Effectiveness – Medium) - Good practice: medium-term costs should be clear when a project is first approved; on-going projects should be prioritized; limits should be placed on transferring money from capital to recurrent budgets. - Allocations for capital projects are appropriated on an annual basis; there is no formal mechanism to protect funding of on-going multi-year projects. - Informal arrangements: MOF and spending ministry agree on funding requirements during budget negotiations; total multi-year commitments are not included in the budget document. The BDD is supposed to take these into account in setting ministry ceilings. - For multi-year projects about to be tendered, MOF issues a certificate of confirmation of funding that includes a provision preventing the ministry from applying for funding for additional new projects in place of agreed funding for the current project. - In practice, funding of on-going projects is adequate. - All requests for in-year reallocations of budgetary appropriations, including those from capital to current lines, require MoF approval. - The Budget Code does not specifically restrict in-year reallocations from capital to current, but there is a cap on total reallocations between programs of 5 percent of the budget agency’s appropriation; changes between programs and sub-program require the agreement of the Ministry of Finance. - Chapter VIII of the Annual Budget Law states that all requests for reallocations involving appropriations earmarked for investment/capital projects must be approved by the government (the MoF, in practice). Reallocations from capital to current appropriations take place only rarely. - Data on projects do not distinguish between on-going and new projects; absence of clear total project costs, expected timelines, and changing project codes makes it difficult to analyze the balance of on-going versus new projects over time. ### Maintenance funding (Design —Low; Effectiveness—Medium) - Adequate maintenance is essential to protect asset quality, ensure intended life-cycle use, and avoid higher operating and replacement costs. - Maintenance spending often suffers from under-investment or in-year cuts relative to other spending. - Maintenance expenditures are not separately identified in budget documents except for roads. - In the road sector, current and capital maintenance are provided in the budget through specifically-designated program/sub-programs. - The Roads Department determines physical maintenance requirements using a multi-criteria analysis and expenditure requirements based on maintaining road condition as measured by the international roughness index (IRI). - Road infrastructure is significant, with annual investments representing around 68percent of total capital spending in the budget. - There is no standard methodology for estimating routine or more extensive maintenance needs and required budget funding; funding amounts are determined largely incrementally based on likely resources available. - Analysis of maintenance expenditures (planned and actual) is made more difficult by the lack of specific identification of maintenance in the budget and in execution reports. - Routine maintenance spending is identified in the budget for roads projects and for machinery and equipment but not systematically beyond these classes. - The lack of a systematic mechanism for budgeting and reporting on maintenance risks deterioration of public capital and increased operating and eventual replacement costs. - Spending ministries do not routinely include estimates of future required maintenance spending when preparing new projects. ### Project selection (Design—Low; Effectiveness—Low) - Formal, transparent, and effective project selection procedures guided by clear criteria and independent review are essential to prioritize projects and ensure efficiency. - Domestically-financed capital projects in the budget are not selected according to standardized selection criteria or formalized selection procedures; no pipeline of appraised investment projects is maintained. - The MoF is currently not applying standard project selection criteria; projects are selected by spending ministries and agreed with the MoF during budget negotiations without standard and consistent criteria. - Municipal-level projects financed through the Regional Development Fund (RDF) are assessed against specified criteria; the RDF transfers represent around 20 percent of central government capital expenditures. - Project selection procedures and criteria are contained in the new PIM methodology but have not been implemented yet. - Major externally-financed projects are subject to project appraisal; however, there is not a systematic review by a central agency before inclusion in the budget. - The new PIM procedures include appraising projects to go into a list intended for inclusion in the budget, but there is no project pipeline currently. - Applying the PIM manual’s procedures and MoF gatekeeping to ensure appraisal before budget inclusion would improve efficiency and outcomes. - A clear documentation trail for selection decisions contributes to accountability and a credible budget. Recommendations (Issues and corresponding Recommendations) - Issue 5: The Basic Data and Directions Document of Georgia (BDD) does not effectively guide multi-year capital spending. - Recommendation 5: Strengthen multi-year budgeting by improving the clarity and linkages in budget documents of annual and medium-term projections for public investment. - Issue 6: There are no formal mechanisms to give priority to on-going capital projects. Resources for new projects could potentially crowd out on-going projects, leading to delays and increased project costs. - Recommendation 6: Implement formal mechanisms to prioritize the completion of on-going projects in the budget process. - Issue 7: There is currently no standard methodology to determine maintenance requirements or to track maintenance funding systematically. - Recommendation 7: Develop a standardized methodology for estimating current and capital maintenance needs to be used by spending ministries over the rolling BDD/budget period. - Issue 8: The lack of standard project selection procedures and a list of approved projects potentially undermine the link between the PIM process and the budget. - Recommendation 8: Operationalize the project selection procedures in the PIM Guidelines/Manual and incorporate them in the budget process applicable for all public investment projects, regardless of the funding source. ### Investment implementation — Procurement (Design—High; Effectiveness—Medium) - Good procurement requires open competitive bidding, comprehensive information systems, and independent review of complaints. - More than three-quarters of capital projects are procured competitively using a modern web-based procurement information system (e-Procurement, Ge-GP), operational since 2011. - The State Procurement Agency (SPA) manages the procurement system; the Law on State Procurement was passed in 2005 and SPA structure results from 2014 reforms. - The value of direct contracting fell from 48.7 percent of the value of all procurements in 2013 to 24 percent in 2017. - A significant number of PPA agreements have been procured through direct contracting. - The number of bids for open tenders is fairly low, averaging about 3 percent in recent years. - Spending agencies prepare 12-month procurement plans covering the budget year. - The e-Procurement system is actively used for monitoring; elements of procurement information follow the Open Contracting Data Standard (OCDS). - Standard analytical reports (quarterly updates on published tenders, the value of tenders and the average number of bidders) are produced; lack of live, retrievable data reduces external monitoring effectiveness. - Planning enhancements include a potential direct link between the e-Procurement and the e-Budget systems to improve control over contract values. - The number of tenders that did not result in a signed contract averaged 29 percent between 2013–16; causes are not clear. - Procurement complaints procedures vary by contract size; complaints procedures follow several good practices (clear submission/resolution processes, PDRB powers to suspend procurement, complainants can lodge without fee, binding PDRB decisions, public availability of PDRB decisions). - For relatively large contracts, the complaints review period should be completed within 5 days. - The Procurement Dispute Review Board (PDRB) is not fully independent: its Chair (deciding vote) plus 3 of the 6 members are from the SPA. ### Availability of funding (Design – High; Effectiveness - High) - Public investment implementation is more efficient when consistent with budget appropriations and not constrained by cash availability; good cash management and flexible commitment procedures remove financial uncertainty from causes of delays and cost increases. - Spending units have considerable flexibility to commit funds during budget execution; quarterly allocations recorded in e-Treasury may be adjusted to allow commitments up to the annual appropriation. - Commitment of funds beyond the fiscal year (e.g., multiyear contracts) is possible with permission of the MoF Budget Department. - Cash management reforms introduced in 2015 created the Cash Management and Forecasting Department (CMFD) in the MoF. - CMFD prepares daily cash forecasts for the current month and monthly forecasts for all full months remaining in the fiscal year, based on historical cash flow analysis and spending unit surveys for atypical planned expenditures. - The coverage of spending units in the Treasury Single Account (TSA) and the e-Treasury system was expanded in 2015 to include all municipalities and LEPLs, in addition to the State Budget. - LEPLs are required to use the TSA and the e-Treasury system for recording revenue and expenditure; e-Treasury is not used by MoF to control LEPL spending. LEPLs may independently invest funds outside the TSA but must transfer funds back to the TSA before spending, permitting recording of all LEPL expenditures through e-Treasury. - In 2017, approximately 48 percent of payments financed by International financial institutions (IFI) loans and grants were channeled through the treasury. - For IFI agreements, typically a foreign currency account is created in the TSA for each agreement; the implementing spending unit spends GEL from the State Budget account and is reimbursed within days by converting foreign currency from the agreement account and depositing GEL to the State Budget account. The agreement account has overdraft rights; IFIs are notified of overdrafts, which are monitored by MoF until funds eliminate the overdraft. Information on payments made directly by IFIs is recorded in the e-Treasury system. *cr18306 - 48. Effective public investment management requires comprehensive information on* ### 69. Systems affecting cash availability are working well in Georgia. This is reflected in ### cr18306 - 69. Systems affecting cash availability are working well in Georgia. This is reflected in ### Cash availability - There has been no instance in at least several years of funding being unavailable to make payments when needed, either for budget-funded or IFI-funded projects. ### Portfolio management and oversight (Design – Medium; Effectiveness - Medium) - Importance of portfolio monitoring: - Provides in-year accountability for progress in implementing the approved budget. - Identifies emerging portfolio-wide implementation problems (e.g., material shortages or price increases). - Screens individual projects to identify those needing assistance or reallocation of funds in-year. - Current reporting and monitoring gaps: - Project implementation progress is not reported systematically to MoF or the respective line ministers. - MoF Public Debt and External Financing Department reports to IFIs on IFI-funded projects based on standard reports from implementing agencies. - Reporting by supervising engineers to implementing agencies is not standardized, preventing easy consolidation. - Quarterly Budget Execution Reports report spending across budget-approved projects but do not include physical progress. - Serious implementation problems are elevated on a case-by-case basis rather than through a system. - Existing reporting cannot be described as a monitoring system aimed at maximizing benefits of project monitoring. - Re-allocation flexibility and execution rates: - Article 31 of the Budget Code prescribes rules for reallocating funds between projects; ministries may re-allocate authority to spend between projects under their responsibility. - In 2017, MRDI shifted between projects approximately 43 percent of the total value of its capital budget between projects and project economic classes. - Capital budget execution increased from 73 percent of initial approved budgets in 2013 to 100 percent in 2016. - Change notices are submitted to the MoF Budget Department through the e-Budget system and recorded, with limitations described elsewhere. - Ex post evaluations: - Ex post evaluations of completed major projects do not occur systematically for budget-funded projects. - PIM Guidelines include a chapter on ex post evaluation, but implementation has not begun. - The State Audit Office highlights cases where project spending deviates by more than 15 percent from initial appropriation but this does not measurably affect project implementation systems. ### Management of project implementation (Design – Low; Effectiveness – Low) - Objectives and good practice: - Project management aims to implement projects with minimum deviation from expected schedule, funding, and scope. - Project profiles and implementation plans should specify tasks, completion dates, and responsible parties, and allow for revisions or cancellations if needed. - Current shortcomings: - Implementing agencies have project management staff and procedures but often lack formal implementation plans for budget-funded projects. - Heads of divisions are assigned responsibilities for several projects; there are no project managers as commonly understood. - Project management is viewed narrowly as contract oversight; projects are nearly always implemented by private contractors with third-party supervisory engineers. - No government-wide guidelines for adjusting approved projects during execution; professional judgment is used instead of systematic criteria. - Suggested triggers for review (currently absent) could include contracts not signed within 9 months of the fiscal year, or estimated total project costs increasing by 15 percent or more. - Empirical indicators of implementation variation: - SAO noted that for projects completed in 2016 there were material cost differences between originally planned and actual in 84 percent of projects. - Material changes in time to completion occurred in 42 percent of projects, with 33 percent taking longer to implement than originally planned. - Audit practice: - SAO audits projects selectively; IFI-funded projects are audited by contracted private firms. - Ongoing budget-funded projects and projects completed within a fiscal year are audited by SAO superficially as part of the spending unit audit. - In-depth audits of budget-funded projects are done only when concerns arise. In 2015–17 SAO did not perform any audits targeting individual projects. ### Monitoring of public assets (Design – Medium; Effectiveness – Medium) - Role of asset information: - Stock, condition, and value data are essential for accountability, financial statements (balance sheet and depreciation), maintenance planning, rehabilitation, and infrastructure needs assessment. - Current practices: - Asset record keeping is decentralized in line ministries following MoF guidelines. - Assets are defined as any single object costing more than 500 GEL and having a life greater than one year (short-term) or three years (long-term). - Assets are recorded at historical cost and are not revalued. - Ministries submit a list of major assets to MoF, published on July 1 annually on the Treasury Department website with historical cost, accumulated depreciation, and use, since 2013. - Ministry-level financial statements are submitted in Excel spreadsheets to the MoF Treasury Department, which consolidates them unofficially at present. - Treasury oversight of spending unit-prepared financial statements provides some quality control over asset records. - Examples of good practice: United Water Supply Company uses geographic information software to catalogue fixed assets and plan replacements/upgrades. - SAO conducts spot checks on asset record accuracy during annual audits. - Accounting and reform plans: - MoF reflects non-financial assets in the balance sheet and depreciation expense in the operating statement since 2010 for budgetary central government. - Depreciation is calculated using straight-line methods consistent with Government Finance Statistics (GFS) 2001 and IPSAS. - MoF plans to introduce all IPSAS standards, including full accrual, initiated in 2012 with hoped completion by 2020 and an additional transition period of two–three years for full application. - e-Treasury budget execution information system will be expanded in 2020 to include accounting; currently accounting records are prepared outside e-Treasury. - An asset registration component will be included in the e-Treasury upgrade; entering and verifying existing assets is likely to take up to two years. - Centralization and linking of asset records with procurement, cash expenditures, and accounting will make asset records more comprehensive and accurate. - Challenge: using balance sheet information for planning, maintenance budgeting, and fiscal risk assessment. ### Recommendations (selected) - Issue 9: Lack of live, retrievable data, particularly for entities outside government. - Recommendation 9: Introduce live machine-readable data, develop interface to improve data-sharing among different data users, and introduce contract implementation data in open format. Develop an application programming interface (API) tool for “receiving from/sending data to” the SPA’s new OCDS portal to allow and facilitate different types of users to access and analyze procurement data. - Issue 10: Project implementation progress is not reported systematically to MoF or related line ministries. - Recommendation 10: Strengthen project implementation monitoring by issuing guidelines for implementing agencies to prepare monitoring reports covering all budgeted projects. - Issue 11: Project managers and procedures are in place at implementing agencies but are not project specific and there are no formal implementation plans. - Recommendation 11: Strengthen project management by issuing guidelines to prepare project implementation plans for every investment projects, regardless of financing source. - Issue 12: MoF compiles limited information on the physical stock, condition, and value of fixed assets, but this information is not taken into account in planning and budgeting for maintenance, rehabilitation, and new infrastructure needs. - Recommendation 12: Link asset registry and accounting data with public investment planning and maintenance in the budget process. ### Crosscutting issues — Legal and regulatory framework - Existing instruments: - PIM Methodology (issued in 2015) contains instructions for implementing the PIM Guidelines. - PIM Guidelines (Decree 191) issued in 2016 assist budgetary organizations in evaluating and prioritizing capital investment proposals. - PPP Law (2018) provides the legal framework for developing, selecting and implementing PPP projects; includes rules, procedures, and institutional definitions. - Need for consistency: - The legal and regulatory framework supporting PIM is still evolving; consistency between PIM and PPP frameworks is needed. - Recommendations: - Improve PIM Guidelines to provide clearer and more balanced guidance across project cycle stages. - Strengthen the link between PIM Guidelines/Methodology and the budget cycle. - Align secondary legislation of the PPP Law with the PIM framework to ensure consistency. - Specific inconsistencies and suggested clarifications: - Timing of procurement decision: - PIM Guidelines: procurement method (including PPP consideration) is considered only after favourable appraisal. - PPP Law: allows identification of projects as PPP and deciding procurement method at project initiation. - Suggested clarification: implementing regulations for PPP Law should state only projects with a favourable appraisal may be considered for PPP and proceed to Value for Money assessment. - Integration in the budget process: - PPP Law: following Government approval, budgetary entities may implement a PPP project; inclusion in and approval through the budget process is not explicitly required. - Concern: PPPs can create substantial fiscal risks and future budget commitments; comprehensive information on such commitments should be provided as part of budget documents so Parliament can consider magnitude of future PPP commitments before launching procurement. - Institutional arrangements: - PIM Guidelines mandate the Economic Council to decide on projects for the investment project list; PPP Law mandates the Government of Georgia to authorize projects as PPP. - The Economic Council has been abolished; all approvals related to public investment projects, including PPPs, should be taken by a single body and this should be reflected in PIM Guidelines and PPP legislation. *Source: cr18306 - 69. Systems affecting cash availability are working well in Georgia. This is reflected in* ### 85. The role and responsibilities of the MoF in the PIM and the PPP process are not ### 85. The role and responsibilities of the MoF in the PIM and the PPP process are not ### Role and responsibilities of the MoF in PIM and PPP - Finding: The MoF does not have a clear and strong enough role to guard public finances – ensure viability and affordability of public investment projects. - Finding: The criteria for the MoF assessment of projects at different project stages are not clear in the PIM or the PPP legal framework. - Example: In the PIM process (Article 10, 9.), the MoF assesses projects for its economic and social value, but: - It is not clear what is meant by economic value. - It is not clear what the competence of the MoF is in assessing the social value. - Key concepts for assessment (economic value, budget implication, affordability, viability) are discussed but not clearly defined in the Guidelines nor the Methodology. - Recommendation (regulatory): The regulatory framework should clearly state the MoF’s responsibility for assessing viability, affordability and Value for Money. The respective concepts and the assessment criteria should be clearly defined in the legal framework. - Finding: It is not clear whether the MoF has the power to stop a project at key decision points if a project is not affordability, viability, and/or does not deliver Value for Money. - International good practice suggestion: - The MoF should have veto power at decision points (gateways): project selection, decision on procurement method, tendering, contract negotiation, and in case of changes to the contract—to stop projects that are not affordable, not viable or that do not deliver Value for Money. - If the MoF is only advisory, then the MoF’s assessment and recommendations should be published together with the approval of the decision-making body (i.e., the Government of Georgia). The MoF would be responsible for its recommendations and the Government of Georgia for its decision to approve projects against the MoF’s recommendations. ### IT Systems and Data Management - Overview: Core PFM-related IT systems include e-Budget, e-Treasury, e-Procurement, e-DMS (debt management), e-HRMS, RS.GE (revenues for tax and customs) and e-auction (sale of state-owned goods). - Table 6 (overview of first three systems) key facts: - e-Budget - When became operational: 2012, in conjunction with reforms to program budgeting - Coverage: Used by 51 budget spending units (including. ministries and LEPLs), for budgeting for more than 900 organizations - Functions: Budget preparation (revenues and expenditures), compilation of consolidated State Budget documentation, cashflow planning, quarterly in-year budget allocations, virements (reallocations) - e-Treasury - When became operational: 2010 - Coverage: Central government spending units, LEPLs and municipalities. - Functions: Payment systems (e-payments), budget execution, expenditure control, commitment of funds, reporting on budget execution, management of spending units’ personnel database (payroll module) - e-Procurement - When became operational: 2010, in conjunction with procurement reforms - Coverage: All government contracts, including for some externally-financed projects - Functions: Procurement of government contracts and related information, including tender announcements, tender documents, decisions of tender commission, signed contracts - Source of table: MoF. - Systems strengths: - Coverage: Systems cover all central government budget entities, autonomous bodies, self-governing bodies, and LEPLs. - Integration: e-Budget and e-Treasury share information and establish controls and data verification using common classifications and real-time exchange of data; linking of line ministries’ cashflow forecasts with commitment authorization enables planning and commitments directly through the system. - Ease-of-use: Systems are used widely and appear to be well-understood. - Flexibility: Developed in house, systems can be adjusted and evolve over time in response to changing requirements. - Systems gaps impacting PIM: - Financial planning at the BDD and action plan stage remain outside of the system, preventing rolling over of information and undermining effectiveness of the MTBF. - The system does not capture capital project information in an accessible way: - Initial project costs are not included in the project profile and must be retrieved from the first year the project is included in the budget. - Prevents integration of future projected current costs arising from investment activity in e-Budget, risking omission of future costs and under-provision for operation or maintenance. - The system does not provide for an asset register (including asset condition) to guide maintenance planning or to generate balance sheets as part of financial statements. - Room for improvement in access to procurement information for analytical purposes, including providing machine-readable information and tools to facilitate receiving and sending data to the OCDS portal. - Recommendation (IT): Ensure that the next phase of IT development supports the data management needs of the budget cycle as a whole. New elements should be actively designed and planned to work systematically and consistently across the related IT systems. ### Capacity Building - Finding: Authorities recognize improving PIM will require capacity building, particularly at the MoF. - Finding: Large line ministries and public corporations have some skill niches constrained, but overall capacity to identify, assess, procure, and monitor investment projects is broadly adequate among main public investors (Ministry of Regional Development and Infrastructure, Ministry of Health, and many main public corporations). - Finding: The MoF has large skills gaps in areas such as CBA, financial analysis, engineering, project monitoring and accounting. - Finding: MoF staffing levels are inadequate and roles/responsibilities regarding PIM are unclear. - Example: MoF organigram provides for a Public Investment Unit, but it has never been functional. Budget Department has been executing PIM-related functions without additional resource allocations. - Authorities plan to eliminate the Public Investment Unit and distribute roles among other MoF departments. - PIMA implication: Need for a capacity building strategy; strengthening staffing and skill sets mainly in the MoF, but also in executing agencies. - Suggested capacity priorities (areas where increases in staffing and capacity are specifically required): - Develop strategies that link national and sectoral development objectives to specific public investment projects. - Support preparation of more comprehensive and credible project proposals in accordance with new PIM guidelines, including project preparation methodologies (needs analysis, project costing, cost benefit analysis, prioritization, risk analysis). - Undertake more thorough project appraisals for large/complex projects and for innovative financing methods. - Oversee experts/consultants contracted for feasibility, project design and appraisal studies. - Secure effective programming and prioritization of projects within overall constraints (sector strategies, resources, financing). - Secure more effective project management: oversight of experts/consultants, monitoring of project progress, problem resolution, reporting, quality assurance and ex post evaluation. - Consolidated monitoring, analysis and reporting. - Develop incentives for optimizing pace of implementation or re-allocating resources to other priority areas. - Audit and conduct ex post evaluation of project outputs and outcomes. ### Cross-cutting Recommendations (summary) - Legal and Regulatory Framework issues and recommendations: - Ensure all public investment projects are covered by the PIM process. - Consider distinguishing between a regular PIM process for larger projects including all PPPs, and a simplified procedure for smaller and highly standardized projects. - Ensure, through the PIM Guidelines or in the PIM Methodology, the alignment of the PIM process with the budget cycle. - Review PIM Guidelines and the PIM Methodology to ensure consistency and to make them more user-friendly. - Align, through detailed provisions of the PPP implementing regulation, the PPP process with the PIM process. - Clearly define roles and responsibilities for the various stakeholders and ensure consistency across procedures. - IT systems and data management recommendation (reiterated): - Ensure next phase of IT development supports data management needs of the budget cycle as a whole and is systematically integrated across related IT systems. ### Annex I: Selected elements of the Proposed Action Plan (2018–2021) - Time horizon in plan: actions scheduled across 2018, 2019, 2020, 2021 with responsible agencies identified (examples below preserve exact phasing and responsible agencies as in source). - Recommendation 1: Improve national and sectoral planning - Update the public investment component of the national development strategy, including all sources of financing, all levels of government and all procurement options. - 2018: Obtain government approval for modification to the planning framework; Design new framework. - 2019: Conduct training in new framework. - 2020–2021: Implement new framework in: (i) new national development strategy; (ii) new government platform. - Responsible agency: Government administration and MOF - Ensure sectoral strategies distinguish public investment, are comprehensive, include existing projects and new initiatives, include a clear resource envelop and clear definition of economic efficiency objectives, and are updated for new investment plans. - Phasing: Obtain government approval; Design; Conduct training; Implement in sector strategies. - Responsible agency: Government administration and MOF - Ensure ministry action plans are aligned with sectoral strategies and fully coordinated to avoid fragmentation of PIM. - Phasing: Obtain government approval; Design; Conduct training; Implement in BDD and ministry action plans. - Responsible agency: MOF - Recommendation 2: Improve project appraisal processes - Implement the new PIM methodology: Review on basis of pilots and need to harmonize with PPP framework; Approve timeline of extending mandatory coverage of PIM methodology; Review implementation (2018–2020). - Responsible: MOF and line ministries - Ensure MOF responsible for providing central support for line ministry project appraisal and for developing and maintaining project appraisal methodology. - Actions: Approve MOF Order; Provide workshops for line ministries. - Responsible: MOF - Ensure key economic assumptions in donor-funded public investment projects are consistent with MOF and MOESD assumptions; include in PIM Methodology approved by order of Minister of Finance; establish regular communication channels with line ministries. - Responsible: MOF - Approve a discount rate methodology and specific discount rates reflecting economy’s opportunity cost of capital to be applied to all public investment. - Actions: Undertake research (TA support needed); Include new discount rate methodology and new discount rates in draft amended decree on PIM methodology. - Responsible: MOF - Recommendation 5: Strengthen multi-year budgeting - Introduce a rolling baseline in the budget process: - Develop methodology and simple model for ministries to prepare baselines; Train MOF and spending ministry staff; Incorporate preparation into budget process. - Responsible: MOF - Strengthen credibility of outer-year capital projections: - Design reconciliation tables; Use e-budget functionality; Include reconciliations in budget instructions and training. - Responsible: MOF - Improve clarity and linkage between different parts of the budget documentation: - Include definitions of capital/investment in Chapter VIII and additions to tables linking chapters III, VI and the capital projects annex. - Responsible: MOF - Recommendation 6: Prioritize completion of on-going projects in the budget process - Specify in BDD/budget instructions that ministries should prioritize completion of on-going projects over new projects. - Use e-Budget to pre-fill ministries’ existing project commitments and to include realistic total project costs disaggregated by main category. - Focus on status of on-going projects during budget negotiations. - Responsible: MOF - Recommendation 7: Standardized methodology for estimating maintenance needs - Develop methodology for particular asset classes; incorporate review of adequacy of planned maintenance expenditures in budget negotiations; enable IT systems to link asset condition data from asset registers into planning and budgeting systems. - Ensure life-cycle costing for new projects and that maintenance spending is explicitly budgeted and reported. - Responsible: MOF - Recommendation 8: Operationalize project selection procedures in PIM Guidelines/Manual and incorporate in budget process - Apply project selection procedures to all public investment regardless of funding source; formalize new PIM procedures in annual budget calendar/process; adopt implementation plan and timeline; decide on thresholds for project appraisal and independent review criteria; enforce MOF gatekeeping role; set clear documentation trail for selection decisions. - Responsible: MOF, new PIM co-ordinating body, PIM co-ordinating body - Recommendation 9: Strengthen procurement practices - Introduce live machine-readable data; develop an API tool for receiving/sending data to SPA’s new OCDS portal. - Responsible: SPA - Recommendation 10: Strengthen project implementation monitoring - Issue guidelines for preparation of capital project monitoring reports; design monitoring and reporting system aligned with standard project profile and implementation plan; pilot in two ministries (e.g., MRDI); revise and expand. - Responsible: MOF, MRDI - Recommendation 11: Strengthen project management - Issue guidelines for preparation of project implementation plans; design standardized project management data and forms; pilot and expand. - Responsible: MOF, MRDI *cr18306 - 85. The role and responsibilities of the MoF in the PIM and the PPP process are not* ### Annex II. Making PIM Guidelines Clearer and Balanced ### Annex II. Making PIM Guidelines Clearer and Balanced ### Presentation and clarity of the PIM Guidelines - The Guidelines cover the entire project-cycle: project screening and pre-selection, project appraisal, project selection and budgeting, project implementation, project monitoring and ex-post evaluation. - Key findings on presentation and clarity: - The Guidelines are not easy to follow because of a complex structure and separation of process and roles and responsibilities, which makes it difficult to see how different actors fulfil responsibilities and may have caused gaps and inconsistencies. - Article 12 covers roles and responsibilities in the project selection process without referring to the role of the MoF or to the project list, which is an essential input to the process. - Article 14 defines roles and responsibilities for project monitoring without mentioning the role of the budgetary (implementing) entity or the need for preparing a project implementation plan against which progress would be monitored. - A clear presentation of the process together with the actors and their responsibilities is recommended to ensure comprehensive and consistent design of procedures and clear accountability of actors; this would be a precondition for effective implementation of PIM. - The Guidelines are overburdened with details on project appraisal: the project appraisal methodology (Article 9) is covered in greater detail than other stages; about half of the guidelines related to the project cycle are devoted to project appraisal, discussing how to assess the value of relevant costs and benefits and how to calculate a present value. Such detail would be better suited for a methodological manual. - The Guidelines interfere with the organization and management of economic entities: Article 6 provides for how the economic entity organizes the preparation of the project concept note. To ensure clear responsibility and accountability, the Guidelines could focus on the responsibility of the head of the entity to submit a Project Concept Note and on the criteria that should be considered when proposing a project. - The Guidelines do not clarify PIM related organizational structures in the MoF: no detail is provided on what structures in the MoF would undertake the MoF’s tasks and on how these would interact (e.g., whether the budget directorate or the Fiscal Risk Unit would assess Project Concept Notes). Such detail is not necessarily needed in the Guidelines but could be provided in the Methodological Manual (this is not the case in the existing Methodology). ### Improving the link between PIM guidelines and the budget process - Coverage and process alignment issues: - The coverage of PIM guidelines and methodology is partial: the Guidelines and procedures do not apply to projects financed by donors. Excluding donor financed projects from the PIM process creates a parallel selection process and thus a parallel project pipeline, allowing projects to be selected based on financing considerations and not based on political priorities. - Donor financed projects absorb fiscal resources that could otherwise be used for projects financed through other channels, or other projects financed by the same source (e.g., road A instead of road B). To ensure that public resources are allocated in line with policy priorities across various spending needs—i.e., across different projects independent of their financing—all project selection should be done in a single process. - The PIM process is not fully aligned with the budget process: the Government of Georgia cannot stop the development of projects that would not be considered a priority or that would not receive budget funding. Budget entities develop projects and may take projects through the appraisal stage after receiving a non-binding opinion from the MOF. - Project appraisal, in particular for large projects, requires significant resources; these resources should only be made available for appraising projects that are a Government of Georgia priority and that may thus receive funding in case of a favourable appraisal. - Allocation of appraisal resources should be done through the budget process where pre-selected projects can be suggested as part of the budget entity’s action plan to receive allocations for appraisal. - In the first budget year, resources would be allocated for project appraisal and after a favourable appraisal, in a later budget year, resources for project implementation. There could be a streamlined process for small and highly standardized projects, which would not require a full appraisal as the basis for the resource allocation decision. - The document references a schematic: Figure II.1. Alignment of PIM and Budget Process (Source: Staff). ### Coverage and consistency between the PIM Guidelines and the PIM Methodology - Inconsistencies in scope and substance: - The Guidelines and the Methodology seem to apply to a different set of public investment projects: - The Guidelines explicitly exclude projects financed by donors under the ratified agreements through observing the basic principles of investment project management. - The Methodology applies to all public investment projects independent of their functional nature or funding source. - It would be important to make these consistent, expanding the coverage under the Guidelines to all public investment projects as discussed above. - The Methodology covers only part of the process laid out in the Guidelines: the PIM Methodology covers only pre-selection, project appraisal, and project selection and budgeting, with major emphasis on project appraisal. Project implementation, project monitoring and ex-post evaluation are not covered by the Methodology. These phases are important and have not received a lot of intention in current practices (see Section III.D). It would be important to provide more support for these phases in the Methodology. - Roles and responsibilities are not fully consistent between the Guidelines and the Methodology: - According to the Guidelines, the MOF, after examining the project appraisal prepared by the budgetary entity, submits the project together with its conclusions to the Economic Council for further discussion and the Economic Council draws up the list of projects. - According to the Methodology, the MOF submits a list of eligible projects to the Economic Council of Ministers for final approval. - To ensure accountability in the PIM process, roles and responsibilities should be assigned clearly and consistently. - The Guidelines and the Methodology overlap in coverage as details on the project appraisal methodology are included in both. To make the documents more user-friendly, it would be preferable to consolidate the details on the appraisal in the Methodology. This would also make the Guidelines more balanced in terms of weight given to provisions for the various stages of the project cycle. - The Methodology repeats parts of the Guidelines (e.g., definitions are largely overlapping). This can lead to inconsistencies, especially if one document is updated without making the same changes to the other. For items covered in the Guidelines, it would be preferable to have a reference in the Methodology to the relevant provisions. ### Policy recommendations and design implications (implicit in findings) - Improve presentation and structure: - Present the project-cycle process together with actors and their responsibilities to ensure comprehensive and consistent procedures and clear accountability. - Move detailed methodological content on project appraisal from the Guidelines to a Methodological Manual. - Simplify provisions that intrude on internal organization of economic entities; focus on the responsibility of the head of the entity to submit a Project Concept Note and the criteria for proposing projects. - Provide clarity (in the Methodological Manual if not in the Guidelines) on which MoF structures undertake MoF’s tasks and how they interact (e.g., budget directorate versus Fiscal Risk Unit). - Align PIM with the budget process: - Expand PIM coverage to include donor-financed projects to avoid parallel pipelines and ensure allocation of fiscal resources in line with policy priorities. - Use the budget process to allocate appraisal resources by pre-selecting projects as part of budget entities’ action plans, thereby prioritizing appraisal resources for Government of Georgia priorities. - Allow a streamlined appraisal and resource allocation process for small and highly standardized projects that do not require full appraisal. - Harmonize Guidelines and Methodology: - Make the coverage consistent between the Guidelines and the Methodology (apply to the same set of public investment projects). - Extend the Methodology to cover project implementation, project monitoring and ex-post evaluation. - Assign roles and responsibilities clearly and consistently across both documents. - Consolidate appraisal methodology details in the Methodology and use cross-references in the Methodology to provisions in the Guidelines to avoid repetition and potential inconsistencies. *Fiscal Affairs Department International Monetary Fund 700 19th Street NW Washington, DC 20431 USA http://www.imf.org/capacitydevelopment* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18306.pdf_