## Scaling Up Quality Public Investment for Stronger Growth ## Source details **Canonical URL:** [Scaling Up Quality Public Investment for Stronger Growth](https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025149.pdf) ## Other formats - [Markdown version](/-/media/files/publications/selected-issues-papers/2025/english/sipea2025149.pdf.md) - [Structured JSON version](/-/media/files/publications/selected-issues-papers/2025/english/sipea2025149.pdf.json) --- ### A. Introduction — context and motivation - Economic momentum has been strong but faster income convergence is needed; incomes in Bulgaria still lag most peers. - The IMF projects potential growth between 2 and 3 percent per year for the medium term (IMF, 2024). - The European Commission projects long-term growth rates between 1 and 1.5 percent (EC, 2023). - High-quality public investment can raise productivity, boost potential growth, and possibly crowd in private investment. ### B. Public investment needs and efficiency — key findings - Infrastructure gaps and performance - Bulgaria’s quality and availability of infrastructure in many areas lag the EU average. - Transport network: inadequately maintained and insufficient to meet business needs. - Road and public transportation infrastructure needed to connect remote and less-developed regions. - Air ports and seaport infrastructure important for travel and tourism development. - Water infrastructure: relatively high population connection but one of the highest loss rates during transport in the EU (based on 2021 data). - Capital stock and public investment trends - Capital stock is low compared to OECD countries, both relative to GDP and population. - Public investment has lagged peers during most of the past decade; EU-funded projects drove much investment but absorption slowed during 2022–24. - Efficiency improvement potential - Bulgaria could achieve about 1.8 percent of GDP in savings by improving the efficiency of public investment (Hallaert et al, 2022). - PIMA assessment: public investment management performs relatively well regionally but could be improved via better forecasting, multiannual prioritization, strengthened project appraisal and selection, and procurement reforms. - Public procurement inefficiencies: World Bank analysis estimates potential savings of 5.3 percent of the total value of public procurement contracts during 2007–22; single-bidder and negotiated outcomes remain prevalent. ### C. Availability and absorption of EU funds — stocks and disbursement performance - Total grant funds available for Bulgaria for the 2021–27 period: EUR 18.7 billion (about 18 percent of 2024 GDP). - Of this, EUR 6.2 billion are funds under the Recovery and Resilience Plan (RRP), which includes EUR 480 million under RePowerEU chapter. - Grants amounting to EUR 12.5 billion are available under the Multiannual Financial Framework (MFF) 2021–27 with utilization date of end-2030. - Disbursement and absorption rates - About 16 percent of the total funds disbursed (as of mid-October 2025). - RRP: about 22 percent of available funds disbursed as of September 2025. - Baseline assumption: about Euro 4.6 billion underutilization of the available EU funds (consistent with the macroframework projections of the 2025 Article IV consultation). - Factors behind slow absorption - Delays due to stalled reforms, frequent snap elections, and reversals of reforms (e.g., electricity market liberalization). - Structural deficiencies: prolonged implementation timelines for large infrastructure projects, procurement-related delays, projects starting with only pre-feasibility studies, fragmented project structures, frequent regulatory changes, complex procurement appeals procedures, and administrative capacity bottlenecks. - Programming-period absorption patterns - Implementation under the 2021–27 MFF is slower compared to previous programming periods. ### D. Simulating the impact of scaled up quality public investment — model and scenarios - Model description - Model used: Debt Investment Growth and Natural Resources (DIGNAR) model — a small open economy dynamic general equilibrium model where public capital enters production and public investment is subject to inefficiencies; solved with perfect foresight in Matlab using Dynare. - Calibrated to Bulgarian economy using key ratios and parameter values corresponding to 2024 data; parameter values based on literature. - Two simulation scenarios - Full absorption scenario: full absorption of available EU funds under the RRP (including REPowerEU) and the 2021–27 MFF by 2029. Total available EU funds until 2030: EUR 18.7 billion; around 16 percent already disbursed as of mid-October 2025. - Efficiency-improvement scenario: gradual increase in the efficiency of public investment, reducing the efficiency gap from 54 percent to 25 percent in 2030 (based on Kapsoli et al, 2023); this efficiency gain is added to the full-absorption scenario. - Public investment outcomes (percent of GDP) - Baseline projected average public capital expenditures in 2026–30: 3.4 percent of GDP. - Full absorption scenario average share in 2026–30: 4.3 percent of GDP. - Efficiency-adjusted investment: - Baseline efficiency-adjusted investment: 1.9 percent of GDP. - If all EU funds are absorbed: efficiency-adjusted investment of 2.3 percent of GDP. - If efficiency is improved to 75 percent (i.e., efficiency gap reduced to 25 percent) by 2030, efficiency-adjusted public investment will amount to 3.2 percent of GDP on average in 2026–30. ### E. Main simulation results and quantified dynamics - Full absorption of EU funds (results) - GDP would be 1 percent higher in 2030 than in the baseline. - This is equivalent to an acceleration of the GDP growth by 0.2 ppt on average in the five-year horizon from 2026 till 2030. - Public capital accumulation stimulates growth in private investment in both the tradable and non-tradable sectors. - Private consumption is estimated to be 1 percent higher in 2030. - The fiscal position remains largely unchanged as higher public investment is financed by increased grants. - Over the next five years, the current account remains largely unchanged: public investment boosts imports, but exports also increase. - Higher-efficiency investment scenario (results) - GDP exceeds the baseline by 2.3 percent in 2030. - Consumption is 2.3 percent higher in 2030. - Private investment surpasses its baseline value by 1.7 percent. - The gradual increase in the efficiency of public investment improves growth trajectories. - Public debt is marginally lower than in the baseline. - The current account remains broadly unchanged. - Selected indicator deviations from baseline (2026–2030) - GDP deviation (percent from the baseline): peak deviations reach 1.0 percent (full absorption) and 2.3 percent (full absorption and higher efficiency) in 2030. - Private Investment deviation (percent from the baseline): private investment surpasses baseline by 1.7 percent under the higher-efficiency scenario in 2030. - Employment deviation (percent from the baseline): gradual increase through 2026–2030 with small positive deviations (values shown in figure up to 0.5 percent by 2030). - Private Consumption deviation (percent from the baseline): private consumption deviates up to 1.0 percent (full absorption) and up to 2.3 percent (full absorption and higher efficiency) by 2030. ### F. Policy implications and recommended reforms - Overarching policy message - Scaling up quality public investment can accelerate income convergence with the EU and reduce disparities within the country. - Accelerating the pace of absorption of EU funds and increasing public investment efficiency is critical and should be a top policy priority. - Reforms that are pre-requisites for the EU funds disbursement need to be implemented steadfastly. - Priority reform areas - Enhanced investment planning and multiannual prioritization to better inform the budget and improve project readiness. - Strengthening project appraisal and selection criteria to increase the quality and returns of public investment. - Procurement reforms to reduce noncompetitive practices, increase the number of bidders, and capture potential savings (estimated at 5.3 percent of procurement contract value during 2007–22). - Administrative capacity building to reduce delays in evaluating proposals and to simplify procedures and red tape. - Implementation urgency - RRP milestones and targets must be completed by end-August 2026; delays risk underutilizing funds and jeopardizing green and digital transition and human capital strengthening. ### Annex I — Baseline model calibration (selected key ratios and parameter values) - Key Ratios - Government investment to GDP (%) 3.3 - Government consumption to GDP (%) 12.00 - Government domestic debt (%) 5.9 - Government external commercial debt (%) 17.5 - Concessional debt (%) 0.001 - Grants to GDP (%) 1.8 - Government revenue to GDP (%) 33.6 - Share of labor taxes in total public revenue (%) 31.3 - Share of consumption taxes in total public revenue (%) 37.8 - User fees of public infrastructure (in percent of recurrent costs) 68.2 - GDP real growth (%) 2.8 - Exports to GDP (%) 55.8 - Imports to GDP (%) 53.5 - Private investment to GDP (%) 14.6 - Private foreign debt to GDP (%) 33.0 - Domestic real interest rate (%) 0.02 - Real risk-free rate (%) 0.001 - Real interest rate on external commercial debt (%) 0.02 - Share of tradables in consumption (%) 61.6 - Share of non-resource tradables in consumption of tradable goods (%) 78.9 - Labor income share in traded sector (%) 43.3 - Labor income share in non-traded sector (%) 47.9 - Parameter Values - Steady-state efficiency of public investment (%) 46.2 - Private capital depreciation rate (%) 10 - Public capital depreciation rate (%) 7 - Elasticity of substitution between labor in tradable and non-tradable sectors 0.5 - Output elasticity to public capital 0.12 - Elasticity of substitution between traded and non-traded goods 0.99 - Elasticity of portfolio adjustment costs 1 - Inverse of Frisch labor elasticity 5 - Investment adjustment cost 25 - Inverse of the intertemporal elasticity of consumption 1.78 - Home bias for additional government spending 0.6 - Elasticity of sovereign risk 0 - Adjustment share by external commercial debt (%) 100 *Source: IMF staffestimates.* ### 2.3 percent in 2030. The findings underscore the ### Scaling Up Quality Public Investment for Stronger Growth ### A. Introduction — context and motivation - Economic momentum has been strong but faster income convergence is needed; incomes in Bulgaria still lag most peers. - The IMF projects potential growth between 2 and 3 percent per year for the medium term (IMF, 2024). - The European Commission projects long-term growth rates between 1 and 1.5 percent (EC, 2023). - High-quality public investment can raise productivity, boost potential growth, and possibly crowd in private investment. ### B. Public investment needs and efficiency — key findings - Bulgaria’s quality and availability of infrastructure in many areas lag the EU average. - Specific infrastructure issues: - Transport network: inadequately maintained and insufficient to meet business needs. - Road and public transportation infrastructure needed to connect remote and less-developed regions. - Air ports and seaport infrastructure important for travel and tourism development. - Water infrastructure: relatively high population connection but one of the highest loss rates during transport in the EU (based on 2021 data). - Capital stock and public investment: - Capital stock is low compared to OECD countries, both relative to GDP and population. - Public investment has lagged peers during most of the past decade; EU-funded projects drove much investment but absorption slowed during 2022–24. - Efficiency improvement potential: - Bulgaria could achieve about 1.8 percent of GDP in savings by improving the efficiency of public investment (Hallaert et al, 2022). - PIMA assessment: public investment management performs relatively well regionally but could be improved via better forecasting, multiannual prioritization, strengthened project appraisal and selection, and procurement reforms. - Public procurement inefficiencies: World Bank analysis estimates potential savings of 5.3 percent of the total value of public procurement contracts during 2007–22; single-bidder and negotiated outcomes remain prevalent. ### C. Availability and absorption of EU funds — stocks and disbursement performance - Total grant funds available for Bulgaria for the 2021–27 period: EUR 18.7 billion (about 18 percent of 2024 GDP). - Of this, EUR 6.2 billion are funds under the Recovery and Resilience Plan (RRP), which includes EUR 480 million under RePowerEU chapter. - Grants amounting to EUR 12.5 billion are available under the Multiannual Financial Framework (MFF) 2021–27 with utilization date of end-2030. - Disbursement and absorption rates: - About 16 percent of the total funds disbursed (as of mid-October 2025). - RRP: about 22 percent of available funds disbursed as of September 2025. - Baseline assumption: about Euro 4.6 billion underutilization of the available EU funds (consistent with the macroframework projections of the 2025 Article IV consultation). - Factors behind slow absorption: - Delays due to stalled reforms, frequent snap elections, and reversals of reforms (e.g., electricity market liberalization). - Structural deficiencies: prolonged implementation timelines for large infrastructure projects, procurement-related delays, projects starting with only pre-feasibility studies, fragmented project structures, frequent regulatory changes, complex procurement appeals procedures, and administrative capacity bottlenecks. - Programming-period absorption patterns: - Implementation under the 2021–27 MFF is slower compared to previous programming periods. ### D. Simulating the impact of scaled up quality public investment — model and scenarios - Model used: Debt Investment Growth and Natural Resources (DIGNAR) model — a small open economy dynamic general equilibrium model where public capital enters production and public investment is subject to inefficiencies; solved with perfect foresight in Matlab using Dynare. - Calibration: - Calibrated to Bulgarian economy using key ratios and parameter values corresponding to 2024 data; parameter values based on literature. - Two simulation scenarios: - Full absorption scenario: full absorption of available EU funds under the RRP (including REPowerEU) and the 2021–27 MFF by 2029. Total available EU funds until 2030: EUR 18.7 billion; around 16 percent already disbursed as of mid-October 2025. - Efficiency-improvement scenario: gradual increase in the efficiency of public investment, reducing the efficiency gap from 54 percent to 25 percent in 2030 (based on Kapsoli et al, 2023); this efficiency gain is added to the full-absorption scenario. - Public investment outcomes (percent of GDP): - Baseline projected average public capital expenditures in 2026–30: 3.4 percent of GDP. - Full absorption scenario average share in 2026–30: 4.3 percent of GDP. - Efficiency-adjusted investment: - Baseline efficiency-adjusted investment: 1.9 percent of GDP. - If all EU funds are absorbed: efficiency-adjusted investment of 2.3 percent of GDP. - If efficiency is improved to 75 percent (i.e., efficiency gap reduced to 25 percent) by 2030, efficiency-adjusted public investment will amount to 3.2 percent of GDP on average in 2026–30. ### E. Policy implications and recommended reforms - Steadfast reforms are essential to accelerate EU fund absorption and improve efficiency to boost growth. - Priority reform areas emphasized in the analysis: - Enhanced investment planning and multiannual prioritization to better inform the budget and improve project readiness. - Strengthening project appraisal and selection criteria to increase the quality and returns of public investment. - Procurement reforms to reduce noncompetitive practices, increase the number of bidders, and capture potential savings (estimated at 5.3 percent of procurement contract value during 2007–22). - Administrative capacity building to reduce delays in evaluating proposals and to simplify procedures and red tape. - Implementation urgency: - RRP milestones and targets must be completed by end-August 2026; delays risk underutilizing funds and jeopardizing green and digital transition and human capital strengthening. *RECOMMENDED CITATION: Vahram Stepanyan and Iglika Vassileva (2025) “Scaling Up Quality Public Investment for Stronger Growth”, Washington DC: International Monetary Fund, Selected Issues Paper, SIP/2025/149.* ### 19. Simulations show that GDP would be 1 percent higher in 2030 than in the baseline if ### 19. Simulations show that GDP would be 1 percent higher in 2030 than in the baseline if ### Main simulation results: full absorption of EU funds - GDP would be 1 percent higher in 2030 than in the baseline. - This is equivalent to an acceleration of the GDP growth by 0.2 ppt on average in the five-year horizon from 2026 till 2030. - Public capital accumulation stimulates growth in private investment in both the tradable and non-tradable sectors. - Private consumption is estimated to be 1 percent higher in 2030. - The fiscal position remains largely unchanged as higher public investment is financed by increased grants. - Over the next five years, the current account remains largely unchanged: public investment boosts imports, but exports also increase. ### Higher-efficiency investment scenario - GDP exceeds the baseline by 2.3 percent in 2030. - Consumption is 2.3 percent higher in 2030. - Private investment surpasses its baseline value by 1.7 percent. - The gradual increase in the efficiency of public investment improves growth trajectories. - Public debt is marginally lower than in the baseline. - The current account remains broadly unchanged. ### Quantified dynamics shown in simulations (selected indicators, deviations from baseline) - GDP deviation (percent from the baseline): annual path shown for 2026–2030 with full absorption and with full absorption plus higher efficiency; peak deviations reach 1.0 percent (full absorption) and 2.3 percent (full absorption and higher efficiency) in 2030. - Private Investment deviation (percent from the baseline): annual path for 2026–2030; private investment surpasses baseline by 1.7 percent under the higher-efficiency scenario in 2030. - Employment deviation (percent from the baseline): gradual increase through 2026–2030 with small positive deviations (values shown in figure up to 0.5 percent by 2030). - Private Consumption deviation (percent from the baseline): private consumption deviates up to 1.0 percent (full absorption) and up to 2.3 percent (full absorption and higher efficiency) by 2030. ### Policy implications and recommendations (Concluding Remarks) - Scaling up quality public investment can accelerate income convergence with the EU and reduce disparities within the country. - Accelerating the pace of absorption of EU funds and increasing public investment efficiency is critical and should be a top policy priority. - Reforms that are pre-requisites for the EU funds disbursement need to be implemented steadfastly. - There is room to improve the effectiveness and efficiency of public investment, including by: - better planning and prioritizing multiannual capital expenditures, - strengthening project appraisal and selection, - improving procurement. - Increasing the efficiency of public investment boosts growth dividends; staff estimates that full absorption of EU Funds could boost GDP by 1 percent in 2030 compared to the baseline, and paired with efficiency improvements the gain could reach 2.3 percent. ### Annex I — Baseline model calibration (selected key ratios and parameter values) - Key Ratios - Government investment to GDP (%) 3.3 - Government consumption to GDP (%) 12.00 - Government domestic debt (%) 5.9 - Government external commercial debt (%) 17.5 - Concessional debt (%) 0.001 - Grants to GDP (%) 1.8 - Government revenue to GDP (%) 33.6 - Share of labor taxes in total public revenue (%) 31.3 - Share of consumption taxes in total public revenue (%) 37.8 - User fees of public infrastructure (in percent of recurrent costs) 68.2 - GDP real growth (%) 2.8 - Exports to GDP (%) 55.8 - Imports to GDP (%) 53.5 - Private investment to GDP (%) 14.6 - Private foreign debt to GDP (%) 33.0 - Domestic real interest rate (%) 0.02 - Real risk-free rate (%) 0.001 - Real interest rate on external commercial debt (%) 0.02 - Share of tradables in consumption (%) 61.6 - Share of non-resource tradables in consumption of tradable goods (%) 78.9 - Labor income share in traded sector (%) 43.3 - Labor income share in non-traded sector (%) 47.9 - Parameter Values - Steady-state efficiency of public investment (%) 46.2 - Private capital depreciation rate (%) 10 - Public capital depreciation rate (%) 7 - Elasticity of substitution between labor in tradable and non-tradable sectors 0.5 - Output elasticity to public capital 0.12 - Elasticity of substitution between traded and non-traded goods 0.99 - Elasticity of portfolio adjustment costs 1 - Inverse of Frisch labor elasticity 5 - Investment adjustment cost 25 - Inverse of the intertemporal elasticity of consumption 1.78 - Home bias for additional government spending 0.6 - Elasticity of sovereign risk 0 - Adjustment share by external commercial debt (%) 100 *Source: IMF staffestimates.* --- _Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025149.pdf_