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### I. Introduction — objectives and methodology
- Maintaining and upgrading public infrastructure—power, water, transport, health and education—are critical challenges for ECCU countries.
- Drivers increasing infrastructure demand: economic growth and modernization, climate change, urbanization and shifting socioeconomic profile.
- Constraints: limited fiscal space over the past decade, high indebtedness, increased intensity of natural disasters leading to higher replacement rates.
- Paper’s view: strengthening public investment management (PIM) systems—planning, budgeting, appraisal, selection, procurement, implementation and maintenance—can increase efficiency, improve investment spending and generate savings.
- Research aim: examine whether governments can improve spending efficiency and "get more bang for the dollar" by analyzing physical infrastructure availability, trends in public investments and public capital stock, and PIM institutional performance.
- Methodology and tools:
  - Data source: IMF’s Investment and Capital Stock Dataset (IMF, 2015).
  - Frontier analysis for infrastructure availability and trends.
  - Perpetual inventory method with standard 2.5 - 3.5 percent annual depreciation for public capital stock estimates.
  - Maintenance spending assessment using Fay and Yepes (2003).
  - Growth effects assessed using Barro-type growth regression.
  - PIMA evaluation tool to assess 15 key institutions across Planning, Allocation, Implementation (including maintenance).

### II. Fixed capital stock, access and efficiency
- Public sector is the main provider of transport, water supply, education and health; except for electricity, access to basic infrastructure is higher than Small States and LAC averages and has increased over the past two decades.
- Caveats on capital stock measurement:
  - Public capital stocks measured via perpetual inventory declined or stagnated over 2010–2015.
  - Standard depreciation used: 2.5 - 3.5 percent annual; estimates likely overstate capital stocks because they ignore ECCU topography, disaster attrition and low maintenance.
  - Adjustments for natural disasters (Thacker et al, Guerson et al) suggest capital stock reductions by 2014 ranging from 2 percent in St. Lucia and St. Vincent and the Grenadines to 15 percent and 19 percent in Dominica and Grenada, respectively—implying average depreciation rates above the standard 3.5 percent.
- Efficiency (PIE-X / frontier analysis):
  - Efficiency of physical public infrastructure in ECCU countries is 68 percent (efficiency gap of 32%).
  - Comparative averages: Small states 62 percent; Advanced economies 74 percent.
- Sectoral stylized facts (select figures preserved):
  - Electricity: about 30 US cents per kWh in 2017 compared with 16 US cents/kWh in OECD countries; time to get a new connection ranged from 18 to 61 days in 2013.
  - Roads: paved roads as a percentage of total road networks range between 33 percent to 89 percent across ECCU countries (table excerpt: Antigua and Barbuda 33 (2002); Dominica 50 (2001); Grenada 42 (2018); St. Kitts and Nevis 43 (2002); St. Lucia 70 (2011); St. Vincent and the Grenadines 90 (2013)).
  - Water: technical and commercial losses are high (>30 percent of production).
  - Maintenance spending on average < one percent of GDP in ECCU governments.

### III. Capital expenditure: levels, trends and adequacy
- Gross public investment in the ECCU (2006–2015): about 8.9 percent of GDP.
- Comparative averages (2006–2015):
  - Small States: 7.9
  - Latin America and the Caribbean: 6.2
  - Emerging Markets: 7.0
- ECCB (2012) benchmark: net annual government investment of 9 percent of GDP required as part of net national investment of 30 percent of GDP to achieve annual economic growth of 6 percent at a capital output ratio of 5.
- Observed patterns:
  - Capital spending varied widely and trended downwards over 2006 to 2018.
  - Reconstruction spending in Dominica and Montserrat following natural disasters masks the declining trend.
  - ECCU average capital spending averaged 7.2 percent of GDP from 2006 to 2018 and 6.8 percent of GDP from 2016 to 2018.
  - Median capital spending excluding Dominica and Montserrat: 4.6 percent of GDP (2006–2018) and 3.3 percent of GDP (2016–2018).
- Accounting and comparability:
  - Grenada’s chart of accounts correction and fiscal rules reduced reported capital expenditure by 3.5 percent of GDP to 4.2 percent of GDP.
  - If standard capital depreciation rates vary between 3.5 percent – 6 percent (befitting ECCU conditions), estimated average capital depreciation is about 4.3 percent to 6.5 percent of GDP.
  - Implication: capital spending in many ECCU countries may be lower than capital depreciation, implying net government investment is negative and public capital stocks-to-GDP may be lower and declining.
- Concluding implication: Additional spending will be needed to close infrastructure gaps, increase growth, provide services and build disaster resilience.

### IV. Execution, committed undisbursed balances (CUB) and absorptive capacity
- Execution rates (actual expenditure as percent of budgeted capital expenditure):
  - Declined from 73 percent (earlier 13-year period) to 59 percent (2016–2018).
  - Variability (standard deviation) in execution improved on average but remains high in Antigua and Barbuda and St. Kitts and Nevis.
- CUB findings (independent countries, 2011–2018):
  - CUBs are 2 to 3 times higher than actual capital spending.
  - Implication: Dominica, Grenada, St. Lucia and St. Vincent and the Grenadines could have increased spending by 1 percent to 2.3 percent of GDP annually during the period by accessing committed funds.
- Project implementation delays:
  - Delays in authorization: time between loan approval by CDB and loan effectiveness declined from 9 months to 8 months between 2015 and 2017; still higher than IDB members’ average of about 7 months in 2015 and longer than Bahamas’ 4-month delay.
  - Disbursement delays occur prior to first disbursement (inadequate project preparation) and during implementation (under-performance against schedule and budget).
  - Project implementation can take 4 to 6 years on average and could be delayed by 2 to 3 years.
- Causes of delays include establishment of project implementation units, staffing, procurement, permits, weak institutional capacity and weak inter-agency coordination.

### V. Cost overruns and potential savings
- Evidence of widespread cost overruns:
  - Flyvbjerg (2016): projects in LAC have cost overruns of 48 percent compared with the global average of 28 percent.
  - Cost overruns affect at least 50 percent of infrastructure projects in IDB and World Bank loan portfolios and account for at least 17 percent of project costs in LAC (IDB, 2018).
  - If MDB-financed projects represent a lower-bound, potential cost savings in national portfolios of about 20 percent exist.
- IDB (2018) estimate: based on average project size of US$100 million, implementation over 14 years, interest rate of 3.1 percent, disbursement inefficiencies would add up to 10.5 percent of project costs.
- Contributing factors:
  - Unavoidable: incomplete information, natural disasters, resettlement, complex geology.
  - Avoidable/reducible: poor project design, incomplete estimates, lack of competition/transparency, weak supervision, optimistic bias.

### VI. Strengthening PIM, project preparation and institutional reforms
- Enhancing PIM from selection through delivery can:
  - improve infrastructure effectiveness,
  - reduce implementation delays,
  - lower costs and cost overruns.
- Recommended institutional and procedural reforms:
  - establish enabling environment and improve pre-investment planning and project preparation to reduce and mitigate costs and risks and improve project quality;
  - resolve challenges in attracting and retaining technical skills (quantity surveyors, engineers, architects, project managers).
  - amend PFM legislation and regulations to require systematic performance-based assessments of project implementation; identification, tracking and prioritization of operational and investment gaps; monitoring of physical and financial progress; monitoring and evaluation of outcomes and impacts.
- Project Preparation Facilities (PPFs):
  - PPFs provide resources for preparatory phases, are demand-responsive and effective in generating quality projects at entry.
  - IDB suggests a single facility encompassing all countries and sectors in LAC; ECCU countries should consider a facility administered by CDB and World Bank extended to non-bank financed public sector and PPP projects.
- Recent institutional developments:
  - Dominica established the Climate Resilience Execution Agency of Dominica (CREAD) in September 2018.
  - St. Lucia established a Delivery Unit in 2018 with CDB support.

### VII. Making best use of existing assets — utilization, demand management and maintenance
- Persistent bias toward new capacity versus improving utilization of existing assets.
- Opportunities:
  - Reduce technical and commercial water losses (>30 percent of production in some countries) via network rehabilitation, metering and billing efficiency—often cheaper than new capacity.
  - Demand-management measures and user fees can create market tests, increase revenue, encourage private participation and access to commercial financing.
  - Examples: improved bus operations, vehicular access routes, parking restrictions, integrated traffic management; incremental technologies like smart parking meters and real-time traffic information.
- Maintenance:
  - Depreciation is non-linear; delays in routine maintenance may cause irreversible deterioration.
  - On average ECCU governments spend less than one percent of GDP on maintenance.
  - Fay and Yepes (2003) estimates: Middle Income Countries 2.5 percent of GDP; LAC 1.4 percent of GDP (annual average maintenance needs between 2005 and 2010).
  - Grenada’s maintenance budget of 0.14percent of GDP for 2018 was estimated by authorities to be at least an ⅛ of current needs.
  - Reasons for low maintenance: budget constraints, inadequate inspection/capacity, poor maintenance culture, political bias toward new externally financed construction.

### VIII. Empirical evidence on maintenance and growth (panel FM-OLS, 2010–2017)
- Dataset: annual data 2010 to 2017 for 12 Caribbean countries (8 ECCU + 4 others); panel cointegration estimated with FM-OLS.
- Key long-run empirical finding:
  - A statistically significant long-run cointegrating relationship exists between maintenance expenditure and real GDP.
  - A 10 percent increase in the maintenance expenditure to GDP ratio raises long-run output by about 0.2 percent.
  - No statistically significant short-run impact from increasing maintenance expenditure.
- FM-OLS long-run coefficients and statistics (standard errors in parentheses; ***, **, * indicate 1%, 5%, 10% significance):
  - Log (Maintenance Expenditure): 0.021 (0.001) ***
  - Log (real domestic investment): 0.062 (0.003) ***
  - Log (real government consumption): -0.191 (0.006) ***
  - Log (broad money): 0.050 (0.009) ***
  - Openness: -0.086 (0.006) ***
  - Inflation: -0.004 (0.000) ***
  - constant: 0.006 (0.003) *
  - Change in Maintenance Expenditure: -0.004 (0.007)
  - Lagged growth: 0.480 (0.098) ***
  - Growth in domestic investment: 0.048 (0.016) ***
  - Growth in government consumption: -0.085 (0.030) ***
  - Growth in broad money: -0.143 (0.044) ***
  - Natural disaster: -0.004 (0.002) *
  - Lagged change in inflation: -0.002 (0.001) **
  - Equilibrium Correcting Term: -0.342 (0.081) ***
  - Observations: 84
  - Countries: 12
  - Sample Period: 2010-2017
  - R-squared: 0.577
  - Adjusted R-squared: 0.523
  - Standard Error of Regression: 0.021
  - Sum Squared Residuals: 0.027
  - Log likelihood: 181.973
  - Durbin-Watson: 2.035
- Policy implications:
  - In the long run, gross domestic investment and financial development positively affect real GDP; government consumption, inflation and openness have negative effects.
  - A 10 percent rise in growth domestic investment accumulation leads to approximately 0.6 percentage point increase in output over time (long-run interpretation).
  - Given low average maintenance spending (< one percent of GDP), higher maintenance spending may have proportionally higher long-run impacts on growth.
  - Medium-term public expenditure programs should set guidelines balancing new infrastructure investment against adequate maintenance and include maintenance costs in project costings.

### IX. PIMA framework, project appraisal, procurement and SOEs
- PIMA overview:
  - Assesses 15 institutions across Planning, Allocation, Implementation; scores three dimensions per institution (1: not met; 2: partially met; 3: fully met).
  - Desk study used for initial diagnostics; full in-country PIMA recommended to assess effectiveness and sequence reforms.
- Project appraisal practices:
  - Most appraisals done in sector ministries with centralized technical support oversight.
  - Antigua and Barbuda and Dominica have standardized, publicly available appraisal methodologies.
  - Project proposals legally required to be supported by CBA except in Anguilla and Grenada (CBAs required only above $15 million and $10 million thresholds, respectively).
  - No evidence of routine use of Cost-Effectiveness Analysis or Multi-Criteria Analysis.
  - Donor-financed projects generally include pre-investment analytical work; domestic projects lack systematic pre-investment rigor.
  - Risks are acknowledged but often not costed or integrated; contingency reserves for cost overruns are generally not included.
- PPPs and SOEs:
  - Most countries lack institutional PPP frameworks; only Anguilla and Grenada have published PPP policy/appraisal/monitoring criteria.
  - SOEs are major contributors to public investment but financial and investment information is limited; net asset positions often unknown; contingent liabilities not recorded and ambivalence exists about their existence.
- Budgeting and classification issues:
  - Multi-year capital budgeting is common (budget year + 2 outer years) but outer years are indicative and unreliable.
  - Few budgets provide total project cost projections or separate recurrent costs.
  - Chart of Accounts and GFS application varied; revisions (e.g., Grenada, St. Lucia) materially affected reported capital expenditure levels.
- Procurement:
  - Legislative procurement frameworks publicly available; open competition is de jure method except Antigua and Barbuda and St. Kitts and Nevis.
  - Limited public information on procurement plans/processes except in Anguilla, Montserrat and Grenada.
  - Central Tenders Boards act as initial review bodies; independent procurement complaints mechanisms generally not established.

### X. Availability of funding, cashflow and donor finance integration
- Cashflow management:
  - Most Ministries of Finance (except St. Vincent and the Grenadines) undertake in-year monthly and quarterly cash flow forecasts.
  - Cashflow constraints (revenue and external financing) cause project delays.
- External financing and TSA integration:
  - External project financing is largely retained by donors in separate bank accounts and not in governments’ treasury single accounts (TSA).
  - Lack of integration with TSA reduces effective cashflow management and oversight; some donor-funded expenditure may not be captured in out-turn statements.
- Policy recommendations:
  - Strengthen in-year monthly and quarterly cash flow forecasting across all countries.
  - Integrate externally financed project accounts with governments’ TSA arrangements where feasible.
  - Ensure donor-funded expenditures are captured in out-turn statements to improve transparency.
  - Recognize donor-funded projects’ relative predictability in multi-year planning while improving predictability and protection of own-source funds.

*Source: wpiea2020177-print-pdf*

### REFERENCES ____________________________________________________________________________________________ 38

### I. INTRODUCTION

### Overview and objectives
- Maintaining and upgrading public infrastructure—power, water, transport, health and education—are critical challenges confronting member countries of the Eastern Caribbean Currency Union (ECCU).
- Drivers increasing infrastructure service demands: economic growth and modernization, climate change, urbanization and shifting socioeconomic profile.
- Constraints: limited fiscal space over the past decade, high indebtedness, increased intensity of natural disasters leading to higher replacement rates.
- Paper’s view: strengthening public investment management (PIM) systems—planning, budgeting, appraisal, selection, procurement, implementation and maintenance—can increase efficiency, improve investment spending and generate savings.
- Research aim: examine whether governments can improve spending efficiency and "get more bang for the dollar" by analyzing physical infrastructure availability, trends in public investments and public capital stock, and PIM institutional performance.

### Methodology and key tools
- Data source: IMF’s Investment and Capital Stock Dataset (IMF, 2015).
- Analytical approaches:
  - Frontier analysis to compare availability of public physical infrastructure in the ECCU to peer country groupings and analyze trends.
  - Perpetual inventory method with standard 2.5 - 3.5 percent annual depreciation for public capital stock estimates.
  - Maintenance spending assessment using Fay and Yepes (2003) methodology.
  - Growth effects assessed using Barro-type growth regression (Mankiw, Romer and Weil, 1992; Barro and Sala-i-Martin, 1995).
  - Public Investment Management Assessment (PIMA) evaluation tool (IMF, 2015, 2018) to assess 15 key institutions across three PIM stages: Planning, Allocation, Implementation (including maintenance).

### Prior findings and literature
- ECCB’s Public Expenditure Review Commission (2012): small size, prevalence of natural disasters, inadequate insurance coverage and maintenance of assets contribute to negative returns on investments; can be minimized through institutional/regional PIM arrangements and disaster risk mitigation.
- Investment multipliers:
  - Roache (2007), Gonzalez-Garcia et al (2013), and Alichi et al (2018) indicate growth impact generally positive but less than one over the medium term.
  - Investment multipliers during episodes of fiscal expansion, recession and booms range between 1 and 1.5 in small states (Alichi et al, 2018).
- Findings preview:
  - Physical infrastructure indices: access and efficiency in the ECCU are higher on average than small states and emerging market economies, but quality is sub-optimal and significant efficiency gains are possible.
  - Investment rates are volatile and, on average, at or lower than the replacement rate of capital.
  - Low project execution rates and high committed undisbursed balances indicate weaknesses in project preparation and implementation.
  - Maintenance spending is suboptimal; long-run cointegrating relationship between maintenance expenditure and real GDP exists but no short-run relationship.
  - PIMA results: considerable variation among ECCU countries; allocation indicators about average; notable weaknesses in planning and implementation.

---

### II. TRENDS IN FIXED CAPITAL STOCK AND PUBLIC CAPITAL INVESTMENT IN THE ECCU

### Public capital stock and infrastructure access
- The public sector is the main provider of physical and social infrastructure in ECCU countries, particularly transport (roads, sea and airports), water supply, education and health.
- Except for electricity, access of the population to basic infrastructure is higher than the average for small states and Latin American and Caribbean Countries (LAC) and has increased over the past two decades.
- Public capital stocks in 3 of the ECCU displayed per capita levels below the average level observed in other Caribbean countries and the Seychelles.

### Public capital stock measurement and caveats
- Public physical capital stocks measured using the perpetual investment method declined or stagnated over 2010–15; capital stocks in Antigua and Barbuda and St. Kitts and Nevis lower than 100 percent of GDP (Figure 3).
- Standard depreciation used: 2.5 - 3.5 percent annual; these estimates ignore ECCU topography, attrition from climate and weather-related factors including natural disasters and low maintenance, and likely overstate capital stocks.
- Thacker et al (2012) and Guerson et al (2016) adjust physical capital stocks for natural disasters; reduction in capital stock by 2014 would range from 2 percent in St. Lucia and St. Vincent and the Grenadines to 15 percent and 19 percent in Dominica and Grenada, respectively—suggesting average depreciation rates above the standard 3.5 percent.

### Efficiency of physical infrastructure (PIE-X / frontier analysis)
- The efficiency analysis compares a country’s index of the output of public investment to per capita public capital stock relative to frontier performers.
- Results:
  - Efficiency of physical public infrastructure in ECCU countries is 68 percent (efficiency gap of 32%).
  - Average efficiency: Small states 62 percent; Advanced economies 74 percent.
- Interpretation: significant room for improving the use of existing assets despite recent investments (e.g., airport rehabilitation); other infrastructure (water and sanitation, roads, health, education, electricity) is aging and/or inefficient.

### Sectoral stylized facts (CDB, McIntyre et al)
- Electricity:
  - In 2017 about 30 US cents per kWh compared to 16 US cents/kWh in OECD countries.
  - Time to get a new connection ranged from 18 to 61 days in 2013.
  - Renewables (e.g., solar) being pursued.
- Roads:
  - Paved roads as a percentage of total road networks range between 33 percent to 89 percent.
  - Unpaved roads correlate with low quality, safety hazards and inefficient transport services.
- Water:
  - Access generally good; Anguilla, Antigua and Barbuda, and St. Kitts and Nevis have very low levels of renewable freshwater resources.
  - Anguilla and Antigua and Barbuda rely on high-cost desalination.
  - Technical and commercial losses are high (>30 percent of production), reducing utilities’ financial performance and service levels.
- Sanitation:
  - Several countries need to improve access to sanitation and invest in wastewater treatment facilities.

### Table excerpt (road infrastructure condition)
- Paved Roads Percentage of Total Roads (Year):
  - Antigua and Barbuda: 33 (2002)
  - Dominica: 50 (2001)
  - Grenada: 42 (2018)
  - St. Kitts and Nevis: 43 (2002)
  - St. Lucia: 70 (2011)
  - St. Vincent and the Grenadines: 90 (2013)
  - Low Income Country: 21 (2009)
  - Lower Middle Income Country: 49 (2009)
  - Latin America and the Caribbean: 22 (2009)
  - High Income: 81 (2009)

---

### Capital Expenditure: levels, trends and adequacy

### Gross public investment comparisons and targets
- Gross public investment in the ECCU (2006–2015): about 8.9 percent of GDP.
- Comparative averages (2006–2015):
  - Small States: 7.9
  - Latin America and the Caribbean: 6.2
  - Emerging Markets: 7.0
- ECCB (2012) benchmark: net annual investment of 9 percent of GDP required from governments as their contribution to a net national investment of 30 percent of GDP to achieve annual economic growth of 6 percent at a desired capital output ratio of 5.

### Observed patterns and concerns
- Capital spending varied widely and trended downwards over 2006 to 2018.
- Significant reconstruction spending in Dominica and Montserrat following natural disasters masks the declining trend.
- Average capital expenditure:
  - ECCU average capital spending averaged 7.2 percent of GDP from 2006 to 2018 and 6.8 percent of GDP from 2016 to 2018 (Figure 5).
- Median capital spending excluding Dominica and Montserrat:
  - 4.6 percent of GDP (2006–2018)
  - 3.3 percent of GDP (2016–2018)

### Accounting and comparability issues
- Grenada’s adoption of fiscal rules in 2016 and a correction of its chart of accounts to exclude recurrent expenses from capital spending reduced reported capital expenditure (3.5 percent of GDP reduction to 4.2 percent of GDP).
- Capital spending in Dominica and St. Lucia may be overstated due to accounting issues.
- If standard capital depreciation rates vary between 3.5 percent – 6 percent (befitting ECCU conditions), estimated average capital depreciation is about 4.3 percent to 6.5 percent of GDP.
- Consequently, capital spending in many ECCU countries may be lower than capital depreciation, implying net government investment is negative and public capital stocks-to-GDP may be lower and declining.

### Implication
- Additional spending will be needed to close infrastructure gaps, increase economic growth, provide essential services and build resilience to natural disasters.

---

### III. CHALLENGES IN CLOSING THE INFRASTRUCTURE GAP

### Scope for improving efficiency
- Substantial scope exists to improve capital spending effectiveness and efficiency via enhanced PIM capabilities and oversight to better access financing, augment project selection, reduce bottlenecks and streamline project delivery.
- Governments can optimize use of existing assets through improved maintenance and demand-management measures rather than building new capacity.

### Enhancing project management: financing vs absorptive capacity
- Determining relative contribution of financing availability and absorptive capacity is challenging due to limited data, but some generalizations:
  - Antigua and Barbuda and St. Kitts and Nevis are middle income and ineligible for concessional financing; domestic financing depends significantly on budget discipline and Citizen-by-Investment (CBI) revenues.
  - Concessional financing availability appears less of an issue for other countries in the region.
  - Anguilla and Montserrat (BOTs) capital spending primarily grant-financed.
  - Dominica since 2016 financed much by CBI revenues.

### Execution rates of capital expenditure
- Execution rates (actual expenditure as percent of budgeted capital expenditure) vary across ECCU countries and have generally declined:
  - Execution rates declined from 73 percent (earlier 13-year period) to 59 percent (2016–2018).
  - Variability (standard deviation) in execution has improved on average but remains high in Antigua and Barbuda and St. Kitts and Nevis.
- Underperformance reflects optimism in budget projections and delayed disbursements due to absorptive capacity constraints (inadequate project readiness and implementation capacity).
- Execution undermines reliability of budget year and outer-year capital spending estimates.

### Committed undisbursed balances (CUB) and financing access
- CUB data (independent countries, 2011–2018) indicate these balances are 2 to 3 times higher than actual capital spending.
- Implication: financing access was not the critical constraint in Dominica, Grenada, St. Lucia and St. Vincent and the Grenadines; these countries could have increased spending by 1 percent to 2.3 percent of GDP annually during the period by accessing committed funds.
- Recommendation: strengthen institutional and implementation capacity to access contracted financing.

### Project implementation delays: types and effects
- Implementation delays immobilize physical and financial capital, increase supervision and management costs, and can raise construction costs due to price escalation, staff turnover and changing needs—reducing rate of return and invalidating project selection rationale.
- Two types of implementation delays:
  - Delays in authorization: time between loan approval by CDB and loan effectiveness by executive/legislative branch declined from 9 months to 8 months between 2015 and 2017; still higher than IDB members’ average of about 7 months in 2015 and longer than Bahamas’ 4-month delay.
  - Delays in disbursements: occur prior to first disbursement (inadequate project preparation) and during implementation (under-performance against schedule and budget).

---

*Source: wpiea2020177-print-pdf - REFERENCES ____________________________________________________________________________________________ 38*

### 1.8 percent.

### 1.8 percent.

### Disbursement delays, implementation bottlenecks, and cost overruns
- Delays in project implementation can take 4 to 6 years on average and could be delayed by 2 to 3 years.
- Causes of implementation delays include:
  - delays in establishing project implementation units, engaging project coordinators and managers, procuring services of engineers, establishing project steering committees, getting relevant approvals within executing agencies, and obtaining relevant planning and building permits.
  - delays in procurement and contracting processes, weak institutional capacity of executing agencies, and weak inter-agency coordination (larger gap for physical infrastructure vs. sectors such as education and health).
- Project cost overruns are a major and widespread problem for PIM efficiency:
  - Flyvbjerg (2016) indicates projects in LAC have cost overruns of 48 percent compared with the average project globally of 28 percent.
  - Cost overruns affect at least 50 percent of infrastructure projects in IDB and World Bank loan portfolios and account for at least 17 percent of project costs in LAC (IDB, 2018).
  - If multilateral development bank-financed projects represent a lower-bound, there is potential for cost savings in national project portfolios of about 20 percent.
- Factors contributing to cost overruns:
  - unavoidable: incomplete information and contingencies such as natural disasters, physical and social constraints (resettlement processes), complex geology.
  - avoidable/reducible: poor project design and incomplete estimates, lack of competition and transparency in bidding processes, weak project supervision, inadequate decision-making, optimistic bias underestimating costs and risks while overestimating implementation capacities.
- IDB (2018) estimate (based on average project size of US$100 million, implementation over 14 years, interest rate of 3.1 percent) that disbursement inefficiencies would add up to 10.5 percent of project costs.

### Strengthening Public Investment Management (PIM) and project preparation
- Enhancing PIM capabilities from project selection through delivery can:
  - improve infrastructure effectiveness,
  - significantly reduce implementation delays,
  - lower infrastructure costs and cost overruns.
- Key institutional and procedural reforms recommended:
  - establish the enabling environment and improve pre-investment planning and project preparation and processes to reduce and mitigate costs and risks and improve project quality;
  - resolve challenges in attracting and retaining persons with requisite technical skills (for example, quantity surveyors, engineers, architects, project managers).
- Recent institutional developments:
  - Dominica established the Climate Resilience Execution Agency of Dominica (CREAD) in September 2018 to assist with project planning and execution (financed by donor funds).
  - St. Lucia established a Delivery Unit in 2018, with support from CDB, to assist with prioritization and implementation of public investment.
- PFM legislation and regulations should be amended to require:
  - systematic performance-based assessments of project implementation;
  - identification, tracking, and prioritization of operational and investment gaps;
  - monitoring of physical and financial progress of project implementation;
  - monitoring and evaluation of outcomes and impacts during on-going operations.
- Project Preparation Facilities (PPFs):
  - PPFs are a financial instrument to provide resources targeted to preparatory phases of priority projects, studies and programmes.
  - PPFs have been demand-responsive and effective in generating quality projects at entry (African Development Fund, 2000).
  - PPFs encourage high-level government commitment before approval, promoting ownership and participation in project preparation and implementation.
  - IDB suggests establishing a single facility encompassing all countries and sectors in LAC (IDB, 2019).
  - ECCU countries should consider a facility administered by the CDB and World Bank, extended to non-bank financed public sector and Public Private Partnerships (PPP) projects to address capacity constraints and benefit from economies of scale.

### Making the best of existing infrastructure: asset utilization, demand management, and maintenance
- Persistent bias toward building new capacity rather than improving utilization of existing assets (Dobbs et al, 2013).
- Opportunities to boost asset utilization where existing infrastructure reaches capacity or where alternatives exist:
  - reduce technical losses due to water leakage and commercial losses (>30 percent of production in some countries) through replacement/rehabilitation of distribution networks, introduction or expansion of water metering, and billing efficiency—often costing less than building new capacity.
  - demand-management measures (restricting access or imposing user fees where appropriate) have advantages:
    - create a market test and put pressure on service providers to improve quality;
    - increase revenue base for investments and bridge financing gaps;
    - encourage private sector participation and improve access to commercial financing (World Bank, 2017).
  - examples of demand-management: improved bus operations, vehicular access routes, parking restrictions, integrated traffic management systems; incremental strategies like smart parking meters and real-time traffic information as alternatives to immediate congestion pricing.
- Maintenance is critical:
  - depreciation of infrastructure is non-linear and not generally visible; delays in routine maintenance may cause irreversible deterioration requiring rehabilitation or rebuilding.
  - neglecting maintenance can reduce productivity and infrastructure services; adverse impact is temporary if full maintenance expenditure is restored before damage becomes irreversible.
- Maintenance spending benchmarks and reality in ECCU:
  - On average ECCU governments spend less than one percent of GDP on maintenance.
  - Fay and Yepes (2003) broad estimates used to calculate minimum annual average requirement for ECCU countries over 2011 to 2017 as illustrative lower bound.
  - Grenada’s maintenance budget of 0.14percent of GDP for 2018 was estimated by authorities to be at least an ⅛ of current needs.
  - Fay and Yepes (2003) estimate annual average maintenance needs between 2005 and 2010 for Middle Income Countries and LAC as 2.5percent of GDP and 1.4percent of GDP, respectively.
  - Reasons for low maintenance spending: budget financing constraints, inadequate capacity for inspections and maintenance planning, poor maintenance culture, political bias toward new construction financed externally on concessional terms.

### Impact of maintenance on growth: empirical evidence
- Econometric approach:
  - dataset: annual data 2010 to 2017 for 12 Caribbean countries (the 8 ECCU countries and 4 other Caribbean countries).
  - methodology: panel cointegration approach, estimated using Fully Modified Least Squares (FM-OLS).
  - model includes maintenance expenditure variable and control variables: fiscal policy, openness to international trade, financial development, government effectiveness index, economic cost of natural disasters and capital accumulation.
  - variables deflated by nominal GDP except inflation, government effectiveness, and openness.
- Key empirical findings:
  - a statistically significant long-run cointegrating relationship exists between maintenance expenditure and real GDP.
  - a 10 percent increase in the maintenance expenditure to GDP ratio raises long-run output by about 0.2 percent.
  - there is no statistically significant short-run impact from increasing maintenance expenditure.
  - possible interpretation: maintenance spending may not boost growth in the short run but raises growth potential over time by improving the environment for growth.
- Additional long-run results from FM-OLS (exact coefficients and statistics reported):
  - Log (Maintenance Expenditure): 0.021 (0.001) ***
  - Log (real domestic investment): 0.062 (0.003) ***
  - Log (real government consumption): -0.191 (0.006) ***
  - Log (broad money): 0.050 (0.009) ***
  - Openness: -0.086 (0.006) ***
  - Inflation: -0.004 (0.000) ***
  - constant: 0.006 (0.003) *
  - Change in Maintenance Expenditure: -0.004 (0.007)
  - Lagged growth: 0.480 (0.098) ***
  - Growth in domestic investment: 0.048 (0.016) ***
  - Growth in government consumption: -0.085 (0.030) ***
  - Growth in broad money: -0.143 (0.044) ***
  - Natural disaster: -0.004 (0.002) *
  - Lagged change in inflation: -0.002 (0.001) **
  - Equilibrium Correcting Term: -0.342 (0.081) ***
  - Observations: 84
  - Countries: 12
  - Sample Period: 2010-2017
  - R-squared: 0.577
  - Adjusted R-squared: 0.523
  - Standard Error of Regression: 0.021
  - Sum Squared Residuals: 0.027
  - Log likelihood: 181.973
  - Durbin-Watson: 2.035
  - ***, **, * indicate statistical significance at the 1%, 5%, 10% levels, respectively. Standard errors in parentheses.
- Interpretation and policy implications:
  - in the long-run, gross domestic investment and financial development exert a positive impact on real GDP; government consumption expenditure, inflation, and openness have a negative effect.
  - a 10 percent rise in growth domestic investment accumulation leads to approximately 0.6 percentage point increase in output over time.
  - the suboptimality of maintenance expenditures (countries on average spend significantly less than one percent of GDP; Trinidad and Tobago and Monserrat allocate around two percent of GDP) may imply that higher maintenance spending would have proportionally higher impact on growth.
  - medium-term public expenditure programs should establish guidelines for optimum resource allocation that consider:
    - the growth impacts and trade-offs of investment in new infrastructure versus adequate maintenance spending of existing infrastructure;
    - the need to incorporate adequate maintenance costs as part of project costs to facilitate appropriate budgetary allocations to sustain infrastructure durability and realize expected benefits.

### Assessment framework mention
- The IMF’s Public Investment Management Assessment (PIMA) Framework is used to assess institutional features that minimize major risks in infrastructure investment and identify elements of reform needed to improve infrastructure spending efficiency (IMF 2015, 2018).

*Source: Country Authorities and Staff estimates; IMF working paper content.*

### Box 1: PIMA Methodology

### Box 1: PIMA Methodology

### Overview
- The Public Investment Management Assessment (PIMA) is a comprehensive framework to assess infrastructure governance practices for countries at all levels of economic development.
- The PIMA examines 15 key institutions that shape the three main stages of public investments: Planning sustainable levels of investment across the public sector; Allocation of investment to the right sectors and right projects; and Implementation to deliver productive and durable assets.
- This paper uses a PIMA desk study to provide initial information on the general situation of PIM systems in ECCU and raise the awareness of potential important issues of PIM in the zone. Building on these initial assessments, in-country PIMA assessment in each country is recommended to assess not only the institutional design but more importantly effectiveness to identify sequenced reform priorities that are specific to each country’s PIM system in order to improve it.

### Scoring and Dimensions
- Each institution is analyzed and graded along three dimensions that reflect the key features of the given institution, resulting in a total of 45 dimensions.
- Three possible scores are assigned to each dimension:
  - 1: not met
  - 2: partially met
  - 3: fully met
- The average of the dimension scores within an institution produces a score for that institution.

### Cross-cutting Factors
- PIMA also covers a qualitative assessment of three cross-cutting factors that often impact the overall effectiveness of public investment management:
  - (1) the legal and regulatory framework,
  - (2) staff capacity, and
  - (3) IT systems.

### Design versus Effectiveness
- Full PIMA in-country assessment evaluates both institutional design (“what is on paper”) and effectiveness (“what is in practice”), because there is often a gap between the design of formal rules and how they are implemented in practice, due to capacity constraints among others.

### Use in This Paper and Next Steps
- This paper’s PIMA desk study provides initial diagnostic information and facilitates awareness-raising on PIM issues in ECCU countries.
- The desk study can be complemented by full PIMA in-country assessments to evaluate effectiveness and identify sequenced, country-specific reform priorities.
- Over time, the desk study can be used to evaluate ongoing efforts at improving the investment environment in ECCU countries.

*Source: IMF (2018); content as provided in the supplied PDF excerpts.*

### 4. Project Appraisal

### 4. Project Appraisal

### Project appraisal arrangements and practices
- In most countries, project appraisals are undertaken at the sectoral ministry or agency with oversight by a centralized technical support unit in the ministry responsible for economic and physical planning.
- Antigua and Barbuda and Dominica have a standardized methodology for project appraisal which is publicly available.
- Procedures for evaluation do not distinguish between the sizes of projects but reflect a basic approach of providing information to inform decision-makers about the value and impact of the project.
- Project proposals are legally required to be supported by standard economic appraisal techniques such as Cost-Benefit Analysis (CBA) except in Anguilla and Grenada.
- In Anguilla and Grenada, CBA’s must be applied to projects above the threshold of $15 million and $10 million, respectively.
- No evidence was found of the use of other standard appraisal techniques such as Cost-Effectiveness Analysis and or Multi-Criteria Analysis.

### Box: General procedures for project proposals (core components)
- Project description, clear and measurable objectives, description of options;
- Institutional arrangements for consultation and prioritization of projects;
- Availability of information and financing to undertake pre-investment work such as sector studies and policy briefs that would inform project proposals;
- Comprehensive identification of costs and sources and amounts of financing for the project. Costings include recurrent and technical assistance costs over a 3-year period;
- Identification of risk factors, monitoring indicators, human resource requirements as well as policy, legal, and regulatory factors that could affect project success.

### Pre-investment work, donor vs domestic financed projects
- Donor financed project proposals (primarily the CDB and World Bank) generally include pre-investment analytical works (socioeconomic impact studies, CBA’s and assessments of feasibility and sustainability) as part of their project appraisal processes and financing approval arrangements.
- Such rigor is not systematically applied to projects funded from domestic revenue and bilaterally negotiated loans and grants.
- It is unclear whether project proposals, as a standard, include comparisons of the estimated economic and social impacts of alternative projects with the same objectives or intended outcomes.
- Establishment of a pre-investment financing mechanism would:
  - provide a potentially useful source of project ideas or solutions;
  - contribute to the deepening of sector knowledge and the strengthening of the evidence basis upon which projects are designed;
  - provide valuable information on risks and other factors that could impede the successful achievement of project objectives;
  - support a more proactive approach to engaging the national community and external financing agencies in informed dialogue on public investment priorities.

### Risk management in appraisals
- Risks are typically acknowledged in project proposals but are often not costed and integrated into the investments.
- Risk management processes are not applied throughout the project life cycle or used to incentivize the private sector to adopt mitigation measures to reduce adverse impacts.
- Contingency reserves that specifically cater for possible project cost overruns are not included in budgets. General contingency allocations in budgets of Grenada, St. Kitts and Nevis, and St. Lucia could be used for this purpose.

### PPPs, regulatory frameworks and institutional capacity
- Economic infrastructure provision is generally undiversified and under regulated; monopolies dominate core services (transportation, water and electricity).
- Independent production of water and electricity is permitted within limits for sale to the utility companies.
- Telecommunications are mainly provided by private companies in a competitive environment; in Dominica, Grenada, St. Kitts and Nevis, St. Lucia and St. Vincent and the Grenadines telecommunications licenses are regulated by the Eastern Caribbean Telecommunications Authority (ECTEL).
- Most countries do not have institutional frameworks for assessing and managing PPPs.
- Only Anguilla and Grenada have published policy, appraisal and monitoring criteria or guidelines for undertaking PPPs:
  - Both require alignment of PPPs with development objectives, presentation of a business case and appraisal of viability to ensure value-for-money, understanding of fiscal impact and affordability, and transparency in selection and performance.
  - Only projects valued above EC$65 million and EC$50 million in Anguilla and Grenada, respectively, will be considered to mitigate preparation and contract management costs.
  - Projects where the fast pace of sectoral change makes it difficult to define outputs will not be considered.
  - Anguilla’s FRL requires correct accounting treatment agreed by independent qualified accountant and UK government approval of the arrangement.
- Capacity to undertake value-for-money reviews and manage PPPs is being considered in some countries:
  - Anguilla must commission independent accounting, legal, financial, economic, environmental, and other technical advice as appropriate.
  - Grenada is establishing a PPP focal point—Steering Committee, Core Team and Execution Team—and has solicited technical assistance from the CDB.
  - St. Lucia has initiated establishment of a PPP Unit in the Ministry of Finance.

### State-owned enterprises (SOEs) and contingent liabilities
- SOEs are major contributors to public investment but information on their investment and reviews of their financial performance is generally limited.
- Except Grenada, the net asset positions of many SOEs is not known on a regular or timely basis.
- Weak reporting compliance limits effective oversight and quantification of the risks to the government's fiscal plans originating from SOEs and the public sector.
- None of the countries have recorded contingent liabilities related to PPPs and there is ambivalence about their existence.

### Multi-year budgeting and capital projections
- Capital spending in many countries is budgeted on a multi-year basis—the budget year and 2 outer year forecasts—but does not provide explicit assurances that the full funding requirements could be met.
- Expenditure estimates for the budget year reflect institutional ceilings while the outer years are indicative and not reliable.
- Budget documents in Antigua and Barbuda, Montserrat and St. Vincent and the Grenadines provide capital expenditure estimates for the budget year only; Dominica forecasts total capital spending for the budget year and 2 outer years.
- Most budget documents identify the source of funding for projects, but few provide both capital spending by ministry and project.
- Few countries (Anguilla, Grenada, and Montserrat) publish projections of the total cost of major capital projects on budget documents.

### Budget comprehensiveness, unity and classification
- The budget reflects central government capital spending and includes funding sources and allocations by ministry.
- Most capital expenditure is externally financed (grants and loans) often agreed by financing agreements.
- In few cases, capital expenditure estimates identify the two subcategories of gross fixed capital formation: (i) infrastructure investments and (ii) equipment and renovations.
- Most externally funded capital projects are integrated into ministerial or sectoral investments in budget documents for the current budget year.
- Statutory bodies and SOEs operate as extra-budgetary units; subsidies/transfers they receive from government are included in budget documents and ex-post financial reports, but other revenues and expenses are not.
- Only St. Lucia includes information in the budget on PPPs.
- Ministries of Finance typically prepare the recurrent and capital budgets in a single document following consultation with sector ministries.
- Except for St. Kitts and Nevis, project costs for sectors and programs did not include or separately identify their recurrent costs of ongoing projects or new projects in budget documents for the budget year and the medium term.
- Road maintenance costs and refurbishment of public buildings are often included in capital expenditures as projects.
- All countries used GFS 2001 during 2013–16; application of program classification and Chart of Accounts varied and often did not comply with international standards.
- St. Lucia reclassification of 2014–15 and 2015–16 capital budgets (5.6 and 5.3 percent of GDP, respectively) by the Ministry of Finance found about 62 percent reflected capital formation.
- Revision of Grenada’s Chart of Accounts in 2016 in preparation for adoption of GFS 2014 resulted in a reduction in capital expenditure from 7.7 percent of GDP to 4.2 percent of GDP.

### Budgeting for investment and appropriations
- Budgetary mechanisms do not totally protect investments, particularly those financed by own funds.
- Total project outlays are not appropriated at project commencement; annual appropriations are provided for estimated annual spending.
- Only in half of the countries (Anguilla, Grenada, Montserrat and St. Vincent and the Grenadines) is information on total project costs included in budgets although not for all projects.
- Virements from capital to current spending is prevented in most countries except Anguilla, Dominica and St. Lucia where there is no limit on virements.
- Unspent appropriations generally lapse at the end of the financial year in all countries.
- In most countries except Dominica and St. Lucia, spending on capital projects contemplated in a previous year continues for at most four months past the commencement of the financial year, in the absence of a current Appropriations Act.
- Donor financed projects are generally protected: donor financing (including counterpart funding) is guaranteed by loan/grant agreement and typically covers the total cost even though annual appropriations are required.

### Maintenance funding and asset management
- Governments do not have standard methodologies for estimating routine maintenance needs and costs nor for determining major improvements to existing assets.
- Maintenance costs are identified in project proposals for large externally financed projects, but there are no records of systematic application.
- Paucity of data on the technical condition and performance levels of infrastructure assets over time limits assessments of optimal maintenance needs.
- All countries provision for maintenance and rehabilitation works in ministerial budgets, but actual spending in most countries is below budget allocations.
- Strengthening the connection between the capital and recurrent components of the budget is highlighted as needed.

### Project selection, readiness and pipelines
- Project proposals and supportive documentation should be cleared by a centralized technical support unit before vetting by an inter-ministerial evaluation committee responsible for proposing project prioritization.
- Project selection for the budget and inclusion in the pipeline of projects in the PSIP is typically decided at the ministerial level.
- In the absence of national development plans, selection criteria are reported as government priorities—employment creation; foreign exchange generation; investment in critical infrastructure, plant and equipment; food safety and security; social programs for poverty alleviation—but criteria are not transparent in many cases.
- It is unclear whether selection is based on the maximum net benefit principle after considering economic, social, environmental and financial impact.
- Verification of project readiness (financing assurances, availability of land, feasibility studies, technical specifications, procurement schedules) is inadequate or missing, causing substantial delays and adverse quality impacts when projects not ready are included.
- Government pipelines of approved investment projects may include other projects based on (i) availability of external funding, (ii) emergency rehabilitation and replacement needs, (iii) political expediency, without vetting by the inter-ministerial committee.

### Procurement
- Legislative frameworks for government procurement are publicly available and have been updated in the last decade, although relevant regulations have not been promulgated in all cases.
- Open competition is the de jure procurement method in the legislation for most countries except Antigua and Barbuda and St. Kitts and Nevis.
- Procurement legislation for Anguilla, Montserrat and Grenada specify the conditions (including values) under which different procurement systems can be deployed; in other countries the approach is subject to discretion.
- Very little information on procurement plans, procurement processes in their stages (invitation to tender, award of contracts) is publicly available except in Anguilla, Montserrat and Grenada.
- Central Tenders Boards act as review bodies in the first instance, but independent administrative procurement complaints mechanisms have not been established.

*Source: 4. Project Appraisal, wpiea2020177-print-pdf*

### 12. Availability of Funding

### 12. Availability of Funding

### Forecasting and cashflow management
- Ministries of Finance establish the financial programming for the financial year (per month and quarter) to allow the management and utilization of financial flows based on the allocation of available funds.
- Most, except St. Vincent and the Grenadines, undertake in-year monthly and quarterly cash flow forecasts which provide a gauge of the timeliness of cash for project implementation.
- Cashflow constraints—revenue and external financing—cause delays in project implementation.
- Donor financing, being guaranteed by an agreement, is considered more reliable for project planning and implementation over the duration of the project than own-source funds, which are more unpredictable and subject to rationing depending on prioritization of allocation (including emergency disaster spending on relief, rehabilitation and repair).

### External financing, treasury single accounts (TSA), and integration
- External project financing is largely retained by donors in separate bank accounts and not in governments’ treasury single accounts (TSA).
- In principle, all externally-financed projects are fully included in budget estimates, but funds generally flow through separate accounts opened for the purpose which are not directly under governments’ control.
- Lack of integration with the TSA reduces effective cashflow management and project implementation.
- There is a possibility that some donor-funded expenditure may not be captured in out-turn statements.

### Impact on capital spending and project implementation
- Capital spending in any given year is unstable in countries experiencing fiscal constraints and in many countries is primarily driven by the availability of external financing.
- Reliability of forecasts and timeliness of cash flows for projects vary and affect project planning and commitment, contributing to implementation delays.

### Policy implications and recommended practices
- Strengthen in-year monthly and quarterly cash flow forecasting across all countries to improve timeliness and predictability of funds for project implementation.
- Integrate externally financed project accounts with governments’ TSA arrangements where feasible to improve cashflow management and oversight.
- Ensure donor-funded expenditures are captured in out-turn statements to improve transparency of public finances and project delivery.
- Recognize the relative predictability of donor-financed projects in multi-year planning, while improving the predictability and protection of own-source funds against reallocation (including for disaster response) to stabilize capital spending.

*From: wpiea2020177-print-pdf — 12. Availability of Funding*

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_Source: https://www.imf.org/-/media/files/publications/wp/2020/english/wpiea2020177-print-pdf.pdf_