## _061115 ## Source details **Canonical URL:** [_061115](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2015/_061115.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2015/_061115.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2015/_061115.pdf.json) --- ### Executive summary — public investment trends and roles - Public investment supports delivery of public services, connects citizens and firms to economic opportunities, and can catalyze economic growth. - Trends by country group: - Advanced Economies (AEs): average public investment decreased from a high of just under 5 percent of GDP in the late 1960s to a historic low of just over 3 percent of GDP in 2012. - Emerging Markets (EMs) and Low Income Developing Countries (LIDCs): public investment rates peaked at over 8 percent of GDP in the late 1970s/early 1980s, declined to around 4-5 percent of GDP in the mid-2000s, and have since recovered to 6-7 percent of GDP. - Public capital stock and provision: - The real value of the public capital stock has nearly tripled on a per capita basis across all countries since 1960, but public capital has generally lagged behind economic output, particularly in AEs. - Public sector dominates economic infrastructure provision in EMs and LIDCs; private sector increasingly important in AEs (example: in the United Kingdom private companies account for almost two-thirds of investment in selected economic infrastructure sectors; in India the private sector accounts for less than a third of infrastructure investment). - Public sector remains main provider of social infrastructure: in education the public sector accounts for more than half of total investment in both AEs and EMs; in health public investment ranges from about a third in selected EMs to about two-thirds in AEs. ### Public investment efficiency, PIE-X, and growth impacts - Public investment efficiency: - Average inefficiencies in public investment processes estimated around 30 percent. - Closing the efficiency gap could yield substantial dividends; strengthening PIM institutions could close up to two-thirds of the public investment efficiency gap (two-thirds stated exactly). - Public Investment Efficiency Index (PIE-X): - PIE-X introduced and estimated across 134 countries (sample size stated in Section II overview). - Three output indicators underpin PIE-X: physical indicator, survey-based indicator (WEF), and hybrid indicator (physical + survey). - Model sample sizes: - Physical indicator: All Countries n=132; AEs {n=26}; EMs {n=62}; LIDCs {n=44}. - Survey-based indicator: All Countries {n=119}; AEs {n=28}; EMs {n=57}; LIDCs {n=34}. - Hybrid indicator: All Countries {n=139}; AEs {n=31}; EMs {n=68}; LIDCs {n=40}. - Reported efficiency gaps (by measure): - Physical indicator: average efficiency gap of 43%. - Survey-based indicator: average efficiency gap of 27%. - Hybrid indicator: average efficiency gap of 20%. - Text statement (hybrid): "Based on the hybrid indicator, the average efficiency gap is 27 percent." - Distribution by income group (hybrid in text): LIDCs gap 40 percent; EMs gap 27 percent; AEs gap 13 percent on average. - Efficiency and growth: - The most efficient public investors get twice the growth “bang” for their public investment “buck” than the least efficient. - Illustrative numeric impacts (Annex III / main text): - A one-off 1 percent of GDP increase in public investment increases output after four years by: - 0.3 percent for countries in the bottom efficiency quartile. - 0.6 percent for countries in the top efficiency quartile. - Regression sample and specification: - Fully balanced sample covering 114 countries, period 1970-2013. - Fixed effects regression with varying effects by public investment efficiency. - Table AIII.1 — Estimated coefficients (in percent) for public investment at horizons k=1 to k=5: - Public Investment - low efficiency: - k=1: 0.098 [*] (0.07) - k=2: 0.147 [*] (0.11) - k=3: 0.162 (0.15) - k=4: 0.152 (0.18) - k=5: 0.130 (0.20) - Public Investment - high efficiency: - k=1: 0.346*** (0.08) - k=2: 0.583*** (0.14) - k=3: 0.684*** (0.18) - k=4: 0.719*** (0.21) - k=5: 0.758*** (0.24) - R-squared: 0.0982 (k=1), 0.1128 (k=2), 0.1163 (k=3), 0.1134 (k=4), 0.1082 (k=5) - Observations: 464 (k=1), 452 (k=2), 427 (k=3), 413 (k=4), 429 (k=5) - Countries: 114 ### Public Investment Management Assessment (PIMA) - Purpose and scope: - PIMA evaluates the 15 key institutions shaping planning, allocation, and implementation of public investments. - Each of the 15 institutions is assessed on three key design features (45 indicators total); scoring yields a PIMA score between 0 and 10. - The 15 PIM institutions grouped by stage: - Planning: 1. Fiscal Rules; 2. National & Sectoral Planning; 3. Central-Local Coordination; 4. Management of PPPs; 5. Company Regulation. - Allocating: 6. Multiyear Budgeting; 7. Budget Comprehensiveness; 8. Budget Unity; 9. Project Appraisal; 10. Project Selection. - Implementing: 11. Protection of Investment; 12. Availability of Funding; 13. Transparency of Execution; 14. Project Management; 15. Monitoring of Assets. - Pilots and results: - PIMA applied to a sample of 25 countries representing AEs, EMs, and LIDCs. - Stylized facts: - Institutional strength strongly correlated with income: weakest in LIDCs, strongest in AEs on average. - Allocation and implementation institutions appear most important for investment efficiency. - An additional point in PIM overall score is statistically significantly associated with a 5 percent increase in PI efficiency. - Improvements in PIM could cut the public investment efficiency gap by around two-thirds; average country in the 25-country sample faces an efficiency gap of 27 percent and could close 66 percent of the distance to the frontier by adopting best practices in the sample. - Correlations and explanatory power (from figures): - R² values reported: R² = 0.154; R² = 0.327; R² = 0.3602; R² = 0.2636. - PIMA institutional strength highly correlated with World Bank WGI — R² = 0.4494; correlated with PIMI — R² = 0.2352. ### Project selection, PIM complementarities, and strategic planning - Linkages and complementarities: - Budget comprehensiveness, protection of investment allocations, and availability of funding strongly correlated. - Strong project appraisal and selection institutions correlate with stronger PPP management. - Implementation institutions (transparency of execution, project management, availability of financing) tend to develop together. - National and sectoral planning correlates relatively weakly with other institutions. - Strategic planning examples and outcomes: - Uganda: PIP mechanism integrated with MTBF; framework not always adhered to. - Brazil: Growth Acceleration Program (PAC) boosted investment from 1.6 percent of GDP in 2006 to 3.4 percent in 2010. - Korea: MOSF uses Preliminary Feasibility Study (PFS) for project eligibility and comprehensive pipeline for budget. - UK: Infrastructure UK and National Infrastructure Pipeline published; pipeline identifies 600-plus projects with medium-term cost profiles. - Project selection institutional features (PIMA indicators): - Central MoF review of major projects, published/adhered selection criteria, and comprehensive pipeline of approved projects are assessed in 10.a–10.c. ### Fiscal frameworks, investment stability, and corruption - Fiscal rules and public investment: - Fiscal rules often do not treat public investment differently and can be procyclical. - Approaches that explicitly protect public investment include structural balance rules, golden rules, other exemptions, and investment floors (examples: 2012 EU Fiscal Compact; Japan, Spain, UK historically; India's current balance target excluding public investment since 2004; Argentina’s Fiscal Responsibility Law; Thailand's capital expenditure floor of 25 percent and public debt limit 60 percent of GDP). - Investment stability and allocation: - Countries with strong PIM institutions have less volatile investment flows and more stable sectoral allocation of investment. - Strong implementation institutions most important for reducing investment volatility, particularly in LIDCs. - No evidence that stronger PIM institutions lead to greater emphasis on “hard” infrastructure; only education investment increases with institutional strength after controlling for income. - Credibility and corruption: - Stronger PIM institutions associated with more credible capital budgets and lower perceived rent-seeking/corruption (ICRG Corruption Index relationship holds when adjusted for income). - Independent appraisal and QA procedures (example: Norway QA2) reduce cost overruns and improve budget credibility: - Norway QA2 results: about 80 percent of first 40 major projects completed within the parliament-approved cost frame; variability of actual vs estimated costs greatly reduced. ### Public-private partnerships (PPPs) — roles, risks, trends, and P-FRAM - PPP structure and trade-offs: - Typical PPP: private firm finances, designs, builds, operates, maintains asset in exchange for user fees and/or periodic government payments. - Advantages: mobilize private finance and know-how, promote efficient use of public funds, improve service quality, bundling can incentivize timely construction and maintenance. - Limits and risks: private finance costlier than government borrowing; PPPs work best when outputs/service quality predictable and measurable; sectors with rapid technological change are difficult for PPPs; require strong legal/policy/appraisal/monitoring arrangements; risk of circumventing budget constraints and generating large fiscal costs via poor contract design, optimistic user-fee assumptions, government minimum income guarantees. - Empirical PPP examples: - Australia rolling stock rail PPP: cost savings of around 30 percent relative to the public-sector comparator. - Five PPP water projects in Singapore: lower-than-expected bid price attributed to design innovations and improved technology. - Portugal: renegotiation of road PPPs during 2008 crisis when revenue guarantees threatened fiscal position. - Scotland Skye Bridge PPP: government bought back project after reduced demand. - PPP trends and statistics (2013 PPP capital stock): - AEs: PPP capital stock averaged around 1 percent of GDP in 2013 (or less than 5 percent of the public capital stock). - EMs and LIDCs: PPP capital stock increased to around 5 percent of GDP on average, and up to 9 percent of GDP in some countries. - Concern: sharp increase in PPPs in LIDCs where frameworks remain weak. - PPP Fiscal Risk Assessment Model (P-FRAM): - Purpose: quantify macro-fiscal implications of PPP projects; provide standardized outcomes (project cash flows, fiscal tables/charts on cash and accrual basis, debt sustainability analyses with and without PPP, sensitivity analyses). - Four-step decision-tree: Who initiates the project? Who controls the asset? Who ultimately pays? Does government provide additional support? - Implementation: Excel-based platform; designed for PPP units in finance ministries; pilot-tested and expected fully developed by mid-2015. - P-FRAM intended to complement PIMA and other fiscal assessment tools and be piloted in selected projects and countries. ### Measuring public investment and capital stocks — data, methods, and assumptions - Measurement conventions: - Public investment measured as gross fixed capital formation (GFCF) of the general government (central + subnational). - Excludes investment grants, loan guarantees, tax concessions, operations of public financial institutions, government-backed saving schemes. - Annual PPP service payments typically classified as public current spending while investment is often classified as private. - SOE and extrabudgetary entity spending may not be recorded as public investment. - Capital stock construction — perpetual inventory method: - Equation: K_{t} = (1 - δ_{t}) K_{t-1} + (1/2) I_{t}. - Series expressed in constant international 2005 prices (PPP). - Investment series sources: - OECD Analytical Database (August 2014) for 26 OECD countries, 1960-2013 (codes: IGV, IPV, GDPV). - Penn World Tables (PWT) Version 8.0 for 132 countries, 1960-2011 (codes: Q_GDP, Q_GFCF); disaggregated using WEO public/private shares and extended to 2013 with WEO. - Initial capital stock set to 0 in 1860; artificial investment series assumed 4 percent growth per year to reach five-year-forward moving average. - Depreciation assumptions (Annex Table AI.1 — percent): - Public Capital: - Low-income: 1860 2.50 | 1960 2.50 | 2013 2.50 - Middle-income: 1860 2.50 | 1960 2.50 | 2013 3.51 - High-income: 1860 2.50 | 1960 2.50 | 2013 4.59 - Private Capital: - Low-income: 1860 4.25 | 1960 4.25 | 2013 4.25 - Middle-income: 1860 4.25 | 1960 4.25 | 2013 8.10 - High-income: 1860 4.25 | 1960 4.25 | 2013 10.41 - Note: income classifications follow World Bank WDI country groupings. - PPP capital stock: - Constructed with perpetual inventory method using initial PPP capital stock = 0 the year prior to first available data, PPP depreciation = public depreciation assumptions, and PPP investment flows. - PPP investment data sources: - EIB (Kappeler and Nemoz, 2010) for 18 European countries, 1990-2009 (project value at financial closure). - World Bank Private Participation in Infrastructure (WB PPI) database for 125 low- and middle-income countries, 1984-2012 (commitments at contract signature/financial closure). - Adjustments: divestitures excluded; project commitments spread over five years; converted to constant 2005 international dollars; extended to 2013 by holding PPP investment to GDP at latest three-year average. - Caveats: incomplete country coverage (missing data for US, Australia, Canada, China, Japan, etc.); heterogeneous definitions; commitments vs executed investments; potential over- or underestimation issues. ### Measuring efficiency using frontier methods (Annex II) - DEA (Data Envelopment Analysis) with variable returns to scale used; output-oriented model. - Outputs used in DEA: - Physical indicator components: length of road network, access to improved water source, electricity production, number of secondary teachers, number of hospital beds (per capita where applicable). - Survey-based indicator: WEF pillar 2 subcomponents focused on infrastructure quality (hard-data subcomponents removed). - Hybrid indicator: arithmetic mean of physical and survey-based indicators. - Inputs: - Public capital stock (IMF staff estimation). - GDP per capita as control input. - Empirical DEA findings: - Estimated average waste ranges from 20 to 43 percent depending on measure. - Based on the quantitative index, on average infrastructure quality could be increased by 43 percent without increasing public capital stock. - Potential efficiency gains by group (quantitative index): AEs around 27 percent; EMs 40 percent; LIDCs 55 percent. - Correlations and robustness: DEA scores correlated 0.51 with survey-based quality index (24 observations); alternative output constructions yield correlations between 0.6-0.9. ### PIM reform priorities and IMF role - Priorities by country group: - AEs: strengthen medium-term fiscal and budgetary frameworks, protect investment spending, strengthen central-local coordination. - EMs: adopt rigorous and transparent project appraisal, selection, and management; central support for appraisal and risk analysis; maintain active project pipeline; ex-post evaluations. - LIDCs: strengthen implementation institutions (transparency, procurement, cash management); appropriate total project costs at commencement; allow some carryover of unspent appropriations; strengthen monitoring and evaluation. - Cross-cutting: stricter oversight of PPPs, better integration between national strategic planning and capital budgeting. - Scaling-up investment: - Strengthening PIM institutions should be integral to scaling-up plans; weak institutions or circumvention diminish benefits. - IMF actions and tools: - Develop PIMA into a comprehensive diagnostic and pilot in FY 2016 across a range of countries (including all G20 countries in context of G20 IIWG). - Launch and finalize P-FRAM to assess PPP fiscal risks; pilot in selected countries. - Support PIM reforms through TA, surveillance, and policy work; further analysis of drivers of public investment efficiency. - Note: large-scale increase of PIMAs would require additional resources. *Source: EXECUTIVE SUMMARY (June 11, 2015).* ### EXECUTIVE SUMMARY ### _061115 - EXECUTIVE SUMMARY ### Key findings on public investment trends and impacts - Public investment supports delivery of public services, connects citizens and firms to economic opportunities, and can catalyze economic growth. - After three decades of decline, public investment has begun to recover as a share of GDP in emerging markets (EMs) and low income developing countries (LIDCs), but remains at historic lows in advanced economies (AEs). - In AEs, average public investment decreased from a high of just under 5 percent of GDP in the late 1960s to a historic low of just over 3 percent of GDP in 2012. - In EMs and LIDCs, public investment rates peaked at over 8 percent of GDP in the late 1970s/early 1980s, declined to around 4-5 percent of GDP in the mid-2000s, and have since recovered to 6-7 percent of GDP. - The real value of the public capital stock has nearly tripled on a per capita basis across all countries since 1960, but public capital has generally lagged behind economic output, particularly in AEs. - The public sector continues to dominate provision of economic infrastructure in EMs and LIDCs; the private sector plays an increasingly important role in AEs (example indicators: in the United Kingdom private companies account for almost two-thirds of investment in selected economic infrastructure sectors; in India the private sector accounts for less than a third of infrastructure investment). - The public sector remains the main provider of social infrastructure: in education the public sector accounts for more than half of total investment in both AEs and EMs; in health public investment ranges from about a third of investment in selected EMs to about two-thirds in AEs. ### Public investment efficiency and economic returns - Comparing public capital (input) and measures of infrastructure coverage and quality (output) across countries reveals average inefficiencies in public investment processes of around 30 percent. - The most efficient public investors get twice the growth “bang” for their public investment “buck” than the least efficient. - Closing the efficiency gap would yield substantial economic dividends: strengthening PIM institutions could close up to two-thirds of the public investment efficiency gap (two-thirds stated exactly). - The paper introduces a new Public Investment Efficiency Index (PIE-X) and estimates public investment efficiency across 134 countries (sample size stated in Section II overview). ### Public Investment Management Assessment (PIMA) - The IMF developed the Public Investment Management Assessment (PIMA) to evaluate the 15 key institutions shaping planning, allocation, and implementation of public investments. - Based on a sample of 25 countries, the PIMA finds significant scope to strengthen PIM institutions. - Countries with stronger PIM institutions have more predictable, credible, efficient, and productive investments. - PIMA methodology and its results are presented, and correlations across institutional dimensions are analyzed (PIMA applied across a range of income levels and regions). ### Priorities for strengthening PIM institutions by country group - Advanced Economies (AEs): Ensure fiscal and budgetary frameworks provide stable and sustainable bases for investment planning across levels of government. - Emerging Markets (EMs): Adopt more rigorous and transparent arrangements for appraisal, selection, and approval of investment projects. - Low Income Developing Countries (LIDCs): Strengthen institutions related to funding, management, and monitoring of project implementation. - All countries: Stricter oversight of public-private partnerships (PPPs) and better integration between national strategic planning and capital budgeting. ### Analytical innovations and methods - The paper links macro studies on public investment and growth with micro analysis of PIM practices and project-level performance. - Two analytical innovations underpin the analysis: - A new cross-country Public Investment Efficiency Index (PIE-X). - The Public Investment Management Assessment (PIMA) applied across countries. - Public capital stock is estimated using the perpetual inventory method (methodology drawing on Kamps (2006) and Gupta and others (2014); details in Annex I). - Public investment efficiency is calculated as the distance from an efficiency frontier (details and frontier methods described in Section II and Annex II). ### Role of the Fund and planned tools - The Fund plans to develop the PIMA into a comprehensive assessment of PIM practices. - The Fund plans to launch a new PPP Fiscal Risk Assessment Model (P-FRAM) to complement its other fiscal assessment tools. - The Fund will support PIM reforms and collaborate with multilateral institutions (roles and support described in Section V). *Source: EXECUTIVE SUMMARY (June 11, 2015).* ### Box 2. Public and Private Roles in the Provision of Infrastructure ### Box 2. Public and Private Roles in the Provision of Infrastructure ### Rationale for public provision and private roles - Traditional public provision rationale: public goods and market failures (nonrival and nonexcludable goods). - Additional causes of underprovision: network effects (e.g., subway systems), positive externalities (e.g., clean water), and natural monopoly characteristics (e.g., electricity transmission). - Governments may intervene for social/equity considerations (e.g., universal access to basic education, ensuring vulnerable groups’ access to transportation). - Many publicly supplied services are mixed or “impure” public goods (example: roads—consumption is rivalrous during congested periods; exclusion may be difficult). ### Technological change and regulatory tools enabling private provision - Technological innovations have enabled commercialization of networks previously dominated by public sector (examples: electricity generation, mobile phones). - Market segments formerly characterized by monopoly provision have changed due to market growth and competition from new technologies. - Regulatory and fiscal instruments can address externalities directly (examples: pollution taxes, noise ordinances, electronic tolling on roads, airport landing fees), allowing private-sector provision within a policy/regulatory framework (examples: telecommunication, electricity, airports, ports). ### Trade-offs: market failure versus government failure - Government intervention can generate inefficiencies due to absence of market signals and commercial discipline. - Even when market failure exists, private provision may be justified if governments cannot operate efficiently (i.e., when governments incur excessive costs relative to expected benefits). - Public sector still dominates social infrastructure provision because of equity considerations and remains main provider of large/complex projects (e.g., national railways, urban transport networks) due to market conditions (pure monopolies) and private financing difficulties (large fixed costs). ### Public-private partnerships (Box 3): potential advantages and limits - Typical PPP structure: private firm provides upfront financing and designs, builds, operates, maintains an asset in exchange for user fees and/or periodic government payments over the contract life. - Advantages of well-designed PPPs: - Mobilize private financial resources and know-how. - Promote efficient use of public funds. - Improve service quality. - Bundling design, construction, and operation can incentivize timely construction of high-quality assets and their maintenance and cost recovery. - Limitations and risks: - Private financing typically more expensive than government borrowing; efficiency gains must offset higher private capital cost. - PPPs work best when outputs and service quality are predictable and measurable for contract duration. - Sectors with rapid technological change (example: IT or health) can be difficult for PPPs because contractual horizons may not match technological evolution. - PPPs require strong legal, policy, appraisal, approval, and monitoring arrangements. - Some PPPs are used to circumvent budgetary constraints and delay fiscal cost recognition, leading to low-quality or fiscally costly projects. - Poor contract design, optimistic user-fee assumptions, and government minimum income guarantees can create large fiscal costs. - Examples cited: - Australia rolling stock rail PPP: cost savings of around 30 percent relative to the public-sector comparator. - Five PPP water projects in Singapore: lower-than-expected bid price, attributed to design innovations and improved technology. - Portugal during the 2008 global financial crisis: forced to renegotiate road PPPs when revenue guarantees called by private partners threatened fiscal position. - Scotland Skye Bridge PPP: reduced demand due to lack of coordination with other crossings; government bought back the whole project from the private partner. - IMF role: FAD is developing a PPP Fiscal Risk Assessment Model (P-FRAM) for systematically assessing potential costs and risks arising from PPP projects. ### Trends and key statistics on private participation and public investment - PPP capital stock in 2013: - AEs: PPP capital stock averaged around 1 percent of GDP in 2013 (or less than 5 percent of the public capital stock). - EMs and LIDCs: PPP capital stock increased more rapidly to around 5 percent of GDP on average, and up to 9 percent of GDP in some countries. - Concern highlighted: sharp increase in PPPs in LIDCs where PPP frameworks remain weak, potentially exposing public finances to significant risks and affecting public investment efficiency. - Composition of public sector investment, 2013 (percent of GDP) — selected countries: - Australia: Central government 0.5; Local government 2.6; Public corporations and other entities 1.6; Public sector (consolidated) 4.7. - Denmark: Central government 0.9; Local government 1.4; Public corporations and other entities 1.7; Public sector (consolidated) 4.0. - France: Central government 1.3; Local government 2.8; Public corporations and other entities 1.7; Public sector (consolidated) 5.8. - Peru: Central government 2.3; Local government 3.9; Public corporations and other entities 0.4; Public sector (consolidated) 6.6. - Mexico: Central government 3.4; Local government 0.8; Public corporations and other entities 2.0; Public sector (consolidated) 6.2. - Senegal: Central government 1.6; Local government n.a.; Public corporations and other entities 9.4; Public sector (consolidated) 11.0. - UK: Central government 1.7; Local government 0.9; Public corporations and other entities 0.3; Public sector (consolidated) 2.9. - Subnational governments and public corporations are major contributors to public investment, particularly in AEs and large EMs (regional/local governments undertake more than half of public investment in some AEs and EMs). Investment is more centralized in LIDCs, with central government accounting for bulk of general government capital expenditure. ### Measuring public investment efficiency: PIE-X - Objective: estimate how much infrastructure “bang” a country gets for its public investment “buck.” - PIE-X: Public Investment Efficiency indicator estimating the relationship between public capital stock and indicators of access to and quality of infrastructure assets for over 100 countries. - Construction and scoring: - Countries with highest infrastructure coverage and quality for given levels of public capital stock and income per capita form an efficiency frontier and receive PIE-X score of 1. - Other countries receive PIE-X scores between 0 and 1 based on vertical distance to the frontier relative to peer best performers. - Three infrastructure output indicators used: - Physical indicator: combines volume of economic infrastructure (length of road network, electricity production, access to water) and social infrastructure (number of secondary teachers and hospital beds). Captures coverage but not fully quality. - Survey-based indicator: World Economic Forum’s business leaders’ impressions of quality of key infrastructure services. Captures quality but may have perception bias and insufficient coverage dimension. - Hybrid indicator: combines physical and survey-based indicators into a synthetic index of coverage and quality. - Model sample sizes (as reported in figures): - Physical indicator: PIE-X available for n=132 (All Countries); AEs {n=26}; EMs {n=62}; LIDCs {n=44}. - Survey-based indicator: All Countries {n=119}; AEs {n=28}; EMs {n=57}; LIDCs {n=34}. - Hybrid indicator: All Countries {n=139}; AEs {n=31}; EMs {n=68}; LIDCs {n=40}. ### PIE-X findings and efficiency gaps - General findings: - Efficiency of public investment generally increases with income per capita. - The slope of the frontier decreases as public capital stock rises, illustrating decreasing marginal returns to additional investment; leveling off is pronounced for the physical indicator due to limited scope to expand access once universal coverage achieved. - Reported efficiency gaps: - Text statement: "Based on the hybrid indicator, the average efficiency gap is 27 percent." - Distribution by income group (based on hybrid indicator in text): LIDCs facing a gap of 40 percent; EMs facing a gap of 27 percent; AEs facing a gap of 13 percent on average. - Figure-specific median/summary notes (as shown in figures): - Physical indicator: average efficiency gap of 43%. - Survey-based indicator: average efficiency gap of 27%. - Hybrid indicator: average efficiency gap of 20%. - Interpretation: substantial scope exists to improve public investment efficiency in most countries; significant variation across and within income groups. ### Public investment efficiency and growth - Efficiency has important implications for growth: public capital adjusted for efficiency contributes significantly to growth. - Literature cited: public investment impact on growth (references in source: Aghion and Howitt, 2009; Ghazanchyan and Stotsky, 2013); evidence that more efficient public investment yields stronger relationships between investment and economic growth (Gupta and others, 2014). - IMF view: growth dividend from investment can be significant but limited when investment process is inefficient (IMF, 2014c). - Caveat: countries with low efficiency but scarce capital can still enjoy high returns to investment relative to countries with more efficient investment but more capital (Berg and others, 2015). *Source: Box 2. Public and Private Roles in the Provision of Infrastructure (extracted from the provided IMF content).* ### Box 4. Public Investment Efficiency and Growth ### Box 4. Public Investment Efficiency and Growth ### Evidence on public investment and output - Public investment raises output through both demand and supply effects (Aschauer, 1989; Straub, 2007; Chakraborty and Dabla-Norris, 2009). - IMF (2014c) estimates: - In advanced economies (AEs): public investment shocks raise the level of output by 0.4 percent in the same year, and 1.5 percent after four years. - In developing countries: the impact is around 0.25 in the same year, and 0.5 after four years. - Investment shocks have an even bigger growth impact in AEs with more efficient public investment: increasing the level of output by 2.6 percent after four years (IMF, 2014c). - Berg and others (forthcoming) note that countries with low efficiency may have scarce public capital and higher marginal productivity of public capital, which can offset losses from lower efficiency; theoretical results rely on the assumption that efficiency is constant over time. ### Cross-country empirical findings on efficiency and growth - Cross-country regressions indicate the growth dividend of investment is larger for high-efficiency than for low-efficiency countries (see Figure 8). - Improving efficiency within a given country has an unambiguously positive impact on growth: the most efficient public investors see twice the growth impact compared with the least efficient, consistent with IMF (2014c). - Illustrative numeric findings (Figure 8 and text): - Moving from the lowest quartile to the highest quartile in public investment efficiency could double the impact of that investment on growth. - A one-off 1 percent of GDP increase in public investment increases output after four years by: - 0.3 percent for countries in the bottom efficiency quartile. - 0.6 percent for countries in the top efficiency quartile. - The effect is strongest in the first year of the investment increase and then tapers off, with the decrease occurring most rapidly for the lowest efficiency countries. - Data and econometric specification: - Data sample: fully balanced covering 114 countries during the period 1970-2013. - The econometric specification uses a fixed effects regression allowing estimation of varying effects of public investment on growth depending on the degree of public investment efficiency. - Regressors include log of real GDP (ppp-adjusted), country fixed effects, time fixed effects, ratio of real government investment (PPP-adjusted) to real GDP (PPP-adjusted), and a function varying between 0 and 1 to allow differentiated responses across efficiency groups. - Results are robust to controlling for private investment. ### Channels through which higher efficiency increases growth (footnote explanation preserved) - Higher quality public capital can lower transaction costs for the private sector and raise the marginal productivity of private human and physical capital. - Improving investment efficiency would also create fiscal space by providing better infrastructure at lower cost and releasing resources for more investment or growth-enhancing recurrent expenditure and/or reductions in marginal taxes. ### Assessing Public Investment Management: PIMA framework - Rationale: Differences in public investment efficiency across countries partly reflect differences in the relative strength of public investment management (PIM) institutions; improving PIM practices could reduce the efficiency gap by two-thirds on average across countries (but changes take time and capacity-building). - The Public Investment Management Assessment (PIMA) evaluates 15 key institutions for planning, allocation, and implementation of public investment; these are a subset of broader budget institutions. - PIMA assesses three stages of the public investment decision process: i. Planning sustainable levels of investment across the public sector; ii. Allocating investment to the right sectors and projects; iii. Implementing projects on time and on budget. ### The 15 PIM institutions (grouped by stage) - Planning - 1. Fiscal Rules - 2. National & Sectoral Planning - 3. Central-Local Coordination - 4. Management of PPPs - 5. Company Regulation - Allocating - 6. Multiyear Budgeting - 7. Budget Comprehensiveness - 8. Budget Unity - 9. Project Appraisal - 10. Project Selection - Implementing - 11. Protection of Investment - 12. Availability of Funding - 13. Transparency of Execution - 14. Project Management - 15. Monitoring of Assets ### Key institutional design features evaluated by PIMA - For each of the 15 institutions, three key design features are identified; each feature can be fully met, partly met, or not met. - Scoring: countries receive a PIMA score between 0 (no key features in place) and 10 (all 45 key features fully in place). - The PIMA framework incorporates elements related to macro-fiscal frameworks, integration of investment planning in medium-term budgeting, coordination across levels of government, and private sector participation; it is designed to be relevant across income levels, including advanced practices in fiscal principles, PPP management, project appraisal and selection, and asset monitoring. ### PIMA results and stylized facts - Sample for PIMA evaluations: 25 countries representing AEs, EMs, and LIDCs (listed in the source). - Overall patterns: - PIM institutional strength is strongly correlated with income: weakest in LIDCs and strongest in AEs on average. - Exceptions where EMs or LIDCs score at least as well as AEs: national and sectoral planning, central-local coordination, and multiyear budgeting. - Across the investment cycle, average institutional strength tends to increase from planning (weakest) to implementation (strongest), though exceptions exist. - AEs are relatively strong in management of PPPs, regulation of infrastructure companies, and budget comprehensiveness and unity. - EMs and LIDCs perform relatively poorly in availability of funding, management of project implementation, and monitoring of public assets. - Variations in institutional strength are largest among LIDCs and in the Asia-Pacific region; overall regional results: strongest in Europe and Latin America, weakest in the Middle East and Central Asia, and considerable variation in the Asia-Pacific region. *Source: Box 4. Public Investment Efficiency and Growth — IMF staff analysis and PIMA framework as presented in the provided content.* ### 10. Project Selection ### 10. Project Selection ### Linkages between PIM Institutions - Correlations in the strength of different institutions point to complementarities between different stages of the PIM process (paragraph 27). - Notable complementarities and correlations: - Budget comprehensiveness, protection of investment allocations, and ensuring the availability of funding are strongly correlated, highlighting the complementarity between sound budgeting and the efficient financing of capital projects. - Countries with strong institutions for project selection and project appraisal are generally also strong in the management of PPPs, underscoring the benefits of strong project evaluation across both conventional public and PPP projects. - Implementation institutions (transparency of budget execution, management of project implementation, and availability of financing) tend to be developed in tandem. - Countries that effectively monitor public assets also tend to have strong institutions for managing PPPs, indicating the role of modern accounting standards in recognizing both physical assets and contingent liabilities associated with PPPs. - National and sectoral planning correlates relatively weakly with other institutions, suggesting plans can be drawn up in a vacuum and not well integrated with budgeting. - Correlation strength definitions (from Figure 12): - Weak relationships: range between 0.1 and 0.3. - Medium relationships: range between 0.3 and 0.6. - Strong relationships: correlations above 0.6. - Institutional list referenced in correlations (numbered): 1. Fiscal Rules 2. National & Sectoral Planning 3. Central-Local Coordination 4. Management of PPPs 5. Company Regulation 6. Multi-Year Budgeting 7. Budget Comprehensiveness 8. Budget Unity 9. Project Appraisal 10. Project Selection 11. Protection of Investment 12. Availability of Funding 13. Transparency of Execution 14. Project Management 15. Monitoring of Assets ### Public Investment and Strategic Planning (Box 6) - Strategic planning has been revived in a number of countries to: - Target scarce funds to key infrastructure bottlenecks. - Ensure projects comply with rigorous standards of evaluation. - Establish a pipeline of strategically important projects for public, private, or hybrid financing. - Share expertise in project management and track project execution. - Country examples: - Uganda: - Prioritizes investment projects within multiyear sector development strategies guided by an indicative medium-term budget framework (MTBF). - Public investment programming (PIP) mechanism established in 1994; framework integrates planning and budgeting, coordinated by the Development Committee in Ministry of Finance, Planning and Economic Development. - Framework not always adhered to in practice. - Brazil: - Growth Acceleration Program (PAC) introduced in 2007 as a rolling four-year plan coordinating investments and PPPs across central, subnational governments, and state-owned enterprises. - To be included in the budget a large project must be part of the PAC. - Ministry of Planning and Budget created a dedicated unit and a project information portal. - PAC helped boost investment from 1.6 percent of GDP in 2006 to 3.4 percent in 2010. - Korea: - Ministry of Strategy and Finance (MOSF) uses Preliminary Feasibility Study (PFS) to evaluate project eligibility for budget financing. - PFS considers economic and policy analyses, risk assessment, and regional evaluation; MOSF prepares a comprehensive pipeline used for annual budget and National Fiscal Management Plan. - United Kingdom: - Infrastructure UK within HM Treasury coordinates planning and prioritization. - In 2010 published National Infrastructure Plan; in September 2013 published National Infrastructure Pipeline identifying 600-plus public and private investment projects and programs across seven strategic sectors with medium-term cost profiles. ### IV. Explaining Public Investment Performance — Key Findings (paragraphs 28–29) - Main findings: - Countries with stronger PIM institutions have more stable, credible, efficient, and productive public investments and lower perceived levels of rent-seeking and corruption. - Strengthening PIM practices can reduce the public investment “efficiency gap” by around two-thirds, with largest payoffs in EMs and LIDCs. - Caveats: - Sample is relatively small, introducing uncertainty about generalizability. - Robust causal relationship is difficult to establish; supporting country examples are provided. - PIE-X indicator and PIMA have limitations in coverage and scope. ### Measuring Public Investment Performance (paragraphs 30) - Eight indicators used (two direct, six indirect): Overall Impact of Public Investment - Efficiency of public investment: measured by the PIE-X indicators of infrastructure coverage and quality. - Productivity of public investment: measured by the ratio of the average real rate of capital stock growth to the average real rate of economic growth. Public Investment Planning, Stage 1 - Level of public investment: measured by general government (GG) investment as a percentage of overall GG spending. - Volatility of total public investment: measured by the standard deviation of GG investment growth. Public Investment Allocation, Stage 2 - Stability in the sectoral allocation of public investment: measured by the average absolute year-on-year percentage change in the distribution of government investment spending between the nine COFOG nondefense functions. - Growth orientation of public investment: measured as investment in the economic affairs sector relative to total government investments. Public Investment Implementation, Stage 3 - Credibility of investment budget execution: measured as the absolute difference between the budgeted and actual level of general government capital expenditure. - Integrity of the public investment process: proxied by the International Country Risk Guide (ICRG) Corruption Index (higher score = lower corruption). ### PIM Institutions and Overall Public Investment Performance — Efficiency (paragraphs 31–33) - Strong positive relationship between overall PIM institutional strength and public investment efficiency across: - Survey-based PIE-X indicator of infrastructure quality. - Physical indicator for infrastructure access. - Hybrid PIE-X indicator combining both. - Relationship holds after controlling for GDP per capita where explicitly mentioned. - Quantitative findings: - Improvements in PIM can cut the public investment “efficiency gap” by around two-thirds. - The average country in the 25-country sample faces an efficiency gap of 27 percent. - Could close 66 percent of the distance from the efficiency frontier by adopting practices of the best performer in the sample. - Regression result: an additional point in PIM overall score is statistically significantly associated with a 5 percent increase in PI efficiency. - Statistical explanatory power: - The strength of all three PIM phases is significantly correlated with investment efficiency, with allocation and implementation institutions appearing most important. - The overall explanatory power of all 15 PIM institutions combined is higher than any individual institution. - Reported R² values (from Figure 13 panels): - R² = 0.154 - R² = 0.327 - R² = 0.3602 - R² = 0.2636 ### PIM Institutions and Public Investment Productivity (paragraph 34) - Stronger PIM institutions are associated with lower average incremental public capital-to-output ratios (ICORs), i.e., higher economic productivity of public capital. - Correlation between ICORs and PIM strength is significant but weaker than for efficiency, reflecting other growth drivers. - ICOR definition: ratio of the growth rate of the capital stock relative to the GDP growth rate and the inverse of the economic productivity of capital. ### PIM Institutions and Other Performance Indicators — Levels and PPPs (paragraphs 35–36) - Stronger PIM institutions tend to be associated with lower levels of public investment (Figure 14a). Explanations include: - Stronger institutions in more developed economies with less need for additional public infrastructure. - Binding fiscal frameworks, stricter appraisal/selection criteria, and tighter capital budget controls constrain new investment. - Higher efficiency reduces required public investment outlays. - Decrease in public sector role as GDP rises and sectors open to private providers. - Stronger PIM institutions are associated with less use of PPPs (Figure 14b); overall negative correlation between PIM strength and the share of infrastructure investment in PPP form. - PPP use remains relatively popular in EMs and LIDCs, possibly reflecting weaker project implementation capacity and tighter budget constraints. ### Fiscal Frameworks and Public Investment (Box 7) — Summarized design choices and experiences - Fiscal rules often do not treat public investment differently and can contribute to procyclicality and lower public investment. - Approaches that explicitly protect public investment: - Structural balance rules: deficit limits that vary with the state of the cycle or resource income; example: 2012 EU Fiscal Compact. - Golden rules: allow borrowing only to invest (examples: Japan, Spain, UK historically); require transparent capital/recurrent definitions and limits on total liabilities. - Other exemptions: India’s current balance target excluding public investment since 2004; Argentina’s Fiscal Responsibility Law excluding basic infrastructure investment and multilateral-financed projects. - Investment floors: Thailand requires capital expenditure to be at least 25 percent of the budget and public debt limited to 60 percent of GDP; Thailand has had difficulties meeting the investment target due to PIM bottlenecks. - UK historical chart notes: - Golden Rule in operation coincided with recovery of public investment from historic lows; chart axes referenced percent of GDP for Public Sector Net Borrowing and Public Investment over 1973–74 through 2012–13 (figure present in source). *Source: IMF staff estimates; content drawn from “10. Project Selection” chapter in the provided PDF.* ### 37. Countries with strong PIM institutions tend to have more stable levels of ### 061115 - 37. Countries with strong PIM institutions tend to have more stable levels of investment ### Key findings on investment stability and allocation - Strong PIM institutions are associated with less volatile investment flows, even when corrected for income levels (Figure 14c). - Rapid scaling up of investment, or efforts to use public investment for countercyclical purposes, have typically failed to deliver desired impacts on growth in part due to substantial inefficiencies generated in the process (Warner, 2014). The scaling-up of public investment should be accompanied by efforts to strengthen PIM. - Strong implementation institutions appear most important to reducing the volatility of public investment, particularly in LIDCs where: - project management tends to be weak; - total public investment is more influenced by large-scale investment projects; and - macroeconomic volatility can lead to funding and material shortages. - Countries with strong PIM institutions tend to have a more stable allocation of investment expenditure between sectors (Figure 14d), reflecting benefits of strong multiyear planning and budgeting arrangements for predictability of investment funding. - Stability of allocation should not become rigidity; some advanced economies are attempting to introduce more “churn” (reallocation) in the sectoral allocation of public investment from year-to-year (Fainboim and others 2013). - There is no evidence that stronger PIM institutions lead to a greater emphasis on “hard” infrastructure: the level of investment in the “economic affairs” sector does not appear to depend on PIM strength. Health investment also shows no relationship to institutional strength. Only education investment seems to increase with institutional strength, even after compensating for income effects. ### Credibility of investment budgets and corruption - Countries with strong PIM institutions have more credible capital budgets (Figure 14e). Patterns observed: - EMs and LIDCs tend to suffer from underexecution of their capital budgets due to overly optimistic assumptions about how soon projects can break ground, lack of funding, and weak implementation capacity. - AEs tend to overspend on large investment projects due to incentives for executing agencies to understate project costs and risks to inflate benefit/cost ratios and secure project approval. - Overall, both over- and underspending, relative to the approved capital budget, decreases with stronger institutions. - Independent appraisal of investment projects can help reduce “optimism bias” in estimates of project costs, benefits, and timetables (see Box 8). - Strong PIM institutions are associated with lower perceived levels of rent-seeking and corruption. Figure 14f shows a positive relationship between institutional strength and perceptions of government integrity as measured by the ICRG Corruption Index. This result holds even when adjusted for income. - Open, competitive, and transparent procedures for allocating and implementing public investment projects are particularly important in limiting opportunities for corruption. - Empirical studies have found corruption to be associated with higher overall levels of public investment and lower levels of public investment efficiency (Tanzi and Davoodi (1997); Abed and Gupta (2002)). ### Box 8 — Independent Project Costing in Norway (implementation example) - Historical problem: During the 1990s cost overruns in Norway typically ranged from 20 to 40 percent. - QA2 (begun in 2000) focus: improve project financial management and implementation to produce realistic cost estimates that serve as firm benchmarks for accountability. - Methodology: - For each major project external experts estimate likely final project cost with 85 percent and 50 percent probability. - Parliament approves the project cost at the 85 percent probability level (the cost frame). - The implementing agency manages the project using the 50 percent probability level (the steering frame). - The appropriated amount includes a risk-based contingency in excess of the cost limit that managers strive to achieve. - Results from the first 40 major projects completed under QA2: - about 80 percent have been completed within the cost frame; - final costs were realized above and below the steering frame in almost equal amounts, meaning the sum of the steering frames estimated is a good predictor of total capital spending; - variability of actual costs compared to estimated costs for individual projects has been greatly reduced; credibility of the capital budget improved. ### Priorities for PIM reform (by country group and cross-cutting) - General: - Strengthening PIM institutions to the level of the best performer in the sample could close around two-thirds of the average efficiency gap in carrying out public investment. - Addressing key weaknesses can have spillover benefits across stages of the PIM cycle. - Advanced Economies (AEs): - Strengthen medium-term fiscal and budgetary frameworks to improve investment planning and coordination across levels of government. - Fiscal frameworks should protect investment spending against fiscal pressures in the near term, and make investment flows less procyclical and more fiscally sustainable in the longer term. - Use of structural balance limits or investment floors, coupled with firm ceilings on overall indebtedness, has proven helpful in some countries. - Strengthen central-local coordination by sharing investment plans and providing subnational governments greater multiyear certainty about capital transfers. - Emerging Markets (EMs): - Adopt more rigorous and transparent arrangements for investment project appraisal, selection, and management. - Finance or planning ministries should develop standardized methodologies and central support functions for project appraisal and risk analysis. - Make all results public, and ensure criteria for project selection are clear and transparent. - Maintain an active pipeline of approved projects that can be funded in future budgets. - During implementation, have standardized procedures for project adjustments that allow, as needed, a fundamental review of a project’s rationale, costs, and expected outputs. - Conduct ex-post evaluations of projects to provide lessons for future projects. - Low-Income Developing Countries (LIDCs): - Strengthen institutions related to investment implementation: transparency of budget execution, openness of procurement, and efficiency of cash management. - Protect investment expenditures within ministry and agency budgets by appropriating total project costs at project commencement, preventing budgets from being “raided,” and allowing some carryover of unspent appropriations to future years. - Increase transparency and accountability in project management, monitoring, and evaluation to strengthen incentives to deliver on time, on budget, and ensure value for money and integrity. - PPPs and strategic planning: - EMs and LIDCs would benefit from stronger management of PPPs: selection based on value-for-money reviews by a dedicated PPP unit, clear criteria for choosing PPPs vs. traditional financing, systematic monitoring of PPP commitments, and overall limits on accumulation of PPP liabilities to minimize fiscal risks. - All countries would benefit from better integrating strategic investment planning with budgeting, appraisal, and project selection (Chile, Korea, and the United Kingdom cited as examples of integrated approaches). - Scaling-up investment: - Strengthening PIM institutions should be integral to any plan to scale up public investment because weak institutions or circumvention of decision-making processes diminish potential benefits from increased investment. PIM diagnostics, reform, and capacity building should be factored into ramping-up plans. - Note: there may be a trade-off between protecting investment spending and accommodating revenue and financing volatility (e.g., during a large fiscal shock that also impacts social spending needs). ### Role of the IMF in supporting PIM reform - Ongoing and proposed initiatives: - Support further analysis of drivers of public investment efficiency. - Help countries strengthen public investment management and efficiency in TA, surveillance, and policy work, informed by the findings of this paper; especially relevant for EMs and LIDCs seeking to finance scaling up of public investment through nonconcessional sovereign borrowing, and for AEs wanting to use infrastructure investment to support recovery. - Develop the Public Investment Management Assessment (PIMA) into a standard diagnostic tool to support PIM reform efforts; PIMA would support and expand upon the public investment indicator in the revised PEFA framework and work alongside the Fund’s Fiscal Transparency Evaluation (FTE). - Finalize the PPP Fiscal Risk Assessment Model (P-FRAM) to assist governments and country teams to assess potential fiscal risks from PPPs by: - gathering relevant PPP project data; - quantifying short- and medium-term impact of a PPP project on a government’s deficit and debt under both cash- and accrual-based reporting standards; - performing sensitivity analysis of potential fiscal impact of a PPP. - P-FRAM will be piloted in selected projects and countries in collaboration with other international organizations (see Annex V for more details). - PIMA piloting and resourcing: - Further development and piloting of the PIMA, and its subsequent application in TA, will be accommodated within FAD’s budget. - In FY 2016, the PIMA will be piloted in a range of countries, including all G20 countries in the context of the G20 Infrastructure and Investment Working Group (IIWG). - A large-scale increase of PIMAs in response to country demand is not contemplated at this stage and would require additional resources. ### Issues for discussion posed to Directors - Do Directors agree there is considerable scope to improve the efficiency of public investment across countries and that strengthening PIM is important for maximizing economic and social benefits of public investment? - Do Directors agree efforts to scale up public investment should be accompanied by improvements in PIM institutions to maximize impact on infrastructure quality and economic growth? - Do Directors agree staff should develop the proposed PIMA into a comprehensive diagnostic to evaluate PIM institutions, identify priorities for reform, and target capacity-building activities? Do Directors support staff efforts to develop the P-FRAM for assessing fiscal risks from PPPs? - How do Directors assess results from applying the PIMA to different country groups (AEs, EMs, LIDCs)? In this context, do Directors agree that: - AEs could benefit most from strengthening their fiscal and budgetary frameworks to ensure adequate, well-targeted, and sustainable levels of investment across sectors and levels of government; - EMs could benefit most from adopting more transparent and rigorous systems for appraising, selecting, and approving individual investment projects; - LIDCs could benefit most from strengthening institutions related to the funding, management, and monitoring of investment project implementation; - All countries would benefit from stricter monitoring and firmer controls over PPPs and better integration between national strategic planning and capital budgeting? *Source: IMF staff estimates and analysis as presented in “MAKING PUBLIC INVESTMENT MORE EFFICIENT,” International Monetary Fund (excerpts provided).* ### Chapter 3: October, pp. 75-114, ed. by Abdul Abiad and others (Washington). ### Chapter 3: October, pp. 75-114, ed. by Abdul Abiad and others (Washington). ### Measuring Public Investment - Public investment is measured using gross fixed capital formation (GFCF) of the general government (i.e., central plus subnational governments). - This approach excludes alternative government support to investment, specifically: - investment grants (transfers from central and/or subnational governments to public and private entities outside the general government), - loan guarantees, - tax concessions (e.g., mortgage interest, research and development, municipal bonds), - operations of public financial institutions (such as development banks), - government-backed saving schemes. - Additional measurement issues noted: - Annual payments for infrastructure services provided by the private sector under PPPs are typically classified as public current spending while the investment is classified as private. - Entities controlled by the public sector but outside the general government (SOEs, parastatals, social housing entities) may undertake infrastructure spending not recorded as public investment. - Special purpose vehicles linked to PPP contracts are typically classified as private even if controlled by the public sector. - The data are constructed with these caveats explicitly noted. ### Constructing Public and Private Capital Stocks (Perpetual Inventory Method) - Capital stocks are constructed following the perpetual inventory equation: - K_{t} = (1 - δ_{t}) K_{t-1} + (1/2) I_{t} (notation: K_{t} is stock at beginning of period t, δ_{t} is time-varying depreciation rate, I_{t} is gross fixed capital formation in period t, assuming new investment is operational in the middle of the period). - All series (output, investment, capital stocks) are expressed in constant international 2005 prices (using purchasing power parity). - Inputs required: - Investment flow series, - Initial capital stock, - Size and time profile of depreciation rate. - Investment series sources and construction: - OECD countries: August 2014 version of the OECD Analytical Database for 26 countries covering 1960-2013. Series retrieved: government GFCF (code IGV), private GFCF (code IPV), real GDP (code GDPV). Converted to 2005 international dollars using OECD purchasing power parities. - Where OECD data have gaps, data are filled from the April 2014 vintage of the IMF World Economic Outlook (WEO) database; annual growth rates from WEO are used to fill missing data and country-specific patches are applied as needed. - Non-OECD countries: Penn World Tables (PWT) Version 8.0 for 132 countries covering 1960-2011. Series retrieved: GDP (code Q_GDP) and total gross fixed capital formation (code Q_GFCF) in 2005 constant prices; converted to 2005 international dollars using PWT purchasing power parities. - Disaggregation of total PWT investment into public and private investment: public and private investment shares (percent of total investment) are calculated from the WEO database and applied to the total PWT investment series. - Data extended to 2013 using the WEO database. - Initial capital stock: - Initial capital stock is set to 0 for all countries in 1860 (following Kamps, 2006). - An artificial investment series between 1860 and the first available data point is constructed by assuming investments grew by 4 percent a year to reach its five-year-forward moving average (first available) observed level. - For public and private investment, two artificial series between 1860 and first available data are constructed by assuming public and private investment grew at the same rate as total investment to reach their respective five-year forward moving averages. - Data treatment notes: - For OECD data, six countries (Austria, Ireland, Italy, Mexico, Portugal, and Spain) required use of earlier vintages because they are no longer published in the latest OECD version. - Modifications to WEO database to accommodate breaks include using older vintages, correcting negative values or inconsistent sums, replacing missing values when there are large breaks, and filling one-year patches by averaging adjacent years. ### Depreciation Rates and Assumptions - Depreciation rates are assumed to be time-varying and to increase with income. - Following Kamps (2006), assumptions for public and private depreciation rates include: - public capital depreciation for high-income economies rises monotonically from 2.5 percent in 1960 to 4.6 percent in 2013, - private capital depreciation for high-income economies rises from 4.25 percent in 1960 to 10.4 percent in 2013, - different depreciation assumptions adopted for middle-income and low-income countries following Gupta and others (2014). - Annex Table AI.1. Depreciation Rates (in percent) — exactly as presented: - Public Capital - Low-income: 1860 2.50 | 1960 2.50 | 2013 2.50 - Middle-income: 1860 2.50 | 1960 2.50 | 2013 3.51 - High-income: 1860 2.50 | 1960 2.50 | 2013 4.59 - Private Capital - Low-income: 1860 4.25 | 1960 4.25 | 2013 4.25 - Middle-income: 1860 4.25 | 1960 4.25 | 2013 8.10 - High-income: 1860 4.25 | 1960 4.25 | 2013 10.41 - Note: Income classifications are based on the World Bank's World Development Indicators’ country groupings. - Footnotes and methodological notes: - Kamps (2006) and Gupta (2014) show different assumptions on the initial capital stock series do not affect the dynamics of the series to a great extent. - The depreciation assumptions were made using evidence from historical data from the United States, Australia, and Canada. ### Capital Stock from PPPs (Public-Private Partnerships) - PPP capital stock constructed using the same perpetual inventory methodology as public and private capital stocks, with inputs: - initial PPP capital stock (assumed 0 the year prior to the first available data point), - depreciation rate series (assumed the same as public investment projects), - PPP investment flows. - PPP investment series sources and construction: - Data sources: - European Investment Bank (EIB) for European countries (Kappeler and Nemoz, 2010): total value of PPP projects (in euro) for 18 countries covering 1990-2009; project value measures total financing requirements at financial closure (a stock variable). - World Bank Private Participation in Infrastructure (WB PPI) database for low- and middle-income countries: total value of PPP investment commitments at contract signature or financial closure (in US dollars) for 125 countries covering 1984-2012. - Exclusions and adjustments: - Divestiture projects (asset sales or privatizations) are excluded from WB data to make it comparable with EIB data. - Following EIB approach, annual PPP investments are derived by spreading the value of PPP project commitments over five years. - PPP investment series converted to constant 2005 international dollars using GFCF deflators and purchasing power parities taken from OECD, PWT, and WEO depending on availability. - Data extended to 2013 by assuming PPP investment to GDP (both in constant 2005 international dollars) remained, for each country, at its latest three-year average. - Caveats regarding PPP data: - Data on high-income or non-European countries such as the United States, Australia, Canada, China, Japan, etc. are not available. - EIB defines PPP projects excluding investments made by regulated utilities, project refinancing, privatizations, and excludes projects below 5 million Euros. - Caveats listed explicitly: - some capital expenditures in PPP databases may be recorded on governments’ balance sheets and thus included in public investment figures; - total PPP project commitments may include financing or maintenance costs and may overestimate PPP annual investment figures; - PPP project commitments may include only a proportion of financing placed on the bond market, ignoring government subsidies, and may therefore underestimate PPP annual investment figures; - PPP commitments represent commitments at financial closure, not actual executed investments; - the definition of PPP projects may vary across countries and databases. ### Data Sources (summarized as presented) - GDP and Public and Private Investment in 2005 International Dollars: - OECD Analytical Database, August 2014 Version - PWT, Version 8.0 - WEO, April 2014 Version - PPP Investment in 2005 International Dollars: - World Bank Private Participation in Infrastructure Database - EIB (2010) - OECD Analytical Database, August 2014 Version - PWT, Version 8.0 - WEO, April 2014 Version - Depreciation Rates: - World Bank World Development Indicators Country Groupings *Source: Chapter 3: October, pp. 75-114, ed. by Abdul Abiad and others (Washington).* ### Annex II. Measuring Efficiency Using Frontier Methods ### Annex II. Measuring Efficiency Using Frontier Methods ### A. Introduction - Framework: production function approach where inputs X are combined to produce outputs Y subject to a technology; the production function represents the technical efficiency frontier. - Inefficiency measure: distance between an observation (P) and the frontier (example distances BP for input-oriented inefficiency and DP for output-oriented inefficiency). - Orientation: - Input-oriented: efficiency score = proportional amount by which input consumption could be reduced while leaving outputs unchanged (distance BP). - Output-oriented: efficiency score = proportional amount by which output could be increased while leaving input consumption unchanged (distance DP). - Applications: widely used for public spending efficiency (health, education); scarce application to public investment (limited to Albino-War and others (2014) so far). - Note: Individual observations are “decision making units” (DMUs). ### B. Methodology - Two alternatives for estimating efficiency frontiers: - Parametric methods: econometric models with restrictions that input-output combinations lie below the frontier; require strict assumptions on stochastic distribution of errors and functional form; typically require control variables. - Nonparametric methods: linear programming methods; sensitive to measurement errors and outliers. - Chosen method: Data Envelopment Analysis (DEA), a nonparametric deterministic algorithm that envelops DMU observations with linear approximations to calculate the efficient frontier. - Original DEA assumes constant returns to scale. - This paper uses DEA with variable returns to scale so each DMU is compared to peers with similar characteristics. - Trade-offs noted: - Parametric: strict distributional and functional-form assumptions. - Nonparametric: sensitive to outliers and measurement error; can be complemented by introducing randomness in sample selection (see Albino-War and others and Annex I). ### C. Empirical Application - Orientation: output-oriented DEA model — efficiency scores interpreted as proportional amounts by which countries could increase infrastructure quality holding public capital (and other inputs) unchanged. - Output indicators (three): - Physical indicator (pure quantitative index): - Components: length of the road network, access to an improved water source, electricity production, number of secondary teachers, number of hospital beds. - All variables except access to improved water source expressed in per capita terms. - Each variable averaged from its original time series since 2000 until the last observation available. - Variables standardized (using mean and standard deviation) and combined with similar weights to obtain output indicator yi. - Rescaled relative to its minimum to ensure positivity. - Survey-based indicator: - Built on World Economic Forum (WEF) pillar 2 sub-components focused on quality of key infrastructure services. - All subcomponents based on hard data (airline seats, mobile and landline telephone subscriptions) are removed to make the index purely qualitative. - Hybrid indicator: arithmetic mean of the physical and survey-based indicators (measures both coverage and quality). - Inputs: - Main input: public capital stock (estimation described in Annex I). - Control input: GDP per capita used as a second input to control for factor quality differences across countries (following Jarasuriya and Wodon (2002)). - Empirical findings on efficiency gaps: - Estimated average waste ranges from 20 to 43 percent depending on the efficiency measure. - Based on the quantitative index, on average infrastructure quality could be increased by 43 percent without increasing the level of the public capital stock. - Potential efficiency gains by country grouping (quantitative index): - Advanced economies: around 27 percent. - Emerging: 40 percent. - Low-income countries: 55 percent. - Survey-based indicator yields the lowest efficiency gaps (survey range 1 to 7 compresses variation). - Robustness and correlations: - Correlation between DEA-based efficiency scores and the survey-based public investment quality index: 0.51 based on 24 observations (statistically significant). - Alternative output index definitions (including principal components and additional telecom, health, education variables like teacher-per-pupil ratios and MRIs) produce efficiency scores highly correlated between 0.6-0.9. - Data sources (as listed): - Outputs: - Length of the road network — World Development Indicators - Access to improved water — World Development Indicators - Number of secondary teachers — World Development Indicators - Number of hospital beds — World Development Indicators - Energy production — World Development Indicators and International Energy Agency - WEF Pillar 2 index and sub-components — World Economic Forum - Inputs: - Public Capital Stock — IMF staff estimation - GDP per capita — IMF WEO database ### Annex III — Assessing the Impact of Investment on Growth (summary of methodology and key regression results) - Purpose: illustrate link between impact of public investment on growth and public investment efficiency index level. - Sample: fully balanced covering 114 countries, period 1970-2013. - Regression specification: - Fixed effects regression estimating varying effects of public investment on growth depending on public investment efficiency. - Dependent variable: log k-difference of real GDP (ppp-adjusted) for horizons k = 1, 2, 3, 4, 5 years. - Key regressor: real government investment-to-GDP ratio (ppp-adjusted). - Interaction: impact allowed to vary with G(z) where z is a time-invariant indicator of public investment efficiency normalized to mean 0 and unit variance; G(z) varies between 0 and 1. - Interpretation: coefficients for "low efficiency" describe effect when efficiency is very low; "high efficiency" describe effect when efficiency is very high. - Robustness: results robust to inclusion of private investment as a regression control. - Table AIII.1 — Estimated Coefficients (in percent) for public investment at horizons k=1 to k=5: - Public Investment - low efficiency: - k=1: 0.098 [*] (standard error (0.07)) - k=2: 0.147 [*] (0.11) - k=3: 0.162 (0.15) - k=4: 0.152 (0.18) - k=5: 0.130 (0.20) - Public Investment - high efficiency: - k=1: 0.346*** (0.08) - k=2: 0.583*** (0.14) - k=3: 0.684*** (0.18) - k=4: 0.719*** (0.21) - k=5: 0.758*** (0.24) - Goodness-of-fit and sample: - R-squared: 0.0982 (k=1), 0.1128 (k=2), 0.1163 (k=3), 0.1134 (k=4), 0.1082 (k=5) - F statistic: 2.55 (k=1), 3.86 (k=2), 5.03 (k=3), 6.21 (k=4), 7.40 (k=5) - p-value (F): 0.0000 for all k - Observations: 464 (k=1), 452 (k=2), 427 (k=3), 413 (k=4), 429 (k=5) [table shows varying counts: 46414527441342994185 — presented in source table as Observations46414527441342994185] - Countries: 114 for each k - Note: Standard errors in parentheses. Significance notation: [*] p<0.2, * p<0.1, ** p<0.05, *** p<0.01. - Interpretation: public investment has substantially larger short- and medium-term effects on GDP growth in countries with high public investment efficiency compared with low-efficiency countries. ### Annex IV — The Public Investment Management Assessment (PIMA) summary - Coverage: 15 public investment management institutions assessed across a sample of 25 countries using 45 indicators (3 indicators per institution). - Scoring: - Three possible scores per indicator; criteria accumulate (lowest score requires A; next requires A and B; highest requires A, B, and C). - Scores based on current practice; if very recent with no opportunity to influence outcomes, scoring based on previous practice. - Inapplicable indicators (e.g., PPP indicators where no PPPs exist) removed from average calculations. - Aggregate scoring via simple averaging — averages calculated for institutions, PIM phases, countries, and country classes. - Implementation: - Scoring performed by FAD staff; reviewed by IMF country desk economist; countries consulted on factual questions; internal review for consistency. - Comparison with other indices: - PIM institutional strength highly correlated with World Bank’s Worldwide Governance Indicators (WGI) — R² = 0.4494 in source figure. - Correlation with PIMI (IMF–World Bank PIM Index) weaker but positive — R² = 0.2352 in source figure. - Principal component analysis confirmed correlations with WGI, but not with PIMI. - Example PIMA questionnaire excerpt (Section A. Planning Sustainable Levels of Public Investment) — sample indicator and scoring options: - 1. Fiscal principles or rules: Are there permanent fiscal principles or rules that support sustainable levels of capital spending? - 1.a. Is fiscal policy guided by one or more permanent fiscal principles, or rules? - Option 1: There are no permanent fiscal principles or rules - Option 2: Fiscal policy is guided by one or more permanent fiscal rules but they have not been adhered to over the last three years and there is no provision in the law allowing rules to be suspended in exceptional circumstances - Option 3: Fiscal policy is guided by one or more permanent fiscal rules and they have been adhered to over the last three years or there is a provision in the law allowing rules to be suspended in exceptional circumstances. - 1.b. Do fiscal principles or rules protect capital spending over the short term or medium term? - Option 1: Capital spending is included under a target or limit for the overall fiscal balance or aggregate expenditure - Option 2: Capital spending is included under a target or limit for the overall fiscal balance or aggregate expenditure, but these are expressed in structural terms - Option 3: Capital spending is excluded from a target or limit for the balance (Golden Rule) or expenditure (Operating Expenditure Rule) or there is a floor on the overall level of capital spending - 1.c. Is there a target or limit for government liabilities, debt, or net worth? - Option 1: There is no target or limit for government liabilities, debt, or net worth - Option 2: There is a target or limit for government liabilities, debt, or net worth - Option 3: There is a target or limit for government liabilities, debt, or net worth with an automatic adjustment mechanism when the target is not being met *Source: Annex II–IV, “Measuring Efficiency Using Frontier Methods” and related annexes, as provided in the source PDF.* ### 2. National and Sectoral Planning: Are investment allocation decisions based on sectoral and inter-sectoral strate ### 2. National and Sectoral Planning: Are investment allocation decisions based on sectoral and inter-sectoral strategies? ### National and Sectoral Planning - 2.a. Does the government publish national and sectoral strategies for public investment? - No national or sectoral public investment strategies are published - Either a national public investment strategy or sectoral strategy is published - Both national and sectoral public investment strategies are published - 2.b. Are the government’s national and sectoral strategies or plans for public investment costed? - The government’s investment strategies or plans include no cost information on planned public investment - The government’s investment strategies include broad estimates of aggregate and sectoral investment plans - The government’s investment strategies include costing of individual, major investment projects - 2.c. Do sector strategies include measurable targets for the outputs and outcomes of investment projects? - Sector strategies do not include measurable targets for outputs or outcomes - Sector strategies include measurable targets for outputs (e.g., miles of roads constructed) - Sector strategies include measurable targets for both outputs and outcomes (e.g., reduction in traffic congestion) ### Central-Local Coordination - 3.a. Are there limits on subnational government (SNG) borrowing? - There are no limits on SNG borrowing - SNGs may borrow only for investments - SNGs may borrow only for investment and within limits set by law - 3.b. Is capital spending by SNGs coordinated with the central government? - Capital spending plans of sub-national governments are not submitted to central government nor discussed with central government - SNG capital spending plans are consolidated alongside central government investments, but there are no formal discussions, between the central government and SNGs on investment priorities - SNG capital spending plans are consolidated alongside central government investments, and there are formal discussions between central government and SNGs on investment priorities - 3.c. Does the central government have a transparent, rule-based system for making capital transfers to SNGs, and for providing timely information on such transfers? - The central government does not have a transparent rule-based system for capital transfers to SNGs - The central government uses a transparent rule-based system for capital transfers to SNGs, but SNGs are notified about expected transfers less than six months before the start of each fiscal year - The central government uses a transparent rule-based system for capital transfers to SNGs, and expected transfers are made known to SNGs at least six months before the start of each fiscal year ### Public-Private Partnerships - 4.a. Has the government published a strategy for PPPs and issued standard criteria for entering into PPP arrangements? - There is no published PPP strategy or set of criteria for entering into PPP arrangements - A PPP strategy has been published, but there are no standard criteria to guide the choice between traditional financing and PPPs - A PPP strategy has been published and there are standard criteria to guide the choice between traditional financing and PPPs - 4.b. Are PPPs subject to value for money review by a dedicated PPP unit prior to approval? - PPPs are not normally subject to value for money review - All or most PPPs are subject to value for money review but not by a dedicated PPP unit - All or most PPPs are subject to value for money review by a dedicated PPP unit - 4.c. Is the accumulation of explicit and/or contingent PPP liabilities systematically recorded and controlled? - Explicit and/or contingent PPP liabilities are not systematically recorded and there are no overall limits for the accumulation of such liabilities - Explicit and/or contingent PPP liabilities are systematically recorded but there are no overall limits for the accumulation of such liabilities - Explicit and/or contingent PPP liabilities are systematically recorded and there are overall limits for the accumulation of such liabilities ### Regulation of Infrastructure Companies - 5.a. Does the regulatory framework support competition in contestable markets for economic infrastructure (e.g., power, water, telecoms, and transport)? - Provision of economic infrastructure is restricted to domestic monopolies - There is domestic competition in some economic infrastructure markets - There is international and domestic competition in major economic infrastructure markets - 5.b. Are there independent regulators who set the prices of economic infrastructure services based on objective economic criteria? - The prices for economic infrastructure services are generally set by the central government - The prices for economic infrastructure services are set by independent regulators, but the regulators do not have full organizational, financial and managerial autonomy - The prices for economic infrastructure services are set by independent regulators, and the regulators have full organizational, financial, and managerial autonomy - 5.c. Does the government oversee the investment plans of infrastructure SOEs and monitor their financial performance? - The government does not review the investment plans and financial performance of infrastructure SOEs - The government reviews, but does not publish, a consolidated report on the investment plans and financial performance of infrastructure SOEs - The government reviews and publishes a consolidated report on the investment plans and financial performance of infrastructure SOEs ### B. Ensuring Public Investment is Allocated to the Right Sectors and Projects #### Multi-Year Budgeting - 6.a. Is capital spending by ministry forecasted over a multiyear horizon? - No projections of capital spending are published beyond the budget year - Projections of total capital spending are published over a three-five year horizon - Projections of capital spending disaggregated by ministry or program are published over a three-five year horizon - 6.b. Are there multiyear ceilings on capital expenditure by ministry or program? - There are no multiyear ceilings on capital expenditure by ministry or program - There are indicative multiyear ceilings on capital expenditure by ministry or program - There are binding multiyear ceilings on capital expenditure by ministry or program - 6.c. Are projections of the full cost of major capital projects over their life cycles published? - Projections of the cost of major capital projects are not published, or are only published for the budget year - Projections of the total cost of major capital projects are published - Projections of the total cost of major capital projects are published together with annual projections over a three-five year horizon #### Budget Comprehensiveness - 7.a. Is capital spending mostly undertaken through the budget? - Significant capital spending is undertaken by extrabudgetary entities with no legislative authorization or disclosure in the budget documentation - Significant capital spending is undertaken by extrabudgetary entities, but with legislative authorization and disclosure in the budget documentation - Little or no capital spending is undertaken by extrabudgetary entities - 7.b. Are externally funded capital projects included in the budget documentation? - Externally funded capital projects are not included in the budget documentation - Externally funded capital projects are included in an appendix to the budget documentation - Externally funded capital projects are integrated into ministerial or sectoral investment budgets in the budget documentation - 7.c. Is information on PPP transactions included in the budget documentation? - No information on PPP transactions is included in the budget documentation - Information on PPP transactions is included in supplementary information or in an appendix to the budget documentation - Information on PPP transactions is fully integrated into the tables on capital investment by ministry or sector in the budget documentation #### Budget Unity - 8.a. Are capital and recurrent budgets prepared and presented together? - Capital and recurrent budgets are prepared by separate ministries and/or presented in separate budget documents - Capital and recurrent budgets are prepared by a single ministry and presented in a single document but without using a program classification - Capital and recurrent budgets are prepared by a single ministry and presented in a single document, using a program classification - 8.b. Does the budget include appropriations of the recurrent costs associated with capital investment projects? - The budget does not include appropriations of the recurrent costs associated with investment projects - The budget includes appropriations of the recurrent costs associated with investment projects for the budget year only - The budget includes appropriations (or estimates) of the recurrent costs associated with investment projects for the budget year and the medium term - 8.c. Does the budget classification and chart of accounts distinguish clearly between recurrent and capital expenditure, in line with international standards? - The budget classification and chart of accounts includes some recurrent expenditure in the definition of capital expenditure or some capital expenditure in recurrent expenditure - The budget classification and chart of accounts includes some capital expenditure in financing or some financing in capital expenditure - The budget classification and chart of accounts clearly distinguishes between recurrent and capital expenditures and financing, in line with international standards #### Project Appraisal - 9.a. Are capital projects subject to standardized cost-benefit analyses whose results are published? - Capital projects are not systematically subject to cost-benefit analyses - Cost-benefit analyses are usually conducted for major projects but not systematically published - Cost-benefit analyses are conducted systematically for major projects and the results published - 9.b. Is there a standard methodology and central support for the appraisal of projects? - There is no published methodology or central support for project appraisal - There is either a standard methodology or central support for project appraisal - There is both a standard methodology and central support for project appraisal - 9.c. Are risks taken into account in project appraisals? - Risks are not systematically assessed as part of the project appraisal - A risk assessment covering a range of potential risks is included in the project appraisal, but budgets do not include contingency reserves to cater for possible cost overruns - A risk assessment covering a range of potential risks is included in the project appraisal and budgets include contingency reserves to cater for possible cost overruns #### Project Selection - 10.a. Does the government undertake a central review of major project appraisals before decisions are taken to include projects in the budget? - Project selection is largely made by the line ministry - Major projects are reviewed by Ministry of Finance (MoF) staff prior to inclusion in the budget. - All major projects are scrutinized by MoF staff with input from external experts prior to their inclusion in the budget - 10.b. Does the government publish and adhere to standard criteria for project selection? - There are no published criteria for project selection - There are criteria published for project selection but projects are regularly selected without going through the required selection process - There are published criteria for project selection and generally projects are selected through a required selection process - 10.c. Does the government maintain a pipeline of approved investment projects for inclusion in the annual budget? - Investment projects are included in the budget on an ad hoc basis - The government maintains a pipeline of approved investment projects but other projects may be selected for financing through the annual budget - The government maintains a comprehensive pipeline of investment projects, which is used for selecting projects for inclusion in the annual budget, and for the medium term ### C. Delivering Productive and Durable Public Assets #### Protection of Investment - 11.a. Are total project outlays appropriated by parliament at the time of the project’s commencement? - Outlays are appropriated on an annual basis - Outlays are appropriated on an annual basis, but information on total project costs is included in the budget - Total project outlays are appropriated upon commencement of the project, with adjustments being made to the budget appropriation on a year-by-year basis - 11.b. Are in-year transfers of appropriations (virement) from capital to current spending prevented? - There are no limitations on virement from capital to current spending - The finance ministry may approve virement from capital to current spending - Virement from capital to current spending is allowed only by act of parliament - 11.c. Can unspent appropriations for capital spending be carried over to future years? - Unspent appropriations for capital spending lapse at the end of the year - Unspent appropriations for capital spending may be carried over within certain limits - Unspent appropriations for capital spending may be carried over without limitations #### Availability of Funding - 12.a. Are ministries/agencies able to plan and commit expenditure on capital projects in advance on the basis of reliable cash flow forecasts? - Cash flow forecasts are not prepared or updated regularly and ministries/agencies are not provided with commitment ceilings in a timely manner - Cash flow forecasts are prepared or updated quarterly and ministries/agencies are provided with commitment ceilings at least a quarter in advance - Cash flow forecasts are prepared or updated monthly, and ministries/agencies are provided with commitment ceilings for the whole year - 12.b. Is cash for project outlays released in a timely manner? - The financing of project outlays is frequently subject to cash rationing, leading to significant delays in project implementation - Cash for project outlays is sometimes released with delays, leading to some delays in project implementation - Cash for project outlays is normally released in a timely manner according to the appropriation - 12.c. Is external (donor) financing of capital projects integrated into cash management and the TSA? - External financing is largely held in commercial bank accounts outside the central bank’s government accounts/TSA - External financing is held at the central bank’s government accounts but is not part of a TSA - External financing is fully integrated into a TSA #### Transparency of Budget Execution - 13.a. Is the procurement process for major capital projects open and transparent? - Few major projects are tendered in a competitive process, and the public has limited access to procurement information - Many major projects are tendered in a competitive process, but the public has only limited access to procurement information - Most major projects are tendered in a competitive process, and the public has access to complete, reliable and timely procurement information - 13.b. Are major capital projects subject to monitoring during project implementation? - Most major capital projects are not monitored during project implementation - For most major projects, annual project costs, as well as physical progress, are monitored during project implementation - For all major projects, total project costs as well as physical progress, are centrally monitored during project implementation - 13.c. Are ex post audits of capital projects routinely undertaken? - Major capital projects are usually not subject to ex post external audits - Some major capital projects are subject to ex post external audit, information on which is published by the external auditors - Most major capital projects are subject to ex post external audit information on which is regularly published and scrutinized by the legislature #### Management of Project Implementation - 14.a. Do ministries have effective project management arrangements in place? - Ministries do not systematically identify senior responsible officers for major investment projects and implementation plans are not prepared prior to budget approval - Ministries systematically identify a senior responsible officers for major investment projects, but implementation plans are not prepared prior to budget approval - Ministries systematically identify senior responsible officers for major investment projects, and implementation plans are prepared prior to budget approval - 14.b. Has the government issued rules, procedures and guidelines for project adjustments that are applied systematically across all major projects? - There are no standardized rules and procedures for project adjustments - There are standardized rules and procedures for project adjustments that are generally applied but do not include a fundamental review and reappraisal of a project’s rationale, costs and expected outputs - There are standardized rules and procedures for project adjustments that are applied systematically and if required include a fundamental review of the project’s rationale, costs and expected outputs - 14.c. Does the government systematically conduct an ex post review and evaluation of a project that has completed its construction phase? - Ex post reviews are neither systematically required, nor frequently conducted - Ex post reviews focusing on project costs, deliverables and outputs are sometimes conducted - Ex post reviews focusing on project costs, deliverables and outputs are conducted regularly, as are evaluations of project outcomes, in some cases *Source: _061115 - 2. National and Sectoral Planning: Are investment allocation decisions based on sectoral and inter-sectoral strate* ### 15. Monitoring of Public Assets: Is the value of assets properly accounted for and reported in financial ### 15. Monitoring of Public Assets: Is the value of assets properly accounted for and reported in financial statements? ### 15.a Are surveys of the stocks, values, and conditions of public assets regularly conducted? - Asset surveys are conducted rarely or only on an ad hoc basis by external stakeholders - Asset surveys are conducted regularly by the government for some sectors or subsectors - Comprehensive asset surveys are conducted regularly by the government ### 15.b Are nonfinancial asset values recorded in the government balance sheets? - Balance sheets do not include non-financial assets - Balance sheets include some non-financial assets, which are revalued irregularly - Balance sheets include all or most nonfinancial assets, which are revalued regularly ### 15.c Is depreciation of fixed assets captured in government operating statements? - Depreciation of fixed assets is not recorded in operating statements - Depreciation of fixed assets is recorded in operating statements based on statistical estimates - Depreciation of fiscal assets is recorded in operating expenditures based on asset-specific depreciations ### Annex V. PPP Fiscal Risk Assessment Model (P-FRAM) - P-FRAM is an analytical tool developed by the IMF’s Fiscal Affairs Department to assess the potential fiscal costs and risks arising from PPP projects systematically. - Rationale: - There is a widespread consensus on the need to improve project evaluation techniques for PPPs to ensure that only the right projects are procured. - Better project evaluation techniques cannot, by themselves, ensure the budget affordability of a project. - Financing and funding conditions for projects are typically agreed upon under completely separate processes, creating a disconnect between project and financial evaluation techniques. - Governments may end up procuring projects that either cannot be funded within the existing budgetary envelope, or that expose the public finances to excessive fiscal risks. - Purpose: - To quantify the macro-fiscal implications of PPP projects. - Implementation: - The tool provides a structured process for gathering project information in a simple, user-friendly, Excel-based platform, following a four-step decision-tree: - Who initiates the project? The impact of main fiscal indicators (i.e., deficit and debt) varies depending on the public entity ultimately responsible for the project (e.g., central, local governments, state-owned enterprises, etc.) - Who controls the asset? Simple standardized questions assist the user in making an informed decision about the government’s ability to control a PPP-related asset—either through ownership, beneficial entitlement, or other means. If the government is regarded as controlling the asset, this typically impacts main fiscal indicators. - Who ultimately pays for the asset? The funding structure of the project is what determines its implication on main fiscal aggregates. P-FRAM allows for three funding alternatives: (i) the government pays for the asset using public funds (e.g., periodic payments); (ii) the government allows the private sector to collect fees directly from the asset’s users (e.g., tolls); or (iii) a combination of the two. - Does the government provide additional support to the private partner? Governments may not only fund PPP projects directly, but can also support private partners in a variety of ways, including providing guarantees (e.g., debt, and minimum revenues), equity injections, and tax amnesties, among others. - Standardized outcomes generated once project-specific and macroeconomic data are introduced: - (i) project cash flows over the whole life cycle; - (ii) fiscal tables and charts, both on a cash and accrual basis—i.e., government’s cash statement, income statement, and balance sheet; - (iii) debt sustainability analyses with and without the PPP project; and - (iv) sensitivity analyses of main fiscal aggregates to changes made within macroeconomic and project-specific parameters. - Comparison and usage: - These standardized outcomes can be compared to the country-specific reporting standards of PPP transactions in order to evaluate how far/close they are from best practices. - While P-FRAM remains a work in progress, it is currently being pilot-tested in various platforms, and is expected to be fully developed by mid-2015. - The tool is designed mainly for use by PPP units in finance ministries to advise on the potential fiscal implications of PPP projects, but is simple enough to accommodate analytical interests from a broader audience with little or no specific PPP knowledge, including Fund country desk economists, or project analysts in the public or private sector. *Source: _061115 - 15. Monitoring of Public Assets: Is the value of assets properly accounted for and reported in financial* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2015/_061115.pdf_