IMF Survey : Closing Efficiency Gaps Means Big Gains for Public Investment

IMF News, June 18, 2015

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On average, about 30 percent of the potential value of public investment is lost to inefficiencies in the investment process.
Closing this efficiency gap could substantially increase the economic dividends from public investment.
The study finds that increasing public investment efficiency could double the impact of that investment on growth:
- A 1 percent of GDP increase in public investment would increase output by just 0.3 percentage points of GDP in countries in the bottom efficiency quartile.
- The same 1 percent of GDP increase would raise output by 0.6 percent for countries in the top efficiency quartile.
Public investment can serve as an important catalyst for economic growth by supporting delivery of key public services and connecting citizens and firms to economic opportunities.

The study looked at 134 countries, the largest investment efficiency analysis carried out to date.
Following three decades of steady decline, public investment as a share of GDP has begun to recover in emerging markets (EMs) and low-income developing countries (LIDCs), but remains at historic lows in advanced economies (AEs).
Indicators of infrastructure quality and access suggest the recent ramping up of public investment in LIDCs and EMs has helped reduce perceived disparities in infrastructure across countries, with convergence especially pronounced in social infrastructure; large disparities persist for economic infrastructure.
The size of the efficiency gap by income group:
- LIDCs facing a gap of 40 percent.
- EMs facing a gap of 27 percent.
- AEs facing a gap of 13 percent on average.

The study explores measurement of public investment efficiency as the relationship between accumulated public capital stock per capita and various indicators of overall quality of and access to infrastructure.
Based on a sample of 25 countries and using the IMF’s new Public Investment Management Assessment (PIMA) tool, the study finds significant scope to strengthen specific institutions involved in managing public investments.
The PIMA framework:
- Evaluates 15 key institutions in the three phases of the investment process—planning, allocation and implementation.
- Provides an in-depth assessment of public investment management from a macro-fiscal perspective.
Findings from PIMA sample:
- AEs have stronger public investment management institutions overall, but not uniformly so.
- EMs and LIDCs score at least as well as AEs in national and sectoral planning, central-local coordination, and multiyear budgeting.
- Public investment management arrangements are generally strongest at the implementation phase and weakest at the planning phase.
- Countries with stronger public investment management institutions have more predictable, credible, efficient, and productive public investment, with less corruption and rent-seeking.

Strengthening public investment management could close up to two-thirds of the efficiency gaps.
Priorities vary 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 the appraisal, selection, and approval of investment projects.
- Low-income developing countries (LIDCs): Strengthen institutions related to the funding, management, and monitoring of project implementation.
Cross-cutting recommendations for all countries:
- Stricter oversight of public-private partnerships.
- Better integration between national strategic planning with capital budgeting.
The IMF will develop the new assessment into a standard diagnostic of public investment management practices to help countries define reform priorities.

IMF Survey : Closing Efficiency Gaps Means Big Gains for Public Investment