Meeting the Challenges of Growth and Infrastructure Investment
IMF News, December 2, 2016
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- Published: December 2, 2016
Macroeconomic setting
- Public investment is an important catalyst for growth: supports delivery of public services, connects citizens and companies to economic opportunities, and can strengthen global growth.
- Since the global financial crisis, growth has been "too low, for too long, and benefitted too few."
- Growing consensus on the need for more public investment:
- Advanced economies: public investment "has steadily decreased from over 6 percent of GDP in the late 1960s to less than 4 percent more recently."
- Emerging and developing Asia: public investment "has been stronger than in the advanced economies—averaging 8 percent of GDP since 2008."
- Infrastructure gaps: "the World Bank estimates that over 660 million people do not have access to clean drinking water while 1.3 billion people live without electricity."
- Well-formulated public infrastructure investment can enhance fiscal positions; IMF research suggests even debt-financed investment can reduce public-debt-to-GDP ratios because of growth effects.
- Efficiency concern: "on average, about one-third of public investment is lost partly through waste, corruption or bad management."
- Fiscal space defined: concerned with whether governments can raise spending or can lower taxes, "without endangering market access and debt sustainability."
- Overarching objective: "more, better, and smarter public infrastructure investment."
Public investment management — findings and challenges
- Strong institutions for public investment management yield:
- Less volatile investment
- More predictable composition of spending
- Better execution of capital budgets
- Political benefit: perception of lower corruption
- Scope to improve public investment management exists "across the entire investment cycle."
- Particularly challenging areas:
- Project evaluation and selection: Australian study found "almost all cost overruns occurred when projects were undertaken before assessments were completed."
- Coordination across levels of government: necessary to harmonize plans and provide funding certainty; positive example: "Australia’s intergovernmental agreements."
- Multi-year budgeting and medium-term frameworks: example—"Korea, the rolling five-year National Fiscal Management Plan provides a medium-term budget framework for spending on major projects."
- Regulation and oversight of infrastructure companies: examples include Korea’s "Open Information System for Public Entities" and Singapore’s SOE governance measures (increased competition, restructuring of loss-making enterprises, enhanced management accountability).
- Systematic review and performance assessment: absence of such reviews in countries including China, Thailand, and Indonesia leads to "almost no learning from mistakes."
Management of fiscal risks — findings and risks
- Large public investment programs involve fiscal risks that must be assessed and incorporated into project financing.
- Predictable future liabilities sometimes omitted from budgets, e.g., failure to account for operational and maintenance expenditures that can leave schools and hospitals idle after construction.
- Cost overruns from optimistic or incomplete appraisals can lead to abandoned half-completed projects.
- Less predictable risks include guarantees, indemnities, or tax exemptions offered to private entities that have significant fiscal implications.
- Public-Private Partnerships (PPP):
- PPPs can increase efficiency and provide value for money, and allow governments to focus on outputs while shifting some risks to the private sector.
- PPPs are not "infrastructure for free":
- Can be costly and reduce budget flexibility in the long term because governments make annual payments after delivery.
- Can give rise to contingent liabilities such as guarantees to private partners.
- Risk of off-balance-sheet debt leading to future liabilities; example: after the 2008 global financial crisis, Portugal reclassified its large PPP program developed through state-owned enterprises "within the general government," contributing to an increase in the ratio of public debt to GDP ratio in subsequent years.
- Policy implication: strengthen institutional frameworks for managing PPPs before embarking on large programs.
IMF’s role, tools, and initiatives
- IMF objective: help members promote growth and achieve macroeconomic stability via a "three-pronged approach"—monetary, fiscal, and structural policies—and exploit synergies across policies to use fiscal space where available to support infrastructure investment.
- Analytical and operational support:
- Public Investment Management Assessment Framework (PIMA):
- A diagnostic tool to identify weaknesses in the investment process.
- Evaluates "15 factors that shape decision-making at three stages of the public investment cycle: planning, allocation of investment, and project implementation."
- Provides practical recommendations to enhance efficiency and impact of public investment.
- Piloted with the World Bank and several development partners in 18 countries; "Governments find the assessment useful for shaping reform priorities, and donors value it as a guidepost for developing follow-up technical assistance."
- PPP Fiscal Risk Assessment Model (developed with the World Bank):
- Analytical tool to quantify macro-fiscal implications of PPP projects for debt and deficits.
- Generates the impact of a PPP on main fiscal aggregates and performs sensitivity analyses to macroeconomic and project-specific changes.
- Facilitates identification of mitigation measures for fiscal risks.
- Usable by IMF and World Bank technical assistance teams and by Ministries of Finance.
Key policy recommendations and priorities
- Prioritize investment efficiency and effective project evaluation and selection to reduce waste, corruption, and bad management.
- Strengthen institutions and governance across the investment cycle to achieve less volatile and better-executed investment.
- Use multi-year budgeting and medium-term frameworks to provide predictability and develop project pipelines.
- Improve coordination across levels of government, particularly in federal or decentralized systems.
- Enhance regulation and oversight of infrastructure companies and SOEs to promote competition, restructuring where needed, and management accountability.
- Systematically assess project performance and outcomes to enable learning from mistakes.
- Manage fiscal risks explicitly, including operational and maintenance costs, cost overrun contingencies, and contingent liabilities from PPPs.
- Strengthen institutional frameworks for PPPs to avoid hidden future liabilities and preserve fiscal flexibility.
Conclusion
- Infrastructure investment can close investment gaps and catalyze growth, but given scarce resources the challenge is to make investment "as efficient and effective as possible."
- The IMF is prepared to assist countries in balancing benefits and risks of infrastructure spending and to help them become "more efficient public investors, to the benefit of their citizens."
Remarks by IMF Deputy Managing Director Tao Zhang, Conference on Meeting Asia’s Rebalance and Growth Challenge, Sydney, Australia, December 2, 2016.