{
  "title": "On the Capacity to Absorb Public Investment: How Much is Too Much?",
  "publication": "IMF Working Papers, February 28, 2020",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2020/02/28/on-the-capacity-to-absorb-public-investment-how-much-is-too-much-49039",
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  "summary": "While expanding public investment can help filling infrastructure bottlenecks, scaling up too much and too fast often leads to inefficient outcomes.",
  "sections": [
    {
      "heading": "Summary findings",
      "content": "- Expanding public investment can help fill infrastructure bottlenecks but scaling up too much and too fast often leads to inefficient outcomes.\n- The paper analyzes the association between cost inflation and public investment using a large sample of road construction projects in developing countries.\n- Results show a non-linear U-shaped relationship between public investment and project costs."
    },
    {
      "heading": "Key empirical results",
      "content": "- Unit costs increase once public investment is close to 10% of GDP.\n- The threshold at which unit costs begin to increase is lower (about 7% of GDP) in countries with low investment efficiency.\n- The effect of investment scaling up on costs is especially strong during investment booms."
    },
    {
      "heading": "Interpretation and mechanisms",
      "content": "- Findings are consistent with the presence of absorptive capacity constraints: rapid or large-scale scaling-up of public investment can overwhelm implementation capacity and drive up unit costs.\n- Cost inflation in the sample of road construction projects serves as the measured outcome linking scaling-up to inefficiency."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Scale-up plans should consider absorptive capacity limits to avoid sharp increases in unit costs.\n- In countries with low investment efficiency, more conservative public investment targets (around the identified lower threshold) may be warranted to prevent cost overruns.\n- Attention to sequencing, implementation capacity, and mitigation of investment booms can reduce the likelihood of cost inflation when expanding public investment."
    },
    {
      "heading": "Research scope",
      "content": "- Evidence is based on a large sample of road construction projects in developing countries.\n- The analysis focuses on the association between public investment levels and project unit costs to infer absorptive capacity constraints.\n\nIMF Working Paper: \"On the Capacity to Absorb Public Investment: How Much is Too Much?\" (Working Paper No. 2020/048).\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2020/02/28/on-the-capacity-to-absorb-public-investment-how-much-is-too-much-49039"
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    "Authors: Daniel Gurara, Kangni R Kpodar, Andrea F Presbitero, Dawit Tessema",
    "Published: February 28, 2020",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781513529981.001",
    "Expanding public investment can help fill infrastructure bottlenecks but scaling up too much and too fast often leads to inefficient outcomes.",
    "The paper analyzes the association between cost inflation and public investment using a large sample of road construction projects in developing countries.",
    "Results show a non-linear U-shaped relationship between public investment and project costs.",
    "Unit costs increase once public investment is close to 10% of GDP.",
    "The threshold at which unit costs begin to increase is lower (about 7% of GDP) in countries with low investment efficiency.",
    "The effect of investment scaling up on costs is especially strong during investment booms.",
    "Findings are consistent with the presence of absorptive capacity constraints: rapid or large-scale scaling-up of public investment can overwhelm implementation capacity and drive up unit costs.",
    "Cost inflation in the sample of road construction projects serves as the measured outcome linking scaling-up to inefficiency.",
    "Scale-up plans should consider absorptive capacity limits to avoid sharp increases in unit costs.",
    "In countries with low investment efficiency, more conservative public investment targets (around the identified lower threshold) may be warranted to prevent cost overruns.",
    "Attention to sequencing, implementation capacity, and mitigation of investment booms can reduce the likelihood of cost inflation when expanding public investment.",
    "Evidence is based on a large sample of road construction projects in developing countries.",
    "The analysis focuses on the association between public investment levels and project unit costs to infer absorptive capacity constraints.",
    "**Working Paper**"
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