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The IMF and Infrastructure Governance

Why Public Investment Matters

Public investment supports the delivery of key public services through the construction of schools, hospitals, public housing, and other social infrastructure. Public investment also connects citizens and firms to economic opportunities through the provision of economic infrastructure hubs such as airport and seaports and networks which support telecommunications, transport, and electricity production and transmission.

Through the provision of both social and economic infrastructure, public investment can serve as an important catalyst for economic growth. A significant body of theoretical and empirical resource underscores the positive relationship between investment in high-quality public infrastructure and economy-wide productivity. In the October 2014 World Economic Outlook, the IMF found that, for a sample of advanced economies, a 1 percentage point of GDP increase in investment spending would increase the level of output by about 0.4 percent in the same year and by 1.5 percent after four years.

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Trends in Public Investment

After decades of steady decline, public investment has begun to recover in emerging markets and developing economies but remains at historic lows in advanced economies (Figure 1). The recent surge of public investment has helped reduce the perceived disparity in infrastructure across countries (Figure 2). This largely reflects improvements in the quality of and access to social infrastructure (e.g. schools and hospitals). Large disparities in economic infrastructure (e.g. roads and electricity) remain.


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Public Investment Efficiency

The economic and social impact of investment critically depends on its efficiency. A recent IMF study explores different approaches to measuring public investment efficiency, defined as the relationship between the accumulated public capital stock per capita and various indicators of the quality of and access to infrastructure. The study finds that around 30 percent of the potential benefits of public investment are lost due to inefficiencies in investment process on average. The size of the efficiency gap shrinks as income rises, with developing facing a gap of 40 percent, emerging markets facing a gap of 27 percent, and advanced economies facing a gap of 13 percent on average.

The potential economic dividend from closing this “efficiency gap” could be substantial: the most efficient public investors get twice the output “bang” for their public investment “buck” than the least efficient investors.

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Public Investment Management Assessment (PIMA)

The efficiency of public investment depends crucially on how it is managed. Countries with stronger public investment management institutions have more predictable, credible, efficient, and productive investments. Strengthening these institutions arrangements could close up to two-thirds of efficiency gap highlighted above.

To help countries evaluate the strength of the public investment management practices, the IMF has developed a new Public Investment Management Assessment (PIMA).

The PIMA evaluates 15 institutions that shape public investment decision-making at the three key stages (Figure 4):

  • Planning sustainable investment across the public sector;
  • Allocating investment to the right sectors and projects; and
  • Implementing projects on time and on budget.

The PIMA provides a comprehensive diagnostic of the strengths and weaknesses of a country’s public investment management system (Figure 5), allowing comparisons with similar groupings, and country-tailored recommendations.

  • For country authorities , it provides a basis to produce a prioritized reform plan, tailored to their specific needs and aligned with the country’s resources and capacities;
  • For the Fund , it supports the policy dialogue with countries, including surveillance and Fund-supported program design, resulting in better reflection of public investment management issues in Fund’s work agenda; and
  • For donors , it helps assess needs, mobilize funding and improve coordination among capacity development providers.

The PIMA framework has been well-received by member countries, with strong demand throughout all income groups. PIMAs have been undertaken in more than 40 countries, and several have already been requested.


The IMF Policy Paper Public Investment Management Assessment - Review and Update (May 2018) summarizes the lessons learned of the PIMAs finalized until April 2018 and updates the assessment framework itself.

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PPP Fiscal Risk Assessment Model (P-FRAM)

The P-FRAM is an analytical tool developed by the IMF and the World Bank to assess the potential fiscal costs and risks arising from Public Private Partnerships (PPP) projects. In many countries, investment projects have been procured as PPPs not for efficiency reasons, but to circumvent budget constraints and postpone recording the fiscal costs of providing infrastructure services. Hence, some governments ended up procuring projects that either could not be funded within their budgetary envelope, or that exposed public finances to excessive fiscal risks. To address these concerns, P-FRAM was developed as an analytical tool to quantify the macro-fiscal implications of PPP projects. It is designed to be used mostly by PPP units in ministries of finance.

P-FRAM provides a structured process for gathering information for a PPP project in a simple, user-friendly, Excel-based platform, following a four steps 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 the PPP-related asset—either through ownership, beneficial entitlement, or otherwise.
  • 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; (b) the government allows the private sector to collect fees directly from users of the asset (e.g., tolls); and (c) a combination of the two.
  • Does the government provide additional support to the private partner? Governments can not only fund PPP projects directly but they can also support to the private partner in a variety of ways, including providing guarantees, equity injections, or tax amnesties.

Once project-specific and macroeconomic data are introduced, P-FRAM automatically generates standardized outcomes. The latter include: (i) project cash flows; (ii) fiscal tables and charts both on a cash and accrual basis; (iii) debt sustainability analysis with and without the PPP project; (iv) sensitivity analysis of main fiscal aggregates to changes in macroeconomic and project-specific parameters; and (v) a summary risk matrix of the project.

P-FRAM is currently being pilot-tested in various platforms, and the current version is available for download.

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Investment and Capital Stock Dataset

Public investment can be a catalyst for growth. As part of the IMF’s work on public investment, the Fiscal Affairs Department has compiled a comprehensive database on public, private, and public-private-partnerships (PPP) investment flows for 170 countries. The database also includes estimates of real public capital stocks, between 1960 and 2015. This note provides a brief overview of the data sources, methods, and main trends, and is accompanied by an update of the Investment and Capital Stock Dataset (since last release of September 2015), and a detailed Manual and FAQ of the database construction.

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Infrastructure Policy Support Initiative (IPSI)

Infrastructure investment can help secure faster and more durable growth. To get the most out of spending on infrastructure investment, the priority is to improve the quality of spending and, where appropriate, also the quantity. Toward this end, the Fund has recently launched an Infrastructure Policy Support Initiative (IPSI). This initiative consolidated ongoing efforts to help all countries increase the efficiency of public investment and explore ways to sustainably scale up such spending (see 2018 Interim Surveillance Review ).

IPSI Tools

  • Public Investment Management Assessment (PIMA) . The efficiency of public investment depends crucially on how it is managed. Countries with stronger public investment management institutions have more predictable, credible, efficient, and productive investments. The PIMA evaluates 15 institutions that shape public investment decision-making at the three key stages: (i)planning sustainable investment across the public sector; (ii) allocating investment to the right sectors and projects; and (iii) implementing projects on time and on budget. PIMA estimates the efficiency of the country’s public investment, outlines the relative institutional strengths and weaknesses, and provides practical recommendations to enhance the efficiency and impact of public investment.
  • PPP Fiscal Risk Assessment Model (P-FRAM) is an analytical tool developed by the IMF and the World Bank to assess the potential fiscal costs and risks arising from Public Private Partnerships (PPP) projects. In many countries, investment projects have been procured as PPPs not for efficiency reasons, but to circumvent budget constraints and postpone recording the fiscal costs of providing infrastructure services. P-FRAM was developed to quantify the macro-fiscal implications of PPP projects. It provides a structured process for gathering and analyzing information for a PPP project in a simple, user-friendly, Excel-based platform.
  • Debt-Investment-Growth (DIG) is a dynamic macroeconomic model to support debt sustainability analysis. It allows policymakers to assess the macroeconomic consequences and potential risks associated with different financing strategies (including a mix of external concessional, external commercial, and domestic debt) and different trajectories of public investment as well as the implications of changes in investment efficiency. The model is constantly under development and can be used to look at current issues (e.g. resource revenue management, building resilience to natural disasters ).
  • Debt Sustainability Assessments (DSA) is the workhorse tool for assessing the sustainability of fiscal policies, including scaling up infrastructure investment. The DSA can also be used to examine alternative scenarios, such as higher or lower capital expenditures.
  • Medium-Term Debt Management Strategy (MTDS) is an established tool implemented jointly with the World Bank. The MTDS framework and the related analytical tool provide a systematic and analytical approach for developing an effective debt management strategy. Such a strategy helps ensure that the government’s financing needs and payment obligations are met at the lowest possible cost consistent with a prudent degree of risk. The IMF and World Bank have provided significant technical assistance and training in this area, especially since 2009.

Country

(Area Dept.)

Pilot Country Focus

Status & outputs

(links if published)

Cambodia (APD)

Assessment of infrastructure gaps and impact on growth, the public investment management process and framework for financing further infrastructure investment through PPPs.

Box 6: “Public Investment, Efficiency and Growth” in 2016 Article IV Staff Report

IMF working paper WP/17/10 : “Collect More, Spend Better: Public Investment in Asian Frontier Markets”

Box 2: “Managing Fiscal Costs and Risks from PPPs” in the 2017 Article IV Staff Report. IMF Country Report No. 17/325

Colombia (WHD)

Assessment of institutional and regulatory framework required to carry out infrastructure investment; explore partial local financing of infrastructure projects and associated macro-financial risks, the growth impact of planned infrastructure investments.

Box 4: “Infrastructure Agenda, a Medium-Term Growth Driver” in 2016 Article IV Staff Report .

Box 1: “The Impact of Infrastructure on Growth and Investment” SIP; IMF Country Report 17/139; April 17, 2017

Honduras (WHD)

Assessment of public investment quality control framework against international best practices.

FAD TA report “Honduras: Evaluation of the Management of Public Investments (PIMA)”, Sept. 2016.

Kyrgyz Rep.

(WHD)

The impact of public infrastructure scaling up on growth; public investment efficiency, and return.

Annex VI, IMF Country Report No. 16/186, 2016 . “Public Investment, Debt Sustainability, and Growth”

Annex VI-Case Studies, IMF Policy Paper . “The Medium-Term Debt Management Strategy: As Assessment of Recent Capacity Building”

Thailand (APD)

The impact of public infrastructure scaling up on growth; financing opportunities; medium to long-term debt sustainability; public investment efficiency; PPPs.

Appendix VII, IMF Country Report No. 17/136 -“Public Investment, Growth and Debt Sustainability”, May. 2017.

Serbia

(EUR)

Assessment of public infrastructure gaps; fiscal space to finance infrastructure development; evaluation of public investment management frameworks; and estimating the potential impact of increased infrastructure spending on economic growth

Annex III: “Public Infrastructure Gaps: Challenges and Opportunities” in 2017 Article IV Staff Report .

Solomon Islands (APD)

On the government’s plans to scale up infrastructure investment and quality of investment projects, including in the context of resilience to natural disasters.

Selected Issue Paper– “Public Investment in the Face of Natural Disasters: A DIG Model Application” IMF Country Report No. 18/73

Timor-Leste

(APD)

Infrastructure gaps are a critical issue. However, rapid scaling up is draining fiscal resources, running the risk of ending up in low-return/low-efficiency projects. The focus is to reinforce the policy message that scaling up of public investment should be consistent with absorptive capacity. Public Finance Management, planning allocation and implementation of public investment should be the focus of capacity building.

2017 Article IV Staff Report. IMF Country Report No. 17/360

Vanuatu

(APD)

Public investment scaling up in the context of resilience to natural disasters.

Annex III – IMF Country Report No. 16/336

IMF WP/17/223 –“Building Resilience to Natural Disasters: An Application to Small Developing States”