Managing Public Investment

Managing Public Investment Overview of Ireland’s Experience of Public Investment Management –with particular emphasis on Transport Projects Tom FerrisPublic Investment Workshop Istanbul, Turkey February 29, 2008

Content of Presentation • Background to Irish Economy • Planning and Appraisal of Investment Projects (ex-ante) • Budgeting for Public Investment • Monitoring and Implementation • Influence of Politics on Project Decisions • On-going Capacity Building

1. Background to Irish Economy • Population 4.3 million (2007) • Independence 1922 • EU member since 1973 • Real GDP growth 5.7 % (2006) • Unemployment 4.5 % (2007) • Exports * 80 % of GDP (2006) • Imports*69 % of GDP (2006) * Exports and imports of goods and services

140.0 120.0 100.0 80.0 60.0 40.0 EU Ireland 20.0 0.0 2002 2006 1960 1964 1966 1968 1970 1972 1976 1980 1986 1990 1994 1996 1998 2000 2004 1962 1974 1978 1982 1984 1988 1992 Ireland’s Economic Transformation: GDP per capita, EU15=100 PPP exchange rates

Ireland’s Rapid Growth*–not a ”Silver Bullet” • Policy-driven: - embrace openness = most important factor - industrial policy…attract Foreign Direct Inv. - education policy…1967/1996 (2nd/3rd free fees) - fiscal policy…eventually - incomes policy • “Enabling” factors: • US economy • high technology boom • elastic labour supply • Role of the EU: • governance • funding------ * See Reference 2: Honohan/Walsh

EU Membership very important for Ireland • Market access: - greater trading opportunities - trade diversification - reduced dependence on UK economy • Completion of Single Market • EMU and Euro • EU structural reform agenda • Access to EU funding

2. Planning and Appraisal of Investment Projects • Investment focus of 1980s/early1990s was on human capital, skills and education • Little infrastructure investment in 1980s and early 1990s (and rapid economic growth in 2000s), put serious pressure on infrastructure • Need to build-up technical, financial and managerial capacity to cope with “growth” • EU funds provided capital. Under EU regulations, a better planning and evaluation culture and capacity was introduced in Ireland • Some project“problems” – erroneous initial estimates; construction cost inflation; design changes and project management weaknesses* * See ESRI Reports (Reference 1 and Reference 4)

Overview of Planning Cycle • Capital Appraisal Guidelines provide for a 4-stage “project cycle” • Appraisal and planning stages may overlap in practice (and also involve mid-term evaluation)

Evaluation Cycle involving… • Cycle built around EU requirements • Ex-ante evaluation • Interim evaluation • Mid-term evaluation • Ex-post evaluation ---Economic & Social Research Institute (ESRI) used to do Ex-ante Evaluations and Mid-term Evaluations for each 5-year National Development Plan (linked-to EU cycles) ---Most Operational Programmes had an ongoing evaluator presence (either an independent internal evaluation unit or an external evaluator)

Basic Questions developedforProject Evaluation • Rationale • Is there a market failure? • Continued relevance • What are the implications of external developments? • Effectiveness • Are we meeting our objectives? • Efficiency • Are benefits commensurate with costs? • Could it be delivered more economically? • Impact • What difference, if any, has it made? • Overall question: Do we get value for money?

Central Evaluation Unit set-up • Main problem • No common understanding of purpose or focus of evaluation • Independent Evaluation Unit under Finance Ministry, set-up in 1996, to: • Assist Ministries with performance indicators • Responsible for interim evaluation of plans • Advisory role on wider evaluation issues • Advisory/standard-setting role re Cost Benefit Analysis • Promoting best practice in evaluation and appraisal, e.g.; Working Rules on Cost-Benefit Analysis, June 1999

Learning from EU-driven Management/Implementation Process E.U. Commission CSF Managing Authority/ Dept of Finance Guidelines Regulations Policy Reports Information on Progress Reporting on Expenditure Operational Programme Managing Authorities Implementing Bodies (Grant Approving Bodies) Final Recipients

Capital Appraisal Guidelines • Designed to be rigorous in their approach to management and evaluation of capital programmes and projects • Reflect best practice • Introduce greater proportionality into project assessment.

New Capital Appraisal Guidelines • Guidelines 2005: do Ex-Ante Appraisal of all Capital Projects • Proportionate to the value of the projects • Guidelines 2005 specify following thresholds: • < €m 0.5: do “Simple Assessment” • >€m 0.5 < €m 5: do “Single Appraisal” • > €m 5 < €m 30: do Multi-Criteria Analysis • > €30 million: do Cost-Benefit Analysis • Above take account of revisions announced in Department of Finance letter of Jan. 2006 • Sponsoring Agency responsible for Appraisal (using “in-house” or “bought-in” expertise) • Pre-requisite to get approval from the Sanctioning Authority * See Reference 5: Department of Finance’s Circulars of February 2006 and of January 2006

Key Issues in Appraisal • Guidelines 2005 identify following steps • Definition of project needs and objectives • Options analysis • Constraints • Quantification of costs • Analysis of options • Appraisal techniques (Cost Benefit Analysis, Cost Effectiveness and Multi-criteria Analysis) • Uncertainty, risk and sensitivity analysis

Clear-cut responsibilities • Clear distinction has to be made between those “authorising” investment projects and those “delivering” • 2005 Capital Appraisal Guidelines require this distinction to be made,within project appraisal, planning, implementation and project management • Sponsoring Agency – primary responsibility for project appraisal and management (Page 10) • Sanctioning Authority – approves sponsoring agency proposals at various stages (Page 11) • Separation of functional responsibility

Sanctioning Authorities’ responsibilities…... • Approving in principle the capital projects to be funded with public assistance • Reviewing conditions under which a project may proceed through stages of development to ultimately becoming fully operational • Paying the public assistance to the Sponsoring Agency and ensuring the project’s delivery as approved

Sponsoring Agencies’ responsibilities….. • State Bodies, who plan and manage projects, have the responsibility of quantifying financial costs, and specifying funding sources • Cost quantification is required to cover ongoing capital and life cycle costs relating to the operation/maintenance of projects, and receipts generated by use of capital assets, as well as the costs involved in their creation • Costs of projects are required to be expected outturn cost, including construction costs, property acquisition, risk and contingency (and include the cost of possible future price increases and variations in project outputs)

Sponsoring Agencies’ do what Transport Projects? National Road Projectsare done under the supervision of the National Roads Authority (NRA). The Department of Transport channels funds for national roads through the NRA which allocates them to the relevant local authorities Light Rail Projectsin Dublinare undertaken by the Railway Procurement Agency (RPA). The RPA is responsible for the procurement of light rail (LUAS) and metro National Rail Projectsare undertaken by Irish Rail,the operator of the Irish rail network and the sole provider of passenger rail services in Ireland

Risk and Uncertainty • We live in an uncertain world • Risks should be clearer through project cycle • Analyse risks and probability of occurrence • Use “experience” with comparable projects • Include some estimates for risks • Reduce ‘optimism bias’ with adjustments • Adjust ‘cost’ assumptions ‘up’ • Adjust ‘benefit’ assumptions ‘down’ • Tackle uncertainties with use of sensitivity analysis

3. Strategic Planning and Budgeting • In the past, Ireland “planned” investment on an annual budgetary basis • Annual planning meant a “stop-go” approach to public investment • During the past twenty years, planning for investment has moved onto a medium-term footing

Move away from “Annual” Investment Planning • Specifically, Irish Government has moved from annual budgets to rolling investment programmes or financial envelopes • Rolling 5-year multi-annual envelopes are now in place for all investment areas • For TRANSPORT, the Irish Government decided in November 2005 to go further and to provide for a ten-year multi-annual envelope - called Transport 21 - to tackle transport infrastructure deficit* * see Reference 13: Ferris

Medium-term Budgeting means.. • Medium-term envelopes put overall limits on the amount of investment that can take place annually. • Carry-over facilityallows under-investment to be carried forward, under certain limits set-by the Department of Finance • Line Departments having to meet certain conditions, e.g. each required to make a contingency provision within overall envelope to meet any unforeseen demands/additional costs • In providing for projects, Departments must plan not just for contract price, but provision for likely price increases, variations in specifications and other factors which might arise during project construction

Rolling 5 year multi –annual capital envelopes : conditions • Vote Section (Dept. Finance) determines nature of responsibility delegated to Department • General conditions of Department of Finance sanction • Additional local/sectoral conditions, if any • Requirements of capital appraisal guidelines – responsibilities of sponsoring agency and sanctioning authority • PPP requirements • Appropriate balance between increased delegation and effective and efficient management of public capital

Conditions involve….... • General conditions of Department of Finance sanction to spend under the envelopes – requirements on Departments/Agencies: • Contractual arrangements for grants of public funding to private companies and individuals or community groups to safeguard the State’s interest in the asset • Provision for programme and project contingencies to meet any unforeseen demands or additional costs • Comply with D/Finance capital appraisal guidelines, and carry out spot checks of projects for compliance and report findings to D/Finance • Comply with PPP guidelines, public procurement and tax clearance requirements • Report to their Management Boards regularly on evaluation of capital projects and progress on capital programmes and projects • Report to D/Finance annually

Medium-term Transport Investment Programmes (with EU Funding)* • Peripherality Operational Programme, 1989/93; • Transport Operational Programme, 1994/99 • Economic and Social Infrastructure Operational Programme, 2000/06 • TRANSPORT 21(2006-2015) within National Development Plan, 2007-2013 (with minimum EU funds – see Reference 7: Transport 21) * These Transport Programmes have been part of overall National Development Plans covering the same periods

Transport 21 : 10 Year €34.4 bn. Investment Programme National Strategy: • To develop a high quality national roads and public transport network and improve regional public transport Greater Dublin Area Strategy: • To transform the transport system in the Greater Dublin Area * Reference 7: Transport 21 (1 November 2005)

Minister for Finance on Transport Investment* “The launch of this ten year capital investment framework … represents a massive and necessary commitment of resources…involves investment of over €34 billion in current prices in ….2006 to 2015. All projects…will be appraised and implemented in line with my Department’s Capital Appraisal Guidelines and the additional Value for Money initiatives…There will be intensive system of monitoring put in place and …much enhanced project management skills in the agencies provide…reassurance that Value for Money will be provided” * see Reference 6: Minister for Finance

4. Monitoring and Implementation • Ireland has developed an effective evaluation system to ensure that projects are monitored on their implementation • National Development Plan (NDP) for 2007/2013 states “Robust monitoring and reporting arrangements…in relation to performance onimplementation…This will include reporting on NDP outputs and impacts and will incorporate thepreparation of an Annual Report on NDP progress which will be submitted to the Oireachtas [Parliament]. A MonitoringCommittee, including regional and social partner representation, will be established to monitor Planimplementation”….see Reference 10: NDP

Procurement at Appraisal Stage of Projects • At appraisal stage a decision on form of procurement – traditional or PPP • Project manager for all projects above €30 million with individual responsibility for: • Managing project • Monitoring progress against contract • Reporting progress to Project Board

Government’s Value for money/effectiveness framework • Reforms to public procurement including roll out of PPPs • Value for money measures in relation to capital appraisal, public procurement, ICT projects and consultancies announced by the Government on 11 October 2005 and the Minister for Finance on 20th October, 2005 • Planned improvements to the operation of the expenditure review initiative • Government reform of the Estimates and Budgetary process announced in Budget 2006

Conditions for successful project implementation • Clear understanding of rules and regulations • Systems in place to communicate rules • Systems in place to ensure compliance with rules and regulations • Need to pay particular attention to eligibility rules in certification of expenditure • Good working relationship with European Commission Desk Officers • Central Coordination at “heart of process”

Management by Project • Appointment of an individual within the organisation as Project Manager for each capital project • Vigorous Competition for Public Sector Contracts • Fixed Price Construction Contracts* • Formal Contracts Review • Monitor to ensure project objectives, performance criteria and milestones are achieved • Regular Progress Reports to Project Board • Projects > €30m, separate quarterly progress reports for each project to Management Board and Minister * see Reference 9: Department of Finance Circular (27 October 2006)

Drive for Compliance… • Need to ensure compliance with all the “rules and regulations” • A new Central Expenditure Evaluation Unit (CEEU), at Finance Ministry, recently given important oversight role • CEEU’s overall objective is to inculcate best practice in the appraisal and the management of projects and programmes by those delivering investment • CEEU’s Unit to carry out spot checks at project level to verify compliance with the various rules

EU-driven Financial Controls in Ireland E.U. Commission Paying Authority Dept. of Finance Certificates of Expenditure • ERDF and Cohesion • Control Fund Unit • Control Checks • System Audit Checks • Annual Reports of • Checks • Programme • Closure Declarations O.P. Managing Authority Intermediate Bodies Grant Approving Bodies Final Recipients

Doing the “Back-check” • Post Project Review to be completed by Sponsoring Agency • All Projects > €30m • Representative sample of at least 5% of all projects • Annual Report on capital envelope programmes to Department of Finance • Performance table – project outcomes vs. budgets – for all projects over €30m* • Included in Annual Report on Capital, and • Annual Report on Statement of Strategy * See Reference 11: Ferris

Monitoring Transport Projects • Department of Transport reviews projects’ progress on a monthly basis with its Sponsoring Agencies and results are used to update financial allocations on a regular basis. • Funds are transferred between sectors where it can facilitate an acceleration of projects or where progress is slower than anticipated • Transport 21 Monitoring Group assisted byprofessional companies engaged to carry out audits of compliance with Guidelines and audits of progress in project implementation • Projects selected for audit by the Monitoring Group, and auditors submit a detailed report of all audits carried out, setting out their findings and making recommendations, where needed

BudgetOver-runs: world-wide experience of transport projects

5. Influence of Politics on Project Decisions • Ireland is a parliamentary democracy, with each coalition government lasting about five-years • Each new coalition government sets its Five Year Programme at start of period of government • Such Five Year Programmes include overall commitments for planned investments • Such commitments are in the public arena for “checking” • Naturally, there may be potential to front-load or back-load projects within Plans (but now all Capital Projects have to go through the new Ex-Ante Appraisal process)

Extracts from “ An Agreed Programme for Government”, FIANNA FAIL, GREEN PARTY and PROGRESSIVE DEMOCRATS”, June 2007 Overall, … to implement a programme under Transport 21 of investment and service development which will: · Cut travelling times · Improve safety · Deliver real commuting choice · Reduce congestion · Protect the environment …….committed to the implementation of Transport 21 on time and on budget. ..Public Transport, recognising the importance of long-term planning in public transport investment, the Government will, in 2011, commence preparation of a successor to the 2006-2015 Transport 21 programme ….Dublin TransportAuthority…Integrated Public Transport System…Roads…Road Safety… --see Reference 13: Ferris

Control on Expenditure • Government has collective responsibility for formulating overall budgetary policy • Government agrees annual aggregate levels of expenditure for the different Ministries, within this overall framework • Expenditure is required to be submitted for Parliamentary approval • Government also approves capital investment envelopes, while Ministers have delegated sanction from the Minister for Finance (but subject to certain checks)

Spot Checks imperative • Departments to ensure annual spot checks on a representative sample of all capital projects • Report annually to Department of Finance on spot checks carried out and on findings • Guidelines in place that have to be adhered to* * see Reference 12: Department of Finance Compliance Circular, 15 May 2007

Checking-up on Spot Checks • CEEU to review Departments spot checks reports and report back on conclusions/findings • CEEU may carry out its own spot checks • To verify the quality and systems in place in Departments and Agencies for spot checking, or • On an ad hoc basis in respect of specific programmes/projects • Project Progress Reports and Contract Reviews may also be subject to spot-checking by the CEEU CEEU = Central Expenditure Evaluation Unit @ Department of Finance

Departments provide AnnualReport to Department Finance • Delegated responsibility means increased accountability for line Departments and their agencies • By end January each year • Outline priorities for capital programme consistent with capital envelope • Provide statement showing consistency with National Development Plan, National Spatial Strategy, Government programmes • For PPP projects an estimate of the unitary payments with breakdown between components • Total level of contractual commitment by year • Progress report on projects and programmes

6. Capacity Building • In 1990, little prior tradition of formal evaluation of public expenditure programmes in the Irish public administrative system* • Ireland learned quickly to develop an extensive experience with the evaluation of EU structural fund programmes during three successive programming rounds (1989/93; 1994/99; 2000/2006) • Ireland is consolidating evaluation experience with current National Development Plan (2007/2013) * see Reference 3: Hegarty

Specific Steps taken Ireland has been developing an extensive experience during past 20 years, through: • Learning from EU processes • Developing its own systems, e.g. Central Evaluation Unit and Evaluations, e.g. ESRI • Putting in place Guidelines --Working Rules on Cost-Benefit Analysis, June 1999, -- Capital Appraisal Guidelines, February 2005 • While the foregoing are necessary, they are not sufficient …there has to be effective and efficient delivery “on-the-ground”

Importance of Training • Specialised training is being provided in the public sector • Ensures that officials are properly trained in areas such as procurement, project management, project appraisal and policy analysis • Professional courses and training are provided on three fronts: • Civil Service Training & Development Centre’s Courses • Masters in Policy Analysis • Higher Diploma in Policy Analysis

7- Some Key Lessons • A well-organised and adequately resourced evaluation system, underpinned by appropriate structures and a clear sense of purpose or focus, is the key to maximising the benefits of investment • Evaluations carried out at right time by experienced and detached evaluators, with a focus on appropriate questions and support of key stakeholders, can make a difference • Important to develop networks for officials to share experience and best practice, including on-going EU liaison

Keep up the Momentum ! • In 2006, ESRI called for the quality of project appraisal to be enhanced, by having Cost-Benefit Analysis (CBA) of projects conducted rigorously and independently of project promoters, and having central commissioningof CBAs and the exercise of quality control on studies delegated to Departments and agencies* • In 2008, Ferris called for the early establishment of fully operational Dublin Transport Authority to allow for much greater co-ordination in the planning of transport investment in Dublin, and the delivery of a supporting detailed traffic management plan for the GDA* * See Reference 8 (ESRI) and Reference 14 (Ferris)

Thomas Jefferson (1743/1826)* * “The price of freedom is eternal vigilance” the delivery of successful projects depends on focussed planning, efficient implementation and effective monitoring

Managing Public Investment