Enhancing Public Investment Management: EU Lessons

1. Assessing Public Investment Management Lessons from the 2008 EU Infrastructure Study and Beyond Bernard Myers, July 24, 2008

2. Administrative Context Affects PIM in our Region • Coalition governments, with weak MOFs • Political incentives to maximize absorption of funds • Reliance on formal laws and regulations • High level of political involvement in administrative decision-making • Lack of an evaluation culture • Incentives for performance are weak and ad hoc

3. Fragmented Institutional Responsibilities: MoF can’t be the only client • Potential TA targeted at multiple levels • Financing decisions at MOF – and possibly split across directorates • Medium Term Planning by MoPlan or MoEcon • Appraisal Standards and Screening at MOF or MOP • Preparation and appraisal by sponsoring ministry • Other bodies: State Expertise; Procurement Office; SAI • Private sector firms conducting feasibility studies

4. EU Report: Questions posed at the beginning of the process • How do countries determine the overall envelope for investment • How do they determine sectoral allocations • How are projects selected within the sector • How do they monitor implementation of the projects to assure effective outcomes • How do they evaluate project performance ex-post

5. Characteristics of the EU Report Preparation • Local consultants/former civil servants prepared cases • Common questionnaire used, but strong reliance on consultant judgment to guide process • Balance criticism of local practice with comparisons to better practice in old member states • Drilled down into experience with individual projects – comparing “formal” rules with the informal practice (e.g., political decision-making) • Two dimensions: Institutional/Process issues versus Technical Tools/Capacity

6. Some Questions Are Difficult to Assess Accurately • Strategic Planning: How relevant is it for decision-making • Cost-Benefit Analysis: What is the quality, and is it really used • Alternative Options: Are the alternatives proposed credible • Project Selection: What really drives decision-making; the role of politics • Project Outcomes: How well are projects being implemented (i.e., cost-effectiveness)

7. Limitations of the Report: Not all issues can be addressed • Difficult to benchmark across countries • Recommendations are general and not country specific • Possible risk that good practice examples may appear too challenging • Limited attention to other relevant issues: • How overall investment level is decided • Asset registries and under-funding of maintenance • Public Procurement processes and anti-corruption • Ear-marked revenues and off-budget financing • Screening for small, standard projects – e.g., school construction • Improving absorption capacity of EU funds • Reasons for cost over-runs

8. Main Findings from EU Study(1) • Strategic Plans – usually disconnected from medium term budget projections and lacking genuine prioritization of projects • Budgeting – Funding is fragmented due to annual budget process; not well supported by medium term budgeting tools. Within-year funding rigidities • Project Appraisal and Selection • Use of CBA on EU-funded projects, less so for national projects • Impact of CBA on decision-making is questionable. • Risk of project over-design and limited consideration of project alternatives.

9. Main Findings from EU Study(2) • Risk mitigation and project planning – Pro forma part of feasibility study, but little risk mitigation. Sometimes hurried project design leads to poor implementation • Role of MOF and external bodies: Weak MOF oversight role in setting quality standards. Inability to stop bad projects early. Little external checks on quality • PPPs and off-budget entities: Private financing used primarily to get around fiscal constraints. Project selection is ad hoc and internal expertise to manage public risk is limited

10. Main Findings from EU Study(3) • Procurement strategies: Do not necessarily balance risk between contractor and purchaser. • Project Monitoring: Little comparison of actual cost versus planned cost over course of project life. Limited non-financial indicators of performance • Audits and Ex-post Review: Internal and external audit limited to financial compliance • Capacity development: Training efforts on CBA but limited in scope. Unlikely to include project management, procurement, or policy analysis

11. Experience from Kazakhstan(1) • Concerns about the quality of project selection and cost-effectiveness of projects • Requirement for CBA is generally enforced, but quality of analysis is inconsistent and capacity for MOF to assess is weak. Limited private sector capacity. • Strategic plans are too general to provide adequate prioritization of projects or enable poor projects to go forward (e.g., soviet-style norms) • No effective mechanism to prioritize projects or rank them even within a sector

12. Experience from Kazakhstan(2) • High turnover of public investment staff in MOF, insufficient clout to challenge • Information on project implementation not well organized at MOF (no database) • Procurement procedures favoring lowest bid, questionable bidders • Budget calendar forces rushed design phase, leading to costly changes during implementation

13. Experience from Kazakhstan(3) • Discrepancies between cost estimate in CBA and actual contract award and final completion cost. • PPPs not well integrated into overall project prioritization processes • Ministry staff supervising contracts lack expertise to challenge contractors • No ex-post evaluation of projects

14. Survey results from 2008 Istanbul conference on PIM • Which results are intuitive and which are unexpected?

15. What have been the most serious weaknesses in the way public investment is managed in your country?

16. Where a cost benefit analysis is prepared, are the results of that analysis a major factor in deciding which projects to proceed with?

17. What other factors affect the decision to proceed with a particular project?