Strengthening Public Investment Management James Brumby Kai Kaiser PREM Public Sector & Governance Brasilia June 16-17, 2011

The World Bank Page 2 Public Sector & Governance Aiming for Infrastructure Results Public Investment "Social" Infrastructure education and health facilities and housing "Economic" Infrastructure transport, communications, energy, irrigation systems, water and sanitation Creating and preserving economically and social productive public assets Efficiency is “value for money”: budget to final cost, completion time to actual time How long will they last? “Right” starting quality/standard Depreciation versus “service value”, O&M Risk: build, neglect, rebuild….

The World Bank Page 3 Public Sector & Governance Value for Money? WEF Infrastructure Quality

The World Bank Page 4 Public Sector & Governance Quality of Effort? Investment “Stimulus Additional % GDP

The World Bank Page 5 Public Sector & Governance Ex Post Benchmarking Source: CoST (2011b:3)2011b:3

The World Bank Page 6 Public Sector & Governance Addressing Infrastructure Gaps: Multiple Sectors & Modalities Engaged General Government Sector (Central State, Local) Public Corporations (Nonfinancial) Private Sector Fiscal financing Other sources of financing Some fiscal & some corporate financing Examples Power Roads Telecommunications/Internet Schools Clinics/Hospitals Stadiums “Green” Infrastructure; Adaptation Examples Power Roads Telecommunications/Internet Schools Clinics/Hospitals Stadiums “Green” Infrastructure; Adaptation Business Environment Private Investment Private Investment 6 Public Investment Management Public Investment Management PPPs Mainly fiscal Mainly regulatory Financial Sector role

The World Bank Page 7 Public Sector & Governance Public Investment Policy Choices How much to spend – Levels (% GDP) – Volatility – Availability of financing Quality of spending – PIM Process Public Investment Modalities – “Standard” Public Investment Across levels of governnment – Donor-financed public investment – Public-Private Partnerships – SOEs/Quasi-Fiscal – Resource for Infrastructure Deals

The World Bank Page 8 Public Sector & Governance A Framework for Assessing PIM Two pillars of the approach – Desirable features of well-functioning system in 8 cycle – Diagnostic Indicators to assess actual system Focus on how to inform reform design to enhance efficiency by Gap-Analysis Desirable Institutional Features Actual Functioning Diagnostic Indicators Gap Analysis

The Eight “Must-Have” Core PIM Features - 1 Guidance & Screening 2 Formal Project Appraisal 3 Review 4 Project Selection & Budgeting 7 Service Delivery 6 Project Changes 5 Implement ation 8 Project Evaluation Pre-feasibility Feasibility CE CBA Regulatory requirements Project development Detailed project design Basic completion review Evaluation 9

The World Bank Page 10 Public Sector & Governance Different Countries Facing Various Challenges

The World Bank Page 11 Public Sector & Governance PIMI – LICs and MICs

The World Bank Page 12 Public Sector & Governance State Diversity in the US Source: Pew Center on the States ( Grading the States Report, 2008

The World Bank Page 13 Public Sector & Governance Public Asset Creation and Preservation Options for addressing infrastructure gaps in periods of fiscal consolidation – Managing fiscal space; balance sheet and operating spending – Leveraging modalities; full choice of interventions Information/monitoring to improve quality – PIM cycle; supported by management information – Operations & Maintenance (O&M) Special challenge of managing across levels of government, PIM modalities

The World Bank Page 14 Public Sector & Governance Strengthening “Good Enough” PIM prioritization in project portfolio Source: Rajaram et al (2010) Well executed Poorly executed Good projects AC Poor projects BD

The World Bank Page 15 Public Sector & Governance Monitoring Implementation Test: do current systems generate CoST type statistics and is it reported? Variety of systems – Single system – Interlinked systems Feedback mechanisms/demand critical

The World Bank Page 16 Public Sector & Governance  65% of the current roads projects have time overruns  In a sample of 10 road projects, 7 had time overruns with completion time of 3.1 years compared to original plan of 1.8 years.  Delays were worse in the directly contracted projects 16 Case: These planning and budgeting problems show up in project execution

The World Bank Page 17 Public Sector & Governance O&M Monitoring Returns are high; commitments are low – Suggests incentive problem Budget/costing benchmarks De Facto responsibility across levels of government/types of assets? Special institutions – Road Funds Feedback mechanisms – Demand side, parents & schools Accounting measures & capability – Accruals, balance sheets & capital charges

The World Bank Page 18 Public Sector & Governance  60 percent of the national paved road network is in poor condition  However, capital repair expenditures did not benefit from the expenditure boom…  …and have declined as a proportion of capital stock and of new investments 18 Case: Low allocative efficiency: under-prioritization of maintenance and repair

The World Bank Page 19 Public Sector & Governance Case: Balance sheet approach rebuilding the state balance sheet buffer against future adverse events systematically working to reduce the state’s risk exposures, including through strengthening the economy sharpening incentives on State agencies to use existing state capital well continuing to look at introducing private sector capital and disciplines where appropriate to help drive up the performance of State assets, and more actively reprioritizing State capital to its highest value use.

The World Bank Page 20 Public Sector & Governance PIM Reforms Three common challenges: – You need to work with politics – High corruption risk – PIM as extremely demanding area of public management It is important therefore to ensure that PIM reforms are incentive compatible – Based on a sound understanding of and tailored to fit individual country paths, circumstances and practices – Technically feasible, relying on good enough practice – Carefully designed and sequenced – Targeted 20

Lessons Learned Ownership of assessment is important – Often, but not always MoF at the center of process – Develops the framework for investment decision and has oversight control of public investment Clarity of roles and responsibilities is crucial for effective PIM – Coordination across sectors and levels of government The role of central guidelines are a particularly critical aspect of a well functioning PIM 21

Lessons Learned Monitoring is important for early remedial action Building capacity : gradual approach – PIM system do not operate in isolation – Well functioning PEM and budgeting system, SOE governance and debt management system is also important Tailoring PIM to country context 22

The World Bank Page 23 Public Sector & Governance Catering “good fit” to country context: Programmatic Approach Country cases; analytic & advisory work A synthesis of the findings of 15 case studies, presents a country typologies, and an assessment of patterns of binding constraints to PIM system performance and approaches to reform (w/ AusAID, Korea): incl. Brazil, Peru, East Timor, Vietnam, Korea, Australia Toolkits/Benchmarking – Rajaram et. al. (2009) eight “must-have” or minimum features of a sound public investment management and offers a systemic approach (studies inc: Korea, Chile, Vietnam, Peru). – Public Investment Management (PIMI) Benchmarking Indicator – PEFA “Drill Down” for Capital Spending Peer to peer Facilitate exchange of experiences between developing countries that have successfully implemented reforms and those who are seeking to fill operational knowledge gaps Seoul, Hanoi Brasilia (5/2011), APEC Conference DC (6/2011) Bank operations Fee-for-service DPL, as in case of Vietnam or IL/TA