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Workshop on Budget Formulation and Public Investment Management
Monrovia, 8-12June, 2015
Investment Planning and Public Investment Plans:
Issues and Best Practices
What is a Public Investment Plan
• Definition: A PIP is a document that gives a
comprehensive and exhaustive view of all
investment projects undertaken or to be
undertaken by MDAs, based on prioritization
criteria, within the framework of a Medium Term
Expenditure Framework and in alignment with a
national strategy and sector development plans,
and that provides rationales for projects
selection as well as key information on cost,
financing, implementation timeline, procurement
plan, and other economic data.
2
• Poor Project Selection
❖ Wasteful “ white elephant” projects
❖ “Political” projects to placate regional demands
❖ Lack of economic screening of projects (ex ante costs may exceed benefits, optimism bias)
• Poor Project Implementation
❖ Poor planning/budgeting –strategic misrepresentation
❖ Corrupt or Inefficient procurement
❖ Delays in project completion
❖ Cost-overruns (Sydney Opera 1400%, Denver Airport 200%, Channel tunnel 100%)
❖ Incomplete projects
• Failure to operate efficiently and maintain assets
❖ No public register/maintenance of assets
❖ Not enough fiscal space for asset maintenance
❖ Theft and missuse of public revenue and assets
• No effort to learn from mistakes and improve PIM system
• Net Effect – Very weak growth and poverty reduction impact
Investible Revenue
What problems may impair efficiency and effectiveness of public investment?
General issues with the management of the investment cycle
Source: World Bank
Optimist bia and strategic
misrepresentation
• Optimism Bias – study of 258 projects found average cost-
overrun is 27%. Railway projects (58 cases) average cost-
overruns of 45%. Why do project planners consistently under-
estimate costs?
– Genuine optimism that costs can be contained despite evidence to the contrary
• Strategic misrepresentation – when a sponsor knowingly
understates costs and overstates benefits in order to receive
approval. Could be:
– Due to vested interest of sponsor/financier in private benefits
– Budgetary rules and incentives (passing SCBA screening)
• Both problems point to need for independent review of
feasibility/ appraisal reports
4
Source: World Bank
Benefit of Public Investment Plans
PIP are a tool to manage investment projects more
effectively.
• If realistic, they are an instrument for sizing the fiscal envelop
required for achieving certain strategic objectives.
• The should linked with the MTFF and MTEF to ensure budget
credibility.
• They should provide costing principles to ensure budget
realism based on realistic cost units.
• They should ensure that all budgeted investment projects can
be executed within the fiscal year with projections for outer
year.
• They should be a tool to monitor the complete investment
project cycle. 5
Good Practices
• PIP should be aligned with national and sector
strategies and geared toward achieving well-
identified objectives through a policy paper
(sustainable growth, poverty alleviation, general literacy, reduction of
infant and maternal mortality, etc.);
• National and sector strategies should be costed and
realistic
• PIP should be realistic and cost-constrained;
• Should proceed from sound technical analysis and
ensure good project preparation (feasibility study, project
documentation, etc.);
• Should able to demonstrate their economic and
social impact. 6
Requirements for good investment
management
• Investment Management Systems backed by strong
institutional arrangements;
• Clear guidance for project preparation
• Introduction of a multi-year time horizon through robust MTFF
and MTEF and tracking of multi-year comitments;
• Arms-length review of project proposal
• Clarity of role of the different stakeholders during project
implementation;
• Robust Monitoring and Evaluation Systems with milestones,
performance indicators, deliverable quality assurance, and
rules for tracking and reviewing project costs.
7
8
-
1
Guidance
2
Appraisal
3
Independent
Review
4
Selection
7
Operation
6
5
Implementation
8
Evaluation
Adjustment
Link to a
development
strategy
Authority to screen
and reject projects
Key to credible
selection
An effective budget and procurement
process to support implementation and
operation
Evaluation to improve
system
Maintain asset register,
operate and maintain asset
To go ahead with
the project or
not?
Key Features of a Public Investment Management System
Source: World Bank
Technical analysis
• Objective of the technical analysis: to challenge the
project feasibility within the indicated timeframe to
avoid mobilization of financial resources that will not
be used.
• The technical analysis may include the following
point:
– Alignment with national priorities
– Reliability of the feasibility study and comprehensiveness of the
technical documentation;
– Environmental impact (if necessary)
– Realism of the of the implementation plan
9
Economic Analysis
• Social and economic impact of the
project
– Size the targeted population
– Relation with poverty alleviation strategy
– Contribution to economic growth
• Cost Benefit Analysis / Investment
return rate
10
Financial / Budgetary Analysis
• Credibility of the project disbursement / cash
plan
• Credibility of the project procurement plan
• Project maintenance cost
• Project fiscal sustainability
• Impact on sector fiscal envelopment
• Review of sector prioritization criteria
• Review of national prioritization criteria
11
The Three Dimensions of the Institutional
Arrangement for Investment Governance
• Integrating the planning function with the
financial function (budgeting + financing)
• Integrating the investment management
function with the budgeting function
• Ensuring independence of the project
appraisal function at the end the project
management cycle
Institutional arrangements vary from country to
country
12
Integrating the planning function with the
financial function
Different models exist:
• Planning Commission + MoF
• Ministry of Finance + Ministry of Planning
• Merger between MoF and MoP
13
Integrating the investment management
function with the budgeting function
Three models:
• Public Investment selection is part of public
investment management as a distinct department
from the budget department.
• The Public Investment Unit is part of the Budget
Department
• The Budget Department is organized by sector and
each sector has its own investment management
officer.
14
The Project Appraisal Function
General Principle: separation between project design and
implementation and project appraisal.
• Chile and Korea have centralized project appraisal systems
while UK (Major Project Authority) and Ireland (Central
Evaluation Unit) are more decentralized systems
• Independent review is achieved through semi-autonomous
agencies (Korea, PIMAC) or by MOP (Chile) or through
special processes (Gateway review – UK) and public
hearings (UK and Ireland)
• Facility operation is achieved through the Gateway process
in the UK and efforts are made to assess outcome effects
whereas in Chile and Korea the focus is on completion of
projects to plan
15
Issues with weak PIPs
• Lack of alignment on national strategy and sector
strategies
• Donors’ preference override national priorities
• Lack of clear rationales to justify the investment
• Weak and unreliable feasibility studies and project
documentation
• Unrealistic costing
• Unrealistic implementation timeline
• Absence or weak procurement plan
16
PIP is not the silver bullet that will solve
the problem of investment prioritization
• The issues associated with dual budgeting
(Capital Budget vs. Recurrent) remain.
• Too much focus on projects and not enough
on sectors and programs.
• Investment policy remain fragmented.
• Requires strong methodology for cost and
benefit analysis in a context in which
capacity might be limited.
17
The future of PIPs
PIP are deeply transformed by the
introduction of program budgeting.
• The investment budget is fully integrated
with the recurrent budget.
• Maintenance cost calculated and integrated
in the program budget.
• Programs become the instrument of
prioritization
18
Issues in Liberia
• Duality of decision and management: Public Investment Unit &
President Deliverable Unit
• MDAs do not have a clearly defined fiscal envelope for
investment.
• As a consequence of cash rationing, the project bank approach
put projects in competition for scare resources with negative
consequences for project preparation.
• Final financing decision is centralized and does not take into
consideration the coherence of the sector strategy.
• 50% of projects are legislative projects obeying a different
logic.
• The budget does not give the breakdown of investment
projects by expenditure categories.
• Project are appropriated before they are fully designed.
19
Thank you

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Investment planning and public investment plans: Inssues and Best Practices

  • 1. Workshop on Budget Formulation and Public Investment Management Monrovia, 8-12June, 2015 Investment Planning and Public Investment Plans: Issues and Best Practices
  • 2. What is a Public Investment Plan • Definition: A PIP is a document that gives a comprehensive and exhaustive view of all investment projects undertaken or to be undertaken by MDAs, based on prioritization criteria, within the framework of a Medium Term Expenditure Framework and in alignment with a national strategy and sector development plans, and that provides rationales for projects selection as well as key information on cost, financing, implementation timeline, procurement plan, and other economic data. 2
  • 3. • Poor Project Selection ❖ Wasteful “ white elephant” projects ❖ “Political” projects to placate regional demands ❖ Lack of economic screening of projects (ex ante costs may exceed benefits, optimism bias) • Poor Project Implementation ❖ Poor planning/budgeting –strategic misrepresentation ❖ Corrupt or Inefficient procurement ❖ Delays in project completion ❖ Cost-overruns (Sydney Opera 1400%, Denver Airport 200%, Channel tunnel 100%) ❖ Incomplete projects • Failure to operate efficiently and maintain assets ❖ No public register/maintenance of assets ❖ Not enough fiscal space for asset maintenance ❖ Theft and missuse of public revenue and assets • No effort to learn from mistakes and improve PIM system • Net Effect – Very weak growth and poverty reduction impact Investible Revenue What problems may impair efficiency and effectiveness of public investment? General issues with the management of the investment cycle Source: World Bank
  • 4. Optimist bia and strategic misrepresentation • Optimism Bias – study of 258 projects found average cost- overrun is 27%. Railway projects (58 cases) average cost- overruns of 45%. Why do project planners consistently under- estimate costs? – Genuine optimism that costs can be contained despite evidence to the contrary • Strategic misrepresentation – when a sponsor knowingly understates costs and overstates benefits in order to receive approval. Could be: – Due to vested interest of sponsor/financier in private benefits – Budgetary rules and incentives (passing SCBA screening) • Both problems point to need for independent review of feasibility/ appraisal reports 4 Source: World Bank
  • 5. Benefit of Public Investment Plans PIP are a tool to manage investment projects more effectively. • If realistic, they are an instrument for sizing the fiscal envelop required for achieving certain strategic objectives. • The should linked with the MTFF and MTEF to ensure budget credibility. • They should provide costing principles to ensure budget realism based on realistic cost units. • They should ensure that all budgeted investment projects can be executed within the fiscal year with projections for outer year. • They should be a tool to monitor the complete investment project cycle. 5
  • 6. Good Practices • PIP should be aligned with national and sector strategies and geared toward achieving well- identified objectives through a policy paper (sustainable growth, poverty alleviation, general literacy, reduction of infant and maternal mortality, etc.); • National and sector strategies should be costed and realistic • PIP should be realistic and cost-constrained; • Should proceed from sound technical analysis and ensure good project preparation (feasibility study, project documentation, etc.); • Should able to demonstrate their economic and social impact. 6
  • 7. Requirements for good investment management • Investment Management Systems backed by strong institutional arrangements; • Clear guidance for project preparation • Introduction of a multi-year time horizon through robust MTFF and MTEF and tracking of multi-year comitments; • Arms-length review of project proposal • Clarity of role of the different stakeholders during project implementation; • Robust Monitoring and Evaluation Systems with milestones, performance indicators, deliverable quality assurance, and rules for tracking and reviewing project costs. 7
  • 8. 8 - 1 Guidance 2 Appraisal 3 Independent Review 4 Selection 7 Operation 6 5 Implementation 8 Evaluation Adjustment Link to a development strategy Authority to screen and reject projects Key to credible selection An effective budget and procurement process to support implementation and operation Evaluation to improve system Maintain asset register, operate and maintain asset To go ahead with the project or not? Key Features of a Public Investment Management System Source: World Bank
  • 9. Technical analysis • Objective of the technical analysis: to challenge the project feasibility within the indicated timeframe to avoid mobilization of financial resources that will not be used. • The technical analysis may include the following point: – Alignment with national priorities – Reliability of the feasibility study and comprehensiveness of the technical documentation; – Environmental impact (if necessary) – Realism of the of the implementation plan 9
  • 10. Economic Analysis • Social and economic impact of the project – Size the targeted population – Relation with poverty alleviation strategy – Contribution to economic growth • Cost Benefit Analysis / Investment return rate 10
  • 11. Financial / Budgetary Analysis • Credibility of the project disbursement / cash plan • Credibility of the project procurement plan • Project maintenance cost • Project fiscal sustainability • Impact on sector fiscal envelopment • Review of sector prioritization criteria • Review of national prioritization criteria 11
  • 12. The Three Dimensions of the Institutional Arrangement for Investment Governance • Integrating the planning function with the financial function (budgeting + financing) • Integrating the investment management function with the budgeting function • Ensuring independence of the project appraisal function at the end the project management cycle Institutional arrangements vary from country to country 12
  • 13. Integrating the planning function with the financial function Different models exist: • Planning Commission + MoF • Ministry of Finance + Ministry of Planning • Merger between MoF and MoP 13
  • 14. Integrating the investment management function with the budgeting function Three models: • Public Investment selection is part of public investment management as a distinct department from the budget department. • The Public Investment Unit is part of the Budget Department • The Budget Department is organized by sector and each sector has its own investment management officer. 14
  • 15. The Project Appraisal Function General Principle: separation between project design and implementation and project appraisal. • Chile and Korea have centralized project appraisal systems while UK (Major Project Authority) and Ireland (Central Evaluation Unit) are more decentralized systems • Independent review is achieved through semi-autonomous agencies (Korea, PIMAC) or by MOP (Chile) or through special processes (Gateway review – UK) and public hearings (UK and Ireland) • Facility operation is achieved through the Gateway process in the UK and efforts are made to assess outcome effects whereas in Chile and Korea the focus is on completion of projects to plan 15
  • 16. Issues with weak PIPs • Lack of alignment on national strategy and sector strategies • Donors’ preference override national priorities • Lack of clear rationales to justify the investment • Weak and unreliable feasibility studies and project documentation • Unrealistic costing • Unrealistic implementation timeline • Absence or weak procurement plan 16
  • 17. PIP is not the silver bullet that will solve the problem of investment prioritization • The issues associated with dual budgeting (Capital Budget vs. Recurrent) remain. • Too much focus on projects and not enough on sectors and programs. • Investment policy remain fragmented. • Requires strong methodology for cost and benefit analysis in a context in which capacity might be limited. 17
  • 18. The future of PIPs PIP are deeply transformed by the introduction of program budgeting. • The investment budget is fully integrated with the recurrent budget. • Maintenance cost calculated and integrated in the program budget. • Programs become the instrument of prioritization 18
  • 19. Issues in Liberia • Duality of decision and management: Public Investment Unit & President Deliverable Unit • MDAs do not have a clearly defined fiscal envelope for investment. • As a consequence of cash rationing, the project bank approach put projects in competition for scare resources with negative consequences for project preparation. • Final financing decision is centralized and does not take into consideration the coherence of the sector strategy. • 50% of projects are legislative projects obeying a different logic. • The budget does not give the breakdown of investment projects by expenditure categories. • Project are appropriated before they are fully designed. 19