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Effective Public Investment at Subnational Level in Times of Fiscal Constraints


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Presentation on "Effective public investment at subnational level in times of fiscal constraints" made at the Workshop on Ex-Ante Conditionalities in Cohesion Policies held on 29 November 2016, by Dorothée Allain-Dupré, Senior Project Manager, Public Investment and Multi-level Governance, Regional Development Policy Division, OECD.
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Effective Public Investment at Subnational Level in Times of Fiscal Constraints

  1. 1. Effective public investment at subnational level in times of fiscal constraints Dorothée Allain-Dupré Senior Policy Analyst OECD 29/11/2016 Presentation for the Committee on Regional Development 1
  2. 2. Outline of the Presentation 1. More effective public investment: the governance levers 2. The use of conditionalities as one example of instrument to enhance effectiveness of funding Presentation for the Committee on Regional Development 2
  3. 3. The context Prolonged decline in sub-national public investment in the OECD 3 Source: OECD national accounts Trends in public and private investment in OECD countries since 1995 -15% -10% -5% 0% 5% 10% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 % change private investment (GFCF) % change public investment (GFCF) Presentation for the Committee on Regional Development
  4. 4. • OECD & IMF: the effect of public investment on growth is sizeable • The effect of public investment depends on circumstances. It is the highest in fields that are associated with large externalities, such as research and development or health. (OECD, 2016). • Good governance of public investment is directly to PI impact. Sound institutional and governance frameworks enhance the efficiency of public investment  Critical framework conditions at the national level  Subnational governance often under-estimated – but critically important  Policy complementarities across investment priorities are critical  require governance tools to manage them 4 Effective Public Investment: Some key messages Presentation for the Committee on Regional Development
  5. 5. Subnational governments are key actors for public investment in OECD countries 5 Source: OECD national accounts Share of public investment at subnational level (2014 data) 60% 59% 56% 55% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Subnational government Central government and social security Presentation for the Committee on Regional Development
  6. 6. 6 Public investment at the sub-national level used as an adjustment variable (Base 100 = 2005) EU sub- national The context: prolonged decline in sub-national public investment in the OECD The decline is particularly marked in the EU at the sub-national level 90 95 100 105 110 115 120 2006 2007 2008 2009 2010 2011 2012 2013 2014 Intermediary consumption Staff expenditures Social expenditure Investment Total public expenditures PIB
  7. 7. OECD-CoR survey results Governance challenges appear prominent for SNGs 7 19% 21% 25% 24% 25% 25% 24% 26% 32% 35% 34% 36% 33% 33% 37% 42% 50% 53% 34% 35% 40% 42% 40% 42% 45% 44% 40% 40% 42% 41% 45% 46% 41% 42% 36% 37% No relevant up-to-date data available at local level Lack of adequate own expertise to design projects Lack of long-term/strategic planning capacity Ex-ante analyses/appraisals not consistently used in decision making Insufficient involvement of civil society in the choice of projects Monitoring not used as a tool for planning and decision making Ex-ante analyses not adequately take into account the full life-cycle of… Lack of (ex-post) impact evaluations Multiple contact points (absence of a one-stop shop) Lack of joint investment strategy with neighbouring SNGs Lack of incentive to cooperate across jurisdictions Lack of political will to work across different levels of government Lack of coordination across sectors Co-financing requirements for central government/EU are too high Lack of long-term strategy at central level Local needs are different from those given priority at central level Lenghty procurement procedures Excessive administrative procedures and red tape Major challenge Somewhat of a challenge
  8. 8. Learning from good practices Policies for more effective public investment across levels of government: Subnational governments should:  Improve medium-term planning for infrastructure investment  Multi-year  Linked with budget  Credible enforcement mechanisms  Adopt investment strategies that cross existing jurisdictional boundaries  Mutualise functions [Procurement, capital funding to have access to finance] National governments should:  Adopt national strategies for infrastructure investment which help guide the strategic priorities for the country – beyond policy silos  Develop some platforms of coordination with SNGs/instruments to foster joint investment/co-financing with SNGs  Provide incentives for SNGs to cooperate on infrastructure development  Clarify the allocation of competencies in the field of infrastructure Presentation for the Committee on Regional Development
  9. 9. • Invest using an integrated strategy tailored to different places • Adopt effective co-ordination instruments across levels of government • Co-ordinate across SNGs to invest at the relevant scale Pillar 1 Co-ordinate across governments and policy areas • Assess upfront long term impacts and risks • Encourage stakeholder involvement throughout investment cycle • Mobilise private actors and financing institutions • Reinforce the expertise of public officials & institutions • Focus on results and promote learning Pillar 2 Strengthen capacities and promote policy learning across levels of government • Develop a fiscal framework adapted to the objectives pursued • Require sound, transparent financial management • Promote transparency and strategic use of procurement • Strive for quality and consistency in regulatory systems across levels of government Pillar 3 Ensure sound framework conditions at all levels of government OECD instrument on MLG Systemic approach on multi-level governance of public investment OECD Council Recommendation on Effective Public Investment across Levels of Government:
  10. 10. 1 0 Implementation Toolkit –
  11. 11. 2. The use of conditionalities as one example of instrument to enhance effectiveness of funding Presentation for the Committee on Regional Development 11
  12. 12. • Ex-ante conditionalities: conditions which must be fulfilled before any contractual arrangement is agreed to. • Ex-post conditionalities occur once a contractual relation is established. With ex-post conditionality, funds are frequently dispersed in tranches, which are not released if conditions are not met (or if waivers for unmet conditions are not provided 12 A broad concept: an element of any financial transfer that is not pure gift Presentation for the Committee on Regional Development
  13. 13. Experience from IMF & World Bank: some lessons • Until the early 1980s, IMF conditionality largely focused on macroeconomic policies. • Significant increase in the use of conditionalities in the 1980s/1990s • Traditional IFI conditionalities are frequently criticised as ineffective, particularly with respect to promoting economic growth and social welfare • Assessments of the efficacy of IMF and World Bank conditionality = where too many detailed conditions apply, programmes become unwieldy, conflictive, time-consuming to negotiate and administer, and ineffectual Changes since the late 2000s: • Objective of reduction in the number of conditionalities applied – principle of “appropriation” promoted • More flexibility from the IMF in the way it engages with countries on issues related to structural reform of their economies. • Conditionalities better tailored to individual country needs, more streamlined, less rigid, greater flexibly to changing economic circumstances • Greater focus on governance and institutional criteria, environmental and social issues • Greater focus of the WB on ex-post conditionalities 13Presentation for the Committee on Regional Development
  14. 14. 14 Most OECD countries use some forms of conditionalities for grants to subnational governments 0 2 4 6 8 10 12 14 Private sector involved in design of PI strategy Private sector involved in financing PI strategy Minimum involvment of other municipalities Use of economic evaluation Implementation of reforms/legislations/regulations Additionality Use of environmental assesment Earmarking to specific priorities Timeframe Reporting Matching Examples of conditionalities used for public investment grants to subnational governments (sample: 20 countries)
  15. 15. Some general lessons from international experience:  Conditionalities alone are rarely sufficient to achieve lasting change  Conditionalities must not be overly prescriptive, given the need for bottom-up input  They must also be accompanied by “strong domestic leadership and political support  They should be evidence-based and be observable, allowing in process and ex post verification.  Credibility is key (enforcement mechanisms, capacity to monitor the implementation).  Rewards more likely to work than pure sanctions 15Presentation for the Committee on Regional Development
  16. 16. Thank you! investment-toolkit/ 16Presentation for the Committee on Regional Development