A Renewed Public Investment Policy in Support of Growth and Poverty Reduction1
1. Weaknesses in public investment have long been major impediments to growth in Haiti. Starting in 2004, the authorities took steps to enhance the efficiency and quality of public investment, and strengthen coordination among government agencies involved in project management. However, the post-earthquake surge in the number of projects as well as stakeholders like donors and NGOs has put further pressure on an already strained framework and limited administrative and technical capacity. In the process, this has also exposed and exacerbated overall weaknesses in the current investment framework, including project preparation, execution, reporting, evaluation, and control.
2. Investment inefficiency is costly. Direct costs of the weak public investment framework include lower growth, loss of domestic fiscal revenue and employment, and higher project costs. As an illustration of waste, it is estimated that over the past 5 years and for several reasons, including political uncertainty, an equivalent of G20 billion of earmarked resources for projects was not injected in the economy due to weak capacity and poor investment framework. This is equivalent to a fiscal adjustment of about 7 percent of average GDP of G280 billion. Assuming a fiscal multiplier of 0.6 percent, (Ilzetzki et al. 2011)2 this implies that the economy has lost an estimated 3.5 percentage points of GDP over the past five years. Indirect costs include lower externalities, the presence of which is linked to the use of some inputs like the learning-by-doing effects stemming from the complementarities between physical capital and skilled labor.
3. Strengthening project preparation, execution, and control while ensuring the overall quality and consistency of public investment are critical for a sustainable growth reform agenda. In addition to protracted political instability and lingering security concerns, major technical reasons for Haiti’s low execution capacity and a weak public investment framework include the fragmentation of the public investment program (PIP), lack of sector-anchored investment and growth policies, complex and nontransparent capital expenditure procedures, and weak information and control systems. Against this background, the reform agenda should be framed in a comprehensive approach based on a strong political commitment for change, including enhanced transparency, better procurement practices, and stronger governance. In particular, there is a need to redefine and clarify responsibilities among government institutions involved in public investment project management, rehabilitate the work of the units in charge of project execution within ministries, enhance the control system, and promote a dynamic information system.
4. This chapter is organized as follows. Section B outlines the key changes introduced by the authorities over the past few years in order to improve investment efficiency. It also discusses the outstanding issues, including the fragmentation of the public investment program (PIP), weak preparation, lack of sector-anchored investment and growth policy, cumbersome capital spending procedures, and other shortcomings on execution, reporting and control. Section C puts forth an agenda for reform to enhance public investment efficiency and increase its growth impact. Subsection D concludes.
B. Assessment of the Current Investment Policy Framework and Practices
5. The impact of public investment on growth has been weak in Haiti. A wide array of literature and research has shown that higher public investment, particularly in infrastructure, may positively affect growth through several channels, including higher productivity. However, the acceleration in investment in Haiti has not led to strong growth, mainly because of weaknesses in the public investment framework. Public investment efficiency as measured by the Public Investment Management Index (PIMI) constructed by Dabla-Norris et al. in 2011 ranked Haiti in the lowest quartile of project performance.3
Haiti: Real Gross Public Investment
|Overall Index||Sub Indices|
|Trinidad and Tobag||1.10||0.00||2.40||1.33||0.67|
6. Key reforms were introduced in the past few years to improve the public investment framework. The authorities have adopted several public financial management (PFM) laws and regulations, which set the stage for improving the public investment policy. In this context, they strengthened project preparation and execution, enhanced transparency of budget information, and reinforced budget oversight. In addition, they have endeavored to link budget preparation with priorities set forth in the medium-term poverty reduction strategy. The authorities have also made headway in improving coordination and consultations among ministries and public agencies that design and execute the public investment program. Other reforms include the introduction of a new budget classification system based on the administrative and economic nature of expenditures and the construction of the key elements of a forward-looking public investment framework, including: (i) a national system for planning and development management (SNPGD); (ii) a system for project information system (SYSGEP) aimed at tracking active projects, reporting physical and financial execution and facilitating overall planning of public investment; the creation of Analytical and Programming Units (UEPs) in key ministries tasked with overseeing project planning and execution as well as reporting; (iii) a directorate of investment at the Ministry of Planning and External Cooperation (MPEC) in charge of following up on SNPGD; and the creation of a Unit of Coordination of Projects (UCP) at the Ministry of Economy and Finance (MEF) in charge of improving capacity and executing some projects aimed at improving economic governance.
7. The authorities launched in November 2012, a new mechanism to strengthen the coordination and harmonization of aid. The new mechanism calls for an alignment of international funds to national development goals and government investment programs, and relies on the national budget as the main vehicle for channeling all aid. The new framework includes an aid effectiveness committee (AEC) chaired by the Prime Minister and comprising representatives of international institutions. The AEC will coordinate resource allocation in line with government priorities. Main priority themes as of now include employment, education, environment, rule of law, energy and disaster prevention.
8. Significant weaknesses remain. While the reforms have addressed important issues, further review of the public investment framework reveals continued fragmentation of the PIP, lack of preparation capacity, absence of sector-anchored investment and growth poles, cumbersome capital expenditure procedures, a weak and partial information and reporting system, low execution capacity, and weak enforcement of control procedures.
9. Fragmentation of the PIP. The fragmentation of the PIP raises concerns about the intra and inter sectoral consistency of the investment program as well as over the projects’ cost and impact on economic integration and growth. Public investment in Haiti is undertaken by 3 entities: (i) the central government which channels domestic resources through the Treasury to fund local projects included in the PIP; (ii) the donor community, including the numerous NGOs that conduct significant investment operations; and (iii) the “Bureau de Monetisation” which finances projects from PetroCaribe resources. However, the PIP only covers ongoing or pipelined projects funded by the government budget and part of PetroCaribe resources. Donor-funded projects are not included into the national budget and the authorities have little information on their execution. The fragmentation of the PIP complicates project planning and coordination.
Current Investment Flows, 2012 A Fragmented Investment Program
10. Weak preparation capacity. Project design and preparation remain incomplete and weak. In many cases, project preparation is reduced to a mere summary note; there is no thorough economic, financial, or social assessment and no basic indicators on which project selection is made. Furthermore, many projects included in the national budget lack a contract for execution as well as an implementation schedule. Consequently, these incompletely prepared projects slow down the pace of execution considerably, complicate project management, and unduly tax Haiti’s limited absorptive capacity.
11. Lack of sector-anchored investment and growth poles. The investment portfolio lacks sector-anchored growth poles. The global portfolio under government control comprises 752 projects. Most projects are medium-sized, of which 2/3 is intended to expand administrative capacity. There are few large infrastructure projects, which could have provided a structuring base for a much-needed growth strategy anchored around key sectoral/regional development poles. During FY2012, 362 new projects were added to the PIP. This significant rise in the number of projects, particularly in a context of low capacity for thorough technical project preparation, heightens concerns about the quality and cohesiveness of the investment program.
12. Complex and non-transparent capital expenditure procedures. Procedures for execution of project spending are regulated by the October 3 1984 decree that created the Public Investment Fund. Disbursement plans for public investment projects are produced in the context of a top-down process, instead of an interactive bottom-up system; the channeling of resources is unusually layered (Box 1); and controls on funds allocated to project managers are lacking.
13. Lack of transparency and control of earmarked funds for project implementation. Disbursements made from project accounts to pay for project spending are not subject of controls by the Minister of Planning (MPEC) nor the Minister of Economy and Finance (MEF). In addition to budgetary credit disbursements from the MEF, project managers may have access to other revenues, which they may use to support outlays linked to the project or for other purposes.
14. Weak and partial information and reporting system. The information system is weak and the tracking mechanism for investment execution (SYSGEP) is in its infancy stage. As a result, data for assessing progress in the implementation of the investment program is incomplete. Data for Treasury-financed projects is available on the financial side and is reported in the TOFE. However, the reporting from project managers is irregular and does not include a full accounting of the physical and financial progress in project execution. Information on PetroCaribe projects is not comprehensive and is not provided in a timely fashion. Donor-funded investment data are partial and reported with significant lags. The current tracking mechanism for investment implementation SYSGEP lacks the resources and staff required to be fully operational.
15. Lower execution rate and uneven implementation across sectors. The effective execution rate is low. It is estimated that project execution falls within a 35-45 percent range. This underperformance is attributable to a range of factors, including poor design of projects, low execution capacity, lack of coordination between government agencies, weak reporting, political uncertainty, volatile security, and loose enforcement of internal control mechanisms. At the same time, and as long as these issues are not addressed, they exacerbate the weaknesses of the investment framework and continue to lessen the efficiency of the projects and their impact on growth.
Box 2.Haiti: Lack of Controls on the Execution of Capital Spending
A top down process guides the preparation of disbursement plans of project funds. The MPEC updates project notes (FIOPs) at the beginning of each fiscal year based on budgetary allocations agreed by the government without the direct involvement of project managers and without a comprehensive report on execution from managers in the field. Project managers are informed at a later stage about the amount of resources allocated to their projects. The MPEC forwards the projected disbursement schedule to the MEF. The MEF takes over and plays a central role in the supply of funds to project accounts.
The channel for public resources allocated to projects is flawed. The MEF Directorate General of Budget (DGB) of the MEF reviews the projected disbursement plan and establishes a payment order to the Minister of Finance, which is then sent to BRH for transfer of funds (equivalent to the first two months of the annual capital budget envelope) from the central Treasury account to a transit account called “Compte Tresor Special Developpement (CTSD)”. Once the latter is replenished, the Treasury Directorate issues payment orders to individual project accounts. BRH then transfers the fund to each of these project accounts. Treasury notifies the project managers and the line ministry that oversees the project account. No copy is issued to the MPEC, except for quarterly notification of subsequent transfers of resources to project accounts. The whole procedure does not involve a public accountant. The usefulness of the CTSD remains to be proven; furthermore, it merely lengthens the transfer process of project funds. The operating revenue of the CTSD (airport tax) is not linked to outlays financed by it. Also, the MPEC is not supplied – or is only with delay—with information on project disbursements.
Spending controls are missing. Spending by the project manager is subject to neither a fiduciary control nor the review of a public accountant. At the beginning of each quarter, project managers are expected to submit to the MPEC a progress report indicating financial and physical execution of the project, together with supporting documents detailing the use of the resources advanced; and a projected disbursement schedule for the subsequent quarters. Those reports rarely provide the required information on the use of funds or on the end period balance of the project account. This does not prevent the MPEC from preparing another quarterly disbursement plan to the MEF and resupply the project accounts managers with additional fund.
Haiti: Disbursement Process for Treasury-Funded Projects, 2012
C. An Agenda for Reform
16. More efficiency in capital spending is crucial. The major reconstruction process under way is likely to be protracted and span the next decade due to the immense needs and time needed to build appropriate capacity. At this time, the investment program financed by domestic resources comprises several hundred projects. To ensure the most efficient use of these resources, there is need for a comprehensive reform plan to improve the design and preparatory phases of projects, but also execution, reporting, and controls. These reforms are key to enhance investment spending efficiency and ensure the highest impact on economic growth and employment creation. This section outlines a road map for reform and discusses the related timeline.
17. The investment framework needs to be strengthened. It will be anchored on (i) a clearly defined set of responsibilities between government institutions in charge of project management; (ii) articulated sequencing regarding project management; (iii) an enhanced role for the UEPs; (iv) a dynamic information system; and (v) an active control process. Most importantly, these reforms should be accompanied by a medium-term strategic budgeting.
A clearly defined set of responsibilities across government institutions
- The sector ministries will remain responsible for the production of coordinated sector projects and programs. They will update their sector strategies and put together clear guidelines on sector projects (Figure 1).
- The MPEC should (i) ensure consistency of sector plans, projects and programs: (ii) consolidate the latter into a comprehensive national strategy; (iii) issue cross-sector guidelines for project management; (iv) manage the information system based on SYSGEP; (v) produce regularly reports on project execution from UEPs; and (vi) assess public-private partnerships ventures in order to determine their costs and benefits.
- The MEF should take a more active role in preparing project disbursement projections with inputs from UEPs, consolidating financial reports on project execution, and working closely with control institutions to ensure the best use of the public resources allocated to investment. The MEF should also coordinate with MEPC in the issuance of project management guidelines.
- The UEPs should play a central role in a newly designed institutional framework. The UEPs are not new as they were created by the May 17, 2005 decree aimed at reactivating a fledging national investment management system. Political uncertainty and low capacity have delayed the implementation of this crucial component. There is a strong need to establish UEPs in all line ministries. These units are to be in charge of (i) sectoral analysis and data compilation; (ii) program and project design; (iii) sectoral, regional and local coordination; (iv) monitoring execution of programs and projects; and (v) control. The UEPs will also be in charge of preparing disbursement projections, review progress report from project managers and prepare payment orders for work execution. Payment of this work will be done by the Ministry of Economy Finance. This will eliminate the need to transfer resource to project managers and most importantly ensure that payment orders functions are clearly separated from payment functions. The UEPs prepare a quarterly progress report to be sent to both MPCE and MEF. They will also have the ability to conduct control of project execution through in site visits or on the basis of documentation sent by the project managers. Experts funded by donors would be assigned to support the UEPs if necessary
Figure 1.Redefined Role for Institutions in Charge of Public Investment Management
1/ The new framework is anchored on sectoral strategies; the Ministry of Plan is in charge of the national system for planning and development of management
2/ Economic, technical, commercial. The objective is to establish key performance indicators. For large projects, there is a need to assess also externalities.
An articulated sequencing of project work
- Project preparation work should focus on producing all the preliminary studies (technical, economic, commercial, and/or social) and indicators that would guide the decision to select a project. The selection process should be completed by the negotiation of a contract (confirmed by the procurement agency, CNMP), a financing plan and a comprehensive work schedule to facilitate reporting and control (Figure 2).
- Project should be incorporated in the national project database and the official investment program. Upon completion of the preparatory phase and recording in the national project database which is run by the MPEC, the new project should then be incorporated in the medium-term budgetary framework (MTBF) for execution and the sectoral budget.. At this stage, the project is fully under the responsibility of the UEP of the sectoral ministry. The UEP will monitor execution, work on disbursement plans, and issue payment orders. It also conducts controls of the project through in site visits as well as on the basis of documents.
- The current institutional framework procurement is weak. The national commission requires additional resources and equipment to operate properly. However, in view of the significant amount of projects, the current institutional arrangement will continue to produce bottlenecks. Therefore, we suggest that regional commissions be reactivated and fully equipped with appropriate staff and equipments and their authorities fully restored, at least for sectors running major investment programs. Second, project thresholds are needed. Regional commissions should review only projects below a certain threshold while the national commission should take up projects exceeding that threshold.
Figure 2.Proposed Project Sequencing and Institutional Framework
A dynamic information system
- The SYSGEP fed with information on execution of all public investment projects is the cornerstone of the investment framework. A reliable integrated information system is critical to ensure execution in a timely manner and the use of resources in a transparent fashion (Box 2). The system is predicated on a steady supply of information from project managers, and from donors and PetroCaribe managers.
Box 3.SYSGEP: A Critical Tool for Project Management
The Système de Gestion de l’ Information sur les Programmes et Projets (SYSGEP) is a critical tool put together by the authorities to monitor project execution and facilitate assessment of public investment policy.
The SYSGEP module is in place as it loads data and information related to all the phases of domestically-financed active projects, including project identification in the context of the National Project Nomenclature, progress in execution on both the physical and financial aspects, disbursement projections, and other aspects of a project under execution. For a full performance of this computerized tool that is a central element of a comprehensive information system in support of economic development, there is a need to:
- Upgrade the National Project System, the legal framework for Public Investment, the General Guide for Investment Projects, and the technical module to manage projects.
- Install SYSGEP in all line ministries to ensure comprehensive flows of information on project implementation; because of capacity constraints, the extension of this system will cover in a first phase large ministries, including education, health, agriculture, and public works. By 2016, SYSGEP is expected to cover all ministries.
- Link SYSGEP to other modules and economic and financial databases to enhance its efficiency and produce real time data on execution, including the module of external aid, the module of current spending (for recurrent spending that projects give rise to), the central bank information system.
In addition to improving the efficiency and transparency of the public investment policy, SYSGEP is expected to facilitate project design and preparation in line with national priorities defined in the country strategy and associated sectoral development plans, while strengthening coordination with the donor community.
An active control process
- The control phase is crucial in the revised framework for public investment policy. Internal controls should be conducted on a quarterly basis and reports sent to the MEF and MPEC. SYSGEP should also receive copies of the control reports. A posteriori controls are also expected to be conducted by the Inspection Generale des Finances, the Unité de Lutte Contre la Corruption if necessary, and the Cour Superieure des Comptes et du Contentieux Administratifs.
Medium-Term strategic budgeting
- Improved project management will require a break with the current annual budgeting process. A one-year authorization for capital spending is not appropriate since most projects are implemented within time horizons exceeding one year and lasting up to 3 years. Therefore, it is important to establish medium-term strategic budgeting (MTB). This will ensure smooth execution of projects as well as incorporating in due time the recurrent costs that arise from projects that enter the operational phase. With medium-term spending comes medium-term revenue planning. In any event, the authorities will have to introduce new tools, including variable length budget authorizations and appropriations, long-term contracts, thorough reviews of execution plans, and regular reports on quarterly and six-month execution.
Timing of the reform agenda
18. This reform is ambitious and will require time to be implemented. That said, the institutional know-how is available and building blocks are in place, including the UEPs and SYSGEP. The reform process will not start from scratch as development partners have already built solid knowledge bases. However, any further progress will require a strong political will, as the proposed changes will affect deeply-entrenched interests.
19. The reform could be conducted in a progressive fashion in two main phases.
- First phase (2013): consolidation of the foundations of the public investment framework. In this phase, the authorities would (i) define the mandate of the UEPs to include all phases of project management and strengthen them with adequate resources with support from the World Bank; (ii) enhance the SYSGEP with support from IDB; (iii) increase procurement capacity with the help of the World Bank; (iv) clarify the roles of the government agencies involved in project management; and (v) reform capital expenditure procedures, in line with the introduction of the Treasury Single Account with the assistance of the IMF. This would include the elimination of the transit account (CTSD) for disbursement of capital outlay funds.
- Second phase (2014): assign international experts to UEPs, introduce a new disbursement plan and execution under the control of the MEF, and lay the ground for extending reporting on project execution for all stakeholders operating in Haiti.
20. Public investment is critical to the development of Haiti. However, investment efficiency has been low. Reforms are needed. Causes of this situation are numerous and include poor project management and a fragmented investment portfolio. Low investment efficiency is also attributable to lack of transparency, poor coordination among branches and levels, and low capacity. Inefficient public investment and lack of transparency have not only resulted in lower growth, lower fiscal revenue, and higher costs but are also the cause of macro imbalances and limited competitiveness and slow economic integration. Haiti is at a cross roads. Large aid inflows are not expected to continue on the scale observed so far. It is imperative for the country to take advantage of the available financial assistance and step up efforts to improve public investment quality. This assistance should be used to: (i) design and prepare and coordinate public investment on the basis of well-developed sectoral strategies and plans and assessment tools to ensure high quality and stability; (ii) streamline the institutional framework to ensure better coordination between government institutions in charge of projects and adequate monitoring of execution and control; and (iii) improve bidding processes. Implementation of such an agenda is expected to take place gradually over the next two years. Once the system is fully operational by 2015, the authorities should be ready to make adjustments if necessary to ensure investment efficiency at all times and have a greater impact on economic growth.
|Brazil||Exemptions for very underdeveloped areas|
|Chile||Exemptions for income derived from activities of certain regions|
|Colombia||15% for industrial or service users in a free-trade zone [0% for years 1-2; 25% for years 3-5; 33% from year 6]|
|Costa Rica||10% for income below 87,609 USD; and 20% for below 176,224 USD. Free Trade Zone Regime companies located in the Great Extended Metropolitan Area (GEMA) benefit from full exemption for first 8 years, and 50% exemption for next 4 years. Outside GEMA, full exemption is for 12 years and 50% exemption for 6 years.|
|Dominican Republic||After 24 months, tax rate from 29% to 25%. Zone of Free Trade are fully exempt up to 15 to 20 years|
|El Salvador||If company turnover is smaller than USD 150,000 the tax rate is 25%|
|Guatemala||Drawback Regime or Free-Trade Zone Regime benefit from full exemption for 5 to 10 years.1|
|Honduras||Exempt Free Trade Zones, Industrial Processing Zones, Temporary Import Regimes, Agroindustrial Export Zones, Free Tourist Zones|
|Jamaica||Exempt from 5 to 15 years companies under the Export Industry Encouragement Act or Hotel Incentives Act and company engaged in approved agricultural activities. For Export Free Zones exemptions are forever|
|Nicaragua||Exemptions for Free Trade Zones|
This will apply until 2015.
This will apply until 2015.
|Argentina||Dividends from local corporations are not taxed|
|Brazil||15% to 22.5%|
|Chile||Dividends are aggregated to personal income|
|Colombia||Paid as personal income|
|Costa Rica||15%, but if listed on the Costa Rican stock exchange 5%|
|Dominican Republic||29% witholding tax|
|Ecuador||Exempt if dividends distributed after CIT/ if not, tax on progressive basis|
|El Salvador||Exempt if dividends distributed after CIT/ if not, 10% witholding tax|
|Guatemala||Exempt if dividends distributed after CIT|
|Mexico||Exempt from tax if the dividends are distributed after CIT/ if not, 30%|
|Jamaica||5 or 25%|
|Panama||10% (5% in free zones or 20% on bearer shares)|
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Gupta, S., Kangur, A., Papageorgiu, C., and Wane, A.,2011, “Efficiency-Adjusted Public Capital and Growth,” IMF Working Paper 11/217, (Washington: International Monetary Fund).
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Ministère de la Planification et de la Cooperation Externe, 2011, “Elements d’ Harmonisation des Sous-Systemes d’ Information de Gestion et de Developpement,” Port-au-Prince, Government of Haiti.
Ministère de la Planification et de la Cooperation Externe, 2012, “Plan d’Actions pour l’Opérationnalisation et le Deploiement du SYSGEP dans le Ministères Sectoriels,” Port-au-Prince, Government of Haiti.
Ministère de la Planification et de la Cooperation Externe, 2012, “Structure Organisationnelle et Plan d’Opération pour la Mise en Œuvre des Unîtes d’Études et de Programmant (UEP) des Ministères,” Port-au-Prince, Government of Haiti.
Straub, S.,2008, “Infrastructure and Growth in Developing Countries: Recent Advanced and Research Challenges;” Policy Research Working Paper No. 4460, (Washington: World Bank).
Prepared by Abdelrahmi Bessaha. The results of the paper were extensively discussed with the authorities and other donors.
Ilzetzki, E., Mmendoza, E., and Veigh C., 2011, “How Big (Small?) Are Fiscal Multipliers,” IMF Working Paper 11/52, Washington, International Monetary Fund.
The PIMI is built around four key pillars, including strategic guidance and project appraisal, project selection and budgeting, project implementation, and project evaluation and audit.