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Chad: Selected Issues

Author(s):
International Monetary Fund. African Dept.
Published Date:
August 2016
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Public Investment Efficiency in Chad1

This chapter focuses on the efficiency of public investment, which can be defined as the relation between the value of public capital (input) and measures of infrastructure coverage and quality (output). This is a relevant issue for Chad, since public investment took off in the early 2000s thanks to the start of oil exports and the associated substantial increase in fiscal oil revenues and increased access to borrowing in foreign markets. Some indicators show beneficial impacts in terms of infrastructure in Chad, even if the infrastructure gap remains significant compared to other African low-income developing countries (LIDCs). In light of the lower oil revenues after the recent oil price shock, and the current high risk of debt distress, strengthening public investment management is even more critical in fostering the efficiency of public investment in Chad.

A. Introduction

1. Public investment is critical to support the delivery of key public services and catalyze economic growth and poverty reduction. For instance, public investment in social infrastructure is essential to improve the access to education and health services throughout the country, while investments in economic infrastructure (e.g., roads and electricity) should help expand integrate and expand economic sectors and favor the generation of private sector employment.

2. However, beyond its level, the efficiency of public investment is crucial. From a theoretical perspective, the arguments in favor of scaling up public investment in a country like Chad include the existence of relatively elevated rates of return due to lack of productive capital, a higher potential growth due to the removal of bottlenecks to development, and the complementarities between public and private capital. However, the economic and social impacts of public investment critically depend on its relative efficiency, which can be inferred through comparisons across countries of the value of public capital (input) and measures of infrastructure coverage and quality (output).

3. Improvements in public investment management (PIM) are key to enhance the efficiency and productivity of public investment. In Chad, the major source of improvement should stem from the strengthening of the institutions related to the funding, management, and monitoring of project implementation.

B. Trends in Chad’s Public Investment and Impact on Infrastructure Gap

4. For decades, investment in Chad remained at very low levels (Fig. 1). Between 1960 and 2000, public investment flows never exceeded 1.5 percent of GDP, averaging only 1.2 percent per year. At the same time, private investment flows were also weak, at 2.8 percent of GDP per year on average. A long period of instability and conflicts between 1965 and the early 1990s prevented the take-off of investments, resulting in an capital stock over 60 percent of GDP in 2000 (only 22 percent of GDP for public investment), by far the lowest level among Sub-Saharan African (SSA) countries.

Figure 1.Long-Term Trends in Chad’s Investment

Source: IMF’s Investment and Capital Stock Dataset

5. Investment in Chad took off in the early 2000s, in the wake of the development of the oil sector. The construction of a pipeline to export oil through Cameroon and the work needed to start production in the first oil fields triggered private investment flows, reaching 10.9 percent of GDP in 2001, 19.5 percent in 2002, and 14.2 percent in 2003. After the start of oil production by mid-2003, private investment flows, largely linked to the oil sector, remained at 8 percent of GDP per year on average, i.e., three times more than the annual average level before Chad’s oil era. The oil sector generated over US$10 billion in public revenues for Chad between 2000 and 2013. Consequently, public investment flows increased significantly and reached, on average, 9 percent of non-oil GDP between 2000 and 2013.

6. Despite significantly higher flows since 2001, the investment stock remains low in comparison with other African LIDCs (Fig. 2). Chad is part of a handful of countries in Africa that have seen a significant increase in their public investment stocks between 2005 and 2013. As a result, the country closed some of the gap in terms of investment levels, with a stock reaching 100 percent of GDP (of which 30 percent of GDP in public investment) in 2013. Despite this substantial increase in less than one decade, Chad remains the African country with the lowest capital stock measured in percent of GDP. That said, this increase would appear more significant if the ratio was calculated as a percentage of non-oil GDP.

Figure 2.Chad: Investment Stock in SSA LIDCs, in 2000 and 2013

Source: IMF’s Investment and Capital Stock Dataset

7. The infrastructure gap has decreased in recent years, but Chad still suffers many deficiencies in this area (Fig. 3 and 4). On the eve of the oil era, Chad’s infrastructure was exceptionally poor, even by the standards of other African LIDCs. Less than 10 percent of 6,200 kilometers of roads were paved in 2000, and access to power, electricity, telecommunications, water, and health services were highly underdeveloped. Significant progress has been made since then, as reflected by several existing indicators:

  • The World Economic Forum’s Global Competitiveness Index (GCI) shows that the perception of the quality of overall infrastructure in Chad increased, on a scale of 1 to 7 (best) from 1.55 in 2007 to 2.43 in 2016. However, progress has been widespread amongst LIDCs, and the perception of the quality of infrastructure in Chad remains significantly lower than in Sub-Saharan African countries on average. The most significant improvement in Chad is on the quality of roads, with the sub-index having more than doubled between 2007 and 2016. By contrast, progress on the quality of electricity supply has been slow. Finally, on the access to telecommunications, while progress has been significant (for instance, mobile phones subscriptions per 100 habitants reached almost 40 in 2016, compared to only 1.4 in 2007), this level remains more than two times lower than the average for Sub-Saharan African countries.

  • In the same vein, the infrastructure pillar of the Logistics Performance Index developed by the World Bank shows Chad’s overall ranking moving up from 141st in 2007 to 112th in 2014. This index is more favorable to Chad than the GCI, since it shows that Chad is now slightly above the average of Sub-Saharan African countries in terms of infrastructure, which can be explained by the focus on trade logistics’ infrastructure (like roads).

Figure 3.Chad: Public Investment and Quality of Infrastructure

Sources: World Economic Forum’s Global Competitiveness Index; IMD staff calculations.

Figure 4.Chad: Perception of the Quality of Infrastructure

Source: World Economic Forum’s Global Competitiveness Index

Source: World Bank’s Logistics Performance Index (LPI)

C. Reinforcing the Efficiency of Public Investment Management

8. The economic and social impact of investment critically depends on its efficiency. The IMF report on “Making Public Investment More Efficient” developed a new Public Investment Management Assessment (PIMA) methodology that explores different approaches to measuring public investment efficiency. The study found that for LIDCs like Chad, around 40 percent of the potential benefits of public investment are on average lost due to inefficiencies in the public investment process.

9. The efficiency of public investment depends crucially on how it is managed. Countries with stronger public investment management institutions have more predictable, credible, efficient, and productive investments. According to the same IMF report, strengthening these institutional arrangements could close up to two-thirds of the efficiency gap highlighted above.

10. More transparent and well-governed institutions at key stages of the investment cycle are crucial to reinforce the investment efficiency:

  • Planning: efficient investment planning requires institutions that ensure public investment is fiscally sustainable and effectively coordinated across sectors, levels of government, and between the public and private sectors.

  • Allocation: allocation of capital spending to the most productive sectors and projects requires a comprehensive, unified, and medium-term perspective to capital budgeting, as well as objective criteria and competitive procedures for appraising and selecting particular investment projects.

  • Implementation: The timely and cost-effective implementation of public investment projects requires institutions that ensure projects are fully funded, transparently monitored, and effectively managed.

11. While the PIMA methodology has not yet been fully applied to Chad, general results for LIDCs suggest weaknesses in terms of public investment efficiency in Chad. For instance, the 2011 Public Investment Management Index (PIMI)2 showed that Chad is among the worst performers among 71 countries (40 low-income and 31 middle-income countries), in particular regarding the strategic guidance and project appraisal, the project selection and budgeting, and the evaluation and audit of projects (Figure 5).

Figure 5.Chad: Public Investment Management Index (PIMI)

Source: IMF Working Paper WP/11/37

12. Like other LIDCs, Chad would benefit from strengthening institutions related to investment implementation. The transparency of budget execution, openness of the procurement process, and efficiency of cash management are critical to the stability and predictability of investment and to reducing opportunities for rent seeking. In addition, the ministry of Finance should focus on protecting investment expenditures by appropriating total project costs at the commencement of the project, preventing budgets from being “raided” to meet current pressures, and allowing some carryover of unspent appropriations to futures years. Finally, greater transparency and accountability regarding project management, monitoring, and evaluation is needed to strengthen incentives to deliver projects on time and on budget, and ensure value for money and integrity in the use of public resources.

Some specific issues and recommendations for Chad3

13. While medium-term investment priorities were identified and outlined in successive National Development Plans (NDPs), their consistency with budget allocations remains insufficient. The NDPs constitute the sole and unique reference framework for all development interventions in Chad, and their priorities in terms of investment expenditure are included in Public Investment Plans (PIPs) across the sectoral ministries. To date, however, the priorities defined in those three-year PIPs are not necessarily followed in the selection of investments by sectoral ministries, resulting in discrepancies between programming and implementation.

14. The discussion and presentation of investment budgets should be improved. The ministries have to submit project proposals for preliminary budget discussions to determine their spending envelope in the budget. However, currently this process results in the allocation of global credit lines by ministry in the budget law, without a detailed list of investment projects being funded and their specific allocations. This means that when the budget is implemented, it may include expenditure commitments linked to projects that were not originally contemplated in the budget formulation process, leading to risks of spending “over-commitments”.

15. While project implementation would be relatively satisfactory, the main drawbacks seem to be in planning and allocation, and in evaluation and audit phases. In most of the cases, investment projects are approved with limited preliminary studies to guarantee their technical quality. Costly investment decisions can therefore be made without a clear view on their consistency with macroeconomic and sectoral objectives set forth in the NDPs. Ex-post evaluations and audits of investment projects are also quite basic and superficial.

16. In addition, spending on transfers and goods and services, which are crucial to making investments function, has not kept up with overall investment spending. Based on a World Bank’s public expenditure review for the 2004-2009 period,4 expenditure on transfers and on goods and services rose by about 156 percent, while domestically financed investment spending rose by 270 percent over the same period. This mismatch leads to concerns on the ability of the government to meet the recurrent spending needs of the newly-created structures (especially schools and health facilities). In fact, field visits by WB team in October 2009 revealed that many of the newly constructed health and education structures stood empty, without an adequate budget to assure their operationalization. Those concerns come to the fore again in the context of the recent fiscal adjustment, as expenditure on goods and services were drastically reduced by 37 percent between 2014 and 2015.

17. Chad should advance towards the establishment of multiyear budgeting for investments. While the implementation of the Organic Law on Finance Laws (LOLF with the French acronym) will be gradual and the transition on program budgeting not planned before 2022, the authorities should improve the preparation and the presentation of the budget, in particular strengthen the current macroeconomic framework by establishing a medium-term macroeconomic framework, and by publishing a multi-year public investment program.

18. The expenditure chain for investments needs to be simplified. In accordance with the directives of CEMAC, Chad adopted the decree on general regulations on public accounting, which describes four phases of the expenditure chain (commitment, validation, authorization, payment). However, the precise steps of this expenditure chain are not specified and are subject to interpretation by administrative officials. Furthermore, the expenditure process is heavy and complex. For some procurement by the ministry of infrastructure, no less than 15 steps between different services were identified by an IMF technical assistance mission. A handbook for all the expenditure chain’s parties should formalize all the procedures, while reducing redundant controls and keeping only those with a real added value.

19. Spending commitments must be better controlled to avoid the accumulation of potential claims against the State. Issues in the investment budget’s allocation (including the lack of details for ministries’ spending envelopes) as well as in expenditure control can lead to the accumulation of potential claims against the State. In fact, there could be spending commitments, as attested by both the private sector and officials5 that do not enter into or are not approved within the official expenditure chain. The recognition of some of those claims could compete with investment projects included in the budget and/or lead to the accumulation of domestic arrears.

20. The Chadian government needs to assess whether it is necessary to play a role in all major infrastructure projects or only in strategic ones. There should be some space for private investment, but its participation will depend on the regulatory framework and more generally on the business environment. Chad faces significant challenges, having one of the most challenging business environments in SSA. Private sector participation can help to achieve higher project execution rates, improve innovation capacity, and transfer technical and managerial know-how.

21. The Chadian authorities should also improve public spending efficiency through greater regional coordination of infrastructure projects. A more concerted regional strategy, in particular among CEMAC countries, is needed for better prioritization, effective coordination, and stronger synergy of national investment programs. Such coordination would reduce infrastructure costs and overall financing needs, prevent duplication of large infrastructure projects, and support further economic integration.

References

    EraDabla-NorrisJimBrumbyAnnetteKyobeZacMills and ChrisPapageorgiou (Feb. 2011). “Investing in Public Investment: An Index of Public Investment Efficiency”IMF Working Paper WP/11/37.

    MariaAlbino-WarSvetlanaCerovicFrancescoGrigoliJuan CarlosFloresJavierKapsoliHaonanQuYahiaSaidBahromShukurovMartinSommer and SeokHyunYoon (Nov. 2014). “Making the Most of Public Investment in MENA and CCA Oil-Exporting CountriesIMF staff discussion note No. 14/10.

    IMF staff team from the Fiscal Affairs Department (June 2015). Making Public Investment More Efficient, SR No. 15/64.

Prepared by Gabriel Léost and Marwa Ibrahim (AFR). This chapter builds on the report on “Making Public Investment More Efficient” prepared by a staff team from the Fiscal Affairs Department and presented to the Executive Board on June 5, 2015. It also benefitted from inputs from JL Helis and JP Nguenang (both FAD).

Investing in public Investment: An index of Public Investment Efficiency, IMF WP/11/37 by Dabla-Norris, Brumby, Kyobe, Mills and Papageorgiou (February 2011).

Some of the recommendations presented in this section are based on the technical assistance report from Jean-Luc Helis and others (Dec. 2015) on Improving public finances’ management to prepare the program budgeting.

World Bank Report No 57654-TD Republic of Chad Public Expenditure Review Update (December 2011)

Those commitments are generally mentioned under the term of “dette intérieure", which should not be confused with the officially recognized domestic debt.

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