Efficiency of Public Investment in Benin: An Empirical Assessment1
Benin could improve the efficiency of public investment by considering a strategy to strengthen the oversight of public investment projects and revamp the framework for managing public investment. Based on data of current infrastructure, Benin’s public investment efficiency compares unfavorably with benchmark countries, including other sub-Saharan African (SSA) countries. The results of panel estimation suggest that strong institutions can play a crucial role in fostering the efficiency of public investment.
1. Benin is projected to increase public investment volumes significantly to help close the region’s infrastructure gap. Benin’s infrastructure gap is relative large and has been widely identified as a growth bottleneck (Figures 1 and 2). Benin’s infrastructure needs are substantial (Dominguez-Torres and Foster 2011). In particular, Benin is lagging behind SSA average in electricity supply, paved road density and telecommunication infrastructure.
Figure 1.Measures of Infrastructure, 2000-2015
Source: World Development Indicators; and IMF staff estimates.
“Units vary to fit scale. Left hand axis: Public education infrastructure is measured as secondary teachers per 1,000 persons; Electricity production per capita as kWh per 1,000 persons; Roads per capita as km per 1,000 persons; and Public health infrastructure as hospital beds per 1,000 persons. Right hand axis: Access to treated water is measured as percent of population.
Figure 2.Benin Selected Quantitative Indicators of Infrastructure, 2015
Sources: World Development Indicators, and IMF Staff estimates.
* Latest available data for Access to electricity is from 2014.
** EDA’s value for airline capacity is 3.6 (40,456,902 passengers) and 5.7 (1,410.90 million ton-km), but it’s not shown in the graph so that smaller values are visible.
Figure 3.Infrastructure Quality, 2006-2015
2. Benin has historically spent much less on public investments than its neighbors. Public investments as a proportion of the national budget were maintained at an average annual rate of 36.7 percent from 2010 to 2014 despite significant needs. The country performances regarding public investment appear weaker in comparison to similar countries and economies. Although Benin’s public investment effort is above the West African Economy and Monetary Union (WAEMU) countries average, it has drastically decreased since 2010; with the investment to GDP ratio dropping from 9.0 percent in 2009 to 5.1 percent in 2010. Capital expenditure has risen again in recent years (8.1 percent in 2015), but remains below SSA average. Despite the high investment effort mentioned previously, public capital stock has continuously deteriorated recently. Also, the perception of the quality of Benin’s infrastructures remains lower than both SSA and WAEMU countries averages. Access to public infrastructure such as electricity or treated water has scarcely improved and even decreased like in the health sector since the 1990’s.
3. Insufficient or inefficient infrastructure reduces the return to trade and economic activity and constraints growth prospects.2 To close this gap, Benin is envisioning to significantly boost public capital expenditure in the medium term. The Government’s Action Program (PAG), 2016–21 encourages the use of innovative financing such as Public-Private Partnerships (PPPs) to ensure project implementation.
4. In addition to the infrastructure gap, however, Benin’s infrastructure is also perceived as being of relatively low quality, and investment efficiency appears low (Figure 4). The most recent World Economic Forum’s (WEF) Global Competitiveness Indicators ranks Benin behind the SSA average and SSA regional groups. The quality of electricity supply, railroads and roads scored below SSA benchmark countries’ average as well. At a comparable level of real public capital stock, Benin’s overall infrastructure quality is perceived lower than that of regional peers.
Figure 4.Indicators of Infrastructure Quality, 2015
Sources: Global Competitiveness Index, and IMF Staff estimates.
5. This note uses several empirical approaches to assess the public investment efficiency for Benin, and highlights its main determinants. It first assesses the infrastructure gap in Benin based on the efficiency frontier analysis. Then, it distills the determinants of public investment efficiency through panel regressions. A concluding section presents the main findings and the policy implications.
6. Caveats. Due to data limitations, this note does not analyze public and private sector infrastructures separately. Likewise, the note does not derive the efficiency of investment spending by type of infrastructure due to missing breakdown of data.
B. Assessing Public Investment Efficiency in Benin
7. The efficiency frontier assesses the relative efficiency of Benin in translating public investment (inputs) into infrastructure (outputs). Following, IMF (2015), Grigoli and Kapsoli, (2013) and Albino-War and others (2014), we use the popular data envelopment analysis (DEA) methodology— the standard approach in the literature using non-parametric methods—to calculate the efficiency of public investment. The DEA is a deterministic algorithm that calculates the efficient frontier through linear approximations enveloping all decision-making units (DMU) performance observations. Efficiency scores are then calculated relative to a peer group consisting of linear combinations of input-output observations for efficient DMUs3. We calculate efficiency scores using an output oriented model.
8. The assessment of the efficiency of public investment is carried out with a two inputs-one outputs model over the period 2000–15.
- Inputs: The first input is the real public capital stock per capita.4 The second input is per capita GDP, which is used as a proxy for the contributions of the private sector to infrastructure services.
- Outputs: To measure infrastructure output, we follow IMF’s (2015) approach by using three measures of infrastructure quality and access:5
- A physical indicator which combines data on the volume of economic infrastructure (length of road network, electricity production, and access to water) and social infrastructure (number of secondary teachers and hospital beds).6
- A qualitative indicator based on the World Economic Forum’s survey of business leaders’ impressions of the quality of key infrastructure services.7
- A hybrid indicator, which combines the physical and survey-based indicators into a synthetic index of the coverage and quality of infrastructure networks.
9. Estimated efficiency scores clearly show that Benin’s public investment efficiency compares unfavorably with regional comparators and there is substantial scope to improve efficiency. We estimate for each infrastructure output index mentioned above its corresponding efficiency score. Overall, Benin’s performance lags that of all comparator groups, and the magnitude of the inefficiency depends on the efficiency score index (Table 1). Under the three efficiency scores index, the results indicate that Benin could increase investment efficiency by 55 percent in average with the same amount of investment.
|Region||Physical Infrastructure||Quality of Infrastructure||Hybrid Indicator|
10. The low quality of infrastructure is only loosely correlated with public investment levels, pointing to significant inefficiency in Benin compared to regional comparators. As shown in Figure 5, the relationship between real public capital stock per capita and perceptions of infrastructure quality is positive but relatively weak. This suggests that there is considerable scope to enhance the efficiency and impact of public investment in Benin.
Figure 5.Real Public Investment and Quality of Overall Infrastructure, 2015
Sources: World Development Indicators, and IMF Staff estimates.
* Equatorial Guinea and Trinidad and Tobago are not shown in the graph as they are outliers.
11. Investment in Benin appears to have been less effective in generating growth than in other peers. The increase in investment rates over the past couple of decades has not been concomitant with an improvement in the growth performance throughout the region. The correlation between real GDP growth and investment in 2015 has been weaker than in other SSA countries (Figure 6).
Figure 6.GDP per Capita vs. Gross Fixed Capital Formation, 2015
Source: Investment and Capital Stock Database; World Economic Outlook; and IMF staff estimates.
C. Explaining Public Investment Efficiency in Benin
12. Empirical literature highlights that higher public investment efficiency is generally associated with stronger institutions and low dependency on natural resource revenues. Albino-War et al (2014), Grigoli and Mills (2014) and Gleb and Grassman (2010) found that in countries with weak institutional quality, governments may use capital spending as a vehicle for rent-seeking, leading to inefficient public investment. To examine the main factors explaining public investment efficiency in SSA countries, we regress over the period 2000–15 the efficiency scores,8 estimated previously, on a set of explanatory variables such as: (i) quality of institutions: measured by two World Development Indicators (WDI), namely control of corruption and regulatory quality,9 (ii) Official Development Assistance (ODA), (iii) percentage of urban population,10 and (iv) natural resources dependency to capture a country’s dependence on its natural resources.11
13. Cross-country regressions suggest that quality of institutions is the main determinant of public investment efficiency in Benin. Overall, our estimations show a positive correlation between the public investment efficiency and the quality of institutions and a negative association between the dependency on natural resource and public investment efficiency (Table 2). Consistent with previous research, our results show that in countries with weak institutional quality, governments may use capital spending as a vehicle for rent-seeking (Keefer and Knack, 2007; Grigoli and Mills, 2014), which leads to inefficient spending.
|Hybrid Efficiency Score||(1)||(2)|
|Proportion of Urban Population||−0.00002||−0.00045|
|Natural Resource Receipts||−0.12216**||−0.11708**|
14. Using an alternative empirical methodology and different indicators of institutional quality did not affect the results significantly. The empirical analysis considers an alternative estimation method (Table 3) as well as alternative measures of efficiency scores.12 The impact of institutional quality on public investment efficiency is significant under both alternative measures of efficiency scores as well as indicators of institutional quality.
|Dependent Variable: Quality Efficiency Score||(1)||(2)|
|Control of Corruption||0.11783***|
|Official Development Assistance||0.00000||0.00000|
|Proportion of Urban Population||−0.00146**||−0.00159**|
|Natural Resources Dependency||−0.02733||−0.02801|
15. Strong institutions can play a crucial role in fostering efficiency of public investment in Benin. Based on various specifications, a 10 percent increase in the control of corruption index or the regulatory quality index could improve public investment efficiency in Benin by about 15 percent on average and could lead to a reduction in Benin’s efficiency gap. Therefore, Benin should speed up the necessary institutional and anti-corruption reforms, which will require significant legal and institutional changes to get more “growth” for their invested “buck.” Obviously, the necessary institutional changes cannot be introduced overnight; it will require the development of new skills and capacities, and time to deliver the envisaged benefits.
D. Improving Public Investment Management to Reduce Efficiency Gap in Benin
16. The difference in the efficiency of public investment between Benin and other comparator countries is in part a function of the relative strength of their PIM institutions. The impact of public investment on infrastructure quality and economic performance is, of course, mediated by a range of factors. These include, for example, the level of economic development, the quality of governance, geography, and climate. However, a growing body of literature underscores the role of legal, institutional, and procedural arrangements in determining the level, composition, and impact of public investment.
17. Fund staff has developed a new Public Investment Management Assessment (PIMA) framework to identify main areas for strengthening public investment efficiency. The PIMA evaluates 15 key institutions for planning, allocation, and implementation of public investment. These PIM institutions are a subset of the broader framework of “budget institutions” that govern the public financial management process (Figure 7).
Figure 7.PIMA Framework
18. Benin needs to identify key public investment management (PIM) institutions that could reduce the efficiency gap. The IMF’s new PIMA framework could help Benin evaluate the strength of its PIM practices. The PIM institutions that shape decision-making at the three key stages of the public investment cycle:
- Planning sustainable investment across the public sector;
- Allocating investment to the right sectors and projects; and
- Implementing projects on time and on budget.
E. Conclusion and Main Findings
19. There is substantial room to improve public investment efficiency in Benin. The analysis finds that Benin’s public investment efficiency seems weak relative to that of the best performers in SSA, using efficiency frontiers. The regression analysis suggests that stronger institutions could reduce the public investment efficiency gap in Benin. Benin, therefore, needs to evaluate the strength of the PIM practices of its institutions and agencies in charge of public investment. Improving public investment efficiency, in turn, could help boost growth and speed up progress in realizing the development agenda.
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MariaAlbino-WarSvetlanaCerovicFrancescoGrigoliJuan CarlosFloresJavierKapsoliHaonanQuYahiaSaidBahromShukurovMartinSommer and SeokHyunYoon2014Making the Most of Public Investment in MENA and CCA Oil-Exporting Countries. International Monetary FundNovember.
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GelbA. and S.Grassman2010. “How Should Oil Exporters Spend Their Rents?” Working Paper 221 Center for Global DevelopmentWashington, DC.
GrigoliF. and J.Kapsoli2013. “Waste Not: The Efficiency of Health Expenditure in Emerging and Developing Countries.” IMF Working Paper 13/87International Monetary FundWashington, DC.
International Monetary Fund2015 “Making Public Investment More Efficient” Fiscal Affairs Department Policy PaperWashington, DC.
KeeferP. and S.Knack2007. “Boondoggles, Rent-Seeking and Political Checks and Balances: Public Investment under Unaccountable Governments.” Review of Economics and Statistics89 (3): 566–72.
This work draws on current work at the IMF on public investment efficiency—in particular, on Making Public Investment More Efficient. 2015. International Monetary Fund.
Commission for Africa (2005); Foster and Briceño-Garmendia (2009).
The original DEA model assumes constant return to scale which implies that all DMUs in the sample are performing at an optimal scale. This is a strong assumption when dealing with a heterogeneous set of countries; therefore, we use DEA with variable return to scale to guarantee that each DMU (country) is only compared to others with similar characteristics.
Data are provided by the Investment and Capital Stock Template prepared by IMF Fiscal Affairs Department.
While this indicator provides a sense of the coverage of infrastructure networks and physical output of public investments, it does not fully measure the quality of the infrastructure.
While this indicator provides a measure of the quality of infrastructure assets, it is affected by individual perception biases and fails to capture the coverage dimension adequately.
The sample includes 154 countries including 45 SSA countries.
It captures perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development. Estimate gives the country’s score on the aggregate indicator, in units of a standard normal distribution, i.e. ranging from approximately −2.5 to 2.5.
10 Urban population refers to people living in urban areas as defined by national statistical offices. The data are collected and smoothed by United Nations Population Division.
We construct a dummy variable with 1 being a LIC or LMIC rich in non-renewable natural resources.
As an alternative approach, we estimate a Tobit Model.