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Policy: Improving the quality of public spending

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 2005
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In many countries—especially in Latin America—budget constraints have limited public investment and led to infrastructure bottlenecks in some places. To boost investment without causing destabilizing fiscal imbalances, many governments are turning to public-private partnerships (PPPs), but these are not without risks. At a recent seminar (see box), sponsored by the IMF and the government of Brazil, representatives from Latin American and industrial countries, international financial institutions, and academics discussed how to improve public investment quality.

The declines in public infrastructure investment reflect a variety of factors, Gerd Schwartz (IMF’s Fiscal Affairs Department (FAD)) explained. They include a decrease in public saving, a high degree of revenue earmarking, a growing preference for a smaller public sector, and a need for continued fiscal consolidation. He pointed to four ways of strengthening public investment: reforming the public sector, including the civil service and social security system, to help reduce current expenditure; improving tax administration to mobilize revenues; reducing revenue earmarking and reallocating public expenditure to investment; and strengthening expenditure management systems to make investments more efficient.

Most countries—particularly those with high debt—had little room to increase public investment by relaxing fiscal policy, Schwartz said, adding that such room cannot be created merely by altering fiscal accounting rules.

Common problems in managing public investment include paralyzed or uncompleted projects, cost overruns, white elephants, and a preference for new projects rather than rehabilitating and maintaining existing infrastructure. To avoid some of these pitfalls, Israel Fainboim (FAD) suggested that public investment projects be selected following a rigorous investment appraisal, which has been facilitated by computerization and new methodologies for assessing and quantifying benefits. Eivind Tandberg (FAD) recommended that public investment (and PPPs) be analyzed in the context of a rolling multiyear expenditure framework that takes into account the implications of projects for future recurrent operating expenditures. Strong coordination between finance and planning ministries is needed, he said, especially in countries where the finance ministry prepares the current expenditure budget and the planning ministry is in charge of the capital expenditure budget—which is common in Latin America.

The seminar was held on April 25–27 at the National Institute for Public Administration in Brasilia. It was cohosted by the IMF’s Fiscal Affairs Department; the IMF Institute; the Brazilian Ministry of Planning, Budget, and Management; and the Brazilian Ministry of Finance.

In 2004, FAD proposed a new framework for analyzing public investment. The framework has since been tested in eight pilot country studies, including Brazil, Chile, Colombia, Ethiopia, Ghana, India, Jordan, and Peru.

Osvaldo Feinstein (World Bank) and Brian Olden (FAD) proposed criteria for cash allocations that favor projects that are executed most efficiently. In Chile, Mario Marcel (Ministry of Finance, Chile) explained, both the planning and finance ministers review and approve investment appraisals, which have been contracted to independent assessors through a competitive process. Chile has also created a “Competitive Fund” that allows all public entities to compete for new investment funding.

With the exception of Chile, however, Latin American countries still have a long way to go before they achieve best practices in this area. Even though several countries carry out some sort of cost-benefit analysis, the results do not necessarily inform budgetary choices, and widespread weaknesses in medium-term investment budgeting contribute to delays in project execution.

Efficiency first

A recent World Bank study concluded that poorly structured PPP projects have been pervasive over the past decade and have generated considerable fiscal risks. What’s more, countries risk giving priority to PPPs at the expense of improving existing procedures for public investments. In this regard, the United Kingdom may be worth emulating. There, PPPs are simply seen as one of several procurement methods for projects that have already been approved, according to Edward Farquharson (Partnerships U.K.).

Participants generally agreed that PPPs should be used to secure efficiency gains: the choice between a PPP and direct public investment should reflect cost-effectiveness rather than financing constraints. However, much of the current interest in PPPs is driven by the desire to mobilize additional resources to fund infrastructure development—regardless of efficiency considerations.

For now, there are no internationally agreed fiscal accounting and reporting standards for PPPs. The IMF is advising that all future costs of PPPs be fully disclosed and taken into account when undertaking debt sustainability analysis for countries.

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