Strengthening Public Investment Management in the Eastern Caribbean Currency Union: Getting more bang for the dollar!
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund
  • | 2 https://isni.org/isni/0000000404811396, International Monetary Fund

Contributor Notes

Author’s E-Mail Address: amitchell2@imf.org, awickham@imf.org, and mrosales@imf.org

The quality and stock of infrastructure vary widely across countries of the Eastern Carribbean Currency Union and are inadequate to achieve the desired higher growth and social development. Given relatively low investment rates in the region, one solution is to invest more. However this paper shows that governments can also narrow their infrastructure and service gaps significantly by improving expenditure efficiency and strengthening public investment management systems.

Abstract

The quality and stock of infrastructure vary widely across countries of the Eastern Carribbean Currency Union and are inadequate to achieve the desired higher growth and social development. Given relatively low investment rates in the region, one solution is to invest more. However this paper shows that governments can also narrow their infrastructure and service gaps significantly by improving expenditure efficiency and strengthening public investment management systems.

I. Introduction

Maintaining and upgrading public infrastructure—power, water, transport, health and education—are critical challenges confronting member countries of the Eastern Caribbean Currency Union (ECCU). 1 Economic growth and modernization, climate change, urbanization and the shifting socioeconomic profile, are a few of the factors intensifying infrastructure service demands to support higher growth and social development. Meanwhile, limited fiscal space over the past decade and high indebtedness has lowered resource allocations for maintenance and investment. Lastly, natural disasters, which have increased in intensity recently, have reduced the capital stock leading to higher replacement rate.

Many governments and developmental agencies have focused on accessing finance to scale up investments, particularly for climate change adaptation and increasing disaster resilience. Notwithstanding the financing needs, this paper takes the view that strengthening public investment management (PIM) systems—planning, budgeting, appraisal, selection, procurement, implementation and maintenance of capital projects—in the ECCU has the potential to increase the efficiency of existing infrastructure, improve investment spending and generate savings.

Understanding the drivers of inefficiency in the ECCU’s public investment systems should provide an objective basis for the choice of targeted interventions aimed at increasing productive public investment and its growth benefits. Assessments that quantify savings or productivity gains from improved PIM in the ECCU are scant. The ECCB’s Public Expenditure Review Commission (2012) acknowledges that small size, the prevalence of natural disasters, and inadequate insurance coverage and maintenance of assets, contribute to the negative returns on investments. They stress that these factors are either avoidable or can be minimized through adequate institutional and regional arrangements for PIM and better disaster risk mitigation. Studies of public investment multipliers by Roache (2007) and Gonzalez-Garcia et al (2013) for ECCU countries and Alichi et al (2018) for small states, indicate that generally the growth impact is positive but less than one over the medium term. 2 This paper aims at examining whether governments can improve spending efficiency and get more bang for the dollar.

Using the IMF’s Investment and Capital Stock Dataset, we use frontier analysis to compare the availability of public physical infrastructure in the ECCU to peer country groupings and analyze the trends in public investments and public capital stock in the region (IMF, 2015). Physical infrastructure indices suggest that indicators of access and efficiency in the ECCU are higher on average than those of small states and emerging market economies. However, anecdotal evidence suggests that the quality of infrastructure is sub-optimal, and the efficiency score indicates significant scope for reducing infrastructure and services gaps.

We find that investment rates are volatile and, on average, at or lower than the replacement rate of capital. This implies that increasing the stock of capital including for climate change adaptation and building resilience to natural disaster will require greater financing and implementation effort. However, low project execution rates and high committed undisbursed balances suggest the need to address weaknesses in PIM primarily related to project preparation and implementation so that this financing can be faster accessed and better spent. A comparison with project implementation data from the InterAmerican Development Bank suggests that project implementation delays are lengthy, cost overruns are high and there is scope for expenditure savings through streamlining project delivery.

Our examination of maintenance spending on public capital using the methodology deployed by Fay and Yepes (2003) suggests that such spending is suboptimal and implies that increasing spending to appropriate levels could improve the productivity and efficiency of infrastructure (World Bank, 1994 and Rioja, 2003a and 2003b). Additionally, we assess the effects of maintenance expenditure on economic growth, using the standard Barro-type growth regression (Mankiw, Romer and Weil, 1992; Barro and Sala-i-Martin, 1995). The results indicate the existence of a long run cointegrating relationship between maintenance expenditure and real GDP but no short-run relationship. This is likely because government spending to maintain public infrastructure might not necessary increase the rate of economic growth in the short run but would certainly provide an environment to raising growth potential over time.These concerns about PIM are consistent with others in the literature including Dobbs et al (2013), Grigoli and Mills (2014) and IDB (2018).

Lastly, we utilize the IMF’s Public Investment Management Assessment (PIMA) evaluation tool to broadly assess and compare PIM in ECCU countries (IMF, 2015, 2018). The PIMA seeks to identify the institutional features that minimize major risks and provide an effective process for managing public physical investments. It examines 15 key institutions that shape the three main stages of public investments. Planning sustainable levels of investment across the public sector; Allocation of investment to the right projects, the use of multiyear budgeting, and project appraisal and selection; and Implementing projects on time and on budget through appropriate funding, monitoring and execution as well as protecting investment through adequate maintenance. We f ind that there is considerable variation among the ECCU countries in PIM and that while indicators for allocation are about average there are notable weaknesses in planning and implementation.

The structure of the paper is as follows. Section II analyses public physical infrastructure an d capital expenditure over the past decade in public investments while section III examines the scope for bridging the infrastructure gap by addressing inefficiencies in project management and optimizing the utilization of existing assets. Regarding the latter, the impact of maintenance spending on growth in ECCU countries is assessed. Section IV presents the results of the Public Investment Management Assessment (PIMA), highlighting the strengths and weaknesses of PIM institutions. Section V concludes.

II. Trends in Fixed Capital Stock and Public Capital Investment in the ECCU

Public Capital Stock

The public sector is the main provider of physical and social infrastructure in ECCU countries particularly in the areas of transport (roads, sea and airports), water supply, education and health.3 Except for electricity, the access of the population to basic infrastructure is higher than the average for small states and Latin American and Caribbean Countries (LAC) and has increased over the past two decades (Figure 2).4 However, public capital stocks in 3 of the ECCU displayed per capita levels below the average level observed in other Caribbean countries and the Seychelles.

Figure 1.
Figure 1.

2015 Public Capital Stock per Capita

Citation: IMF Working Papers 2020, 177; 10.5089/9781513555003.001.A001

Figure 2.
Figure 2.

Measures of Infrastructure Access in 2015

Citation: IMF Working Papers 2020, 177; 10.5089/9781513555003.001.A001

*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 thousands of kWh per person; 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.Source: IMF Fiscal Affairs Department – Investment and Capital Stock Database.

Public physical capital stocks, measured using the perpetual investment method, declined or stagnated over 2010–15 with capital stocks in Antigua and Barbuda and St. Kitts and Nevis lower than 100 percent of GDP (Figure 3).5 These estimates, which use a standard 2.5 -3.5 percent annual depreciation, ignore ECCU countries’ topography, attrition from climate and weather-related factors including natural disasters and low maintenance, and likely overstate capital stocks. Thacker et al (2012) and Guerson et al (2016), in conducting endogenous growth models for the Caribbean, adjust physical capital stocks to reflect the adverse impact of natural disasters and inclement weather on the quality and level of physical capital stock. The latter suggests that the reduction in the capital stock by 2014 would range from 2 percent in St. Lucia and St. Vincent and the Grenadines to 15 percent and 19 percent in Dominica and Grenada, respectively. These estimates suggest average depreciation rates above the standard 3.5 percent used in the perpetual investment method.

Figure 3:
Figure 3:

Public Investment in ECCU Countries (nominal, percent of GDP)

Citation: IMF Working Papers 2020, 177; 10.5089/9781513555003.001.A001

Source: IMF Fiscal Affairs Department – Investment and Capital Stock Data set

Using the IMF’s Investment and Capital Stock Dataset we assess the efficiency of physical infrastructure in sovereign ECCU countries. This compares a country’s index of the output of public investment to its per capita public capital stock relative to countries that have achieved the highest output per unit of input (IMF, 2015).6 Here output is an aggregate physical indicator which combines the volume of physical infrastructure networks and social infrastructure.

Countries are given efficiency scores based on their distance from the frontier of best performers. The results in Figure 4 indicate that the efficiency of physical public infrastructure in ECCU countries is 68 percent (or an efficiency gap of 32 percent), better than the average of other small states (62 percent) but lower than the average for advanced economies (74 percent). While the index is subject to several caveats, the results suggest there is significant room for improving the use of existing assets.

Figure 4.
Figure 4.

Physical Infrastructure Efficiency in ECCU Countries

Citation: IMF Working Papers 2020, 177; 10.5089/9781513555003.001.A001

Source: IMF Fiscal Affairs Department – Investment and Capital Stock Database

Notwithstanding recent significant investments and rehabilitation of airports much of the other infrastructure, particularly in water and sanitation, roads, health, education and electricity are aging and or inefficient. Under-investments and poor maintenance means that infrastructure rehabilitation and upgrading is required so that countries can provide higher service standards and be more competitive and productive. The CDB (2014) and McIntyre et al (2016) indicate the following stylized facts:

  • Electricity: most countries have good access to electricity, but costs are high relative to peers — in 2017 about 30 US cents per kWh compared to 16 US cents/kWh in OECD countries— and the reliability of service and the length of time to get a new connection (ranged from 18 to 61 days in 2013) needs to improve. Many have embarked on initiatives to supplement electricity generation with renewable energy such as solar energy (McIntyre et al, 2016).

  • Roads: paved roads as a percentage of total road networks is very diverse ranging between 33 percent to 89 percent and f alls within comparator averages for Low-Middle Income and High-Income countries.7 Unpaved roads are associated with low quality, safety hazards and inefficient transport services.

  • Water: access to water services is generally good although Anguilla, Antigua and Barbuda, and St. Kitts and Nevis all have very low levels of renewable freshwater resources. Anguilla and Antigua and Barbuda rely on high-cost desalination plants to meet their domestic water needs. Technical losses due to water leakage and commercial losses—where water is delivered to customers without revenue being received—are high (>30 percent of production) and reduce utilities’ financial performance and service levels.

  • Sanitation: several countries need to improve access to sanitation and many need to invest in improved wastewater treatment facilities.

Table 1.

The Condition of Road Infrastructure

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Source: Caribbean Development Bank, World Bank and Country Authorities.

Capital Expenditure 8

Gross public investment in the ECCU as a share of GDP over 2006 to 2015 was higher than other country groups—about 8.9 percent compared to 6 to 8 percent—(Table 2).9 However, this is much lower than the net annual investment of 9 percent of GDP required of ECCU governments as their contribution to a net national investment of 30 percent of GDP to achieve annual economic growth of 6 percent at a desired capital output ratio of 5 (ECCB 2012). This benchmark suggests that the countries in the ECCU region have a significant infrastructure deficit. While we do not attempt to ascertain whether addressing the infrastructure deficit is necessary or feasible, it would suffice to indicate that the financing requirements would be significant and challenging given the fiscal situation and debt sustainability concerns.

Table 2.

Public Investment as a percentage of GDP

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Source: IMF Fiscal Affairs Department – Investment and Capital Stock Database.

Capital spending varied widely among ECCU countries and a declining trend was observed over the period 2006 to 2018. Significant increases in expenditure for reconstruction in Dominica and Montserrat following natural disasters mask the declining trend in capital expenditure that averaged 7.2 percent of GDP from 2006 to 2018 and 6.8 percent of GDP from 2016 to 2018 (Figure 5). 11 The median, excluding these two countries, is 4.6 percent and 3.3 percent of GDP, respectively during two periods. 11 The declines also reflect Grenada’s adoption of fiscal rules in 2016, particularly the real primary expenditure growth rule, which has restricted non- grant financed capital spending, as well as a correction of its chart of accounts to exclude recurrent expenses from capital spending. 12 This latter issue needs to be emphasized as capital spending in Dominica and St. Lucia are also overstated and are not comparable across countries (ECCB, 2012). Properly accounting for capital expenditure has important implications. If standard capital depreciation rates on average vary between 3.5 percent – 6 percent, befitting the conditions in the ECCU, then capital spending in many of the 6 ECCU countries would be lower on average than capital depreciation which we estimate at about 4.3 percent and 6.5 percent of GDP. Consequently, the level (and/or quality) of public capital stocks-to-GDP in many ECCU countries may be lower than estimated and declining as net government investment is negative, and vertical and horizontal infrastructure gaps might be widening.13 Additional spending will be needed to close infrastructure gaps so that countries can increase economic growth, provide essential services and build resilience to natural disasters.

Figure 5.
Figure 5.

Capital Spending in ECCU Countries (2006–18)

Citation: IMF Working Papers 2020, 177; 10.5089/9781513555003.001.A001

Source: Country authorities and IMF staff estimates.

III. Challenges in Closing the Infrastructure GAP

There is substantial scope to improve capital spending effectiveness and efficiency to close the infrastructure gap. Governments can enhance PIM capabilities and oversight to better access financing, augment project selection, reduce bottlenecks, and streamline project delivery. Additionally, governments can get more out of existing assets by optimizing maintenance and through demand-management measures rather than building new capacity.

Enhancing Project Management

Determining the relative contribution of financing availability and absorptive capacity to capital spending is a challenge because of the paucity of data. However, we can make some generalizations from aggregate data. Antigua and Barbuda and St. Kitts and Nevis are middle income countries and are ineligible for concessional financing. Their ability to secure domestic financing (tax or Citizen-by-Investment (CBI) revenues) for capital expenditure depends significantly on budget discipline and CBI inf lows. 14 The availability of concessional f inancing appears less of an issue in the remaining countries. Capital spending in Anguilla and Monserrat—British Overseas Territories (BOTs)—is primarily grant financed; and concessional loan financed in the remaining countries except for Dominica since 2016 where CBI revenues made up most of the financing.

The execution rate of capital expenditure relative to budget intentions is an important indicator of PIM performance and efficiency. Execution rates vary significantly across ECCU countries but have generally declined over the 13-year period from 73 percent to 59 percent from 2016 to 2018 notwithstanding the decline in budget allocations for the investment portfolio (Figure 6). 15 While the variability in execution (measured by the standard deviation) has significantly improved on average it is still very high in Antigua and Barbuda and St. Kitts and Nevis. Underperformance in project execution generally reflects optimism in budget projections as well as delayed disbursements because of absorptive capacity constraints, such as inadequate project readiness and implementation capacity. 16 These factors reduce the reliability of budget year and outer-year capital spending estimates.

Figure 6.
Figure 6.

Execution of Capital Spending in ECCU Countries (2006–18)

Citation: IMF Working Papers 2020, 177; 10.5089/9781513555003.001.A001

Source: Country Authorities and Staff estimates1/ /1. Execution as a percentage of budgeted expenditure.2/ /2. Standard deviation in execution rates.
Figure 7.
Figure 7.

Capital Expenditure Budget and Execution in ECCU Countries

Citation: IMF Working Papers 2020, 177; 10.5089/9781513555003.001.A001

Source: WEO and IMF staff calculations.

The significance of committed undisbursed balances (CUB) of external project loans is another indicator of PIM efficiency. Our review of CUB data in the independent countries from 2011 to 2018 indicates that these are 2 to 3 times higher than actual capital spending. This suggests that access to financing was not the critical constraint to infrastructure investment in Dominica, Grenada, St. Lucia and St. Vincent and the Grenadines as these countries could have increased spending by 1 percentto2.3 percent of GDP annually in the intervening period. Governments need to strengthen institutional and implementation capacity to access the financing that is already contracted.

Figure 8:
Figure 8:

Stock of Committed Undisbursed Balances

Citation: IMF Working Papers 2020, 177; 10.5089/9781513555003.001.A001

Source: Country Authorities and Staff estimates.

There are additional indicators of project management efficiency. Project implementation delays, for instance, immobilizes physical and financial capital and increase project supervision costs to the lender and project management costs to the borrower.17 During the interlude unit prices of components can increase, trained staff leave, and needs and priorities can change with adverse effects on construction costs. Consequently, implementation delays lower the rate of return on projects and invalidate the rationale for their selection. Since we do not have quantitative estimates on project implementation delays in ECCU member countries, we use general data from the CDB (ECCU countries are member borrowing countries) and from the IDB (2018) to make inferences. We distinguish two types of implementation delays:

  • Delays in authorization. The length of time between loan approval by the CDB and loan effectiveness by the executive or legislative branch of government has generally declined from 9 months to 8 months, between 2015 and 2017. This is still higher than the observations by the IDB (2018) of the average time between approval and eligibility by its members in Latin America and the Caribbean of about 7 months in 2015. It is also longer than the 4-month delay in the Bahamas.

  • Delays in disbursements. They occur prior to the first disbursement (because of inadequate project preparation) and during project implementation (where projects initially estimated to take 4 to 6 years on average could be delayed by 2 to 3 years).18 The former includes delays in establishing project implementation units, engaging project coordinators and managers, procuring services of engineers, establishing project steering committees, getting relevant approvals within executing agencies, and obtaining relevant planning and building permits.19 The gap between the optimal and actual disbursement curve is larger for physical infrastructure projects than it is for other sectors, such as education and health. Delays during project implementation generally reflect delays in procurement and contracting processes, weak institutional capacity of executing agencies, and weak inter-agency coordination.

Project cost overruns are another major and widespread problem of PIM efficiency. The IDB (2018) notes that cost overruns are common and are to be expected not because of inexperience, ineptitude or corruption but rather because building infrastructure is challenging and sometimes reflects investment complexities and risks in infrastructure construction. Incomplete information and the occurrence of contingencies such as natural disasters, physical and social constraints (resettlement processes that might trigger legal disputes), complex geology which contribute to forecast errors and to changes in project scope are unavoidable. Other factors are avoidable, or their incidence can be reduced—poor project design and incomplete estimates, lack of competition and transparency in bidding processes, weak project supervision, inadequate decision-making, and an optimistic bias that underestimates costs and risks while over estimating implementation capacities (Dodd, 2013 and IDB, 2018).

We rely on research done on LAC as well as on discussions with government officials and contractors in the ECCU region to draw inferences for the region. Flyvbjerg (2016) indicates that projects in LAC have much higher cost overruns (48 percent) than the average project globally (28 percent) and in other regions. Cost overruns are also widespread in the loan portfolios of the IDB and World Bank, affecting at least 50 percent of infrastructure projects and accounting for at least 17 percent of project costs in LAC (IDB, 2018). The IDB attributes the lower cost overruns to their higher quality standards for preparation and implementation—regarding feasibility, procurement, and supervision—than do national systems. If estimates of cost overruns in the multilateral development bank-financed projects represent a lower-bound, then there is the potential for cost savings in national project portfolios of about 20 percent.

Enhancing PIM capabilities from the project selection stage through project delivery can improve the effectiveness of infrastructure, significantly reduce implementation delays and lower infrastructure costs and cost overruns. Establishing the enabling environment and improving pre-investment planning and project preparation and processes would reduce and mitigate the costs and risks of projects and improve their quality. Additionally, ECCU member governments must resolve the challenges in attracting and retaining persons with the requisite technical skills (for example, quantity surveyors, engineers, architects, project managers). Dominica and St. Lucia have recently established dedicated agencies with strengthened PIM institutional capacities.20

PFM legislation and regulations should be amended to require systematic performance-based assessments of project implementation as well as the identification, tracking, and prioritization of operational and investment gaps. This should include the monitoring of physical and financial progress of project implementation; and the monitoring and evaluation of outcomes and impacts during on-going operations.

Project Preparation Facilities (PPFs) by multilateral development banks—a financial instrument to expeditiously provide resources targeted to the preparatory phase of priority projects, studies and programmes—could be useful in addressing the challenges related to these issues in ECCU countries. The experience of multilateral development banks in the use of PPFs confirms that it has been a demand-responsive facility and very effective in generating quality projects at entry (African Development Fund, 2000). It encourages high-level commitment of the government before the PPF is approved which in turn promotes government’s ownership and participation in project preparation and implementation. The IDB also acknowledges the merits of PPFs and suggests the establishment of a single facility encompassing all countries and sectors in LAC (IDB, 2019). ECCU countries should consider such a facility, administered by the CDB and World Bank, and extended to non-bank financed public sector and Public Private Partnerships (PPP) projects, as this would allow them to address capacity constraints and benefit from economies of scale.

Making the Best of Existing Infrastructure

Dobbs et al (2013) indicate that there is a persistent bias toward building new capacity rather than getting the most out of existing assets by improving asset utilization and through demand-management measures. Boosting asset utilization is viable where existing infrastructure reaches capacity constraints or where there are other options to addressing the service gap along with quality and affordability that cannot be efficiently resolved by building more.

For example, technical losses due to water leakage and commercial losses are high (>30 percent of production) and impair the financial performance and service levels of utilities in some countries. Investments that reduce these losses and improve asset utilization—replacement or rehabilitation of the distribution networks, introduction or expansion of water metering, and billing efficiency—often cost less than building new capacity. 21

Figure 9.
Figure 9.

Annual and Minimum Required Expenditure on Maintenance (2011–17)

Citation: IMF Working Papers 2020, 177; 10.5089/9781513555003.001.A001

Source: Authorities and Staff Estimates1. Calculated as 2 percent and 5 percent equally distributed replacement cost for roads and other public infrastructure, respectively.2. Calculated as 5 percent of the replacement cost of public infrastructure.

Timely and adequate maintenance of infrastructure is required to sustain its durability and effectiveness. Since depreciation of infrastructure is nonlinear and not generally visible, delays in routine maintenance overtime may cause irreversible deterioration requiring rehabilitation or rebuilding of infrastructure. Neglecting maintenance can lead to a reduction in productivity (in the public and private sector) and infrastructure services. For instance, pothole-filled roads adversely affect road safety and transportation times and increases operational costs to the public and private sector. The adverse impact of maintenance underspending is temporary if there is a return to full maintenance expenditure before the damage becomes irreversible.22

On average ECCU governments spend less than one percent of GDP on maintenance. We utilize Fay and Yepes (2003) broad estimates of maintenance expenditures for different categories of public capital to estimate the minimum annual average requirement for ECCU countries over the period 2011 to 2017. These do not represent an optimum for maintenance expenditures but could be considered, for illustrative purposes, a minimum or lower bound annual average expenditure on maintenance to maintain infrastructure integrity and functionality.23 The results are mixed and, notwithstanding caveats about the robustness of the data, the significant underspending in some countries are worrisome. Grenada’s maintenance budget of 0.14percent of GDP for 2018 was estimated by the authorities to be at least an ⅛ of current needs, much wider margins than implied by our estimates. By comparison, Fay and Yepes (2003) estimate that annual average maintenance needs between 2005 and 2010 for Middle Income Countries and LAC as 2.5percent of GDP and 1.4percent of GDP, respectively.24 Budget financing constraints, inadequate capacity for inspections and maintenance planning, poor maintenance culture are among the reasons for low maintenance spending. On the other hand, the fact that new construction can be financed externally and on concessional terms and is more politically attractive, may bias spending against maintenance.

More extensive use of demand-management measures by restricting access or imposing user fees where possible and appropriate, has many advantages. In addition to managing demand, they (i) create a market test and put pressure on the service provider (public or private) to improve quality, and (ii) increase the revenue base for investments and create the potential for bridging the financing gap by encouraging private sector participation in infrastructure provision as well as improving access to commercial financing (World Bank, 2017). Improving facilities and services and effective engagement of stakeholders are precursors for public acceptance of the measures. For instance, traffic congestion can be addressed by combining improved bus operations, vehicular access routes and parking restrictions, with an integrated traffic management system (Dobbs et al, 2017). Additionally, a comprehensive view of demand management can also help planners avoid an all-or-nothing approach and adopt more incremental strategies, which can help overcome public acceptance or feasibility challenges. For example, smaller scale solutions such as smart parking meters that dynamically adjust parking prices based on demand, or real-time traffic information that allows drivers to make better choices about road usage may be preferable than immediate adoption of congestion pricing.

The Impact of Maintenance on Growth

Research by Gibson and Rioja (2013), Agénor (2005), Rioja (2003a and 2003b), and World Bank (1994) indicates that when maintenance spending is sub-optimal, the returns on increased spending on infrastructure maintenance are significantly higher than similar size investments on new construction.25 This occurs because improved or adequate maintenance improves the effectiveness of existing infrastructure and increases the payoff of new public investment. Additionally, adequate maintenance of public infrastructure enhances the durability of private sector capital stock such as vehicles and electrical equipment (Agénor, 2005) and is welfare improving (Gibson and Rioja, 2013).

We estimate the effects of maintenance expenditure on real economic growth by modelling a standard Barro-type growth regression (Mankiw, Romer and Weil, 1992; Barro and Sala-i-Martin, 1995) that includes the maintenance expenditure variable. The dataset consists of annual data from 2010 to 2017 for 12 Caribbean countries (the 8 ECCU countries and 4 other Caribbean countries)26. We use a panel co-integration approach to identify the long-run effect of capital maintenance expenditure on growth as well as the dynamics of the various channels. The model is estimated using Fully Modified Least Squares (FM-OLS) which is shown to produce superior estimates in small samples and provides optimal estimates of cointegrating regressions, as discussed in Phillips and Hansen (1990), McCoskey and Kao (1998) and Kao and Chiang (2000). The method modifies least squares to account for serial correlation effects and for the endogeneity in the regressors that results from the existence of a cointegrating relationship. Moreover, FM-OLS are superior to the OLS estimates derived from the standard panel-VAR because: FM-OLS estimates are not only super-consistent but efficient in the presence of I (1) variable; and, FM-OLS eliminates the endogeneity and serial correlation present in standard OLS using a nonparametric approach.

yt=αt+βMEit+Σnk(θkXtk)+ϵt

where yt is the growth rate of real GDP, MEit is the maintenance expenditure variable, Xtk is a set of k control variables, αt is the constant, and εt is the error term. Consistent with the growth literature we use fiscal policy, openness to international trade, financial development, government effectiveness index, economic cost of natural disasters and capital accumulation.27 To control for other growth effects outside of expenditure on maintenance, all variables were deflated by nominal GDP except inflation, government effectiveness and openness to international trade. The estimated model is well fitted and passed all the standard diagnostic tests, including that of serial correlation, normality and heteroscedasticity.

The results indicate the existence of a statistically significant long run cointegrating relationship between maintenance expenditure and real GDP such that a 10 percent increase in the maintenance expenditure to GDP ratio raises long-run output by about 0.2 percent (Table 5). There is no statistically significant short-run impact from increasing maintenance expenditure This result can be explained by the fact that government spending to maintain public infrastructure might not necessary increase the rate of economic growth in the short run but would certainly provide an environment to raising growth potential over time.

Table 3.

Maintenance Expenditure and GDP Growth

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***, **, * indicate statistical significance at the 1%, 5%, 10% levels, respectively. Standard errors in parentheses.

Additionally, the econometric analysis of this paper suggests that in the long-run, gross domestic investment and financial development exert a positive impact on the level of real GDP, while government consumption expenditure, inflation, and openness have a negative effect. The positive impact of investment on the long-run level of output is consistent with the central role given to investment in physical capital in the growth literature. Moreover, a 10 percent rise in growth domestic investment accumulation leads to approximately 0.6 percentage point increase in output over time. Similarly, the positive coefficient on financial development is consistent with the endogenous growth literature and suggests that there is positive intermediation of the financial system leading to growth. The negative impact of government consumption expenditure on the long-run level of output is not surprising and suggests that government spending often crowds out private investment and to the extent that this spending is not productive, fiscal policy will have a negative impact on growth.

On average, the countries covered by the above analysis spend significantly less than one percent of GDP on maintenance. Trinidad and Tobago and Monserrat are exceptions, as they allocate on average around two percent of GDP. This suboptimality of maintenance expenditures may have resulted in the low coefficients and could suggest that higher maintenance spending would have proportionally higher impact on growth. Our econometric analysis implies that, making the most of existing public assets by providing adequate maintenance is a cost saving and efficient strategy. Medium term public expenditure programs should establish guidelines for optimum resource allocation that considers (i) the growth impacts and trade-offs of investment in new infrastructure and adequate maintenance spending of existing infrastructure; and (ii) the need to incorporate adequate maintenance costs as part of project costs to facilitate appropriate budgetary allocations to sustain infrastructure durability and the realization of expected benefits.

IV. Assessment Of Public Investment Management In The ECCU

Public Investment Management Assessment (PIMA) Framework

The previous sections identified many challenges to PIM in the ECCU. In this section we use the IMF’s Public Investment Management Assessment (PIMA) Framework, to assess the institutional features that minimize major risks in infrastructure investment and identify the various elements of reform needed to improve infrastructure spending efficiency (IMF 2015, 2018). See Box 1 below.

PIMA Methodology

The Public Investment Management Assessment (PIMA) is a comprehensive framework to assess infrastructure governance practices for countries at a ll levels of economic development. The PIMA examines 15 key institutions that shape the three main stages of public investments. Planning sustainable levels of investment across the public sector; Allocation of investment to the right sectors and right projects, and Implementation to deliver productive and durable assets.

Each institution is analyzed a nd graded along three dimensions that reflect the key features of the given institution, resulting in a total of 45 dimensions. Three possible scores are assigned to each dimension (1: not met, 2: partially met, 3: fully met), and their average within an institution produces a score for that institution.

PIMA also covers a qualitative assessment of three cross-cutting factors that often impact the overall effectiveness of public investment management: (1) the legal and regulatory framework, (2) staff capacity, and (3) IT systems.

Full PIMA in-country assessment evaluates both institutional design (“what is on paper”) and effectiveness (“what is in practice”), because there is often a gap between the design of formal rules and how they are implemented in practice, due to capacity constraints among others.

Source: IMF (2018)

This paper uses a PIMA desk study (see Box 2) to provide initial information on the general situation of PIM systems in ECCU and raise the awareness of potential important issues of PIM in the zone. Building on these initial assessments, in-country PIMA assessment in each country is recommended to assess not only the institutional design but more importantly effectiveness to identify sequenced reform priorities that are specific to each country’s PIM system in order to improve it. 28

PIMA Desk Study Process and Data Sources

The PIMA desk studies of each ECCU country in this paper are based on compiling responses of country officials knowledgeable about their PIM institutional and legal frameworks and PIM practices related to planning, allocation and implementation. A first round of assessments using the 2015 PIMA questionnaire (IMF, 2015) for the ECCU member countries were completed in 2017. The assessment by Public Financial Management (PFM) and Macro-Economic experts from the Caribbean Technical Assistance Center (CARTAC) were instrumental in corroborating the responses to the questionnaires. The IMF’s Fiscal Affairs Department reviewed the first round of survey responses from the six sovereign ECCU countries that are its members. Antigua and Barbuda and Grenada PIM systems were reassessed and updated during Article IV missions in October 2017 and May 2018, respectively.

A second round of assessments were undertaken from September 2018 to incorporate the revision to the PIMA (IMF, 2018). Updates were received from country officials in Anguilla, Antigua and Barbuda, Grenada, Montserrat, St. Lucia, St. Vincent and the Grenadines and reviewed by staff. Assessments for Dominica and St. Kitts reflect the views of staff. The revised PIMA framework retains the structure of the earlier version but highlights aspects of maintenance, procurement, independent review of projects, and the enabling environment more prominently. The results for Grenada were updated to reflect the outcomes of the 2019 Climate Change Policy Assessment mission by the IMF and World Bank. The latter updates marginally affected the scores. Data from national budgetary statements and information from recent country Public Expenditure and Financial Accountability (PEFA) assessments were also used to assess and corroborate the effectiveness of PIM systems and functions across different stages of the investment cycle.

Countries with strong PIM systems that are effectively implemented have more predictable, credible, efficient, and productive investments. Where these systems are weak or ineffective, their strengthening could help close the public investment efficiency gap.

PIM in ECCU countries shows considerable variation with institutional ratings ranging from weak (“Not met”) to strong (“Fully met”) with many desirable features (Table 4). The average score for the ECCU (4.1) is below those of emerging market countries (4.6) and countries in the Western Hemisphere (4.3) assessed by the IMF (2018). The better ratings for Anguilla and Montserrat (BOTs) reflect their stronger institutional frameworks particularly regarding fiscal governance and accountability arrangements with Britain.

Table 4.

Summary Institutional Scores of PIM in the ECCU

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Source: Country Authorities and IMF Staff AssessmentsGreen: Fully met Orange: Partially met Red: Not met

Across all countries, PIM institutions are generally better in the allocation stage than in the planning and implementation stages. We summarize our findings on the design and effectiveness of the 15 institutions below and provide details in Annex I.

The efficiency of the PIM system is affected by significant weaknesses in the planning, budgeting, appraisal, selection, procurement, and implementation of capital projects. These weaknesses have important implications for key areas of public investment management.

Except for Grenada and the BOT’s investment planning is not guided by an explicit fiscal objective, permanent rules or principles that guides fiscal policy. However, objectives for fiscal policy, the budget deficit, and the stock of public debt are discussed in budget circulars and the budget speeches.

While many countries have national and sectoral investment plans the absence of comprehensive analysis of investment project costs undermines their credibility and validity. Further, the translation of sector plans into the budget is hindered by the lack of budget ceilings that weakens the link between planning and budgeting.

There is limited central review of major project appraisals before decisions are taken to include projects in the budget. Many domestically financed projects have inadequate feasibility studies and lack rigorous project appraisal consequently they may not be ready for implementation. The capacities in budget agencies and statutory bodies to conduct rigorous project selection is low and is compounded by the lack of standard criteria for project selection. This leads to execution delays, cost overruns, adjustments to the specification and cost of projects, and insufficient consideration of maintenance and recurrent costs.

The supporting legal framework for PIM has been strengthened in some ECCU countries— Anguilla, Grenada, Montserrat, and to a lesser extent Dominica and St. Lucia—over the past five years. These include legislation for PFM, PPPs, and Procurement. However, implementation is still limited in certain phases of public investment management. For instance, for PPPs the institutional framework for scrutiny, selection and oversight is not public nor is information available on government liabilities. Additionally, other countries have significant gaps in their procurement framework and there is a political imperative of using local firms, leading to implementation inefficiencies. There is limited access to public information—procurement statistics are not available to demonstrate that principles of competitiveness and transparency have been adhered to in awarding tenders for investment projects. Few countries have an independent body for reviewing procurement complaints. In the World Bank’s benchmarking public procurement for 2017 the average composite score for ECCU countries was 36 out of 100 (World Bank, 2018).29

Project implementation in the ECCU is generally weak. Systems to monitor physical progress of domestically financed major capital projects are lacking. Ex-post reviews are not systematically conducted for major projects. In addition, detailed implementation plans are generally not in place until after the tendering process is completed late in the fiscal year causing implementation delays. Checks and balances in the system are lacking. For example, absence of, or delays in, obtaining feedback on the performance of capital projects reduces the effectiveness of the audit process.

Figure 10.
Figure 10.

Ranking of PIM Institutions by Score

Citation: IMF Working Papers 2020, 177; 10.5089/9781513555003.001.A001

The monitoring of public assets is made difficult by the lack of a comprehensive register of non-financial assets. While some ministries carry out surveys of their fixed assets, the overall condition, location and maintenance needs of public assets cannot be ascertained. There is no valuation of non-financial assets in the government’s financial statements.

Inadequate capacity is an underlying cause of the low execution rates in ECCU countries. This reflects staffing numbers and skills sets which in turn is affected by the government’s ability to attract and retain staff. Shortages in skills sets are sometimes resolved through short term contracts for the project. Additionally, donor agencies often establish Project Implementation Units (PIUs) to supplement skill sets of implementing government agencies to manage the planning and implementation of large capital projects

PIM based ICT systems in the ECCU are not integrated and provide partial information. A separate ICT system is deployed by the treasury department and budget departments for facilitating financial payments, accounting and reporting on financial transaction. Systems f or procurement are also separate but are increasingly being rolled out to the public to improve transparency. Project accounts are not integrated with debt management ICT systems and systems for physical asset management and maintenance are not deployed. An effective ICT system allows line ministries and executing agencies to share information in real time, monitor projects throughout the project cycle, apply the regulatory framework, and produce administrative and analytical reports.

The initial PIMA desk study facilitates the diagnostic assessment of the institutional framework for the investment cycle (planning, allocation, and implementation) and could be complemented by full PIMA in-country assessments of the ECCU countries. Over time it can be used to evaluate ongoing efforts at improving the investment environment in ECCU countries. Formal fiscal rules would help improve aggregate fiscal discipline and protect investment when debt falls to sustainable levels. Linking national and sectoral plans more closely with budgeting would make them more effective.

V. Conclusion

Capital spending in ECCU countries falls short of expanding needs and has declined as a share of GDP over the last decade. Additional investment will be needed to close infrastructure gaps so that countries can increase economic growth, provide essential services and build resilience to natural disasters. This will be challenging not least because these countries are financially constrained and are significantly indebted. Regardless of the financing situation, consideration should be given to increasing the efficiency of infrastructure spending, from upstream planning to the appropriate maintenance of available assets, as this will improve the quality and efficiency of investments and productivity.

Investment rates in ECCU countries are volatile and are on average equal to or lower than the replacement rate of capital. This implies that increasing the stock of capital including for climate change adaptation and building resilience to natural disaster will require greater financing as well as implementation effort. However, high committed undisbursed balances suggest the need to address weaknesses in PIM primarily related to project preparation and implementation so that this financing can be faster accessed and better spent. Additionally, project implementation delays are lengthy and anecdotal evidence of high cost overruns suggest the potential for expenditure savings by streamlining project delivery. Our examination of maintenance spending on public infrastructure suggests that such spending is suboptimal. This implies that increasing maintenance spending to appropriate levels could improve the productivity and efficiency of existing infrastructure and could be a lower cost option than investments in new infrastructure.

The low scores on the PIMA highlight several weaknesses in public investment management systems in ECCU countries and identifies areas for institutional strengthening—of structures, rules and procedures—to improve the quality and efficiency of public investment. Better transparency and accountability requirements and public oversight of planning frameworks, improved decision making, and increased reporting combined with better compliance with rules and procedures could increase the likelihood of achieving investment objectives. Doing so will require upgrading legal frameworks, improving human and technical capacities a n d strengthening institutional coordination and administrative efficiency. Regional solutions to strengthen planning, project assessments including PPP’s, regulation, audits, etc., should be explored to address capacity constraints and take advantage of economies of scale. Reliable data and integrated ICT systems are needed to facilitate planning and oversight. Lastly, strengthening the governance and accountability framework across PIM systems could improve effectiveness and help unlock concessional financing for infrastructure investment.

Strengthening Public Investment Management in the Eastern Caribbean Currency Union: Getting more bang for the dollar!
Author: Mr. A. E. Wayne Mitchell, Ann Marie Wickham, and Mr. Manuel Rosales Torres