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7 Reasons why Public Investment Management is Critical

 

May 5, 2017

There is rising interest in improving public investment planning and public investment management. The management of long-term capital public expenditures is seen as a critical contribution to sustainable growth. This rising interest in public investment management includes finding better automation and management through the use of Government Resource Planning (GRP) enterprise software. This is the first part of a series that explores:

  1. Why is public investment management crucial?
  2. How can software enable the public investment lifecycle?
  3. Why is integration among public investment software systems and subsystems important?
  4. What software solutions are available from FreeBalance to assist government in managing public investments?

Why is interest in public investment software on the increase?

Our government customers are experiencing a convergence of forces:

Public Investment Forces

  1. Positive impact of public investments on growth that includes higher public sector productivity and growth
  2. Introduction of Sustainable Development Goals (SDGs) that require infrastructure investment to achieve sustainable growth
  3. Continued pressure on government expenditures that has resulted in an increasing “infrastructure gap” that is hampering productivity and growth
  4. Increasing urbanization where “smart city” public investments are seen as critical to reducing energy and waste
  5. Wide range of public investment outcomes and efficiency around the world
  6. Wide range of government capacity to plan, implement and management public investments
  7. Difficulty in integrating long-term public investments with annual planning cycles to achieve budget coherence 

The use of integrated GRP software that integrates the public investment lifecycle of planning, allocation and implementation can overcome many of the problems associated with efficiency, effectiveness, capacity and coherence.

Research Summary

Our research has validated the feedback from customers about the need for public investment management software. It has been an important subject of conversation with public servants, and Public Financial Management (PFM) and Smart City professionals. Here is a summary of the research:

1. Impact of Public Investments

  • Infrastructure Spending“The IMF found a 1% point of GDP rise in public investment spending can raise output by 0.4% in the same year, and 1.5% four years later…on average, a 1% increase in infrastructure investment is associated with a 1.2% increase in GDP growth. (Citigroup 2016)”, where “government infrastructure spending has one of the highest fiscal multipliers among all types of fiscal stimulus measures – that is, an extra dollar of infrastructure spending translated into higher increase in the overall value added for the economy compared with most other fiscal measures. The high multiplier reflects both direct and indirect effects of infrastructure provision. (Nagy et al 2015)
  • Productivity: “Investments in public capital have significant positive impacts on private-sector productivity, with estimated rates of return ranging from 15 percent to upwards of 45 percent. (Our preferred estimate is 30 percent, which coincidentally is roughly equivalent to the rate of return on investment in information and communications technology.)  (Bivens 2012)”
  • Additional Benefits: “Public investment produces benefits that cannot be measured, such as safer water and cleaner air.  (Bivens 2012)”

2. SDGs and Infrastructure Investment

  • Significant investment: “The SDGs will have very significant resource implications across the developed and developing world. Global investment needs are in the order of $5 trillion to $7 trillion per year. Estimates for investment needs in developing countries alone range from $3.3 trillion to $4.5 trillion per year, mainly for basic infrastructure (roads, rail and ports; power stations; water and sanitation), food security (agriculture and rural development), climate change mitigation and adaptation, health, and education. (UNCTAD 2014)”
  • Emerging economies: “developing countries alone face an annual gap of $2.5 trillion. In developing countries, especially in LDCs and other vulnerable economies, public finances are central to investment in SDGs. (UNCTAD 2014)”

3. Infrastructure Gap

  • Infrastructure gap: “Estimates $57 trillion in infrastructure investment will be required between now and 2030—simply to keep up with projected global GDP growth. This figure includes the infrastructure investment required for transport (road, rail, ports, and airports), power, water, and telecommunications…this amount would not be sufficient to address major backlogs and deficiencies in infrastructure maintenance and renewal or meet the broader development goals of emerging economies. (Dobbs et al 2013)”
  • Infrastructure gap with SDGs: “From 2016 through 2030, the world needs to invest about 3.8 percent of GDP, or an average of $3.3 trillion a year, in economic infrastructure just to support expected rates of growth. Emerging economies account for some 60 percent of that need. But if the current trajectory of underinvestment continues, the world will fall short by roughly 11 percent, or $350 billion a year. The size of the gap triples if we consider the additional investment required to meet the new UN Sustainable Development Goals. (Woetzel ea l 2016)”
  • Basic infrastructure needs: “over 1.5 billion people have no access to electricity; just under 1 billion still live without safe drinking water, and over 2.5 billion are without access to basic sanitation. If the UN are right, and we need to accommodate an additional 1.5 billion people in the next 20 years, most of whom will be in emerging markets, and most of them in infrastructure-heavy urban centers, then there will be an ever more pressing need for infrastructure investment. (Citigroup 2016)”
  • Emerging economies: “The biggest global infrastructure needs are to be found in emerging economies, but these are the countries least able to afford the fiscal expansion required to get infrastructure going. (Citigroup 2016)”
  • Financing: Governments experiencing financing problems (Bhattacharya et al 2016),  “strained budgets” (Black & Vetch 2016), and lack of “viability of fiscal space to finance infrastructure (Nagy et al 2015)” where “demands and desires for capital investment are always higher than available funding.  (Kaganova 2011)”
  • Debt“developed market governments find themselves with debt at typically 100% of GDP, and hence limited capacity to spend, and, while emerging markets are less indebted at 40%, they are reluctant to boost debt and place sovereign ratings at risk (Citigroup 2016)
  • Wellbeing: “Quality of life in a particular city and its attractiveness to people and businesses depend, to a substantial degree, on the quality of public infrastructure and related services. (Kaganova 2011)”

4. Smart Cities

  • Population growth: from 7.3 Billion in 2015 to 9.7 Billon in 2050 and 11.2 Billion by 2011 (UNDESA 2015)
  • Urbanization growth: “urban population is seen rising to 70% by 2050 from 55% in 2016. (Rodriguez 2016) with expectation of  13 new mega cities of over 20M population by 2030 adding to the 28 current megacities in 1 estimate, 35 megacities by 2025, 77% from developing world (UNDESA 2014)
  • Economic growth: Cities account for 70% of global GDP,  Cities expected to contribute 2/3 of world economy & 85% of technology innovation (UN 2014) with cities “share of gross domestic product will almost double to $115 trillion by 2030…As a rule of thumb, a 230% increase in a country’s urbanisation rate will double the income per person (Rodriguez 2017)”.
  • Sustainability: “Cities occupy about 3% of the earth’s land mass but consume more than 75% of natural resources and account for 50% of global waste, roughly 76% of both energy use and greenhouse gas emissions” (Rodriguez 2017), in other estimates, cities accountability for 67% of global greenhouse gas emissions and expected to by 74% by 2047, 80% of CO2 and 60 to 80% of global energy consumption (UNDESA 2014)

5. Public Investment Outcomes

  • Planning: Poor project selection, including wasteful “white elephant” projects (Rajaram et al 2010) with Poor estimates during planning, scope changes, insufficient resources (PwC 2014) “Public investment, particularly infrastructure, may also respond to political economy motives rather than simple economic efficiency considerations (Dabla-Norris et al 2011).”
  • Effectiveness: “If infrastructure owners around the world were to adopt proven best practice, they  could increase the productivity of infrastructure investment to achieve savings of 40 percent. Put another way, scaling up best practice could save an average of $1 trillion a year in infrastructure costs over the next 18 years. (Dobbs 2013)”
  • Corruption: Corrupt procurement practices (Rajaram et al 2010), political interference (Ronsholt 2013),  we show that public investment is dramatically higher in countries with low-quality governance and limited political checks and balances or no competitive elections (Keefer et al, 2007).”
  • Delays: Delays in design and completion of projects with cost overruns and incomplete projects (Rajaram et al 2010) with  project delays (Miler 2015), unrealistic time lines (Ronsholt 2013)
  • Inefficiency: Poor value for money (Miller 2015), “study finds that around 30 percent of the potential benefits of public investment are lost due to inefficiencies in investment process on average (IMF 2014), “based on a survey of their experts, identified US$1 trillion in potential efficiency gains from improvements in PIM around the globe…around 30 percent of the potential gains from public investment are lost due to inefficiencies in public investment processes (IMF 2015)”
  • Operations: Failure to operate and maintain assets effectively so that the benefits are less than they should be (Rajaram et al 2010).”
  • Public Private Partnerships: Lack of PPP oversight , while “stronger PIM institutions are also associated with less use of PPPs (IMF 2015).”
  • Mimicry: danger of “isomorphism” in public investment management (Miller 2015).

6. Public Investment Capacity

  • Success associated with capacity: (OECD 2014) where “closely linked to a country’s institutional capacity…the ability to design, select, procure and implement infrastructure projects effectively. It reflects both technical capacity and general quality of economic institutions. Numerous “white elephant” projects can impose high fiscal burden without yielding growth benefits (Nagy et al 2015)” , shortage of skills (Ronsholt 2013), where “countries with strong PIM institutions have more credible capital budgets” (IMF 2015)
  • Structural capacity:  “Unclear lines of responsibility and accountability…Perverse incentives for project managers to underestimate risk” (Ronsholt 2013) ,and coordination challenges (OECD 2014)
  • Lifecycle capacity: “Average institutional strength tends to increase along the investment cycle, with planning being the weakest and implementation the strongest. (IMF 2015)”
  • Capacity at local government: “complex infrastructure projects usually exceed the LGs’ technical capacities, even in large cities. (Kaganova 2011)”

7. Budget Coherence

  • Annual budget cycle: “allocating funding for capital projects should be done annually within a … budgeting cycle. On the other hand, complex infrastructure projects may require several years’ preparation. (Kaganova 2011)”
  • Capital and operating cost definitions: “Which life cycle costs are included in capital investment planning; and which, instead, are a part of operating budgets vary across countries, even among cities in one country (for instance, depending on city size). Which costs are included also can vary depending on accounting rules. Often, this division between capital and operating expenses is a subject of convention, locally or nationally. However, some of these costs—buying land for a new building, building a new facility, conducting major repair or modernizing an existing facility, or replacing long-lived components of a building (for example, the roof)—usually are included in capital investment planning. (Kaganova 2011)”
  • Operations and maintenance budgets: “a proportion of capital expenses (sometimes, a very substantial part) should be appropriated not for new construction but for the repair and replacement of existing assets (Kaganova 2011)”, “spending on investment creates lasting assets that need to be maintained. This means decisions on whether to go ahead with a project today create future financing obligations for operation and maintenance. (Miller and Mustafa 2016)”
  • Budget incentives: “Appropriate balance between spending on new infrastructure and maintenance spending: maintenance spending often gets overlooked in favour of large new projects that make headlines while returns to maintenance spending can be equally high (or higher). (Nagy et al 2015)
  • Budgeting for longer term: “Spending on public investment projects often involves significant costs and can span several years, making accurate budgeting inherently more challenging…there is an imbalance in the timing of costs and benefits because projects usually require significant up-front financing, while the benefits accrue over years and may only be fully realised decades after the asset has been built. (Miller and Mustafa 2016)”

References

Bhattacharya, A; Meltzer, JP; Oppenheim, J;  Stern, N. Delivering on Sustainable Infrastructure for Better Development and Better Climate. Brookings Institution, December 2016. https://www.brookings.edu/wp-content/uploads/2016/12/global_122316_delivering-on-sustainable-infrastructure.pdf 

Bivens, J. Public Investment, The Next ‘New Thing’ for Powering Economic Growth. Economic Policy Institute, April 18, 2012. http://www.epi.org/publication/bp338-public-investments/

Dabla-Norris, E; Brumby, J; Kyobe, A; Mills, Z; Papageorgiou, C. Investing in Public Investment: An Index of Public Investment Efficiency. International Monetary Fund, February 2011. http://www.imf.org/external/pubs/cat/longres.aspx?sk=24651

Dobbs, R; Pohl, H; Lin, D-Y; Mischke, J; Garemo, N; Hexter, J; Matzinger, S; Palter, R; Nanavatty, R. Infrastructure Productivity: How to save $1Trillion a Year. McKinsey, January 2013. http://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/infrastructure-productivity 

Kaganova, O. Guidebook on Capital Investment Planning for Local Governments. The World Bank, October 2011. https://openknowledge.worldbank.org/handle/10986/17394

Keefer, P; Knack, S. Boondoggles, Rent-Seeking, and Political Checks and Balances: Public Investment under Unaccountable Governments. The Review of Economics and Statistics, August 2007. http://www.mitpressjournals.org/doi/abs/10.1162/rest.89.3.566#.WP9p_1AzqRs

Miller, M; Mustapha, S. Public investment management, A public financial management introductory guide. Overseas Development Institute, November 2016. https://www.odi.org/sites/odi.org.uk/files/resource-documents/11064.pdf 

Miller, M. Public Investment Management Management Assessments (PIMAs) Please Handle with Care. Beyond Budgets, July 27, 2015. http://www.beyondbudgets.org/blog/2015/7/27/public-investment-management-assessments-pimas-please-handle.html

Nagy, P; Nies,M; Plekhanov, A. Infrastructure Spending as a Catalyst of Growth and Transition. European Bank for Reconstruction and Development, August 5, 2015.  http://www.ebrd.com/news/2015/infrastructure-spending-as-a-catalyst-of-growth-and-transition.html

Rajaram, A; Le, T M; Biletska, N; Brumby, J. A Diagnostic Framework for Assessing Public Investment Management. The World Bank, July 2010. http://elibrary.worldbank.org/doi/abs/10.1596/1813-9450-5397

Rodrigues, J. World’s fragile cities need a $78 trillion boost. Live Mint. March 24, 2017. http://www.livemint.com/Politics/yzKCCCrSYKAM3gn8fujqbL/Worlds-fragile-cities-need-a-78-trillion-boost.html

Rohsholt, F. PEFA Framework Enhancement for Better Measurement of Country PFM Systems, Analytical Note 4: Public Investment Management in the PEFA. PEFA Secretariat, May 2013. https://pefa.org/sites/default/files/asset/study_document/Technical%20Note%204%20-%20Public%20Investment%20Management%20-%20May%2024%2C%202013.pdf

Woetzel, J; Garemo, N; Mischke, J; Hjerpe, M; Palter, R. Bridging infrastructure gaps. McKinsey, June 2016. http://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/bridging-global-infrastructure-gaps 

—2014  Recommendation of the Council on Effective Public Investment Across Levels of Government. Organisation for Economic Development and Cooperation, March 2014. http://www.oecd.org/gov/regional-policy/recommendation-effective-public-investment-across-levels-of-government.htm

2017 Strategic Directions: Smart City/Smart Utility. Black and Veatch, 2017.  https://www.bv.com/docs/reports-studies/sdr-smart-city-smart-utility.pdf

Infrastructure for Growth, the dawn of a new multi-trillion dollar asset class. Citigroup GPS, October 2016 www.urbangateway.org/system/files/documents/urbangateway/a7lin.pdf

Making Public Investment More Efficient. International Monetary Fund, May 2015. http://www.imf.org/external/pp/longres.aspx?id=4959

—The Power of Public Investment Management Transforming Resources into Assets for Growth. The World Bank, 2014. http://documents.worldbank.org/curated/en/461121468164052711/The-power-of-public-investment-management-transforming-resources-into-assets-for-growth

—When will you think differently about programme delivery? PwC, September 2014. https://www.pwc.com/gx/en/consulting-services/portfolio-programme-management/assets/global-ppm-survey.pdf 

—World Investment Report, Investing in SDGs: An Action Plan. United Nations Conference on Trade and Development, 2014. http://unctad.org/en/PublicationsLibrary/wir2014_en.pdf

—World Population Prospects: The 2015 Revision. United Nations Department of Economic and Social Affairs, 2015. https://esa.un.org/unpd/wpp/publications/files/key_findings_wpp_2015.pdf

—World Urbanization Prospects. United Nations Department of Economic and Social Affairs, 2014. https://esa.un.org/unpd/wup/publications/files/wup2014-highlights.Pdf

 

http://databank.worldbank.org/data/download/site-content/wdi-2016-highlights-featuring-sdgs-booklet.pdf

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Doug Hadden

Doug Hadden

Executive Vice President, Innovation at FreeBalance
Doug is responsible for identifying new global markets, new technologies and trends, and new and enhanced internal processes. Doug leads a cross-functional international team that is responsible for developing product prototypes and innovative go-to-market strategies.
Doug Hadden

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