FPO
I N TERNAT IONAL DEVEL OPM EN T IN PR ACTICE
Public Investment
Management
Reference Guide
Jay-Hyung Kim, Jonas Arp Fallov, and Simon Groom
INTERNATIONAL DEVELOPMENT IN PRACTICE
Public Investment
Management
Reference Guide
JAY-HYUNG KIM, JONAS ARP FALLOV, AND SIMON GROOM
© 2020 International Bank for Reconstruction and Development / The World Bank
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Contents
Foreword ix
Acknowledgments xi
About the Authors xiii
Abbreviations xv
CHAPTER 1 Introduction 1
The need for a PIM reference guide 1
What is in this reference guide 3
How to use this reference guide 10
Limits to this reference guide and challenges 12
Notes 15
References 15
CHAPTER 2 Establishing the Concept and Scope of Public
Investment Management 17
Overview 17
Defining public investment: What is being managed? 17
Why does public investment need specially designed
management arrangements? 25
Notes 30
References 31
CHAPTER 3 The Legal and Regulatory Framework for PIM 33
Overview 33
Legal authority for PIM: Tier 1 34
Procedural guidelines and methodological guidance:
Tiers 2 and 3 35
Comparison of country legal and regulatory frameworks 38
Notes 39
References 39
CHAPTER 4 Allocation of Roles and Responsibilities among
Key Players 41
Overview 41
Options for the allocation of roles and responsibilities 42
Different approaches to decision rights according to project size,
sector, and level of government 44
Demarcation and coordination when a separate planning ministry
(or its equivalent) and finance ministry coexist 47
iii
iv | Public Investment Management Reference Guide
Establishing a dedicated PIM unit 49
Other specific issues in allocation of roles and responsibilities 52
Notes 55
References 55
CHAPTER 5 Designing the Project Appraisal and Selection System:
Quality-at-Entry Processes 57
Overview 57
Preappraisal 57
Appraisal 61
Independent review 82
Project selection 85
Notes 87
References 89
CHAPTER 6 Integrating the Strategic Planning, Project, and
Budgeting Cycles 91
Overview 91
Ensuring integration at the strategic planning stage 92
Ensuring integration at the quality-at-entry stage 96
Ensuring integration at the capital budgeting stage 100
Key issues in relation to linkages between strategic planning,
quality at entry, and budgeting 107
Notes 108
References 108
CHAPTER 7 Upgrading Capital Budgeting Practices 111
Some common problems 111
Estimating a capital baseline 111
Providing for carryover of unused budget appropriations for
capital projects 115
Introducing multiannual commitment appropriations 117
Integrating capital and recurrent budgeting 121
Notes 124
References 125
CHAPTER 8 Project Implementation, Monitoring, and
Adjustment 127
Overview 127
Project implementation arrangements 128
Monitoring 134
Project adjustment 143
Notes 145
References 145
CHAPTER 9 Ex Post Review and Asset Management 147
Overview 147
Ex post review 147
Asset registration and management 156
Notes 165
References 165
CHAPTER 10 Integrating PIM and PPP in a Unified Framework 167
Overview 167
Why PIM-PPP integration matters 168
Legal and institutional framework for PIM-PPP integration 170
Integrated project selection practices for PIM and PPP 178
Integrated fiscal management for PIM and PPP 184
Integrated project implementation for PIM and PPP 188
Contents | v
Notes 194
References 195
CHAPTER 11 Rationalizing a Nonperforming PIM Portfolio 197
Overview 197
Main features of portfolio rationalization 200
Steps in preparing and conducting portfolio rationalization 203
Criteria and benchmarks to identify nonperforming projects 206
Managing the portfolio rationalization program 209
Notes 212
References 212
CHAPTER 12 PIM Information Systems: Requirements, Options,
and Issues 213
Overview 213
Conceptual description of PIM information systems 214
Functional scope of a PIM information system 216
System design issues and options 222
System architecture 225
Planning for implementation of PIM information systems 229
Notes 232
References 233
APPENDIX A References for International Guidance on Designing
Appraisal Methodologies 235
APPENDIX B Further Issues in Developing an Economic Appraisal
Methodology 239
APPENDIX C Examples of Project- and Portfolio-Level Management
Support Capabilities Provided by a PIM Information
System 255
APPENDIX D Types of Content for a PIM Information
System Database 257
Boxes
2.1 Major categories of fixed assets 19
2.2 Distinguishing between major improvement and maintenance 19
2.3 OECD governance framework for SOEs 24
2.4 Planning and management of megaprojects: 10 negative
characteristics 26
3.1 Treatment of public investment management in Kazakhstan’s budget
systems law 35
3.2 Treatment of public investment management in Croatia’s budget
systems law 35
3.3 Content of budget system laws versus lower-order instruments 36
3.4 Treatment of public investment in Cyprus’s budget systems law 36
4.1 The Netherlands’s MIRT rules: Strict definition of roles and
responsibilities 45
4.2 Variations in review and decision making by project size, sector, and level of
government in the United Kingdom 46
4.3 Allocation of responsibilities in Chile’s national public investment system 49
5.1 Examples of formats for project concept notes 60
5.2 Performing environmental and social impact assessments 71
5.3 Content of Ireland’s guide to economic appraisal: Carrying out a cost-benefit
analysis 75
5.4 Chile’s guidelines on analytical methods 76
vi | Public Investment Management Reference Guide
5.5 The Australian government’s advice on the treatment of the equity and
distributional implications of a project 78
5.6 The problem of optimism bias in projects 82
5.7 Questions for independent reviewers in France 84
5.8 The United Kingdom’s full business case 86
6.1 The OECD’s definition of a long-term national strategic vision 93
6.2 Strategic guidance in Moldova 94
6.3 Ireland’s successful national development planning process 94
6.4 Rolling sector investment plans in Norway and Sweden 95
6.5 Australian infrastructure plan, 2016–31 96
6.6 The United Kingdom’s three business cases and five thematic cases 98
6.7 MTEF typologies 101
6.8 Guide to MTEF good practices 102
6.9 An integrated MTBF and budget preparation process 103
6.10 Capital budgeting in a medium-term perspective in Ireland 105
6.11 Linking strategic planning, project appraisal, and budgeting in
the Netherlands 108
7.1 Carryover provisions in Ireland 116
7.2 Potential for carryover provisions by public financial
management status 117
7.3 Multiannual commitment appropriations in France 119
8.1 Example from the United States: Table of contents of the Metrolink project
management manual 131
8.2 Example from the United States: Federal Transit Administration project
management plan outline 132
8.3 Example of project reporting requirements 136
8.4 The United Kingdom’s delivery confidence assessment 142
8.5 Ireland’s guidelines on project adjustment 143
8.6 Reassessment study of feasibility and project adjustment in Korea 144
9.1 Example of a format for a project completion report in the
United States 148
9.2 Ireland’s approach to ex post evaluation (postproject review) 150
9.3 U.K. Highways Agency’s post-opening project evaluation 155
9.4 Performance audit of projects by the U.K. National Audit Office 156
9.5 Norway’s Concept Research Program 157
9.6 Asset register: Areas of good practice in Belarus 161
9.7 Developing Northern Ireland’s national asset register 161
9.8 Extracting value through good asset management practices 163
10.1 Cyprus’s legal framework for integrating PIM and PPP 173
10.2 Korea’s PPP law and regulation for PIM and PPP integration 174
10.3 Jamaica’s PIM system for integrating PPP 175
10.4 Zimbabwe’s PIM guidelines, including integrated treatment of
PPP projects 176
10.5 Korea’s PIM and PPP unit responsibilities under the PPP law and
national finance law 177
10.6 Country PPP policy statements 178
10.7 VFM assessment method for unsolicited proposal projects in Korea:
Comparing all options with the same level of scrutiny 184
10.8 International financial standards for PPP accounting treatment 187
10.9 Refinancing examples 191
10.10 Guidelines for effective change management and renegotiation 192
10.11 U.K. National Audit Office: Highlighting insufficient data in evaluating
Private Finance Initiative projects 194
11.1 Underresourcing of the PIP in Romania 198
11.2 Fundamental quality issues affecting PIM performance in Ukraine 199
11.3 Implementation of public investment portfolio rationalization
in Turkey 200
11.4 Unreformed procedures for approval and selection impede portfolio
rationalization in Bangladesh 202
11.5 World Bank portfolio reviews 203
Contents | vii
11.6 Application of the analytical framework to three ministry PIPs
in Romania 209
12.1 Guiding principles for developing and implementing a PIM
information system 214
12.2 The Integrated Bank of Projects in Chile 220
12.3 An integrated database of public investment projects in Colombia 221
12.4 Integration of a PIM module in the Romanian budget planning system 226
12.5 PIM systems based on aid management platforms in Iraq and
Mauritania 227
12.6 Learning from past failures: The National Investment Planning system
in Serbia 231
B.1 National parameter values for social cost-benefit analysis in France 240
B.2 European Commission guidance to member states on the social
discount rate 242
B.3 Possible causes of labor market distortions 246
B.4 International experience in adjusting for the deadweight economic losses
from general taxation 247
Figures
2.1 Capital expenditures, public investment, and national capital investment 23
2.2 Systematic framework for public investment management 28
6.1 Intersection of the project cycle with the strategic planning and
budgeting cycles 92
7.1 Capital baseline and fiscal space for public investment projects 113
7.2 Example of a US$500 million multiannual appropriation carried over
five years 120
8.1 Responsibilities of the project manager and senior responsible owner (SRO)
in the United Kingdom 129
8.2 Project management arrangements for complex health projects
in Ghana 130
9.1 The results chain: Conceptual logic 151
9.2 The results chain: Illustrations 151
9.3 Design process for a road project following the results chain 152
9.4 Example of an asset register and of asset management in South Africa,
by function 158
B11.1.1 Cost of completion of the 2015 project portfolio in Romania 198
B11.4.1 Number of approved and unapproved projects in the Annual Development
Program (ADP) and revised ADP 202
11.1 Diagrammatic representation of the main steps in public investment
portfolio (PIP) rationalization 204
B11.6.1 Analysis of public investment projects in three ministries in Romania 209
12.1 Stakeholder map for a PIM information system 215
12.2 Options for defining the functional scope of a PIM information system 218
B12.2.1 Diagrammatic representation of the Integrated Bank of Projects
in Chile 220
12.3 Possible technical architecture of a stand-alone PIM information system 228
B.1 Equilibrium and the impact of market imperfections 243
Tables
2.1 Public financial management objectives and implications for PIM 27
2.2 Potential consequences of PIM failings 28
3.1 Comparison of legal and regulatory hierarchies for PIM in three
countries 38
4.1 Roles and responsibilities of key players in PIM 44
4.2 Public investment units in some countries with advanced PIM
frameworks 50
5.1 Differences between financial and social cost-benefit analysis 62
5.2 Reference analysis periods for a project, by sector 65
5.3 Template for summary budgetary analysis 66
viii | Public Investment Management Reference Guide
5.4 Proportionality in the application of assessment tools in Ireland 74
B5.4.1 Chile’s guidelines on analytical methods 76
5.5 The United Kingdom’s coefficients for correcting optimism bias 83
6.1 An example of a logical framework 97
6.2 Matrix of thematic and business cases: United Kingdom 99
7.1 Forward capital expenditure estimates 115
B8.4.1 Delivery confidence assessment: Red-amber-green (RAG) ratings
and criteria 142
9.1 Evaluation criteria 149
9.2 Example of suggested data requirements for land assets 160
10.1 Summary of possible drivers and questions relating to public-private
partnership (PPP) implementation 182
11.1 Summary of possible project-level criteria, indicators, and performance
benchmarks for identifying nonperforming projects 208
12.1 Examples of status indicators and performance rankings available for
dashboard operations 225
B.1 Social discount rate (SDR) perspective and discount rate, by country 244
B.2 Reference analysis periods for project, by sector 245
B.3 Schedule of declining discount rates in the United Kingdom 245
B.4 Use of revealed preference and stated preference methods, by the nature of
the public good or benefit 249
B.5 Strengths and weaknesses of willingness to pay valuation methods 250
C.1 Project- and portfolio-level support capabilities 255
D.1 Elements of a PIM system database, by project stage 257
Foreword
Public investment management (PIM) is crucial to improving infrastructure
outcomes and spurring economic development. Analysis has shown that
improvements in the systems, processes, and procedures supporting public
investment can significantly increase its quality and efficiency.
Over the past decade, the World Bank has worked extensively to provide
guidance to countries and share experiences on how to adopt identified
principles of functionality in the design of PIM institutions. A key lesson from
the work is that it is tempting but not necessarily wise to seek to emulate high-
income countries that may have developed sophisticated management systems
compatible with their specific political contexts. Yet, clear management princi-
ples exist that should be retained and adapted to lower-capacity contexts. These
“must-have” features of a PIM system—features that help to ensure that key risks
are appropriately reduced through decision steps and controls—are within most
governments’ capacity to implement. Since 2008, a World Bank PIM diagnostic
framework for assessing the extent to which the must-have principles are
reflected in country systems has been applied in more than 70 countries.
World Bank PIM engagements have revealed an increasing demand for
practical guidance on how to adapt the must-have principles to country
contexts and develop specific reforms in relation to country practices and
procedures.
The Public Investment Management Reference Guide aims to fill the gap
between what should be done and the immediate demand for pragmatic guid-
ance from countries on how to adapt the implied reforms. It conveys country
experiences and good international practices as a basis for decisions on how to
address a country-specific PIM reform agenda. The country references are
drawn largely from previous diagnostics and technical assistance work of the
World Bank.
The PIM Reference Guide identifies key reform issues in the following
areas: clarification of the definition and scope of public investment and pub-
investment management; establishment of a sound legal, regulatory, and
lic
institutional setting for PIM; allocation of roles and responsibilities for key
players in PIM across governments; strengthening of appraisal and deepen-
ing of appraisal methodologies; integration of strategic planning, project
appraisal, and capital budgeting; management of multiyear capital budget
ix
x | Public Investment Management Reference Guide
allocations and commitments; efforts to address the effective implementa-
tion, procurement, and monitoring of projects; strengthening of asset
management and ex post evaluation; integration of PIM and public-private
partnerships (PPPs) in a u nified framework; rationalization and
prioritization of the existing n onperforming portfolio of public investment
projects; and development of a PIM information system.
The PIM Reference Guide provides an overall framework for each of the
issues, lists different approaches and experiences across countries, and
summarizes actionable reforms. It does not seek to provide definitive answers or
detailed templates for replication across countries. Instead, it clarifies the
differences and commonalities across countries.
I hope readers will appreciate the experience-based knowledge and practical
value of this publication and that it will encourage countries to seek reforms
more systematically. PIM is indeed a complex matter, but it is of critical
importance if countries want to meet the current and emerging demands of the
global economy, reduce poverty, and increase their contribution to global
prosperity. In the World Bank, we look forward to working closely with member
countries, other development partners, and the private sector to deliver better
public investment solutions and achievements.
Edward Olowo-Okere
Director, Governance Global Practice
The World Bank
Acknowledgments
This volume was prepared by a World Bank Governance Global Practice team
led by Jay-Hyung Kim (task team leader) and Jonas Arp Fallov, with Simon
Groom (international consultant). The team worked under the guidance and
direction of James Brumby and Edward Olowo-Okere. The team is grateful to
peer reviewers Marianne Fay (former chief economist, Sustainable Development
Global Practice and current country director), Cem Dener (lead governance
specialist, Governance Global Practice), Jens Kromann Kristensen (head, PEFA
Secretariat; lead public sector specialist, Governance Global Practice), Tuan
Minh Le (lead economist, Macro, Trade, and Investment Global Practice), David
Gentry (former senior economist, Fiscal Affairs Department, International
Monetary Fund [IMF]), Rui Monteiro (former senior public-private partner-
ship specialist, Public-Private Partnerships Cross-Cutting Solution Area, World
Bank; current technical assistance adviser, Fiscal Affairs Department, IMF), and
Onur Erdem (public sector specialist, Governance Global Practice).
The team would like to recognize advice and suggestions received from
Bernard Myers, Nicola Smithers, Robert Taliercio, and Hisham Waly at vari-
ous points during preparation of the volume. The work of Marc Robinson and
Andrew Bird (international consultants) provided invaluable source material for
chapter 7 and chapter 11, respectively. The background work of Martin Darcy
(international consultant) is acknowledged for developing the asset manage-
ment section of chapter 9 and for framing and strengthening the contents of
chapter 10. Background work by Eduardo Talero (international consultant) is
also acknowledged for defining the requirements for public investment manage-
ment (PIM) information systems and enriching the conclusions of chapter 12.
Helpful comments were provided by the participants at brown bag seminars
organized by the Public Investment Management Community of Practice at the
World Bank.
The work on the PIM Reference Guide benefited from a valuable partnership
with the Korea Development Institute (KDI) and financial support from the
Korean Trust Fund Program.
xi
About the Authors
Jonas Arp Fallov is a senior public sector specialist with the World Bank’s
Europe and Central Asia West Region, specializing in public financial manage-
ment and public investment management. His experience includes leading proj-
ects as well as advisory and analytical work in 18 countries as well as long-term
assignments in Bangladesh and Indonesia. Mr. Fallov has served as a steering
committee member of the PIM Community of Practice. Before joining the World
Bank, Mr. Fallov held several positions in the Danish government, including as
head of the Ministry of Finance Budget Reform Secretariat, head of the Division
for State Accounts and Reporting under the Ministry of Finance, and head of the
Budget Division under the Ministry of Environmental Affairs. Mr. Fallov holds
master’s degrees in public administration from the Maxwell School of Citizenship
and Public Affairs, Syracuse University, and in public managerial economics
from Roskilde University.
Simon Groom began his career as an economist working on feasibility studies of
public sector transport infrastructure projects, first in the United Kingdom and
then internationally. He then became involved in public financial management,
focusing on assisting countries such as Albania, Bosnia, and Vietnam to intro-
duce a stronger medium-term perspective and performance orientation to bud-
geting. Since 2008, he has specialized in advising on public investment
management (PIM) reforms, mostly for the World Bank and the International
Monetary Fund. This work has involved participating in PIM diagnostic assess-
ments and providing follow-up technical assistance, including drafting of proce-
dures and guidelines and advising on legislative changes. His work in this area
has taken him to countries in the European Union (Bulgaria, Cyprus, Ireland,
and Romania), Eastern Europe and the South Caucasus (Azerbaijan, Southeast
Balkan countries, Belarus, Georgia, Moldova, and Ukraine), and Africa (Botswana,
Ethiopia, Ghana, Kenya, Rwanda, Tanzania, and Uganda), as well as to Vietnam.
As part of the technical assistance, Mr. Groom has been involved in organizing
study visits to the Republic of Korea, Norway, Slovenia, and the United Kingdom.
Mr. Groom has a BSc in economics from the London School of Economics and
Political Science and an MA in development economics from the University of
Sussex.
xiii
xiv | Public Investment Management Reference Guide
Jay-Hyung Kim is an adviser in the Governance Global Practice of the World
Bank. Since 2012, he has been working in areas of public investment manage-
ment and public-private partnership (PPP) in various departments and units of
the World Bank. He served as co-convenor and steering committee member of
the PIM Community of Practice. His country experience includes substantive
assignments for advisory and analytical works on Cambodia, Ethiopia, Georgia,
Kenya, Mongolia, Romania, Ukraine, Vietnam, and Zimbabwe. Before joining
the World Bank, from 2000 to 2003 and from 2006 to 2012, he served as execu-
tive director of the PIM/PPP organization of the government of the Republic of
Korea, the Public and Private Infrastructure Investment Management Center
(PIMAC), which, according to the National Finance Law and the Public Private
Partnership Law, is mandated to be responsible for supporting the management
and supervision of public and private infrastructure investments of the govern-
ment. From 2003 to 2005, he was seconded as a senior economist in the
Operations Evaluation Department of the World Bank. He has been a fellow of
the Korea Development Institute (KDI) since 1994. Dr. Kim holds bachelor’s and
master’s degrees in economics from Seoul National University and a PhD in eco-
nomics from the University of Chicago.
Abbreviations
FMIS financial management information system
ICT information and communication technology
IMF International Monetary Fund
IPSAS International Public Sector Accounting Standards
IT information technology
LOLF Loi Organique Relative aux Lois de Finance
(Organic Budget Law) (France)
MCA multicriteria analysis
MFD maximizing finance for development
MTBF medium-term budgetary framework
MTEF medium-term expenditure framework
MTFF medium-term fiscal framework
MTPF medium-term performance framework
NPC net present cost
NPV net present value
OBC outline business case
OECD Organisation for Economic Co-operation and Development
PEFA public expenditure and financial accountability
PIM public investment management
PIMAC Public and Private Infrastructure Investment Management
Center (Republic of Korea)
PIP public investment portfolio
PPP public-private partnership
SCBA social cost-benefit analysis
SDR social discount rate
SNG subnational government
SNI National Public Investment System (Chile)
SOC social opportunity cost; strategic outline case
SOE state-owned enterprise
SRO senior responsible owner
SRTP social rate of time preference
xv
xvi | Public Investment Management Reference Guide
TIP traditionally implemented project
VFM value for money
WTA willingness to accept
WTP willingness to pay
1
Introduction
THE NEED FOR A PIM REFERENCE GUIDE
Public investment management (PIM) is a crucial component of infrastructure
investment and economic development. Improvements to PIM are expected to
enhance the efficiency and effectiveness of infrastructure investment as well as
its contribution to achieving development goals. Analysis has shown that the
quality of public governance correlates with public investment and growth out-
comes; improving governance arrangements, across levels of government at
national and subnational levels, throughout the life cycle of an investment proj-
ect could therefore achieve significant benefits (OECD 2013). An International
Monetary Fund (IMF) study using a scale to measure the difference between one
country’s efficiency and that of its best-performing peers has shown that coun-
tries achieve very different efficiency from their public investments (IMF 2015).
In emerging markets, the difference in efficiency is 27 percent on average; in
low-income countries, it is 40 percent. The differences become even more pro-
nounced for the bottom quarter of performers, where more than half of the pub-
lic capital accumulated from public investment does not contribute meaningfully
to the delivery of quality infrastructure services.
A World Bank publication, The Power of Public Investment Management:
Transforming Resources into Assets for Growth, synthesized global knowledge on
this topic to provide guidance on how to adopt identified principles of function-
ality in the design of institutions in order to strengthen PIM (Rajaram et al.
2014). Given a country’s institutions, infrastructure, and unique issues, it is
tempting but unwise to seek to emulate high-income countries that have evolved
sophisticated management systems compatible with their specific political
contexts. Yet clear management principles exist that should be retained and
adapted to lower-capacity contexts. These principles can be termed the “must-
have” features of a PIM system—features that help to ensure that key risks are
appropriately reduced through decision steps and controls that are within most
governments’ capacity to implement. Addressing these issues requires a sys-
temic view and careful diagnostic assessment (Rajaram et al. 2014, 8). Since
2008, a World Bank PIM diagnostic framework for assessing the extent to which
“must-have” principles are reflected in country systems was applied in more
1
2 | Public Investment Management Reference Guide
than 70 country diagnostics, revealing the generally poor quality of s ystems
across the globe.
Introduced in 2015 (IMF 2015) and recently revised (IMF 2018), the IMF’s
Public Investment Management Assessment (PIMA) framework is another
key tool for assessing infrastructure governance over the full investment cycle
and for supporting economic institution building in this area. A key motivation
for its development has been that strong infrastructure governance is critical
for public investment to spur economic growth. PIMAs are used to assess
infrastructure governance—that is, the key PIM institutions and processes of a
country. More than 50 PIMAs have been conducted to date, revealing much
room for strengthening PIM.
These PIM diagnostic assessments often lead to follow-up work by the
World Bank, IMF, or other global institutions involving technical assistance
and development actions to address recommendations for individual coun-
tries. Follow-up work has included support for building PIM institutional
frameworks, developing PIM regulations and guidelines, and launching
capacity-building programs. The work has been carried out using a variety of
instruments, including development policy loans or operations (DPLs or
DPOs), reimbursable advisory services (RASs) or technical assistance (TA),
investment project financing (IPF), and program for results (PforR) projects.
Recent DPLs or DPOs have included PIM components in many country oper-
ations, such as in Georgia, Ghana, Iraq, Jamaica, Mongolia, Peru, São Tomé and
Príncipe, and Tanzania. PIM RAS or TA projects have been implemented in
Belarus, Botswana, China, Colombia, Croatia, Cyprus, Ethiopia, Equatorial
Guinea, Georgia, Ghana, Jordan, Kuwait, Libya, Oman, Romania, Ukraine,
Vietnam, Zambia, and Zimbabwe. Recently, some IPF or PforR projects have
also included PIM c omponents in countries such as Benin and Nigeria or
Kenya and Nigeria,1 respectively.
Unfortunately, a gap remains between the functionality principles pre-
sented in the PIM and PIMA diagnostic frameworks and the countries’
demand for practical guidance on how to adapt these principles to their
country contexts. While the PIM and PIMA diagnostics recommend “what”
should be done, countries frequently request a provisional reference guide on
“how” to develop specific reforms in relation to country PIM practices and
procedures and how to clarify the roles and responsibilities of key players.
Addressing PIM reforms by developing customized institutions and regula-
tions presents a complex challenge, given unique country settings that reflect
different political and institutional histories. Country-specific variations in
public investment and the underlying institutional, policy, and legal arrange-
ments argue against the development of a standardized set of management
rules and guidelines.
The Public Investment Management Reference Guide aims to fill the gap
between “what” should be done and the immediate demand for pragmatic guid-
ance from countries on “how” to adapt the implied reforms. It provides PIM
practitioners with different approaches and experiences and draws attention to
any commonalities among them.
The application of the country diagnostics and assessments has revealed the
following prioritized agenda when undertaking reform (World Bank 2015):
• Clarification of the definition and scope of public investment and public
investment management
Introduction | 3
• Establishment of a sound legal, regulatory, and institutional setting for PIM,
making sure that it is linked to the budget process
• Allocation of roles and responsibilities for key players in PIM across
government
• Strengthening appraisal and deepening appraisal methodologies
• Integration of strategic planning, project appraisal and selection, and capital
budgeting
• Management of multiyear capital budget allocations and commitments
• Efforts to address the effective implementation, procurement, and monitor-
ing of projects
• Strengthening of asset management and ex post evaluation
• Integration of PIM and public-private partnerships (PPPs) in a unified
framework
• Rationalization and prioritization of the existing portfolio of PIM projects
• Development of a PIM database and information technology in the form of a
PIM information system.
The PIM Reference Guide provides an overall framework for each of the
issues, lists different approaches and experiences across countries, and summa-
rizes actionable reforms. It does not seek to provide definitive answers or a
detailed template for replication across countries; such a template would be
impossible given the diversity of country situations. Instead, it clarifies the
differences and commonalities across countries.
WHAT IS IN THIS REFERENCE GUIDE
The PIM Reference Guide sets out the reform agenda outlined above and exam-
ines the key issues to be addressed. It identifies the most important areas for
country-level discussion and provides references that country PIM practitioners
can turn to for answers or to enhance their own knowledge. It is arranged into
12 chapters, including this introduction, plus four appendixes. The chapters
focus on each of the agendas in turn, aiming to give detailed advice on how to
formulate and establish country practices, procedures, and roles and responsi-
bilities in PIM development. Application of the PIM Reference Guide will help
governments to improve their core public expenditure management functions
and capacities, particularly by helping to strengthen the relevant functionalities
of the finance ministry (and/or planning ministry), line ministries, and agencies.
It draws upon the lessons emerging from comparisons of the systems and prac-
tices of high- and low-income countries.
Chapter 2 discusses the agenda of how to deal with the concepts and defini-
tions of public investment and public investment management. It explores how
public investment and PIM are conceptualized and how their scope is deter-
mined. Defining public investment is important for establishing the boundaries
of the PIM system; public investment can be defined too narrowly or too broadly,
usually as a result of the context within which it is being defined. A narrow defi-
nition may lead to significant expenditures bypassing the PIM system. A broad
4 | Public Investment Management Reference Guide
definition may equate public investment with the general notion of “develop-
ment” expenditures and could, for example, capture expenditure initiatives
relating to human capital formation within a PIM system. Ensuring a precise
definition of public investment does not mean that public expenditure proposals
falling outside the definition should escape proper planning, scrutiny, and
management; rather, the particular characteristics of public investment, appro-
priately defined, demand the special attention achieved through a dedicated
system.
PIM is a regulatory and oversight system that forms a subcomponent of
public financial management. As such, there should be no room for interpreta-
tion when it comes to its scope. There may be no universally recognized
answers to the questions posed here, but each country needs to have its own
definitions and conceptual understanding of the scope of PIM within its own
jurisdiction. These definitions need to be well established in the legal and reg-
ulatory framework to avoid ambiguity. The chapter examines the features of
public investment that differentiate it from other types of expenditures and
that require a separate regulatory system and distinct management processes.
It links public investment management to the broader public financial man-
agement system and identifies key features and institutional arrangements for
supporting an effective PIM system.
Chapter 3 discusses how to develop a hierarchical legal and regulatory frame-
work for PIM to ensure its proper functioning and to support the consistent
application of common standards and methods. The legal tradition and adminis-
trative culture in any given country will determine the most suitable approach,
but the guiding principle should be to avoid using legal instruments to set down
detailed procedural arrangements and methodological guidance. Procedures
and methods will almost certainly have to be adapted over time, particularly in
the early days of PIM reform, and the more authoritative a legal instrument is,
the harder it is to change.
There are three principal points in the design and adoption of a three-tier
hierarchical legal and regulatory framework:
1. Legal authority for the PIM system, which is usually established through
some form of primary legislation
2. Basic procedural guidelines, high-level decision criteria, roles and responsi-
bilities, and designation of analytical tools
3. Methodological guidance, detailed criteria, standardized parameter values,
and procedural documentation, which are generally issued directly by the
PIM coordinating agency in the form of manuals, templates, and circulars,
under the authority granted to it by the primary legislation.
Within this broad hierarchical framework, chapter 3 demonstrates that there
can be much variation from country to country. Despite this variety, the aim
should be to preserve as much flexibility as possible so that the agency responsi-
ble for coordinating PIM can improve systems on the basis of lessons learned
and capacity developed. This agency also needs to be given clear legal authority
to enforce the rules of the game.
Chapter 4 discusses and presents lessons on the allocation of roles and
responsibilities among the main players, a core part of PIM institutional arrange-
ments. This allocation is important for both the upstream and downstream
phases of the PIM system, when assessments, budgeting, and implementation
Introduction | 5
must be carried out and overseen, and formal decisions on whether to proceed
further with a project must be made at key control points. Key players in the PIM
process may include the finance ministry, the planning ministry or agency, line
ministries and their departments and subordinated agencies, an interministerial
committee or similar body, and a ministerial committee, made up of finance,
planning, and infrastructure ministers, with powers delegated from the council
of ministers in the area of major projects. The role of the legislature should not
be forgotten, since the legislature has the ultimate decision-making power over
project funding through the budget process. Depending on the country context,
this role may or may not extend to decisions on individual projects.
Chapter 4 defines four general roles for PIM functions:
• Proposer, who, in response to an identified need or emerging problem, iden-
tifies the project concept and initiates the steps that follow
• Appraiser, who performs analysis of the net social worth, affordability, and
sustainability of the project as it develops from concept to budget-ready
expenditure proposal
• Reviewer, who reviews the quality and robustness of the analysis at each step
and advises decision makers accordingly
• Decision maker, who is ultimately responsible for deciding to proceed to the
next stage on the basis of the analytical findings and the reviewers’ advice.
For each stage of the PIM system, responsibilities related to each role must be
clarified. In some cases, the same body may perform different roles; but where
this is the case, internal safeguards against conflicts of interest may be required,
such as involving disinterested parties within the organization.
Chapter 5 discusses how to establish suitable institutional arrangements and
provides supportive guidance for strengthening or developing the project
appraisal and selection processes within PIM. As part of the upstream part of the
PIM system, quality-at-entry processes ensure that the projects that are imple-
mented have been properly vetted.
Quality-at-entry processes combine rigorous analysis with sequenced and
disciplined review and decision making. Although the terms used may vary
between countries, four distinct processes are involved in the PIM upstream
decision:
1. Preappraisal
2. Appraisal
3. Independent review
4. Project selection.
These processes act as a filtering system, by which projects are passed through
finer and finer filters to arrive at projects that are eligible to be considered for
funding.
Preappraisal introduces gradualism into the assessment process, creating
space to reflect on the merits of the project, its logic, and its coherence with gov-
ernment and sectoral strategic policy priorities. It provides an opportunity to
consider alternative solutions to the reference project. The aim should be to pro-
duce a short list of a handful of alternatives from a long list for further analysis
alongside the reference project.
6 | Public Investment Management Reference Guide
Appraisal activities create the analytical basis for making an informed deci-
sion on whether a project is the most socioeconomically profitable use of public
financial resources. This factor is not the only basis for proceeding with a proj-
ect; appraisal also provides the basis for assessing the long-run sustainability of
the project from financial, budgetary, environmental, social, and managerial
perspectives.
The main rationale for independent review derives from the problem of
systematic optimism bias, which has been shown to beset all major projects,
across time, across countries, and across sectors. This function can be performed
by the finance ministry or by a designated specialized agency. The chapter
discusses the meaning of independence and the coverage, depth, outcomes, and
timing of the review.
Project selection is a key decision point and the culmination of the
quality-at-entry processes. The decision is made on the basis of appraisal find-
ings and recommendations, usually presented to decision makers in a summary
appraisal report together with supporting documentation. Selection ends with a
formal decision on a project’s socioeconomic viability and sustainability and
confirmation of its eligibility to be proposed for budget funding. Selection does
not represent a decision to fund a project, which can only be made through the
budgetary process.
Chapter 5 also explores issues in relation to the effective design of the proj-
ect appraisal process and methodology. It envisages key issues in designing an
appraisal process, including stepwise appraisal analytics, proportionate
appraisal considering the threshold, publication of national methodological
guidance, optional or obligatory prefeasibility study, and limitations of quanti-
tative economic analysis, taking into account distributional and environmental
sustainability, among other issues. It does not set out a detailed appraisal meth-
odology for governments to adopt; rather, it points out some of the more
important design issues to be considered when using social cost-benefit anal-
ysis (SCBA) and addresses some of the potential pitfalls. Along with an over-
view of SCBA, the chapter discusses the choice of approach to estimating
nonmarket benefits and costs, the treatment of labor market distortions, the
setting of national parameter values, decisions regarding the sophistication of
risk analysis, and decisions concerning the setting of the social discount rate.
When drawing up national methodologies, governments need to include spe-
cific guidance regarding common pitfalls in the application of SCBA, such as
double counting benefits, ignoring displacement effects, including job creation
effects during construction as benefits, counting multiplier effects as benefits,
or ignoring the opportunity cost of public assets. The chapter is supported by
appendix B, which explores these issues in depth.
Chapter 6 discusses how to integrate the strategic planning, project selec-
tion, and capital budgeting cycles. Upstream PIM processes consist of more
than quality at entry. The upstream subsystem, if designed well and working
properly, should ensure that strategic planning, quality at entry, and capital
budgeting are closely integrated, so that the right infrastructure is provided at
the right price and at the right time. This integration is not straightforward,
because the strategic planning cycle, the project cycle, and the budgeting
cycle are not concurrent and have different planning and implementation
horizons. Strategic planning and budgeting have a wider scope than public
investment. A functioning PIM system must, however, ensure that the three
cycles come together at key points.
Introduction | 7
The governance structure and procedural and methodological manuals for
PIM should be designed with a view to strengthening the integration of the three
upstream cycles, while taking account of their differences in timing and scope.
At the strategic planning stage, several important linkages need to be considered:
strategic planning is the basis for identifying projects for preparation and
appraisal, strategic plans are key for prioritization during capital budgeting, and
strategic plans have to be fiscally constrained to improve consistency with future
capital budgets.
During the quality-at-entry stage (including preappraisal, appraisal, and
selection stages), verifying project compliance with the relevant strategic docu-
ments is essential. Strategic relevance should therefore be assessed at preap-
praisal and reviewed again at appraisal. To the extent possible, affordability and
fiscal sustainability should also be taken into account during preappraisal and
appraisal, making the link (although not direct) with capital budgeting.
At the capital budgeting stage, it is important both to reflect strategic
guidance in decisions regarding resource allocation and prioritization of new
projects and to respect quality-at-entry decisions. The critical linkages to
consider are (a) effective “gatekeeping” to ensure that projects entering the
capital budgeting process have been positively appraised and selected before-
hand; (b) a medium-term budget framework, possibly supplemented by a
longer-term strategic expenditure framework for infrastructure sectors, to
provide a conducive environment for linking strategic plans, appraisal, and
capital budgets; and (c) an emphasis on strategic prioritization in capital
budget decisions.
Chapter 7 tackles how to upgrade the capital budgeting system and processes
in order to ensure continuity of funding for ongoing projects and sustainable
funding for new projects. In weaker PIM systems, ongoing projects typically
compete with new projects for funding and frequently lose out, resulting in them
either being “drip-funded” or stalled altogether. When ongoing projects are
starved of funding for efficient implementation, costs tend to be higher overall
and the realization of benefits is often delayed, eroding social viability.
The chapter examines continuity of funding for ongoing projects by estimat-
ing a capital budget baseline as part of the medium-term expenditure frame-
work, with the aim of completing projects before funding is redirected to new
projects. It also describes the carryover of unused budget for capital projects,
which can help to prevent inefficient bunching of expenditures at the end of a
year and avoid having slower-moving projects compete for funding with new
priorities in the new budget year.
The adoption of multiannual commitment appropriations for investment
projects could help to resolve the problem of having too many “drip-funded”
projects. Under this system, an initial multiannual commitment equal to the total
approved project cost is made. This appropriation is used each time a legal con-
tract is entered into in relation to implementation of the project. The unused
balance of the multiannual appropriation, if any, is then carried forward to sub-
sequent years so as to remain available when further contracts are signed. The
multiannual commitment appropriation for a specific investment project is
reserved specifically for that project and may not be used for other projects. The
advantage of such a system is that it clearly shows the amount required to com-
plete all current projects, thus avoiding the illusion that additional fiscal space is
being created by splitting available payment appropriations among more
projects.
8 | Public Investment Management Reference Guide
Chapter 8 is reserved for discussions of project implementation, monitoring,
and adjustment. Previous chapters deal mostly with upstream PIM processes
and their treatment in the regulatory framework. The downstream stages of the
project cycle and the broader PIM system also need to be addressed in the regu-
latory framework for PIM. Procedural guidelines are required, supported by
detailed methodological guidance.
Where aspects of downstream processes are already defined in existing legal
and regulatory instruments—for example, budget execution or public
procurement—it is not useful to repeat these definitions in the regulatory frame-
work for PIM. Instead, national PIM guidance should refer users to the relevant
parts of existing laws and regulations. It is important for PIM procedural guide-
lines to set out the organizational requirements for managing project implementa-
tion. These guidelines may vary in sophistication, depending on the project size,
but accountabilities and responsibilities need to be clearly assigned in all cases.
Monitoring should provide early warning of implementation problems and be
accompanied by formal procedures to ensure that such warnings are addressed.
More sophisticated monitoring after project completion ensures that projects are
delivering the intended outcomes—that is, services are being delivered to target
beneficiaries with the anticipated positive effects on their welfare. Monitoring
provides the raw material for midterm and ex post evaluation exercises.
If a project is so badly off track that it is no longer feasible within reasonable
budgetary and time constraints, the possibility of making fundamental adjust-
ments, including closure, should exist.2
Chapter 9 envisages ex post evaluation and asset management as integral
parts of PIM. On project completion, following formal verification and handover
to the user, the basis for proper custodianship should be established by register-
ing the asset in a country’s asset management system.
Immediately after project completion, a basic completion review, involving
analysis and lesson learning from project implementation, is the minimum
requirement for a functioning PIM system. More advanced systems deepen the
feedback mechanism by evaluating the impact of a project and assessing whether
its objectives have been achieved. The aims of this evaluation are to inform pol-
icy design, to develop similar projects in the future, and to strengthen account-
ability for project results. Such ex post evaluations should examine how the PIM
system functions as a whole to provide feedback into system design. The chapter
discusses the legal and regulatory framework for these requirements.
Asset registers need to be updated regularly, and asset values need to be
recorded. Countries should require their operating agencies to compile balance
sheets, where the value of assets created from new fixed capital expenditures
can be recorded alongside existing assets. Active asset management helps to
ensure that assets serve their purpose throughout their intended life span. This
process requires asset quality to be tracked over time. The chapter describes
how agencies that are responsible for service delivery should be held account-
able for results as an incentive to optimize the economic life of the assets.
Chapter 10 discusses developing a harmonized and integrated PIM-PPP sys-
tem, focused on achieving the best outcomes at the lowest cost and risk, regard-
less of the implementation and contracting modality. All public investment
projects, whether they are implemented through a PPP modality or through a
traditionally implemented project (TIP) modality, should aim to support the
creation of viable economic infrastructure—such as roads, airports, and
railways—or to provide social infrastructure and public services. In many
Introduction | 9
countries, however, PPPs have been prepared, appraised, selected, budgeted,
and monitored separately from TIPs. This disparity has undermined unified
public financial management; it has also created undue fiscal risks and lack of
clarity, leading to concerns with accounting, reporting, and budgeting, among
other processes. Intrinsically, a “PPP project” is simply a way of implementing a
public investment project. A bad project will remain a bad project, and a PPP
form of implementation cannot transform it into a good one, underlining the
need for a harmonized and integrated system.
The chapter develops specific guidance on how to go about framing PIM-PPP
harmonization and integration and discusses specific country examples for
establishing an integrated regulatory framework for PIM and PPP. All projects
should follow the process requested by the PIM system, regardless of whether
they are flagged as potential PPPs at the preappraisal stage. A project not flagged
as a potential PPP during the preappraisal stage may nevertheless be flagged as
such later, at the appraisal stage, if it presents significant PPP potential during
the detailed assessment of the project’s costs and benefits. The chapter discusses
how to examine the rationale for flagging a project as a potential PPP within a
unified framework.
Some governments introduce rules to control the fiscal commitment to PPP
projects. Defining the types of fiscal commitments to be included and establish-
ing how to aggregate a long-term flow of different types of fiscal commitments
presents a challenge. One issue is to determine whether the rule applies only to
direct liabilities or whether contingent liabilities are also to be included. Working
out how to measure and aggregate these liabilities is challenging. For this reason,
the chapter presents relevant examples of safeguards against exposure to risk
from PPPs.
Many public authorities are still unfamiliar with PPPs, and it is critical to
understand the differences between traditional contracting and PPP methodol-
ogies for project implementation rules and practices. The chapter addresses
various issues from the perspective of PPPs, including procurement, renegotia-
tion, contract management in operation, asset registers, and ex post evaluation.
It encourages authorities to use the same rules and conditions as for PIM.
Chapter 11 examines approaches to rationalizing a severely nonperforming
and underfunded portfolio of public investment projects, a common situation in
many countries. Portfolios are underfunded when the financing required to
deliver public investment projects according to the original implementation
schedule significantly exceeds the available funding. An underfunded portfolio
is often a legacy of inadequate quality-at-entry processes that lead to exceeding
the budget financing during project selection, despite planned fiscal limits for
the annual and the medium-term budgets. A dilution of financial resources
across too many projects is a symptom of an ineffective gatekeeping mechanism;
a central finance agency should be checking that all quality-at-entry require-
ments have been complied with and that a project’s affordability in the context
of the wider portfolio has been verified. Faced with a shortage of funds, too many
projects, and the fact that ongoing projects tend to compete with new projects
for funding, decision makers often feel compelled to spread funds too thinly
across the portfolio, rather than prioritizing the projects.
Problems with an oversubscribed portfolio of public investment projects may
be resolved by implementing reforms to strengthen quality-at-entry processes,
provided these reforms address affordability issues from an early stage. As ongo-
ing projects are completed and fiscal space for new projects gradually builds,
10 | Public Investment Management Reference Guide
reforms of these processes—if successfully implemented—will ensure the neces-
sary quality control of new projects. Reforms should prevent approval of
low-quality proposals and unaffordable project commitments. Without such
reforms, significant damage to public investment outcomes is likely.
A more effective short- to medium-term option is to initiate a portfolio ratio-
nalization, especially in cases where the portfolio is overloaded and implemen-
tation performance is chronically affected. Rationalization involves portfolio
review, identification of poorly performing projects, and creation of a resolution
procedure to restructure or terminate projects.
The chapter describes how rationalization might be designed and organized.
It provides an overview of the main features of portfolio rationalization, includ-
ing the objectives, scope, and main steps of a rationalization program; it details
the criteria, indicators, and other aspects of the analytical framework to be used
for rationalization; and it offers guidance on managing a rationalization pro-
gram, including data, legal, institutional, and sustainability issues.
Chapter 12, the final chapter of the PIM Reference Guide, addresses the design
and implementation of a PIM information system. An efficient and effective
PIM system requires diligent management at project and program levels and
throughout all stages of the project life cycle. As PIM coincides with several pub-
lic expenditure management processes, establishing an information system will
need to overcome complex information requirements. Comprehensive data han-
dling is needed, which requires collecting, storing, and processing large amounts
of data from a variety of sources and making them available in a timely fashion
and in easily digestible form at each decision point.
The chapter provides an overview of requirements and options for developing
and implementing PIM information systems. It focuses on the following issues: a
conceptual description of PIM information systems with regard to objectives,
stakeholders, functional scope, and capabilities; the most important issues related
to system design; issues and options related to the architecture of a PIM informa-
tion system, including whether to build the system as a m odule of another system
or as a stand-alone system; and how to plan for implementation.
HOW TO USE THIS REFERENCE GUIDE
The PIM Reference Guide is a practical guide to critical PIM reform actions. For
each potential reform agenda, it describes different approaches and experiences
from around the world, while aiming to find commonalities. It is designed to
provide advice on focused and pragmatic actions for dealing with the agenda set
out above, providing “how-to” advice and relevant references. It encompasses
elements of a PIM reform agenda but is not intended to outline a generic PIM
reform strategy: it is seen mainly as a resource that countries can dip into once
they have identified priorities and outlined their own strategy on the basis of a
diagnostic exercise. The PIM Reference Guide is intended to help countries to
engage in the detailed design of activities within a chosen reform path. For
example, if a country prioritizes building a sound legal, regulatory, and institu-
tional framework for PIM, chapter 3 provides detailed references on a three-tier
hierarchical legal and regulatory framework for PIM and describes core proce-
dural guidelines. Alternatively, if the priority is to devise a robust project
appraisal and selection process, chapter 5 provides detailed references on how
to build project preappraisal, appraisal, independent review, and selection plans.
Introduction | 11
The PIM Reference Guide does not suggest that all countries should have all
elements of an idealized PIM system in order to benefit. Reflecting on coun-
try-specific implications—such as variations in political circumstances, degree
of decentralization, and the role of parliament—it aims to help practitioners to
understand and implement reform actions “selectively.” This knowledge will
allow countries to highlight more customized reforms and adopt intermediate
solutions.
Appropriate sequencing is critical for implementing PIM reforms, although
sequencing should not be viewed simply as a technical exercise. The technical
specification of reform actions needed to improve the PIM system must be con-
sistent with what is currently possible (implementable) and what is wanted
(politically supported). Aligning these dimensions is a crucial factor in success-
ful reforms. The PIM Reference Guide does not indicate a preference for a partic-
ular reform-agenda sequencing; rather, a country’s priorities for PIM reform
should guide sequencing. Sequencing decisions should focus on the following
three groups of PIM deliverables:
1. Putting controls in place to ensure the development of core legal, regulatory,
and institutional settings for the country, mostly referenced in chapters 2–4
2. Establishing and strengthening decision-making mechanisms to improve
both upstream and downstream PIM functionalities, referenced in
chapters 5–9
3. Other relevant on-demand agendas concerning PIM-PPP integration,
rationalizing the existing project portfolio, or developing a basic data and
information system to support performance of the PIM system, addressed
individually in chapters 10–12.
Hierarchical prioritization will be needed to mainstream the three groups of
deliverables. A core level of arrangements for the legal or regulatory framework
and procedures as well as the institutional setup for key stakeholders need to be
at the top of the hierarchy. A core level of legal and regulatory settings will also
help to support performance in PPP management, portfolio rationalization, and
data system development. Attempting to leapfrog this hierarchy will likely lead
to unsuccessful reforms. For example, attempting to improve analytical method-
ologies for project appraisal without adequate legal and regulatory settings or
with undue instability in the roles and responsibilities of key stakeholders in the
appraisal procedure is unlikely to be successful and could even prove counter-
productive. The same applies to attempting to upgrade the PIM information sys-
tem without the core legal, regulatory, and institutional settings.
With this starting platform, subsequent PIM reforms could be sequenced as
follows, depending on country circumstances:
1. Further improving the legal, regulatory, and institutional arrangements for
PIM (chapters 2–4)
2. Upgrading the upstream project selection and downstream project imple-
mentation processes (chapters 5–9)
3. Concentrating on a staged effort to strengthen PIM-PPP integration, portfo-
lio rationalization, or the PIM information system (chapters 10–12).
Country-specific circumstances and preferences will determine the type and
depth of reform actions and the pace of reform.
12 | Public Investment Management Reference Guide
LIMITS TO THIS REFERENCE GUIDE AND CHALLENGES
The PIM Reference Guide is meant to be revised and upgraded continually. The
current version is termed “Version 1.0,” and future versions will be augmented
and updated to reflect comments on the organization of the guide and to intro-
duce more examples from country experiences.
Version 1.0 does not cover some important public sector issues, which may
have a significant influence over a country’s PIM decisions. Such issues include
the political economy of PIM, governance of state-owned enterprises (SOEs),
coordination with subnational governments (SNGs), procurement practices,
and maximizing finance for development (MFD). These issues are closely linked
to the traditional PIM framework, procedures, and decision making.
Improvements to the PIM system must be consistent with what is supported
politically and must accommodate political-economic aspects of PIM. SOEs play
critical roles in public investment in many countries, which ties issues of SOE
governance to PIM (and public financial management). Countries are unlikely to
achieve their public investment aspirations unless SNGs contribute and are
involved as stakeholders, funders, and implementers. Inefficiency in the pro-
curement system may also have significant effects on the cost-benefit rationale
for investment decisions. The MFD approach is a new finance window that
leverages private sector support for infrastructure investment and can have an
important place in PIM.
Major challenges exist for connecting each of the currently out-of-scope
issues to the traditional PIM guidance and references. Future work will be
needed to elaborate the specifics of the many challenges for PIM related to the
political economy, SOEs, SNGs, procurement, MFD, and so forth and then to
adapt the PIM guidance and references accordingly.
The political economy of PIM
There are concerns about why policies and reforms can be ineffective (World
Bank 2017b). It may be that the political will at the national level is missing.
Political will plays a critical role in successfully implementing policies and
reforms, including in the PIM arena. There is a risk that implementing the right
policies could challenge the existing balance of power.
Approaching PIM reforms through the lens of the political economy has
enormous potential to strengthen the driving force of reforms and to identify
obstacles to reform with an eye to designing more appropriate institutional solu-
tions. Future editions of the PIM Reference Guide could address the following
issues:
• Who are the actors involved in de facto decisions over the PIM cycle?
• What are their incentives, and how do they affect PIM decisions?
• What are the processes and procedures, both formal and informal, according
to which these actors reach decisions for PIM?
• Which institutional reforms would shift the balance of power in favor of those
actors who are more likely to make prudent fiscal and investment choices
and, at the same time, help to mediate distributional and allocative
conflicts?3
Introduction | 13
PIM and state-owned enterprises
SOEs are discussed briefly in chapter 2 in relation to public investment. A rea-
sonably tight definition of “investment” can be formulated, but there is consid-
erable room for variation when defining a system for managing public
investment projects in SOEs. A key issue is the extent to which investments by
SOEs fall within the remit of the national PIM system. Governance arrange-
ments for SOEs pursuing economic activities, which have been established as
part of a government’s industrial policy, should be exercised largely through
the state’s role as shareholder. In exercising its position as shareholder on
behalf of the public, the government has a clear interest in ensuring the good
governance and sound financial performance of commercial SOEs. This inter-
est may be better exercised separately from PIM, reflecting the distinct legal
status of SOEs and the shareholder-management relationship implied by their
corporatized status. In countries with more developed systems, SOE invest-
ment usually falls outside the scope of PIM.
SOE investment may be included in PIM in certain country cases—for exam-
ple, if a government is financing investment in pursuit of public policy objectives
that are outside the main remit of an SOE or if the SOE investment is established
specifically to address public policy. This sort of investment, which fits with the
state’s role in assuring the provision of welfare and growth-enhancing public
services, is considered more appropriately within the scope of PIM.
In countries where SOE governance is still in the early stages of development,
there may be a case for governments to have a more hands-on approach to invest-
ment, something that would extend the scope of PIM to SOEs. Whether to include
budget-funded SOE investment within the scope of the PIM system remains a
country’s choice and needs to consider workload, capacities, and financial risks.
Further work could be done to develop clear PIM guidance and references for
SOEs, especially in countries that are sensitive to governance arrangements,
funding mechanisms, regulatory regimes, and public policy objectives.
PIM in subnational governments
Most national and central government PIM systems have linkages to subnational
government budgetary and management systems. They may also be affected by
such factors as the constitutional position of SNGs in relation to central govern-
ment. Constitutional issues may prevent the national PIM system from extend-
ing to subnational governments or make the system “advisory” only. This
situation arises especially in federal states, but it also applies to constitutional
arrangements where local governments have significant autonomy. Even when
SNG investment is not covered, it would be good for the national PIM system to
include any SNG project that benefits from earmarked capital transfers from the
central government budget. If the national PIM system cannot be applied to
lower levels of government, SNGs should try to replicate it.
All PIM functionalities and references in the PIM Reference Guide can be
decentralized or performed across levels of government. Regulation—including
the setting of legal, regulatory, and institutional frameworks and implementa-
tion practices—can be decentralized to SNGs or be concurrent. Different formats
exist for connecting the national PIM system with the SNG PIM system and
could be considered in more depth in the future. The following are some of the
possible formats (Frank and Martínez-Vázquez 2015):
14 | Public Investment Management Reference Guide
• National planning and implementation, subnational maintenance. Public
investment can be created by the national government and then transferred
to subnational governments for operation and maintenance.
• National planning, subnational implementation. Public investment can be
planned by the national government and implemented by subnational
governments.
• National goal setting, subnational planning and implementation. Public invest-
ment can be created by subnational governments in line with the national
government’s planning goals.
• Devolution. Subnational governments can define their own public investment
priorities and manage the creation and use of infrastructure throughout.
However, the central government may have a role in planning and finance.
Decentralized provision of infrastructure requires coordination among levels
of government. Project planning and appraisal rules, service standards, and pro-
curement regulations tend to be shared; and even in the most decentralized
countries, SNGs are often required to adopt central regulations and standards.
Procurement and PIM
According to Rajaram et al. (2014, 139–40), procurement is often mistakenly con-
ceived as a technical contracting exercise that culminates in the signing of a con-
tract by a successful bidder. This conceptualization has given rise to the need to
focus on the contracting process and to define the steps and mechanisms needed
to determine the winning bid. Steps and mechanisms are important aspects of a
good procurement system, but they provide an incomplete picture and create a
potentially costly detachment from the full public investment process. A more
integrated and robust understanding of the procurement function stretches
from project planning through selection of the appropriate procurement method,
contracting process, and contract management. Procurement does not stop
when the contract is awarded; it remains relevant during implementation and
contract management, particularly for technically complex systems.
The key stages of procurement are planning, method selection, contract plan-
ning, tender evaluation and contract award, contract management, review and
monitoring, and audit and reporting.4 Each stage has linkages to aspects of PIM
and budgeting that could lower costs and speed up project implementation.
Some of the complexity of public investment procurement can be better man-
aged with an approach that links project selection, design, budgeting, and pro-
curement processes. Making better use of information from upstream PIM and
budgeting can enhance key stages of procurement and project implementation
and contribute to efficiency in public investment. As Rajaram et al. (2014) iden-
tify the need for linking procurement processes more strongly to PIM and bud-
geting processes, more detailed guidance could be developed in this area for
future versions of the PIM Reference Guide.
PIM and maximizing finance for development
The MFD initiative is a recent World Bank “algorithm” that involves leveraging
the private sector and optimizing the use of scarce public resources in a way that
is fiscally, environmentally, and socially sustainable. The World Bank has
Introduction | 15
embarked on an effort to help countries to maximize finance for development
and to do so responsibly, without pushing the public sector into unsustainable
levels of debt and contingent liabilities. This effort will entail pursuing private
sector solutions where they can help to achieve development goals and reserving
scarce public finance for where it is needed most (World Bank 2017a).
Operations aligned with the MFD approach typically include the following:
• Those that lead to more sustainable private sector solutions—private finance
(crowding-in) or private delivery—for development projects
• Those that address binding constraints (for example, physical, operational,
regulatory environment) in a way that could open up private solutions where
appropriate.
The extent, nature, and relevance of the MFD approach will depend on the
nature of the project or program development objectives. The algorithm can be
used to weigh the benefits and opportunity costs of deploying public and pri-
vate resources for individual investments included in a government’s overall
development plans. The first issue to consider is whether an investment proj-
ect or program can be financed on commercial terms, while remaining afford-
able and offering value for money; if this is the case, the investment would not
be a priority for the provision of finance on private concessional terms or
through public forms of financing.
There is a challenge to using the MFD algorithm: public investment systems
for the physical, operational, and regulatory environment are rarely developed
enough for the algorithm to be feasible. Without well-established institutional or
regulatory frameworks in PIM, public and private parties will be unable to
implement the algorithm; therefore, the MFD algorithm will work well under
the precondition of a unified and sufficiently developed PIM-PPP framework.
The aim should therefore be to provide clear guidance and references for the
following question: what are the PIM and PPP preconditions for successful
MFD projects? Strengthening governance for integrating PIM and PPP, as pre-
sented in chapter 10, may partly answer this question.
NOTES
1. Nigeria has the Kaduna State Economic Transformation PforR as well as an IPF, the Fiscal
Governance and Institutions Project, supporting better PIM.
2. If many existing projects are off track and exceed agreed-on tolerance levels, the existing
portfolio of PIM projects may be reprioritized. See discussions in chapter 11.
3. These issues comply with the issues discussed in the political economy of public financial
management reforms. See Allen, Hemming, and Potter (2013).
4. For more detailed steps in the procurement process, see Viega Malta et al. (2011).
REFERENCES
Allen, R., R. Hemming, and B. Potter, eds. 2013. The International Handbook of Public Financial
Management. London: Palgrave Macmillan.
Frank, J., and J. Martínez-Vázquez. 2015. Decentralization and Infrastructure in the Global
Economy: From Gaps to Solutions. Routledge Studies in the Modern World Economy.
London: Routledge.
IMF (International Monetary Fund). 2015. “Making Public Investment More Efficient.” IMF
Policy Paper, IMF, Washington, DC.
16 | Public Investment Management Reference Guide
———. 2018. “Public Investment Management Assessment—Review and Update.” IMF Policy
Paper, IMF, Washington, DC.
OECD (Organisation for Economic Co-operation and Development). 2013. Investing Together:
Working Effectively across Levels of Government. Paris: OECD Publishing.
Rajaram, A., T. M. Le, K. Kaiser, J. H. Kim, and J. Frank, eds. 2014. The Power of Public Investment
Management: Transforming Resources into Assets for Growth. Washington, DC: World Bank.
Viega Malta, J. N., P. Schapper, O. Calvo-Gonzales, and D. Berroa. 2011. “Old Rules, New Realities:
Are Existing Public Procurement Systems Addressing Current and Future Needs?” Public
Sector Study 66427, World Bank, Washington, DC.
World Bank. 2015. “Public Investment Management: Status, Opportunities, Challenges.”
Technical Briefing to the World Bank Board, World Bank, Washington, DC.
———. 2017a. “Maximizing Finance for Development (MFD): Guidance for Applying an MFD
Lens.” Unpublished paper, World Bank, Washington, DC.
———. 2017b. World Development Report 2017: Governance and the Law. Washington, DC:
World Bank.
2
Establishing the Concept and
Scope of Public Investment
Management
OVERVIEW
Before embarking on the design of guidelines, procedures, and methods, it is
important to establish the concept and scope of public investment management
(PIM). Public investment and public investment management can mean differ-
ent things to different people in different places. This chapter therefore attempts
to address the following questions:
• What is being managed? PIM is designed to manage public investment proj-
ects, and “public investment” and “project” need to be well defined.
• Why and how is it being managed? Public investment is part of public expen-
ditures; governments therefore need to have a clear understanding of why it
deserves supplementary processes beyond those required as part of the pub-
lic financial management system. The basic features of a system for managing
public investment projects need to be defined.
PIM is a regulatory and oversight system that forms a subcomponent of pub-
lic financial management, and there should be no room for interpretation when
it comes to its scope. There are no universally accepted solutions to the questions
posed above, and each country needs to have its own definitions and conceptual
understanding of the scope of PIM within its own jurisdiction. These definitions
need to be established in the legal and regulatory framework. The scope of PIM
may change over time as reforms evolve, and the regulatory framework must be
updated as necessary.
DEFINING PUBLIC INVESTMENT:
WHAT IS BEING MANAGED?
Introduction
PIM concerns the management of public investment projects; each part of the
term “public investment project” needs to be defined carefully to establish the
boundaries of the PIM system. This section considers the possible definitions of
“investment,” “public investment,” and “project,” so that users of this guidance
17
18 | Public Investment Management Reference Guide
may fix the operational scope of their own PIM system. There is reasonable
agreement about what constitutes a project, but public investment is subject to
different interpretations, particularly the “public” part. Too narrow a definition
of public investment can lead to significant expenditures bypassing the PIM sys-
tem,1 while too broad a definition can erode the rationale for having a distinct
PIM system or overwhelm its capacities. The aim here is to guide users toward a
balanced definition appropriate to their country context.
The discussion in this chapter fills a gap in the international reference mate-
rial. The International Monetary Fund’s Government Finance Statistics Manual
(IMF 2014), the usual reference point for public expenditure terminology, pro-
vides some significant insights, but no explicit definitions of the terms to be dis-
cussed. The latest public expenditure and financial accountability (PEFA)
framework (PEFA Secretariat 2016), which now includes an indicator for public
investment management (PI–11), is also silent on what expenditures are cap-
tured under the heading of “public investment,” except to indicate that they
should be delivered in project form.
What is investment?
Generally defined, investment is the acquisition of an asset in the expectation of
generating a stream of future benefits. Investment by the public sector can there-
fore take various forms involving the acquisition of both financial and nonfinan-
cial assets, including fixed assets.2
The PIM Reference Guide takes the position that the PIM system should be
concerned with the acquisition (or major improvement) of fixed assets, which is
synonymous with capital expenditures.3 This does not mean that the acquisition
of other assets—that is, financial assets and other nonfinancial assets—should
not be subject to proper management and oversight, only that it would be better
to keep the acquisition of such assets outside the scope of PIM. Capital expendi-
tures on fixed assets should be the point of departure for PIM, but the scope of
PIM processes should also extend to proper planning and management of the
whole-life costs of the fixed assets created (see chapters 5 and 7).
In countries with development budgets, care should be taken when defining
the scope of PIM. Development budgets often include significant noncapital
expenditures, and the “recurrent” budget may include capital expenditures not
captured in the development budget.4 It is suggested that in such cases, the focus
of PIM should be on capital expenditures, properly defined, and not on wider
developmental expenditures or donor-financed initiatives.
The Government Finance Statistics Manual identifies the different categories
of fixed assets, as shown in box 2.1. These categories and their finer subcatego-
ries are useful when determining the types of expenditures to be considered cap-
ital investment.5
The definition of capital investment should not be confined to physical fixed
assets; hence, the category “other fixed assets” is important. The inclusion of
computer software and databases in this category and within the scope of PIM
is particularly important. For many countries, investment in information and
communication technology (ICT) systems—hardware and software—is an
increasingly significant part of public investment and can be a major source of
waste, if managed poorly.6
Many countries exclude weapons systems from their PIM systems on the
grounds of sensitivities relating to national security. This is a legitimate choice.
Establishing the Concept and Scope of Public Investment Management | 19
Other countries—Norway, for example—consider that such a significant invest-
ment should be subject to the discipline of the PIM system, as poor planning and
management of defense procurement are often a major source of inefficiency.
The Government Finance Statistics Manual also distinguishes between
expenditures on a major improvement to a fixed asset, classified as capital
expenditures, and maintenance and repair, classified
as current expenses (see box 2.2). The main differ- BOX 2.1
ence is that major improvements are discretionary,
whereas maintenance and repairs are an obligation of
owning an asset. Major categories of fixed assets
The distinctions made in box 2.2 can be important
• Buildings and structures, including all amounts pay-
when establishing d efinitions. In some countries,
able for site clearance and preparation and the cost
periodic maintenance (or “heavy maintenance”) is
of all fixtures, facilities, and equipment that are inte-
often considered to be a capital expenditure, and
gral parts of buildings and structures
therefore discretionary, which it should not normally
• Machinery and equipment (when separate from
be. The regular replacement of the wearing course of
buildings and structures)
a road, for example, is an obligation of asset owner-
• Other fixed assets, including intellectual property
ship and should not be a choice. When counted as
products, such as research and development and
public capital investment and included under the
computer software and databases
PIM system, such expenditures are traded off against
• Weapons systems.
new investment and risks being underfunded or
delayed, when maintenance of the existing asset
Source: IMF 2014.
stock should generally be given the highest priority.7
In other countries, substantial improvements to fixed
BOX 2.2
Distinguishing between major improvement and maintenance
Major improvements cover renovations, reconstruc- restructuring of the interior of a building also
tions, and enlargements of existing assets to increase qualifies.”
their productive capacity, extend their service life, or Maintenance and repairs are different and have the
both. According to the IMF (2014), they have the following features:
following features:
• “They are activities that owners or users of
• “The decision to renovate, reconstruct, or assets are obliged to undertake periodically in
enlarge an asset is a deliberate investment deci- order to be able to utilize such assets over their
sion that may be undertaken at any time and is expected service lives. They are current costs
not dictated by the condition of the asset. Major that cannot be avoided if the fixed assets are to
renovations of ships, buildings, or other struc- continue to be used. The owner or user cannot
tures are frequently undertaken well before the afford to neglect maintenance and repairs, as the
end of their normal service lives. expected service life may be drastically short-
• The major renovations, reconstructions, or ened otherwise.
enlargements increase the performance or • They do not change the fixed asset or its perfor-
capacity of existing assets or significantly mance, but simply maintain it in good working
extend their previously expected service lives. order or restore it to its previous condition in the
Enlarging or extending an existing road, build- event of a breakdown. Defective parts are
ing, or structure constitutes a major change in replaced by new parts of the same kind without
this sense, but a complete refitting or changing the basic nature of the fixed asset.”
20 | Public Investment Management Reference Guide
assets may be carried out under the guise of “maintenance,” without proper
planning and scrutiny. Taking the example of a road again, the replacement of a
double-surface treatment wearing course with an asphaltic concrete overlay
may be classified as periodic maintenance, when, in fact, it would substantially
strengthen the pavement and extend its expected life. According to the IMF
definitions, such an expenditure should be considered an improvement to a
fixed asset and be subject to the discipline of the PIM system.
Rehabilitation is usually considered to be capital investment because the
need to rehabilitate the asset arises from a poor maintenance program, to the
extent that the planned life or performance of the asset is reduced. Capital
investment is therefore required to reestablish the performance or planned life
of the degraded asset. The timing of rehabilitation becomes a matter of choice
because the asset is no longer subject to a planned maintenance program.
Notwithstanding the distinctions made above, there will always be gray
areas where judgment will be necessary to decide whether an expenditure fits
within the definition of capital investment. There will be a natural tendency
for spending agencies to try to exploit these gray areas if the PIM system
forces more rigor on planning and decision making than is required for expen-
ditures not classified as public investment. It would be wise, therefore, for
PIM regulations to hand over the final say on what expenditures should fall
within the scope of PIM to the relevant oversight authorities (see chapter 4,
on roles and responsibilities).
What is infrastructure investment?
A body of evidence confirming the importance of the quantity of infrastructure
assets and economic growth has spurred interest in public investment and its
management. It is therefore important to see how “infrastructure” fits into the
previous discussion of investment.
Despite numerous studies exploring the relationship between infrastructure
provision and economic growth, there is no precise definition of infrastructure
(Torrisi 2009). Generally speaking, however, infrastructure is taken to be a sub-
set of investment, encompassing the physical assets required to deliver the ser-
vices needed to support economic activity. As such, IMF (2017) identifies key
characteristics that distinguish infrastructure from other types of capital:
First, infrastructure investments are often large, capital-intensive projects
that tend to be “natural monopolies”—it is often more cost-effective for
services to be provided by a single entity. Second, they tend to have signif-
icant up-front costs, but the benefits or returns accrue over very long peri-
ods of time, often many decades; this longevity (and the associated difficulty
of ascertaining adequate returns over such a long horizon) can pose a chal-
lenge to private financing and provision. Third, infrastructure investments
have the potential to generate positive externalities, so that the social
return to a project can exceed the private returns it can generate for the
operator. This can lead to underprovision of needed investments. For these
reasons, infrastructure has historically been provided by the public sector,
public-private partnerships, or regulated private entities.
This categorization of infrastructure is consistent with the definition used
in Australia, where Infrastructure Australia is responsible for preparing an
infrastructure priority list covering transport, water, energy, and telecommu-
nications.8 The World Bank implicitly uses this definition,9 which excludes the
physical assets required to deliver many public services—such as education,
Establishing the Concept and Scope of Public Investment Management | 21
health, and justice—as well as the assets of the public administration. Also
excluded are the categories “other fixed assets” and “weapons systems,” which
are included in box 2.1.
This characterization of infrastructure is not universal, and looser defini-
tions, which include social infrastructure, are possible. Although the United
Kingdom, for example, initially adopted a definition of infrastructure that was
broadly consistent with the preceding discussion,10 the most recent National
Infrastructure Delivery Plan extends the coverage to include housing and urban
regeneration, social infrastructure, and regional infrastructure.11
The definition of infrastructure only becomes important if a decision is made
to restrict the scope of the PIM system to this narrower class of fixed assets.
Otherwise, it is not an issue. The PIM Reference Guide takes the position that the
wider perspective on investment is more suitable; if a decision is made to limit
the scope of PIM, it is important to define what is meant by “infrastructure” in
the regulatory framework to avoid any ambiguity.
The IMF quotation above indicates that the private sector may also provide
infrastructure, in regulated or unregulated form, depending on the nature of
competition. Governments should have policies encompassing national infra-
structure as a whole, including the private sector. In general, private provision of
infrastructure would be outside the scope of PIM, with some important excep-
tions. These exceptions include cases where earmarked capital subsidies (direct
or contingent) are given to private sector infrastructure providers in order to
achieve public policy objectives, such as welfare gains from changes in external-
ities, and where infrastructure is provided through public-private partnership
(PPP) arrangements (discussed later in this chapter).
What is a project?
The PIM system should deal with investment delivered through projects. A proj-
ect can be defined as follows:
A group of activities (and associated expenditures) with clearly defined
objectives and outputs implemented over a fixed time schedule and within a
fixed budget. It should encompass all the activities and resulting outputs
required to deliver sustainable benefits to the target beneficiaries.12
This definition draws attention to the need to specify project boundaries
properly. First, a project needs to have clear beginning and end dates, and its
scope needs to be well defined. A frequent mistake is to define the scope of a
project too narrowly and omit key activities or to equate projects with
“objects” or contracts, when multiple components or contracts may be
required to achieve the desired objective. An example would be a bridge
forming part of a new city bypass. The bridge cannot deliver benefits to the
population without the rest of the investment in road infrastructure; it should
not, as a consequence, be planned, analyzed, and managed in isolation from
the rest of the investment, even if different contractors, funding sources, and
timing are involved.
Equating projects with contracts can underestimate the full scope and cost of
projects with multiple contracts. Such underestimates can happen as a result of
internal coordination problems within the proposing agency, but they may also
be a strategy to hide the full cost of a project, particularly if there are value
thresholds above which analytical requirements are more stringent or decisions
go to a higher authority.
22 | Public Investment Management Reference Guide
Adequate safeguards should be put in place, beginning at the preappraisal
stage, to ensure that a project is being defined properly in the PIM system so as
to avoid fragmentation. A common error is to restrict the project’s scope to com-
ponents that are the responsibility of the proposing agency, omitting compo-
nents that are the responsibility of another agency and that are critical to the
project’s success. This error can be the result of problems with interagency coor-
dination or an attempt to keep the apparent costs of a project down and to influ-
ence decision makers when funding has been secured. Occasionally, it may be
helpful to define a “programmatic project.” This is a “composite” project that
groups similar, small, site-specific projects with common objectives, implemen-
tation arrangements, and management responsibilities (HM Treasury 2003).13
The PIM system would then focus on the internal management systems for pro-
grammatic projects rather than on individual-component projects. This
approach can assist high-level management and decision making by focusing on
strategic decisions and leaving the day-to-day planning and management of the
component projects to the project management team. One representative com-
ponent project may be analyzed, or the project as a whole may be examined and
prioritized; in either case, a programmatic project design should not be used as
a smoke screen for poor-quality subprojects.
Variation in the scope of “public” investment: SOEs and
subnational government investment
A reasonably tight definition of “investment” can be formulated, but there is con-
siderable variation when defining the scope of a management system for public
investment projects. A key issue is the extent to which investments by state-
owned enterprises (SOEs) and subnational governments (SNGs) fall within the
scope of the national PIM system.
When defining the scope of PIM, countries should consider two principles:
• PIM is a subsystem of public financial management; as such, public invest-
ment should have direct implications, actual or potential,14 for the public
finances at some point in time.
• “Public” may be interpreted as indicating a public policy purpose—that is,
through the delivery of public services or other welfare-improving effects.
Figure 2.1 looks at the issue from a statistical, or national income accounting,
perspective; it distinguishes between public capital expenditures, public invest-
ment, and national capital investment. Public investment, as defined in figure 2.1,
is investment undertaken by the public sector, and thus extends to investment by
SOEs. When the PIM system is defined in line with the first principle above, it
would be confined to that part of SOE investment with potential implications for
public finance—that is, it would be funded by capital transfers or subject to gov-
ernment guarantees.
Figure 2.1 shows the full-scope model—a PIM system covering all national
public sector investment with a potential impact on public finances. In practice,
most PIM systems will be narrower in scope, depending on such factors as the
constitutional position of subnational government and the framework for SOE
governance. A narrower scope for the central PIM system is especially common
in federal states, but it also applies to constitutional arrangements where local
governments have significant autonomy. Even where subnational government
Establishing the Concept and Scope of Public Investment Management | 23
FIGURE 2.1
Capital expenditures, public investment, and national capital investment
Capital expenditures by the
central and local budgets (Public)
Capital
Capital transfers or subsidies expenditures
for SOEs and households
(Total Total
budgetary public
Capital expenditures by investment) investment National
extrabudgetary funds capital
investment
Government guarantees for (gross fixed
SOE financing for investment capital
formation)
Domestic private sector
investment
Foreign private sector
investment
Source: World Bank 2007.
Note: SOE = state-owned enterprise.
investment is not covered, the system usually would include SNG projects
receiving earmarked capital transfers from the central government budget.
Where constitutional arrangements prevent the national system from applying
to lower levels of government, SNGs should replicate the national system at their
level. This is the case in the Australian states and in the devolved governments of
the United Kingdom.15
Ideally, governance arrangements for SOEs pursuing an economic activity,16
established as part of a government’s industrial policy, should be “arm’s-length,”
exercised largely through the state’s role as shareholder (see box 2.3). In its posi-
tion as shareholder on behalf of the public, the government has an undeniable
interest in ensuring good governance and sound financial performance of com-
mercial SOEs. This interest is, however, better exercised separately from PIM,
reflecting the distinct legal status of SOEs and the intended shareholder-
management relationship implied by this status. In countries with more
advanced systems, SOE investment generally falls outside the scope of PIM.17 By
contrast, in the Republic of Korea, major budget-funded public investment proj-
ects in SOEs are subject to the PIM appraisal system.
SOE investment may be included in PIM in those cases where government
investment has public policy objectives that are not the SOE’s primary economic
activity or where an SOE has been established to achieve public policy objectives
that enhance welfare or public services.18
In countries where SOE governance is still developing and management is
weak, there may be a case for taking a more “hands-on” approach to investment
by SOEs engaged in economic activity; this approach would extend the scope of
PIM closer to that shown in figure 2.1. In Zimbabwe, for example, all SOE proj-
ects should follow the PIM guidelines when requesting capital budgetary fund-
ing, imposing recurrent expenditures on the budget, or seeking government
guarantees. In the end, inclusion of all budget-funded SOE investment within
24 | Public Investment Management Reference Guide
BOX 2.3
OECD governance framework for SOEs
The Organisation for Economic Co-operation and • Costs related to public policy objectives should
Development (OECD) has developed corporate gover- be funded by the state and disclosed.
nance guidelines that shed light on the possible scope • SOEs’ economic activities should face consis-
tent market conditions regarding access to debt
of PIM with respect to state-owned enterprises—
and equity finance.”
SOEs (OECD 2015). The framework acknowledges
that some SOEs may be engaged in economic activity As indicated, the framework envisages that the costs
and the pursuit of public policy objectives. However, of achieving public policy objectives in a mixed-
the presumption is that, as far as economic activities purpose SOE should be funded by the state. OECD
are concerned, the government should adopt a hands- guidelines also exclude any SOE engaged primarily in
off approach, exercising influence through its position public policy objectives (OECD 2015):
as a majority shareholder. It should not provide finance
“The Guidelines are generally not intended to
for investment on favorable terms through the budget.
apply to entities or activities whose primary pur-
According to OECD guidelines,
pose is to carry out a public policy function, even if
• “The government should allow SOEs full the entities concerned have the legal form of an
operational autonomy to achieve their defined
enterprise.”
objectives and refrain from intervening in SOE
management. The government as a shareholder The guidelines imply that, where an appropriate cor-
should avoid redefining SOE objectives in a non- porate governance framework for SOEs exists, the
transparent manner. PIM system should only encompass investment
• The state should let SOE boards exercise their related to the achievement of public policy objectives.
responsibilities and should respect their Where corporate governance deviates from the model,
independence. as may be the case in low-income or emerging econo-
• Where SOEs combine economic activities and
mies, the scope for PIM might be wider, including
public policy objectives, high standards of trans-
expenditures on fixed assets for economic activities,
parency and disclosure regarding their cost and
revenue structures must be maintained, allow- where these expenditures have actual or potential
ing for an attribution to main activity areas. implications for public finances.
the scope of the PIM system, irrespective of the policy purpose, is each country’s
choice; however, the decision needs to be made in the knowledge of the work-
load and capacities involved and the relative risks that poor investment manage-
ment by SOEs will lead to the misallocation of public sector resources.
Public investment through public-private partnerships
Public-private partnerships should fall within the scope of the PIM system
because they use public financial resources (even if only over the longer term or
on a contingent basis); as such, they should have a public policy rationale.19
A PPP should be subject to the same preinvestment processes as any other public
investment project, plus some additional analytical steps and decisions to deter-
mine whether the PPP represents better value for public money than other
implementation modalities. The additional analysis should be performed only
after the project has been shown to be a good use of public financial resources,
irrespective of how it is implemented. Consistent with this approach, PPPs are
generally fully integrated into the PIM system of good-practice countries, and
Establishing the Concept and Scope of Public Investment Management | 25
there is no dual-track approach. Chapter 10 discusses how to engage PIM and
PPP in a unified framework.
WHY DOES PUBLIC INVESTMENT NEED SPECIALLY
DESIGNED MANAGEMENT ARRANGEMENTS?
Introduction
Public investment management is a regulatory concept. It should be gov-
erned by an appropriate legal and regulatory framework, including agreed-on
definitions and scope, and should be supported by comprehensive proce-
dures and methods. For PIM to function effectively, the roles and responsi-
bilities of key players should be clearly established. This section looks at
those features that differentiate public investment from other types of expen-
ditures and that necessitate a separate regulatory system and special man-
agement processes. It links public investment management to the broader
public financial management system.
Special features of public investment requiring a separate
regulatory system
Certain technical features set public investment apart from other forms of
expenditures and give rise to the need for a dedicated management system with
distinct procedures and specialized methods:
• Multiyear projects. Public investment usually involves multiyear projects
with long gestation periods, long implementation phases, and extended oper-
ating lives. The planning and implementation of these projects are difficult to
synchronize with the budget cycle or even a medium-term budget. Special
arrangements are needed to manage the interfaces between the different
planning cycles and to ensure intertemporal consistency.
• Large and “lumpy” projects. Capital investment projects tend to be large scale
and irreversible; as such, a mistake can be very costly, certainly higher than
for current expenditure initiatives, which can be piloted on a small scale
before full implementation and reversed if necessary. Processes and methods
that support good decision making and help to manage risk are essential.
• Long forecasting horizons. The long-term nature of costs and benefits, which
usually include intergenerational effects, means that sophisticated forecast-
ing techniques and analytical methods are needed, as are the requisite skills
to apply them.
• Potential impacts on economic growth. Filling gaps in infrastructure service
provision and meeting suppressed demand can provide a significant boost to
economic growth, but the provision of excess capacity can be very costly in
terms of the opportunity cost of public resources. This opportunity cost sug-
gests a need for taking a considered approach to timing.
• Systematic planning error. There is clear evidence that investment planning
is subject to systematic excessive optimism concerning the estimation of
costs and benefits and the underlying factors critical to project success
26 | Public Investment Management Reference Guide
(Ansar et al. 2014; Flyvbjerg 2005). This tendency has been referred to as the
“iron law of megaprojects”— “over budget, over time, over and over again”
(Flyvbjerg 2014)—and requires well-designed arrangements for ensuring
greater planning realism and impartial review.
• Megaprojects. Extremely large projects, often known as megaprojects, have
their own particular set of problems—some of which are a magnified version
of the problems besetting major projects, while others are unique to the scale
and dynamics (both technical and political) of a megaproject. These prob-
lems are summarized in box 2.4.
Public investment management as it relates to
public financial management
Public investment is a component of public expenditures, and public investment
management is a branch of the wider public financial management system.
Therefore, the hierarchy of objectives for public financial management corre-
sponds to those for PIM, as shown in table 2.1.
Some of the important specificities of PIM within the broader public finan-
cial management system have been recognized in the recently revised PEFA
framework (PEFA Secretariat 2016). A new PEFA indicator, PI–11, has been
added, which looks at whether the public financial management system ensures
BOX 2.4
Planning and management of megaprojects: 10 negative characteristics
According to Flyvbjerg (2014), megaprojects often suf- • Due to the large sums of money involved,
fer from the following problems: principal-agent problems and rent-seeking
behaviour are common, as is optimism bias.
• “Megaprojects are inherently risky due to long • The project scope or ambition level will typi-
planning horizons and complex interfaces. cally change over time.
• Often, projects are led by planners and manag- • Delivery is a high-risk, stochastic activity, with
ers without domain experience who keep overexposure to so-called ‘black swans,’ i.e.,
changing throughout the long project cycles extreme events with massively negative out-
that apply to megaprojects, leaving leadership comes. Managers tend to ignore this [risk], treat-
weak. ing projects as if they exist largely in a
• Decision making, planning, and management deterministic Newtonian world of cause, effect,
are typically multiactor processes involving and control.
multiple stakeholders, both public and private, • Statistical evidence shows that such complexity
with conflicting interests. and unplanned events are often unaccounted
• Technology and designs are often nonstandard, for, leaving budget and time contingencies
leading to ‘uniqueness bias’ among planners and inadequate.
managers, who tend to see their projects as singu- • As a consequence, misinformation about
lar, which impedes learning from other projects. costs, schedules, benefits, and risks is the
• Frequently there is overcommitment to a cer- norm throughout project development and
tain project concept at an early stage, resulting the decision- m aking process. The result is
in ‘lock-in’ or ‘capture,” leaving analyses of alter- cost overruns, delays, and benefit shortfalls
natives weak or absent and leading to escalated that undermine project viability during proj-
commitment in later stages … ect implementation and operations.”
Establishing the Concept and Scope of Public Investment Management | 27
TABLE 2.1 Public financial management objectives and implications for PIM
IMPLICATIONS FOR PUBLIC INVESTMENT
LEVEL OBJECTIVES OF PUBLIC FINANCIAL MANAGEMENT MANAGEMENT
Level I: aggregate fiscal Exercising effective control of the total Aggregate public investment spending planned
discipline budget and management of fiscal risks within realistic resource ceilings and individual
projects completed within budget
Level II: strategic allocation Planning and executing the budget in line Capital investment projects selected and budgeted
of resources with government priorities aimed at in accordance with government’s strategic
achieving policy objectives priorities to address the most pressing problems or
constraints
Level III: efficient service Using budgeted resources to achieve the best Capital investment projects evaluated to verify that
delivery levels of public services within available they represent efficient and effective solutions to
resources identified problems; that they are procured
economically, implemented efficiently, and
operated as planned
that public investment provides value for money. This indicator falls under pillar
III, management of assets and liabilities, and includes the following four
dimensions:
• Economic analysis of investment proposals
• Investment project selection
• Investment project costing
• Investment project monitoring.
Common failings indicating that public investment
management requires attention
Signs of weak PIM are often apparent to citizens and other stakeholders, mostly
in terms of poor public services, but also the low importance given to achieving
value for money—that is, vanity projects going ahead when basic services remain
unmet or new projects starting while others are visibly stalled.
Short-term political influence that leads to wasteful “white elephant” proj-
ects, with limited economic or social value compared with costs, is a serious
problem in a weak PIM environment. A tendency to fund new projects rather
than to complete ongoing projects efficiently, leading to a backlog of stalled and
incomplete projects, may be the result of the search for short-term political gain
or a sign of general weakness in multiyear budgeting.
Corrupt procurement practices, often with a political dimension, can lead
to higher costs than necessary and to the selection of unsuitable contractors
that are unable to meet the necessary standards or worse. In the least robust
systems, corruption and poor supervision of contractors during implementa-
tion lead to the delivery of substandard assets that are unable to provide the
intended quality. General capacity and procedural weaknesses in project plan-
ning and management may cause significant delays and cost overruns. Finally,
even high-quality assets, delivered on time, on budget, and to specification,
will not produce benefits if no provision has been made for sustainable opera-
tions and maintenance, which is often the case with donor-funded projects in
low-capacity environments (Rajaram et al. 2014).
The common failings of PIM and the resulting consequences are inventoried
in table 2.2.
28 | Public Investment Management Reference Guide
TABLE 2.2 Potential consequences of PIM failings
COMMON PROBLEMS POTENTIAL CONSEQUENCES
• Development plans disconnected from actual budgets or • Creation of few valuable public assets
projects • Lack of key public facilities
• White elephant projects with little socioeconomic value • Stock of decaying infrastructure: power and water shortages, road
• Lack of pipeline of high-quality projects and railway accidents, crowded hospitals, deteriorating human
• Projects awarded to unqualified firms development index
• Opaque resource-for-infrastructure deals without due • Failure of investment to spark growth and improve social welfare
safeguards for ensuring good value • Difficulty of countercyclical expansion of investments
• Corruption or delays in procurement • Creation of a liability if investment is financed by debt
• Delays in land or site acquisition • Burden on citizens and private sector if investment is financed by
• Cost escalation, time overruns taxes
• Contract disputes or abandoned projects • Reduction in net wealth if investment is financed by the extraction
• Poor quality of completed projects of finite natural resources
• Poor operation and maintenance of completed assets • Macroeconomic instability
• Institutional inertia or no systemic response to problems • Political instability
• Fiscal pressures and risk
Source: Based on World Bank 2015.
FIGURE 2.2
Systematic framework for public investment management
Consistency in Authority to Maintenance of asset Evaluation to
project screen and register; operation and improve
preparation reject projects maintenance of asset guidance
1 2 3 4 5 6 7 8
Implementation
Independent
Adjustment
Evaluation
Operation
Guidance
Appraisal
Selection
review
Link to a Key to An effective budget and
development credible procurement process to support
strategy selection implementation and operation
Sources: Rajaram et al. 2010, reproduced in Rajaram et al. 2014.
Main features of an effective public investment
management system
A World Bank publication (Rajaram et al. 2014) identifies eight key features for
an effective PIM system, as illustrated in figure 2.2. The “must-have” functions
associated with these key features can be found in good-practice countries; their
division into eight categories is for the purpose of conceptualizing the
framework.
In simplified terms, eight must-have functions are key:
1. Strategic investment guidance, project concept development, and preappraisal
screening. Broad strategic guidance to guide sector-level decision makers and
preliminary screening to ensure that project concepts meet minimum criteria
Establishing the Concept and Scope of Public Investment Management | 29
of consistency with the government’s strategic objectives and with the eco-
nomic classification
2. A formal project appraisal process. A regulated set of project preparation steps:
prefeasibility and feasibility studies, including preliminary design; environ-
mental and social impact assessments that must be completed before a proj-
ect can be approved for funding; and methods appropriate to the technical
capacities and scale and scope of the project.
3. Independent review of appraisal. Review by the finance ministry, a planning
ministry, or an independent agency to counter optimism bias—overestimation
of demand and underestimation of costs
4. Final decision on project selection and budgeting using a well-managed budget
process. Linking appraisal and selection of public investment projects to the
budget cycle, even if the project evaluation cycle is on a different timetable;
verification of project eligibility and priority; close scrutiny of forward costs
and funding during budgeting
5. Efficient project implementation. Scrutiny for implementation realism, includ-
ing organizational arrangements, procurement planning, and a timetable;
adequate monitoring systems; and systems for managing total project costs
6. Ability to make project adjustments. Flexibility to allow changes in the dis-
bursement profile—including discontinuation of nonperforming projects—to
take account of changes in project circumstances
7. Provision for sustainable operation of facilities. Processes to ensure that a new
facility is ready for operation and that the intended services can be delivered
on a sustainable basis; requires effective handover of management responsi-
bility for operation and maintenance and upkeep of robust and up-to-date
capital asset registers
8. Basic completion review and ex post evaluation. A systematic review of all proj-
ects upon completion to assess whether a project was delivered as specified,
on time, and according to budget, and to introduce a more sophisticated ex
post evaluation to assess the project’s outputs and outcomes against objec-
tives established in the design.
Reforming public investment management
The challenges faced when introducing reform to public investment man-
agement are significant and well known; they should not be underestimated.
As the common failings and problems presented in table 2.2 illustrate, three
facets of public investment present potential obstacles to improving proce-
dures and methods: public investment is highly politicized, it involves a high
risk of corruption, and it is in an area demanding a high level of public
management.
Public investment is highly politicized because of the discretionary nature
of these expenditures, their high visibility, and the fact that they are
location-specific. The long life of the assets created is attractive to politicians
wishing to leave a “legacy.” The corruption risk attached to public investment
is well known and comes from the high value of contracts and the vulnerability
30 | Public Investment Management Reference Guide
to manipulation of the procurement process. Corruption can distort invest-
ment and implementation decisions and render useless any intended proce-
dural and methodological improvements. In a corrupt environment, strong
vested interests can smother PIM reforms in their infancy.
PIM is a highly demanding area of public management, requiring advanced
technical capacities and organizational capabilities. Even the key features of a
minimally effective system, as identified in figure 2.2, require high levels of skill,
farsightedness, and discipline. Given these potential obstacles, there should be
no misconceptions about the scale of the challenge of a PIM reform, even for
supportive governments.
Ensuring a suitably precise definition of public investment does not mean
that public expenditure proposals outside the definition should escape proper
planning, scrutiny, and management; all the same, public investment propos-
als demand the attention of a dedicated system. The procedures and methods
for public investment management may be applied to other expenditure pro-
posals or even to regulatory measures. Ireland’s 2005 Guidelines for the
Appraisal and Management of Capital Expenditure Proposals are now incor-
porated in the broader Public Spending Code that covers capital and current
spending. In the United Kingdom, methodological guidance is applied to cap-
ital and current expenditures and to regulatory measures.20 These examples
show the wide applicability of the procedures and methods, but the priority
for reforming countries should be to develop a focused PIM system, as the
payoff in terms of enhanced growth, improved welfare, and improved effi-
ciency is high (IMF 2015).
NOTES
1. In Ukraine, before 2015 amendments to the Budget Code, only 8.9 percent of public capital
investment by value was passing through the regulated PIM system. See Biletska et al.
(2012).
2. IMF (2014) defines fixed assets as “produced assets that are used repeatedly or continu-
ously in production processes for more than one year.”
3. IMF (2014) adopts the accrual accounting basis and does not define capital expenditure
explicitly. Instead, it talks about “transactions in fixed assets” affecting the balance sheet. For
the purposes of defining capital investment for PIM, the acquisition of fixed assets and capi-
tal expenditures can be taken as equivalent. Capital expenditures should not be confused
with the term “capital expenses” as used in the Government Finance Statistics Manual.
4. This is often the case in aid-dependent countries, where the development budget rep-
resents externally financed projects, both capital and recurrent.
5. The categories are broken down into subcategories in the IMF manual.
6. The notorious project to digitize the United Kingdom’s health records is an extreme exam-
ple of a failed ICT project. Costing as much as £9.8 billion, it failed to yield benefits of
anything like the same order as a result of poor planning and implementation. See
Parliamentary Public Accounts Committee (2013).
7. Many studies have shown that the return to punctual routine and periodic maintenance is
many times the return to new investment, in almost all instances. For example, annual
benefit-cost ratios of between 1.4 and 44.8, depending on traffic level, have been estimated
for timely road maintenance (World Bank n.d.)
8. Infrastructure Australia is an independent statutory body with responsibility for advising
the government on infrastructure policies and priorities.
9. See https://data.worldbank.org/topic/infrastructure.
10. See the first National Infrastructure Plan, adopted in 2010.
11. The full scope of the U.K. National Infrastructure Delivery Plan 2016–21 is roads, rail,
airports and ports, energy, digital communications, flood and coastal erosion, water and
Establishing the Concept and Scope of Public Investment Management | 31
waste, science and research, housing and regeneration, social infrastructure, and regional
infrastructure.
12. This definition is compatible with international experience. In the United Kingdom, for
example, a project is defined as having “definite start and finish dates, a clearly defined
output, a well-defined development path, and a defined set of financial and other resources
allocated to it” (Office of Government Commerce 2007).
In the European Union, a project is defined as “a series of works, activities, or services
intended to accomplish an indivisible task of a precise economic and technical nature
which has clearly identified goals” (Article 100 [Major Projects] of Regulation (European
Union) no. 1303/2013).
13. The United Kingdom, for example, defines a program as “a group of related projects” and
treats it as a single project. “Program” is not used in the PIM Reference Guide to avoid con-
fusion with budgetary programs in a program budgeting system.
14. Potential financial liabilities may be explicit or implicit.
15. See https://www.finance-ni.gov.uk/topics/finance/northern-ireland-guide-expenditure
-appraisal-and-evaluation-nigeae.
16. “An economic activity is one that involves offering goods or services on a given market and
which could, at least in principle, be carried out by a private operator in order to make
profits” (OECD 2015).
17. Before the public sector reforms of the 1980s, investment by commercially oriented SOEs
in the United Kingdom fell within the scope of the national PIM system.
18. According to the OECD (2015), “Public policy objectives are those benefitting the general
public within the SOE’s own jurisdiction. . . . These could include the delivery of public
services, such as postal services, as well as other special obligations undertaken in the
public interest.”
19. A PPP is not the same as a commercial joint venture, which would normally fall outside
of PIM.
20. “All new policies, programs, and projects, whether revenue, capital, or regulatory, should
be subject to comprehensive but proportionate assessment” (HM Treasury 2003).
REFERENCES
Ansar, A., B. Flyvbjerg, A. Budzier, and S. Linn. 2014. “Should We Build More Large Dams? The
Actual Costs of Hydropower Megaproject Development.” Energy Policy 69 (June): 43–56.
Biletska, N., J. A. Brumby, F. Grigoli, R. Hemming, Y, K. Kang, J. W. Lee, Z. Mills, S. Y. Min,
B. Moreno-Dodson, M. Verhoeven, R. Vlaicu, H. T. T. Vu, and L. Zoratto. 2012. Beyond the
Annual Budget: Global Experience with Medium-Term Expenditure Frameworks.
Washington, DC: World Bank.
Flyvbjerg, B. 2005. “Policy and Planning for Large Infrastructure Projects: Problems, Causes,
and Cures.” Policy Research Working Paper 3781, World Bank, Washington, DC.
———. 2014. “What You Should Know about Megaprojects and Why: An Overview.” Project
Management Journal 45 (2): 6–19.
HM Treasury. 2003. The Green Book: Appraisal and Evaluation in Central Government. Amended
in 2011. London: HM Treasury.
IMF (International Monetary Fund). 2014. Government Finance Statistics Manual. Washington,
DC: IMF.
———. 2015. “Making Public Investment More Efficient.” IMF Policy Paper, IMF,
Washington, DC.
———. 2017. World Economic Outlook. Washington, DC: IMF.
OECD (Organisation for Economic Co-operation and Development). 2015. Guidelines on
Corporate Governance of State-Owned Enterprises. Paris: OECD Publishing.
Office of Government Commerce. 2007. “OGC Gateway Process—Review 2: Delivery Strategy.”
Office of Government Commerce, London.
Parliamentary Public Accounts Committee. 2013. “Dismantled National Programme for IT in
the NHS: Nineteenth Report of Session 2013–14.” House of Commons, London.
32 | Public Investment Management Reference Guide
PEFA Secretariat. 2016. Framework for Assessing Public Financial Management. Washington, DC:
PEFA Secretariat.
Rajaram, A., T. M. Le, N. Biletska, and J. Brumby. 2010. “A Diagnostic Framework for Assessing
Public Investment Management.” Policy Research Working Paper 5397, World Bank,
Washington, DC.
Rajaram, A., T. M. Le, K. Kaiser, J. H. Kim, and J. Frank, eds. 2014. The Power of Public Investment
Management: Transforming Resources into Assets for Growth. Washington, DC: World Bank.
Torrisi, G. 2009. “Public Infrastructure: Definition, Classification, and Measurement Issues.”
MPRA Paper, University Library of Munich.
World Bank. 2007. “Belarus Policy Note: Selected Issues in Capital Budgeting; Improving the
Quality of Public Capital Expenditures to Promote Growth.” Poverty Reduction and
Economic Management Unit, Europe and Central Asia Region, World Bank, Washington,
DC, August 17.
———. 2015. “Public Investment Management: Status, Opportunities, Challenges.” Technical
Briefing to the Board, World Bank, Washington, DC.
———. n.d. “The Impact of Poor Road Maintenance.” World Bank, Washington, DC. http://
siteresources.worldbank.org/INTROADSHIGHWAYS/Resources/338993-111531
6562809/10-poor_rd_maint.pdf.
3
The Legal and Regulatory
Framework for PIM
OVERVIEW
Public investment management (PIM) needs to be situated in an appropriate
legal and regulatory framework to ensure its proper functioning and to apply
common standards and methods in a consistent manner. A country’s legal
tradition and administrative culture will determine the most suitable approach,
but the guiding principle should be to avoid using superior legal instruments for
detailed procedural arrangements and methodological guidance, as procedures
and methods may have to be adapted over time, particularly in the early days of
PIM reform, and a superior legal instrument is less flexible. This principle points
to the design and adoption of a hierarchical legal and regulatory framework,
consisting of three tiers from top to bottom:
• Tier 1: legal authority for the PIM system. Usually established through some
form of primary legislation
• Tier 2: basic procedural guidelines, high-level decision criteria, roles and
responsibilities, and designation of analytical tools. Often established in
governmental or ministerial regulations, or the equivalent,1 issued under the
authority of primary legislation, but looser and tighter arrangements may be
possible or necessary, depending on country circumstances
• Tier 3: methodological guidance, detailed criteria, standardized parameter
values, and procedural documentation. Generally issued directly by the PIM
coordinating agency (finance ministry or other) in the form of manuals,
templates, and circulars, under the authority granted to it by the primary
legislation. In some countries such guidance may require a stronger legal
basis to give it adequate force.
There can be a lot of variation among countries within this broad hierarchical
framework, but the main aim should be to preserve as much flexibility as possible
for the PIM coordinating agency to improve systems as lessons are learned and
capacity is developed. The agency needs to have sufficient legal authority to
enforce the “rules of the game.”
This chapter describes some of the options for establishing this hierarchical
framework, with some relevant country examples.
33
34 | Public Investment Management Reference Guide
LEGAL AUTHORITY FOR PIM: TIER 1
The legal authority for PIM can be established via three models:
• Specific primary legislation: a “PIM law”
• Directly through the budget systems law or fiscal responsibility law
(or equivalent)2
• Indirectly through the budget and fiscal systems legislation
(or equivalent).
The second of these three models combines sufficient legal authority
with adequate flexibility and is usually the preferred choice.
The first model is the least common and is associated with reform-
oriented, state-planned economies such as those of the Lao People’s
Democratic Republic and Vietnam, where planning and budgeting for capi-
tal investment are separated institutionally from planning and budgeting for
current expenditures. Vietnam’s Law on Public Investment (2014) runs to 57
pages (in English translation); in addition to establishing the legal authority
for PIM, it covers the kind of procedural detail indicated at tier 2. Lao PDR’s
2009 law (revised in 2015) is similar in scope and content. Italy used a
specific law (Law 144/1999) to establish the concept of the project cycle and
place the feasibility study at the center of project preparation and appraisal,
which is unusual for countries with more advanced systems (Scandizzo and
Napodano 2010).
The third model generally applies to countries with more advanced public
financial management systems and may not work where there is an urgency
to implement PIM reforms. Australia’s Financial Management and
Accountability Act (1997),3 for example, requires heads of spending agencies
to promote “proper use” of public resources, defining “proper use” as
“e fficient, effective, and ethical use” that is “not inconsistent with the
policies” of the country. In relation to PIM, the Australian Finance Ministry
then issues guidelines connecting different dimensions to the obligations of
public sector managers to make “proper use” of public resources. New
Zealand and the United Kingdom take a similar approach. South Africa goes
marginally further by requiring responsible officers to ensure that their
organization maintains “a system for properly evaluating all major capital
projects prior to making a final decision on the project,”4 but provides no
egulatory
further detail at the level of primary legislation; the detail comes in r
instruments issued by the Finance Ministry.
Within the preferred second model, a decision must be made concerning
the level of detail on PIM contained in the budget systems law. At one end of
the spectrum, Kazakhstan includes considerable detail in its already very
detailed Budget Code (see box 3.1);5 at the other end of the spectrum, Croatia
has a single article on PIM in its Budget Act, requiring expert assessment of
projects and conferring authority on the government to prescribe PIM meth-
odologies (see box 3.2). Generally accepted principles concerning the balance
between the budget system law and supporting regulations may help policy
makers to determine the appropriate level of detail (see box 3.3). Cyprus’s
recently adopted Fiscal Responsibility and Budget Systems Law illustrates
how this approach could be compatible with the legal and administrative
context (see box 3.4).
The Legal and Regulatory Framework for PIM | 35
BOX 3.1
Treatment of public investment management in Kazakhstan’s budget
systems law
Two chapters of Kazakhstan’s Budget Code deal with review of economic performance and risk analysis,
public investment (although these chapters also is mandatory. Based on the review, budget program
address concession arrangements and government administrators may approve projects.
shareholdings). Chapter 30 covers budgeting for
3. Project selection via the annual budget process. Only
investment projects, and chapter 31 (not summarized
projects that have a completed feasibility report, a
here) deals with project implementation, including
positive appraisal, and a positive decision from the
project adjustment and ex post evaluation.
relevant budget committee are eligible for inclusion
Chapter 30 sets out a three-stage upstream PIM
in the draft budget.
process:
1. Project proposal. Administrators of budget
programs Chapter 30 also authorizes the issuance of secondary
develop investment project proposals in coordina- legislation:
tion with the drafting of medium-term strategic
• The government is authorized to specify the
plans. Investment proposals are subject to scrutiny
detailed procedures for the development, review,
by the Planning Authority and to approval by the rel-
and selection of investment proposals.
evant budget committees before being included in
equirements
• The Planning Authority decides on the r
the budget for funding the next stage.
of feasibility studies (stage 2).
2. Project appraisal. Detailed feasibility studies are • The government is authorized by law to specify
undertaken, reports are prepared, and project via-
procedures for submission, selection, monitoring,
bility is appraised. Feasibility studies examine eco- and evaluation of government investment projects,
nomic feasibility using cost-benefit analysis. including those not requiring feasibility studies or
Independent review of appraisal results, including those having increased budgets.
Source: Kazakhstan’s 2009 Budget Code.
PROCEDURAL GUIDELINES AND BOX 3.2
METHODOLOGICAL GUIDANCE:
TIERS 2 AND 3
Treatment of public investment
Once the legal basis for PIM has been established, management in Croatia’s budget
it needs to be made operational using a compre- systems law
hensive regulatory framework that details the
PIM system’s design and functioning. This second “Assumption of liabilities for investment projects
tier of the hierarchy generally covers procedures, Article 45
roles, and responsibilities; h igher-level assess- 1. State budget users may assume liabilities for
ment criteria; and designated analytical methods investment projects only after expert assessment
(it does not provide in-depth guidance on the has been completed, and the i nvestment proj-
methods). Depending on the depth of coverage at ect’s justification and efficiency were evaluated.
2. The provisions of this Article shall apply accord-
tier 1, there may be some repetition at tier 2; PIM
ingly to local and regional self-government units.
guidelines should deepen the framework estab- 3. The government shall prescribe the methodol-
lished in the law. ogy of preparation, evaluation, and execution
In rare cases, such as Lao PDR and Vietnam, of investment projects by a decree.”
some of the content of tiers 1 and 2 is com-
Source: Croatia’s 2008 Budget Act.
bined in a single piece of primary legislation.
36 | Public Investment Management Reference Guide
BOX 3.3 Tier 2 procedural guidelines are generally issued
by the government or the responsible finance
or planning ministry in the form of secondary
Content of budget system laws versus legislation,6 as authorized in the primary legisla-
lower-order instruments tion. In the United Kingdom and countries with
similar political and administrative systems,
Three criteria provide guidance on whether an issue procedural guidelines issued by the economic
should be covered by law or by government regulation: and finance ministry (the “Treasury”) have the
• Public finance areas over which the legislature has implicit legal force of regulations and are recog-
final authority should be specified in law, whereas nized as such because of the superior status of this
budgetary issues for which the executive has dele- ministry in the political hierarchy.
gated authority should be governed by regulations. Moldova, Ukraine, and Zimbabwe are exam-
• The responsibilities of the executive to the legislature ples of countries where tier 2 regulations have
should be covered in the law, whereas the responsi- recently been introduced as a basis for initiating
bilities internal to the executive are best specified in operational PIM systems. In Moldova, under
regulations or decrees issued by the executive. authority of the Law on Fiscal Responsibilities7—
• The new budget principles should be durable. Since the tier 1 legislation—the Cabinet of Ministers
laws are more difficult to change than regulations, adopted, by resolution,8 a regulation governing
they should not include provisions if there is a strong roles and responsibilities and setting out rules and
risk that these provisions will be abrogated or procedures for a five-stage PIM system. In
amended one to three years later. Ukraine, the Cabinet of Ministers adopted, by res-
olution, procedures for project appraisal and
Source: Lienert and Fainboim 2007. selection and a regulation on organizational
arrangements. This resolution was subsequent to
amendments to the Budget Code in 2015, which
BOX 3.4
Treatment of public investment in Cyprus’s budget systems law
Part XI of the Fiscal Responsibility and Budget 5. Monitoring of projects and amendments to
Systems Law deals with the selection and imple- contracts.
mentation of public investment projects. In eight
Under the authority of the law (tier 1 in the
articles, part XI sets out the basic principles and
h ierarchy), the minister of finance has issued a
scope of PIM in Cyprus, establishes a five-stage
methodological manual covering upstream PIM
PIM process, and authorizes the minister of finance
processes and will shortly issue another for
to issue regulations or instructions to set out “pro-
downstream processes. The manuals are equivalent
cedures, methodolog ies, criteria, a nd other
to tier 3 in the hierarchy.
requirements.”
The law also includes a general article giving the
The following are the five stages of Cyprus’s PIM
Council of Ministers power to issue regulations to
process:
improve implementation of the law and regulation of
1. Preselection of projects technical matters. This power has allowed the Council
2. Project assessment of Ministers to issue PIM guidelines delineating PIM
procedures, roles, and responsibilities and designating
3. Project selection
analytical methods. The guidelines are equivalent to
4. Project implementation tier 2 in the hierarchy.
Source: Cyprus’s 2014 Fiscal Responsibility and Budget Systems Law.
The Legal and Regulatory Framework for PIM | 37
were required to give PIM a firm legal footing. In Zimbabwe, the Ministry of
Finance and Economic Development adopted in 2017, by a Treasury circular,
PIM guidelines that regulate a five-stage PIM procedure for project concept
note, prefeasibility study, feasibility study, implementation, monitoring and
adjustment, and asset registry, management, and evaluation. The PIM guide-
lines are a tier 2 regulation under the country’s public financial management
law. Work is ongoing in all three countries to develop, introduce, and further
refine methodological guidance at tier 3.
Tier 2 regulations need to be supported at tier 3 by technical guidance on
assessment methodologies, detailed assessment criteria, and templates. This
guidance usually consists of overarching methodological guidance, supple-
mented by sector-specific guidance on how to apply the general guidance in
an individual sector or subsector (for example, roads, railways, airports,
irrigation, and water supply and sanitation). In the United Kingdom, the
general methodological guidance (HM Treasury 2003) is supplemented by
various sector- specific knowledge resources, including those for transport9
and flood defenses.10 The Republic of Korea has published more than 10 sets
of guidance books for subsectors.11 Chile has perhaps the most extensive
sector-specific guidance, with more than 30 sets of guidance for individual
subsectors (see box 5.4).
Flexibility is required, as methodological approaches may need to be updated
and refined on a regular basis; at the same time, the official status of the guidance
needs to be upheld. This is usually done by issuing guidance through a ministe-
rial decision or equivalent. Procedural and methodological templates are issued
at tier 3, and they may be subject to more regular revision. In the United Kingdom,
templates to present “business cases” for projects are required for decision mak-
ing at three points in time during the upstream phase of the PIM system. In
addition to other information for decision makers, the templates present the
findings of assessments carried out according to methods from the Green Book
(HM Treasury 2003).
Overarching national methodological guidance should be issued by the
central financial or planning ministry responsible for coordinating PIM;
sector-specific guidelines may be developed and promulgated either by the
responsible central financial or planning ministry (as in Chile and Korea) or
by line ministries or their subordinated agencies (as in France or the United
Kingdom). The first model ensures that sector-specific guidelines are consis-
tent with the overarching national guidelines; the second model has the
potential to promote buy-in at the sector level and to use available sector
expertise more efficiently. The second model needs to have a mechanism for
ensuring that sector guidance is consistent with national guidance.
Somewhere between these two models and less common is the example of
the Netherlands: national guidelines include light treatment of sector-
specific methods, which are then open to further development by line minis-
tries or agencies.
Regularly updated guidance on standardized values for key parameters for
economic analysis (for example, discount rate, value of work and personal
time, value of a statistical life, value of a ton of carbon dioxide saved) supports
the methodological guidance. These values may be subject to more frequent
updating than the methods themselves, and are often promulgated through
ministerial circulars or research papers. National parameter values are
discussed further in chapter 5.
38 | Public Investment Management Reference Guide
COMPARISON OF COUNTRY LEGAL AND REGULATORY
FRAMEWORKS
Table 3.1 illustrates the structures of the legal and regulatory frameworks in
three countries. Cyprus and Korea illustrate the most typical choices facing most
countries embarking on PIM reform and the hierarchical structure. The Cyprus
case has already been described in relation to tier 1 (box 3.4).
Cyprus has a separate chapter on PIM in the Fiscal Responsibility and Budget
Systems Law. Korea grants PIM legal authority through the National Finance
Act, which confers on the Ministry of Economy and Finance the authority to
issue detailed regulations (tier 2) and to support these regulations with method-
ological guidance, both general and sector specific (tier 3). The case of the United
Kingdom, while not unusual, is difficult to replicate if a country does not already
have similar political and administrative traditions (which may apply to mem-
bers of the Commonwealth).
It is interesting to compare tier 2 authority in Cyprus and in Korea; in Cyprus,
the Council of Ministers adopts the regulatory framework (“guidelines”) pro-
posed by the minister of finance; whereas in Korea, the Ministry of Economy and
Finance has this authority. Even though it could be useful for the PIM system to
obtain buy-in at the highest political level, leaving tier 2 authority with the gov-
ernment may weaken the momentum of reform. This approach has worked in
Cyprus but not in Croatia: the government of Croatia has been unable to reach
agreement on the details of the PIM system for many years, and PIM reform has
stalled, despite the intentions of the 2008 Budget Systems Law (box 3.2). In
Korea, a coalition of the Prime Minister’s Office and the Ministry of Economy
and Finance was responsible for driving through PIM reforms, with some initial
resistance from line ministries. This case illustrates that the political context and
TABLE 3.1 Comparison of legal and regulatory hierarchies for PIM in three countries
TIER UNITED KINGDOM CYPRUS KOREA, REP.
Tier 1: legal Finance Act and Managing Public Fiscal Responsibility and Budget National Finance Act authorizes
authority Money embody the principle of Systems Law sets out a five-stage the Ministry of Economy and
efficiency and require public PIM system and authorizes the Finance to carry out a preliminary
resources to be used in ways that minister of finance to issue feasibility study of major
give value for money. regulations and instructions on investment projects and to provide
procedures, methodologies, and guidelines on the conduct of any
criteria. study that may be delegated to an
independent institution.
Tier 2: procedural Major project approval and PIM guidelines adopted by the Operational guidelines for the
guidelines assurance guidance is issued jointly Council of Ministers cover preliminary feasibility study and
by the Cabinet Office and the procedures, roles, and guidelines for total project cost
Treasury (the economic and finance responsibilities at each stage and management are issued by the
ministry). set high-level assessment criteria. Ministry of Economy and Finance.
Public sector business cases using
the five-case model is issued by the
Treasury.
Tier 3: Appraisal and evaluation in central Methodological manual for General and sector-specific
methodological government (the Green Book) and preselection and appraisal of guidance on appraisal is issued by
guidance templates for business cases are public investment projects is issued the Ministry of Economy and
issued by the Treasury. under authority of the minister of Finance.
finance by the Directorate General
Sector-specific methodological
for European Programmes,
guidance is issued by line ministries.
Coordination, and Development.
The Legal and Regulatory Framework for PIM | 39
relative power and motivation of the players are important in the design of any
legal and regulatory framework.
Vietnam’s dedicated PIM law is a rarity and includes elements of both tiers 2
and 3. Parliament is involved in regulating details of the PIM system and in
upstream decision making through its power to approve investment decisions
for nationally important projects. This legalistic approach reflects the country
context but may not be efficient because of its inherent inflexibility.
NOTES
1. Usually referred to as “secondary” legislation.
2. The term “budget law” is often used, but it is not used here to avoid confusion with the
annual budget law.
3. Australia is generally recognized as having a well-managed public sector.
4. Public Financial Management Act 1999.
5. The Budget Code extends to 125 pages (in English translation).
6. Government decisions or resolutions for adopting regulations and procedures.
7. Amended in 2013.
8. Government’s PIM Resolution no. 1029 (dated December 19, 2013).
9. See https://www.gov.uk/guidance/transport-analysis-guidance-webtag.
10. See https://www.gov.uk/guidance/flood-and-coastal-defence-appraisal-of-projects.
11. For example, roads and railways, seaports, airports, water supplies, industrial complexes,
information technology projects, social and cultural projects, environmental facilities, and
hospital projects.
REFERENCES
HM Treasury. 2003. The Green Book: Appraisal and Evaluation in Central Government. Amended
in 2011. London: HM Treasury.
Lienert, I., and I. Fainboim. 2007. “IMF Reforming Budget Systems Laws.” PFM Technical Note
2, Fiscal Affairs Department, International Monetary Fund, Washington, DC.
Scandizzo, P., and M. Napodano. 2010. Public Investment Management: Linking Global Trends to
National Experiences. Saarbrücken: VDM Verlag Dr. Müller, Germany.
4
Allocation of Roles and
Responsibilities among
Key Players
OVERVIEW
A core part of public investment management (PIM) arrangements should be
the clear allocation of roles and responsibilities to key players from government
bodies at each stage of the PIM system. This allocation is important for upstream
and downstream phases of the system; for assessments, for budgeting and imple-
mentation, and for key decisions on whether to proceed further with a project.
The following may be key players in the PIM process:
• Line ministries with their departments and subordinated agencies, where
projects originate and are implemented
• The finance ministry, which has a critical role in coordinating capital
budgeting for new and ongoing projects and may have an oversight role in
quality-at-entry processes
• The planning ministry or agency, which may be an alternative location for
overseeing quality-at-entry processes and should have a critical role in coor-
dinating strategic planning
• An interministerial committee (or similar committee), which may have a role
in confirming appraisal decisions and selecting projects to compete for bud-
get funding
• A ministerial committee—made up of finance, planning, and infrastructure
ministers—with powers delegated from the council of ministers for major
projects.
These are the key players on the executive side of government, which is the focus
of this chapter. The role of the legislature is also important, however, as it makes the
final decisions on project funding through the budget process. Depending on the
country, this power may or may not extend to decisions on individual projects.
As indicated in chapter 3, roles and responsibilities should generally be set at
tier 1 or tier 2 in the hierarchy of PIM legislation and regulations—that is, through
government or ministerial decisions, regulations, or the like. Depending on the
depth of PIM coverage in primary legislation, high-level roles and responsibili-
ties may be established at tier 1, but they would still need to be given more sub-
stance at tier 2. Cases where roles and responsibilities are fully developed in
primary legislation are rare—for example, in Vietnam.
41
42 | Public Investment Management Reference Guide
The framework for guidance on roles and responsibilities should follow the
eight PIM functions identified in figure 2.2. The first four functions prior to
implementation (strategic guidance, appraisal, independent review, and selec-
tion) are the upstream processes; the remainder (implementation, adjustment,
operation, and evaluation) form the downstream processes.
This chapter focuses on upstream roles and responsibilities because well-
informed, structured decision making prior to implementation is essential for a
good PIM system. While there is still scope for defining roles and responsibilities
for the downstream functions, these downstream roles and responsibilities will
already be governed partly through legal and regulatory instruments with wider
scope than PIM, such as laws on budget systems, procurement, public account-
ing, public internal financial control, and state audit. Downstream roles and
responsibilities are discussed separately in chapters 8 and 9.
OPTIONS FOR THE ALLOCATION OF ROLES AND
RESPONSIBILITIES
Upstream PIM functions
Upstream functions have four general roles:
• Proposer. Identifies the project concept in response to an identified need or
emerging problem and initiates the steps that follow
• Appraiser. Analyzes the project’s net social worth, affordability, and sustain-
ability as it develops from concept to budget-ready expenditure proposal
• Reviewer. Evaluates the quality and robustness of the analysis at each step and
advises decision makers
• Decision maker. Makes a decision to proceed to the next stage on the basis of
analytical findings and reviewers’ advice.
Table 4.1 summarizes the responsibilities related to each stage of the upstream
phase of the PIM system. In some cases, the same body may carry out different
roles, but this approach will require internal safeguards against conflicts of inter-
est, such as involving disinterested parties within the organization.
Project preappraisal
At the preappraisal stage, it is advisable for the proposer and appraiser to be the
same in order to ensure the development of a coherent project concept. The
reviewer should be different from the proposer and appraiser. Particularly for
major projects, the reviewer should be external to the proposing or appraising
organization or will need to come from another part of the same organization.
The decision maker should be different from the proposer, at least for major proj-
ects; it may be the finance or planning ministry, but such strategic decisions may
be made at the central government level, particularly for megaprojects.
Project appraisal and selection
At the appraisal stage, capacity considerations and objectivity requirements usu-
ally mean that the proposer and appraiser are different. External consultants and
experts may act as appraisers, especially for major projects. In such cases, it is
Allocation of Roles and Responsibilities among Key Players | 43
important for the proposer to retain strong oversight. The reviewer also needs to
be different from the proposer and appraiser and to have no vested interest in the
project. The finance or planning ministry usually performs the role of reviewer
(sometimes with assistance from external experts), but an independent agency
may also be established.
Smaller projects may be reviewed by the proposing organization, but the
review must be undertaken by an independent unit within the organization to
preserve some degree of separation between the two roles. It is advisable not to
take the selection decision to the government level simply to avoid it becoming
politicized.
The minister of finance or planning usually makes the final appraisal decision
for major projects; for smaller projects, the head of the proposing body may
make the final decision. The selection decision may be escalated to a higher
authority for “projects of national significance” or “megaprojects,” in which case
the decision would fall to the council of ministers or to a committee of ministers
with delegated authority.
Capital budgeting
Capital budgets are prepared by line ministry planning and finance units and
proposed by the respective minister.
The budget department in the finance ministry is in charge of appraising cap-
ital budgets. It is not advisable to split this role between separate finance and
planning ministries; separating functions within the finance ministry by the eco-
nomic nature of expenditures is also not recommended.
The minister of finance, advised by the budget department, will generally
be the official reviewer of budget submissions and their capital components.
Such reviews usually involve a high-level team from within the finance min-
istry. The finance minister should have ultimate responsibility for advising
colleagues in the council of ministers or cabinet about the outcome of the
review process.
The final decision on the draft budget, including its capital component, is
made by the council of ministers or cabinet. Any unresolved issues from the
finance minister’s review should be resolved at this time.
Table 4.1 describes the roles and responsibilities of the executive, but the
legislature is the ultimate decision maker for capital budgeting. In some
countries—for example, the United States—the legislature can play an active
role in choosing individual projects (provided decisions are neutral with
respect to the overall size of the budget); in other countries, the legislature
can only accept or reject the budget in its entirety. The latter model is rec-
ommended. If the first model is constitutionally embedded, the PIM legisla-
tion (tier 1) needs to be strong enough to ensure that the legislature can only
introduce projects that have passed through disciplined quality-at-entry
processes.
Through its recently introduced PIM guidelines, Cyprus has carefully
systematized roles and responsibilities using the format set out in table 4.1.
Similarly, through its Multi-Year Plan for Infrastructure, Spatial Planning, and
Transport (MIRT) Rules, the Netherlands also designates decision makers at
clearly defined control points in the upstream phase of the PIM system, as
summarized in box 4.1.
44 | Public Investment Management Reference Guide
TABLE 4.1 Roles and responsibilities of key players in PIM
STAGE OR ROLE PROPOSER APPRAISER REVIEWER DECISION MAKER
Preappraisal Identifies and develops the Prepares an assessment Reviews justification for Decides if, on balance,
project concept in (preappraisal) of the proceeding to project there is a strong enough
response to an identified project concept and preparation, to identify case for proceeding to
need or emerging possible alternatives, nonstrategic projects and project preparation, taking
problem, in discussion focusing on strategic those likely to be account of the preappraisal
with relevant stakeholders relevance, rationale, and nonviable economically or findings and reviewer’s
long-run fiscal unaffordable (especially advice
Secures funding for
sustainability “white elephants”)
appraisal if the ultimate
decision is positive Advises decision makers
accordingly
Appraisal and Initiates the preliminary Prepares a feasibility study Reviews the feasibility Decides if, in principle, the
selection design, feasibility study, to determine whether the findings and tests their project represents good
and any necessary impact risk-adjusted net social robustness, with an eye to value for public money
studies for the project worth of the project is identifying excessive (that is, is likely to be
positive, if the social and optimism concerning efficient and effective)
Secures funding for
environmental impacts are costs and benefits and
detailed design and tender Decides if a major project
acceptable, and if the inattention to risks and
preparation if the decision is a priority for public
fiscal consequences are deliverability
is positive funding, given competition
sustainable from other projects
Decides if a project may be
proposed for budget
funding
Capital Prepares the capital Analyzes the capital Reviews capital budget Approves capital budget
budgeting budget proposal, including budget proposal to check proposals to verify proposals, having resolved
new projects that have that individual projects alignment with all competing claims
been selected; ensures have all the necessary government priorities, In so doing, decides to
consistency with guidance decisions and that none deliverability of new fund the full
from the finance ministry has circumvented earlier projects in the budgetary implementation of new
on financial constraints PIM stages; that new planning horizon, and projects included therein
and government priorities projects are deliverable in aggregate fiscal
the planned time frame sustainability, taking
and within budgets; that account of the appraisers’
proposed funding for new findings
projects does not Prepares advice for the
compromise the ultimate decision maker
implementation of on resolving any
ongoing projects; and that competing claims for
the proposal supports the funding that cannot be
government’s declared resolved bilaterally
policy priorities, fitting
within previously specified
fiscal limits
Identifies any competing
claims for funding of new
capital projects
DIFFERENT APPROACHES TO DECISION RIGHTS
ACCORDING TO PROJECT SIZE, SECTOR, AND
LEVEL OF GOVERNMENT
Bearing in mind the scarcity of key decision makers’ time and variations in the
riskiness of different sectors, the allocation of roles and responsibilities may dif-
fer according to project size, sector, level of government, or all three. This ensures
that only “significant” or “major” projects are escalated to the highest levels of
scrutiny. This process is illustrated in box 4.2 with reference to the
Allocation of Roles and Responsibilities among Key Players | 45
BOX 4.1
The Netherlands’s MIRT rules: Strict definition of roles and responsibilities
The Netherlands’s MIRT Rules regulate the project 3. Project decision. The decision to proceed with imple-
cycle from identification to completion. a They mentation is made on the basis of a detailed study.
describe the roles and responsibilities of the parties 4. Handover decision. The project is completed and is
involved and the decision-making requirements for ready to begin delivering services or benefits as
the government to reach a decision on a possible planned.
financial grant. The rules establish four key deci-
At each decision point, the aim is to set out the
sion points corresponding to stages of the project
basis for the decision, what the decision involves, and
cycle:
what the possible follow-up process is. To support the
1. Start decision. A formal declaration is made by the
decision, information must be supplied in a standard
relevant minister that there is a problem that needs format at each decision point, covering (a) the
to be addressed; a decision is made to begin the c hallenge or
p roblem analysis, (b) solutions,
explorative study. stakeholders, (d) financing, (e) decision making,
(c)
2. Preferred decision. The preferred option for and (f ) follow-up approach.
detailed study is identified on the basis of Apart from the handover decision, the flow of a proj-
the explorative study, and a decision is made ect from one stage to the next does not happen automat-
by the relevant minister to begin the project ically; an explicit decision must be made regarding
study. whether or not to take the project to the next stage.
Source: World Bank 2014.
a. Rules for the Multiannual Program for Infrastructure, Spatial Development, and Transport (Spelregels van het Meerjaren programma
Infrastructuur, Ruimte en Transport).
United Kingdom, where the Treasury becomes involved in decision making for
projects above specified thresholds of investment cost. These thresholds vary by
sector and level of government, with lower thresholds for local government and
for sectors deemed to be risky. Similar arrangements are contained in Vietnam’s
2014 Law on Public Investment, which categorizes projects into a four-group
hierarchy (nationally important projects and groups A–C) by investment cost,
sector, and potential for significant environmental or social impacts. It then
specifies a corresponding hierarchy of decision rights from the national assem-
bly down to the people’s committees at lower levels of government. Both of these
systems may be too elaborate for many countries, but most countries will need to
have some degree of hierarchy in the designation of roles and responsibilities.
Based on this discussion, a simple structure of value thresholds for defining a
“significant” or “major” project that requires a deeper review and high-level
decision making may look like the following:
• A threshold above which a project should be subject to independent review
by a body external to the proposing or appraising organization
• A threshold above which the ultimate decision maker for project selection
should be the finance or planning minister; for simplicity’s sake, this thresh-
old could be the same as in the previous bullet
46 | Public Investment Management Reference Guide
BOX 4.2
Variations in review and decision making by project size, sector, and level of
government in the United Kingdom
In the United Kingdom’s public financial manage- million, whereas for foreign affairs, it is only
£100
ment system, the Economic and Finance Ministry (the £15 million.
Treasury) has ultimate responsibility for all expendi- Ministries themselves must establish their own
ture decisions but delegates this authority (by means delegated limits for public agencies (arm’s-length
of a formal letter) to spending ministries for decisions bodies) coming under their responsibility. Above
below a certain monetary value. This value varies by these limits the ministry itself will scrutinize and
ministry and by sector or subsector, according to the approve investment proposals, whereas below the
Treasury’s assessment of the performance of the min- limits responsibility is delegated to the agency pro-
istry and the riskiness of the sector or subsector. posing the investment. The Health Ministry, for
Major projects are defined as those costing in example, requires investment above £35 million to be
excess of the delegated authority’s remit, requiring approved by the ministry, investment of £10 million to
them to be reviewed formally and approved by the £35 m illion to be approved by the Board of the
Treasury. The definition of a major project can be National Health Service for England, investment of
extended to cover projects that could potentially £3 million to £10 million to be approved by the agen-
breach ministry expenditure limits, that set poten- cy’s Finance and Investment Committee, and invest-
tially expensive precedents, or that are especially ment of up to £3 million to be approved by a senior
novel or contentious. officer of the agency.
Major projects are subject to scrutiny and approval Megaprojects that are especially large or complex
by the Treasury at key control points, known as are subject to a different and more intense review by
Treasury approval points (TAPs) during preparation. the Major Projects Review Group. Projects are selected
These TAPs are (a) the strategic outline case, (b) the for scrutiny according to one or more of the following
outline business case, and (c) the full business case. criteria:
Delegated limits, and hence the definition of a • Projects that have a whole-life cost over £1 billion
major project, vary by implementing organization,
• Projects that are high risk and complex in their pro-
sector, and subsector. In the transport sector, for
curement and delivery of benefits
example, national road projects are subject to TAP
when capital costs exceed £500 million; local govern- • Projects that set a precedent or are highly
ment transport projects have a lower threshold of innovative
£50 million. In the health sector, capital investment or • Other projects “of concern” (as agreed on by the
property transactions above £50 million require chair of the Major Projects Review Group or recom-
Treasury approval. For defense, the figure is mended by the Treasury or Major Projects Authority).
Source: World Bank 2014.
• A threshold above which the selection decision must be confirmed by a higher
authority than the minister of finance or planning, such as a delegated sub-
committee of ministers or even the council of ministers itself.
Setting thresholds is very much a country-specific decision, and international
experience is of little help because conditions and the resulting threshold values
vary greatly between countries. In Cyprus, for example, a significant project is
defined as having a value of greater than €5.0 million. This threshold compares
to the much higher values indicated in box 4.2 for the United Kingdom
Allocation of Roles and Responsibilities among Key Players | 47
(between £1 million and £500 million, depending on sectors) or the Republic of
Korea (approximately US$50 million),1 but it is appropriate for a small country
with few high-value projects.
When deciding on appropriate thresholds, governments need to consider
practical issues such as the capacities and competing workloads of the bodies
and decision makers involved. Decisions need to be made regarding a reasonable
number of projects for the key players to manage. The size distribution of the
ongoing project portfolio and of recently completed projects needs to be exam-
ined to determine sensible cutoff values that allow for a manageable workload.
If thresholds are set too low, then the level of scrutiny may become superficial; if
thresholds are set too high, then too few projects will proceed to the intended
deeper scrutiny.
A more sophisticated system of thresholds should be considered only after
the simpler system has been shown to work. In this case, government may wish
to set lower thresholds for sectors considered to be riskier with regard to the
reliability of appraisal findings. It is also important to take account of the com-
bined workload of the key players. In the absence of information on the riski-
ness of different sectors, thresholds may be lower in sectors where the margin
of error of the monetary estimates of benefits is likely to be highest or where
benefits are more likely to be assessed in qualitative terms only. This is gener-
ally the case in the social and environmental sectors. Lower thresholds may also
be set for local government projects, if subject to central government scrutiny,
reflecting the likelihood of weaker appraisal capacities at this level.
As in the case of the United Kingdom, it will be helpful for the PIM oversight
body to have the authority to override thresholds and to subject lower-value
projects to greater scrutiny where there is cause for concern.
Table 4.2 discusses proportionate application of appraisal tools, such as social
cost-benefit analysis, which may also involve setting value thresholds, although
this is not essential.2 It would be less confusing if the two sets of thresholds—
decision rights and methodological sophistication—were consistent at suitable
points of convergence.
It is unwise to define value thresholds in primary legislation (tier 1 in the
legal or regulatory hierarchy established in table 3.1), as it will be more difficult
to change them when circumstances change or when cost inflation erodes real
values. It is more appropriate to use primary legislation to establish the author-
ity to set thresholds and then to define them in tier 2 decisions or regulations.
This is the case in Cyprus, where the Fiscal Responsibility and Budget Systems
Law authorizes the finance minister to define a significant project; this author-
ity is promulgated through guidelines approved by the Council of Ministers.
DEMARCATION AND COORDINATION WHEN A SEPARATE
PLANNING MINISTRY (OR ITS EQUIVALENT) AND FINANCE
MINISTRY COEXIST
Where there is a separate state planning agency (ministry or other body),
there needs to be a clear demarcation of the roles and responsibilities of the
finance ministry versus those of the planning agency. There also needs to be
adequate coordination between the two ministries.
Responsibility for preparing the current and capital budgets may be divided
between the finance and planning ministries. This divided responsibility is
48 | Public Investment Management Reference Guide
particularly evident where state planning is still practiced, for example, in the
Lao People’s Democratic Republic and Vietnam. Such a division is not generally
recommended (see Asian Development Bank 1999; Tommasi 2010) because of
the inefficiencies associated with dual budgeting,3 including:
• Poor coordination between capital expenditure decisions and their recurrent
consequences, usually seen in an underprovision of the operational budget of
new facilities
• Failure to consider trade-offs between capital and current expenditures,
often to the detriment of current spending and frequently resulting in the
suboptimal maintenance of capital stock.
Despite becoming less common, shared responsibility for budgeting exists in
many countries,4 which requires formal coordination to alleviate dual-budgeting
problems. Combining responsibilities in the finance ministry does not necessar-
ily resolve these issues if the separation of functions is reproduced within a
“united” planning and finance ministry.
A planning agency or ministry may have an important role in coordinating the
preparation of strategic guidance for public investment, but this role demands
close coordination with the finance ministry to ensure that strategic plans are
developed within a realistic macrofiscal framework, within an appropriately
long-term horizon (see chapter 6), and with an appropriate level of financial
resources. In some Sub-Saharan African countries—for example, Ghana and
Tanzania—planning commissions have been created under the office of the pres-
ident or prime minister to strengthen the strategic thinking behind public invest-
ment choices. The impact of this approach has sometimes been disappointing
because poor coordination with the finance ministry has resulted in unaffordable
strategies and plans, which have limited use in guiding public investment choices.
Some countries with advanced PIM systems have reinvigorated the strategic
planning function with a narrower remit covering infrastructure only and
involving close coordination with the finance ministry. Infrastructure Australia,
“an independent statutory body with a mandate to prioritize and progress
nationally significant infrastructure [providing] research and advice to govern-
ments,” is responsible for coordinating preparation of the Australian infrastruc-
ture plan. The United Kingdom’s Infrastructure and Projects Authority,5 a new
body reporting jointly to the Cabinet Office and the Treasury, has a similar stra-
tegic planning function and has recently issued a national infrastructure delivery
plan for 2016–21.
As well as having responsibilities for strategic planning, the planning ministry
may also be responsible for overseeing preappraisal, appraisal, and selection;
capital budgeting would remain the responsibility of the finance ministry. This
separation of responsibilities has previously worked well in Chile, where the
Planning Ministry (MIDEPLAN) was responsible for the National Public
Investment System (SNI) (see box 4.3) but had no role in capital budgeting,
which fell under the Ministry of Finance.6 Azerbaijan’s and Ukraine’s economic
development ministries follow Chile’s example, ensuring that upstream PIM
responsibilities remain detached from their finance ministries.
Coordination between the planning and finance ministries is always advis-
able, even when the latter has the mandate for capital budgeting, because ques-
tions of affordability during preappraisal and appraisal can only be addressed
with input from the finance ministry. This input may be difficult to obtain, as
finance ministries may fear that opinions on affordability will be taken as an
Allocation of Roles and Responsibilities among Key Players | 49
BOX 4.3
Allocation of responsibilities in Chile’s national public investment system
Chile’s Planning Ministry (MIDEPLAN) managed the • Developing project preparation and appraisal
country’s long- established SNI for many years follow-
methodologies, including the determination of
ing its inception. This role continued when MIDEPLAN social prices
was transformed into the Ministry of Social
• Training public officials in project preparation and
Development, with the following responsibilities:
evaluation.
• Regulating the procedures for preparing and
This role has been strictly segregated from capi-
appraising projects that apply for public funding
tal budgeting, which rests with the Ministry of
• Developing and managing an information system for Finance.
all investment initiatives (the so-called Integrated
Project Data-Bank)
Source: Gómez-Lobo 2012.
implicit approval of budget funding, which can never be the case. Psychologically,
it may be easier for the finance ministry to be asked to give an opinion on the
likelihood of a project being unaffordable—rather than affordable—in the
medium- to long-term fiscal climate.
In summary, the roles of a planning ministry and a finance ministry should be
differentiated and coordinated according to the PIM stage. During the early
stages (strategic guidance, preappraisal, and appraisal), the planning ministry
will take the lead role, especially for checking the economic viability of projects,
and will collaborate with the finance ministry. In later stages, the finance minis-
try will check budget affordability, still collaborating with the planning ministry.
Potentially, the planning ministry could take the lead again in the final stage of ex
post review and evaluation.
ESTABLISHING A DEDICATED PIM UNIT
PIM oversight activities are highly specialized, and are perhaps among the most
specialized of all activities related to public financial management. Where no
planning ministry already performs these functions, having a dedicated central
PIM unit would help to bring together the required expertise. If the dedicated
PIM unit is established outside the finance ministry, all of the arguments relating
to the planning ministry apply. Where the PIM unit is established in the finance
ministry, issues will arise concerning its location within the ministry, its respon-
sibilities, and its powers.
If the PIM unit is placed outside the budget department of the finance minis-
try, its remit needs to be tightly circumscribed in order to avoid coordination
issues and intra-agency rivalries; dual-budgeting problems, for example, could
emerge if the PIM unit is given significant responsibilities relating to capital
budgeting. Limiting the PIM unit’s responsibilities to strategic guidance and
quality-at-entry activities will help to avoid this problem. In weaker institutional
50 | Public Investment Management Reference Guide
contexts, however, placing the PIM unit outside the budget department could
potentially leave it isolated, without influence, and unable to command adequate
financial and human resources to establish its reputation (as has been the case in
Romania). For many countries, therefore, placing the PIM unit within the bud-
get department or having it report to the budget director may ensure sufficient
authority and adequate resourcing.
Table 4.2 summarizes the organizational arrangements and responsibilities
of public investment units in five countries that are generally recognized as hav-
ing good PIM practices. The first thing to note is the diversity of organizational
arrangements, which range from New Zealand’s unit, located under the budget
director in the Finance Ministry, to Korea’s Public and Private Infrastructure
Investment Management Center (PIMAC), an independent think-tank with
important PIM responsibilities. In spite of this diversity of location and report-
ing lines, the units have similar responsibilities with respect to public investment
management, none of which include direct involvement in capital budgeting.
These responsibilities include undertaking or coordinating independent reviews
of major projects and acting as a center of excellence for the development and
dissemination of best-practice assessment methodologies. Units in France, New
Zealand, and the United Kingdom also have broader portfolio-monitoring roles
for major projects. Their roles are all advisory; decision-making power lies
elsewhere.
Even in countries with advanced PIM systems, the creation of a dedicated
public investment unit is a relatively recent phenomenon, which can be explained
by the following:
• Renewed focus on closing infrastructure deficits, perceived as inhibiting eco-
nomic growth
TABLE 4.2 Public investment units in some countries with advanced PIM frameworks
INDICATOR FRANCE IRELAND NEW ZEALAND KOREA, REP. UNITED KINGDOM
Name of PIM unit General Commission Central Expenditure National Public and Private Infrastructure and
for Investment Evaluation Unit Infrastructure Infrastructure Projects Authority
(Commissariat Unit Investment
Général à Management Center
l’Investissement) (PIMAC)
Date of creation 2010 2006, but preceded 2009 2005, but preceded 2016 (from a
by an independent by the Public merger between
central evaluation Investment Infrastructure UK
unit created in 1996 Management Center, and the Major
which had no Projects Authority)
responsibilities for
public-private
partnerships (PPPs)
Location or The commissioner Situated in the Finance Ministry PIMAC—an Reports jointly to
reporting lines general reports to Finance Ministry; reports to the independent the Economics and
the prime minister acted independently director of organization under Finance Ministry
until 2011, when it budget and the government’s and the Cabinet
was integrated into public think-tank, Korea Office
the new Ministry for investment Development Institute
Public Expenditure (KDI)—responds to
and Reform direction and requests
from the Ministry of
Economy and Finance
continued
Allocation of Roles and Responsibilities among Key Players | 51
TABLE 4.2, continued
INDICATOR FRANCE IRELAND NEW ZEALAND KOREA, REP. UNITED KINGDOM
Summary of PIM Prepares government As a central Formulates and Under the direction Develops the
responsibilities decisions for evaluation unit, monitors and supervision of government’s
contracts between progress on a Ministry of Economy major projects
Offers advice on and
the state and 20-year national and Finance, portfolio, in
sets standards for
agencies responsible infrastructure collaboration with
cost-benefit analysis Conducts the
for managing funds plan ministries, and
(Working Rules on preliminary feasibility
under the special reports regularly to
Cost-Benefit Analysis Establishes study (PFS) for major
program ministers
1999 and Capital robust and projects, according to
“Investments for the Appraisal Guidelines reliable general and sector- Initiates and
Future” 2005) cross- specific guidelines oversees integrated
Coordinates the government [quality] assurance
Offers advice on Develops and revises
preparation of frameworks for and approval
wider evaluation PFS methodologies
specifications that infrastructure planning process
issues—for example, and manages the PFS
accompany the call project appraisal for all major
ex post evaluations database
for projects and and capital asset projects or
checks that they are As a central management; Conducts a programs, in
consistent with the expenditure monitors the reassessment study coordination with
government’s action evaluation unit with implementation of feasibility (RSF) for the Finance
in terms of future a wider remit, and use of those off-track projects Ministry
investment and the Verifies application frameworks Supports the Initiates and
reform of public of the Capital government in
Provides support oversees
policy Appraisal Guidelines developing policies
to, and acts as a mandatory
Coordinates the secretariat for, and plans on PPPs assurance reviews
Promotes value for
processing of the National and their (formerly gateway
money across the
investment projects, Infrastructure implementation reviews) for all new
system, resulting in
including the publication of the Advisory Board, Conducts value-for- projects and
independent review online Public representing money tests for PPP programs
process, and Spending Code in stakeholders projects Escalates concerns
provides advice on 2013 Carries out ex post to ministers and
proposals
evaluation of accounting officers
Oversees the government programs Provides additional
evaluation, a priori assurance and
and a posteriori, of direct involvement
investments, where projects are
including cost- causing concern
effectiveness
Works with
Provides an annual ministries to build
review of the capability in
implementation of projects and
the public program
investment program management
Publishes an annual
report on major
government
projects
• Heightened focus on efficiency and effectiveness in response to tighter fiscal
constraints following the global financial crisis
• Emergence of a stronger portfolio approach to public investment manage-
ment, particularly with respect to major projects and public-private partner-
ship projects
• General dissatisfaction with a more decentralized approach, in terms of
choice of projects and efficiency of delivery.
52 | Public Investment Management Reference Guide
OTHER SPECIFIC ISSUES IN ALLOCATION OF ROLES AND
RESPONSIBILITIES
Sector or line ministries
Modern public administration is increasingly emphasizing the policy role of line
ministries while delegating implementation to arm’s-length bodies. These new
arrangements may create potential advantages for performance, but it is import-
ant to retain minimum capacities within line ministries to review projects that
have been proposed, prepared, and appraised by subordinated implementing
agencies. Line ministers should see themselves as the “first line of defense”
against any lack of strategic focus, weak project rationale, and optimism bias;
they should not simply be conduits for channeling unvalidated projects to the
central financial and planning authorities. This process will require an adequate
planning and investment unit within a line ministry, mirroring the functions of
the national public investment unit at the sector level. This unit should also have
a monitoring role in the downstream phase. In fact, the line ministry needs to
allocate roles and responsibilities internally for the sectors they manage, similar
to those in table 4.1.
Worldwide trends toward performance-oriented management and budget-
ing have tended to shift expenditure decision making to line ministries within
firm fiscal constraints. This decentralization is increasing accountability for out-
comes, rather than inputs; in relation to capital budgeting, this shift has often
meant a decline in project prioritization and decision making at the center of
government. As a result, line ministries have to make decisions within aggregate
expenditure envelopes, whereby they trade off current and capital expenditures
in pursuit of higher-level performance objectives. There has been some dissatis-
faction with this approach recently with regard to capital budgeting, especially
with major or megaprojects. This dissatisfaction has resulted in the emergence
of a stronger role for the center of government in coordinating and prioritizing
capital expenditure decisions in some countries with advanced systems, includ-
ing France, Ireland, Korea, and the United Kingdom.7 These changes are intended
to accomplish the following:
• Ensure greater consistency between national and sector capital expenditure
priorities
• Ensure intertemporal consistency of capital expenditure decisions
• Better manage the macrofiscal consequences of major projects or megaproj-
ects and ensure efficient implementation
• Address intersectoral capital expenditure trade-offs at the government level
• Target resources more effectively toward infrastructure bottlenecks
• Improve deliverability and risk management of the overall portfolio of major
government projects.
While the broader arguments and approaches for performance-based man-
agement and budgeting remain strong, governments need to make note of the
risk of tensions between line ministries and the center of government when it
comes to capital budgeting for major projects or megaprojects. These tensions
can be addressed when designing PIM roles and responsibilities, but this effort
should be done sensitively, without undermining the broader performance
framework. Capital budgeting is discussed further in chapters 6 and 7.
Allocation of Roles and Responsibilities among Key Players | 53
Coordination with subnational governments
Spending by subnational governments (SNGs) also uses public financial
resources, but the extent to which such spending comes under the national PIM
system will depend on country-specific constitutional arrangements. Almost by
definition, SNGs have a substantial degree of autonomy in decision making and
in the decision-making process. However, where central government is funding
local government investment using conditional capital grants or cofunding using
matching grants, it has leverage to impose good PIM practices. This leverage is
much more limited when SNGs benefit from unconditional transfers deter-
mined by a formula.
In Georgia, the central government has no power over the expenditure deci-
sions of local assemblies within their constitutional mandates. Nevertheless, the
Budget Code does allow the Ministry of Finance to regulate the budget process
at any level of the budget system.8 Specifically, the Ministry of Finance is autho-
rized to issue a capital budgeting methodology.9 Local governments have auton-
omy to allocate roles and responsibilities for implementing PIM, guided by
advice from the central government, but it is difficult for the central government
to control the process.
In contrast to Georgia, Chile requires projects from all levels of government10
to use the SNI, overseen by the Planning Ministry.11 In Korea, all major SNG proj-
ects are also subject to the national PIM system when they request funding from
the central government beyond a certain threshold.
Council of ministers or delegated committee of ministers
The council of ministers or cabinet will be involved in the capital budgeting pro-
cess. The council, or a delegated committee of ministers, may be involved in
selection and prioritization, especially for projects of national significance. It is
important that the selection decision does not become the subject of political
horse trading, especially in the budgeting process, as an overly politicized proj-
ect selection process can lead to distorted choices (rubber stamping), whereby
the project’s actual quality does not figure in the decision-making process. One
way to avoid this distortion is to require a positive decision from the finance or
planning minister before a project can go to a higher-level body. Another solu-
tion is for the finance or planning minister to act as chair and to have the decid-
ing vote. Whatever the case, higher-level decision-making bodies need usable,
robust analysis to assist their decisions.
Development partners
Development partners often have their own project appraisal systems, but gov-
ernments should not cede too many core roles and responsibilities to organiza-
tions operating outside the national system.
National players should perform the roles and responsibilities for preap-
praisal, even if development partners have equivalent systems. This arrange-
ment is important for national ownership and strategic relevance.
At appraisal and selection, development partners are also likely to be involved
in managing and funding appraisal activities, which they will use to decide on
the social profitability of a project. They are not immune to optimism bias and,
54 | Public Investment Management Reference Guide
where possible, national authorities need to ensure that they subject donor
project appraisals to rigorous independent review; national authorities should
also be involved in steering the appraisal process because they need to make the
final selection decision, without which no project should proceed. To ensure
consistency, government- and donor-funded projects should use the same tracks
for decision making.
Capital budgeting should be the preserve of national authorities, and
development-partner projects should not be allowed to proceed without prior
approval from the budget process—even if a project does not intend to use the
national financial management system. The established roles and responsibili-
ties for capital budgeting should apply equally to all projects, regardless of
funding source.
Use of consultants
Contracting out analytical tasks is an important way to obtain expertise that the
public sector typically lacks. Consultants are frequently used to prepare projects
evelopment.
and fulfill the “appraiser” role in countries at all levels of PIM system d
When this is the case, governments need to ensure that the public sector has
adequate capacity to (a) prepare adequate terms of reference; (b) fulfill a proac-
tive client role toward consultants; (c) maintain active engagement with internal
and external stakeholders; and (d) be able to interpret and communicate
appraisal results to reviewers and decision makers. Weaknesses in these areas
tend to result in weak project preparation and assessment and poorly informed
decision making.
The proposer needs to maintain ownership of a project to ensure the
following:
• The rationale is robust and consistently applied.
• The project design is in line with the original concept.
• All sensible options for addressing the identified need have been considered.
Too often, clients do not give consultants enough direction, resulting in sub-
optimal project design, supported by appraisal documentation that serves more
as justification of a decision already made than as an aid to decision making.
Irrespective of the source of funding, proposers need to be active rather than
passive clients, and this recommendation applies to both donor- and
government-funded projects.
Proposers can build and retain ownership by taking control of the preap-
praisal stage, acting as both proposer and appraiser. If they need to bring in
external expertise at this stage, such expertise should be integrated into the pro-
poser’s preappraisal team, rather than being contracted out entirely. At the
appraisal stage, the proposer should retain responsibility for preparing summary
documentation and recommendations for decision makers and not contract out
these tasks. This issue may seem minor, but preparation of such documentation
helps to foster stronger engagement.
Consultants can also be used to support or carry out the reviewer role.
In Norway, consultants employed through framework contracts are used to
assist the Ministry of Finance in its reviewer role as part of the country’s two-
step quality-at-entry process for major projects.12 In France, the General
Commission for Investment (table 4.2) is able to contract individual private sec-
tor experts to create teams to conduct independent reviews of major projects.
Allocation of Roles and Responsibilities among Key Players | 55
Where a public investment unit performs the role of reviewer, it needs to have an
adequate budget for ad hoc external support in specialist areas where it cannot
be expected to retain permanent in-house experts.
Too much reliance on consultants can be problematic, leading to the stalled
development or hollowing out of government capacities. In the United Kingdom,
excessive reliance on external consultants in key project management roles led
to a dearth of project leadership expertise in the public sector. This lack of exper-
tise is being rectified, following establishment of the Major Projects Leadership
Academy.
NOTES
1. In Korea, the threshold for major projects is legislated explicitly in the National Finance Act.
2. Some countries choose to apply the same methods to all projects, but vary the degree of
effort involved according to project value or novelty.
3. The “dual-budgeting” problem is one of process, not presentation: there are good reasons
for clearly separating recurrent and capital expenditures in the budget presentation, pro-
vided expenditures are classified properly. However, presentation of a separate develop-
ment budget covering donor-funded expenditures in aid-dependent countries is
problematic, as it often includes a mixture of current and capital expenditures and may use
a different classification from the current budget (which may include domestically funded
capital expenditures).
4. A recent survey of a sample of 25 low-income countries found that in 44 percent of cases
budget formulation was a shared responsibility, compared with 0 percent in 32
Organisation for Economic Co-operation and Development (OECD) countries (see
Allen et al. 2015).
5. The new body was created on January 1, 2016, merging Infrastructure UK with the Major
Projects Authority.
6. Recently, following an organizational reform, the superior administration of the SNI now
corresponds to the Ministry of Social Development and the Ministry of Finance, through
the Budget Directorate. Both institutions are responsible for the system and fulfill specific
roles, competencies, and responsibilities regarding public investment.
7. New national infrastructure plans are one indication.
8. Article 7 of Georgia’s Budget Code, 2009: “The Minister of Finance of Georgia shall issue
relevant legislative acts for the purpose of maintaining integrity of the budgetary process
and ensuring compliance with the present Code at any level of the budgetary system of
Georgia.”
9. Article 9 of Georgia’s Budget Code, 2009.
10. Central, provincial, local, and major municipalities.
11. For public investment projects of local municipalities in which they contribute more than
50 percent of the investment amount, however, a technical economic analysis is not neces-
sarily conducted.
12. The two-step process entails (a) quality assurance of the choice of concept, prior to a cabinet
decision to proceed to more detailed project preparation; and (b) quality assurance of the
management base and cost estimate, prior to a decision by parliament to fund the project.
REFERENCES
Allen, R., Y. Hurcan, P. Murphy, M. Queyranne, and S. Yläoutinen. 2015. “Evolving Functions
and Organization of Finance Ministries.” IMF Working Paper WP/15/232, International
Monetary Fund, Washington, DC.
Asian Development Bank. 1999. Managing Government Expenditure. Manila: Asian
Development Bank.
Gómez-Lobo. A. 2012. “Institutional Safeguards for Cost Benefit Analysis: Lessons from the
Chilean National Investment System.” Journal of Benefit-Cost Analysis 3 (1): 1–30.
56 | Public Investment Management Reference Guide
Tommasi, D. 2010. Gestion des dépenses publiques dans les pays en développement. Paris:
Agence Française de Développement.
World Bank. 2014. “Study on Cross-Country Comparison: Technical Assistance for Public
Investment Project Appraisal and Selection System Development in Ukraine.” World Bank,
Washington, DC.
5
Designing the Project
Appraisal and Selection
System
QUALITY-AT-ENTRY PROCESSES
OVERVIEW
Within the upstream part of the public investment management (PIM) system,
quality-at-entry processes ensure that projects proceeding to an implementation
decision have been properly vetted as a socially profitable use of public financial
resources and that there is no better way to use the financial resources involved.
Quality-at-entry processes combine rigorous analysis with sequenced, disci-
plined review and decision making. Although the definitions used vary between
countries, four distinct processes are involved:
• Preappraisal
• Appraisal
• Independent review
• Project selection.
These processes act together as a filtering system, with projects passing
through finer and finer sieves to arrive at those that are eligible to be considered
for funding.
PREAPPRAISAL
Why carry out a preappraisal?
By the time a project reaches appraisal (involving a preliminary design and fea-
sibility study), planning will already have gathered momentum, and it may be
difficult to stop the project from being implemented. Preappraisal provides an
opportunity to address weak concepts before they advance too far in the plan-
ning process or before they have gained too much political commitment. 1
Preappraisal is especially important for politically driven “white elephant”
projects, which should be culled as early as possible. At preappraisal, projects
57
58 | Public Investment Management Reference Guide
undergo preliminary screening; those assessed worthy of further study are
allowed to proceed to appraisal.
Preappraisal introduces gradualism into the assessment process as a whole,
creating space for reflection on the declared merits of a project, its internal logic,
and its coherence with government and sector strategic policy priorities. It also
provides an opportunity to consider alternative solutions to the reference
project. The aim should be to reduce a long list of alternatives to a short list of
several alternatives for further analysis alongside the reference project.
Appraisal is costly and a waste of public resources if a project is conspicuously
likely to be stopped at this stage anyway; preappraisal presents an opportunity to
make the system for selecting PIM projects more efficient.
What does a preappraisal involve?
Preappraisal usually begins with drawing up a project concept note (or equiva-
lent), which forms the basis for the preappraisal decision. This process encour-
ages project promoters to give substance to their proposal and to verify that it
satisfies minimum criteria before committing resources to preparation. The
components of the concept note and the related preappraisal criteria may differ
from country to country, but verification of strategic relevance must be at the
core of preappraisal. A comprehensive preappraisal process may involve the
following steps.
Checking the project rationale
The project needs to address the identified problem or emerging demand; the
logic behind the assumed cause-effect relations needs to make sense. Projects
that are tangential to the problem at hand should be dropped and alternatives
identified.
Verifying strategic relevance
Good project ideas may not necessarily be consistent with government or sector
strategic priorities, and it is not worth taking strategically irrelevant projects
beyond the concept stage (the strategic allocation of resources, as described in
table 2.1). Determining strategic relevance depends on well-specified, realistic,
and authoritative strategic guidance—the first of the eight key features of a good
PIM system (see figure 2.2 and chapter 6).
Making an order-of-magnitude assessment of costs and benefits
Preappraisal is not expected to include a quantified cost-benefit analysis, which
usually forms part of an appraisal, but it is possible to make rough estimates of
costs and to weigh these costs against the likely benefits and demand. The aim is
to identify and stop obvious outliers where experience shows that social profit-
ability is extremely unlikely. An effective PIM system examines evidence from
ex post evaluations of similar completed projects.
Ensuring that a full range of alternatives is considered
Good appraisal involves comparing the reference project to a small set of reason-
able project alternatives; preappraisal provides an opportunity to verify that a
sufficiently wide range of alternatives has been considered (including those not
involving capital expenditures) and that the more promising will be taken for-
ward to appraisal.
Designing the Project Appraisal and Selection System | 59
Slowing down unaffordable project concepts and managing the
project pipeline
Preappraisal allows central financial authorities to take a view on affordability
and to control the flow of projects under preparation and queuing for available
fiscal space.
Checking sustainability issues
However promising the project concept, success will hinge on whether the proj-
ect can be delivered as planned and then operated on a sustainable basis.
Preappraisal provides an opportunity to consider the capacities of implementing
and operating entities and to examine the adequacy of funding for future opera-
tion and maintenance. Clear evidence of insurmountable problems would be a
cause for not proceeding, but it is more likely that preappraisal will identify sus-
tainability issues and ensure that appropriate strengthening measures form part
of later project design and preparation.
Identifying potential risks and constraints
Preappraisal does not require a full-scale risk analysis; however, early identifica-
tion of potential risks allows for proper assessment and planning for risk
management during the next stage. Insurmountable constraints, such as envi-
ronmental restrictions or international obligations, must be identified before
resources are dedicated to appraisal.
Flagging potential for adopting public-private partnerships
Preappraisal is too early to decide on the procurement-financing modality, but
any projects with characteristics that make them conducive to public-private
partnerships (PPPs) can be identified, and additional assessments can be planned
for the appraisal stage.2
Planning for appraisal
The process of preparing a concept note is essential groundwork for appraisal.
The issues raised, especially concerning sustainability and risk, should guide the
preparation of terms of reference for the feasibility study, which should follow a
positive preappraisal decision.
Preappraisal is generally a lighter and technically less demanding form of
assessment than a prefeasibility study. If a prefeasibility study is required, it
should follow the preappraisal and involve deeper analysis. In many countries,
prefeasibility studies are optional—depending on project size, risk, or novelty—
whereas preappraisal should be obligatory. Prefeasibility studies are discussed
below in the context of appraisal.
Issues to be considered in designing a preappraisal process
The comprehensive preappraisal process just described is the “full-scope”
model. It is similar to that of the United Kingdom, where the preappraisal
equivalent is known as the strategic outline case (SOC). This discussion
emphasizes the strategic case, but economic, commercial, financial, and man-
agement cases are also considered. The U.K. case is examined in more detail in
chapter 6. Formats for project concept notes in Colombia and the Republic of
Korea, which have narrower coverage than the United Kingdom, are illus-
trated in box 5.1.
60 | Public Investment Management Reference Guide
BOX 5.1
Examples of formats for project concept notes
Although the detail varies between countries, infor- Korea: written request for preliminary feasibility study
mation requirements for project concept notes are • Draft project plan, including
generally similar, covering the nature of the problem – Project purpose
to be addressed, the urgency of the need, the rationale
– Related developments and scale of the project
for the proposed solution, and the links with national
– Estimated total project costs
and sector strategies. Colombia and Korea provide
– Implementation system
examples of two formats for project concept notes,
– Financing method
with the former representing the minimum
– Anticipated benefits.
requirement.
• Need for project implementation
Colombia: identification stage • Adequacy of likely central government subsidy
• Identification of the current situation and the (affordability)
expected future situation • Amount and financing method of necessary
• Diagnosis of the problem or the need to be resources
addressed, including identification of the target • Potential contribution to balanced regional devel-
population and their social and economic opment (“need for technological development” in
characteristics the case of a research-and-development project)
• Rationale for the project solution and its objectives • Risks associated with project implementation and
• Identification of alternative solutions. mitigation measures.
The importance of defining roles and responsibilities is discussed in
chapter 4 (see table 4.2). Responsibility for the preappraisal decision needs to
be assigned carefully, and the decision needs to be documented properly. Who
makes the decision may have implications for project coding in the national
public investment database, where one exists. If the central financial authori-
ties are responsible for the preappraisal decision (at least for major projects),
preappraisal is the time to issue a unique project code. This code could also
serve budget management and accounting purposes for future project prepa-
ration work. Coding at this stage is less obvious if the preappraisal decision is
made at the level of line ministries or agencies.
Flagging potential PPP projects is an advantage of a preappraisal but should
not be seen as a point of departure for creating a separate track for PPP project
assessments. As already indicated (see chapter 2), PPP projects should be subject
to the same upstream processes as traditionally procured projects, up to and
including an appraisal.
Given the extended preparation time for major projects and the lack of direct
synchronization between preappraisal and budgeting, it is difficult to reach a
definitive conclusion on affordability at the preappraisal stage; however, taking
account of broad fiscal trends, the number of high-value projects that can be
funded over the medium to long terms should be reasonably evident, particu-
larly for megaprojects, where delivery capacity should also be taken into consid-
eration. The conclusions may require putting some strategically relevant and
potentially economically viable projects in a “holding position” rather than mov-
ing straight to appraisal.3 Affordability issues are dealt with in more depth in
chapter 6.
Designing the Project Appraisal and Selection System | 61
A balance needs to be struck between a country’s procedural guidelines and
methodological guidance when it comes to preappraisal. Procedural guidelines
should provide the broad outline of the process and assign roles and responsibil-
ities; methodological guidance should detail the technical methods and provide
templates as annexes.
APPRAISAL
Why carry out an appraisal?
Appraisal activities create the analytical basis for making an informed decision
on whether a project is viable from a societal perspective—that is, whether it is
the most “socially profitable” use of the public financial resources required.
Social profitability is not enough for a project to proceed if the sustainable deliv-
ery of benefits is in question; an appraisal therefore also provides the basis for
assessing the long-term sustainability of the project from financial, budgetary,
environmental, social, and managerial perspectives.
What does an appraisal involve?
An appraisal involves preparing a feasibility study or the equivalent. A feasibility
study should have both technical and economic dimensions and be supported by
a preliminary technical or engineering design for the project, including cost esti-
mates and detailed forecasts of demand for the services provided by the asset to
be created or improved. The economic feasibility study examines the social prof-
itability of the project, analyzing market effects and nonmarket social and envi-
ronmental effects.4
The economic feasibility study needs to compare whole-life cost and benefit
streams for the reference project with a short list of technically feasible alterna-
tives, including the status quo, to determine which project will provide the high-
est net benefits to society.5 Alternatives may include technical variants of the
reference project as well as alternative technical solutions. For major projects, a
prefeasibility study will help decision makers to decide which of the possible
technical solutions to take forward into a feasibility study.6
Preparation of an economic feasibility study involves the application of dif-
ferent methodological tools, in isolation or in combination, depending on the
nature of the project and its societal costs and benefits. The main tools are social
cost-benefit analysis, cost-effectiveness analysis, and multicriteria analysis. The
feasibility study should be seen as an input into the appraisal process, resulting
in a decision on the social worth and sustainability of a project. An appraisal
should be structured around a series of sequential steps.
Social cost-benefit analysis
Social cost-benefit analysis (SCBA), also known as economic cost-benefit analy-
sis, is the default tool for determining the social profitability of a project. SCBA
looks at the project from the perspective of the welfare of society as a whole and
includes costs and benefits that do not involve market transactions (for example,
positive or negative externalities or public goods). Financial cost-benefit a nalysis,
in contrast, looks at the project from the narrower perspective of the operating
entity. This difference is often poorly understood by project planners, decision
62 | Public Investment Management Reference Guide
TABLE 5.1 Differences between financial and social cost-benefit analysis
INDICATOR FINANCIAL ANALYSIS SOCIAL ANALYSIS
Perspective Agency, organization, firm Economy, society
Objective Analyze the net financial Maximize the social returns to
impact of the proposal on the economy’s resources
the agency
Pricing Market prices Shadow prices to correct for
distortions and opportunity costs
Transfer payments Included Usually excluded
(taxes and subsidies)
Equity and Excluded Can be included, but usually
distributional effects treated qualitatively
Externalities and Excluded Included
values of public
goods
Depreciation Excluded (from discounted Excluded
cash-flow analysis, but
included in financial
statements)
Source: Adapted from Commonwealth of Australia 2006.
makers, and the public,7 but it is very important, since public policy is concerned
with aggregate social welfare, not just narrow profitability. The main differences
between the two are summarized in table 5.1. SCBA is central to appraisal, but
financial analysis is also required to assess the financial sustainability and prof-
itability of revenue-generating public investment projects. A country’s method-
ological guidelines should cover both types of analysis.
If all costs and benefits, including those for which there are no direct market
transactions, can be readily estimated in monetary terms, the results of a social
cost-benefit analysis will be sufficient to determine social profitability. Depending
on the sector, some significant costs and benefits may not be feasible to value in
monetary terms; they will need to be taken into account when reaching a final
decision on social profitability. In these cases, a qualitative assessment of the
relative importance of these nonmonetized costs and benefits will be required.
In some instances, nonmonetized effects may be judged important enough to
overturn the findings of the SCBA. Ideally, risk should be quantified and reflected
in monetary terms in the SCBA findings, which would then be expressed as
expected values.8 Such quantification may not always be possible; in such cases,
the relative scale of risk of each alternative will have to be assessed qualitatively
when determining economic feasibility.
Multicriteria analysis
Multicriteria analysis (MCA) can help to structure the qualitative assessment of
the nonmonetized costs and benefits of project alternatives, particularly when
the array of effects to be considered is complicated. Care is required when pro-
viding methodological guidance, as MCA does not provide an absolute measure
of costs or benefits, just a ranking of alternatives according to predetermined
criteria; therefore, combining it with the results of SCBA to form a single indica-
tor should generally be avoided. However scientific its design might appear and
whatever guidance is given on limiting subjectivity, MCA is also based on subjec-
tive assessments against specified criteria. It should be seen as providing an
additional piece of information to be used alongside SCBA when deciding on the
overall worth of a project.
Designing the Project Appraisal and Selection System | 63
Cost-effectiveness analysis
Where none of a project’s benefits can be easily valued and where project alter-
natives produce the same or very similar outputs (that is, public services),
cost-effectiveness analysis (CEA) can be used to compare alternatives and
choose the least costly option.9 CEA can also be used to determine the least-cost
solution for meeting a legally mandated public service obligation, when measur-
ing benefits becomes irrelevant because not providing the mandated service is
not an alternative.10 The problem with CEA is that, unlike SCBA, it does not give
an absolute measure of a project’s social worth; a qualitative assessment must be
made as to whether the posited benefits exceed the costs (of the most cost-
effective option). In many areas of the public sector, particularly in the social
sectors, CEA may turn out to be the most suitable tool. MCA may be used along-
side CEA to examine benefits, but the results should not be combined in a single
indicator, as with the results of SCBA.
Testing the rationale for PPP: Value-for-money assessment
A project not flagged as a potential PPP during the preappraisal stage may be
flagged as such at the appraisal stage if assessment of the project’s costs and ben-
efits finds significant PPP potential. A further step in the appraisal process
should examine the rationale for flagging a project as a potential PPP. It is per-
formed for those projects with PPP potential, whether this potential is identified
at preappraisal or appraisal. It is only performed for projects with PPP potential
that have been positively assessed at earlier steps.
Projects for which the rationale for PPP is assessed to be solid will proceed to
a more in-depth, value-for-money assessment. When a project is initially flagged
as a potential PPP, the following factors should be considered: (a) value for
money of the potential PPP, (b) institutional capacity for procuring and manag-
ing PPP contracts, and (c) institutional justification for long-term constraints on
possible changes to public policy. Further discussions regarding the correspond-
ing check points for guiding the choice of PPP structure as part of a unified PIM
framework are provided separately in chapter 10.
Stepwise appraisal analytics
The appraisal process is usually conceptualized as a series of steps. While there
are variations, good-practice countries tend to envisage a similarly sequenced
process.11 The following is an amalgamation of this experience:
• Step 1. Define project objectives and scope
• Step 2. Identify and choose project alternatives for appraisal
• Step 3. Demonstrate demand for the services of the project
• Step 4. Perform financial analysis
• Step 5. Perform economic analysis
• Step 6. Analyze risks and risk management
• Step 7. Assess environmental and social sustainability of the project
• Step 8. Assess implementation and handover arrangement
• Step 9. Identify the preferred project alternative and make recommendations
to decision makers.
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The sequencing in this process is helpful, but it should not be so rigid as to
exclude some iteration as the analysis develops. It may, for example, be necessary
to go back and develop more accurate estimates of the costs and benefits of a
more promising project alternative revealed at step 5. Guidelines should allow
for, and indeed encourage, some flexibility in this respect.
The nine steps cover the sequenced analytical work to inform a decision on
the social worth of a capital investment project and its long-term sustainability.
Balanced and consistent decision making depends on systematic application of
these steps during project appraisal; the main technical instrument is the feasi-
bility study. While the detailed content and any supporting studies may be proj-
ect or sector specific, the overall analytical framework for a feasibility study
should reflect these steps.
Step 1. Define project objectives and scope
Step 1 is a review and confirmation of the project concept note (or equivalent),
as introduced in the discussion of the preappraisal stage. It includes a review of
the project’s rationale and strategic case and a description of the project’s goal
(higher-level objective), purpose (central objective), results or outputs (deliver-
ables), and activities (actions to deliver outputs).
The strategic relevance of the project is central to the project concept note
and a core criterion for the preappraisal decision. The continued strategic rele-
vance of the project will need to be verified to take account of any changes in
policy direction that may have occurred at the government or ministry level; in
the event of such changes, the strategic case for the project should be reviewed.
Once the problem and rationale for government intervention are justified, it
is important to have a clear statement of the objectives of the project so that
appropriate alternatives for achieving them can be considered.
For appraisal, the scope described in the project concept note must be
reviewed and given more detail. This process involves setting out all of the proj-
ect outputs—that is, what will be delivered by the project upon completion and
what are the main activities required to accomplish these outputs.
Step 2. Identify and choose project alternatives for appraisal
Project appraisal involves comparing the life-cycle costs and benefits of the ref-
erence project with feasible project alternatives. Project planners should refine
the alternatives that have been short-listed in the preappraisal stage and should
be open to introducing new alternatives that may have been ignored at preap-
praisal. These options will then undergo further analysis in the feasibility study.
An analysis period must be determined and should correspond to the useful
life of the fixed asset created. Table 5.2 presents reference analysis periods by
sector, as recommended by the European Commission. Longer periods may be
considered for long-lived assets or for projects with long-term effects, especially
environmental effects.
Step 3. Demonstrate the demand for the services of the project
Rigorous demand analysis is at the heart of a good project appraisal; it is essential
for designing appropriately sized capital assets, with the necessary capacity for
current and future users, and for making reliable cost and benefit estimates for
the project.
As part of project appraisal, promoters must develop a quantified forecast of
the expected demand for project services, including the expected growth in
demand over the lifetime of the project. Depending on the nature of the project,
Designing the Project Appraisal and Selection System | 65
TABLE 5.2 Reference analysis periods for a project, by sector
SECTOR NUMBER OF YEARS
Railways 30
Roads 25–30
Ports and airport 25
Urban transport 25–30
Water supply and sanitation 30
Waste management 25–30
Energy 15–25
Broadband 15–20
Business infrastructure 10–15
Other sectors 10–15
Source: European Commission 2014.
these forecasts may cover such aspects as school enrollment, hospital caseloads,
road traffic, water consumption, and solid waste production.
The level of detail in demand forecasts may vary according to the scale of the
project and the extent to which it is innovative. Excessively optimistic demand
forecasts are a worldwide cause of poor public investment decisions. This sys-
tematic phenomenon, referred to as optimism bias, should be avoided wherever
possible, and it is advisable to subject demand forecasts to independent external
scrutiny, especially for major projects.
Step 4. Perform financial analysis
A financial analysis should be performed to estimate profitability and financial
sustainability. Project promoters should verify that projects are financially
affordable and sustainable, both during implementation and during operation.
For projects carried out by profit-oriented public enterprises, investments
should also be shown to be profitable compared to other alternative investments.
Profit maximization may not be an objective for publicly owned enterprises with
wider public policy objectives, but their investments generally should be shown
to be financially sustainable; if they are not, the budget subsidies required to
make them so should be determined. Budgetary analysis is often performed to
examine fiscal impact and affordability as well.
Financial analysis to determine project profitability and sustainability.
Financial analysis is applicable to revenue-earning projects—for example,
investments by energy and water utilities or by public transport operators.
Meaningful financial analysis may not be feasible for nonrevenue-earning
projects—for example, in health, education, or justice—but financial issues,
such as adequacy of recurrent financing and financial management capacities,
should be investigated for nonrevenue projects. These projects are generally
the focus of a separate budgetary analysis (see below).
Analysis of the project’s financial performance will determine whether the
project will make a positive contribution to the financial objectives of the oper-
ating entity and whether it is sustainable over the longer term.
Analysis to assess financial sustainability of the operating entity. Financial
analysis of the operating entity looks at its overall financial strength and its
capacity to deal with any negative cash-flow requirements of the project.
It also examines the need for subsidies from the state budget.
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Usually, a capital investment project will be carried out by an existing entity,
which will be performing other ongoing operations. In these cases, the financial
analysis of the entity as a whole will be relevant to assessing financial sustain-
ability; a profitable project undertaken by a financially weak entity is unlikely to
be sustainable. Sometimes a project is carried out in isolation and a new entity is
created to operate it: in these cases, the two dimensions of financial analysis—
project level and entity level—effectively merge into one.
Budgetary analysis as an input to assessing budget affordability. Budgetary
analysis is required for all projects to determine the net impact on the national
budget during implementation and operation and to help to determine whether
an investment is fiscally affordable. It assesses affordability in relation to pro-
jections of expenditure ceilings and available fiscal space during budget
preparation.
The minimum requirements for demonstrating budgetary impact are
shown in table 5.3, which identifies total budgetary costs, projected revenues
(if any), and net impact. Costs for budgetary impact analysis must be in
current prices—that is, adjusted for expected inflation. Economic entities
promoting projects should use forward estimates of inflation specified by
the finance ministry to ensure consistency. If annual operating and mainte-
nance costs are expected to be similar year on year, the postimplementation
analysis period can be truncated, and estimated annual averages may be pre-
sented post–year 7.
Full budgetary analysis can be used to estimate the total budgetary impact in
present value terms, to learn if it is positive overall. This analysis is wider in its
perspective than financial analysis (but not as wide as economic analysis), as it
takes account of all direct and indirect financial flows that affect public
finances—not just those that affect the project’s operating entity. A full budget-
ary impact analysis should only be prepared for major projects with significant
direct revenue-earning potential or substantial tax effects.
Step 5. Perform economic analysis
Economic analysis is the core element of project appraisal, providing the means
to assess the economic viability of a project and to rank project alternatives
on the basis of net economic benefit so as to facilitate the efficient allocation of
resources. It involves assessing the costs and benefits of investment projects in
economic terms—that is, looking beyond the narrower effects on the
TABLE 5.3 Template for summary budgetary analysis
COSTS YEAR 1 YEAR 2 YEAR… YEAR 7 POST–YEAR 7
Budgetary costs
Capital costs
Net recurrent costsa
Operations
Maintenance
Total costs
Projected direct budgetary
revenues (if any)a
Net budgetary impact
a. Allowing for any cost savings related to the investment.
Designing the Project Appraisal and Selection System | 67
financial position of the operating entity to include costs and benefits to society
as a whole, including those for which there are no directly observable market
prices. As discussed, the two techniques mainly used for economic analysis are
social cost-benefit analysis12 and cost-effectiveness analysis.
Economic analysis has three stages:
• Identify relevant costs and benefits
• Estimate the value of relevant costs and benefits
• Calculate net present values (or net present costs).
Identify relevant costs and benefits. The main types of relevant costs and ben-
efits should be identified, including those that are difficult to value. Evaluations
should be based on the additional cost to the state of undertaking the particular
project; costs that would have been incurred anyway should be excluded. The
stream of costs should cover the life of the proposed investment item.
The degree of accuracy in identifying costs will vary with the significance of
the project and the availability of data. Assumptions underlying all capital and
recurrent cost estimates should be made explicit in the evaluation, including
assumptions regarding real labor costs, real energy costs, demand growth, or real
charges and rates.
Costs and benefits estimates need to be undertaken on a consistent basis to
enable meaningful comparisons to be made between competing projects.
A distinction should be made between identification and analysis of the envi-
ronmental and social costs and benefits and assessment of the differential
impacts of these costs and benefits. Environmental and social costs and benefits
should be identified, valued, and included in the calculation of costs and benefits
as part of the economic analysis, wherever possible. If this calculation is not pos-
sible, every effort should be made to quantify costs and benefits in terms of their
scale and the number of people affected, even if it is not feasible to monetize
them.
Estimate the value of relevant costs and benefits. The values of all relevant
costs and benefits should be estimated in real terms. Where feasible, costs and
benefits, including social effects or environmental externalities, should be
given monetary values. They should also be accounted for when monetary
values cannot be estimated.
The following are some basic principles for valuing costs and benefits:
• Proportionality. Depending on the nature of the project, valuing costs and
benefits can be resource intensive, requiring surveys and in-depth analytical
work. It is not generally expected, therefore, that the same depth of research
and analysis will be carried out for a project costing.
• Incremental costs and benefits. Costs and benefits should be estimated incre-
mentally compared to the status quo alternative: relevant costs are those
above what would be spent without the project, and relevant benefits are
those received above what would be delivered without the project.
• Use of market prices. While adjustments may have to be made, the default
assumption is that market prices are the best starting point for valuing costs
and benefits. They are expected to be a good reflection of opportunity costs
such as labor and land, unless there is a clear market failure or distortion.
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• Use of real prices. Costs and benefits should be expressed in real terms (that is,
excluding the effects of general inflation) and valued in the prices of a com-
mon base year, declared in advance to all analysts and decision makers. The
base year is usually the current year.
• Adjustment for taxes, subsidies, and transfers that are likely to affect the choice
of the preferred alternative in a material way. Indirect taxes, subsidies, and
social transfers do not equate to the consumption or creation of economic
resources; they represent the redistribution of resources from one part of
society to another (from households to government and from government to
households). As such, they should be excluded from the valuation of costs and
benefits.
Calculate net present value (or net present costs). Net present value (NPV) is
the difference between the streams of costs and benefits of a project, discounted
to their present value. The use of net present value facilitates comparison
between project alternatives with different profiles of costs and benefits. For a
cost-effective analysis, the present value should be provided for costs alone.
Discounting takes account of the fact that initial investment costs are borne
up front, while benefits and operating costs may extend far into the future; it
reflects the concept of social time preference of money, which is relevant even in
the absence of inflation. The use of real interest rates—that is, with the effect of
inflation removed—reflects this time preference. The calculation of present
value requires the use of a discount rate. All ministries, departments, and agen-
cies in the government sector should use a centrally defined social discount rate
for this purpose. Estimation of the social discount rate is considered below and
in appendix B.
In a social cost-benefit analysis, NPV is the preferred decision criterion.
Complementary decision criteria such as the economic internal rate of return
and benefit-cost ratio can also assist in decision making. A project is viable if the
NPV is greater than zero—that is, the total discounted value of benefits is greater
than the total discounted costs. For cost-effectiveness analysis, net present cost
(NPC) is the key decision criterion used to rank projects and to show the
lowest-cost alternative.
In step 5, cost-benefit analysis looks at the dimensions of a project that can be
expressed in monetary terms. Significant costs or disbenefits and benefits that
cannot be monetized should be identified and taken into account in the
recommendations.
Step 6. Analyze risks and risk management
The results of project appraisal are subject to various types of risks; the extent of
the analysis of these risks should be commensurate with the nature of the issues
involved. NPV (and NPC) calculations are performed as if the underlying values
of costs and benefits are certain; but in the real world, these values will be uncer-
tain as a result of unavoidable errors and perfectly reasonable assumptions that
do not turn out as anticipated. Quantified economic analysis is therefore not
complete without a systematic analysis of a project’s risks and an assessment of
their likelihood and impact.
A risk is an uncertain event or condition that, if it occurs, has a positive or
negative effect on a project. Risks exist as a consequence of uncertainty concern-
ing key parameters of a project (for example, cost, implementation time,
demand).
Designing the Project Appraisal and Selection System | 69
Risk analysis and risk management represent a structured approach to iden-
tifying, assessing, and controlling risks that could emerge during a project’s life
cycle. Risks can be categorized according to the following list:
• Construction risk. The asset is not completed on time, to budget, or to
specification.
• Demand risk. Demand for services does not meet forecasts.
• Design risk. Design cannot deliver services at the required performance or
quality.
• Economic risk. Project costs or benefits are affected by economic events, such
as inflation or exchange rate movements.
• Environmental risk. Environmental impacts may have a negative effect on air,
water, or land quality and may give rise to public objection.
• Funding risk. Availability of funding delays the project or changes its scope.
• Legislative risk. Changes in legislation increase costs—for example, a tighten-
ing of environmental standards.
• Operation and maintenance risk. Costs of operating and maintaining a new
facility deviate from the planned budget.
• Procurement risk. There is a shortfall in contractor capacities, or contractual
disputes arise.
• Technological risk. Services provided use less-than-optimal technology
because of rapid technological change.
Risk analysis will begin at the preappraisal stage when the project con-
cept note is drawn up and will be extended to quantitative risk analysis as
part of project appraisal. At a minimum, quantitative risk analysis should
involve sensitivity analysis or the calculation of switching values. 13 More
advanced quantitative analysis should be employed for major projects or
highly innovative projects that are likely to be replicated. This analysis
involves measuring the uncertainty attaching to critical parameters—such
as cost, time, and demand estimates—and the stochastic combination of
individual uncertainties to arrive at an expected outcome for the project.14
Getting the right balance in risk analysis is discussed further below and in
appendix B.
Risk management involves formulating management responses to the main
risks. The immediate response is to alter the project plan so that the identified
risks are mitigated or removed. The contingency response is to make provision
in the project plan for actions to be implemented only if any of the identified
negative risks materialize.
Step 7. Assess environmental and social sustainability of the project
The notion of sustainability extends beyond financial and budgetary sustain-
ability. Project appraisal should verify that projects are environmentally sus-
tainable and that they do not have unduly unbalanced impacts on different
groups in society that could jeopardize their social sustainability. Decision
makers will need to receive adequate evidence on the environmental and social
sustainability of a project and be made aware of any significant risks that could
threaten sustainability.
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Infrastructure projects frequently have significant environmental and social
impacts arising from construction and operation. Depending on the scale and
nature of the project and the likely importance of these effects, a formal environ-
mental or social impact assessment may be necessary. In certain cases, an envi-
ronmental impact assessment will be required by law.
Preliminary environmental and social impact assessments will need to be
conducted early in the appraisal stage, prior to completion of the feasibility
study, so that findings can be incorporated in the economic analysis and broader
feasibility assessment.15 Significant environmental and social costs and benefits
should be accounted for in monetary terms in the economic analysis at step 5,
where feasible. Failing this, they should be identified in quantitative or qualita-
tive terms, and their relative importance should be compared to monetized ben-
efits and costs, as assessed at step 5.
It is not usual to provide comprehensive guidance on how to conduct envi-
ronmental and social impact assessments as part of the main procedural and
methodological guidance for appraisal. These specialized areas are typically
governed by their own specific methodologies and are usually performed by spe-
cialized practitioners; box 5.2 summarizes approaches to environmental and
social impact assessments.
Step 8. Assess implementation and handover arrangements
Efficient project implementation is enabled by a capable organization, with
adequate internal arrangements. Appraisal requires an assessment of the ade-
quacy and sustainability of the proposed implementation and operational
arrangements. It should include an assessment of the capacities of the organi-
zation(s) responsible for implementing and operating the project, indicating
any strengthening measures that will be required before construction or oper-
ations commence. An assessment of the following elements is therefore
necessary:
• The capabilities of the organization(s) responsible for implementing or
operating the project, especially determining the adequacy of human
resources to meet estimated needs during implementation and operation,
identifying any constraints, and proposing capacity-building measures,
where required
• The outline plan and timetable for implementing the project, indicating key
milestones in detailed planning, approval, and construction and outlining the
steps from a positive appraisal decision to commencement of construction—
that is, detailed design, preparation of tender documents, procurement
arrangements, environmental and spatial planning approvals, and land
acquisition
• Planning for the project management arrangements, including the organiza-
tional arrangements and the allocation of responsibilities between the parties
involved, indicating whether any part of project management is to be handled
externally to the organization promoting the project
• Outline of organizational arrangements and the allocation of responsibilities
for operating and maintaining the project once completed, including an
assessment of the capabilities of the responsible organization and identifica-
tion of any requirements for strengthening measures.
Designing the Project Appraisal and Selection System | 71
BOX 5.2
Performing environmental and social impact assessments
An environmental impact assessment (EIA) is a formal The following are the minimum reporting
planning tool used to assess the potential negative and
requirements for the coverage of an EIA:
positive consequences of a project on the human and
natural environment and to identify possible mitiga- • Description of the activity and the potentially
tion measures or project design improvements to affected environment
reduce negative impacts. A preliminary EIA should be • Description of alternatives
carried out toward the beginning of project prepara- • Assessment of likely or potential impacts of the
tion to ensure that potential problems are foreseen activity and alternatives (direct, indirect, cumula-
and addressed at an early stage of the project’s tive, short-term, and long-term effects)
planning and design. The EIA looks at the impact
• Identification and assessment of mitigation
in the project area and in associated areas, such as measures
downstream, groundwater, and ambient air. It exam-
• Identification of gaps in knowledge and uncertainties
ines effects on environmental resources, such as • Nontechnical summary for decision makers
biodiversity, land-use changes, and pollutants, among
• Public consultation.
others. The assessment may need to be supported by
A social impact assessment (SIA) is an assessment
a mitigation plan and an environmental monitoring
of a project’s potential social consequences. It focuses
plan.
more on where costs and benefits fall and less on
The following are the main steps in performing an
the identification and valuation of these impacts,
EIA:
which are the subject of economic analysis. An SIA
• Screening to determine if a project requires an envi- will therefore focus on the impacts on income
ronmental impact assessment
d istribution—both between income levels and
• Scoping to identify potential impacts and legal between geographic areas—on poverty, on unemploy-
requirements, identify alternative solutions, and ment, on gender equality, and on minorities.
prepare terms of reference An SIA looks at impacts on the communities affected
• Assessment and evaluation of impacts and develop- by the project. These impacts could include require-
ment of alternatives ments for resettlement and the associated impact on
• Design of monitoring, compliance, enforcement, quality of life and livelihoods. There could also be social
and auditing arrangements impacts related to environmental alteration, such as
• Report on the environmental impact statement, effects on health and livelihoods. The distributional
including a nontechnical summary for a general effects of the project are also examined to see how
audience direct and indirect costs and benefits arising from the
• Review of the environmental impact statement, project will be distributed among different income
including public consultation groups or social categories. Social impact assessments
• Decisions on issuing authorizations concerning the usually involve affected stakeholders in consultations
acceptability of the environmental impacts. and in the design of mitigation measures.
Step 9. Identify the preferred project alternative and make
recommendations to decision makers
The final step is to identify the preferred alternative based on a comprehensive
appraisal of all factors and to arrive at a conclusion on whether to proceed with
a project proposal. This decision must be based on a balanced evaluation of the
findings of the analyses noted above.
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In addition to quantitative economic analysis, the determination of the eco-
nomic viability of a project should consider intangible benefits and costs that
cannot be monetized. The environmental and social impacts of the project need
to be considered. Different perspectives of project sustainability during imple-
mentation and operation also need to be confirmed.
Project planners should use quantitative economic analysis to decide whether
the reference project is preferred over the alternatives considered, including
retaining the status quo. The robustness of the quantitative economic analysis
needs to be taken into account.
A two-stage appraisal judgment process is recommended for projects, for
which NPV has been calculated:
• Stage 1. Take a position on the economic viability of the project, according to
quantified economic analysis, at step 5
• Stage 2. Adjust this position according to the sustainability factors addressed—
financial, fiscal, environmental, and social—and taking into account the
importance of costs and benefits that may not have been captured in mone-
tary terms but have been analyzed qualitatively at other steps.
Findings from and recommendations of this analysis should be presented in
aproject appraisal summary table, which is an aid to making an informed judg-
ment and an important tool for presenting the basis for recommendations to
decision makers.
Recommendations should be based on findings with respect to economic via-
bility and include findings on risk, affordability, sustainability, and nonmone-
tized effects. When the findings from the economic analysis (stage 1) and analyses
of affordability, sustainability, and other intangibles (stage 2) point in the same
direction, the recommendation can be considered to be reliable. If the factors
considered at stage 2 point in a different direction from the economic analysis,
care must be taken with the final recommendation; a full explanation of the rea-
soning and the relative importance assigned to different factors must be given.
In the case of projects subject to cost-effectiveness analysis, the decision
should be based on which project alternative is likely to be the most efficient—
that is, is likely to deliver a unit of output at the lowest expected cost. In reaching
a final conclusion on whether to proceed with the preferred alternative, an
informed position on the scale of benefits relative to costs must be taken, either
implicitly in the case of a predetermined and legally binding policy decision to
meet a minimum service standard or explicitly when a view is reached on the
relative importance of the qualitatively assessed nonmonetized benefits. This
step is important when deciding whether the least-cost option represents a bet-
ter use of public finances than the status quo.
Feasibility study report
A typical feasibility study report might be organized as follows, being mindful
that the exact content will depend on the nature and sector of the project:
1. Executive summary
2. Analysis of the existing context for the project
3. Examination of project alternatives
4. Market assessment and demand analysis
Designing the Project Appraisal and Selection System | 73
5. Summary of technical studies and project costs
6. Spatial planning dimensions of the project
7. Financial analysis
8. Economic analysis
9. Risk analysis and management
10. Environmental and social impacts assessment
11. Implementation and operational arrangements
12. Conclusions on project feasibility.
Making a distinction between the appraisal process and the preparation of a
feasibility study may seem artificial, but it is important. The feasibility study is a
piece of analytical work that may be, and often is, contracted out; the appraisal
process must be managed by the public sector, so that the resulting appraisal
decision is “owned” by the responsible public sector body. In this respect, public
sector officers’ preparation of a formal “appraisal report,” which uses input from
the feasibility study, should be seen as an important conclusion to the appraisal
process.
Key issues in designing an appraisal process
Prescribing the range of project alternatives, including “do nothing”
or “do the minimum”
Project proposers and appraisers need guidance on identifying project alterna-
tives. Some countries suggest the number of alternatives that should be exam-
ined. The United Kingdom’s guidelines suggest about a dozen options for the
long list considered at preappraisal and three to four options for the short list
considered at appraisal (HM Treasury 2013). These guidelines may be overly
prescriptive; for simpler investment ideas, it may be difficult to generate so many
alternatives for the long list. Failure to examine alternatives is frequent when
appraising infrastructure projects, which often are highly specified, engineer-
ing-led solutions.16
The business-as-usual alternative should generally be equated with doing
nothing (the “do-nothing” alternative), but a “do-the-minimum” alternative may
also be defined. The latter represents the minimum level of expenditures required
to maintain the status quo or to avoid an unacceptable deterioration in public ser-
vices over the life cycle of the proposed project. An overly specified
“do-the-minimum” solution could make gold-plated solutions look more attrac-
tive;17 and it is therefore advisable to require consultation with the PIM coordinat-
ing authority when defining a do-the-minimum alternative for major projects.
There are two types of project alternatives: (1) alternative technical solutions
for the identified problem and (2) technical variants of a given solution. A tech-
nical variant may involve a change in the specification or phasing of different
components so that capacity increases more closely to match growth in demand.
For example, different possible horizontal alignments for a road project should
be considered as alternative technical solutions (as should alternative solutions
such as improvements in traffic management, instead of investment in new
infrastructure), whereas choices concerning the vertical alignment or strength
of the road pavement should be considered as technical variants.18
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Proportionate appraisal considering the threshold
An appraisal is intensive in its use of financial resources and skills; the effort
dedicated to it should be proportionate to the scale of the project. There are
different ways of dealing with this issue: either recommend the same meth-
ods for all projects, with reduced effort for smaller projects, as in the
Netherlands (Ministry of Finance, the Netherlands 2013) and United
Kingdom (HM Treasury n.d.), or require more sophisticated methods only
for major projects, as in Ireland (see table 5.4). In practice, the second solu-
tion may be preferable in low-capacity environments, although careful con-
sideration of the threshold for applying SCBA will be required. Ireland’s
threshold is high by international standards,19 and the requirement for SCBA
usually kicks in at a lower project cost. The threshold will be country spe-
cific, and the decision on where to place it should be based on an analysis of
the size distribution of projects by sector and on an assessment of available
analytical capacities.20
Publication of national methodological guidance
While international organizations have published many excellent textbooks on
appraisal and methodologies, it is important to have a recognized national meth-
odology for appraisal to explain how procedural guidelines and the techniques
mentioned therein are put into practice. A national methodology is unlikely to
differ substantially from international guidance, but it serves to notify stakehold-
ers, at all levels in the system, of the common standards to be applied in the coun-
try. It is especially important when consultancy firms are employed to carry out
the feasibility studies that underpin project appraisal.
Methodological guidance should be published and made widely available.
Box 5.3 lists the content of Ireland’s methodological guidance for appraisal as an
example of typical guidance in good-practice countries. The guidance is avail-
able online as part of the country’s Public Spending Code.21
As discussed in box 5.4, a general methodological manual is usually supported
by sector-specific methodologies. Box 5.4 details Chile’s rich set of sector-specific
methodologies, supporting the application of its general methodological guide-
lines.22 The Republic of Korea has developed a standard guideline and more than
10 sector- specific guidelines. Most good-practice countries do not have such an
extensive range of sector-specific methodologies, but it is common practice to
have guidelines for key sectors.
Appendix A to this PIM Reference Guide provides some useful references for
general methodological and sector-specific methodological guidance assembled
from international agency and national government sources that governments
TABLE 5.4 Proportionality in the application of assessment tools
in Ireland
PROJECT VALUE (MINIMUM) TYPE OF ASSESSMENT
< €0.5 million Simple assessment for minor projects, such as those involving
minor refurbishment works, fit-outs
> €0.5 million Single appraisal (combining elements of preliminary appraisal and
< €50 million detailed appraisal)
> €5.0 million Multicriteria analysis of options
< €20.0 million
> €20.0 million Cost-benefit analysis or cost-effectiveness analysis (depending on
the extent to which monetary values can be estimated for benefits)
Designing the Project Appraisal and Selection System | 75
BOX 5.3
Content of Ireland’s guide to economic appraisal: Carrying out a cost-benefit
analysis
• Introduction • Present value and discounting
• Principles of cost-benefit analysis (CBA) – Basics of discounting
– Effectiveness of the public sector – Selection of discount rate
– Defining the project – Inflation and interest rates
– Defining the benchmark • Analyzing the options
– Rationale for a CBA – Net present value
– Steps in carrying out a CBA – Benefit-cost ratio
– When to carry out a CBA – Internal rate of return
– Limitations of a CBA • Risk and uncertainty
• Identifying and valuing costs and benefits – Assessing risk and uncertainty
– Identifying costs and benefits – Sensitivity analysis
– Valuing costs (including opportunity cost and – Switching values
shadow pricing) – Optimism bias
– Valuing benefits (including demand analysis and – Scenario analysis
valuing time and lives) – Monte Carlo analysis
– Other technical considerations (including treat- • Presentation and reporting
ment of externalities and taxes or transfers) • Further reading and resources.
Source: Ireland’s Public Spending Code, Central Expenditure Evaluation Unit, Department of Public Expenditure and Reform.
can use to develop methodological guidance on SCBA. Governments may still
need to make country-specific decisions on certain key issues.
Optional or obligatory prefeasibility study
Methodologically, a prefeasibility study is the same as a feasibility study, but it is
based on a more rudimentary project design and generally uses available
secondary data, rather than primary data, to test technical and economic
feasibility.23 If primary data are needed, collection will occur on a very limited
scale. Cases of both optional and obligatory prefeasibility studies can be found.
A prefeasibility study should be a requirement for the most costly and complex
projects (megaprojects). Whether it should be a requirement for all major
projects may depend on how “major” is defined: if the value threshold is
relatively low, an optional prefeasibility study may be advisable. In Korea, an
independent agency, the Public and Private Infrastructure Investment
Management Center (PIMAC), performs a prefeasibility study (known as the
“preliminary feasibility study”) for major projects (those more than
US$50 million).24 This study forms part of Korea’s successful independent
review process, which has more depth than those of many other countries.
Setting the boundaries of the analysis
Projects are analyzed mostly from a national perspective, accounting for ben-
efits and costs to residents of the country. Sometimes, a wider international
perspective may be appropriate. In the case of a cross-border cooperation
76 | Public Investment Management Reference Guide
BOX 5.4
Chile’s guidelines on analytical methods
Chile’s general methodology for the presentation projects
application of social cost-benefit analysis to
and appraisal of projects is supported by more than in the subsector, 12 concern the application of
30 subsector-specific guidelines. As indicated in cost-effectiveness analysis, and 2 offer the option
table B5.4.1, 12 of these guidelines concern the of SCBA or CEA.
TABLE B5.4.1 Guidelines
PRESCRIBED
METHODOLOGICAL
APPROACH TYPE OF PROJECT COVERED BY GUIDELINE
Social cost-benefit 1. Airports
analysis (SCBA) 2. Fishing ports
3. Low standard roads
4. Fluvial defenses
5. Public buildings
6. Multipurpose dams (reference only, not obligatory)
7. Ancillary investments related to roads
8. Small airfields
9. Equipment replacement
10. Interurban transport
11. Intermediate roads
12. Urban roads
Cost-effectiveness 1. Drinking water
analysis (CEA) 2. Replacement of street lighting
3. Primary health care
4. Sports facilities
5. Educational projects
6. Juvenile housing and detention centers
7. Police infrastructure and equipment
8. Jails
9. Sustainable reconstruction plans
10. Information technology
11. Police surveillance
12. Rural electrification
SCBA or CEA 1. Rainwater drainage
2. Residential waste management
Sources: Based on Gómez-Lobo 2012, improved and updated on the basis of comments
provided by the Ministry of Social Development.
project benefiting two (or more) neighboring countries, it would be appropri-
ate to take into account the benefits and costs accruing to residents of both (all)
countries. A government may also wish to take account of global environmen-
tal externalities—carbon dioxide emissions, for example—which is a legitimate
reason for widening the scope of the analysis.
In the context of a country’s regional development policy, projects need to
be analyzed carefully. In principle, it is possible to analyze a project from the
perspective of a specific (lagging) region within a country; however, benefits to
Designing the Project Appraisal and Selection System | 77
residents of the region in question might actually be losses to residents of
another region, making the project less compelling from a national perspec-
tive. If it is important to demonstrate the impact of a project on the welfare of
a region, this analysis should include the national perspective; national and
subnational analytical perspectives should be presented to decision makers so
that they can decide on the importance to give to regional effects.
Allowing for the limitations of quantitative economic analysis
SCBA is an attractively “scientific” tool, but its limitations should be recognized
and allowed for in the appraisal process. The quantified results of SCBA can give
a false sense of accuracy and may ignore or underplay important factors that
cannot be monetized. The appraisal process should be designed to leave room
for qualitative assessments of important nonmonetized effects. At the same time,
qualitative assessments need to carry more weight in an appraisal if they have a
quantitative basis; for example, estimates of the number of people or households
affected by an environmental nuisance and the level of the nuisance should be
given, rather than vague statements about the severity of environmental exter-
nalities. Notwithstanding the need to take account of nonmonetized effects,
there is greater potential for manipulation of appraisal findings when they rely
heavily on qualitative assessments. In such cases it is a good idea to build in
heightened independent scrutiny,25 which can be done by lowering the value
threshold for independent review in sectors where such manipulation is likely to
happen, as is done in the United Kingdom.26
Considering distributional impacts and environmental sustainability
As well as allowing for qualitative assessment of social costs and benefits that
are difficult to monetize, the appraisal process also needs to take into account
distributional impact: who loses and who gains? This issue is important for
assessing social sustainability and consistency with government equity objec-
tives. Box 5.5 presents the Australian government’s guidance on the treatment
of distributional impacts. The distribution of environmental impacts across
society is also important, as is their scale.27 There may also be negative environ-
mental impacts that do not necessarily affect humans but are particularly sen-
sitive and thus represent potential “no-go” areas or require mitigation
measures.28 These impacts too should be presented separately to decision mak-
ers at appraisal.
Key issues in developing an economic appraisal methodology
Appendix B goes into more depth on some technical aspects related to develop-
ing an economic appraisal methodology. Key issues are as follows.
Setting national parameter values and considering conversion factors
Governments should ensure that nationally applicable values for key parame-
ters, especially nonmarket effects, are updated regularly and are available for
feasibility study preparation. Having updated values will ensure consistent valu-
ation of costs and benefits across projects, rather than having values estimated
and reestimated on a case-by-case basis; it also will improve comparability and
deliver savings in analytical effort.
Even where there is a market for project inputs and outputs, market prices
may not always represent the best basis for estimating a project’s economic
costs and benefits. Adjustments may need to be made to financial values in
78 | Public Investment Management Reference Guide
BOX 5.5
The Australian government’s advice on the treatment of the equity and
distributional implications of a project
“There may also be broader social justice consider- distributional consequences of the project to deter-
ations where a project involves a significant redis- mine its overall merit.
tribution of income, regardless of the net economic
gains to the community. For example, a limitation “Due to the potential redistributive impact of a pro-
may arise if the costs fall on low-income earners posal, determining the ‘winners’ and ‘losers’ (along
and the benefits accrue to higher-income earners. with the size of their wins and losses) is important.
Cost-benefit analysts should provide program man- However, this is an equity consideration. CBAs
agers and policy makers with an indication of the aggregate costs and benefits across individuals,
income distributional effects of a proposal. This without regard to the distribution of those costs and
information may be useful where distributional benefits between individuals. To illustrate, a CBA of
impacts rather than economic efficiency are the a new highway that bypasses a country town will
objective. compare, primarily, the costs of constructing the
new road with the benefits in terms of travel time
“Benefits are typically measured in terms of esti- savings and reduced accidents (involving both trav-
mated willingness to pay prices for a good. However, elers and local residents). However, building the
willingness to pay is generally constrained by road is likely to have distributional consequences: for
income and wealth, which are not distributed example, retailers in the town may be adversely
equally in the community. In these circumstances, affected, while new retailing opportunities—such as
the project’s NPV may be considered an inadequate service stations, restaurants, and motels—may open
measure of its worth to society, and decision mak- up along the new highway. These distributional con-
ers would need additional information on the sequences are not captured by the CBA.”
Source: Commonwealth of Australia 2006.
Note: CBA = cost-benefit analysis.
order to yield economic values (“social opportunity costs” or “shadow prices”)
as a result of distortions in the economy. Such distortions can arise from taxes
on trade, production subsidies, or inefficient labor markets. Early guidance on
cost-benefit analysis often recommended that the planning authorities use an
elaborate set of national conversion factors, covering the major sectors of the
economy, to transform market prices to economic values for use in SCBA. This
guidance was developed for economies where markets or prices were more
distorted than they are today. Authorities rarely followed the guidance; if they
did, they rarely employed the factors in actual SCBA, as few planners knew of
them or understood how to use them.
For practical reasons, and as a result of the generally more efficient markets
in many countries now, in many cases it is no longer considered necessary to
devote significant planning resources to developing economywide conversion
factors. Good practice is to make adjustments for key inputs or outputs on a case-
by-case basis, if the adjustment is likely to make a significant difference in the
findings of the SCBA.
Many countries with advanced systems do not estimate these standardized
factors because their economies tend to be relatively open and undistorted; the
required price correction would therefore be negligible. National financial or
planning authorities need to decide whether it is worth making the implied
adjustment, taking account of the relative openness of their country’s
economy.
Designing the Project Appraisal and Selection System | 79
One final area where a national parameter value may be specified is the dead-
weight cost of taxation. A generalized loss of social welfare occurs when distor-
tionary tax instruments are used to finance projects. In effect, a part of general
taxation is taken from consumers and transferred to no one; this is known as the
deadweight economic cost from general taxation or the marginal cost of public
funds (see appendix B). Practice with advanced PIM systems is not consistent
across countries in the sense that only some countries specify a factor to be
applied to the project costs funded out of taxation.
Approach to the social discount rate
The social discount rate may be the most important national parameter value.
It is needed to estimate the present value of costs and benefits and thus the
net present value of a project and its alternatives. How to set the social dis-
count rate when developing appraisal methodology is an important issue for
national governments. There are two different approaches with distinct
methodologies:
• Social rate of time preference. The SRTP captures the way society values
consumption at different points in time. This perspective relies on inter-
preting the discount rate as the minimum economic compensation per dol-
lar invested required for a representative consumer to be willing to forgo
present consumption in return for higher consumption one period later.
• Social opportunity cost of capital. The SOC reflects the rate of return on
investment and derives from returns in financial markets. This perspective
interprets the discount rate as a market-determined opportunity cost,
which represents the additional consumption that would have been
achieved one period later by investing a dollar in a financial instrument
of equivalent risk to the project instead of consuming it now.
Both perspectives are valid and have positive and negative dimensions. The
SOC may be difficult to apply in underdeveloped capital markets because it
markets. The SRTP is
involves strict assumptions about the workings of these
frequently applied in countries with advanced PIM systems and is probably eas-
ier to estimate, particularly as some simplifying assumptions may be made in
applying the Ramsey formula. Neither approach is purely technical, and each
involves value judgments by governments (see appendix B).
Approach to valuing labor
When labor markets work efficiently and there is no structural unemployment,
the market wage rate is the best measure of the social opportunity cost of labor
for SCBA purposes—that is, the marginal value to society of a unit of labor in its
next best alternative use. Imperfections in the way labor markets are working,
policy-induced rigidities—such as minimum wage legislation—or macroeco-
nomic imbalances may result in the opportunity cost of labor being less than the
market rate. In these cases, an adjustment factor can be applied to estimate a
shadow wage rate. A method for estimating a shadow wage rate is outlined in
appendix B.
Governments need to decide on their approach to the social opportunity
cost of labor, keeping in mind that calculation of a shadow wage rate will be
technically demanding and may be costly. It is only worth considering if the
resulting adjustment is likely to have a significant bearing on investment
decisions.
80 | Public Investment Management Reference Guide
Approaches to estimating nonmarket costs and benefits
Taking account of nonmarket effects is a critical part of SCBA, but their valua-
tion is conceptually difficult for noneconomists to understand. Without
in-house experts, governments will need to use external experts if more
sophisticated valuation techniques are employed. However, they will still need
to be able to specify the work and interpret the results. Good guidance is there-
fore essential.
When designing appraisal methodologies, governments need to consider the
depth and direction of guidance that they provide on valuation techniques, bal-
ancing the desire for quantitative estimates of a project’s social worth against the
availability of skills. The importance of the decision compared with the cost of
the research will also have to be weighed.
As much as possible, valuation of project costs and benefits should be based
on real or estimated market prices for the costs incurred or services produced
by the project. Many public services are free of charge, either because it is dif-
ficult or impossible to charge for public goods or because a policy choice is
driven by generally accepted equity or social concerns.29 Health, educational
success, family and community stability, and environmental amenity are intan-
gible effects that fall into the category of benefits that have no directly observ-
able market value. By definition, positive and negative externalities have no
market value.
Where no markets exist and there are no market prices for valuation
purposes, alternative, market-based means of estimating values for costs and
benefits can be used. These approaches hinge on estimating potential users’
willingness to pay (WTP) for the project’s benefits or willingness to accept
(WTA) negative consequences. WTP is the maximum payment that a benefi-
ciary would be willing to make to receive a public service;30 it is therefore a
measure of the “utility” that a consumer expects to obtain.31 WTA is the mini-
mum compensation that an affected party would require to be willing to toler-
ate a negative economic outcome—increased noise or pollution, for example.
Balanced risk analysis
Identification, analysis, and management of risks are critical components of any
project appraisal; however, risk analysis can rapidly become complex and place
huge demands on scarce research and analytical capacities. Governments need
to decide on the degree of sophistication that they require in national appraisal
methodologies. Below is a stepped approach to risk analysis developed by the
European Commission:
• Sensitivity analysis aims to identify those variables that, when they vary, have
the largest impact on the project’s social profitability (as measured by the
economic NPV)
• Qualitative risk analysis involves identifying critical risks and assessing their
importance. It also requires assessing the extent to which these risks might be
mitigated and the significance of the residual risk remaining after mitigation
• Quantitative risk analysis establishes a probability distribution for each of the
critical variables identified in the sensitivity analysis in order to estimate the
expected value of the NPV.
A more complex quantitative risk analysis, the final step, is only required in
certain circumstances—that is, when the residual risk exposure remains
Designing the Project Appraisal and Selection System | 81
significant following qualitative analysis. Governments may wish to consider
adopting a similar approach (see also appendix B).
Drawing attention to potential pitfalls in appraisal methodology
When designing an appraisal methodology involving the application of SCBA, it
is important to warn against mistakes that are frequently made when identifying
and valuing economic costs and benefits. The following are some common
mistakes:
• Double counting benefits. Sometimes there are two ways of looking at the
same effect, and including both views as benefits would lead to double-
counting. The benefits of an irrigation project can, for example, be measured
either as the present value of the increased future income of farmers or as an
increase in the value of farming land, but not both, as land values are a reflec-
tion of future income-earning potential. Similarly, it would be wrong to add
revenues from user charges and user benefits based on WTP estimates for a
water supply or sanitation project, since a user charge is just the financial
manifestation of (part of ) a consumer’s willingness to pay.
• Counting “job creation” as a benefit. Wages paid are a project cost, not a bene-
fit. Frequently, job creation and wages generated are mistakenly seen as ben-
efits. If there are reasons to believe that the market price of labor overstates
the opportunity cost, either nationally or in a particular locality, and that this
situation is likely to persist indefinitely, then the overstatement can be
reflected in a suitable downward adjustment of the wage rate to arrive at
what is known as a shadow wage. The social benefits of employment are then
reflected as a lower monetary value for the cost of labor. Alternatively, the
impact of the project on the local labor market can be considered part of a
social impact assessment to be taken into account when a decision is based on
a comprehensive appraisal. In this case, project planners must be careful not
to declare labor costs as benefits (and to take account of displacement effects;
see the next point).
• Ignoring displacement effects. Additional economic activity generated around
a project—for example, along a new road or at new transport hubs—is some-
times counted as a secondary benefit of a project, ignoring the fact that eco-
nomic activity will often have been displaced from elsewhere. Only the net
additional economic activity can be assigned to the project and, even then,
any additional investment costs associated with new activities should be
taken into account.
• Counting multiplier effects. The inclusion of multiplier effects from income
and spending generated by a project can only be justified under two strict
(and rarely achieved) conditions: (a) the affected resources would otherwise
not have been employed and (b) the activities displaced by the project would
not have used the idle resources. At the national level, it is usually a mistake
to include income generated from multiplier or “second-round” effects as a
benefit because alternative uses for the same financial resources could
generate similar effects. Occasionally there may be a case for examining
multiplier effects when a project targets a particular economically depressed
locality. In such cases, it may be useful to understand the net impact of
second-round effects on the local economy, but these effects should not be
confused with project benefits from a national perspective.
82 | Public Investment Management Reference Guide
• Ignoring the opportunity costs of public assets. A common mistake when valu-
ing project costs is to ignore the opportunity cost of assets already owned by
the public sector, particularly land, and to treat these costs incorrectly as sunk
costs. Publicly owned assets as inputs to a project should be valued using mar-
ket valuations, even if there is no actual financial transaction. Publicly owned
land should be valued at the best price that it would fetch on the open market
(adjusted for any important distortions) and must not be assumed to have
zero cost. The next best use of public land that has been identified for new
government offices might, for example, be for private sector residential devel-
opment, and it should be valued at the market rate for residential land.
Similarly, any publicly owned equipment or buildings that will be used in the
project should be valued at what they would fetch on the open market.
INDEPENDENT REVIEW
Rationale for independent review
The main rationale for independent review derives from the problem of system-
atic “optimism bias,” which has been shown to beset all major projects, across
time, across countries, and across sectors (the “iron law of megaprojects”).
Optimism bias consists of the statistically demonstrated tendency of project
planners to underestimate costs and to overestimate benefits, thus making the
ex ante case for the project more convincing than it turns out to be. Box 5.6 sum-
marizes some of the evidence for optimism bias. Box 2.4 in chapter 2 has already
given reasons why optimism bias should arise, concluding, “Misinformation
about costs, schedules, benefits, and risks is the norm throughout project devel-
opment and the decision-making process. The result is cost overruns, delays, and
BOX 5.6
The problem of optimism bias in projects
Optimism bias is the systematic tendency for project overestimated traffic, with actual passenger traffic
costs to be underestimated and for project benefits to 51 percent lower, on average, than forecast.
be overestimated. A research group on large infra- Research on large dams found that three out of
structure at Aalborg University in Denmark tried to every four large dams suffered a cost overrun in con-
quantify the extent of the problem and offer explana- stant local currency terms and that actual costs were
tions, working from a large sample of major transport on average 96 percent higher than estimated costs.
projects. This research (summarized in Flyvbjerg The research also found that systematic cost overruns
2005) finds significant cost overruns across a sample were experienced in every region of the world.
of 258 major transportation projects, irrespective of Because errors are systematically biased in one
country, continent, or transport mode, with no direction, poor techniques cannot be the explanation,
tendency to diminish. Nine out of 10 projects had a as they would result in an equal likelihood of underes-
cost overrun, and the average (real) cost overrun was timation as overestimation. The plausible explanation
45 percent for rail, 34 percent for bridges and tunnels, is that, to obtain funding approval, project promoters
and 20 percent for roads. From a sample of 208 rail and planners systematically make projects look better
and road projects, 9 out of 10 rail projects had than they are.
Sources: Ansar et al. 2014; Flyvberg 2005.
Designing the Project Appraisal and Selection System | 83
TABLE 5.5 The United Kingdom’s coefficients for correcting optimism bias
HISTORICAL AVERAGE % INCREASE AT
OUTLINE BUSINESS CASE
CAPITAL
PROJECT TYPE EXPENDITURES WORKS DURATION
Standard buildings 24 4
Nonstandard buildings 51 39
Standard civil engineering works 44 20
Nonstandard civil engineering works 66 25
Source: Presentation on HM Treasury 2003.
benefit shortfalls that undermine project viability during project implementa-
tion and operations” (Flyvbjerg 2014). Possible organizational arrangements for
dealing with optimism bias are discussed earlier in this c hapter. This section
deals with the more practical issues of designing an independent review
process.
There are other responses to optimism bias, apart from independent review,
including the obligatory use of escalation coefficients to uplift cost estimates to
reflect demonstrated differences between appraisal estimates and outturns for
previous projects of a similar type. The United Kingdom uses this approach,
alongside an independent review process for major projects. Table 5.5 indicates
the coefficients used at appraisal (outline business case) to uplift capital expen-
ditures and works duration. Estimating such coefficients requires a good ex post
review process and strong research capacities, which countries at the beginning
of a PIM reform process may not have. Another disadvantage is that planners
may “game” such a system and deliberately underestimate costs, knowing that
the uplift factor will be applied afterward.
Key issues in designing an independent review function
Meaning of “independence”
Independence does not mean external to the government. The independent
reviewer function should be performed by an objective body with nothing to
gain from the project going ahead. Ideally, this body should be external to the
proposer or appraiser, but still within the public sector. The public sector body
charged with independent review may use private sector consultants or experts
from elsewhere within the public sector.
Coverage of independent review
Appraisals for all projects should be subject to some form of objective review.
Capacity constraints mean that it may not be practical for the nominated organi-
zation to carry out this review as a result of specialization for major and riskier
projects. However, the appraisal for lower-value projects should at least be
reviewed by a part of the proposing or appraising organization with no interest
in the project’s going ahead.
Depth of review
Independent review varies according to the depth of the analysis performed:
• In the United Kingdom, the Treasury only reviews major projects. A checklist
approach is used to ensure that the fundamentals of the appraisal methodol-
ogy have been followed and to question critically the appraisal findings and
underlying assumptions.32 For all projects, the gateway review system,
84 | Public Investment Management Reference Guide
BOX 5.7
Questions for independent reviewers in France
The second opinion in France should answer the fol- • How have the nonmonetized effects of the project
lowing questions: been taken into account where these are critical for
• Does the project documentation respond to the evaluation of the project?
documentary requirements of a socioeconomic • Is the scope of the evaluation appropriate to the
evaluation? project?
• Have the methodological guidelines and ministerial • What method has been used, and how does this
instructions been followed properly? method compare to recognized practices in other
• Have the prescribed parameter values for appraisal comparable sectors and in other countries?
been respected? • Are the input parameters realistic and coherent?
Source: PLF 2015.
internal to the agency sponsoring the project, must be reviewed by external
peer reviewers elsewhere in the public sector.
• In Chile, all projects are subject to review. All interested institutions do the
appraisal, but the review is carried out by the Ministry of Social Development,
which rejects projects that do not conform to methodological guidance. The
ministry requests corrections until the appraisal is satisfactory. The review is
less a “second opinion” and more quality control to ensure that the detailed
methodologies (box 5.4) have been applied properly.33
• In France, the General Commission for Investment organizes a second opin-
ion on appraisals of major projects (more than €20 million) that critically
examines the methodological approach,34 the calculation of parameters used
in the appraisal, and appraisal findings. Box 5.7 provides a list of the overarch-
ing questions that reviewers are expected to address.
• In Korea, an independent review precedes appraisal and draws up a prelim-
inary feasibility study for major projects (those more than US$50 million)
as a basis for deciding whether to proceed to appraisal. This unusual, but
highly effective, approach involves much deeper analysis by the independent
reviewer, PIMAC, than in other countries; but, combined with a system for
controlling cost escalation, it has proved remarkably effective.35
Outcome of independent review
It should be difficult for a project to proceed with a negative independent review.
Completing an independent review is not necessarily a decision point (see the
section on project selection), as the independent reviewer may often only advise
the final decision maker:
• Chile’s system is recognized as being rather strict, but even here some proj-
ects proceed without positive reviews from the planning ministry.36
• In France, the General Commission for Investment prepares an opinion for
the prime minister, which also goes to the minister proposing the project and
to parliament.37
Designing the Project Appraisal and Selection System | 85
• In Ireland, the review by the Central Expenditure Evaluation Unit is purely
advisory for the minister proposing the project.
• In the Netherlands, independent review findings need to be taken into
account in making the final decision, but there is no requirement for these
findings to determine the final decision.
• In the United Kingdom, independent review is closely tied to a decision point
(known as the Treasury approval point); projects will not proceed if they
receive a negative review.
• In Korea, the National Finance Law requires PIMAC to conduct an indepen-
dent review of major projects (those more than US$50 million) for the
Ministry of Economy and Finance; in practice, the ministry’s decision is
closely tied to the result of the independent review.
Timing of independent review
An independent review can take place at any time and should not be driven by
the budget preparation calendar. The time needed for an independent review
varies between countries and reflects the depth of the analysis performed. In the
United Kingdom, the turnaround for a decision at a Treasury approval point is
28 days. France allows one to four months for a second opinion to be prepared
after project documentation has been received. Korea’s much more elaborate
preliminary feasibility study takes around four months and may be extended if
the study indicates that the project concept has been altered.
PROJECT SELECTION
Status of project selection
Project selection is a key decision point and the culmination of the quality-at-
entry processes. The decision is made based on appraisal findings and recom-
mendations, which are usually presented to decision makers in a summary
appraisal report together with the supporting documentation.38 Selection ends
with a formal decision on a project’s social viability and sustainability and con-
firmation of its eligibility to be proposed for budget funding. Selection does not
mean that funding is guaranteed; funding can only be guaranteed through the
budgetary process, when a project’s merits are considered alongside competing
claims on budget allocations.
Key issues in designing a project selection process
Status of a selection decision
Selection is a decision in principle to proceed with a project. It is neither a fund-
ing commitment nor a final decision to go ahead. Funding commitments are
made through the capital budgeting process (see chapters 6 and 7). The final
decision to implement a project should only be made following completion of
the detailed design and evaluation of bids, when a more accurate estimate of
costs is available. Although it is often very difficult to stop a project once a selec-
tion decision has been made—hence the significance of this decision point—PIM
systems should still review the decision before an irreversible contractual com-
mitment is made.
86 | Public Investment Management Reference Guide
BOX 5.8
The United Kingdom’s full business case
“[The full business case (FBC)] is the procurement documents the contractual arrangements, confirms
phase for the spending proposal, following detailed funding and affordability, and sets out the detailed
negotiations with potential service providers/sup- management arrangements and plans for success-
pliers prior to the formal signing of contracts and ful delivery and post evaluation.
the procurement of goods and services.
“… If the OBC has been prepared in accordance
“The purpose of the FBC is to revisit and where with the guidance set out earlier and the procure-
required rework the OBC [outline business case = ment run in accordance with accepted and estab-
appraisal/selection] analysis and assumptions lished best practice, much of the work involved in
building in and recording the findings of the formal developing the FBC will simply focus on updating
procurement. This case at its conclusions recom- the OBC and documenting the outcomes of the pro-
mends the ‘most economically advantageous offer,’ curement rather than starting from scratch.”
Source: HM Treasury 2013.
In the United Kingdom, the full business case for a project is reviewed, and a
final decision to proceed is made prior to contract signature. The review process
need not be elaborate, as box 5.8 indicates. In Ireland, approval to proceed to
tender is a decision point, following detailed planning and design, and a verifica-
tion that the project remains the same as the one approved in principle. A further
review precedes contract signature. In Korea, once a selection decision is made,
almost all projects are funded.
Organizational arrangements for a selection decision
Selection should be largely a technical decision; achieving the right balance
between technical and political inputs to decision making is nevertheless import-
ant. Placing the selection decision for major projects in the hands of the finance
or planning minister (or equivalent) may be the best option, if politically feasible.
Where there is reluctance to place such power in the hands of these ministers,
recourse is sometimes made to a broadly representative political body or an
interministerial committee of senior officials. The danger with such arrange-
ments is that selection can often become part of a political bargaining process,39
rather than a decision on the quality of individual projects. One option in such
circumstances is to give the finance or planning ministries veto power on a
broader decision-making body or to have them chair the body (and thus set the
agenda).
In some systems, a minister is “sovereign” in his or her ministry, and the final
selection decision remains with the minister who has ultimate responsibility for
the project.40 This approach is the case in Ireland, where the emphasis is on
developing and promoting good practices so that ministers and their officials
have the tools to make sound decisions. Performance evaluation is used to incen-
tivize the use of these tools (World Bank 2014).
Prioritization and selection
Selection is a form of prioritization to the extent that it involves reducing the set
of projects under consideration to those that have been shown to be a potentially
Designing the Project Appraisal and Selection System | 87
good use of public funds; as such, it is one of the filters in the upstream PIM
process. Although the capital budgeting process should be the ultimate prioriti-
zation mechanism, there may be some merit in attaching priorities to projects
that are selected, as not all projects selected are affordable. Priorities will need
to be made using the strategic planning process (see chapter 6). Priorities deter-
mined outside the budget process can never be binding, as the budget process
remains sovereign.
Limiting the size of the pool of selected projects
As well as, or instead of, prioritizing selected projects, there may be advantages
to constraining the pool of selected projects more closely to reflect the likely
fiscal constraints; thus, the selection decision may include an affordability
element. The most sensible way of including an affordability element is to place
an expiration date on a selection decision, so that if the project has not been
prepared in detail and proposed for funding after a certain length of time, it
needs to go back to the beginning of the quality-at-entry system. This require-
ment makes sense because costs and demand forecasts are likely to become out-
dated after several years.
In the absence of fiscally constrained, long-term strategic planning (see
chapter 6), another approach might be to set financial limits on the total value of
a ministry’s portfolio of selected projects. If these limits are reached, projects
should be “de-selected” to accommodate newly selected projects. There will be
a degree of arbitrariness to fixing such limits, but limits need to be tight enough
to restrict the potential growth of a “feasibility study industry”—that is, the
development of projects with little chance of being implemented, while being
generous enough to allow for a sufficient margin of “shovel-ready” projects.
A better way of restricting the pool of selected projects is through a medi-
um-term budget framework, whereby funding for feasibility studies for major
projects is programmed in line with the availability of financial resources for
implementation (see chapter 6).
Tracking selected projects
If projects were not given a unique code and entered into a database at preap-
praisal, this task should be done when the selection decision is made.41 The data-
base should be kept up-to-date, and projects for which approval has lapsed
should be suitably categorized.42 Information systems are important for PIM,
but there may be a misconception that they can be used to “automate” the
appraisal, selection, and prioritization process. Countries with advanced
PIM systems do not use information systems in this way (see chapter 12 on PIM
information systems).
NOTES
1. As well as the strategic outline case, discussed below, the United Kingdom also has what is
effectively a pre-preappraisal step: the starting gate review, which must be completed at
an early stage of planning, before any public commitment has been made.
2. For further discussion on adopting PPP projects, see chapter 10.
3. Best practice is to manage the pipeline for major infrastructure sectors (for example,
transport or energy) through a fiscally constrained, rolling long-term infrastructure plan.
See chapter 6.
4. The economic tools used in project appraisal are a practical application of welfare eco-
nomics, a branch of economics that examines how public policy interventions can be used
88 | Public Investment Management Reference Guide
to maximize aggregate social welfare, a broader concept than is captured in the income,
expenditure, and output measures of the economy. The term “economic,” when used here
and elsewhere in the guidelines, therefore has a wider meaning than just the financial
flows captured in the national income accounts, consistent with international practice.
5. Net benefits are benefits minus costs, adjusted so that costs and benefits at different points
in time are comparable.
6. See the discussion above concerning the difference between preappraisal and
prefeasibility.
7. To avoid some of this confusion, the term “social cost-benefit analysis” is used in this
guide, instead of economic cost-benefit analysis, although the two are interchangeable.
8. “Expected” in a statistical sense.
9. The option with the lowest present value of costs per unit of output.
10. The exception is where legislation is passed without attention to the fiscal consequences,
which can result in unfunded mandates. In order to avoid this situation, the required min-
imum is an obligatory fiscal impact assessment of all legislative proposals.
11. See https://www.finance-ni.gov.uk/topics/finance/step-by-step-economic-appraisal
-guidance.
12. Sometimes referred to as cost-benefit analysis, but social cost-benefit analysis better con-
veys the wider perspective of the analysis.
13. A switching value is the required change in a critical parameter that would cause the NPV
to turn negative.
14. The statistical definition.
15. Assessments need to be finalized when the detailed project design is completed following
a positive appraisal decision.
16. A tendency sometimes referred to as “gold-plating.”
17. The incremental costs of the gold-plated solution compared to doing the minimum are
considerably lower than the incremental costs compared to doing nothing; the benefits
remain similar.
18. Technical variants usually are not analyzed at preappraisal, as cost estimates will almost
certainly not be accurate enough, but potential variants can be highlighted for evaluation
at appraisal.
19. The threshold was higher, but it has been lowered as capacities have developed.
20. See also chapter 4, which explains different approaches according to project size, sector,
and level of government.
21. See http://publicspendingcode.per.gov.ie/d-standard-analytical-techniques/.
22. Box 5.4 also indicates when SCBA is required and when CEA is acceptable.
23. As discussed in the section on preappraisal, a prefeasibility study is different from preap-
praisal. Preappraisal is generally a lighter and technically less demanding form of assess-
ment than a prefeasibility study.
24. For research and development investment projects in Korea, prefeasibility studies are
performed by the Korea Institute of Science and Technology Evaluation and Planning.
25. Reviewers should be suspicious when quantified SCBA points to very low social profitabil-
ity, but has a positive overall appraisal when qualitative assessments of nonmonetized
benefits are taken into account.
26. The threshold at which the U.K. Treasury delegates authority over expenditure decisions
is lower in the social sectors than in the transport sector, for example.
27. For valuation purposes, environmental costs and benefits (negative and positive “external-
ities”) are subsumed within social costs and benefits and are captured within the scope of
social cost-benefit analysis.
28. Often these areas will be legally prescribed through official designations for protection of
species, ecosystems, or areas of outstanding natural beauty.
29. A pure public good (or service) is one where it is not possible to exclude users from con-
suming the good (service) and where consumption by one consumer does not diminish the
amount of the good (service) available for others. These characteristics mean that there is
no incentive for the private sector to supply the good (service) because it is impossible to
earn revenues and make a profit.
30. WTA is a closely related alternative measure used to value negative impacts. See
appendix B.
31. “Utility” is a concept used in welfare economics meaning the satisfaction or change in
welfare that a person gets from consumption of a good or service.
Designing the Project Appraisal and Selection System | 89
2. A similar model is used in Australia and New Zealand.
3
33. This characteristic explains the range and detail of the sector-specific methodological
guidance in Chile.
34. To ensure conformity with guidelines.
35. Of 707 projects subject to a preliminary feasibility study over the period 1999–2018,
253 projects (35.8 percent) were found to be not worth progressing to full feasibility. See
PIMAC (2019).
36. Gómez-Lobo (2012) quotes a figure of 11 percent.
37. A summary assessment of the key issues, strengths, weaknesses, or risks attached to the
project and either a favorable opinion, with qualifications if necessary, or an unfavorable
opinion concerning continuation of the project.
38. Part of the role of the independent reviewer is to assure that the summary appraisal report
accurately represents the feasibility study, preliminary design work, and supporting
impact studies.
39. Trade-offs at the political level will need to be made, but not at this point in the PIM
process. They should be made as part of capital budgeting.
40. In reality, the responsible minister will always need to make a selection decision (or dele-
gate it to one of his or her officials). In some countries, this decision will be referred to a
higher authority.
41. The tracking code in selected projects is sometimes inconsistent with the one in budgeted
capital projects because some selected projects are not funded in the budgeting process.
See chapter 12.
42. It is important to retain information on these projects in case they reappear.
REFERENCES
Ansar, A., B. Flyvbjerg, A. Budzier, and D. Lunn. 2014. “Should We Build More Large Dams? The
Actual Costs of Hydropower Megaproject Development.” Energy Policy 69 (June): 43–56.
Commonwealth of Australia. 2006. “Introduction to Cost-Benefit Analysis and Alternative
Evaluation Methodologies.” Commonwealth of Australia, Camberra.
European Commission. 2014. Guide to Cost-Benefit Analysis of Investment Projects: Economic
Appraisal Tool for Cohesion Policy 2014–2020. Brussels: Directorate General for Regional and
Urban Policy.
Flyvbjerg. B. 2005. “Policy and Planning for Large Infrastructure Projects: Problems, Causes,
and Cures.” Policy Research Working Paper 3781, World Bank, Washington, DC.
———. 2014. “What You Should Know about Megaprojects and Why: An Overview.” Project
Management Journal 45 (2): 6–19.
Gómez-Lobo, A. 2012. “Institutional Safeguards for Cost-Benefit Analysis: Lessons from the
Chilean National Investment System.” Journal of Benefit-Cost Analysis 3 (1): 1–30.
HM Treasury. 2003. The Green Book: Appraisal and Evaluation in Central Government. Amended
in 2011. London: HM Treasury.
———. 2013. Public Sector Business Cases: Using the Five Case Model. London: HM Treasury.
———. n.d. “Assessing Business Cases: A Short Plain-English Guide.” HM Treasury, London.
Ministry of Finance, the Netherlands. 2013. Kabinetsbrief bij de algemene MKBA Leidraad.
The Hague: Ministry of Finance.
PIMAC (Public Infrastructure Investment Management Center). 2019. KDI PIMAC Annual
Report 2018 [in Korean]. Seoul: Korea Development Institute.
PLF (Projet de Loi de Finances). 2015. Évaluation des grands projets d’investissements publics.
Paris: Government of France.
World Bank. 2014. “Study on Cross-Country Comparison: Technical Assistance for Public
Investment Project Appraisal and Selection System Development in Ukraine.” World Bank,
Washington, DC.
6
Integrating the Strategic
Planning, Project, and
Budgeting Cycles
OVERVIEW
Upstream public investment management (PIM) processes consist of more
than quality at entry. A well-designed and functioning upstream subsystem
should ensure that (a) strategic planning, (b) project appraisal and quality at
entry, and (c) capital budgeting are closely integrated so that the right infra-
structure is provided at the right price and at the right time. This process is not
straightforward because the strategic planning cycle, the project cycle, and the
budgeting cycle are not concurrent and have different planning and implemen-
tation horizons. A functioning PIM system must ensure that the three cycles
coincide at key points, as illustrated in figure 6.1.
The following are the main direct points of coincidence between the three
cycles, as identified in figure 6.1:
• When project concepts are identified on the basis of strategic planning
guidance
• When project concepts, confirmed as eligible at preappraisal, have budget
funding approved for preparation
• When prepared projects, confirmed as eligible, have budget funding approved
for implementation
• When monitoring information confirms the continued eligibility or require-
ments of ongoing projects for budget funding and availability of resources for
new projects is determined and allocated
• When evaluation results of completed projects feed into the revision and
update of strategic plans.
The governance structure and methodological manuals for PIM should be
designed with a view to strengthening integration of the three upstream stages,
while taking account of differences in their timing and scope.
91
92 | Public Investment Management Reference Guide
FIGURE 6.1
Intersection of the project cycle with the strategic planning and budgeting cycles
Strategic
planning Strategic
planning
Evaluation and audit Identification and
preappraisal
Budgeting
Budgeting
Implementation, Project cycle Preparation and
monitoring, and appraisal
adjustment
Review and
Funding approval selection
Budgeting
ENSURING INTEGRATION AT THE STRATEGIC
PLANNING STAGE
Realistic, operational, and authoritative strategic guidance is essential for identify-
ing projects, prioritizing the budget, and ensuring intertemporal consistency in
expenditure decisions. Strategic plans need to be fiscally sustainable and consis-
tent at the different levels of national strategy, sector strategies, sector or subsector
investment plans, and subsector master plans. High-level, long-term visions are
useful for setting the scene (see box 6.1), but they are most helpful for PIM when
supplemented by more operational strategies. Bottom-up lists of investment needs
(“wish lists”) are not helpful for strategic guidance, unless they can be developed
further and prioritized within a realistic expenditure framework. Close coordina-
tion between sector ministries, the finance ministry, and the planning ministry
(where one exists) is often inadequate and is required to achieve fiscal realism.
Creating the right conditions for this coordination is essential for strong PIM.
Strategic investment planning needs to take account of information on exist-
ing assets provided by comprehensive and up-to-date asset management sys-
tems. Strategic plans should also allow for renewal of assets at the end of their
life, maintenance of the existing stock of fixed capital assets, and planning for the
creation of new assets. This step is often missing from strategic guidance, which
tends to focus on new increments to the capital stock rather than on the contri-
bution of the entire capital stock to the government’s service delivery objectives.
Asset management systems are often not advanced enough to drive this kind of
systematic life-cycle planning, which may only be a long-term aim for many
countries; however, strategic planning should aim to encompass maintenance
and renewal of existing assets, not just creation of new assets (see chapter 9 for
more on asset management).
Integrating the Strategic Planning, Project, and Budgeting Cycles | 93
BOX 6.1
The OECD’s definition of a long-term national strategic vision
According to the Organisation for Economic process that distils complex and multifaceted
Co-operation and Development (OECD), infrastructure issues, cutting across a multi-
plicity of actors, sectors, and interests, into a
“A long-term national strategic vision is a coherent set of decisions with long-term
politically sanctioned document that demands impact, including projects and processes.
concrete action in terms of infrastructure Such a process should be anchored in central
services to society over the long term. This agencies and have substantial input from pol-
might go beyond a normal political mandate icy departments, subnational governments,
period. The design of the vision requires a civil society, and business stakeholders.”
Source: OECD 2017.
Strategic guidance is almost always available for planners; in fact, there may
be too many incompatible and unconstrained strategic plans, with few, if any,
linkages to asset management systems. The case of Moldova described in box 6.2
illustrates the general problems of strategic guidance commonly found in other
countries—that is, lack of realism, vague objectives, weak coordination, and lim-
ited information on the condition of existing assets.1 Compared with Moldova,
Ireland developed a more cohesive national planning process in the context of
significant external funding for investment, as described in box 6.3.
In the absence of coherent strategic guidance, planners must still plan new
project ideas; stakeholder consultation and the use of tools, such as the logical
framework approach (discussed below), to test the rationale for a project become
more important in such cases.
Good practice indicates that linking strategic planning and capital budgeting
is best achieved through a rolling, medium-term budgetary framework. The
medium-term perspective (usually three to four years) allows resource alloca-
tion decisions to be made in line with strategic plans. The rolling dynamic allows
plans to adapt to emerging macrofiscal conditions and enables the implementa-
tion progress of current projects to be taken into account when deciding on new
projects and programming their expenditures. Some coordination difficulties
may arise when the strategic planning framework is static and has a relatively
short horizon—for example, fixed five-year planning periods, which are often
still used in countries that retain the vestiges of central planning such as Belarus
and Vietnam. The problems with coordinating a rolling budgetary perspective
and a static plan become most apparent toward the end of one planning period,
before the new planning period is initiated, when there is no strategic basis for
the outer years of the budgetary framework.
From conception to completion, planning and implementation of major
infrastructure projects generally take longer than the three- to four-year horizon
for medium-term strategic budgeting and the traditional five-year planning per-
spective. One option is to provide extra time for planning in infrastructure sec-
tors, although this approach may mean that implementation plans may bridge
two or more political mandates. Stakeholder consultations and cross-party con-
sensus building should be part of the planning process to avoid abrupt changes
94 | Public Investment Management Reference Guide
BOX 6.2
Strategic guidance in Moldova
Strategic investment guidance has improved and updating is irregular, strategies become out
considerably in recent years. . . . However, weak- of step with the changing fiscal realities.
nesses remain in the way strategies are devel-
oped. Not all strategies realistically assess “Strategic investment guidance is not yet built
resource availability for funding priorities, and upon a solid assessment of the condition of
identified investment needs often exceed feasi- assets, trends in service demand, emerging infra-
ble financing capacities. Lack of realism arises structure gaps, and funding possibilities. The
because strategies have often been prepared in sector strategies for land transport and for water
isolation, with no aggregate resource framework supply and sanitation represent moves in the
and weak coordination with the Ministry of right direction. . . . Future strategy development
Finance. Absence of specificity in defining invest- would be enhanced by more systematic assess-
ment priorities is a problem, allowing too much ment of asset condition in these and other sec-
room for maneuver in the choice of projects to tors, requiring regularly updated asset registers
pursue. And because monitoring is not strong and linked asset management systems.”
Source: World Bank 2013.
BOX 6.3
Ireland’s successful national development planning process
Ireland has successfully used a series of national recreational infrastructure. For each of these
development plans (NDPs) to guide the identification ectors, more detailed investment strategies were
s
and prioritization of projects. Ireland’s strategic plan- prepared by the relevant sector ministries and
ning process evolved while it was more reliant on framed within an indicative capital spending enve-
European Union funding, but the NDP was retained as lope agreed to with the Department of Finance.
a centerpiece of government policy making. The NDP was implemented much as planned
Preparation and implementation of the 2000–06 NDP because it was prepared within realistic estimates of
incorporates many features of good process, including the resources available for implementation, and oper-
extensive public consultation, independent review, ational programs were fully costed. This discipline
and evaluation of progress. It is generally recognized was assisted by the fact that the Finance Ministry led
as having been highly successful. the planning process.
The 2000–06 NDP was made operational The 2000–06 NDP was succeeded by the 2007–13
through six cross-cutting operational programs, of NDP, confirming the Irish government’s commitment
which the Economic and Social Infrastructure to the planning process. However, the financial crisis
Operational Programme was the largest. This NDP that engulfed the country and severely damaged the
took an integrated approach to planning, incorpo- public finances made this later plan unachievable as
rating strategies that required both recurrent and originally conceived. In its place, a new strategy for
capital expenditures, as well as institutional mea- infrastructure was developed, Infrastructure
sures. In the case of infrastructure investment, the Investment Priorities 2010–2016: A Financial
sectors identified as relevant for public investment Framework, which was more in line with the new
were housing, transport, environmental, social, and fiscal realities.
Source: World Bank 2014.
Integrating the Strategic Planning, Project, and Budgeting Cycles | 95
of direction with the electoral cycle, although such consensus building may be
difficult in many political contexts. Some countries with advanced systems have
sought to ensure continuity from one government to the next by creating inde-
pendent advisory bodies; Infrastructure Australia and the United Kingdom’s
National Infrastructure Commission are two examples. National planning com-
missions in some African countries—such as Ethiopia, Ghana, and Tanzania—
may fulfill a similar function.
Some countries with advanced systems lack a tradition of national develop-
ment planning but have been using long-term infrastructure plans to address
perceived infrastructure deficits. Their plans are within realistic resource frame-
works. Financing is indicative, however, and firm funding is delivered through
the usual budgeting process, which is framed within a medium-term perspec-
tive. These long-term infrastructure plans are often rolling plans, which allows
adjustments to be made in line with progress and shifting macrofiscal constraints
and priorities to be updated.
Long-term, rolling infrastructure plans address the issue of a sensible time
horizon for strategic planning of major investments and the potential difficulties
associated with integrating static planning with dynamic budgeting. The con-
cept has been practiced for some years in Norway, where the first plan was for
the period 2006–15, and in Sweden, as described in box 6.4, but it has now been
adopted elsewhere (see box 6.5). Cross-party consensus building and stake-
holder consultations are an important component of the planning process and
are expected to ensure the durability of these plans when governments change;
the rolling nature of these plans also allows for priorities to be adjusted over time.
BOX 6.4
Rolling sector investment plans in Norway and Sweden
Norway has a 10-year transport infrastructure plan public airports, Avinor AS, the regional offices assem-
that is rolled forward every four years. To date, plans ble a proposal for the next national transport plan and
have covered 2006–15, 2010–19, and 2014–23. They submit it to the government. After receiving and
identify specific major projects and their estimated reviewing stakeholders’ comments, the government
costs and are developed around four fiscal scenarios: a assembles the plan and sends it to parliament for
base case, −20 percent financing, +20 percent financ- ratification.
ing, and +45 percent financing. Projects are priori- Sweden’s first national transport plan covered the
tized within each scenario by transport mode. period 2010–21. It has subsequently been rolled for-
The procedure to develop the plan begins when the ward to cover 2014–25. The plan is approved by the
government informs the Public Roads Administration government after public consultation. In addition to
about its policy objectives immediately after publish- describing the economic and fiscal framework for
ing the previous plan. The regional offices of the development, operation, and maintenance of the
Public Roads Administration then provide a list of national road and rail network, the plan contains sev-
projects in their regions that can help to support the eral defined projects to be started during the period.
defined policy objectives. Based on priorities of the Preliminary social cost-benefit analysis is used to pri-
regional offices and in cooperation with the Norwegian oritize projects within the plan, but political factors
National Rail Administration, the Norwegian Coastal and regional distribution also influence the projects
Administration, and the owner of the Norwegian that are eventually included.
Source: Forsgren and Westin 2014.
96 | Public Investment Management Reference Guide
BOX 6.5
Australian infrastructure plan, 2016–31
Infrastructure Australia, an independent statutory closely with representatives from all levels of govern-
body, is tasked with preparing a rolling, long-term ment, as well as businesses, industry, peak bodies, and
national infrastructure plan. The infrastructure plan the wider community.
for 2016–31 was developed through a collaborative The plan lays out a comprehensive package of
18-month process of research and consultation. To reforms focused on improving the way Australia
underpin the planning process, two infrastructure invests in, delivers, and uses its infrastructure. The aim
audits were performed, the Northern Australia audit is to extract the greatest value from existing infrastruc-
and the Australian infrastructure audit. The latter ture, while sustainably funding new investments to
represents the nation’s first comprehensive examina- deliver better services. The plan identifies focal areas
tion of infrastructure across the energy, telecommu- for investment, rather than a list of projects, which is
nications, water, and transport sectors. Together, the done through a separate infrastructure priority list.
two audits provide the primary evidence for the plan. The plan seeks to achieve the following main goals:
They set out the case for substantially enhancing the
• Improved productivity of cities and regions through
quality, capacity, and efficiency of infrastructure and
optimal infrastructure provision
overhauling the way infrastructure is planned,
• Efficient markets for supply of infrastructure
funded, constructed, operated, and maintained.
services
Following release of these audits, Infrastructure
• Sustainable infrastructure with equitable access
Australia received more than 100 formal submissions
• Better decision making and delivery of
from jurisdictions, a wide range of industry associa-
infrastructure.
tions, public interest groups, local government bodies,
and individuals. More than 500 stakeholders were The plan has a 15-year horizon but will be reviewed
consulted in every state and territory and worked and rolled forward every five years, beginning in 2021.
Source: Infrastructure Australia 2016; http://infrastructureaustralia.gov.au/.
ENSURING INTEGRATION AT THE QUALITY-AT-ENTRY STAGE
Strategic fit and affordability
Chapter 5 summarizes quality-at-entry processes and discusses issues related
to system design in some depth. Preappraisal, when the strategic relevance of
the project is center stage, represents a critical linkage with strategic
planning. Preappraisal also involves a broad-based assessment of affordabil-
ity (or unaffordability), making the link with capital budgeting. In certain
cases, where approval of a distinct budget is required for project preparation
and appraisal, as may be the case for a major project or megaproject, a formal
preappraisal decision should be a prerequisite for including such activities in
a capital budget request and will strengthen the linkage.
At appraisal, the strategic relevance of a project is reviewed again (as sum-
marized in chapter 5). At this point, the continued coherence of the project
with higher-level strategic guidance should be confirmed; project objectives
need to be framed to make a clear link with the relevant strategic plans.
Applying the logical framework approach at appraisal can assist with the
Integrating the Strategic Planning, Project, and Budgeting Cycles | 97
strategic orientation of a project.2 The approach establishes a hierarchy of
objectives related to the cause-effect logic, often referred to as the “results
chain,” that drives the project rationale: the highest level of objectives is
expected to be derived from or to be consistent with the strategic planning
guidance. Table 6.1 presents an example of a logical framework taken from
European Commission guidance. The logical framework includes identifica-
tion of indicators and means of verification for each level of objectives, so that
it also forms a basis for monitoring and evaluation during the downstream
stage of PIM (Gasper 1999).3 The World Bank’s results framework is another
tool that performs a similar function.
One step in the appraisal process described in chapter 5 involves examining
the financial sustainability of the project from the perspective of the operating
entity and from a budgetary perspective. As indicated above, the project cycle
and the budgetary cycle are not necessarily concurrent, which means that a
definitive statement cannot be made regarding the affordability of a project from
the perspective of the budget; such a statement can only be made through the
budget process when trade-offs are made with other new projects and new
spending initiatives. Nevertheless, appraisal should estimate the impact on
TABLE 6.1 An example of a logical framework
PROJECT DESCRIPTION INDICATORS MEANS OF VERIFICATION ASSUMPTIONS
Overall objective. Incidence of water-borne Municipal hospital and clinic
Improved family health, diseases, skin infections, records, including maternal
particularly for children and blood disorders caused and child health records
under five, and improve by heavy metals is reduced collected by mobile maternal
the general health of the by 50% by 2008, and child health teams
riverine ecosystem specifically among Results summarized in an
low-income families living Annual State of the
along the river Environment report by the
Environmental Protection
Agency
Purpose. Improved quality Concentration of heavy- Weekly water quality surveys, Public awareness campaign
of river water metal compounds (lead, conducted jointly by the conducted by local
cadmium, mercury) and Department of Environment government has a positive
untreated sewage is and River Authority and impact on families,
reduced by 25% reported monthly to the local sanitation, and hygiene
(compared to 2003), and government minister for the practices
established national health environment (chair of Project Fishing cooperatives are
and pollution control Steering Committee) effective in limiting their
standards are met by end members’ exploitation of
of 2007 fish “nursery” areas
Result 1. Reduced volume 70% of wastewater Annual sample survey of River flows are maintained
of wastewater discharged produced by factories and households and factories above X megaliters per
directly into the river 80% of wastewater conducted by municipalities second for at least eight
system by households and produced by households between 2003 and 2006 months of the year
factories are treated in plants by Upstream water quality
2006 remains stable
Result 2. Wastewater Wastewater from four Environmental Protection Environmental Protection
treatment standards existing treatment plants Agency audits (using Agency is successful in
established and enforced meets Environmental revised standards and reducing solid waste
effectively Protection Agency quality improved audit methods) disposal levels by factories
standards (heavy metals conducted quarterly and from X to X tons per year
and sewerage content) reported to Project Steering
by 2005 Committee
Source: Adapted from European Commission 2004.
98 | Public Investment Management Reference Guide
public finances on a whole-life basis—that is, including recurrent costs—and
should identify and assess the realism of intended funding sources, including
foreign loans, grants, and nonbudgetary sources.
Linking quality at entry with strategic planning and capital
budgeting in the United Kingdom
The integration of appraisal with strategic planning and capital budgeting is best
illustrated through a concrete, good-practice example, in this case, the United
Kingdom’s “business case” model.4
Quality at entry in the United Kingdom consists of three sequential assess-
ments and associated decision points:5 (1) the strategic outline case (SOC), (2)
the outline business case (OBC), and (3) the full business case (FBC). At each
point, five thematic cases are examined. Box 6.6 summarizes these five
BOX 6.6
The United Kingdom’s three business cases and five thematic cases
The U.K. business case model consists of three specific and measurable terms, the fit with wider
sequential business cases prepared during the plan- public policy objectives, and the previous experi-
ning phase for a project or program: ence of similar projects
1. Strategic outline business case. A preliminary screen- 2. Economic case. Assesses the economic costs and ben-
ing of a project proposal, on the basis of a detailed efits of the proposal to society as a whole over the life
outline of the project concept, to confirm its ratio- span of the project. Must include a sufficiently wide
nale and strategic “fit” consideration of alternative options for achieving the
desired objective, establish the rationale for choosing
2. Outline business case. Equivalent to full-scale ex ante
the preferred option, and include a plan for monitor-
evaluation, based on the preparation of a socioeco-
ing the project’s effects and evaluating its success
nomic feasibility study using the mandated methodol-
ogy for social cost-benefit analysis or cost-effectiveness 3. Commercial case. Examines procurement require-
analysis and including risk analysis ments, assesses their importance for project deliv-
ery, develops a procurement strategy, and explores
3. Full business case. A rerunning of the economic
traditional procurement versus possible
analysis and confirmation of deliverability during
public-private partnership (PPP) arrangements
the procurement phase of the project, prior to the
formal signing of contracts and before the procure- 4. Financial case. Deals with the impact on the budget
ment of goods and services takes place; may lead to and is concerned with issues of affordability and
project adjustment. sources of budget funding over the life span of the
project. Assesses any contingent liabilities, particu-
Five thematic cases must be examined at each of
larly in relation to PPP proposals
the three stages forming the phase of the project cycle
preceding implementation. The five thematic cases 5. Management case. Is concerned with deliverability
examine different dimensions of a project: of the proposal. Sets out the project management
responsibilities and the governance and reporting
1. Strategic case. Sets out the rationale for the pro-
arrangements. Must include a delivery plan with
posed investment, making the case at the strategic
clear milestones.
level and setting out the objective to be achieved, in
Source: HM Treasury 2013.
Integrating the Strategic Planning, Project, and Budgeting Cycles | 99
thematic cases as well as the three sequential business cases. The strategic and
financial cases ensure integration of the quality-at-entry subsystem with stra-
tegic planning and capital budgeting. Table 6.2 indicates the varying degrees of
emphasis placed on each thematic case when developing the business cases.
The strategic case is the focus of attention at SOC, while the financial case is the
focus at OBC; both of these thematic cases are considered in each of the three
business cases.
The strategic context for the project, established as part of the SOC6 (and
reviewed at OBC), has two components:
• Organizational overview. Provides a brief profile of the organization, includ-
ing a statement of its aims and the nature and level of resources currently at
its disposal (HM Treasury 2013)
• Existing business strategies. Explains how the proposed project supports,
promotes, and fits within the agreed-on strategy and work program, of
which the project forms an integral part. It explains how the proposed proj-
ect helps to achieve the organization’s business goals, strategic aims, and
plans. All relevant strategies should be referenced, including those at
national, regional, and local levels. These strategies highlight the high-level
policy aims (strategic aims) and business goals of the organization, from
which the objectives for the spending will flow (HM Treasury 2013).
The financial case, introduced at SOC, is examined in depth at OBC to ascer-
tain the affordability and funding requirements of the preferred project option
in relation to the other short-listed options.7 This examination estimates the
following:
• The capital and current implications of the preferred option and associated
deal (in the case of PPPs)
• The impact on the income and expenditure account and the organization’s
charges for services (if applicable)
TABLE 6.2 Matrix of thematic and business cases: United Kingdom
THEMATIC CASE STRATEGIC OUTLINE CASE (SOC) OUTLINE BUSINESS CASE (OBC) FULL BUSINESS CASE (FBC)
Strategic case Is completed in full but may be Is revisited Is revisited and revised if
revised later required
Economic case Is completed as far as the review of a Is completed according to Includes and records the
long list of options, recommended methodological guidance on findings of procurement in
way forward, and an initial short list appraisal and evaluation in the economic analysis;
for OBC stage central government (the reassesses the economic case
Green Book)
Commercial case Addresses the fundamentals of any Outlines envisaged “deal” Writes up the recommended
potential procurement or “deal”—for structure(s) and any “deal”
example, initial identification of contractual clauses and
potential public-private partnership payment mechanisms
(PPP) optionsa
Financial case Discusses likely affordability of the Conducts detailed analysis of Resolves affordability and
proposed project affordability and any funding funding issues
gaps
Management case Outlines how the project will be set Develops how the project will Records detailed plans for
up and managed be delivered in more detail, delivery and arrangements
with an outline of the for realization of benefits,
proposed project management of risk, and ex
management plan post evaluation
Source: HM Treasury 2013.
a. Public-private partnerships have been pursued vigorously in the United Kingdom, one of the highest PPP users in the world.
100 | Public Investment Management Reference Guide
• The impact on the budget, other sources of available funding, and any
shortfalls
• The impact on the operating organization’s balance sheet.
The design principles applied in the U.K. model—that is, attention to strategic
and affordability issues during quality-at-entry processes—should be seen as a
broad guide to designing country-specific procedures and methods elsewhere; it
is not suggested that the business case model be adopted as a rigid template.
ENSURING INTEGRATION AT THE CAPITAL
BUDGETING STAGE
Gatekeeping
Capital budgeting must respect the quality-at-entry processes by preventing
projects from being “parachuted” into the budget without first having been
appraised and selected as “budget eligible.” The absence of a strong
gatekeeping function to enforce quality-at-entry decisions is a frequent
problem with weak PIM systems. Gatekeeping is an administrative check on
projects presented in budget requests to ensure compliance. It is not the same
as independent review, which is more of a “challenge function” that should
precede budgeting. Gatekeeping is usually performed by the budget depart-
ment in the finance ministry and relies on the finance ministry having
sufficient power to turn away noncompliant projects.
There will be pressures to exempt certain projects from the PIM system,
usually because of their supposed “urgency.” International experience shows
that, if such a fast track exists, it is likely to be overexploited, particularly in
relation to politically driven projects, unless adequate safeguards are in
place. Such safeguards include being very specific about the circumstances
when a project may be fast tracked and establishing a clear set of procedures
for determining eligibility. Exemptions must apply only to unforeseeable
events and should consider events such as natural disasters, humanitarian
emergencies, and national security threats. The final decision on eligibility is
best made outside the political arena to avoid political “horse trading.” Even
for exempt projects, a minimum analysis needs to be performed and docu-
mentation prepared to ensure an adequate and proportionate response to the
new problem.
Medium-term perspective for expenditure planning
A medium-term perspective for fiscal and expenditure planning is helpful for
PIM for the following reasons:
• Project implementation usually lasts longer than one budget cycle.
• Projects have consequences for future expenditures after construction.
• Strategic investment planning, prioritization, and decision making require a
longer-term view of resource availability than is provided by the annual
budget.
A medium-term budgetary perspective has advantages for PIM as it:
• Allows expenditure planning for the efficient implementation of ongoing
multiyear projects (see chapter 7 for a capital expenditure “baseline”)
Integrating the Strategic Planning, Project, and Budgeting Cycles | 101
• Assists in estimating the sustainable level of public financing for new spend-
ing initiatives, including for new projects (see chapter 7 for estimation of “fis-
cal space”)
• Allows for multiyear expenditure programming, consistent with planning
horizons adopted in strategic planning guidance
• Provides a realistic and supportive framework for determining strategic
resource allocations, including resource allocation for capital investment
expenditures
• Creates a conducive environment for prioritizing new projects in line with
strategic planning guidance
• Favors forward planning for the current expenditure requirements of capital
investment projects upon completion (chapter 7 looks more closely at the
integration of capital and recurrent budgeting).
Despite the advantages of a medium-term expenditure planning perspective,
a medium-term perspective (generally three to four years) is often too short
to encompass the planning, implementation, and commencement of major
projects. As indicated above, supplementary, longer-term strategic expenditure
plans may be required for the important infrastructure sectors.
In broad terms, a medium-term expenditure framework (MTEF) is usually
seen as the appropriate instrument for implementing a medium-term budgetary
perspective. An MTEF can be one of three types: fiscal, budgetary, or perfor-
mance, corresponding to the stages of development of the instrument. A typology
along these lines is described in box 6.7.
A medium-term fiscal framework is a prerequisite for any minimally
functional budgetary system and therefore for PIM. The medium-term bud-
get framework is the next stage of development and aims to support a more
strategic allocation of budgetary resources (level II in the hierarchy of
BOX 6.7
MTEF typologies
A medium-term fiscal framework (MTFF) determines MTFF and the need for bottom-up resources to
the availability of aggregate resources as an input finance sector spending plans. MTBFs are primarily
into budget formulation and sets expenditure input based, in that expenditure allocations may be
ceilings for spending agencies as a basis for budget determined by reference to outputs or outcomes, but
implementation. The MTFF is top-down in nature,
spending agencies are still held accountable for the
focuses on allocating resources to purchase inputs, use of inputs.
and holds spending agencies accountable for the use A medium-term performance framework
of inputs. (MTPF)a—the highest form of MTEF—shifts the focus
A medium-term budgetary framework (MTBF) of attention away from spending agency or program
specifies spending agency and program expenditure inputs and toward agency or program outputs and
ceilings based on a compromise between the avail- outcomes, holding spending agencies responsible for
ability of top-down resources determined using an their performance and linking funding to results.
Source: World Bank 2012.
a. MTPF is a term created by the World Bank. The International Monetary Fund (IMF) uses a different term, referring to the advanced stage as
a medium-term expenditure framework. MTEF is not used generically in IMF typology. See IMF 2007.
102 | Public Investment Management Reference Guide
public financial management objectives shown in table 2.1). A functioning
MTBF is essential for a fully effective PIM system, where medium-term
capital budgeting allocations need to be linked to strategic plans.
The more advanced form of MTEF, the medium-term performance frame-
work, is a desirable objective, but may not be feasible for many countries because
it places heavy demands on limited technical, administrative, and political
capacities. It is possible to have a fully functional PIM system without having the
equivalent of an MTPF, but PIM could be enhanced further by introducing a
stronger performance orientation over time.
Box 6.8 provides a short guide to MTEF good practices according to each
stage of development. The MTPF will be out of reach for most countries, and
many will even struggle to achieve a functioning MTBF, to the detriment of PIM
system performance. Nevertheless, it is important to understand how PIM can
be supported by best practice in budgeting to be able to visualize and lay the
foundations for longer-term reform goals.
While the broad principles and methods will be similar, the exact form and
pace of development of an MTEF will vary from country to country according to
BOX 6.8
Guide to MTEF good practices
Medium-term fiscal framework indicates the availability of budget resources,
• Debt and deficit targets are established using u
sually in the form of provisional agency or pro-
model-based debt sustainability analysis, taking gram expenditure ceilings, and the aggregate cost
into account constraints imposed by policy rules. assumptions to be used, including changes in
• Revenue forecasts are based on revenue depart-
inflation and public sector pay.
ment or other tax and nontax receipt models. • The budget requests of spending agencies reflect
• Independent macroeconomic forecasts are used, strategic objectives, the costs of current and new
and fiscal forecasts are subject to scrutiny by an activities, expected cost recovery, and other rele-
audit office, fiscal council, or similar consultative vant factors.
body. • Final expenditure ceilings are reflected in the
• Aid commitments are covered by debt sustainability annual budget submitted to the legislature for
analysis and revenue forecasts. consideration.
• The ministry of finance issues a background paper • Spending agency budgets are finalized, and sector
on macrofiscal objectives to inform budget deci- strategies are revised to reflect budget realities.
sion making and form part of the budget • Spending agency budgets and sector strategies are
documentation. published.
Medium-term budgetary framework Medium-term performance framework
• The ministry of finance issues a budget strategy • Sector strategies discuss program outputs, out-
paper describing the macrofiscal framework with a comes, and performance.
broad indication of national development and bud- • Agency output, outcome, and performance indica-
getary priorities for the medium term. tors are used to establish budget targets.
• A budget circular is sent to spending agencies out- • Spending agencies report on results relative to
lining the basis on which they should prepare their targets. Comprehensive spending reviews are con-
medium-term budget requests. This circular ducted periodically.
Source: World Bank 2012.
Integrating the Strategic Planning, Project, and Budgeting Cycles | 103
administrative, budgetary, and political traditions. For example, the approach to
MTBF expenditure ceilings is highly variable: ceilings by sector versus ceilings
by organization or aggregate ceilings versus separate capital and current ceil-
ings. There is greater room for variation when an MTPF has been achieved,
depending on the form and degree of sophistication of the performance manage-
ment system. It is therefore not possible to be as prescriptive when it comes to
design issues, unlike the quality-at-entry part of upstream PIM processes.
Box 6.9 sets out an integrated MTBF8 and budgeting process, adapted to include
more depth on capital budgeting. Variations on this model should be expected,
depending on a country’s institutional framework for public financial manage-
ment and political contexts.
BOX 6.9
An integrated MTBF and budget preparation process
Phase 1: 9–12 months before the new fiscal year • Spending agencies prepare their budget and MTEF
• Cabinet and spending agencies set out national and submissions, taking into account sector strategies,
sector strategic priorities consistent with national costings for existing expenditure policies, and new
and sector plans. initiatives, including capital costs of new major
• The ministry of finance, in consultation with other projects, their future recurrent costs, and proposed
economic agencies, develops the macrofiscal frame- ceilings.
work and determines the MTEF resource envelope,
Phase 3: 3–6 months before the new fiscal year
based on the previous year’s MTEF and high-level
• The ministry of finance reviews the submissions of
fiscal targets and rules.
spending agencies, and hearings are held with
• Spending agencies cost existing expenditure poli-
spending agencies to resolve technical differences,
cies and new initiatives, including major projects.
including with respect to new major projects.
• The ministry of finance prepares a medium-
• The cabinet is consulted about policy differences,
term budget strategy paper and budget-MTEF
including with respect to new major projects, and
guidelines that include provisional expenditure
other issues that could require significant realloca-
ceilings. There may or may not be separate ceilings
tion of budget resources across spending agencies
for capital and current expenditures, depending
or expenditure programs.
on whether the government wishes to control
• The ministry of finance updates the macrofiscal
these aggregates.
framework.
• The ministry of finance prepares the final budget
Phase 2: 6–9 months before the new fiscal year
and MTEF, incorporating revised expenditure
• The cabinet reviews and endorses the medium-term
ceilings.
budget strategy paper and provisional ceilings.
• The budget strategy paper is submitted to parlia- Phase 4: 0–3 months before the new fiscal year
ment for information. • The cabinet reviews the final budget or MTEF,
• Budget and MTEF guidelines are circulated to endorses ceilings, and submits the budget to parlia-
spending agencies. (The nature of the guidelines will ment for approval.
depend on whether the MTEF is a medium-term • Spending agencies revise sector expenditure strate-
budget with hard multiyear ceilings or an annual gies and prepare business plans, including for the
budget combined with forward estimates, hard bud- acquisition and improvement of fixed capital assets,
get-year ceilings, and indicative out-year ceilings.) consistent with their ceilings.
Source: World Bank 2012, extended by authors to cover capital expenditure dimensions of medium-term budgetary framework (MTBF).
104 | Public Investment Management Reference Guide
In the absence of a functioning MTBF, the minimum requirement, in addition
to an MTFF, is to prepare forward estimates as an input into the budgetary pro-
cess and then to revise them when the budget is agreed to. Forward estimates
capture the implications of ongoing public investment projects for future expen-
ditures.9 Their value is in presenting budget officials and decision makers with a
full picture (by year) of the forward funding requirements for the efficient
implementation of the portfolio of ongoing projects. Forward estimates should
be presented by year for at least three years—but preferably longer—with a bal-
ance to complete after three years. While it may not be practical to present
project-specific forward estimates for all ongoing projects as part of budget doc-
umentation, consolidated forward estimates should be built up from informa-
tion on individual projects and should include detailed information on the most
important projects in the national investment portfolio. Forward estimates
should also be produced for new projects included in the budget, but these for-
ward estimates should be kept separate from those of ongoing projects. With
these two pieces of information—(a) forward estimates for ongoing projects and
(b) forward estimates for new projects—budget officials and decision makers
will have a necessary minimum amount of information to ensure adequate
financing for projects to be realized as planned and to balance strategic priorities
against the fiscal realities in the case of new projects.
Where PIM systems are still weak, it may not be possible to produce forward
estimates for all spending ministries at first. In these cases, the first step is to
produce estimates for the major investing ministries.
After the budget is agreed to, it is important to update the forward estimates
to take account of the latest decisions. Updated forward estimates will then form
the starting point for the following year’s budget preparation.
When integrated into a two-step decision-making process, agreed-on for-
ward estimates will form the basis for the capital baselines described more fully
in chapter 7. A format for presenting forward estimates is given in table 7.1.
Ireland provides an interesting example of how the adoption of a
medium-term expenditure planning perspective has supported PIM and
how the approach has developed over time (see box 6.10).
Managing the project pipeline
A medium-term budget framework can be a useful instrument for managing the
pipeline of major projects and avoiding the situation where too many projects
have been selected and are waiting for budget funding. The latter can put pres-
sure on finance ministries and governments to begin more projects than are
affordable over the medium term, resulting in inefficient “drip funding” and
delayed completion (see chapter 7 for more on this situation and how to deal
with it).
Managing budgetary allocations for conducting feasibility studies for major
projects within an MTBF may control the flow of “budget-eligible” projects
coming forward. To be effective, such a system would require imposing sub-
ceilings for feasibility study funding, forcing spending agencies to prioritize
those projects they wish to move from preappraisal to appraisal. It would also
require early coding of projects (see chapter 5), so that expenditures on indi-
vidual feasibility studies can be allocated and accounted for in the budget
system. This approach may require a higher degree of management by the
center of government than some countries are prepared to countenance and
Integrating the Strategic Planning, Project, and Budgeting Cycles | 105
BOX 6.10
Capital budgeting in a medium-term perspective in Ireland
Ireland’s 2004 budget introduced rolling multiannual the first year) to support new government priorities
envelopes for capital expenditures. An envelope is a for capital investment. This reserve represented
binding aggregate expenditure allocation—that is, it is around 7 percent of the total within the aggregate allo-
not defined by project—that is valid for an extended cation for capital expenditures for 2004–08. The unal-
period of time and cannot be exceeded. This envelope located reserve is not for meeting price and physical
provides a stable and predictable financial framework contingencies arising from planned and ongoing proj-
within which multiyear projects can be planned, pro- ects: ministries must plan for such contingencies
grammed, and implemented. within their allocated capital envelopes.
The envelopes are set for five years and are rolled As part of the Comprehensive Review of
forward annually by one year. The aggregate capital Expenditure 2012–14, Ireland introduced an MTEF
allocation is broken down by ministry (“department”) with binding medium-term financial constraints for
or other relevant higher-order spending agency. The most current and all capital expenditures for a three-
envelope is allocated by year over the five-year period, year period. The ceilings for current expenditures do
but unused allocations can be carried over, subject to not apply to demand-driven expenditures (unemploy-
certain restrictions. Spending ministries must plan ment benefits, for example), which are still planned
and implement their capital expenditures within the and managed on an annual basis. This approach is
limits set by the envelopes. similar to the U.K. model.
In the case of capital investment in transport infra- The aggregate expenditure ceilings for the MTEF
structure, the Irish government decided in November are set by the government upon the recommendation
2005 to go further and to provide for a 10-year multi- of the minister of finance, who consults with the min-
annual envelope—Transport 21—to take account of the ister for public expenditure and reform. The alloca-
longer time scale for planning and implementing tions between ministries (“ministerial ceilings”) are
major transport infrastructure projects and to tackle set by the government upon the recommendation of
the transport infrastructure deficit. Transport 21 was the minister for public expenditure and reform.
not, however, a rolling framework; it covered the fixed Having regard to fiscal and economic conditions, the
period 2006–15. It was subsequently pushed off track minister of finance makes a recommendation to
when the global financial crisis engulfed the country. the minister for public expenditure and reform on the
An unallocated reserve providing additional proportions of total expenditures that should go to
amounts is available for allocation each year (except capital and current expenditures.
Source: World Bank 2014.
ecision making, which
may be seen to contradict the philosophy of delegated d
is inherent in performance-oriented budgeting systems. In practice, countries
with advanced systems such as the Netherlands and the United Kingdom
restrict central management of the project pipeline to major projects only. In
Latin America, countries such as Chile and Colombia enforce more discipline
from the center.
Project prioritization and capital budgeting decisions
When the quality-at-entry system and gatekeeping function are working
effectively, only projects that have been confirmed as a good use of public funds
106 | Public Investment Management Reference Guide
ought to be presented for budget funding. As a result, the appraisal findings
will generally have less relevance than other factors at the capital budgeting
stage, except to the extent that they will have been instrumental in determining
a project’s eligibility to be presented for budgeting. This does not mean that
appraisal findings are irrelevant to budget decisions. When all other factors are
equal, it makes sense to focus public financing on projects that bring a higher
social return; however, other factors are usually not equal when it comes to
these budgetary decisions.
Some countries, such as Australia and the United Kingdom, have been
trying to give more weight to the results of social cost-benefit analysis in
budgetary decision making, but the practical impact has tended to be
restricted. In the 2010 spending review,10 the United Kingdom introduced a
capital-ranking exercise based on the benefit-cost ratio estimated from
social cost-benefit analysis. In Australia, Infrastructure Australia is required
to draw up an infrastructure priority list, using benefit-cost ratio and strate-
gic fit as criteria for prioritizing budgetary decisions; however, the govern-
ment does not necessarily follow the advice.
The complexity of budgetary decisions is illustrated by the U.K. National
Audit Office’s summing up of expenditure decisions made in the 2010 spending
review (U.K. National Audit Office 2012):
Final prioritisation also reflected other factors [apart from ranking based on
benefit-cost ratio], including the government’s political and strategic priori-
ties, deliverability, commitments, and regional distribution.
Bearing in mind the political dimension of budgeting, broad technical criteria
should generally guide capital budgeting decisions, including
• Strategic importance of the project and the sector based on government pol-
icy as expressed in strategic planning documentation and the budget strategy
paper (or equivalent)
• Indications, following positive appraisal decisions,11 that the project will
deliver better value for public money than competing, comparable projects
• Significance and sustainability of future budgetary consequences on comple-
tion (operation and maintenance costs and “availability” payments for some
types of PPPs)
• Compatibility with other proposals for new projects and noncapital
expenditures
• Readiness to proceed in the forthcoming budget year, including deliverability
of plans for detailed design and procurement and status of land acquisition,
compensation, and resettlement arrangements
• Compatibility with the spending ministry’s portfolio of ongoing projects in
terms of implementation capacity (based on monitoring reports)
• Impact on the overall balance and risk profile of the national public invest-
ment program.
Integrating capital budgeting and program-based budgeting
Capital budgeting as part of a developed PIM system should be fully compatible
with program-based budgeting;12 however, care needs to be taken when relating
projects to the program structure. It is a mistake to situate projects at the same
level as budgetary programs or subprograms; projects should be seen as activi-
ties, or components of activities, that are carried out within subprograms.
Integrating the Strategic Planning, Project, and Budgeting Cycles | 107
Projects should contribute to the achievement of subprogram and therefore
program objectives.
When fully implemented, program-based budgeting should have implica-
tions for decision rights in the budget process. Line ministries are typically
responsible for expenditure decisions, including capital investment projects,
within their program expenditure allocations. They are then held accountable
for achieving subprogram and program objectives. Governments may wish to
consider the extent to which they delegate decision making for major projects
because they may want to have a stronger say in the strategic orientation, deliv-
erability, and riskiness of their national investment program.
KEY ISSUES IN RELATION TO LINKAGES BETWEEN
STRATEGIC PLANNING, QUALITY AT ENTRY, AND
BUDGETING
The following issues need to be considered to integrate strategic planning, proj-
ect, and budgeting cycles:
• At the strategic planning stage, the national strategy, sector plans, and
subsector master plans, among others, need to be compatible and feasible,
to the greatest extent possible. Three linkages are important to consider:
— Strategic planning is the basis for identifying projects for preparation and
appraisal.
— Strategic plans should be an important reference point for prioritization
during capital budgeting.
— Strategic plans need to be fiscally constrained to improve consistency with
future capital budgets.
• During the quality-at-entry stage, project compliance with the relevant stra-
tegic documents should be a critical assessment criterion. Two linkages are
important to consider:
— Strategic relevance is assessed at preappraisal, as a basis for a decision to
proceed to appraisal, and is reviewed again at appraisal.
— To the extent possible, affordability and fiscal sustainability needs are
taken into account at preappraisal and appraisal, making the link with cap-
ital budgeting.
• At the capital budgeting stage, strategic guidance is reflected in resource allo-
cation decisions and prioritization of new projects, and quality-at-entry deci-
sions are respected. Three linkages are important to consider:
— Effective gatekeeping is needed to ensure that projects entering the capital
budgeting process have been positively appraised and selected
beforehand.
— A medium-term budget framework, possibly supplemented by a lon-
ger-term strategic expenditure framework for infrastructure sectors, pro-
vides a conducive environment for linking strategic plans, appraisal, and
capital budgets.
— Emphasis is placed on strategic prioritization in capital budget decisions.
Box 6.11 captures how strategic planning, project appraisal, and budgeting are
integrated in the Netherlands.
108 | Public Investment Management Reference Guide
BOX 6.11
Linking strategic planning, project appraisal, and budgeting in the Netherlands
In the Netherlands, the National Policy Strategy for investment program of the government, which is
Infrastructure and Spatial Planning (SVIR), a com- rolled over annually. It brings together national invest-
prehensive vision for the country to 2040 with goals to ment and local or regional investment.
2028, is implemented through the Multi-Year Plan for The MIRT Project Book is annexed to the annual
Infrastructure, Spatial Planning, and Transport budget and presents projects to be funded in line with
(MIRT). priorities set out in the SVIR and the government
MIRT is both a medium-term investment plan (the program. The Project Book, recently renamed the
“MIRT Project Book”) and a set of rules (the “MIRT MIRT Overview and available online, explains the
Rules”) for project development and implementation. basis for selection, referring to the focal areas for
The MIRT Project Book is the medium-term
central government action identified in the SVIR.
Source: World Bank 2014.
NOTES
1. Since adoption of the government’s PIM resolution in 2013, however, strategic orientation
and monitoring have improved in Moldova.
2. The logical framework approach is well described. See Asian Development Bank (2007).
3. The logical framework methodology can and should be used as early as possible in the
project cycle (before appraisal) to assist in identifying alternatives and testing their ratio-
nale. The methodology is often described as a project cycle management tool because it
relates to the whole project cycle. This approach has some drawbacks and should never be
used to replace a rigorous quality-at-entry system.
4. A similar model is used in Australia and New Zealand. See http://www.finance.gov.au
/p roperty/property/two-stage/ and http://www.treasury.govt.nz/statesector
/investmentmanagement/plan/bbc/.
5. These decision points are dealt with in other chapters.
6. See cell 1 in table 6.2.
7. See cell 11 in table 6.2.
8. The process described in box 6.9 is for the MTBF stage of development. The same process
is required for an MTPF, with more emphasis on using information on performance to
guide expenditure allocation decisions.
9. Forward baseline estimates are estimates of expenditures that are required if policies
remain unchanged—that is, there are no new spending initiatives. Forward baseline esti-
mates for both capital and recurrent expenditures are essential for a medium-term
budgeting system.
10. The spending review is conducted when multiyear budgets are prepared for expenditures
that are not managed annually.
11. Only projects that have been positively appraised and selected should be allowed to request
budget funding (see chapter 5). Gatekeeping should control this.
12. Program-based budgeting is the most common approach used to introduce a stronger stra-
tegic focus and performance orientation into budgeting.
REFERENCES
Asian Development Bank. 2007. “Project Performance Management System: Guidelines for
Preparing a Design and Monitoring Framework.” Asian Development Bank, Manila.
Integrating the Strategic Planning, Project, and Budgeting Cycles | 109
European Commission. 2004. Project Cycle Management (PCM) Handbook. Brussels: European
Commission.
Forsgren, A., and J. Westin. 2014. Infrastructure Planning: A Challenge for Cross-Border
Cooperation. CERUM Report 41/2014. Umea, Sweden: Umea University, Centrum för
Regionalvetenskap.
Gasper, D. 1999. “Problems in the Logical Framework Approach and Challenges for Project
Cycle Management.” ACP-EU Courier 173 (January–February): 75–77.
HM Treasury. 2013. Public Sector Business Cases: Using the Five Case Model. London: HM
Treasury.
IMF (International Monetary Fund). 2007. Manual on Fiscal Transparency. Washington,
DC: IMF.
Infrastructure Australia. 2016. Australian Infrastructure Plan: Priorities and Reforms for Our
Nation’s Future Report. Canberra: Infrastructure Australia.
OECD (Organisation for Economic Co-operation and Development). 2017. Getting Infrastructure
Right: A Framework for Better Governance. Paris: OECD Publishing.
U.K. National Audit Office. 2012. Managing Budgeting in Government. London: National Audit
Office.
World Bank. 2012. Beyond the Annual Budget: Global Experience with Medium-Term Expenditure
Frameworks. Washington, DC: World Bank.
———. 2013. “Making Public Investment Work for Competitiveness and Inclusive Growth in
Moldova.” Public Expenditure Review, World Bank, Washington, DC.
———. 2014. “Study on Cross-Country Comparison: Technical Assistance for Public Investment
Project Appraisal and Selection System Development in Ukraine.” World Bank,
Washington, DC.
7
Upgrading Capital Budgeting
Practices
SOME COMMON PROBLEMS
In weaker public investment management (PIM) systems, where budgeting
practices are not well developed, ongoing projects typically compete for
available fiscal space directly with proposed new projects and frequently lose
out, resulting in their either being “drip funded” or stalled. Starving ongoing
projects of funds for efficient implementation often leads to higher overall costs
and delayed realization of benefits, eroding their social viability.
Another problem in many PIM systems is the failure to plan for the operation
and maintenance costs of newly completed projects. A medium-term budgetary
perspective can help to avoid this problem, which is often caused by poorly
integrated capital and recurrent budgeting.
This chapter looks at approaches to ensuring continuity of funding for the
implementation of ongoing projects. These approaches include estimating and
agreeing on a capital baseline, allowing for carryover between budget years, and
introducing multiannual commitment appropriations. The chapter also
examines approaches to better budget integration.
For many countries, the reforms discussed in this chapter will be longer term,
and more basic reforms should perhaps be given higher priority. Estimating and
agreeing on a capital baseline as part of a medium-term budgetary framework
(MTBF)–budget process is a relatively complex reform, requiring a reliable
medium-term fiscal framework (MTFF) as well as an accurate and timely mon-
itoring system (see chapter 8). Introducing a system of multiannual commitment
appropriations has many advantages, but this reform is even more advanced and
should follow successful implementation of a process for estimating and agreeing
on a capital baseline.
ESTIMATING A CAPITAL BASELINE
Ceiling setting as part of a medium-term budgetary perspective
medium-term
As discussed in chapter 6, budgeting is best performed within a
perspective, especially capital budgeting, because of the multiyear nature of
111
112 | Public Investment Management Reference Guide
expenditures for major capital investment projects. Box 6.9 shows how the
medium-term budgetary perspective needs to establish a sustainable medi-
um-term macrofiscal framework (the MTFF) and, subject to this constraint,
create firm, strategic expenditure ceilings for the annual budget plus several
years. Establishing ceilings involves an arbitration process in which competing
“bottom-up” claims on budget allocations by line ministries are reconciled
with (fixed) “top-down” constraints on aggregate expenditures. Ceilings are
usually established early in the MTEF-budget process. Unlike open-ended bid-
ding, fixed ceilings provide strong incentives for line ministries to prioritize
expenditures. Box 6.9 presents a stylized model, within which choices need to
be made concerning the following:
• The “firmness” of ceilings. The ceiling for the annual budget must be
b inding, but the outer years of the medium-term perspective may
i ndicative only. Firm outer-year ceilings are ideal, with technical
be
adjustments made only when the MTEF is rolled over; however, the
r eliability of forecasts, potential macroeconomic instability, and
political resistance may make the use of firm outer-year ceilings difficult
in some country contexts.
• The level of disaggregation of ceilings. Line ministry expenditure ceilings
may be either aggregate ceilings or ceilings disaggregated by current and
capital expenditures.1 Disaggregated ceilings are the preferred approach
where a government wishes to ensure minimum expenditures on capital
investment (perhaps where such spending has been neglected in the past)
and is in line with a commitment to a robust PIM system. On the negative
side, separate capital ceilings also diminish the ability of line ministries to
make internal trade-offs between current and capital spending in pursuit of
their strategic objectives and may be harder to reconcile with a stronger
orientation toward performance.2
Advantages of a two-step capital budgeting process
In addition to these important choices regarding the scope of ceilings, the
approach to setting ceilings and prioritizing expenditures needs to be
designed carefully to avoid problems associated with inadequate provision
for ongoing projects.
Introducing a two-step ceiling-setting process helps to guard against
these problems and to preserve the intertemporal consistency of decision
making. This process involves projecting the expenditures needed to con-
tinue existing expenditure policies before allocating discretionary fiscal
space to new spending initiatives. As far as capital expenditures are is con-
cerned, this process means establishing expenditure requirements for effi-
cient completion of ongoing or committed projects (the “capital baseline”)
before making decisions on budgetary allocations for new projects. It serves
four purposes:
• Establishes minimum expenditure requirements for ongoing projects, setting
a lower boundary for ceilings3
• Reduces the potential for competition over available financing between ongo-
ing and new projects by directing budgetary discussions toward the alloca-
tion of genuinely discretionary fiscal space for new capital projects
• Provides information on how ceilings may have to be adjusted between line
Upgrading Capital Budgeting Practices | 113
ministries to accommodate major new projects considered as priorities,4
while ensuring efficient funding for ongoing projects
• Helps to program the efficient implementation of new projects over the
medium term to avoid funding shortfalls.
The advantages of the two-step approach apply if there is an aggregate
ceiling or are separate capital and recurrent ceilings. In either case, capital
and recurrent baselines need to be created as a starting point; the difference
comes in the direct trade-offs between new current spending initiatives and
new capital projects that will be required when establishing aggregate
ceilings.
Figure 7.1 illustrates these concepts. The fiscal space for new projects is
shown as the difference between the total resources available for public invest-
ment, minus a contingency, and the capital baseline. As illustrated, available fis-
cal space for capital spending can be expected to increase over time as ongoing
projects are completed and financial resources are freed up for new projects; as
a result, it becomes easier to allocate funding to new projects toward the end of
the medium-term horizon.
Line ministries also should adopt a two-step process internally when decid-
ing how to allocate their designated capital expenditure ceilings. Resources
should first be allocated for capital baselines before proposing new projects,
while remaining within ceilings.
Figure 7.1 should be interpreted as being applied at the aggregate
level, with the resource envelope for public investment derived from
the MTFF and reflecting government preferences for capital over
recurrent spending.
Figure 7.1 would be similar in the case of aggregate expenditure ceilings: the
resource envelope would be for all spending, the baseline would combine the
capital and recurrent baselines, and the discretionary fiscal space would be avail-
able for new recurrent initiatives and new projects. The difference would lie in
the ability to realize efficiency savings on the current baseline5 and open up fur-
ther fiscal space for new initiatives or projects.
At the beginning of the first phase of the MTEF-budget process (see box 6.9),
line ministries should be required to prepare baseline estimates for capital
expenditures,6 showing the forward funding implications of ongoing and already
FIGURE 7.1
Capital baseline and fiscal space for public investment projects
Year t Year t+1 Year t+2 Year t+3
Contingency
Fiscal space for
new projects
Resource
envelope for public
investment
Capital baseline
114 | Public Investment Management Reference Guide
committed projects, based on the latest monitoring information, procurement
plans, and financial plans for projects, updated as necessary.
The finance ministry should independently verify the coherence and practi-
cality of the line ministries’ forward financing estimates for ongoing and already
committed capital investment projects. These estimates should be agreed to
with the respective ministries before discussing new projects. The finance min-
istry should then consolidate the agreed-on estimates to arrive at aggregate for-
ward capital estimates, which are important inputs into determining the
aggregate discretionary fiscal space available for capital spending, and should
then set provisional capital expenditure ceilings for individual ministries.7
The provisional capital ceilings for line ministries should account for the
overall resource limits as determined in the MTFF, the ministry capital baselines
that have been agreed to, the previous year’s ceilings for the relevant years, and
the pipeline of major projects under development.
Although estimation of the capital baseline and its incorporation in the
ceiling-setting process are good practices, they may not always be feasible.
Estimating the forward financing needs of capital projects is information inten-
sive and requires monitoring systems that can track progress and provide a basis
for forward projections. Two-step ceiling setting requires strong administrative
capacities as well as a tightly disciplined MTEF-budget preparation calendar.
These conditions may not exist in low-capacity environments, where an MTEF
process is still in the early stages of development and capacity strengthening may
be required as a first step.
Budget documentation
The budget documentation should be fully transparent regarding the
f orward expenditure implications of ongoing and new projects, so that
l egislators and the public are aware of the commitments entered into
through previous and current expenditure decisions. Table 7.1 presents a
stylized template for such a presentation, which would normally come as
an annex to the budget. The first part of this table builds directly from
information on the capital baselines presented by and agreed to with line
ministries.
Including information on all projects would be unwieldy, and the focus
should be on major projects, with aggregate figures for smaller projects.
The forward estimates provided with the budget provide a starting point
for estimating the capital baseline in the next year’s exercise and a bench-
mark for validating line ministry submissions. The information provided on
new projects will depend on whether MTEF ceilings are binding or indicative.
If indicative, then it is wiser to present only new projects agreed to in the
annual budget, together with their implications for future expenditures. If
the ceilings are binding, then new projects to begin in the outer years of
the medium-term horizon may also be presented, with their forward
expenditure implications.
In the Republic of Korea, forward expenditure estimates for projects
must be presented to parliament as part of the budgetary documentation.
For “continuing expenditures,”8 the budget bill must be accompanied by “a
statement on the payments or estimated payments up to the end of the pre-
ceding year, predetermined payments to be disbursed after the current
year, an overall activity plan, and details on the status of progress thereof.”9
Upgrading Capital Budgeting Practices | 115
TABLE 7.1 Forward capital expenditure estimates
PLANNED CAPITAL EXPENDITURESa
CUMULATIVE
TOTAL EXPENDITURES
PROJECT ESTIMATED START TO END YEAR
TITLE COST DATE T−2 YEAR T−1 YEAR T YEAR T+1 YEAR T+2 YEAR T+3 YEAR T+4 YEAR T+Ib
a. Expenditures on ongoing projects
Total
a. Expenditures on new projects within ceilings
Total
Grand total
Expenditure
ceiling
a. Where t is the budget year under preparation and years t+1 and t+2 are the medium horizon for fiscal planning.
b. Expenditure projections required to the end of the implementation period for all projects.
Moldova has instituted a similar requirement as part of its budgetary
reforms.
PROVIDING FOR CARRYOVER OF UNUSED BUDGET
APPROPRIATIONS FOR CAPITAL PROJECTS
Slower-than-planned implementation as a result of unforeseen factors may
cause discontinuities in project funding between years, unless handled
carefully. One method of dealing with this problem is to allow carryover of
unused expenditure appropriations from one year to the next, as this prac-
tice can help to prevent inefficient bunching of expenditures at year end.
Slower-moving projects will also not have to compete for f unding against
new priorities in the new budget year. Where this practice is allowed
for multiyear projects, a limit is usually placed on the extent of carryover,
typically up to 5 percent of annual appropriations (Lienert and
Ljungman 2009).
Box 7.1 summarizes the carryover provisions in Ireland, where the
approach is relatively flexible and allows carryover of up to 10 percent of the
voted capital allocation. Too liberal a policy can lead to problems, however,
as the United Kingdom found when the extent of carryover that had built up
over time threatened to jeopardize fiscal sustainability rules. In this case, no
limits were placed on the amount of carryover for capital projects, and
116 | Public Investment Management Reference Guide
BOX 7.1
Carryover provisions in Ireland
As part of the capital envelope system (see box 6.10), The amount of the carryover is identified
ministries are allowed to carry over from one budget
separately in the law granting ministries the right
year to the next an amount of unspent capital not to spend (the Appropriations Act); if the amount is
exceeding 10 percent of the voted capital allocation for not spent by the end of the second year, it must be
the first year. This practice is referred to as “deferred given up definitively (hence the term “deferred
surrender” since the default rule is that all unused surrender”).
budgetary allocations should be given up at the end of The carryover provisions give ministries some
the budget year. flexibility in cases where implementation of one or
Carryover is subject to approval by the minister of more projects is proceeding more slowly than
public expenditure and reform, and each request is expected. There is also an incentive to realize sav-
assessed on its own merits. Ministries are no longer ings, since these amounts can be retained and redi-
required to spend the carryover on projects where rected to other priorities in the subsequent year. Any
there has been underspending; they are allowed to deliberate slowdown in implementation in order to
redirect it to other priorities. A case must be made for free up resources to start new projects at the expense
carryover and for any reallocation to other priorities, of ongoing projects is prevented by the requirement
and this case is assessed by the Ministry of Public for approval by the minister of public expenditure
Expenditure and Reform. and reform.
Source: World Bank 2014.
carryover could be accumulated over several years. In response, the United
Kingdom tightened up its rules and reactivated an annual control on carry-
over (Lienert and Ljungman 2009).
The International Monetary Fund (IMF) has provided some practical guid-
ance on carryover of budget authority (Lienert and Ljungman 2009). Several
preconditions determine whether provision for carryover should be
considered:
• Accurate estimation of appropriations so that carryover can be confidently
assumed to be a result of efficiency savings or unforeseen delays rather than
overbudgeting
• Well-developed accounting and reporting systems to be able to determine the
amount by which the budget has been underspent at the end of the year
• Access to finance, so that a government can finance payments when requested
and there is no cash rationing
• Well-functioning internal and external audits to prevent wasteful or misdi-
rected expenditures
• Devolved budget management powers that enable adequate managerial
authority over the use of carryover funds.
Where the preconditions are not met, carryover should not be allowed or
should only be allowed on a restricted basis, as indicated in box 7.2. This situation
is likely to be more prevalent in countries with less-developed public financial
management systems.
Upgrading Capital Budgeting Practices | 117
BOX 7.2
Potential for carryover provisions by public financial management status
High-income countries Emerging-market countries
A generalized system of carryover for both capital When emerging-market countries have low levels of
and operating expenditures could be introduced investments as a percentage of spending and gross
once the preconditions are met. Multiyear projects domestic product, carryover of investments could be
can be granted large carryover, subject to a case- introduced without creating problems for aggregate
by-case evaluation. For most types of spending, fiscal management or cash management. However, a
however, carryover should be subject to a quantita- more cautious approach is needed for the general car-
tive limit of say 3–5
p ercent of the appropriation. ryover provisions for operational expenditures, as
If budget regulations do not make it feasible to many of the preconditions are not met.
s ingle out appropriat ions for
e nt it lement s, Low-income countries
grants, interest payments, and other exogenously Most low-income countries do not meet the criteria
determined expenditures, the carryover limit necessary to introduce generalized carryover. Where
for these types of expenditures should be set at multiyear controls on capital projects are in place and
zero. To ensure that aggregate fiscal manage- work reasonably well, selected carryovers could be
ment is not threatened, the government will considered to avoid having to reappropriate funds in
need to have the ability to limit both the right the event that there is a delay in project implementation.
to carry over unused appropriations and the Carryovers could also be allowed for donor-financed
right to spend accumulated carryovers in individ- projects to reduce the administrative burden when
ual years. expenditures are shifted from one year to the next.
Source: Lienert and Ljungman 2009.
INTRODUCING MULTIANNUAL COMMITMENT
APPROPRIATIONS
Overview
To combat the buildup of an excessive stock of ongoing projects, the budget
preparation process needs to impose constraints on funding approval for new
projects to ensure that the amount approved is not greater than the amount the
budget can finance for timely and efficient project completion.
Beginning the budget process by estimating and agreeing on the capital base-
line, as discussed above, is one part of the solution. Restricting the approval of
new projects within the available fiscal space is the other part. Such restrictions
can be approached through less formal, administrative means or through the
establishment of more formal, legal restrictions, known as multiannual commit-
ment appropriations, which are approved as part of the legislative process for
budgeting. Although the solution will be influenced by administrative and legal
traditions, the introduction of multiannual commitment appropriations has
much to recommend it.
The adoption of multiannual commitment appropriations for investment
projects could assist in resolving the problem of having an excessive number of
drip-funded projects. Under this system, an initial multiannual commitment
appropriation equal to the approved total project cost is made for each
118 | Public Investment Management Reference Guide
investment project. This appropriation will be drawn on each time a legal con-
tract is entered into in relation to project implementation. The unused balance
of the multiannual appropriation is carried forward to subsequent years and
remains available to be used as further contracts are signed. The multiannual
commitment appropriation for an investment project is reserved specifically
for that project and may not be used for other projects. The total amount of
multiannual commitment appropriations for investment projects across the
whole of government is limited in line with the resource envelope available to
government for capital expenditures. The advantage of such a system is that it
makes transparent the amount required to complete all projects that are
already under way, avoiding the illusion that, by splitting available payment
appropriations between more projects, additional fiscal space is being
created.
Multiannual commitment appropriations within a system of
dual cash and commitment appropriations
Multiannual appropriations fit into a system of dual cash and commitment
appropriations, as exemplified by the French system of budget appropriations.
Multiannual commitment appropriations for investment projects were intro-
duced in France through the 2001 Organic Budget Law (see box 7.3).
Under a system of dual cash and commitment appropriations, each line min-
istry receives two types of appropriation (budget allocation) per year in the
annual budget. The first is an appropriation for payments, and the second is an
appropriation for commitments. The total cost of each investment project is
included within the commitment appropriation of the spending ministry con-
cerned and is reserved exclusively for that project.10 This amount is reserved
irrespective of whether contracts equivalent to the total project cost are antici-
pated to be assigned immediately or whether contracts are expected to be signed
at several stages during the multiyear construction period. For each investment
project, at any point in time there is a reserved (blocked) commitment appropri-
ation that is equal to the portion of the total approved project cost for which
contracts have not yet been signed, but which will be signed during the remain-
der of the construction period. This system requires the ability to carry over
unused commitment appropriations for investment projects during the con-
struction period of the project.
How multiannual appropriations prevent drip funding
Multiannual appropriations for investment projects, if properly implemented,
make it impossible to fund new investment projects by “drip funding” current
projects or by placing them on the inactive list. The proper implementation of
a system similar to that of France is based on two principles: (a) the multian-
nual appropriation for a specific project must be reserved for that project and
may not be diverted to another project,11 and (b) the government must control
the total value of multiannual appropriations for investment project purposes
to keep the stock of approved investment projects at an affordable level. When
a limit is placed on the value of multiannual appropriations for investment
projects and specific multiannual appropriations are reserved for specific proj-
ects, it is no longer possible to make room for new projects by cutting funding
for current projects. New projects may not be adopted unless the government
Upgrading Capital Budgeting Practices | 119
BOX 7.3
Multiannual commitment appropriations in France
France has an advanced system that uses commit- medium- to long-term fiscal sustainability or the effi-
ment authorizations (appropriations) voted by parlia- cient implementation of the portfolio of ongoing proj-
ment to enhance control over multiannual contractual ects. The approach increases transparency and
commitments (engagements juridiques) and to ensure strengthens the hand of the legislature over the execu-
the sustainability of the budget. The 2001 Organic tive (a key motivation behind France’s LOLF).
Budget Law (Loi Organique Relative aux Lois de Notably, France’s Constitutional Council did not
Finances , the LOLF) established the annually judge the introduction of multiannual commitment
approved commitment authorizations (autorisations appropriations to be in contradiction to the constitu-
d’engagements), which extend over several years for tional requirement for annuality of the budget. The
investment projects. This authorization creates an relevant article of the LOLF reads as follows:
upper limit on the total value of new commitments,
not just their value for the budget year in question, for “Article 8
which a spending authority can legally contract in a The appropriations made comprise commitment
budget year. Payments against these contractual authorizations and cash-limit appropriations. The
commitments can only be made if there is an accom- commitment authorizations set the upper limit on
panying annual payment appropriation: a crédit de the expenditure that may be committed.
paiement, or annual limit on the issuing of payment In the case of an investment transaction, the com-
orders, voted by parliament. The commitment autho- mitment authorization covers a consistent whole
rizations for spending other than investment lapse at able to be implemented or executed without any
the end of the budget year, as do payment authoriza- additions.
tions for all spending. The cash-limit appropriations set the upper limit
Since a commitment appropriation does not repre- for the expenditure that may be authorized for pay-
sent authority to pay, payment appropriations for the ment or paid during the year to cover commitments
years beyond the budget year in question must be voted contracted under commitment authorizations.
on by parliament in subsequent budgets. Parliament The sum of commitment authorizations made for
thus exercises a double control, first over contractual personnel expenditure is equal to the sum of cash-
commitments entered into and then over payments limit appropriations made.
against these commitments. The intention is to ensure Multiannuality of commitment authorization is
that there can be no unchecked buildup of multiyear captured by the requirement for an investment
commitments that might potentially undermine transaction to be a ‘consistent whole.’”
Source: The official translation of the 2001 LOLF is from Ministry of Economy and Finance, France 2001.
provides an additional multiannual appropriation equal to the total project
cost. Figure 7.2 illustrates how multiannual commitments would work for a
notional project of US$500 million carried out over five years through a series
of contracts.
Multiannual investment project appropriations also give line ministries an
incentive to complete the construction of existing projects in a timely manner. As
long as an existing project remains incomplete, the total project cost remaining,
up to the point of completion, is reserved as a multiannual appropriation for that
project. Only by completing the project can the amount of the ministry’s com-
mitment appropriation be reduced and space freed up for new projects. When
the total multiannual appropriation for current projects is reduced, it becomes
easier for the ministry to request approval of new projects.
120 | Public Investment Management Reference Guide
FIGURE 7.2
Example of a US$500 million multiannual appropriation carried over five years
500
Commitment 1
(Project 1)
400
Commitment 2
US$ (millions)
(Project 2)
300
Payment 2.2
Payment 1.2
Payment 1.3
Payment 2.1
Payment 1.1
200
100
0
Year 1 Year 2 Year 3 Year 4 Year 5
Multiannual appropriation Commitments Payments
Source: World Bank 2016.
Note: After making an initial multiannual appropriation of US$500 million for the total cost of the project in
year 1, a first contract is entered into in year 1, involving a commitment of US$300 million and leading to three
separate payments to the contractor of US$100 million in each of years 1, 2, and 3. No further contracts are
signed in years 2 and 3, so commitments for those years are zero. In year 4, the remaining US$200 million is
committed in the form of a second contract. This process results in two separate payments of US$100 million in
each of years 4 and 5. Nothing remains of the initial multiannual project appropriation in year 5, as the total of
US$500 million had been contracted for by year 4.
Design issues for implementing a system of multiannual
commitment appropriations
Some key design issues must be addressed when implementing a system of
multiannual appropriations:
• A prerequisite for adopting a system of multiannual commitment appropria-
tions is the introduction of a credible, rolling multiannual fiscal and expendi-
ture framework within which aggregate expenditure limits and ceilings on
line ministries’ expenditures are defined (see chapter 6). Without such a
framework, it is difficult to place realistic limits on the total value of multian-
nual commitment appropriations and their allocation across credit holders.
• The positive effects of reserving multiannual appropriations for the remain-
ing total cost of each investment project depend entirely on constraining the
total value of such commitment appropriations in line with affordability
across the whole of government. To achieve this balance, the total value of
multiannual appropriations across the government as a whole must be made
a function of the aggregate resource envelope that is available for capital
expenditures, as derived in the MTFF prepared for the budget strategy paper
or its equivalent.
• An essential prerequisite for introducing the new project appropriation
system is rationalization of any excessive stock of existing investment projects
(active or inactive) in line with affordability. If the estimated cost of complet-
ing the existing portfolio is already many times more than what the
government can afford, then a system of multiannual appropriations cannot
begin to function. This system can only work if the stock is sufficiently
Upgrading Capital Budgeting Practices | 121
rationalized, resulting in projects being definitively canceled, mothballed
for possible subsequent completion, or prioritized for swift completion.
• Institutional and technical reforms to improve the reliability of cost estimates
are essential. The system depends on reliable estimates of total project costs.
• Operating a system of commitment appropriations requires the ability to
monitor and control the value of the contractual commitments into which
line ministries enter. This ability requires the development of a satisfactory
commitment control system, an essential component of a functioning public
financial management system.12 Operating the dual system of commitment
and payment appropriations will only be feasible when this system is in place.
So, for prioritizing reforms, countries need to focus on building stronger com-
mitment controls before introducing multiannual commitment controls.
• The system needs to be able to carry over unused commitment appropria-
tions during the construction period of the project concerned.
• Aggregate fiscal discipline is needed to ensure that the government retains
firm control over annual aggregate cash expenditures. Under any system of
dual commitment and cash appropriations, individual ministries and the
government as a whole need to manage the interaction between multiannual
commitments and cash expenditures. Each time a line ministry signs a
contract requiring payments that extend over several years, it commits the
government to cash expenditures beyond the current fiscal year. It is essential
that the volume of these future cash expenditures is monitored and managed
carefully to ensure that it is not excessive.
• Clear rules about the treatment of donor-funded projects are needed within
this framework. Donor-funded projects are also limited by the availability of
fiscal space in the national budget because they often require national
cofinancing. In these cases, the national cofinancing component of the total
project cost13—not the total project cost—needs to be reserved through
commitment appropriations.
INTEGRATING CAPITAL AND RECURRENT BUDGETING
Introduction
Provision for the sustainable operations of newly created assets has been identi-
fied as one of the eight key components of a minimally functional PIM system
(see chapter 2, figure 2.2). Sustainable operation requires planning and budget-
ing for adequate funds to cover the costs of operation and maintenance over the
planned economic life of a new facility.14
Poor integration of capital and recurrent expenditure planning and budgeting
are frequently cited as weaknesses of public financial management systems.
Poor integration often leads to the planned benefits of investment not being real-
ized in full because a shortage of funding for operating expenses or maintenance
prematurely ends an asset’s planned operating life. This shortage may be partic-
ularly problematic where a large share of public investment is planned and
financed by donors and inadequate attention is paid to the financing of operation
and maintenance through domestic financial resources.
The importance of these failings is illustrated by the public expenditure and
financial accountability (PEFA) assessment framework, where the rationale for
dimension 11.3 of PI–11, “Public investment management,” is described as
follows (PEFA Secretariat 2016):15
122 | Public Investment Management Reference Guide
Dimension 11.3 evaluates whether budget documentation includes medi-
um-term projections of investment projects on a full-cost basis and whether
the budget process for capital and recurrent spending is fully integrated.
Sound budget management requires preparation of comprehensive and for-
ward-looking project budget plans for capital and recurrent costs over the life
of the investment. Projections of recurrent cost implications from projects are
needed to plan and incorporate costs into budgets. Solid budget and cash-flow
management, as well as cost-benefit analysis, depend on comprehensive finan-
cial analysis of investment projects.
Under this dimension, the highest score is reserved for those systems where
“projections of the total life-cycle cost of major investment projects, including
both capital and recurrent costs together with a year-by-year breakdown of the
costs for at least the next three years, are included in the budget documents.”
The ideal model is one where information on the total life-cycle costs of
major projects16 is presented to decision makers at budget time and includes an
annual breakdown of expenditures over the medium term. At the technical level,
this information needs to be supported by cost estimates for the entire life of a
project, which are developed during preparation of a feasibility study and
updated after detailed design, before a project is selected for budget funding.
Country public financial management systems with a high degree of integra-
tion between capital and recurrent expenditure planning usually have the fol-
lowing key features (Webber 2007):
• A single (combined) annual budget law and appropriation process
• Clear and unified responsibilities for budgetary preparation and implementa-
tion within the relevant public sector institutions
• A unified budget presentation, with supporting classification and accounting
systems
• Budget planning and management techniques within individual spending
agencies that encourage and enable the effective use of financial resources.
Budget integration encompasses more than sustainable financing of individ-
ual investment projects, once operational; it also covers the wider issue of
achieving an optimal balance between recurrent and capital spending in pursuit
of government and sector policy objectives. A program-based approach to bud-
geting, set within a medium-term perspective, is often seen as a suitable way to
achieve this balance, whereby capital and recurrent expenditures are planned
jointly to achieve desired budgetary outcomes.
Reasons for poor integration
Poor integration of capital and recurrent budgeting can arise for various reasons,
which may apply in combination or separately:
• Dual budgets. Two separate budgets are prepared and approved, one for
recurrent expenditures and one for capital or “development” expenditures.17
• Dual budgeting. Dual budgets themselves need not cause problems, provided
preparation is coordinated adequately; institutional constraints may impede
this coordination, however.
• Institutionalized dual budgeting. Where there are separate budgets, responsi-
bilities for their preparation may be allocated to two different organizations,
the finance ministry for the recurrent budget and the planning ministry
(or equivalent) for the development budget. Such an allocation of
Upgrading Capital Budgeting Practices | 123
responsibilities can impede integrated budget planning, unless strong coordi-
nation mechanisms are in place.
• Internalized dual budgeting. Even where one organization is responsible for
preparing both budgets, separate departments may be responsible for each.
Inadequate internal coordination may then prevent integrated budget plan-
ning. This problem often arises where finance and planning ministries have
been merged in the interests of, among other things, better budget integration,
for example. It may even occur in the context of an apparently unified budget.
• Dual budgeting at the line ministry level. Even where the central financial and
planning authorities are organized for integrated budgeting, dualism can con-
tinue to exist at the line ministry level, with responsibilities separated between
the finance department (recurrent) and planning department (capital and
recurrent). This impediment may also accompany and intensify weak coordi-
nation at the center. Even if there appears to be integration at the center, this
integration is illusory if spending agencies maintain a dichotomy between
capital and recurrent expenditures.
• Absence of medium-term budgetary perspective. Integrated budgeting has lim-
ited meaning when the budgetary planning horizon is annual. Major projects
take more than a year to complete, and the consequences of recurrent expen-
ditures will only be felt on completion. Operation and maintenance expendi-
ture requirements for new projects can only be considered within a
medium- to long-term planning perspective.
A comprehensive solution to budget integration
World Bank guidance on the integration of recurrent and capital “development”
budgets (Sarraf 2005) identifies four necessary elements to achieving fully inte-
grated budgeting:18
• Organizational and staffing integration within a single ministry. Good-practice
experience suggests that responsibility for coordinating budget preparation
should reside with a single ministry. This ministry may be a strengthened
finance ministry with upgraded analytical capabilities for budgeting capital
or development expenditures, or it may be a unified finance and planning
ministry, bringing together the budgetary and planning expertise of two pre-
viously separate ministries.
• Integrated budget preparation. Organizational integration is not sufficient by itself
and generally needs to be accompanied by bringing budget preparation staff
together in a single department with a single manager. The same staff also needs
to be responsible for both capital and recurrent spending in any sector or subsec-
tor. The same arrangements should be mirrored at the line ministry level.
• Unified budget documentation and presentation. A budget presentation that
brings together capital and recurrent spending in a single place, using a com-
mon classification, is an important foundation for integrated budgeting,19
although it is not enough to ensure the integration of underlying processes. The
use of different budget classifications for recurrent and development budgets is
a frequent concern and allows for the emergence of a hybrid development bud-
get containing both capital and recurrent expenditures. This issue frequently
arises where the development budget is heavily donor financed.
• Unified execution, accounting, and reporting systems. Integrated budgeting
needs to be supported by integrated flows of financial information. The lack
124 | Public Investment Management Reference Guide
of integrated financial information can be a particular weakness where donor
projects make up a significant share of investment and where donors do not
systematically use national financial management systems. In these cases,
integrated budgeting becomes very difficult because of irregular and inaccu-
rate information on projects and their progress.
While reforms of this nature are desirable goals, it may be difficult to achieve
them in the near term. The presumption in favor of a single budgeting entity,
driven by the simplicity of the arrangement, among other things,20 may need to
be tempered according to the country context, as the following extract from
World Bank guidance on budgeting (Dorotinsky 2004) explains,
When the current and investment budget processes are separate, whether or
not they should be unified depends on the institutional characteristics of the
country. In countries where the agency responsible for the investment budget
is weak, and the ministry of finance is not deeply involved in ex ante line-item
control and day-to-day management, transferring responsibilities for the
investment budget to the ministry of finance would tend to improve budget
preparation as a whole. (Whether this option is preferable to the alternative of
strengthening the agency responsible for the investment budget can be
decided only on a country-specific basis.) In other countries, one should first
study carefully the existing processes and administrative capacities. For
example, when the budgetary system is strongly oriented toward ex ante con-
trols, the capacity of the ministry of finance to prepare and manage a develop-
ment budget may be inadequate. A unified budget process would in this case
risk dismantling the existing network of civil servants who prepare the invest-
ment budget, without adequate replacement. Also, as noted, coordination
problems may be as severe between separate departments of a single ministry
as between separate ministries.
Governance issues may also make it preferable to sequence reforms—for
example, ensure that robust quality assurance arrangements are in place for pub-
lic investment projects—before unifying responsibilities for capital and recur-
rent budgeting under a single ministry (Dorotinsky 2004).
In the interim, before major reforms can be implemented, operational solu-
tions to the budget integration question are needed, with an emphasis on the
narrower issue of providing for the sustainable operation of new projects on
completion.
NOTES
1. Within current expenditures, governments may also wish to put a ceiling on the wage bill
while allowing wage bill savings to be spent on other goods and services.
2. Where line ministries are held accountable for budgetary outputs and outcomes rather
than inputs.
3. When the system is stable and has been functioning well. If this is not the case, it may not
be possible to fund the capital baseline; a rationalization of the national portfolio of public
investment projects will be required before attention to the capital baseline will yield
results. See chapter 11 for a further discussion on the rationalization.
4. Because of the scale and indivisibility of major capital projects, step-changes in ceilings
will generally be required to accommodate new projects. Generally, such step-changes can
be accommodated more readily in the final year of the MTEF horizon, which will not have
been included in the previous year’s MTEF.
5. Savings in the capital baseline would not normally be expected. Attention is focused on
delivering well-designed projects on time and within budget. The exception might be if a
failing project is canceled.
Upgrading Capital Budgeting Practices | 125
6. Line ministries should also provide baseline estimates for current expenditures.
7. Or aggregate ceilings, taking into account estimates of the current baseline and any
potential savings if this is the preferred approach.
8. In Korea, “continuing expenditure” is defined as “expenditure on the projects for construc-
tion works, manufacturing, [and] research and development, which take several years for
completion.”
9. Article 34 of the National Finance Act, 2006 as amended.
10. Since the 2001 passage of the LOLF in France, the nature of commitment appropriations
in respect of investment projects was changed to require reservation (blocking) of the full
amount of project costs within the total amount of each ministry’s commitment
appropriation. Article 9 states that commitment appropriation is required to cover
the costs of a project that is complete and of a nature that can be put into service without
the addition of further components.
11. Other than in redefined circumstances, such as cancellation of an existing project.
12. PEFA Secretariat (2016). See dimension 2, “Effectiveness of expenditure commitment
controls.”
13. More generally, when developing a system that requires appropriations for investment
projects to be committed up front, the anticipated cost to the national budget should be
reserved. If there is other nongovernment funding (for example, private), this funding
should be disregarded in reserving funding from the commitment appropriation. As in
France, rules will need to be developed for commitments associated with the use of
innovative funding mechanisms, such as public-private partnerships.
14. User charges may be a source of financing for operation and maintenance, but careful
planning is needed.
15. This preoccupation is not new. The previous version of the PEFA assessment framework
included dimension IV of PI–12, “Linkages between investment budgets and forward expen-
diture estimates.” A “D” score was applied in cases where “budgeting for investment and
recurrent expenditure are separate processes with no recurrent cost estimates being shared.”
16. The appropriate way to present this information is in present value terms—discounting
future costs to the budget year in question using the applicable public sector discount rate.
In the United Kingdom, when the government reports on the size and composition of its
government major projects portfolio (GMPP), it addresses the whole-life cost of projects,
not just their initial capital cost: “The total whole-life cost of those projects on the GMPP
reporting cost data this year is £489bn [billion]” (Major Projects Authority 2015).
17. A further complication is that development budgets often include expenditures that are recur-
rent in nature. This situation often occurs where the development budget is funded mainly by
donors and the recurrent budget is funded through domestic resource mobilization.
18. Other commentators have set out similar requirements for an integrated approach that
emphasizes legislative, institutional, presentational, and management dimensions of
reform (see Webber 2007).
19. Different types of expenditures should be distinguishable from one another. A separate
presentation of capital and recurrent funding within a unified budget, using a common
economic classification, is essential.
20. According to Caiden and Wildavsky (1974), “Where coherence is at a premium, where any
consistent policy may be better than several that cancel each other out, where layers of
bureaucracy already frustrate each other, and where a single budget hardly works,
choosing two budgets and two sets of officials over one seems strange. The keynote in
poor countries should be simplicity. Designs for decisions should be as simple as anyone
knows how to make them. The more complicated they are, the less likely they are to work.
On this basis, there seems little reason to have several organizations dealing with the
same expenditure policies. One good organization would represent an enormous advance.
Moreover, choosing the finance ministry puts the burden of reform where it should be—in
the budgetary sphere.”
REFERENCES
Caiden, N., and A. Wildavsky. 1974. Planning and Budgeting in Poor Countries. Piscataway, NJ:
Transaction Publishers.
126 | Public Investment Management Reference Guide
Dorotinsky, W. 2004. “The Budget Preparation Process.” In PFM Training Course, ch. 4.
Washington, DC: World Bank.
Lienert, I., and G. Ljungman. 2009. “Carry-Over of Budget Authority.” Public Financial
Management Technical Guidance Note, Fiscal Affairs Department, International Monetary
Fund, Washington, DC.
Major Projects Authority. 2015. Major Projects Authority Annual Report 2014–15. London:
Cabinet Office.
Ministry of Economy and Finance, France. 2001. Loi organique relative aux lois de finances.
Ministry of Economy and Finance, Paris.
PEFA Secretariat. 2016. “Effectiveness of Expenditure Commitment Controls of PI–25.” In
Framework for Assessing Public Financial Management. Washington, DC: PEFA Secretariat.
Sarraf, F. 2005. “Integration of Recurrent and Capital ‘Development’ Budgets: Issues, Problems,
Country Experiences, and the Way Forward.” Public Expenditure Working Group
Implementation Note, World Bank, Washington, DC.
Webber, D. 2007. “Integrating Current and Capital Budgets: A Four-Dimensional Process.”
OECD Journal of Budgeting 7 (2): 93–107.
World Bank. 2014. “Study on Cross-Country Comparison: Technical Assistance for Public
Investment Project Appraisal and Selection System Development in Ukraine.” World Bank,
Washington, DC.
———. 2016. “Romania: Advisory Services Agreement on Support to Strengthening Public
Investment Management. Output 2: Draft Report Identifying Potential Improvements to
Information System for Monitoring the Public Investment Portfolio.” World Bank,
Washington, DC.
8
Project Implementation,
Monitoring, and Adjustment
OVERVIEW
The previous chapters have mainly dealt with upstream public investment man-
agement (PIM) processes and their treatment in the regulatory framework. The
downstream stages of the project cycle and broader PIM system also need to
be addressed in the PIM framework. Procedural guidelines will be required,
supported by detailed methodological guidance, with the aim to establish a sys-
tem that ensures the following:
• Works and services are procured economically and contracts are managed
properly.
• Projects are delivered on time, to budget, and in accordance with design
specification.
• Implementation progress is monitored against plans, any deviation or emerg-
ing problems are identified early and transparently, and suitable solutions are
put in place in a timely fashion.
• Where necessary, projects are adjusted to reflect changes in cost, scheduling,
and demand conditions, including termination if this solution is the most eco-
nomically efficient.
Where aspects of downstream processes are already defined in existing
legal and regulatory instruments—for example, public procurement or bud-
get execution—they do not need to be repeated in the regulatory framework
for PIM, which may risk setting up unintended contradictions. Instead, PIM
guidelines should refer users to the relevant parts of existing laws and
regulations.
The rest of this chapter looks at management, monitoring, and adjustment of
project implementation. Procurement and contract management are specialist
subjects and are not yet dealt with in this guide.1
127
128 | Public Investment Management Reference Guide
PROJECT IMPLEMENTATION ARRANGEMENTS
Organizational arrangements and responsibilities for managing
project implementation
The PIM procedural guide (tier 2 in the hierarchy described in chapter 3) must
establish organizational arrangements for project implementation. Their sophis-
tication may vary based on project size, but accountabilities and responsibilities
need to be assigned clearly and should indicate the following:
• Who is accountable at the senior management level of the project’s sponsor
or owner (hereafter referred to simply as the sponsor) for achieving project
objectives and making critical implementation decisions
• Who is responsible for managing project delivery according to the plan
agreed on with senior management
• What decisions are delegated to the project manager, what deviations from
plan can be decided at this level, and what must be escalated to senior
management
• What are the reporting obligations from the lower to the senior management
levels.
Using the U.K. model, the following hierarchy of roles and responsibilities
represents a good basis for managing and controlling the implementation of
major projects, irrespective of the level of development of a country:
• Senior responsible owner (also known as project executive or director in other
systems). The senior responsible owner (SRO) chairs the project board and
has executive responsibility for decisions relating to the project. The SRO
ensures that the project remains focused on achieving its objectives and
delivers the anticipated benefits.
• Project board (also known as project steering committee in other systems).
The project board comprises representatives with authority to make decisions
and commit resources, including from the user and supplier sides. Chaired by
the SRO, it has overall accountability for successful project delivery. It should
include one person, the senior user, who represents senior managers with an
interest in the project and whose activities will be affected by it. This person
should also represent end users to promote their concerns and interests. The
senior supplier represents those units that are designing, developing,
facilitating, procuring, and implementing the project and is responsible for
the quality of project outputs. Additional expert opinions may be sought to
help the SRO and project board in decision making. Membership of the board
should be kept to a minimum to facilitate effective decisions and provide clear
leadership and direction.
• Project manager. The project manager is responsible for managing project
development and delivery on behalf of the project sponsor or delegated
agency. The project manager leads and manages the project team and has the
authority and responsibility to run the project on a day-to-day basis, within
the remit provided by the project sponsor and agreed-on constraints or dele-
gations provided by the SRO or project board.
• Project team (also known as the project implementation unit in other sys-
tems). The project team assembles the necessary professional technical or
specialist skills and reports to the project manager. It is responsible for
Project Implementation, Monitoring, and Adjustment | 129
activities defined by the project manager within the time, cost, and quality
constraints set by the project board. The size and makeup of the team will
depend on the nature of the work and may be supplemented by specialists at
key points in the project. It may also include staff from different organizations
working together as a team.
Although the titles may vary, this management structure is useful for coun-
tries that are implementing major projects. For less sophisticated projects, it may
not be necessary to nominate a project board (or equivalent); for the simplest
projects, a full-time project team may not be required. Figure 8.1 summarizes
project manager and SRO responsibilities.
Figure 8.2 shows how arrangements similar to those in the United Kingdom
have been applied in Ghana for complex health sector projects. In this case, the
user panel is a country-specific addition.
The SRO, project board, project manager, and project team come from the
project sponsor or the subordinate government agency where project imple-
mentation has been delegated. If services or works are contracted out, the con-
tractors will have their own arrangements, which will interface with those of the
project sponsor. The contractor should appoint a project director as the senior
point of contact with the project sponsor.
FIGURE 8.1
Responsibilities of the project manager and senior responsible owner (SRO) in the
United Kingdom
Project manager SRO / project board
Analyze progress reports; seek clarification
Authorize project team to start work
of issues raised
Consider implications of exceptions to
Verify progress at checkpoints at specified
delegated tolerances; advise project manager
intervals
how to proceed
Compare actual performance with plan; Consider requests for change; set priorities, and
identify deviations in cost, time, or quality make decisions whether to accept changes
Make minor corrections; escalate to SRO if Inform stakeholders, including the project
proposed changes are outside delegated sponsor (owner) and beyond—including finace
authority ministry—of progress and issues
Report on progress to SRO / project board Consider ongoing viability of plans, benefits,
at specified intervals and detail costs, and risks
Source: Adapted from U.K. Department for Business, Innovation, and Skills 2010.
130 | Public Investment Management Reference Guide
FIGURE 8.2
Project management arrangements for complex health projects
in Ghana
Investment decision maker
minister of health
Senior responsible owner Project steering
(head of capital investment managment unit) committee
User panel
Project
manager
Project implementation unit
- Civil engineer,mechanical engineer, electrical engineer
- Biomedical engineer
- Accountant
- Architect
- Quantity surveyor
Source: Ministry of Health, Ghana.
If the project sponsor lacks the capacity to perform some of the roles in full,
additional human resources may be contracted for; but these resources must be
integrated into the organization for the duration of the project, and the SRO, or
equivalent, must be a permanent member of the organization. A common error
is to rely too much on outsourcing project management, even at senior levels,
resulting in inadequate internal control over project implementation. Senior
managers may also lack the necessary skills to perform their roles effectively.
Negative experiences in these areas have led the United Kingdom to embark on
a major training program to develop the capacities needed within government to
lead projects at the senior level.2
Project management guidance and project
management planning
PIM procedural regulations or guidelines outline the project management
requirements, and more detailed guidance should be issued in the form of a
project management manual (tier 3 in the hierarchy; see chapter 3), which can
be general or sector specific. Individual agencies may then prepare their own
project management guidance on the basis of the general or sector-specific
guidance. The U.S. Federal Transit Administration’s Construction Project
Management Handbook is an example of relatively straightforward sector-
specific guidance (U.S. Federal Transit Administration 2012). Such guidance
usually covers the entire project cycle, including upstream stages, but it does so
from the management perspective, not the methodological perspective covered
in the project appraisal manuals considered in chapter 5. Following on the
example of the U.S. Federal Transit Administration, box 8.1 summarizes the
Project Implementation, Monitoring, and Adjustment | 131
BOX 8.1
Example from the United States: Table of contents of the Metrolink project
management manual
1. Introduction 3.3. Planning phase
1.1. Purpose and structure of the manual 3.4. Design phase
1.2. Metrolink’s service territory 3.5. Bid award phase
1.3. Typical Metrolink projects 3.6. Construction phase
1.4. Safe working 3.7. Closeout phase
1.5. Nonconstruction projects 4. Procurement or contract delivery
2. Metrolink project structure 4.1. Teaming with technical groups
2.1. General 4.2. Contract management
2.2. Strategy and capital planning group 4.3. Coordination with the program management
2.3. Project executive group office
2.4. Project sponsor 5. Project manager role and responsibilities
2.5. Program manager 5.1. Qualifications and training
2.6. Project manager 5.2. How project managers are assigned
3. Project life cycle 5.3. Project manager work loads
3.1. Strategic phase 5.4. Project manager duties
3.2. Initiation phase 6. Program management office
Source: Southern California Regional Rail Authority 2011.
project management manual of the Metrolink commuter rail system for
Southern California in the United States.
Based on project management guidance, it is good practice for the project
manager to prepare a project management plan, setting out how the project will
be managed, executed, monitored, controlled, and closed. The plan should lay
out the project delivery strategy, organization and management structure,
assignment of responsibilities between the project owner and contractors, and
delegation of management and financial authority within the project team.
Box 8.2 indicates a possible structure for a project management plan.
Planning implementation activities
Implementation of a construction project, once it has been agreed to in principle
on the basis of an appraisal, has four main components:
1. Implementation planning and land acquisition
2. Detailed design
3. Construction supervision
4. Construction.
132 | Public Investment Management Reference Guide
BOX 8.2
Example from the United States: Federal Transit Administration project
management plan outline
1. Project overview 6. Construction phase management
• Background (authorization) • Construction management
• Stakeholders • Field inspection
• Scope, budget, schedule • Third-party construction
• Delivery strategy • Change management
• Construction safety
2. Organization and staffing
• Design support
• Position within owner organization
• Project organization 7. Closeout phase management
• Key personnel job functions • Test and start-up
• Operator training
3. Project management and controls
• Contract closeout
• Scope control and configuration management
• Administrative closeout
• Budget and cost control
• Schedule control 8. Quality management
• Project accounting • Design quality assurance and control
• Project reporting • Construction quality assurance and control
• Records management • Final acceptance and approval
4. Planning and conceptual design phase 9. Risk management
management • Risk identification and analysis
• Sustainability goals • Risk monitoring and response
• Planning studies
10. Procurement and contract administration
• Site investigations
• Procurement plan
• Permitting
• Contract administration
• Environmental clearance
—— Professional services
• Real property acquisition
—— Construction
5. Final design phase management —— Equipment supply and install
• Design management • Third-party agreements
• Design standards
11. Communications
• Design reviews
• Project team
• Value engineering
• Community
• Constructability reviews
• Media
• Government
Source: U.S. Federal Transit Administration 2012.
PIM guidelines should emphasize that activities under each component must
be carefully planned,3 sequenced, and managed by the project manager within
the constraints set by senior management within the project sponsor. As much
of the work will be outsourced, contract management will be an important part
of the project management team’s responsibilities. Separate and sequential
funding allocations should be planned for each component during budgeting,
Project Implementation, Monitoring, and Adjustment | 133
linked to the achievement of important project milestones. Appropriate sequenc-
ing of procurement and contracting activities and of related budget allocations is
important. Premature selection and contracting can lead to penalty payments if,
for example, land acquisition, resettlement, and permitting issues have not
already been resolved. Failure to plan properly for preconstruction activities is a
frequent problem in many countries. Budgeting for project implementation
when these issues have not been resolved runs the risk of underexecuting the
budget and tying up funding that could be better used elsewhere.
The project management team should begin implementation by updating and
deepening the project implementation plan, an outline of which should have
been prepared at appraisal. Typical activities under the main components of
project implementation could be sequenced as follows for a standard construc-
tion project:
1. Planning and land acquisition:
• Selection of site and administration
—— Select site, align road; decide on location of facilities and route for
power lines
—— Obtain licenses and approvals
• Resettlement action plan
—— Conduct resettlement study
—— Draw up a resettlement plan
—— Fix the cost for resettlement and request funding for this action
• Compensation for crops, land, and infrastructure
—— Determine crops, land, and infrastructure that could be influenced by
the project
—— Complete detailed survey of land required and submit it to relevant
authority
—— Estimate cost for crop compensation
—— Estimate cost for infrastructure compensation
—— Estimate cost for land compensation
—— Consolidate cost and request funding
—— Initiate consultative and legal steps for land acquisition and
resettlement
—— Make compensation payments
—— Source funding for procurement of design consultants
—— Obtain approval of funding for procurement of design consultants
2. Procurement of consultants and detailed design
—— Compile terms of reference for design consultants
—— Start the bidding process
—— Evaluate bids submitted
—— Receive the approval and award of the tender committee
—— Sign the contract
—— Set timelines for completion of design, agree, and sign-off
—— Provide consultants with land acquisition detail
—— Make progress payments for consultants
—— Have consultants issue preliminary designs for comments or approval
—— Have consultants compile detailed designs, specifications, and bill of
quantities, as well as draft tender documentation
—— Have consultants issue works contract estimate
—— Apply for funding to appoint construction supervision consultants
134 | Public Investment Management Reference Guide
—— Receive approval for funding for appointment of construction supervi-
sion consultants
—— Apply for funding based on the approved and agreed-on works con-
tract estimates
—— Receive funding approval from the finance ministry for execution of
works contract
3. Procurement of construction supervision consultants
—— Compile terms of reference for supervision consultants
—— Start the bidding process
—— Evaluate bids submitted
—— Receive approval and award from the tender committee
—— Sign contracts
4. Works contract procurement, implementation, and completion
—— Start the bidding process
—— Evaluate bids submitted
—— Have the tender committee issue approvals and awards
—— Sign agreement
—— Hand over the site
—— Mobilize the contractor
—— Have the contractor issue a baseline program shortly after signing the
contract
—— Have the contractor issue a detailed program cash flow shortly after
signing contract
—— Have the contractor issue legally required documentation
—— Have the contractor issue a health and safety plan
—— Have the contractor issue an environmental management plan
—— Have the supervision consultants conduct monthly progress meetings
and complete monthly progress reports
—— Have the contractor update program and cash flow on a monthly basis
—— Have the contractor hire an engineer to certify interim payment certif-
icates for contractor on a monthly basis
—— Complete the works contract
—— Have a practical completion certificate issued
—— Have the engineer submit as-built drawings
—— Begin the defects liability period
—— Conduct a final inspection at the end of the defects liability period
—— Have the engineer issue a final completion certificate
—— Have the engineer issue a final contract certificate for payment
—— Complete the contract
—— Conduct a contract review.
MONITORING
Introduction
In a well-functioning PIM system, financial and physical progress is monitored
closely during project implementation. Monitoring should provide early warn-
ing of any implementation problems and be accompanied by formal procedures
to ensure that such warnings are followed up. More sophisticated, performance
monitoring after implementation ensures that projects are delivering the
expected results with the intended outcomes—that is, services are delivered to
Project Implementation, Monitoring, and Adjustment | 135
target beneficiaries with the anticipated positive effects on their welfare.
Performance monitoring provides the raw material in terms of information for
midterm and ex post evaluation exercises.
The World Bank (2008) offers one definition of monitoring:
The continuous assessment of project implementation in relation to agreed
schedules and of the use of inputs, infrastructure, and services by project
beneficiaries. It is an integral part of good management by a project imple-
menting agency. Its main objectives are to provide continuous feedback on
implementation and to identify actual or potential successes and problems
as early as possible to facilitate timely adjustments to project operation.
This is a good general definition, but it does not capture the variations in fre-
quency or detail of monitoring activities. Monitoring differs in intensity because
information requirements vary according to the roles and responsibilities of
organizations at different levels of public investment management and delivery.
Organizations at the center of government, such as the finance or planning min-
istries,4 will have different information needs from the project manager, who has
direct responsibility for delivering an investment project on time and within
budget, and from the spending agency that is financially accountable for the
project. Finance ministries should be more concerned with the aggregate pic-
ture and less concerned with day-to-day progress on individual projects, except
in the case of major projects with significant fiscal consequences or where inad-
equate implementation might threaten value for money.
A good monitoring system is built on reliable information flows within the
public investment management and delivery system. Basic summary informa-
tion on individual projects needs to be available to persons at the top of the
system to be able to (a) identify potential problems early on, (b) request more
information, and, if necessary, (c) solicit remedial action. The extent to which
the finance ministry itself requires direct access to information on all individual
projects will depend on the nature of the public financial management system—
for example, how much expenditure decision making has been decentralized to
spending agencies and what is the degree of performance orientation.
In general, finance ministries in Organisation for Economic Co-operation
and Development (OECD) countries with more advanced public financial man-
agement systems and stronger performance are less likely to be concerned with
individual projects and more likely to focus on the overall performance of a bud-
get program to which a project is contributing—that is, whether service delivery
targets and wider policy objectives are being achieved. Major projects are the
exception, and some finance ministries, as in New Zealand and the United
Kingdom, are increasingly undertaking formalized monitoring of their major
project portfolios.
Countries that are still building robust public financial management systems
or are in the early stages of performance-oriented or program budgeting may
need to adopt a different approach. Public investment management capacities in
spending agencies may also be weak, such that the finance ministry needs to
remain involved in monitoring and supporting a more distinct role in monitoring
at the project level. The finance ministry should not be swamped by having too
much detail or too many small projects in the system; only the most pertinent
information should reach the finance ministry, and there should be fewer proj-
ects that are more strategic in scope—that is, programmatic projects. A middle
ground between intensive monitoring at the center and the “light touch”
approach might help the finance ministry to assure the quality of line ministry
monitoring systems, rather than follow individual projects, and to carry out spot
136 | Public Investment Management Reference Guide
checks to ensure that these systems are working. Monitoring of individual proj-
ects at the center could then focus on the major project portfolio.
At whatever level in the system it takes place, monitoring should ideally:
“Test that the defined control limits for each project, and for the portfolio of
government projects, are appropriate and highlight whether they have
exceeded or are in danger of exceeding:
• Time. Variance against milestones
• Cost. Variance against planned budget
• Quality. Degrees off the quality target
• Scope. Variance agreed to against what will be delivered
• Risk. Limits on identified risks as a percentage of the overall budget
• Benefit. Variance against level of benefit identified as part of the business
justification.” (U.K. National Audit Office 2010)
Box 8.3 presents a typical example of project reporting requirements that
may be used to inform PIM guidelines. A minimum reporting standard,
BOX 8.3
Example of project reporting requirements
“Although all projects differ, a minimum reporting • Corrective action to be taken on the variances
standard should be established which is general and identified
flexible to allow for specific project reporting needs, • Progress of design against schedule, reason for
while providing concrete guidelines and requirements delays, and remedial action taken
for all projects. • Details of changes in scope and related costs
As a minimum requirement, capital project report- • A narrative including:
ing should incorporate the following concepts: —— Accomplishments for the period
—— A simple statement indicating project is on,
1. Cost. Project cost in constant and current dollars
ahead, or behind schedule
2. Time. Target dates, impact of missing target dates
—— A listing of any changes to project objectives or
on the project and on departmental operations,
scope
and all target dates missed and revised
—— A listing of any factors or changes that have
3. Performance. Expected quantity and characteris-
affected the business climate
tics of outputs resulting from the project.
—— Any unanticipated problems that are currently
In all cases, a permissible variance should be estab- being faced
lished for each project and, if necessary, for each fac- —— Any changes required due to such problems
tor being measured. This information will enable —— A listing of persons whose approval is required
management to review and analyze pertinent vari- to implement these changes
ances only and will allow for the timely recognition of —— Any additional anticipated problems
what constitutes a material variance. —— All action steps that are being taken or
More specifically, to be effective, progress reports planned
and reporting requirements should incorporate the —— All potential constraints should be identified,
following minimum standards: analyzed, and reported
• Comparison of actual costs to budgets, with explana- —— Additional relevant comments.”
tions for variances above the established threshold
Source: Deloitte Consulting 2000.
Project Implementation, Monitoring, and Adjustment | 137
which is general and flexible, should be established to allow for specific
project-reporting needs, while providing concrete guidelines and require-
ments for all projects.
A basic monitoring system for budgeting and financial control
Project implementation plans
Monitoring needs to reflect a predetermined implementation plan. Timely
preparation and updating of project implementation plans, particularly with
respect to the budget preparation cycle, can be problematic, but without these
plans the feasibility and usefulness of a monitoring system is compromised. PIM
guidelines need to specify the content and timetable for updating implementa-
tion plans.
Investment project monitoring systems need project financial plans to be
prepared and updated as an integral part of the medium-term budgetary frame-
work (MTBF)–budget preparation process to fulfill their function in supplying
information for budgeting; this step cannot wait until capital budgets are agreed
to. The finance ministry needs to be able to establish capital baseline spending—
that is, the expenditures required to meet forward commitments to ongoing
projects—early in the MTBF–budget preparation process so that it can then
determine the fiscal space for new capital spending and its allocation between
sectors and first-line spending agencies (see chapter 7). The responsible spend-
ing agencies therefore need to provide updated expenditure plans for ongoing
projects. These plans must take account of actual expenditures since the last
update and include any approved adjustments to the total estimated cost of proj-
ects, which should then receive final approval through the budget process.
Realistic implementation plans need to support requests for new project
funding. These plans are an essential component of sound budgeting as well as
an important signal that the project is ready for implementation in the next bud-
get year. In the more disciplined PIM systems, where central agencies retain a
strong role, spending agencies need to submit detailed implementation plans,
including disbursement and procurement plans, before budget preparation is
completed if proposals are to be considered for funding in the following year’s
budget. All too frequently in countries with weaker systems, planning for project
implementation begins once the budget has been approved and often after the
budget year has begun, making poor execution almost an inevitability.
Information requirements
At its most basic level, an effective centralized monitoring system must pro-
vide the finance ministry with the essential information it needs to have
financial control over capital spending and to perform designated tasks when
budgeting public investment. These latter tasks include setting realistic
expenditure ceilings for spending agencies that conform to aggregate fiscal
constraints and take adequate account of forward funding commitments to
implement ongoing projects efficiently. The required information must be
complete and timely in relation to the budget cycle. Often, finance ministries
with less advanced systems lack the necessary information because of the
absence of a systematic monitoring process for nationally funded capital proj-
ects based around a modern information system. In these contexts, monitor-
ing can be ad hoc, irregular, and incomplete. PIM guidelines should be
designed to address these weaknesses.
138 | Public Investment Management Reference Guide
In its simplest form, monitoring requires a register of public investment proj-
ects to be created and updated regularly by the finance ministry. This register
should track financial progress at the aggregate, sector, organization, program,
and individual project levels. Such a database can technically be handled in
spreadsheet format, but this format is cumbersome, and appropriate off-the-
shelf database software is preferred when the number of projects is significant.
The following are the minimum reporting requirements of such a monitoring
system:
• A short description of each project that summarizes the objectives and nature
of the investment. It should also give the location and name the implementa-
tion body.
• The total estimated cost of the project as approved by the budget process,
which is a key financial management control figure. The sum of actual and
forecast expenditures must not exceed the total estimated cost without the
necessary approvals (supplementary funding request).
• Details of actual expenditures to date, budgeted expenditures for the coming
fiscal year, and the forecast expenditures for each subsequent year of the proj-
ect until completion. The information on actual expenditures should come
from regular accounting reports generated by a computerized financial man-
agement information system.5 Expenditure forecasts must come from spend-
ing agencies with overall responsibility for project implementation, generated
by individual project managers. These forecasts should be updated annually
through the MTBF–annual budget preparation process.
In-year monitoring should involve updating actual expenditures on the
basis of budget execution data and comparisons to planned expenditures.
Such monitoring can be done monthly if data flows are automated but should
be done at least quarterly. Comparing actual to plan can be done on the crude
assumption of an even disbursement profile but will be radically improved if
spending agencies make realistic monthly or quarterly disbursement plans in
advance of the commencement of the financial year; these comparisons will
also be important for broader cash management planning. Regular monitoring
reports should be produced that cover different levels of aggregation (total,
sector, organization, and program), depending on the audience, and should
address individual projects only in the case of major problems.
On the basis of monitoring reports, reallocations from slow- to fast-moving
projects may be needed to maximize the effectiveness of the annual capital bud-
get. Spending agencies are normally expected to take the lead with such reallo-
cations (within legislated virement limits), but the finance ministry must have
the minimum information to understand the issue and agree on any realloca-
tions. If capacity in spending agencies is weak, the finance ministry should be
ready to identify this fact and instigate action. Such reallocations represent
in-year adjustments to implementation plans and must be authorized and
reflected in the monitoring system.
The finance ministry must also be in a position to assess whether transfers to
“faster-moving projects” do not, in fact, represent unauthorized increases in the
total estimated cost of a project. The basic monitoring framework described
above should allow this. Frequent major reallocations (for example, in excess of
virement limits and requiring parliamentary approval through a supplementary
budget) may have short-term advantages, but do not create an environment
conducive to improving implementation planning; they may also allow poorly
Project Implementation, Monitoring, and Adjustment | 139
prepared, politicized projects to slip into the budget. Reallocations should
therefore be limited and longer-term improvements in implementation plan-
ning should be instigated.
Spending agencies with capital investment programs should have their own
systems that mirror and feed the central system, but also contain more detail
than is required by the finance ministry. Project managers will probably require
more detailed and more frequent information.
Financial management information system
A well-designed and automated financial management information system
(FMIS) should be able to provide timely and comprehensive information on the
financial implementation of capital projects. Using such a system to generate
information on actual expenditures by project requires the design and use of a
project-level expenditure coding structure, without which it is impossible to
record expenditures systematically against individual projects. To exercise
tighter financial control from the center, Kenya and Uganda have recently intro-
duced project codes to the budget classification for individual projects.
Linked to the issue of project-level codes, there also needs to be an agreed-on
final list of projects (new and ongoing) to be funded through the capital budget
approved through the budget preparation process. This list does not need to be
part of the budget law itself, although it could form an annex to it; it should,
however, be prepared before budget approval and made available to approval
bodies in the executive and the legislature.
Monitoring physical progress
As well as monitoring financial progress, the computerized monitoring system
should be extended to monitoring physical progress. It needs to assess the actual
physical implementation of the project compared to the plan and to examine any
gaps between financial and physical progress.
The implementation plans described above need to be extended to include
projections of physical progress. Projections of financial and physical progress
should be broadly similar for a project that is expected to be on track. Variations
would normally only occur if advance payments are needed or if payment sched-
ules are lumpy. Where projections of physical progress for multiyear projects
lag projections of financial progress, such lags could indicate the buildup of
potential cost overruns that have not yet been reflected in an adjustment of the
approved total estimated cost. Such overruns would be a cause for concern for
the finance ministry during budget preparation.
While a centralized financial management information system is the obvious
source of information on financial execution, information on physical execution
must come from responsible first-line spending agencies and should originate
with the project management team for individual projects. The finance ministry
would not usually be expected to make direct observations of the physical prog-
ress of projects, although this inspection function still exists in some current and
former centrally planned economies. Nevertheless, the finance ministry should
have the right to demand such information as a matter of course and to insist on
the creation of adequate systems to collect it where these do not already exist.
Rights and responsibilities can be vague in weaker systems and should be
embodied in primary legislation at the framework level, to be expounded in
detailed procedural guidelines.
140 | Public Investment Management Reference Guide
Defining project milestones
Monitoring physical progress is best done using project implementation “mile-
stones,” rather than percentage completion, which is difficult to gauge and sub-
ject to manipulation. Monitoring based on the final project deliverables—for
example, 120 kilometers of national standard road or a 200-bed general hospital
constructed6—is also not desirable, as it gives no idea of progress toward achiev-
ing the deliverables.
A milestone is the achievement of a significant step in the project, usually the
completion or acceptance of an important component of the final deliverable.
Milestones are generally indicative of the project having reached a status that is
readily recognizable. This recognition may be based on starting or completing a
key project management stage or making significant progress with construction
work. A milestone should be clearly indicated in the project plan, even though
it is not technically an item of work.
Examples of milestones include the following:
• Detailed design completed
• Tender launched
• Land acquisition completed
• Foundation for new building completed
• Buildings watertight
• New equipment received and ready for use
• Handover of completed facility
• Facility operational and delivering services.
The number of milestones depends on project complexity and dura-
tion. A relatively straightforward project with a short implementation
period will have few milestones; a complex project with a multiyear con-
struction period could have many milestones, perhaps organized in a hier-
archy. For example, the f ollowing construction milestones were adopted
in London’s extremely complex Crossrail project, implemented over
10 years:
• Tunneling completed
• Station construction and civil engineering works completed
• Network rail works finalized
• Railway systems in place
• Trains and railway depot delivered
• Public space and development around stations completed
• Introduction of services—in five phases.
Underlying these high-level milestones are intermediate milestones—for
example, completion of each of the five tunneled sections.
The following is key information when monitoring against project
milestones:
• Name of the milestone
• Planned completion date
• Expected completion date
• Deviation from plan
• Explanation for deviation
• Remedial actions where deviation exceeds agreed-on tolerances.7
Project Implementation, Monitoring, and Adjustment | 141
Organizational arrangements in the finance ministry
Efficiency considerations indicate that the central monitoring function should
be as close as possible to the directorate of the finance ministry with direct
responsibility for capital budgeting and budgetary performance. Information
flows should be organized so that monitoring data go directly from spending
agencies and the treasury to this directorate; otherwise the monitoring process
is likely to suffer from coordination difficulties.
Risk-based monitoring
A responsive monitoring system should focus attention on problem projects so
that necessary adjustments can be made. Some countries—for example, New
Zealand and the United Kingdom—practice risk-based monitoring at the central
level using a red-amber-green (RAG) traffic light system to identify projects
according to the risk of delivery failure. Box 8.4 summarizes the basis for the
RAG ratings in the United Kingdom. The results can help to focus high-level
managerial attention on projects with red or red-amber ratings. Movements
between higher- and lower-risk projects are used to assess trends in the overall
delivery risk of the portfolio.
In the United Kingdom, RAG ratings are derived from delivery confidence
assessments (DCA). DCAs are a component of the project assessment review
(PAR) carried out as part of the assurance processes set up and overseen by the
Infrastructure and Projects Authority,8 the body responsible for monitoring the
government major project portfolio (GMPP). PARs are carried out on a planned
basis during project implementation but may also be triggered by any new cir-
cumstances likely to influence project deliverability.9 The RAG ratings are pub-
lished in the annual report on the implementation of the GMPP by the
Infrastructure and Projects Authority.
Performance monitoring
After strengthening the basic system of monitoring financial and physical prog-
ress, the next step is to extend the system to include more performance informa-
tion, especially that related to performance after implementation. This step
could be initially confined to high-value projects and to basic information on
budgetary outputs and outcomes to supplement financial control information.
The system could then be expanded to cover lower-value projects and to include
more sophisticated information on performance. Some projects may be com-
pleted in stages and may start delivering benefits before the entire project is
completed. In these cases, performance monitoring can begin earlier and may
even inform the development of subsequent stages.
As with physical monitoring, the finance ministry should not be collecting the
performance information itself; it should ensure that spending agencies have
adequate systems in place to ensure that this information is being generated and
verified at the appropriate level in the system. Project managers are responsible
for carrying out project activities and delivering project outputs and should be
expected to report on these matters; they should not be expected to report on
outcomes, which is a policy analysis responsibility. Procedures also need to be in
place to ensure that performance information is transmitted to the finance
ministry.
142 | Public Investment Management Reference Guide
BOX 8.4
The United Kingdom’s delivery confidence assessment
Each project in the government major project portfo- • Specific issues that threaten delivery on time, to cost,
lio is subject to a delivery confidence assessment and to quality and jeopardize the delivery of benefits
(DCA); overall progress in delivering the portfolio is • The review team’s professional judgment of the
examined in terms of aggregate movements in the rat- likelihood that the project will succeed, even
ings from the DCAs. when there may be no definitively clear evidence
Delivery confidence is defined as the confidence in either way
a project’s ability to deliver its aims and objectives: • The resilience of the project to overcome identified
shortcomings or threats.
• Within the time scales
• Within the budget Delivery confidence is reported using a traffic light
• To the quality requirements, including delivery of system, the red-amber-green (RAG) rating. Projects
benefits, both financial and nonfinancial. rated green are those most likely to succeed; those
• The DCA reflects the following objective and rated red are facing serious delivery problems. The
subjective factors: definitions of the RAG ratings are given in table B8.4.1:
TABLE B8.4.1 Delivery confidence assessment: Red-amber-green (RAG) ratings and criteria
DELIVERY CONFIDENCE RAG
RATING CRITERIA FOR RAG RATING
Green Successful delivery of the project on time, budget, and quality appears highly likely, and there
are no major outstanding issues that at this stage appear to threaten delivery significantly.
Amber-green Successful delivery appears probable; however, constant attention will be needed to ensure
that risks do not materialize into major issues threatening delivery.
Amber Successful delivery appears feasible but significant issues already exist, requiring
management attention. These appear resolvable at this stage and, if addressed promptly,
should not present a cost-schedule overrun.
Amber-red Successful delivery of the project is in doubt, with major risks or issues apparent in a number
of key areas. Urgent action is needed to ensure that these issues are addressed and to
determine if resolution is feasible.
Red Successful delivery of the project appears unachievable. There are major issues with project
definition, schedule, budget, quality, and/or benefit delivery, which at this stage do not
appear to be manageable or resolvable. The project may need rescoping and/or to have its
viability reassessed.
Source: Major Projects Authority 2015.
The logical framework is a planning and monitoring tool based around
reparing and updating a matrix that describes project objectives and mea-
p
sures of achievement. This tool is therefore particularly useful in providing a
basis for performance monitoring.
Initiated at project conception and detailed and refined during project
preparation and appraisal, the logical framework sets out a hierarchical descrip-
tion of a project’s objectives based on cause and effect (the internal project logic).
A project is described in terms of its:
• Overall goal. The general policy objective to which the project will contribute
along with other interventions, which are usually only achievable in the
longer term
Project Implementation, Monitoring, and Adjustment | 143
• Project purpose. The project’s central objective expressed in terms of the
achievement of sustainable benefits for the target group
• Outputs. The direct results of the project required to achieve the project
purpose—that is, services or facilities delivered; project management can be
held accountable for their delivery
• Activities. The actions required to produce the project outputs.
Measurable indicators of achievement and the means of verification are iden-
tified in the logical framework matrix for each level; they form the basis for sub-
sequent monitoring. Baseline values must be established for indicators of the
goal and purpose before the project begins, so that project effects can be
determined.
PROJECT ADJUSTMENT
When monitoring reports indicate that projects are going off track—exceeding
agreed-on tolerances with respect to budget, schedule, or specification—action
must be taken. Where these deviations risk threatening the overall viability of
the project, there should be scope within the PIM system for making
fundamental adjustments to improve the chances of success. If projects are so
badly off track that successful achievement of the objectives within reasonable
budgetary and time constraints is no longer feasible, the possibility of terminat-
project should exist. Box 8.5 describes Ireland’s guidance on project
ing the
adjustment as set out in the country’s Public Spending Code.
BOX 8.5
Ireland’s guidelines on project adjustment
Adverse developments or changes in excess, along with a detailed explanation of why it was
circumstances not possible to take appropriate measures to offset the
“Regular management reports should be prepared by increased cost. The viability of the project, given the
the Sponsoring Agency covering all significant devel- changed circumstances, should also be reported on.
opments relating to the project and its costs. If adverse If a project is going badly wrong, there should be a
developments occur, including unforeseen cost willingness to terminate it before completion. Action
increases, which call into question the desirability or of this kind can be justified if the cost of the project
viability of the project, the Sponsoring Agency should escalates above earlier estimates or if the benefits
submit a report at the earliest possible moment to the expected from it are not likely to be realised. An atti-
Sanctioning Authority, detailing the necessary mea- tude that, once work on a project commences, it must
sures proposed to rectify the situation. be completed regardless of changed circumstances, is
Where, despite these measures, increased costs to be avoided. Before making a final decision to termi-
above those already approved are likely to arise, the nate a project that is not going according to plan, the
approval of the Sanctioning Authority for the extra costs of termination (for example, payments that
expenditure should be obtained before any commit- might have to be paid by way of compensation to con-
ment is made to accept cost increases. Any application tractors, etc.) should be ascertained and made known
for such approval should outline the reasons for the to the appropriate authorities.”
Source: Ireland’s Public Spending Code (http://publicspendingcode.per.gov.ie/).
144 | Public Investment Management Reference Guide
The legal framework and supporting guidelines should incorporate formal
procedures for project adjustment and a mechanism for officially terminating a
project.10 Without this framework, a failing project will continue to be a drain on
the budget. For major projects, organizations that are external to the project
sponsor (or owner) should be involved in the closure decision so as to counter
vested interests in continuing a poor project.
The Republic of Korea has a particularly effective system for project adjust-
ment, described in detail in box 8.6. A starting point is the country’s total proj-
ect cost management (TPCM) system, a centralized monitoring system focused
on controlling the total costs of the country’s largest multiyear projects. The
TPCM is based on strict principles that limit the justifications for cost increases
and the authority to agree to them. If real cost increases, as captured through
the TPCM, exceed a defined threshold, then a reassessment of project feasibil-
ity is required. If the cost increases are then shown to undermine the project’s
viability, an adjustment is needed, such as cutting costs by changing the proj-
ect’s scope or closing down the project entirely. As box 8.6 indicates, the deci-
sion to end failing projects has resulted in considerable savings. The TPCM
and the reassessment and adjustment processes are detailed in a specific reg-
ulation (Ministry of Economy and Finance, Korea 2009). This regulation
defines general and specific guidance on procedures for adjusting different
project components.
The principles of the Korean model should be replicable, provided there is
adequate monitoring of total project costs. Triggers for activating a fundamental
review may vary according to country preferences.
Any reassessment of feasibility must use costs that are net of sunk costs. Sunk
costs are resources that have already been used up in project implementation
BOX 8.6
Reassessment study of feasibility and project adjustment in Korea
In Korea, a reassessment study of feasibility (RSF), • The prefeasibility study (PFS) has not been conducted,
was introduced in 1999 and strengthened in 2006. even though the project falls under the PFS coverage.
An RSF can be triggered by significant changes in • The Board of Audit and Inspection formally
project conditions that risk undermining the requests the RSF.
forecast economic returns from the investment. • The National Assembly formally requests the RSF.
According to Articles 50 and 50-(2) of the National
On the basis of the results of the new RSF, a deci-
Finance Act, an RSF is performed for projects in the
sion is made on whether to continue, rescope, or stop
total project cost management (TCPM) if the follow-
the project. Rescoping involves looking for ways to
ing occurs:
reduce the size and cost of the project to achieve con-
• The total cost for a project increases by more than tinued viability and avoid cancellation.
20 percent in real terms (excluding land acquisition) More than 20 out of 172 projects subject to RSF
compared to the previously approved cost. were stopped between 2003 and 2013. Total savings
• The demand forecast for a project falls by stimated for this
of 11.4 percent of project costs were e
30
percent or more (on the basis of the reassess- period (compared to the requested increase) on proj-
ment of demand forecast). ects that continued.
Source: Kim 2015.
Project Implementation, Monitoring, and Adjustment | 145
and can no longer be used for any other purpose—that is, their opportunity costs
are zero. For example, if a bridge project has been partially constructed (in phys-
ical terms), the costs associated with the completed works should not be counted
in the new economic feasibility study.
NOTES
1. See chapter 1 on limits to the reference guide and challenges for further discussion on
procurement and contract management.
2. Between 2012 and 2016, 120 senior civil servants completed training at the newly created
Major Projects Leadership Academy.
3. Provisional plans should already have been prepared as part of the feasibility study.
4. The rest of this section refers to the finance ministry, which should be taken to include the
planning ministry where such a ministry exists and has a designated role in monitoring.
5. See further details in chapter 12.
6. Some output-based budgeting systems monitor performance in this way.
7. As indicated, project managers should be allowed to make decisions within pre-agreed-on
deviations from plans; these are the agreed-on “tolerances.” Larger than agreed-on devia-
tions must be escalated to higher authorities.
8. Formerly known as the Major Projects Authority.
9. A project assessment review (PAR) is usually initiated by the SRO of a project in the spon-
soring ministry, but may be requested by senior officials or ministers with key roles in pub-
lic investment management. In exceptional circumstances, the Infrastructure and Projects
Authority may initiate a PAR. The PAR team reports to the SRO in the sponsoring ministry.
At the request of the SRO, the Infrastructure and Projects Authority will assemble a team
of independent reviewers from outside the sponsoring ministry for the review. A reviewer
from inside the sponsoring ministry, but from a different department, is also part of the
review team. DCA findings are given at the end of the PAR and included in the draft report
to the SRO.
10. Chapter 11 discusses methods and principles for rationalizing and prioritizing ongoing
portfolio projects. Underperforming projects in the pipeline are a priority to recost,
reshape, or terminate.
REFERENCES
Deloitte Consulting. 2000. “Capital Management Process Review for the Government of
British Columbia.” Deloitte, New York.
Kim, J.-H. 2015. “Public Investment Management: Framework, Lessons, and Challenges.”
Workshop presentation, Bogotá, September.
Major Projects Authority. 2015. Major Projects Authority Annual Report 2014–15. London:
Cabinet Office.
Ministry of Economy and Finance, Korea. 2009. “Guidelines for Total Project Cost Management
[in Korean].” Ministry of Economy and Finance, Seoul.
Southern California Regional Rail Authority. 2011. Metrolink Project Management Manual,
Southern California 2011. Los Angeles: Southern California Regional Rail Authority.
U.K. Department for Business, Innovation, and Skills. 2010. “Guidelines for Managing Projects:
How to Organize, Plan, and Control Projects.” U.K. Department for Business, Innovation,
and Skills, London.
U.K. National Audit Office. 2010. “Assurance for High Risk Projects.” National Audit Office,
London.
U.S. Federal Transit Administration. 2012. Construction Project Management Handbook. FTA
Report 0015. Washington, DC: Federal Transit Administration. https://www.transit.dot.gov
/sites/fta.dot.gov/files/docs/FTA_Construction_Project_Management_Handbook_2016.pdf.
World Bank. 2008. “Operational Manual.” World Bank, Washington, DC. http://documents
.worldbank.org/curated/en/597381468040174626/Operational-Manual.
9
Ex Post Review and Asset
Management
OVERVIEW
A minimum requirement for a functioning public investment management
(PIM) system is a basic review immediately after project completion. This review
should provide some analysis and lessons learned from project implementation.
More advanced PIM systems further evaluate project impact and assess whether
project objectives have been achieved. An effective PIM system needs to inform
the design of policy and the development of similar future projects and to
strengthen accountability for project results. Evaluations should also assess the
functioning of the overall PIM system, particularly when reforms are ongoing, to
ensure that appropriate feedback is reflected in the reform process.
After a project has been completed, custodianship should be established by
recording the asset in the country’s asset register and management system.
This effort requires a procedure to hand over management responsibility for
future operation and maintenance, as well as adequate budget funding for ser-
vice delivery agencies in charge of operating and maintaining the asset. Asset
registers need to be updated regularly, and asset values need to be recorded.
Countries should require their operating agencies to compile balance sheets,
where the value of assets created from new fixed capital expenditures can be
recorded alongside existing assets. Active asset management will help assets to
serve their purpose throughout their intended life span; for this reason, asset
quality needs to be tracked over time.1 Agencies responsible for service deliv-
ery should be held accountable for results to incentivize them to optimize the
economic lives of the assets.
EX POST REVIEW
Basic completion review
PIM guidelines should specify requirements for a project completion review,
including the timetable and content of the report. A completion review should
usually be carried out within six months of the end of the project. The completion
review should assess the success in delivering the project on time, within budget,
147
148 | Public Investment Management Reference Guide
BOX 9.1
Example of a format for a project completion report in the United States
1. General project information 2.4 Unplanned side effects
1.1 Background 2.5 Residual risks
1.2 Postimplementation review objectives 3. Administrative closure and accomplishments
and scope
3.1 Performance metrics
1.3 Postimplementation review team members
3.2 Customers’ and users’ satisfaction
2. Findings 4. Open issues
2.1 Management effectiveness 5. Lessons learned
2.2 Cost 5.1 Recommendations
2.3 Schedule 6. Contract closure
Source: U.S. Department of Housing and Urban Development 2015.
and to the specified design. Major departures from the planned implementation
timetable, budget, or design should be identified and any reasons for departures
explained. The extent to which any risks that materialized had been foreseen and
whether risk management plans and mitigation measures were adequate should
also be considered. Any lessons for improved design or implementation of similar
projects in the future need to be identified and recommendations made.
A completion review should also include an assessment of whether the project
has started to deliver the expected services to the intended beneficiaries, together
with any available evidence on user satisfaction and user demand compared
to what was forecast during planning.
The completion review should be performed by the project sponsor or owner
(hereafter referred to simply as the sponsor), and the findings and recommenda-
tions should be internalized. To ensure objectivity, the review should be carried
out by a part of the organization that is not involved in project implementation.
Arrangements need to be in place to ensure that lessons learned feed into the
planning of new projects.
Completion reports should be submitted to the ministry or agency to which a
project sponsor is subordinated. In addition, reports for major projects should be
submitted to the finance ministry and, where relevant, the planning ministry. The
central ministries should review the quality of the reports and, where necessary,
request additional information or analysis. The finance or planning ministry
should prepare an annual report summarizing the main findings of project
completion reports submitted during the year and containing recommendations
for improving project planning and implementation in the future.
Decision makers should take into account failure to finish a completion
review or to submit a report on time when assessing proposals for new projects
by the same sponsor; this failure may be a reason for questioning these proposals
on the grounds of internal institutional weaknesses in existing PIM.
Box 9.1 summarizes the content of a template for a project completion report
as used by the U.S. Department of Housing and Urban Development.
Ex Post Review and Asset Management | 149
Ex post impact evaluation
An ex post impact evaluation 2 is deeper than a basic completion review
and requires careful design and more expertise. Like appraisal, detailed
methodological guidance is needed to support the procedural arrangements
set out in PIM regulations and guidelines.
Ex post evaluation can have two complementary perspectives, the emphasis
given to each perspective may vary with the nature of the project. The first is
strategic performance, and the second is social welfare. The strategic perfor-
mance perspective looks at the project in relation to the hierarchy of objectives,
including the strategic goals that were set during planning and approval. It also
considers the achieved efficiency, effectiveness, impact, and relevance of the
project in relation to these objectives. The aim is to evaluate the operational,
tactical, and strategic success of the project (as indicated in table 9.1). The social
welfare (or socioeconomic profitability) perspective looks at a project’s economic
performance, as measured by social cost-benefit analysis. This analysis involves
estimating the achieved economic performance indicators (net present value,
economic internal rate of return, and cost-benefit ratio) and comparing the same
indicators from planning and approval.
For projects where a social cost-benefit analysis can be performed and where
the scale of the investment justifies the effort of such an evaluation, the social
welfare perspective is generally given more weight in the evaluation. For projects
where social cost-benefit analysis is difficult to conduct or cannot capture signif-
icant costs or benefits, the strategic performance perspective will necessarily
carry more weight. In most cases, however, it will be important to incorporate
both perspectives to provide a comprehensive assessment of the actual
performance of a project compared to what was foreseen during planning and
formed the basis for decision making.
PIM guides should establish both perspectives as valid approaches to evalua-
tion and encourage joint application, where feasible. The strategic performance
perspective and the social welfare perspective are explored in more detail below.
Box 9.2 reproduces Ireland’s approach to evaluation, which effectively
incorporates a dual perspective.
TABLE 9.1 Evaluation criteria
CRITERION INDICATOR
Strategic performance evaluationa
Efficiency Measures operational success: to what degree have the outputs achieved
derived from efficient use of financial, human, and material resources?
Effectiveness Measures tactical success: were the stated objectives achieved and to what
extent did the project contribute to the achievement of the goal?
Impact Measures strategic success: has the project had any positive or negative
consequences other than those planned?
Relevance Measures strategic success: has the project been in line with the needs and
priorities of the owners, the intended users, and other affected parties?
Sustainability Measures strategic success: are the positive effects from the project likely to
continue after the project has been completed?
Socioeconomic profitabilityb Has the project delivered a positive net present value?
Source: Welde and Volden 2018.
Note: The Concept Research Program (Norway) develops ways of improving the use of resources and enhancing the effects of major public
investments. It is financed by the Ministry of Finance.
a. Referred to as “goal-oriented evaluation criteria” in the original paper.
b. Measures the change in society’s aggregate welfare.
150 | Public Investment Management Reference Guide
BOX 9.2
Ireland’s approach to ex post evaluation (postproject review)
All large capital projects and a proportion of Mandatory evaluation/post-project review
other capital projects have to be subjected to a requirements
post-project review to see if the predicted bene-
• All capital projects costing > €20 million are to
fits of the project were realised. Post-project
be subject of a post-project review
reviews should be undertaken once sufficient
• At least 5% of other capital projects should
time has elapsed to allow the project to be prop-
be reviewed
erly evaluated with sufficient evidence of the
flow of benefits/costs from it. There are two sep- Additional evaluation/post-project review
arate focuses of review—(i) project outturn and requirements
(ii) appraisal and management procedures. The Departments and agencies should not restrict
second element can be done after project comple- themselves to the mandatory evaluation or
tion as it involves reviewing administrative and post-project review requirements. From time to
management procedures. The timing of the first time it may be apparent that while not mandatory,
element will depend on the nature of the project, an area of expenditure would benefit from a more
i.e., the period required to observe the expected in-depth review based on the picture the
benefits. This period should be no longer than performance indicators paint or maybe because
one third of the time frame used in the the performance indicators are not as informative
Appraisal. The detailed appraisal provides the as originally thought.
base against which the outturn review is made. Communicating lessons learned
The aim of a review of project outturn is to deter- As with all parts of the Public Spending Code any
mine whether: significant lessons should be translated into
changes in the Sponsoring Agency’s practices and
• The basis on which a project was undertaken
communicated within the organization and to the
proved correct
sanctioning authority so that it can apply any gen-
• The expected benefits and outcomes
eral lessons learned to this Code or to supplemen-
materialised
tary information.
• The planned outcomes were the appropriate
responses to actual public needs Responsibility for evaluation/review
• The appraisal and management procedures It is the responsibility of the Sponsoring Agency to
adopted were satisfactory carry out the evaluations or post-project reviews.
Those conducting reviews and evaluations should
• Conclusions can be drawn which are applicable
not be the same people as conducted the appraisal
to other projects, to the ongoing use of the asset,
or managed the implementation.
or to associated policies.
Source: Reproduced from Ireland’s Public Spending Code (http://publicspendingcode.per.gov.ie/c-03-periodic-evaluationpost-project
-review/).
Strategic performance perspective
The strategic performance perspective is based on the results chain approach to
project design. The results chain is the cause-effect logic that provides the
rationale for a project by establishing the relationship between the project inputs
and the project’s ultimate goal. The results chain approach is used by the World
Bank and by many governments. The logic of the results chain is also embodied
in the logical framework approach as discussed in chapter 6.
If a project has not been conceptualized and planned with the logic of the
results chain or a similar approach to establishing the project rationale, it becomes
very difficult to apply the strategic performance perspective (or the social welfare
Ex Post Review and Asset Management | 151
perspective). For this reason, strict consistency is required between the PIM
guidelines for upstream processes of project development and appraisal and the
PIM guidelines for downstream processes of monitoring and evaluation. The
same requirement applies to methodologies for appraisal and evaluation. Without
such consistency, a systematic approach to evaluation becomes very difficult.
This requirement also influences the sequencing of PIM reforms: there is little
point in establishing elaborate performance monitoring and evaluation processes
as long as project planning and appraisal processes remain poorly defined.
The conceptual logic of the results chain is set out in figures 9.1 and 9.2 using
real examples. The logic of the results chain runs from inputs to impacts, but the
project design process should work in reverse, with desired impacts being the
starting point for strategically driven project identification and design. This
process is illustrated in figure 9.3 for a road project.
FIGURE 9.1
The results chain: Conceptual logic
Inputs Activities Outputs Outcomes Impacts
• Certain inputs • If there is • If the planned • If the planned • If the planned
(resources) access to activities are activites are benefits are
are needed required accomplished, acccomplished achieved, then
to implement inputs, then then the as intended certain
the project these can be intended and the changes in
activities. used to volume of expected society,
accomplish products or products or organizations,
the planned services can services are communities,
activities. be delivered. delivered, or systems
then the target might be
beneficiaries expected to
or stakeholders occur.
will benefit in
certain ways.
Source: Based on World Bank Inedpendent Evaluation Group 2017.
FIGURE 9.2
The results chain: Illustrations
Inputs Activities Outputs Outcomes Impacts
• Finance • Constructing • Roads • Access to • Improved
• Facilities roads constructed markets household
• Equipment • Building, • Students increased and incomes
equipping, completing more products • Improved
• Supplies sold
and staffing courses labor force
• Staff secondary • More students incomes
• Babies
• Technical schools vaccinated entering • Decreased
expertise • Development university or incidence of
of health using disease and
centers; knowledge infant or child
providing • Reduced mortality;
vaccinations susceptibility improved
of babies to health
diseases
Source: Based on World Bank Independent Evaluation Group 2017.
152 | Public Investment Management Reference Guide
FIGURE 9.3
Design process for a road project following the results chain
Impacts • Trade activities and economic development improved
• Employment and household income increased
Outcomes
• Journey time reduced; more products sold because farmers and
manufacturers have better access to markets
Outputs
• Roads improved; 100 kilometers of roads completed and rehabilitated
Activities
• Roads constructed and rehabilitated
Inputs
• Funds for road construction, equipment, and staff provided
Source: Based on World Bank Independent Evaluation Group 2017.
As introduced in table 9.1, the performance indicators for the results chain
and its components are as follows:3
• Efficiency. Does the quantity and quality of the results of the project justify the
quantity and quality of the means used for achieving them? Efficiency
concerns the relation between the results and the means—that is, whether the
process of transforming means into results has been cost-effective. Efficiency
assessments are normally part of the monitoring process and part of a basic
completion review. They should also form part of ex post evaluations,
especially if evaluation covers management performance.
• Effectiveness. To what extent has the immediate outcome been achieved
(or is likely to be achieved), and to what extent is the achievement a result of
the project? Effectiveness describes how well the outputs achieved have
furthered the achievement of the immediate outcome (project purpose in
the logical framework).
• Impact. What has happened (or is likely to happen) as a consequence of
the project? Impact concerns whether there has been a change toward the
achievement of the intended impacts (overall objectives in the logical
framework) as a consequence of the achievement of the project’s immediate
outcome (purpose). Both intended and unintended impacts are reviewed.
• Relevance. Does the project make sense within the context of its environ-
ment? Relevance assesses whether the outputs, outcome, and impact of the
project are aligned with the needs and aspirations of the beneficiaries and
with the policy environment of the project.
Ex Post Review and Asset Management | 153
• Sustainability. What has happened (or is likely to happen) to the positive
effects of the project over the long term, now that construction has been
completed? In terms of a single project, sustainability can be described as the
degree to which the benefits produced by the project continue after physical
implementation has come to an end. This is a central theme in all evaluation
work and relates to all elements of the logical framework for a specific
project.
Social welfare (or socioeconomic profitability) perspective
In addition to strategic performance, achieving value for public money also
matters. A completed project may be evaluated positively according to strategic
performance criteria, but performance may be poor with respect to socioeco-
nomic profitability. This situation may occur when actual costs prove higher
than estimated, actual demand is lower than forecast, or unexpected disbenefits
occur (for example, negative externalities). Net costs or benefits are important
in assessing whether a project has turned out to be a worthwhile use of public
financial resources. It is also possible to imagine a project that has achieved a
positive net present value but has failed to deliver a broader impact or is of
questionable relevance. In this case, the resources involved could potentially
have been spent on another (economically viable) project with a stronger
impact or more directly correlated with stakeholders’ needs. An ex post evalu-
ation will be more complete if both the strategic and the socioeconomic
perspectives are taken into consideration.
Evaluating socioeconomic profitability involves a rerun of the social cost-
benefit analysis that was carried out for appraisal but using actual construction
costs and realized demand for services and benefits after the project has been
operating for some time. This analysis seems relatively straightforward, more so
than appraisal, where costs and benefits are only forecasts, but it is not necessar-
ily so. Difficulties arise from a lack of data, particularly with respect to realized
demand, and from problems in determining the net contribution of the project
because of significant and unforeseen external changes within the zone of
influence that could not be foreseen during appraisal. The problem of
attribution—determining what effects can be attributed to the project and what
effects are due to factors beyond the project’s control—is a fundamental diffi-
culty of ex post evaluation, especially for outcome and impact indicators in the
strategic performance perspective. The usual approach to addressing the attri-
bution problem is to develop a “counterfactual” scenario against which to com-
pare with-project effects.
The following practical steps, based on U.K. guidelines,4 form a good basis for
performing an ex post evaluation from the perspective of socioeconomic
profitability:
• Step 1. Establish what is being evaluated and how. The scope of the evaluation
must first be established, and then performance indicators need to be defined
and quantified as precisely as possible for use in step 3. Indicators should have
been established and reviewed at the preappraisal (project concept note) and
appraisal (feasibility study) stages, but these indicators will need to be
reconfirmed at evaluation. The availability of data on the identified indicators
must be established and, if necessary, additional data should be collected if
available monitoring data fall short of what is required.
• Step 2. Decide on the counterfactual situation against which the completed
project will be compared. The impact of a project may turn out to be different
154 | Public Investment Management Reference Guide
from the impact forecast in the feasibility study because of significant and
unexpected changes in background conditions (unpredictable shifts in
demand or unexpected increases in the cost of key construction inputs, for
example) or the actions of those responsible for implementing the project,
rather than forecasting or design issues. It is therefore important to define a
realistic counterfactual situation against which the evaluation will be made,
because this situation may be significantly different from what was assumed
in the planning of the project. Thus, if underlying background conditions have
changed substantially, a scenario representing unchanged conditions needs to
be constructed as a comparator. Similarly, if management actions have
resulted in the project being implemented differently than planned, an
artificial comparator scenario needs to be constructed where management
behaves as planned.
• Step 3. Compare the actual results with targeted results. Feasibility and evalua-
tion methodologies are similar, but with the difference that the former is
based on forecasts and the latter is based on actual data. Both methodologies
should aim to identify direct and indirect benefits or disbenefits from a
project. An evaluation should include (a) an assessment, preferably quanti-
fied, of what happened; (b) a comparison of this information with the tar-
geted project results; and (c) a comparative assessment of the alternative
results that might have happened if background conditions and implementa-
tion had been as planned and the envisaged situation if the project had not
happened—that is, a comparison with the counterfactuals defined at step 2.
The last element will not be necessary if everything materializes as planned,
but this is rarely the case.
• Step 4. Present the findings and recommendations. Findings should cover
(a) why the project results differ from those in the feasibility study (if indeed
they do); (b) the effectiveness of the project in achieving its specific and wider
objectives and an explanation of why; (c) an estimate of the cost-effectiveness
of the project; and (d) the implications of the findings for the identification,
design, and implementation of future projects and the resulting
recommendations.
• Step 5. Disseminate the findings and recommendations. It is important to
ensure that the findings and recommendations are fed into the decision
making of future projects; hence the importance of obtaining the approval
of evaluations from senior management within the project sponsor and any
ministry or agency to which it is subordinated. Project sponsors should
generally aim to publicize evaluation findings and recommendations on
their websites and in other media once they have been approved. Summaries
and syntheses of evaluation reports are important for wider dissemination
and should be prepared.
Sampling for ex post evaluation
Systematic ex post evaluation of all completed projects is rarely performed, 5
probably for good reason, as it is intensive in its use of skilled human resources.
Even in good-practice countries, evaluation is usually on a sample basis, with
some sectors covered more intensively than others. In Ireland, only major
projects—those with a value in excess of €20 million—are systematically
evaluated; lower-value projects are evaluated on a sample basis, using a
Ex Post Review and Asset Management | 155
5 percent sample. The U.K. Highways Agency’s post-opening project evaluation
(POPE) is one of the relatively few examples of systematic ex post evaluation of
transport sector projects (see box 9.3), but almost all of these projects are likely
to be large scale, given the agency’s responsibilities.
Timing of ex post evaluation
The timing of evaluation varies with the nature of the project, depending on the
time before the full extent of the realized benefits is revealed; however, it does
seem reasonable to set a limit on the maximum time that can elapse before an
evaluation is performed. This limit will ensure that results are not influenced by
too much extraneous “noise.” In the case of Ireland, the time that passes before
evaluation should not exceed one-third of the time frame used in appraisal.
In the case of national roads in the United Kingdom, evaluations are performed
one year and five years after opening to assess the immediate outcome and the
longer-term impact separately.
Responsibilities for ex post evaluation
Evaluation should be performed by the project sponsor and the results shared
with higher-level decision-making bodies and more broadly; however, the eval-
uation should ideally be performed by a part of the organization that is indepen-
dent of the department that promoted and implemented the project.
On top of their responsibilities for compliance and financial audits, external
audit bodies often undertake impact evaluations (or “performance audits”) of
major projects. These audits are most often performed on a sample basis, fre-
quently focusing on a small number of projects from which important lessons
are expected to be learned—usually notable failures or notable successes.
Box 9.4 summarizes some of the work of the U.K. National Audit Office in this
respect.
BOX 9.3
U.K. Highways Agency’s post-opening project evaluation
Comprehensive ex post analyses of transport associated with estimates of costs and benefits.
p rojects are rare. A noticeable exception is the
POPE studies are undertaken for each Major
post-opening project evaluation (POPE) of the U.K. Scheme one year and five years after opening. The
Highways Agency (HA), which are undertaken for latest summary report showed that 94% of schemes
all of the HA’s major schemes. The key objective of achieved their objectives. Most schemes, 72%,
POPE is to identify the extent to which the expected offered high value for money and 85% achieved
impacts of highway schemes have materialised and medium or high value for money. Forecasts were
to inform thinking on current and future national accurate—a majority (65%) of the schemes accu-
scheme appraisal methods. POPE also measures rately forecasted traffic flows (within +/− 15%), and
whether schemes have offered value for money, i.e., half of the schemes had costs in the appraisal within
positive net present values, and the level of accuracy +/− 15% of outturn costs.
Source: Reproduced from Welde and Volden 2018.
156 | Public Investment Management Reference Guide
BOX 9.4
Performance audit of projects by the U.K. National Audit Office
The U.K. National Audit Office is an independent body • Evaluation of a canceled project to improve the
responsible for auditing central government spending efficiency and resilience of fire and rescue services
only. It has no judicial or administrative authority by replacing 46 local control centers with 9 regional
reporting to parliament. Its reports are used by the centers.
Public Accounts Committee, which holds hearings
The National Audit Office also produces good-
and then reports to Parliament.
practice guidance based on its audits, for example:
It is legally empowered to carry out performance
audits, including for projects. It performs audits on • Delivering successful information technology–
a (small) sample basis with a focus on problem or enabled business change, including case studies of
innovative projects. Recent examples of audits include nine successful projects
the following:
• Initiating successful projects, including five
• Evaluation of a failed public-private partnership examples of good project planning.
(PPP) project to rehabilitate the London
Underground
The Ghana Audit Service has recently issued a Guide to Performance Audit
of Infrastructure Projects, which could serve as a useful reference for other
countries. In addition to general guidance, the guide gives specific guidance on
implementing audits of road, building, energy, railway, and port projects.
Evaluating the PIM system
In addition to examining the performance of individual projects, ex post evalua-
tion is important for assessing and improving PIM system performance. PIM
guides should be supportive of this aim. Norway, which has initiated important
PIM reforms aimed at improving front-end quality assurance of public invest-
ment projects, provides a notable example. At the same time as the reforms were
initiated, the Concept Research Program was set up (see box 9.5 for an over-
view). Funded by the Ministry of Finance and led by the Norwegian University
of Science and Technology, the research program “develops knowledge that will
ensure efficient use of resources and enhance the benefits of major public
investments.” In particular, the Concept Research Program organizes ex post
evaluation of completed projects that have been through the new quality assur-
ance process. The lessons learned are seen as being crucial to improving know-
how and practices in the front-end phase of projects and in the quality assurance
effort itself. The Republic of Korea instituted similar feedback mechanisms as
part of its PIM reforms.
ASSET REGISTRATION AND MANAGEMENT
Asset registers
An asset register is a record of the property owned by the state and its
institutions. Asset registers should cover all fixed assets that are owned
directly by the central government’s ministries, departments, and agencies, as
Ex Post Review and Asset Management | 157
BOX 9.5
Norway’s Concept Research Program
The Concept Research Program
Front-end management of major projects
• The Concept Research Program develops knowl- • The program is funded by the Norwegian Ministry
edge that will ensure efficient use of resources and of Finance
enhance the benefits of major public investments. • Results are openly available and published in a
Our focus is on project governance, and the projects’ series of scientific reports, in addition to textbooks,
long term utility as seen from the financing party’s working papers, scientific papers in journals and
perspective. This calls for conference proceedings,
interdisciplinary research, etc. We have developed
The Norwegian scheme for quality
where the social sciences several courses at Master
assurance of major public investments
merge with project man- and PhD level, and students
Compulsive for land based public investment
agement and engineering. are directly involved in the
projects with an expected budget exceeding
• We focus on the front-end program in various ways.
NOK 750 mill. (about EUR 100 million).
phase, from the initial • The first projects that were
idea until the decision to Front-end analyses and decision document to quality assured under
implement is made. This be prepared by the ministries according to a the QA scheme after it was
is the period when the common format issued by the Ministry introduced year 2000, have
most essential decisions of Finance now been completed and
are made. There is also an are in their operational
Documents to be reviewed by external Quality
urgency, since the possi- p h a s e. T h e C o n c e p t
assurers pre-qualified by the Ministry of
bility to make major Program organizes ex post
Finance
changes decreases as evaluation of these to mea-
projects enter into their Two decision gates, only: sure their effects, societal
implementation phase. relevance, and sustainabil-
• QA1: Quality assurance of the analyses of
• One of our main activities is ity. Lessons learned are
alternative conceptual solution. The
to do formative research on crucial to improve know-
Government will choose among the
major public investments how and practices in the
alternatives and decide whether or not to
under the Norwegian front-end phase of projects,
proceed to a pre-project phase
Quality Assurance scheme; and the QA scheme itself.
• QA2: Quality assurance of the management
see text box. Large amounts • The Concept International
base and cost estimates. The Parliament
of information are com- Symposium on Project
makes the final approval whether or not to
piled from the projects as Governance is held biannu-
implement, and sets the budget for the
the basis for empirical and ally. This is a forum for
project.
theoretical research. decision makers, project
• The Concept program is managers, consultants, and
based at the Norwegian University of Science and researchers from home and abroad for networking
Technology (NTNU) and co-operates with sev- and exchange of experiences and ideas in this field.
eral research institutions both in Norway and The Concept Symposium 2016 is entitled Governing
abroad. the Front-End of Major Projects.
Source: See www.ntnu.concept.no.
158 | Public Investment Management Reference Guide
FIGURE 9.4
Example of an asset register and of asset management in South Africa, by function
Acquisition Identification Accountability Performance Disposal Accounting
• Date • Descripion • Location • Capacity • Capacity • Historic cost
• Supplier • Model • Program • Condition • Condition • Replacement
• Reference • Manufacturer • Custodian • Useful life • Useful life value
• Serial • Residual • Depreciation
• Amount • Convertants • Residual
number value rate
or restrictions value
• Unique asset • Warranties or • Accumulated
number • Heritage or guarantees
cultural depreciation
• Measures
“identifier”
Source: Republic of South Africa 2004.
well as assets in which the government has a direct interest, usually meaning
through the regular use of the asset. An asset register is the foundation of
sound asset management.
PIM regulations need to stipulate when a newly created asset is to be entered
in the asset register, the required information to be recorded at each entry, and
the obligation to keep the relevant information up-to-date, particularly with
respect to variable parameters, such as the current condition, valuation, and
depreciation of the asset. As PIM regulations or guidelines may not provide
sufficient instruction or detail, an asset management policy framework docu-
ment may be helpful to support legislation. This is the case in South Africa,
where the legal foundations for public asset management are embodied in the
Public Financial Management Act (1999) and implementation was achieved
through the development of an asset management framework and supporting
practical guides (figure 9.4). The act’s legal framework has subsequently been
strengthened with enactment of the Government Immoveable Asset
Management Act (2007).
Benefits of asset registers
An asset register facilitates good asset management practices, with the following
main benefits.
First, asset registers enable accountability and audit tracing. In theory, gov-
ernments acquire assets to assist in the provision of economic and social infra-
structure services. Assets should be acquired following a robust appraisal and
feasibility process that assesses the need for the asset and its viability against
alternative options. This assessment should be followed by an open and compet-
itive procurement process. As assets are funded from public resources, govern-
ment officials in charge of their custodianship should be held accountable for
ensuring that they are properly maintained and used.
Second, asset registers serve as supporting public investment planning and
appraisal tools. Effective and regularly updated asset registers can become an
essential tool for the medium-term planning of future public investment. Asset
registers allow planners to understand the condition of existing public assets
and the likely timeline for replacement or capital renovation. A fully functioning
asset register can provide information on appraisal options as well—for exam-
ple, whether new requirements are best met by making new investments or by
sharing or repurposing underused existing assets. A good example is govern-
ment office space, where using existing assets better can be an alternative to
Ex Post Review and Asset Management | 159
building new assets. To facilitate a more comprehensive appraisal, the asset reg-
ister needs to be updated constantly to ensure that newly completed assets have
been added.
Third, asset registers provide national, regional, and sector statistical infor-
mation. The information in a well-maintained asset register can allow econo-
mists and statisticians to monitor key indicators, such as average age and total
depreciated value of assets. Such monitoring can highlight underinvestment
(for example, for roads) that should be addressed as priorities in strategic
investment planning or identify downward trends in public investment that
might need to be addressed. Some asset registers can be used to understand the
geographic service coverage in important sectors such as health care and
education. Such information is relevant to decisions regarding where future
public investments should be located to improve coverage of public services. It
can also inform policy makers about the required scale of regional development
initiatives and any disparities between them.
Fourth, asset registers monitor operating and maintenance costs. A fully
functioning asset register can help governments to monitor the maintenance
and operating costs of assets. Such monitoring is particularly important to com-
pare costs for similar asset classes. Significant differences in unit expenditures—
for example, for roads of a similar class—might identify a need for further
investigation and, if necessary, corrective action.
Fifth, asset registers assist the identification of targets for divestment.
An asset register can help to identify underused or unwanted assets that can be
sold off; any proceeds from divestment could then be reinvested in more
productive assets. Such sales can make governments more efficient by trans-
forming unwanted assets into a source of income rather than an expense.
Coverage and scope of asset registers
Clarity of asset ownership is important. Unclear ownership structures run the
risk of double counting assets or failing to include them in the asset register.
Assets that are assumed to belong to a city or a regional authority may in fact be
owned by the state. The reverse may also be true—that is, presumed “state-
owned” assets may in fact be owned by regional or local administrations.
Furthermore, assets that are used by the state may not always be owned by
the state; PPPs are an example, as the asset being used often belongs to the pri-
vate partner.6 Another example is an office building that is leased from a private
company.
Governments may opt to specify thresholds for the value of equipment to
ensure that the register is not “overwhelmed” by a large number of relatively
insignificant entries. There is no best practice for such thresholds, and indi-
vidual governments should establish relevant thresholds that reflect country
context, including the size of the economy, the expected number of assets, and
the government’s capacity to manage the resulting information. Examples for
threshold exclusions may be low-value items such as desks and chairs in
schools or hospitals. These items should be recorded locally. Alternatively,
groups of items may be bundled into a single line item, for example,
“352 chairs,” with the average age, condition, and value recorded alongside.
Bulk buying and acquiring operational assets at the time of project handover
facilitate this kind of bundling. Accounting practices are also likely to differ
for fixed assets and short-life, disposable items that are not required to be
included in an asset register.
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The gathering of information required to create an asset register is a signifi-
cant undertaking. The scale of information required should be considered care-
fully and assessed against the capacity needed to undertake the exercise. Only
information that is of future value should be collected. Different governments
will have different views on what information is appropriate or even possible
within given capacity constraints. At a minimum, information should be col-
lected that allows assets to be easily identified, including their age and condition,
and that covers financial information on initial acquisition cost and current
value. Additional information can be added at a more advanced stage of
development.
To facilitate asset register analysis, a coding system is needed. Some countries
use a coding system known as a unique asset number. Suggested headings for
required data (or “column headings” in Excel or in database terms) related to
land assets are shown in table 9.2. A coding system could use the budget code to
assist in identifying assets.
Institutional arrangements for developing and
operating an asset register
The central agency of government responsible for economic planning or finance
may be considered as most likely to house the national asset register, as it may
benefit the most from analysis of the data. However, this information may also be
of value to other central institutions, such as the prime minister’s office or the
presidential administration.
The sophistication of the asset register system in place determines which
institution is in charge of data entry and updating. Entry-level systems may
require line ministries to complete paper or online forms before sending them
to the central agency for consolidation. For basic systems, it may only be practi-
cal to update data on an annual basis. More sophisticated systems, such as the
example from Belarus described in box 9.6, allow line ministries to upload
changes “in real time,” ensuring that data are current and reducing the burden
on the central agency.
Developing a national asset register from scratch requires careful coordina-
tion between the responsible central agency and the asset owners, as illustrated
in box 9.7 for the case of Northern Ireland.
TABLE 9.2 Example of suggested data requirements for land assets
LAND ASSETS
PHYSICAL
DESCRIPTION
(INCLUDES
DIMENSIONS LOCATION (BY INITIAL CURRENT
BUDGET AND GPS OR INVESTMENT ESTIMATED ANNUAL PURPOSE
CODE SURFACE SIMILAR DATE COST BOOK MARKET COST OF OF UTILIZATION
REFERENCE AREA) COORDINATES) ACQUIRED (IF ANY) VALUE VALUE OWNERSHIP OWNERSHIP %
Average
Totals
Ex Post Review and Asset Management | 161
BOX 9.6
Asset register: Areas of good practice in Belarus
The asset database operates in “real time,” and all uses “categorization codes” for each registered
users are able to access the same information at the asset; it allows users to identify quickly assets that
same time. The database is open to “authorized are not in use (Code 06) or that are used ineffi-
users” in central and local government, and data ciently (Code 07); those assets are highlighted, and
are often updated by authorized users on a daily decisions can be made readily regarding their
basis. The real estate section is open-access and future use.
Source: World Bank 2018.
BOX 9.7
Developing Northern Ireland’s national asset register
During 2004, a first attempt at creating a database in own departments and agencies and for reporting them
Northern Ireland involved a centralized Strategic for consolidation by the Strategic Investment Board.
Investment Board that coordinated teams responsible Line ministries were asked to nominate a senior offi-
for data collection. Each team member was assigned cial to coordinate the task internally; this step was
between two or three line ministries. Under the guid- essential, as central agencies are not always suffi-
ance of the relevant team member, each line ministry ciently informed about the detailed workings of line
was responsible for collecting the asset data from its ministries and their departments and agencies.
Source: Northern Ireland, Strategic Investment Board.
When gathering information for the asset register, the central coordinating
agency should validate any information provided. It is essential for the informa-
tion to be both reliable and trustworthy; if not, the purpose of the asset register
will be undermined and benefits will not materialize.
Regardless of which institution is in charge of coordinating or housing
the asset register, the line ministries or agencies that own the asset should
always be responsible for presenting the required information, for ensuring
the accuracy of the information, and for updating the relevant information
in the asset register. This process is important for public accountability
purposes.
The institution that houses the asset register should adopt a monitoring and
oversight role that includes occasional on-the-spot physical compliance checks
to verify the existence of listed assets, their claimed physical condition, their
actual usage, and any records related to operating and maintenance costs. Checks
should also seek to identify unreported assets that are not included in the
register.
162 | Public Investment Management Reference Guide
Subnational and sector asset registers and management
The large scale of public asset ownership often makes central-level monitoring
challenging and is the main reason why governments with established asset
management practices devolve most of the practical work to entities in lower
levels of government. The State of Victoria in Australia, for example, has issued
guidance on how its assets should be managed (Auditor General’s Office,
Victoria 2014).
It is good practice for line ministries, agencies, and state-owned enter-
prises to maintain their own asset register, which is then used as baseline
data for the national register. Keeping a property register at a line ministry or
a state-owned enterprise is an essential tool for sector investment planning;
it also makes reporting to the central or national asset register less
burdensome.
At a practical level, most assets are managed (that is, operated and main-
tained) by the owner or custodian of the asset, which could be a line ministry,
an agency of the line ministry, or a state-owned enterprise. However, some
asset classes may best be managed centrally; land and buildings are a good
example. The United Kingdom has created the Office of Government
Property under the Cabinet Office to maximize the efficiency of its estate
on a national scale.7
The thresholds for accounting for and reporting on individual pieces of
equipment may be much lower at lower levels of government, leading to low-
value items such as tables and chairs being “tagged” with asset identification
labels, as is the case in Australia, Canada, the United Kingdom, and other coun-
tries. More sophisticated electronic tags are now available that would help to
prevent the theft or misuse of assets. When line ministries report their asset
information to the central agency, only the aggregate numbers and values of
these lower-value items are likely to be recorded.
It is important to avoid subnational entities using their own asset registers as
an excuse not to report asset information at the national level. Failure to report
to the national register reduces the benefits of having a single unified register; it
also reduces the oversight and audit capability of the central government
agencies.
Operation and maintenance of assets and monitoring
their cost of ownership
Assets need to be maintained to ensure continuing ability to function and deliver
the public services for which they were created. Governments should under-
stand the need to provide adequate operation and maintenance funding in recur-
rent budgets; otherwise, the condition of assets will decline more rapidly, leading
to calls for new capital investment within shorter-than-expected timelines.
Annual operation and maintenance costs are rarely found in basic asset
registers, but their inclusion might be considered in a subsequent development
phase. Operating and maintaining assets are a significant cost to government.
It is sensible, therefore, to search for ways to monitor these costs with a view to
managing them most efficiently.
Information about operation and maintenance costs, potentially
obtained through more advanced asset registers and management, will
assist budget holders to plan for future demand on resources and help
Ex Post Review and Asset Management | 163
them to compare costs when making difficult spending decisions. It also
helps to make “whole-life cost” comparisons when assessing the potential
to renovate, upgrade, or replace assets. Estimates of predicted operation
and maintenance costs and, in particular, major upgrade or replacement
costs help planners to make more informed choices about calls on recur-
rent and capital budgets in future years.
Records of individual assets and their operation and maintenance costs
should be kept by officials of the public body responsible for the asset. The
officials collecting and monitoring operation and maintenance costs should
be knowledgeable about the specific asset class, understand the expected
performance data under different operating conditions, and be able to iden-
tify anomalies. Anomalies may occur because of poor maintenance, poor
operating practices, poor initial design, the need to replace or renovate an
older asset, or, potentially, fraud. Identifying differences in operation and
maintenance performance is not only about rectifying poor performance,
but also about understanding good performance—that is, why performance
might be superior to comparator assets and what lessons can be shared with
other operators to improve performance. The regular monitoring of opera-
tion and maintenance costs further provides insurance against possible theft
and fraud. The scope for potential savings from better maintenance and
monitoring of the costs of ownership is indicated in box 9.8 for the case of
the United Kingdom.
Disposal of surplus or underused assets
Effective asset management allows the identification of assets that are no lon-
ger functional, are no longer required, or have simply outlived their original
purpose. Even when an asset has lost its value for the current owner, it may still
enefit
have value for some other part of the public sector. An asset transfer can b
both the original and the new owner; the original owner is freed from storage
and security costs for a redundant asset, while the new owner can benefit from
lower cost and faster procurement times. An asset transfer should occur at the
asset’s “book value.”
BOX 9.8
Extracting value through good asset management practices
The devolved governments of Northern Ireland and the importance of the subject, winning political
Wales have benefited from various asset management support that led to targeted savings of £33 million
initiatives over the past 10 years: to £54 million per year in the costs of government
office accommodation.
• Northern Ireland’s asset register revealed that the
• Wales has been able to target a 30 percent reduction
operation and maintenance cost of assets was the
in government office running costs as a result of
second-largest individual cost to central govern-
availability of better asset data.
ment, after staff costs. This fact helped to elevate
Sources: Strategic Investment Board, Northern Ireland; Welsh Assembly Government.
164 | Public Investment Management Reference Guide
Some assets are of no further use to the government, which opens up the
option of divesting to a nongovernment entity that can make the asset economi-
cally productive. The rules for divesting should be clear and transparent and
preferably enshrined in legislation.
Great attention should be paid to the entire process of divestiture.
Establishing whether an asset has monetary value is important for public
accountability. Valuations should be undertaken independently from the
divesting authority, as collusion in the undervaluation of government assets is
a major form of corruption. Independent valuation can be achieved through
the use of government valuation offices (central or local statutory bodies) or
alternatively through private regulated or licensed valuation services.
If an asset has monetary value, divestiture rules should ensure maximum
value from it. An important incentive for encouraging public authorities
to divest redundant assets and to ensure maximum value is to allow them to
retain the receipts from the asset sale and to reinvest them in new assets. This
policy has proven successful in Ireland and the United Kingdom, which even
brought to light redundant assets that were previously unknown to central
authorities.8
In order to ensure maximum value from a divestiture, asset owners should,
for the sake of transparency, avoid single bidding. Rules should describe how the
asset is offered for sale and the criteria for approving the sale. The divestiture
process, the buyers, and the prices offered should be fully transparent.
Furthermore, the process should be time-bound, while allowing buyers suffi-
cient time to assess the value of the asset. In the case of divesting immovable
assets such as land, state authorities may set a “guide price.” If offers are signifi-
cantly below the expected value, public authorities are advised to review the
process and should not be obliged to proceed with a sale until they are satisfied
with the authenticity of the procedures.
Since choosing the successful buyer is often influenced by the monetary offer,
divesting entities might be tempted simply to choose the highest bid. However,
other criteria also need to be considered, such as conditions attached to the
bid or warranties requested from the public authority. Unconditional bids
sometimes known as “sold as seen” or “caveat emptor”) are preferred but may
(
not always be forthcoming.
Under the right circumstances, offers of value “uplift” may be c onsidered.
“Uplifts” are additional payments offered by the buyer to the public authority
that are conditional on certain risks being managed appropriately or not materi-
alizing. An example would be a site where contamination is suspected but sub-
sequent detailed investigations find that this is not the case.
If an asset has no monetary value or has a negative value, the public authori-
ty’s concern should be able to dispose of the asset in an environmentally respon-
sible manner.
Assets used in public-private partnerships
Assets used in PPPs are critical to the structure and financing of the transaction.
In most cases assets are owned by the private company, and the public authority
pays for the services provided through the assets. The management of these
assets is therefore entirely the responsibility of the private operator. However, it
is important for public authorities to be aware of the exact nature of the contrac-
tual arrangements of the PPP.
Ex Post Review and Asset Management | 165
Under some forms of PPPs—which are common, for example, in the power
generation sector and are known as build, own, operate (BOO)—the asset remains
the property of the private company even after the contract to supply power has
expired. The private company can then decide what to do with the residual
assets. Under other forms of PPPs—which are common for highways, airports,
and social infrastructure and are known as build, operate, transfer (BOT)—the
asset reverts to the public authority at the end of the contract. With BOT con-
tracts, which often last more than 20 years, public authorities run the risk of
inheriting time-expired assets with expensive repair and maintenance costs. To
protect against such liabilities, public authorities should ensure that PPP con-
tracts contain provisions that oblige the private operator to maintain the asset in
good condition (particularly in the final few years of the contract) and to guar-
antee its functional capability for several years after the contract expires.
NOTES
1. Public sector asset management generally refers to all government-owned assets—that is,
financial assets, including assets held as part of the foreign currency reserve, and non-
financial assets. This chapter refers only to public nonfinancial assets, such as land and
buildings, plants, and equipment.
2. Ex post evaluation is sometimes divided into two stages. The first, undertaken after a
project has been operating for a few years, examines efficiency and effectiveness; the
second, undertaken several years later, examines the contribution of the project to the
achievement of higher-level policy goals, usually referred to as “impact.” The second stage
may be referred to as impact evaluation.
3. See http://formin.finland.fi/public/default.aspx?contentid=69920.
4. Guidance on evaluation in HM Treasury (2003).
5. According to Florio and Vignetti (2013), “Evidence from international practices shows
that ex post CBA [cost-benefit analysis] is not as widespread as its potential role in terms of
policy learning would recommend.”
6. Until the end of the contract term, when ownership often reverts to the state. A few
examples of PPPs—such as build, transfer, operate (BTO)—transfer the asset to the con-
tracting entity on completion of the asset.
7. Formerly known as the Government Property Unit.
8. The receipts were only allowed to be reinvested—not to supplement recurrent budgets.
REFERENCES
Auditor General’s Office, Victoria. 2014. “Asset Management and Maintenance by Councils.”
Auditor General’s Office, Melbourne.
Florio, M., and S. Vignetti. 2013. “The Use of Ex Post Cost-Benefit Analysis to Assess the Long-
Term Effects of Major Infrastructure Projects.” Working Paper 2/2013, Centre for Industrial
Studies, Milan.
HM Treasury. 2003. The Green Book: Appraisal and Evaluation in Central Government. Amended
in 2011. London: HM Treasury.
Republic of South Africa. 2004. “Asset Management Framework: Management of Tangible
Non-Current Assets in the Public Sector.” Cape Town.
U.S. Department of Housing and Urban Development. 2015. “Project Completion Report: PPM
Version 2.0.” U.S. Department of Housing and Urban Development, Washington, DC. portal.
hud.gov/hudportal/documents/huddoc?id=proj_compl.docx.
Welde, M., and G. H. Volden. 2018. “Measuring Efficiency and Effectiveness through Ex Post
Evaluation: Case Studies of Norwegian Transport Projects.” Research in Transportation
Business and Management 28 (September): 33–39.
166 | Public Investment Management Reference Guide
World Bank. 2018. “Belarus: Strengthening Public Investment and Public-Private
Partnerships, Assessment Report (P160080).” Governance Global Practice, World Bank,
Washington, DC.
World Bank Independent Evaluation Group. 2017. Presentation at the IEG conference on
“Harnessing the Power of the Private Sector in Support of Sustainable Development,”
Washington, DC, October 12, 2017.
10
Integrating PIM and PPP in
a Unified Framework
OVERVIEW
The last two decades have seen growing global interest in public investment
management (PIM) and public-private partnership (PPP). Public investment
projects, implemented through a PPP or through more conventional means,
should aim to support the creation of viable economic infrastructure—such as
roads, airports, and railways—or to provide social infrastructure and public
services, such as hospitals and schools. Both implementation modalities
should stem from the same basic government demands or policy objectives.
Nonetheless, traditional public investment and PPPs are often managed
through distinctly different systems and institutions.
In many countries, most PPPs have been prepared, appraised, selected, bud-
geted, and monitored separately from traditionally implemented projects
(TIPs). This disparity has undermined efficient public financial management
and created undue fiscal risks and opacity, leading to concerns about appropri-
ate forms of accounting, reporting, budgeting, and more. For example, a line
ministry may seek capital funding from the ministry of finance for a project
that it sees as important for its own strategic reasons. The ministry of finance
might then reject this application for various reasons, and the proposing
authority may then attempt to pass off its project as a PPP project in order to
bypass the system that has just rejected the project. PPP projects should always
be required to seek final approval from the ministry of finance before entering
into contracts or financing agreements. Parallel systems should not be allowed
to develop. Intrinsically, there is no such a thing as a PPP project; PPP is a way
of implementing a public investment project. A bad project idea will remain a
bad project idea, and PPP implementation will not transform it into a good one.
It is therefore important to use a unified system of project identification,
appraisal, and implementation—which includes projects funded by the budget,
by donors, or by the PPP—to ensure consistency in selection choices and
throughout the life cycle of the project.
167
168 | Public Investment Management Reference Guide
The World Bank has developed a PIM-for-PPP (PIM4PPP) diagnostic tool
to help governments to put in place a unified approach to public investment
that encompasses traditional project financing and PPPs (Kim, Biletska, and
Darcy 2015). This tool provides an analytical framework for assessing the
whole investment cycle, from ex ante appraisal to ex post review, under a uni-
system for effectively managing traditional public investment and PPP.
fied
The PIM4PPP diagnostic has been pilot-tested in some countries, including
Ukraine (Biletska et al. 2016), and a key lesson from the results is the need for
clear guidance to assist the development of country-specific practices, proce-
dures, and roles and responsibilities of the main stakeholders to integrate PIM
and PPP effectively into a unified framework. More and more countries are
interested in developing an integrated public investment system for PIM and
PPP.1
This chapter provides guidance on the harmonization and integration of
PIM and PPP, presenting the rationale for why PIM and PPP integration matters
and discussing “must-have” elements for PIM-PPP integration.
WHY PIM-PPP INTEGRATION MATTERS
Benefits and risks of implementing public investment projects
using a PPP methodology
Since it is clear that implementation through PPP is a possibility for many
public investment projects, it is of critical importance for public authorities
to be aware of both the benefits and risks of using a PPP approach to procure
the project. Many country PPP units still take the role of PPP promotion too
literally, meaning that they concentrate on benefits rather than risks. This
focus on benefits creates a strategic risk for governments, in that it creates a
subjective bias toward PPP that increases the probability of making mis-
takes, leading to poor choices with long-lasting consequences. This section
describes both the benefits and risks in order to provide the best information
on which to make informed choices and to advise decision makers
accordingly.2
Benefits
Economically, the main benefit of encouraging a policy of PPP projects is that it
promotes intergenerational equity by spreading the budgetary cost of providing
a service or infrastructure over the same period of time as the benefits of the
projects are realized.
The most commonly cited benefit of PPP implementation is greater efficiency
in project delivery, but other important benefits are associated with PPP as well:
• Transferring important risks from governments to private business
• Encouraging better project management and outcomes
• Indicating increasing openness in the economy, thus encouraging further
foreign direct investment, when the investment and financing include an
element of foreign direct investment
• “Locking in” the cost of maintenance over the contractual period, thus sup-
porting sustainability of the assets, where maintenance budgets are
suboptimal or not adequately protected
• Building service delivery quality standards into the project agreement.
Integrating PIM and PPP in a Unified Framework | 169
Risks
As with all projects, whether they are initiated by governments or by private
enterprises, PPP projects entail risks. PPP is often considered more suitable for
larger projects, resulting in a higher public profile, which creates a perceived
difference in the risks faced. Care needs to be taken to distinguish between the
perceived risk from people who are simply opposed to PPP as a policy and the
real risks to the successful outcome of the project as actually experienced by
officials and their advisers in many countries. Most risks can be avoided, mini-
mized, or managed within a well-designed holistic PIM-PPP framework for
strategic-level risks and a carefully implemented risk management program for
project-level risks.
There are two principal categories of risks in PPP:3
1. Strategic risks. Those risks that are not specific to an individual project
2. Project risks. Those risks that are project specific.
Strategic risks may have several characteristics:
• Overpromotion and bias toward PPP implementation in the PPP unit
• Weak objectivity among advisers who can earn more in fees from PPP
implementation than from TIP implementation, raising the risk of conflicts
of interest
• Unrealistic expectations of affordability, schedule, and cost of preparation,
all leading to inadequate preparation and putting the outcome at risk
• Incorrect problem identification
• Unchecked, unsolicited proposals from private companies
• Inability to communicate the objectives of the project to bidders
• Inability to express the project requirements in terms of “outputs” and
“outcomes”
• Poor project governance and decision-making structure
• Poor coordination between government bodies
• Fiscal risks, which are perhaps the most important strategic risks and there-
fore are considered separately.
Project risks may include the following:
• Lack of preparation and implementation capacity
• Unwillingness to accept external advice or support
• Inaccurate or overly optimistic demand forecast
• Site risk
• Planning and permitting risks
• Construction risks
• Risk of the authority changing the scope of the project
• Insolvency of the private partner
• Risk of force majeure
• Risk of vandalism
• Miscalculation by the private partner during implementation
• Miscalculation of the responsible public authority’s costs during
implementation
• Change of law risk (general)
• Discriminatory change of law
• Funding risk
• Risks in use or operation
• Risks of unexpected maintenance, including cost and disruption.
170 | Public Investment Management Reference Guide
Benefits from the integration of PIM and PPP
A unified framework provides several advantages across the whole investment
cycle for both traditional public investment and PPPs.4 First of all, a unified
framework can help to ensure that assessments of and decisions about public
investment projects are consistent with maintaining the value-for-money (VFM)
objective throughout the project cycle, even though objective decisions cannot
always be guaranteed. According to an Organisation for Economic Co-operation
and Development (OECD) survey, the VFM objective is often blurred in practice,
and the choice between a PPP and traditional procurement is skewed by factors
other than VFM; government officials in many countries feel that the rules in
place impede attaining the maximum VFM by creating incentives for either tra-
ditional procurement or PPPs (OECD 2010).
Second, a unified framework helps to accomplish optimal risk transfer. It is
important to note that all service delivery mechanisms—whether they are pub-
lic, private, or partnership models—are exposed to risks. Failure by the govern-
ment to mitigate these risks not only may have fiscal consequences for the
government but also may affect service delivery. The key advantage with PPPs,
if executed properly, is that much of the efficiency or VFM gain is derived from
effective identification, pricing, and transfer of risk from the public to the private
sector. Good risk management practice allocates risk to the party best able to
manage it. If each project (traditional or PPP) is subject to separate appraisal
arrangements, the transfer of risk from one project to the other may not be opti-
mal, opening the door to inadequate risk shifting at different steps in the project
cycle. A unified framework, therefore, might be considered one of the conditions
for achieving optimal risk transfer in both traditional and PPP options.
Third, a unified framework may help to avoid unidentified and unmanaged
fiscal risks and improve transparency in the public financial management
system. It should lead to the incorporation of all PPP fiscal commitments and
risks into the government’s routine fiscal screening and monitoring process.
As such, it enables the government to assess effectively the real burden of PPP
commitments and risks within a medium- to longer-term fiscal framework.
A unified framework should discourage parallel budgeting by reporting the
known and potential future fiscal costs of PPPs in the traditional budget system,
which is considered good practice.
LEGAL AND INSTITUTIONAL FRAMEWORK FOR PIM-PPP
INTEGRATION
Relevant legal framework for PIM-PPP integration
“Legal framework” refers to laws, decrees, regulations, by-laws, and policy
papers that permit or prevent PPP forms of implementation, as well as creating
the conditions that encourage or discourage private sector partners to engage
with the government. It should meet the needs of project proposers, investors,
and lenders, regardless of the chosen means of implementation. Sector legisla-
tion should be considered in addition to national laws.
Common law versus civil law
The best PPP policy document in the world is meaningless without the will to
implement it. In countries with little or no previous experience of PPPs,
Integrating PIM and PPP in a Unified Framework | 171
risk-averse officials may resist attempts to implement projects through PPP.
Furthermore, policy statements are often considered to be more aspirational
than instructional. Many countries require a legal intervention to direct spe-
cific actions. There are clear differences between countries that have a “common
law” legal tradition and those that have an “administrative civil law” system.
Common law countries, such as the United Kingdom, do not necessarily need a
PPP law, whereas administrative civil law countries find it nearly impossible to
take any action unless there is a specific law allowing them to do so. Therefore,
PIM-PPP integration will need to take account of the differences between the
different systems; what is considered a necessary part of a legal framework in
one country may not be necessary in another.
“Must-have” elements for PPP legislation
The presence or absence of a specific legal framework for PPP does not form the
whole picture. There are often sector laws and regulations, some of which may,
without sufficient attention to harmonization, even contradict provisions in a
PPP law and regulation, so a broader legal picture needs to be established. It is
most important to ensure that project proposals being considered for PPP
implementation are appraised equally under national legislation within the
existing PIM system.
The PPP legal and regulatory framework needs to have the following elements:
• Principles on which PPP projects are initiated and contracts are awarded
• Unambiguous authority to award PPP contracts, including who can award
what types of contracts and for how long
• How projects are assessed and appraised for value for money (which should
be the same for all public investment projects regardless of funding source)
• Long-term fiscal affordability of financial obligations
• How fiscal risks are assessed, managed, monitored, and reported
• How unsolicited proposals are handled
• Termination provisions, specifically compensation on termination
• Direct agreements
• Forms of permitted government support, if necessary
• Appropriate procurement procedures within the public procurement law
• Dispute resolution procedures, including international arbitration.
Dedicated legislation versus adaptation of existing legislation
In countries where many PPP projects have been initiated and implemented, the
must-have legal and regulatory elements for a functional system have been
adopted through two different approaches to developing the legal framework
(or combinations of the two):
• Developing dedicated PPP legislation to clarify conditions for PPP
implementation
• Adapting and strengthening the existing laws and regulations in sectors,
procurement, contracting, and public financial management to support
PPP implementation.
The first model has been adopted widely in many countries. A country’s
legal and administrative systems will determine whether a dedicated PPP law
or regulation is needed or would be beneficial. A PPP-specific law or regulation
can help to demonstrate political commitment to the PPP program and raise its
profile, although care is needed to avoid conflict with other laws and above all to
172 | Public Investment Management Reference Guide
avoid an impression of bias. A well-designed PPP law generally sets out princi-
ples that may then be supported by more detailed regulations. PPP laws may
establish guiding principles for a PPP program, processes, and institutional
responsibilities—such as for selecting PPP projects, handling procurement, and
dealing with disputes—and for policies, such as public financial management
rules governing PPPs. Dedicated PPP legislation is most common in civil law
countries,5 as is the case in many African, Asian, European, and Latin American
countries implementing PPPs. These countries do so under a specific PPP-
concession law or regulation, or both. Some common law countries have also
adopted PPP laws, which are more binding than a statement of PPP policy.6
Another less common, but equally successful, model is where no specific
PPP law has been adopted. In Germany, for example, the Budget Law
establishes guiding principles and appraisal requirements for all public pro-
curement, including PPP projects. In Portugal, which has more PPPs than
Germany, there is no PPP law or dedicated PPP legislation.7 Permitting legal
texts include one section on PPPs in the Public Procurement Law and one in
the Budgetary Framework Law.
Existing administrative laws or regulations—such as those for sector policies,
procurement, or resolution of contractual disputes—may define processes and
institutional roles for PIM and PPP. The following existing laws and regulations
may be adapted and applied to PPP processes (World Bank 2017d, sec. 2.2):
• Sector-specific laws and regulations. PPPs are often implemented in sectors
that are already governed by laws and regulations that may constrain the
government’s ability to contract with the private sector or provide rules for
doing so.
• Procurement law. The transaction process for a PPP must typically comply
with or preferably be integrated with a public procurement law and
regulations.
• Contract law. Insolvency and contract resolution mechanisms are included.
• Public financial management law. Institutional responsibilities, processes,
and rules established in public financial management laws and regulations
can contribute to the PPP framework, including project approval require-
ments, fiscal limits, budgeting processes, and reporting requirements.
Country examples for legal integration of PIM and PPP
The PPP legal structure has been developed and strengthened in many
countries using dedicated PPP legislation or adapting the existing sector,
procurement, contract, or public financial management laws and regula-
tions. Integrating PIM and PPP into the legal framework has been consid-
ered only recently in most countries. Separate PPP legislation has encouraged
or facilitated fragmented treatment of PPP projects, separate from TIPs,
especially when new legislation assigns specific roles to newly formed PPP
units that duplicate or supersede those of existing PIM institutions. This
fragmentation should be avoided; PIM units should only be given the pow-
ers to deal with matters that are specific to PPP implementation and should
not be given a mandate to promote PPP as a “preferred” method of
implementation.
PIM-PPP legal integration has recently become an important agenda in PIM
and PPP management; as such, some countries have made specific efforts to
establish an integrated legal framework. Cyprus, for example, enacted the Fiscal
Responsibility and Budgetary System Law in 2014, which includes a special
Integrating PIM and PPP in a Unified Framework | 173
chapter for public investment projects, reserved for regulating PIM and PPP
projects in an integrated system. The law makes both TIP and PPP projects sub-
ject to the same provisions for project preselection, assessment, and selection;
there is, however, a supplementary provision for an economic entity considering
the PPP procurement option, which requires additional steps in the selection
stage in order to assess the desirability of a PPP option (see box 10.1).
In the Republic of Korea, the PPP Law provides legislative support for
PPP preparation and management. It is a special law and has precedence
over other laws; however, efforts to integrate equal treatment and flexible
interchangeability between TIPs and PPPs have been addressed through
several pieces of secondary legislation under PPP law. PPP projects need to
be reviewed and approved by the PPP Review Committee (PRC), chaired by
the finance minister in alignment with TIP projects at three critical stages:
(1) project appraisal and selection, (2) contract agreement, and (3)
BOX 10.1
Cyprus’s legal framework for integrating PIM and PPP
The 2014 enactment of the Fiscal Responsibility and analysis to prove the desirability of the PPP option
Budgetary System Law (FRBSL) includes a chapter over the traditional public procurement option.
(chapter 11, on selection and implementation of public If the results of the procurement option pretest
investment projects) for public investment projects. suggest that undertaking a PPP procurement option is
The FRBSL requires all public investment projects— worth exploring, the PPP modality (type of PPP
whether TIP or PPP—to follow the same preselection, contract) should be chosen for further investigation.
assessment, and selection processes; if an economic As a next step, when the economic entity has
entity is considering the PPP procurement option, decided on the PPP modality, a VFM assessment has
further steps need to be taken at the selection stage in
to be undertaken. In this assessment, the public sec-
order to assess the desirability of a PPP option. tor comparator tool is used to determine whether
Under the FRBSL, PIM guidelines provide more implementing the project through a PPP would be
specific regulation of the decision to select a PPP more cost-effective than implementing it through
project in a unified framework with traditional public traditional public investment. The net present value
investment procurement. Only when a project has of the PPP (determined by a feasibility study analysis
been preselected, appraised, and selected can eco- for the PPP project) is compared with the net present
nomic entities proceed to deciding the most appropri- value of the preferred option as a TIP. Implementing a
ate procurement method for PPP. Public procurement project through a PPP yields value for money if it
options available to economic entities are defined in results in a net positive gain to society greater than
the Coordination of Procedures for the Award of Public that which could be achieved by implementing the
Works Contracts, Public Supply Contracts, and Public preferred option as a TIP.
Service Contracts and for Related Matters Law, of The PPP procurement method will be selected if
2006 (12(I)/2006). the VFM assessment is positive and if the project does
For the purpose of determining the desirability of a not exceed the ceilings imposed by the minister of
PPP option, economic entities considering this pro- finance on the annual commitments of PPPs in the
curement option should undertake a procurement economic entity’s budget; otherwise, the project will
option pretest, select the most appropriate PPP be implemented through the traditional public pro-
modality, and perform a value-for-money (VFM) curement method.
Sources: Government of Cyprus 2014, 2016.
174 | Public Investment Management Reference Guide
renegotiation or refinancing (see box 10.2).8 At the appraisal and selection
stage, a PPP project should be assessed using VFM analysis and approved by
the PRC over a TIP procurement option. At the contract agreement stage, the
PRC should review the analysis to ensure that the negotiated PPP contract
still provides better value for money. During renegotiation or refinancing,
changes to the PPP contract agreement should be reviewed and approved by
the PRC to confirm value for money. The legislative framework allows a proj-
ect to switch modality during preparation and implementation; the PPP
Basic Policy regulation states that TIP and PPP project modality may be
interchanged to produce better value for money.
According to the National Finance Law, the Korean government’s medi-
um-term expenditure framework (MTEF) considers PIM-PPP integration. The
MTEF has a PPP section that includes agriculture, defense, education, environ-
ment, health, research and development, welfare, and other sectors, where all
active PPP projects are systematically considered and formulated with all other
TIP infrastructure projects.
BOX 10.2
Korea’s PPP law and regulation for PIM and PPP integration
Under the Republic of Korea’s PPP Law, the PPP money of PPP procurement with that of TIP procure-
Review Committee (PRC) chaired by the finance ment. The analysis consists of three phases:
minister, is responsible for reviewing and approving
• Phase 1 ( feasibility assessment). Economic feasibil-
ever y PPP project at critical stages of PPP
ity (mainly cost-benefit analysis) is examined and
implementation:
a policy analysis is conducted.
• Article 10 (2). When a master plan for a PPP project • Phase 2 (VFM assessment). A comparative analysis
meets the requirements specified in the PPP Decree, is conducted between a public sector comparator
it shall undergo prior deliberation by the PRC. The and the PPP proposal to examine the VFM of the
same shall apply where modification is required. PPP option.
• Article 13 (3). The competent authority shall desig- • Phase 3 (development of an alternative option using
nate a concessionaire by making a concession the PPP approach). Additional financial analysis is
agreement with the potential concessionaire, conducted to calculate an appropriate level of
including the conditions for project implementa- project cost, user fee, government subsidy, and so
tion, such as the total project cost and the concession forth from a public sector perspective and an
period. Matters regarding the designation of a con- alternative option using the PPP approach.
cessionaire who meets the requirements deter-
In the PPP Basic Policy, Articles 161–162 regulate
mined by PPP Decree shall undergo a prior
how TIP and PPP projects can be interchangeable in
deliberation by the PRC.
the context of achieving a better VFM option. Article
According to the regulation of PPP Basic Policy, 161 regulates how an ongoing TIP project can be
value-for-money (VFM) analysis is required to ensure
transferred to a PPP project, and Article 162 regulates
a better value for money of the PPP project. The how an ongoing PPP project can be transferred to a TIP
assessment is carried out to compare the value for project if needed to meet the better VFM requirement.
Sources: Government of Korea, Act on Public Private Partnerships in Infrastructure, Enforcement Decree on the Act on Public Private
Partnerships in Infrastructure, and Regulation of Basic Policy Plan on the Act on Public Private Partnerships in Infrastructure.
Integrating PIM and PPP in a Unified Framework | 175
The World Bank has been working with several countries to develop the
relevant legal framework to harmonize and integrate PIM and PPP
management.9 In 2018, the government of Jordan worked with the World Bank
to develop a PIM-PPP framework, including provisions for aligning PPP
decision making with project appraisal and selection for TIPs (World Bank
2018). The government of Jamaica developed a coordinated and integrated
decision-making system in 2015 covering all projects funded by the budget
(Capital A), donor funds (Capital B), public corporations’ funds, and PPPs.10
The PIM Committee was established, supported by a secretariat, to screen,
review, and prioritize all projects, including TIPs and PPPs, at an early stage
(see box 10.3 for Jamaica’s PIM system).
BOX 10.3
Jamaica’s PIM system for integrating PPP
Jamaica has significantly strengthened its public technical support to the PIM Committee, assesses
investment management since 2013. Under the new proposals, and undertakes evaluations.
system, all proposed public investment projects, The second operation supported the government
regardless of funding source, including PPPs, are now in making these institutions operational. The cabinet
screened, approved, and managed through an inte- appointed the PIM Committee in 2016. The executive
grated process. This process extends across all public director was hired in August 2015, and other core
entities and sectors, includes all types of public sector staff members of the PIM Secretariat were hired
expenditures (actuals and contingencies), covers all during 2016. In December 2016 the cabinet approved
steps and phases that a project has to complete through operational guidelines that govern the PIM system
its productive life, ensures that all projects and the from proposal to impact evaluation. Investment proj-
overall portfolio are aligned with a larger develop- ect financing is funding investments (including a pre-
ment purpose, and ensures that both future capital investment evaluation facility) and additional
and recurrent spending associated with investment technical support for the new PIM system.
projects is provided for in budget forecasts. Important improvements in PIM performance
The World Bank supported the government in two have been achieved: the quality of project proposals
operations throughout the reform process.a World has improved, and project costing is now incorporated
Bank technical advisory services helped the govern- into the budget. (Projections of the total life-cycle cost
ment to design the new PIM system and supported of major investment projects, including both capital
cabinet approval of it. and recurrent costs together with a year-by-year
The first operation supported amendment of the breakdown of costs for at least the next three years, are
Financial Audit and Administration Act in 2014 to included in the budget.) Interinstitutional coordina-
establish two new institutions: (a) the PIM Committee, tion has improved, minimizing overlapping projects
which reviews the feasibility and strategic alignment across ministries, departments, and agencies and
of all investment proposals, sets investment project ensuring that linkages are clear in project proposals.
priorities, and recommends projects to the cabinet for The strategic alignment is better, and the policy focus
approval; and (b) the PIM Secretariat, which provides is sharper.
Source: World Bank 2016b.
a. One was a development policy loan (the first operation) and the other was investment project financing (second operation).
The development policy loan helped to move the legislative actions forward, while the investment project financing is financing the
underlying investments.
176 | Public Investment Management Reference Guide
BOX 10.4
Zimbabwe's PIM guidelines, including integrated treatment of PPP projects
The Zimbabwe PIM guidelines define the scope and b. Imposing recurrent expenditures on the budget
coverage of public investment projects. The appraisal
c. Seeking government guarantees.
and approval of all public sector investment projects,
including PPPs, should follow these guidelines, which 3. Public-private partnership projects
define projects such as those financed through ( joint-venture projects)
1. National budget or centrally managed resources 4. Development partner projects when:
2. Public entities and grant-aided institutions when: a. Cofinanced from the budget
a. Requesting capital budgetary funding b. Imposing recurrent costs on the budget.
Source: Ministry of Finance and Economic Development, Zimbabwe 2017.
In 2017, the government of Zimbabwe approved a new regulation establish-
ing PIM guidelines through a Treasury circular, whereby PPP appraisal and
selection decisions are incorporated into the PIM decision-making framework
(see box 10.4).11
Relevant institutional arrangements for PIM-PPP integration
Governments need experience, capacity, and coordination to implement PPPs.
While the private party will design, finance, build, and maintain the infrastruc-
ture and provide services, the government is responsible for ensuring that public
services are provided in accord with expected quality standards in a way that
achieves good value for money. Many governments choose to define institutional
responsibilities for PPPs in order to select the right project and a competent
partner as well as to manage the contract.
Institutional arrangements and the allocation of functions differ depending
on the PPP program and player needs.
Two key institutional roles for PPP are often described (Rajaram et al.
2014, ch. 7):
• A promoter role. Doing the day-to-day management work for the PPP pro-
cess, involving identifying potential projects, conducting an appraisal,
structuring the project, drafting the contract, handling bidding, and manag-
ing the contract after it is signed
• A gatekeeper role. Overseeing the PPP process through review and approvals
at key stages to ensure that the project represents a good investment decision.
The roles and responsibilities of dedicated PPP units need to be examined
carefully to avoid distortions in the overall PIM system. Inherent conflicts of
interest should be avoided, which means that the “promoter” should be different
from the “gatekeeper,” as should be the case in traditionally implemented
projects.
Integrating PIM and PPP in a Unified Framework | 177
Finance ministries play a central gatekeeping role in the overall PIM system
in most countries. The avoidance of parallel systems for TIP and PPP implemen-
tation is essential; finance ministries (through their role in coordinating other
actors) should therefore be at the heart of PPP institutional arrangements.
Sector ministries and agencies should generally play the role of promoter in day-
to-day implementation of the steps involved in bringing a PPP project to
fruition.
It is important to highlight the recent trend toward changing the roles of
PPP units as they become more “mainstream” within traditional PIM institu-
tional arrangements.
The United Kingdom has a long-running experience of PPP that serves as
a useful case study. Since the mid-1990s, institutional development to sup-
port the PPP form of implementation has been adapted to changing
perceptions regarding the best role for PIM and PPP units. When the first
major wave of PPP projects was being developed alongside important policy
measures, HM Treasury appointed external full-time advisers to provide
market-oriented guidance on policy making. A further iteration known as
Partnership UK, established in 2001, was merged into Infrastructure UK
under the umbrella of HM Treasury in 2010 in order to harmonize TIP and
PPP implementation and to ensure objective assessment of project propos-
als, regardless of the means of implementation, and there has not been a
separate PPP unit since then.12 The intention behind these changes was for
PPP to be used as the implementation modality only when it provides better
value for money than TIP.
Korea also has a long history of a unified PIM-PPP unit, putting PIM-PPP
integration into practice (see box 10.5). According to the PPP Law and the
National Finance Law, a dedicated unit called the Public and Private
Infrastructure Investment Management Center (PIMAC) has been mandated
to provide review and oversight services for the decision making of the
BOX 10.5
Korea’s PIM and PPP unit responsibilities under the PPP law and
national finance law
According to Article 38 of Korea’s National Finance review PPP preparation and implementation
Law, in order to formulate a budget for any new large- comprehensively, the article describes the man-
scale project, including PPPs, defined as a project dates of the PIMAC. At all stages of a PPP project—
with a total cost of at least almost US$50 million, the preparation, feasibility appraisal, procurement
minister of economy and finance shall conduct a pre- bidding and negotiation, contract agreement
liminary feasibility study. The preliminary feasibility and management, implementation, renegotia-
study shall be undertaken by PIMAC, which works as tion, and so on—the PIMAC is responsible for
a professional PIM unit. working as the professional PPP unit of the
Article 23 of the PPP Law also articulates the government.
establishment of PIMAC. In order to support and
Source: Government of Korea, Act on National Finance and Act on Public Private Partnerships in Infrastructure.
178 | Public Investment Management Reference Guide
Ministry of Economy and Finance in TIP and PPP project preparation and
implementation. The dedicated unit is therefore able to provide consistent
quality assurance for both TIP and PPP projects.
INTEGRATED PROJECT SELECTION PRACTICES FOR PIM
AND PPP
Consistency in PIM and PPP project identification and initial
development
PIM-PPP integration requires cohesive decision making. Project identifica-
tion and initial concept development require a standard methodology to
examine the need for government intervention to address a given situation.
How these issues are handled can affect how the government allocates
resources and may affect future value for money. Designating projects as
“PPPs” at this stage should be avoided, as the potential for PPP implementa-
tion is largely irrelevant until the decision has been made about whether
there should be any project at all and about what are the objectives, scope,
scale, and desired outcomes.
BOX 10.6
Country PPP policy statements
Australia’s State of Victoria’s policy statement Korea defines a public-private partnership project
describes the aim of PPPs as being “to deliver as a project to build and operate infrastructure such as
improved services and better value for money, road, port, railway, school, and environmental facilities,
primarily through appropriate risk transfer, encour- which have traditionally been constructed and run by
aging innovation, greater asset utilization, and an government funding, with private capital, thus tapping
integrated whole-of-life management, underpinned into the creativity and efficiency of the private sector.
by private financing.” South Africa defines a public-private partnership
India’s draft National PPP Policy sets several as a commercial transaction between a government
objectives for PPPs: institution and a private partner in which the pri-
vate party either performs an institutional function on
• Harnessing private sector efficiencies in asset
behalf of the institution for a specified or indefinite
creation, maintenance, and service delivery
period or acquires the use of state property for
• Providing a focus on the life-cycle approach for its own commercial purposes for a specified or
development of a project, involving asset creation indefinite period. The private party receives a bene-
and maintenance over its life cycle fit for performing the function or for utilizing state
• Creating opportunities to bring in innovation property, either by way of compensation from a
and technological improvements revenue fund, collection of charges or fees by the
• Enabling affordable and improved services to the private party from users of a service provided to them,
users in a responsible and sustainable manner. or a combination of compensation and charges or fees.
Source: World Bank 2017d.
Integrating PIM and PPP in a Unified Framework | 179
A comprehensive system to ensure that PPP is a viable implementing option
within PIM needs to start with a PPP policy statement. A policy document
should lay out the rationale for PPP implementation within a country’s
economic and development context. It should explain the benefits of PPP to
citizens and reach out to potential partners to fund and operate projects.
Australia,13 India, Korea, South Africa, and Slovakia provide examples of
good-practice PPP policy papers (see box 10.6).
Management of the early stages of TIP and PPP project identification and
initial development needs to be addressed in official guidance, which
should emphasize that management applies to all forms of implementation.
PPP legal instruments and policy statements should avoid references to PPP
projects as being separately identified or as being somehow outside the normal
PIM system. Identifying the need for intervention of any kind, with a clear
elucidation of the nature of the problem and various options for resolving it,
should precede thoughts on whether a PPP or any other form of implementa-
tion makes the most sense.
Integrated preappraisal for PIM and PPP projects
A good PIM system will attempt to keep the number of project proposals to a
minimum, as there typically are more projects than resources. The most
common way to keep the number of proposals manageable is to use a
preappraisal system that identifies and eliminates projects that have little or no
chance of being approved later on (as set out in chapter 5). If a project proposal
passes the preappraisal stage, this fact gives project proposers enough
confidence to devote resources to a feasibility study. The process could also help
proposers to improve the project design.
The basic project concept should be introduced in the preappraisal tem-
plate. The template should include enough information to support an
informed decision on whether to prepare the project for a detailed proposal
and possible implementation as well as an assessment of the potential for
PPP implementation, if the project’s characteristics indicate that a PPP
could be the best means of implementation. The process also needs to be
able to screen out projects that are unsuitable for PPP implementation.
A section on suitability for PPP implementation should be included in the
preappraisal template and should be completed by relevant government
experts.
A manual recently prepared for the government of Cyprus is a good example of
a process for screening for PPP potential at preappraisal. According to the World
Bank (2016a), the following factors and preconditions favor a PPP solution:
It will be important to highlight any characteristics that would suggest
that PPP may be considered as a procurement option. These would include
the potential for proper allocation of risk between public and private
partners or for private sector innovation in design solutions or operational
practices. There should also be the possibility of formulating a long
duration contract of sufficient size to outweigh the significant fixed costs
of negotiating a PPP deal. Good candidates for PPP procurement are as
long as: (a) outputs and quality can be defined and monitored in a clear
way; (b) user needs are stable over time; (c) the project is reasonably
robust to policy changes; and (d) fast technological change is not expected
to require significant changes in project design.
180 | Public Investment Management Reference Guide
Integrated appraisal for PIM and PPP projects
PPP is merely an alternative form of project implementation. Recognizing this
characteristic, national project appraisal rules should clearly state that they
apply to PPP as well as TIP. Projects should be appraised for their economic
value, not their means of implementation. Good practice demands a single
appraisal manual that explicitly includes PPP implementation.
At the project appraisal stage, all projects should follow the process laid
down in the PIM system, regardless of whether they are flagged as potential
PPPs at the preappraisal stage. A project not flagged as a potential PPP during
the preappraisal stage may still be flagged as such at the appraisal stage.
Separate guidance on matters of technical relevance to PPP implementa-
tion is acceptable as long as the guidance operates within the PIM
framework.14 The guidance must warn against potential distortions in appraisal
that PPP can bring, including:
• Describing projects as “PPP projects” before an appraisal has been conducted.
Such descriptions are poor practice and lead to distortions and subjective
decision making.
• Incentivizing PPP over TIP. Governments sometimes create special funds
to promote private sector involvement, which may result in project promot-
ers from public authorities refusing to consider non-PPP options.
• Fast-tracking PPPs. In addition to being labeled PPP projects before appraisal,
projects are often given preferential treatment, which could easily influence
the implementation route. Ministers and officials may expedite their projects,
bypassing normal quality assurance systems to avoid the full scrutiny that
would normally be required.
If the rationale for PPP is assessed to be solid, projects will proceed to a more
in-depth VFM assessment or public sector comparator assessment.
When flagging a project as a potential PPP, the following factors should be
considered:
• VFM proposition for the potential PPP. Achieving value for money from
private capital for building and operating public infrastructure requires
efficiency savings that compensate for the additional financing cost of private
capital. A public investment project should not be flagged as a potential PPP
simply because of the need to leverage public investment with private capital.
• Institutional capacity for procuring and managing PPP contracts. Potential for
value for money is not enough; the relevant authorities must have the capac-
ity to prepare, procure, monitor, and manage contracts to ensure value for
money.
• Marketability of the proposed project. Market interest in the project from
suitably qualified bidders needs to be sufficient to ensure meaningful
competition.
• Affordability and acceptability of fiscal commitments. Fiscal commitments
include guarantees and contingent liabilities.
VFM proposition
A comparative assessment of the costs of PPP and non-PPP implementation
routes has become an essential element in assessing the merits of each
Integrating PIM and PPP in a Unified Framework | 181
implementation option. However, these assessments are riddled with potential
distortions through their (necessarily) subjective nature: skilled officials or
consultants can manipulate comparative assessment inputs in order to achieve
the results they want.
This assessment has two essential components: qualitative assessment and
quantitative assessment (World Bank 2013). A key area of concern in quantita-
tive assessment is risk pricing; significant focus is placed on risk pricing in PPP
arrangements, but it is often not given the same level of importance in conven-
tional implementation, and possibly none at all. Each identified risk should be
priced consistently as part of the comparative assessment.
Officials and their advisers should be able to identify risks to be transferred
to the private sector and to assess the cost of those risks. The adjudged values
can then be assigned to the benefits column of the PPP option appraisal.
Subjectivity enters into the assessment of risk and the valuation of associated
costs, leading to the possibility of manipulation. In recent times, this difficulty
has led to quantitative assessments being given less importance in the overall
VFM assessment. Instead, governments appear to be focusing more on qualita-
tive assessment to guide decision making, although such a focus is also fraught
with subjectivity.
There is significant scope for managing an assessment in such a way as
to reach a prejudged conclusion (“case making”). In order to ensure consis-
tency across projects and to avoid case making, governments should issue
formal written guidance for pricing risks. There is also the legitimate con-
cern that such a comparative assessment should not create an administrative
burden by being too complex. Comparative assessments can be slow and
involve substantial bureaucracy if not designed well.
Institutional capacity
Assessments of PPP implementation viability should assess whether the
awarding authority has the capacity to prepare and implement a successful
PPP project. Knowledge and skills for preparing and procuring a PPP project
are often scarce in public authorities. It is reckless to attempt to implement a
PPP project without the necessary skills; the liabilities connected with a badly
executed project could last for decades.
Marketability of the proposed project
PPP implementation needs interest from private sector investors and lending
institutions. A “soft market test,” an assessment of the competitive environment
for the project, should be carried out to establish the potential level of interest
from likely bidders. It should also assess their competence to deliver PPP and
their ability to bring anything extra to the process.
Affordability and acceptability of likely fiscal commitments
PPP contracts can create fiscal commitments in the form of (a) up-front cap-
ital payments, (b) obligations to provide connecting infrastructure or utili-
ties, or (c) obligations to pay for the availability of assets and their associated
services. PPP contracts also contain contingent liabilities such as debt guar-
antees, minimum revenue guarantees, early termination payments, or envi-
ronmental warranties. All of these liabilities need to be part of the
182 | Public Investment Management Reference Guide
decision-making process so that the government enters into contracts
knowing the risks and with a plan to manage and monitor them. Increasingly,
international accounting standards15 require that the value of PPP assets be
scored against national debt statistics, thus removing a previously attractive
motivation for PPP transactions.
Overall rationale
The rationale for PPP implementation is presented through the identification of
possible “drivers” of value for money. Table 10.1 summarizes the possible drivers
and the corresponding questions for guiding the choice of PPP structure.
TABLE 10.1 Summary of possible drivers and questions relating to public-private partnership (PPP)
implementation
POSSIBLE DRIVER WHY MIGHT THIS APPLY? WHEN MIGHT IT APPLY? PPP STRUCTURE QUESTIONS
More effective PPPs may bring in experience May apply to projects where • Can payments be linked to
management under a PPP and expertise not available in the there is: performance?
delivers the infrastructure public sector or may strengthen • Current sector • Can sufficient private capital
asset and associated managerial incentives by linking underperformance or be placed at risk to ensure
services more quickly or payments to performance. significant delivery capacity the private party faces a
more cost-efficiently than constraints in the public strong incentive to perform
the alternative. sector that could not readily over the long term?
be overcome internally • Can project risks be
• Significant scope to improve reasonably defined, identified,
quality or to lower overall and measured, such that the
project cost and risk through right risks can be transferred
management improvements to the private party?
A whole-of-life costing PPPs integrate up-front design May apply to projects for which • Can sufficient private capital
approach is expected to and construction with ongoing operation and maintenance be placed at risk to ensure
lower the lifetime cost of operation and maintenance costs are expected to vary that the private party faces a
the project. under one company. This significantly according to design strong incentive to perform
integration creates an incentive and quality of construction over the long term?
to carry out each function in a
way that minimizes total lifetime
project cost.
Private management Specifying required outputs May apply to projects with a • Can performance be specified
under a PPP is expected rather than inputs in a PPP range of possible delivery in terms of outputs?
to allow for innovation in contract provides scope and technologies
infrastructure service incentives for innovation.
delivery, resulting in
improved reliability, lower
cost, or both.
PPP may lead to reduced By requiring the private company May create liabilities that are • Can sufficient private capital
public liabilities and fiscal to raise finance for a PPP project harder to assess than those be involved?
risk compared to public and bear substantial risks, a good associated with traditional
financing and provision. PPP contract can reduce the infrastructure procurement
public liabilities and fiscal risk funded from public debt; the
associated with providing the potential risks and benefits
infrastructure. The extent of the should be treated with caution
reduction depends on the
structure of the PPP project.
“User pays” PPPs may Private operation may be more May apply when there is • Can revenue risk (demand
increase the overall effective in charging users for substantial scope to reduce and payment risk) be
resources available for services. commercial losses or when transferred to the private
funding infrastructure significant revenues can be sector?
assets and services. generated from alternative uses
in addition to the core project
purpose
Source: Government of Cyprus 2016.
Integrating PIM and PPP in a Unified Framework | 183
Independent review of appraisal for PIM and PPP projects
Independent review of project proposals is the main means of applying quality
assurance to a PIM system. It is also an important means of screening out
unsuitable projects, correcting mistakes and inaccurate assumptions, and
avoiding the natural bias that comes with officials or consultants who are
concerned with the promotion of a PPP project.
When PPP has been chosen, extra vigilance is required, as authorities often
realize that they may be pitching their project to a skeptical private sector and
try to overcompensate by painting a particularly rosy picture of potential demand
for the project or by minimizing the costs and risks involved (optimism bias).
In an attempt to encourage private participation and investment, they may also
offer contractual terms that could lead to unacceptable fiscal risks.
Optimism bias can affect the private sector as well; private bidders may be
so keen to participate in a project that they overlook faults in the appraisal.
Worse still, they may not care, thinking that the government will be the ultimate
guarantor of the liabilities involved in failure. This guide therefore strongly
promotes independent review.
The rules on providing independent scrutiny should be the same regardless
of whether the chosen implementation method is TIP or PPP. Conflicts of
interest may emerge when national PPP units have a promotional role for PPP
but are also asked to review proposals involving PPP implementation;
reviewer independence is therefore essential. A “challenge and review” system
is needed to stop unsuitable projects from progressing as well as to identify
improvements in design and appraisal for potentially suitable projects that might
improve outcomes. Independent review should be more than a simple “stop-go”
technique; it should offer a “checklist” for conducting reviews of project
proposals and for quality management.
Decisions regarding unsolicited proposals
PPP projects are categorized into solicited and unsolicited proposals, depending
on who initiates the project. An unsolicited proposal is initiated by a private
partner, in contrast to one submitted in response to a government request. This
approach is the opposite of conventional proposals, which are initiated by the
government. Most countries give the public sector the sole right to initiate PPP
projects; however, some countries also allow unsolicited proposals.
When appropriately adopted, unsolicited proposals can allow governments
to benefit from the creativity of a private partner. However, unsolicited
proposals also create challenges that may increase the risk of funding
mismatches or shifts in government strategic prioritization for infrastructure
projects. They also can act as a conduit for corrupt practices. Solicited PPP
projects are selected within the scope, sectors, and boundaries established by
a national strategy, but unsolicited projects may not be part of a national
strategy. Accepting unsolicited proposals may therefore cause distortion
within the public investment portfolio, especially if they are prioritized over
existing high-priority government projects.
To minimize the risks from unsolicited proposals, specific eligibility criteria
should be developed and covered by legislation. These criteria should ensure
that an unsolicited proposal is consistent or compatible with the existing national
plan or sector strategy to avoid distorting already-agreed-on priorities (Rajaram
184 | Public Investment Management Reference Guide
BOX 10.7
VFM assessment method for unsolicited proposal projects in Korea: Comparing
all options with the same level of scrutiny
According to the regulations of the PPP Basic Policy in are compared to the VFM from the unsolicited pro-
Korea, value-for-money (VFM) analysis should be posal, based on the assumption that the comparable
carried out and reviewed by PIMAC to screen and solicited project is designed on the same reference
ensure that an unsolicited proposal provides better package as the unsolicited proposal while the TIP
VFM than other options. The analysis calculates the project is not.
value for money from all procurement options, cover- This way of comparing VFM has proven effec-
ing the unsolicited proposal itself, a comparable solic- tive in encouraging private partners to propose
ited project with public initiative, and a traditionally more creative unsolicited projects and in helping
implemented project (TIP) project. the government to expect and reap greater bene-
The VFM from the option of “a comparable solic- fits from the creative ideas of the private
ited project with public initiative” and a TIP project partner.
Source: PIMAC 2016.
et al. 2014, ch. 7). They should also be creative and efficient enough to deliver
extra value to the sector to compensate for the possible costs of distortion.
A recent World Bank study provides guidelines for managing unsolic-
ited proposals, which governments should adapt to fit local contexts
(World Bank 2017b). The principles are relevant from initial concept assess-
ment, appraisal, project development, procurement, and implementation, and
should be embedded in the same approval and decision-making processes
required for solicited proposals.
When unsolicited projects are subject to the same checks as publicly
initiated PPPs, stakeholders are less likely to see them as controversial;
when projects are seen to be subject to the same level of scrutiny, stake-
holders can be assured that project decisions will be equally robust.
Harmonizing procedures will have important benefits for government
oversight and may reduce public transaction costs as well as the risk of
corrupt practices.
Korea provides an example of an advanced approach to keeping the same
level of appraisal scrutiny and robustness across the three options: (1) unsolic-
ited PPP, (2) solicited PPP, and (3) TIP (see box 10.7).
INTEGRATED FISCAL MANAGEMENT FOR PIM AND PPP
PPP fiscal risk management
Fiscal risk singles out PPP implementation for special attention. There is
increasing scrutiny of this subject, and bodies such as the International
Monetary Fund (IMF) have been highly focused on it. This section assesses the
latest work on the subject.
The subject of risk is always raised when preparing project proposals in the
context of PPP; however, within project teams, risk is always construed to mean
Integrating PIM and PPP in a Unified Framework | 185
project risks,16 which tend to be issues such as construction, operational, demand,
and future regulatory risks. Important as they are, these risks are of principal
concern to investors and lenders, although inasmuch as they affect the ultimate
price of the project, they should be of concern to the government too.
Additional risks can be and often are transferred in the process of
negotiation between public and private entities and subsequently appear in the
contract between the parties. Sometimes these are risks that only the govern-
ment can absorb. Since PPP projects are governed entirely by the project agree-
ment and the associated financing documents, governments can unwittingly
expose themselves to significant fiscal risk by agreeing to explicit guarantees
and contingent liabilities when entering into PPP contracts. The following are
the main types of instruments in project agreements that can create fiscal risks:
• State guarantees on the debt raised against the project
• Guaranteed payments against minimum levels of demand (for example,
volume of traffic or megawatts of generated power through “take or pay”
agreements)
• Change in the law causing contractual claims
• Material adverse government action, which is a discriminatory step that
results in the private company being unable to manage the contract in the
way originally intended, potentially leading to claims or early termination
• Environmental warranties
• Viability gap funding
• Early termination provisions that require the state to buy back assets at
market or write-down value
• Other “buy back” clauses.
There are several examples of how governments have been exposed to these
risks and have suffered the consequences when the risks materialized. There
are even cautionary tales from highly regarded PPP systems in countries
such as Korea and the United Kingdom as well as in countries with less-
developed PPP systems.
Four key challenges arise with respect to fiscal risk in PPP projects:
• Understanding risks and how they are incurred,
• Knowing how to measure these risks,
• Recording the risks in individual projects and cumulatively, and
• Monitoring the likelihood of risks occurring.
The following are essential points to consider:
• Explicit liabilities should be recorded clearly and should be managed within
the budget system.
• Contingent liabilities in PPP contracts should be assessed and priced before
commitments are made through signed contracts.
• Even when PPP projects are entirely “user-funded” and are not accounted for
on the project's balance sheet, the government should still monitor and record
their contingent liabilities, as the government is always the funder of last
resort.
• Accumulated aggregate fiscal risks related to increasing numbers of PPP
commitments should be recorded and monitored, and their impact should be
considered in the selection process.
• The Ministry of Finance should sign off on PPP projects before they are
approved.
186 | Public Investment Management Reference Guide
Controlling the aggregate amount of fiscal commitments
under PPP contracts
Some governments introduce rules to control the aggregate fiscal commitments to
PPP projects. Types of fiscal commitments should be defined, but determining
how to aggregate a long-term flow of different fiscal commitments represents a
challenge. Whether to apply the rule to direct liabilities only or to include con-
tingent liabilities should be decided, and liabilities should be measured and
aggregated. The following are some examples of safeguards introduced to reduce
aggregate exposure to risk from PPPs (see some updates from Irwin 2007; World
Bank 2017d, 87–90):
• Brazil. The Federal PPP Law (2004) initially limited total financial
commitments undertaken in PPP contracts to a maximum of 1 percent of
annual net revenue.17 In 2009 this limit was raised to 3 percent, and in 2012 it
was raised again to 5 percent in the cases of subnational governments.
• Cyprus. The Fiscal Responsibility and Budget Systems Law (2012) determines
the total budget ceiling of each economic operator regarding annual commit-
ments toward public-private partnerships.
• Hungary. Act 38 (1992) limits the total nominal value of multiyear commit-
ments to PPPs to 3 percent of government revenue.
• Peru. Legislative Decree no. 410-2015-EF (2015) states that the present value
of the total fiscal commitments to PPPs—excluding government finance
entities—shall not exceed 12 percent of gross domestic product. The presi-
dent may change this limit every three years, with the endorsement of the
Ministry of the Economy and Finance, depending on the infrastructure needs
of the country.
The Korean government also considered the idea of setting a safeguard
ceiling for annual PPP commitments and disbursement. Noting that PPP
fiscal commitments were important fiscal burdens, a regulatory fiscal rule
was considered that consisted of imposing an upper limit to control annual
PPP disbursements. It was proposed that the government should manage its
PPP fiscal burden on a medium- to long-term basis by setting an annual
safeguard ceiling on government PPP disbursements at 2 percent of the
total annual government expenditure budget (Kim et al. 2011).
Given the difficulties of deciding whether a particular PPP commitment is
affordable, controlling limits on aggregate fiscal risk exposure can help to ensure
that the government’s aggregate exposure to PPP costs and risks remains within
manageable limits. An alternative is to incorporate limits on PPP commitments
within other fiscal targets. For example, some governments introduce targets or
limits on public debt. Some types of PPP commitments may be included within
measurements of public debt, according to international norms or national rules
(Irwin 2007). The IMF–World Bank PPP fiscal risk assessment model (PFRAM)
can be used to identify and analyze fiscal risks; it advises the user on how to con-
sider the allocation of risks and how to assess the likelihood of the risks materi-
alizing, the fiscal impact if they do materialize, and what should be done to
mitigate them (IMF and World Bank 2016).
PPP transparency and accounting treatment
In many countries, significant decisions about the use of PPP as opposed to tra-
ditional implementation have been made on the basis of an expectation of
Integrating PIM and PPP in a Unified Framework | 187
“off-balance-sheet” accounting treatment. How different governments register
their projects in national accounts can influence the choice of implementation
route, perhaps more than considerations of efficiency and risk allocation.
Adopting international accounting standards that apply to PPP contracts can
help to avoid these distortions. Examples include the International Public Sector
Accounting Standards (IPSAS), the IMF’s Government Finance Statistics Manual,
and the Eurostat method used by many European Union countries (see box 10.8).
These standards have been developed relatively recently to deal with the increas-
ing popularity of PPP and the tendency for PPP to be used as an off-balance-
sheet financing modality. Without such rules, the assets used in a PPP contract
may appear on the balance sheet of the service provider, the financial institutions
involved in the deal, the government, or none of these.
Transparency is needed in the way PPP contract awards and PPP projects are
reported and presented to the media, civil society, and the general public. Finance
ministries and national assemblies or parliaments need full information on
future liabilities for payments against PPP contracts as part of the budget plan-
ning and approval processes.
BOX 10.8
International financial standards for PPP accounting treatment
International financial standards vary in their treat- assets and liabilities for statistical reporting
ment of PPP fiscal commitments. A few standards purposes. Under these criteria, PPP assets and
specifically address when and how direct liabilities liabilities are accounted for in the government’s
and assets of PPP projects should be recognized by balance sheet if the government bears most of the
contracting governments: project’s risks and rewards—for example, taking
• International Public Sector Accounting Standard into consideration the degree to which the govern-
no. 32 (IPSAS-32), introduced in 2011, define when ment controls the design, quality, size, and mainte-
PPP assets and liabilities should be recognized, nance of the asset and bears construction risk—as
assuming that a government is following IPSAS well as the allocation of demand risk, residual value
accrual accounting standards, meaning that it and obsolescence risk, and availability risk.
records revenues and expenses when they are • Eurostat guidelines require European govern-
incurred, regardless of when cash is exchanged. ments to recognize PPP liabilities in debt statistics
Under IPSAS-32, PPP assets and liabilities appear where the government retains construction risk
on the government’s balance sheet, provided the or demand or availability risk. Since PPPs transfer
government controls or regulates the services that those risks to the private party, under this rule
the operator must provide with the PPP asset, to most PPPs tend to remain off the government’s
whom, and at what price and controls any signifi- balance sheet. Realizing that an excessive focus on
cant residual interest in the asset at the end of the off-government-balance-sheet recording can
contract. Under this definition, government-pays come at the expense of sound project preparation
PPPs appear on the government’s balance sheet; and value for money and may push public
the treatment of user-pays PPPs depends on the authorities to use PPPs where they are not appro-
details of the contract. priate, Eurostat, with the European PPP Expertise
• The IMF’s Government Finance Statistics Manual Centre, prepared the 2016 Eurostat Guide to the
(IMF 2014) sets out criteria for classifying PPP Statistical Treatment of PPPs (EPEC 2016).
Source: Based on World Bank 2017d, 91–92.
188 | Public Investment Management Reference Guide
Integrated budgeting and reporting for PIM and PPP projects
Upfront government payments to PPP projects are similar to those for TIPs.
Given that they are typically made within the first few years of a project, they
need to be built into annual capital budgets and medium-term expenditures
frameworks. Budgeting for long-term direct commitments for PPPs, such as
availability payments, is more challenging. Availability payments are not capital
payments; rather, they come from the recurrent budget of the responsible public
entity. The mismatch between the annual budget appropriation cycle and the
multiyear payment commitments to PPP exposes the private party to the risk
that payments may not be appropriated in a timely fashion. Many governments
do not introduce any particular budgeting approach for direct, long-term PPP
commitments, on the assumption that a responsible legislature will approve
appropriations to meet the government’s legally binding payment commitments.
Where appropriations risk is high, mechanisms to minimize this risk may be
needed to give potential private partners some confidence.
At the federal level in Brazil, the Fiscal Responsibility Law requires subsidy
payments to PPPs to be treated in the same way as debt service payments—that
is, they are not discretionary and are automatically appropriated so that as soon
as the subsidy is approved, appropriations are not subject to further legislative
approval.18 In addition, since the sixth edition of the Manual de contabilidade
aplicada ao setor público, inspired by IPSAS-32, the government must consider
the assets and the respective liabilities related to PPP contracts as being “on
balance sheet,” with consequences for debt capacity. Such an approach is
intended to provide investors with more certainty.
In Korea, Article 7 (2)–(4) of the PPP Law requires availability payments
in build, transfer, lease (BTL) projects to be treated in the same way as debt
service payments, but not liabilities and contingent liabilities in build, trans-
fer, operate (BTO) projects.19 The aggregate amount for BTL availability pay-
ments should be subject to advance legislative approval. The government
therefore needs to submit the aggregate ceiling for BTL projects to the
national assembly at the same time as the details of fiscal disbursements for
all BTL projects.
INTEGRATED PROJECT IMPLEMENTATION
FOR PIM AND PPP
Effectiveness of PPP project implementation and procurement
The differences in project implementation rules and practices between tradi-
tional contracting practices and PPP methodologies need to be understood.
PPP is not common in many public authorities, and the degree of involvement
in the implementation phase of TIPs and PPPs varies markedly. In a TIP proj-
ect, the asset under implementation will become the authority’s property,
and the authority will naturally take a hands-on approach to monitoring
progress—albeit often through a supervising agent (consulting engineer, for
example) for day-to-day monitoring. When a project is implemented as a PPP,
the asset generally belongs to the private consortium,20 and the consortium is
responsible for its correct and timely completion. Failure to do so may result in
significant financial consequences.
Integrating PIM and PPP in a Unified Framework | 189
The authorities naturally have a direct interest in the project, but they should
avoid the same hands-on approach of more traditional implementation. Too
much interference by the authority might be seen as impairment by the private
entity. It may also run the risk of inadvertently transferring risk back from the
contractor.
PPP-implemented projects should be subject to the same procurement rules
and conditions as any other form of PIM contract. With no special rules or pref-
erences, procurement processes should be transparent and fair and should
encourage open competition, while allowing for some flexibility (which may
also be advantageous for traditional procurement).21 The costs of bidding for a
PPP-implemented project are significantly higher than those for a typical TIP
project, and potential bidders will always look at the bidding risk before commit-
ting themselves to the costs.
Award criteria should be objective, fair, and easy to measure. They should
be aligned with the project objectives as set by the implementing authority in
their project rationale. The number of participants in a bidding competition is
indicative of the quality of requests for proposals as well as the country’s
general PPP framework.
Timeliness of implementation
Information on the timeliness of implementation can provide empirical
evidence on the comparative merits of PPP versus TIP implementation. It
can also be used for the qualitative and quantitative analysis of the VFM
test.
Common reasons for delays in project procurement need to be identified
so as to flag those that might be reduced through PPP implementation.
These issues include the following:
• Private sector administrative and approval processes
• Negotiations concerning the bid of the preferred bidder
• Delays caused by public sector administrative and approval processes
• Delays caused by planning procedures
• Delays caused by having to adapt to policy changes
• Reiterations of project design that are caused by a poor response from
bidders
• Reiterations of design as a result of authority-led scope and specification
changes or affordability issues
• Lack of expertise, experience, or resources within public sector
procurement teams
• Insufficient development of specifications prior to the project going to the
market
• Poor process management
• Unforeseeable events, such as the impact of the terrorist attacks on the
United States on September 11, 2001, on insurance markets and the financial
collapse of private companies involved in PPP activity in the wake of the
2008 financial crisis.
There are two distinct stages to implementation: (a) project approval through
to contract signature and (b) contract signature through to the completed assets
being available for service.
190 | Public Investment Management Reference Guide
Project approval through to contract signature
The implementation stage of a project starts when it has been approved by the
government. The first implementation stage covers the period from the point
of approval to the point where a contract has been signed and physical work
can proceed. Delays in this period are often good indicators of weaknesses in
the overall system, such as a legal impediment or the quality of project
preparation. They may also suggest weaknesses in the procurement system or
lack of interest among bidders, which, in turn, could indicate inadequate prepa-
ration and a failure to identify problems in the review and challenge function.
Contract signature through to the completed assets being available
for service
The second stage covers activities between the moment when the public
authority signs the contract with the private company and the moment
when the assets become available for use, the service commencement date.
Most of these activities are construction related and may require permits
from utility companies or others. Delays may indicate poor preparation,
including permit and land acquisition issues, as well as a failure of the review
and challenge function to identify such weaknesses. Thorough project
preparation and coordination between all public stakeholders is the best
way to avoid implementation problems.
The best sources of reliable performance data are audit functions, where
these exist. Ideally, this body would be the national external auditing author-
ity, but not all such bodies measure time-based performance. Internal audit
functions may also be a source of information, where these are working
effectively.
Refinancing practices
The majority of PPP projects using project finance will undergo a refinancing,
and this is to be expected during the life of a contract. It makes sense to refinance,
as it is usually in the interests of both the public authority and the private contrac-
tor, if it is executed correctly. However, the rules under which refinancing takes
place are changing constantly. In the early period of PPP development in leading
countries, refinancing resulted in some significant financial gains for PPP com-
pany shareholders. While it might be argued that these gains were nothing more
than a reward for managing the risks of construction and early implementation
well, it may also be argued that the gains came partially from factors outside the
influence of a PPP company, such as favorable macroeconomic conditions or
greater confidence in PPP generally. Large windfall gains made by private compa-
nies from the taxpayer may lead to political difficulties and negative media atten-
tion, which may lead to pressure to reduce or eliminate PPP as an implementation
option. Sharing the financial gains from refinancing between a PPP company and
the authorities is often considered more appropriate and has been built into the
regulatory framework and contractual agreements in several cases (see box 10.9).
Change management and renegotiation practices
PPP arrangements are long term and can last 25 years or longer, making
some form of change to the contract inevitable. It is impossible to predict long-
term needs over such time frames, so it is better to accept that change is
Integrating PIM and PPP in a Unified Framework | 191
BOX 10.9
Refinancing examples
Under the terms of many PPP project agreements, the competent authority may expect to share the
refinancing benefits equally with the project company. The refinancing benefit is measured as the increase
in the investor’s expected internal rate of return in the post-refinancing financial model against the base
case financial model. Several governments have already introduced rules for how refinancing benefits
will be treated. The public authority and the concessionaire may split the benefit 50/50 or in other ways.
The United Kingdom’s HM Treasury introduced into its standard Private Finance Initiative contracts a
50/50 split of any refinancing gain (HM Treasury 2003), but this split was subsequently revised to a 70/30
split in favor of the government in the wake of the global financial crisis of the late 2000s.
Korea also introduced a refinancing rule (the 50/50 rule) in the PPP regulation.
likely and to take great care with contract design to ensure that all eventualities
can be accommodated within the framework of clauses. These clauses are
often referred to as “change mechanisms.” The need to make changes does not
necessarily indicate failure; changes are quite common in operational PPP
contracts.
The most common type of adjustment is to the prices paid on the basis of
inflation. Price escalation formulas must be included in a PPP contract,
together with the relevant inflation index and the permitted application of any
price increases. Cost escalation formulas can go from the simple, such as those
relating to changes in the costs of raw material inputs in power purchase agree-
ments, to more complex public service contracts requiring periodic benchmark-
ing exercises to determine market prices.
Projects that are implemented through PPP should, in principle, bring about
fewer adjustments and changes during the implementation period as a result of
disciplined preparation and due diligence. When the need to adjust is apparent,
the PPP unit, or equivalent, should monitor the changes and the reasons
for them in case they indicate other weaknesses in the project, in the capacity
of the implementing authority, or in the wider framework itself. Awareness may
help to avoid such issues in the future or help to develop guidance on how to
resolve them in future projects.
The contract should identify a mechanism to facilitate these changes.
Changes during construction that are initiated by the authority are consid-
ered poor practice and can be highly costly for the authority. These projects
are likely to take longer due to concerns about adjusting the risk profile of
the project and often leave private partners with residual concerns.
Investors and lenders may also be concerned about the resultant shift in the
financial model, as any need to remodel or renegotiate the contract can lead
to substantial delay. Better project preparation and planning and improved
stakeholder consultation will help to avoid any disruption or ineffi-
cient practices. Any changes required after signing the PPP contract will be
of concern to investors and lenders, and they should be fully engaged
throughout the process. Box 10.10 presents some guidelines for managing
change.
192 | Public Investment Management Reference Guide
BOX 10.10
Guidelines for effective change management and renegotiation
Renegotiation requires agreement among public • The government should consider compensating the
and private partners along with their financiers. private partner only when conditions change
The following principles may help to strengthen because of discretionary public policy actions.
renegotiations: • Careful consideration is needed regarding any shifts
in the project risk profile.
• The rules and procedures for making changes
• Project financiers will want to be sure that their
should be included in the contract.
rewards are not diluted through a renegotiation.
• Renegotiation should take into account the original
Financing documents almost always have strict
project rationale and appraisal of the project as well as
conditions on seeking the active engagement of
the project agreement. Many countries (especially
and approval from financiers before any change
European Union countries) have strict rules on add-
can be agreed to.
ing to the original scope or scale of the project without
• Any renegotiation process should be transparent
changing the nature of the original tender process.
and subject to the law.
• Renegotiation should not negatively affect ex ante
value for money.
Source: Rajaram et al. 2014, ch. 7.
Dispute resolution procedures
Disagreements do occur between parties in most contractual arrangements,
and PPP is no different. However, the motivation to resolve disagreements is
stronger for both parties in PPP contracts than in TIPs, as disputes may lead to
early termination, which is in no one’s interest and should only be a measure of
last resort. Litigation costs can be huge in PPP contract disputes, and it is better
to deal with problems before they escalate.
Many minor disputes can be resolved through careful negotiations, and most
PPP contracts in high-income economies include clauses that require at least
two steps before legal proceedings are initiated. The first step is a formal meeting
for both sides to discuss the issue. If they cannot reach an agreement, the second
step is to move to independent arbitration, usually conducted by an outside
expert agreed to by both parties to be independent. Both parties agree to be
bound by the recommendations of the arbitration, and legal proceedings may be
initiated only if the dispute is still not resolved.
Asset registers
It is good practice for governments to compile registers of existing fixed
assets and newly completed fixed assets in TIP (see chapter 9). If projects
are implemented as a PPP, they are often not considered public assets because
they are owned by the private company. They are, however, assets in public use
for the delivery of public services, and they should be considered as such. Also,
due to the potential of these projects to incur substantial liabilities, the entire
“stock” of PPP projects should be monitored closely. Even though they do not
Integrating PIM and PPP in a Unified Framework | 193
form an integral part of the asset register, PPP projects should still be recorded,
preferably as an annex to the asset register of the state.22 An appropriately
designed template should also allow financial obligations and fiscal risks that
come with PPP contracts to be monitored.
Ex post review
Conducting ex post reviews of PPP projects, which are fully aligned with the TIP
approach, is a key means of understanding how well project preparation and
implementation have gone. The following will need to be decided:
• The appropriateness of different public entities to conduct ex post reviews
• What exactly should be reviewed
• How results should be disseminated.
Governments typically carry out a completion review of a traditionally pro-
cured project. Templates for completion reviews from other countries are help-
ful for designing a country-specific template. Completion review is an important
and necessary step; however, many officials confuse it with ex post evaluation,
which is an assessment of project performance in terms of activities, outputs,
and results (see chapter 9).
Many public authorities claim to conduct ex post evaluations, but further dis-
cussion reveals that this may be a simple financial compliance check. Most gov-
ernments are keen to ensure financial compliance during project execution, but
performance reviews are not common.
Performance reviews challenge the project at two levels:
• At the project level. Assessment of how well the individual PPP project fulfilled
its objectives
• At a strategic level. Exploration of claims that PPP implementation is more
efficient than traditional procurement. Evidence found here can help to
determine which option might perform better in future situations and
may become key for future option assessments in the VFM analysis. Policy
makers are also keen to learn about the challenges and difficulties faced
during the project.
Ex post evaluations should not be undertaken to allocate blame for mistakes
or to investigate misconduct. In the event of suspicions of wrongdoing, the
appropriate authorities should be notified; however, there should be no sanc-
tions for genuine mistakes, particularly mistakes caused by the relative novelty
of PPP as an implementation method.
As PPP is relatively new in many countries, it is important to learn whether it
is advantageous over conventional implementation. The government needs to
seek out data and assess whether the use of a PPP:
• Achieved its objectives in terms of outcomes or intermediate outcomes
• Offered time advantages over more conventional means
• Offered cost-efficiency advantages over more conventional means
• Offered better overall performance of service indicators over more
conventional means.
On the basis of strategic performance evaluation, the U.K. National Audit
Office (2011) provides the recommendations given in box 10.11.
194 | Public Investment Management Reference Guide
BOX 10.11
U.K. National Audit Office: Highlighting insufficient data in evaluating Private
Finance Initiative projects
The U.K. National Audit Office highlights greater are available to challenge whether the best solu-
focus on data, including, in particular, tion to a defined requirement is being pursued and
the best commercial terms are being obtained.
• Government has failed too often to identify, collect,
• Departments should undertake periodic value-for-
and use the data it needs to help support decision
money (VFM) reviews of their programs, high-
making and secure the best value for money. Greater
lighting any areas where value for money has
focus should be given to the types of data that should
diminished. These reviews should be high level,
be gathered to improve decision making, who should
with sufficient project data to inform the reviews,
collect them, and how much collection should cost.
but should not revisit all aspects of project busi-
• The Major Projects Authority, the Treasury, and
ness cases. Program reviews should be used to
departments should work collaboratively to agree
improve performance and to assess how well the
on the data required to support the preparation,
procurement method is working.
assurance, and scrutiny of major projects in
• As there has not been a government assessment of
government. Data should be collected where the
the value contributed by Private Finance Initiative
information adds demonstrable value and sup-
equity investors, the Treasury should consider
ports decisions but only where the benefits clearly
how data can be collected to understand better the
outweigh the costs and burden of data collection.
relationship between investors’ returns and the
• Those setting the data requirements should
risks they have borne.
consider whether good-quality, up-to-date data
Source: U.K. National Audit Office 2011.
NOTES
1. Including Cyprus, Ethiopia, Jamaica, Jordan, Romania, Vietnam, and Zimbabwe.
2. For further discussion on PPP benefits and risks, see World Bank (2017d).
3. Other common risks such as country risk or sector risk are important to investors and
financiers; these risks are mentioned only briefly because they are not specific to PPPs.
4. This section draws from Rajaram et al. (2014, ch. 7).
5. Examples include Brazil, Colombia, Indonesia, the Republic of Korea, Mexico, and the
Philippines.
6. For example, Zimbabwe.
7. Portugal has a PPP Decree-Law on the work of the PPP unit.
8. South Africa has a similar regulation. To ensure that PIM and PPP projects are treated
equally and reviewed, the Treasury must give approval at four stages: (1) after the feasibil-
ity study, (2) after preparation of tender documents and a draft contract, (3) for appoint-
ment of the preferred bidder, and (4) prior to contract signatures.
9. Including Jamaica, Jordan, and Serbia.
10. Capital A and Capital B have been combined into Capital C (since fiscal year 2019/2020),
so there is no longer a distinction.
11. Ethiopia’s draft PIM proclamation has similar requirements for incorporating PPPs under
the PIM scope of application.
12. In 2016 Infrastructure UK merged with the Major Projects Authority to create the
Infrastructure and Projects Authority.
13. In the State of Victoria.
14. For example, market testing, contractual terms, or fiscal risks.
Integrating PIM and PPP in a Unified Framework | 195
15. Such as the International Public Sector Accounting Standards (IPSAS-32), introduced in
2011. See box 10.8.
16. Risks contained within the project from the perspective of the private sector.
17. Accounting rules for PPPs are being defined, including the valuation of guarantees and
their treatment in relation to this limit.
18. Law no. 101 of 2000.
19. The PPP Law in Korea defines two types of PPP modalities: build, transfer, lease (BTL),
which involves a service availability type of payment, and build, transfer, operate (BTO),
which involves a concession type of payment. Given that measuring the liabilities and
contingent liabilities in BTO projects is difficult, BTO payments are not required to obtain
legislative approval in advance. However, all BTO payments are reported to the national
assembly as incorporated later in the annual budget appropriations.
20. Not always, for example, with a BTO model of implementation.
21. The competitive dialogue used throughout the European Union was created largely to
provide flexibility for PPP procurement when the competitive pool is small, but it is not
used exclusively for PPPs.
22. Or the relevant public authority.
REFERENCES
Biletska, N., J. H. Kim, M. Darcy, M. P. Dunne, and I. Zapatrina. 2016. Public-Private Partnerships
in the Context of Public Investment Management in Ukraine: An Assessment. World Bank,
Washington, DC. https://openknowledge.worldbank.org/handle/10986/24772.
EPEC (European PPP Expertise Centre). 2016. 2016 Eurostat Guide to the Statistical Treatment
of Public-Private Partnerships. Kirchberg, Luxembourg: European Investment Bank.
Government of Cyprus. 2014. “The Fiscal Responsibility and Budgetary System Law.”
Government of Cyprus, Nicosia.
———. 2016. “Guidelines for the Selection and Implementation of Public Investment Projects.”
Government of Cyprus, Nicosia.
HM Treasury. 2003. The Green Book: Appraisal and Evaluation in Central Government. Amended
in 2011. London: HM Treasury.
IMF (International Monetary Fund). 2014. Government Finance Statistics Manual 2014.
Washington, DC: IMF.
IMF and World Bank. 2016. Public-Private Partnership Fiscal Risk Assessment Model (PFRAM)
User Guide. Preliminary version. Washington, DC: IMF and World Bank.
Irwin, T. 2007. Government Guarantees: Allocating and Valuing Risk in Privately
Financed Infrastructure Projects. Directions in Development—Infrastructure.
Washington, DC: World Bank.
Kim, J. H., N. Biletska, and M. Darcy. 2015. “Public Investment Management for Public
Private Partnership: Analytical Framework and Assessment Tool.” Unpublished paper,
World Bank, Washington, DC.
Kim, J. H., J. Kim, S. Shin, and S.-Y. Lee. 2011. Public-Private Partnership Infrastructure
Projects: Case Studies from the Republic of Korea, Volume 1: Institutional Arrangements and
Performance. Manila: Asian Development Bank.
Ministry of Finance and Economic Development, Zimbabwe. 2017. “The Public Investment
Management Guidelines.” Secretary to the Treasury, Harare.
OECD (Organisation for Economic Co-operation and Development). 2010. “How to Attain
Value for Money: Comparing PPP and Traditional Infrastructure Public Procurement.”
OECD Working Paper, OECD, Paris.
PIMAC (Public and Private Infrastructure Investment Management Center). 2016. “Guidelines
for the Value for Money Assessment.” PIMAC, Korea Development Institute (KDI), Seoul.
Rajaram, A., T. M. Le, K. Kaiser, J. H. Kim, and J. Frank, eds. 2014. The Power of Public
Investment Management: Transforming Resources into Assets for Growth. Washington, DC:
World Bank.
U.K. National Audit Office. 2011. “Lessons from PFI and Other Projects.” Report by the
Comptroller and Auditor General, HC 920, session 2010–2012, National Audit Office,
London.
World Bank. 2013. “Value for Money Analysis Practices and Challenges: How Governments
Choose When to Use PPP to Deliver Public Infrastructure and Services.” World Bank,
Washington, DC.
———. 2016a. “Cyprus Manual for Pre-Selection and Appraisal of Public Investment Projects:
Reimbursable Advisory Service Report.” World Bank, Washington, DC.
———. 2016b. “Jamaica: The Second Competitiveness and Fiscal Management Programmatic for
Development Policy Financing.” World Bank, Washington, DC.
———. 2017a. “Maximizing Finance for Development (MFD): Guidance for Applying an MFD
Lens.” Unpublished paper, World Bank, Washington, DC.
———. 2017b. “Policy Guidelines for Managing Unsolicited Proposals in Infrastructure Projects.”
World Bank, Washington, DC.
———. 2017c. “Public Investment Management Systems: Summary Note on PIM Systems.” Note
delivered to the Financial Management Information Systems Community of Practice,
World Bank, Washington, DC.
———. 2017d. Public-Private Partnerships: Reference Guide Version 3. Washington, DC: World Bank.
———. 2018. “Jordan 2018 Public Investment Management: Public-Private Partnership
Governance Framework.” World Bank, Washington, DC.
11
Rationalizing a
Nonperforming PIM Portfolio
OVERVIEW
Many countries face issues with an overcommitted portfolio of public
i nvestment projects. A portfolio is overcommitted when the financing
requirements to deliver projects according to the originally envisaged
implementation schedules significantly exceed the funding available.
Faced with a shortage of funds and too many projects, decision makers
often feel compelled to spread funds across the public investment portfolio
(PIP). This “drip funding” may lead to the need to revise project schedules to
fit the reduced funding and to stop-go implementation of projects. Box 11.1
presents an example from Romania of an overcommitted PIP: the cost of
completing the portfolio was found to be seven times the amount allocated in
the 2015 budget; in an adequately funded program, it would have been no
more than three to four times the allocated amount.1 Box 11.2 presents
another example from Ukraine.
An overcommitted portfolio is a legacy of inadequate quality-at-entry
processes for public investment projects. Projects have been selected for
financing despite planned allocations exceeding the fiscal limits set for the
fiscal year and for the medium term. Overcommitment is a symptom of an
ineffective gatekeeping mechanism by which a central finance agency should
be checking that all requirements have been met, especially with respect to
project affordability in the context of the wider portfolio. Inadequate
gatekeeping may lead to admitting “too many” projects as well as admitting
projects that have not been subject to the usual scrutiny and quality steps
essential for good international practice.
The problem with an overcommitted portfolio can be exacerbated by
inadequacies in project implementation—for example, delays in p rocurement
or appointment of project managers and teams, delays in the release or
approval of funding, and delays caused by limited capacity for project man-
agement. Delays in project implementation mean that a project remains in
the portfolio longer than necessary and blocks scarce resources that could be
used for new projects.
197
198 | Public Investment Management Reference Guide
BOX 11.1
Underresourcing of the PIP in Romania
A World Bank reimbursable advisory services (RAS) funded projects was a more reasonable six
project reviewed Romania’s public investment port- times (see figure B11.1.1).
folio (PIP) and
concluded that it was substantially Inadequate funding leads to substantial
underresourced. When adequately funded, PIP com- delays in completion. More than 11 percent of all
pletion costs should be less than three to four times
p rojects in Romania’s PIP had been under
the 2015 budget allocation; the cost to complete this
implementation for more than 10 years; 11 projects
underresourced PIP was seven times the allocation. had been in the i nvestment program for more than
Funding levels were particularly inadequate 20 years. The RAS project concluded that a major
for domestically funded projects, where rationalization of the PIP was required to address the
completion costs were 13 times the 2015 budget under f unding and improve PIP implementation
a llocations. The equivalent figure for externally
performance.
FIGURE B11.1.1
Cost of completion of the 2015 project portfolio in Romania
14
Costs of completion as a multiple of
12
2015 budget allocation
10
Well-funded PIP, 3–4 times
8
12.9
6
4
7.1
6.0
2
0
All projects External grant- or Fully domestically
loan-funded projects financed projects
Note: PIP = public investment portfolio.
Source: World Bank 2015.
An excessive number of ongoing projects, some with little prospect of social
profitability, may have a negative impact on overall PIM system performance,
including:
• Delays in achieving benefits from public investment projects. Since the
completion of ongoing projects is delayed, the time at which project
benefits should start accruing is also delayed, negatively affecting social
profitability. Long delays may also mean that a project loses its strategic
relevance.
Rationalizing a Nonperforming PIM Portfolio | 199
BOX 11.2
Fundamental quality issues affecting PIM performance in Ukraine
Historical weaknesses in Ukraine’s public investment • Most projects avoided scrutiny due to loopholes in
management (PIM) procedures have exacerbated an classification (lack of definition of a public
overcommitted and poorly performing state-level public investment project).
investment portfolio. A 2013 survey of construction • The PIM system did not seem to block new p rojects
projects in Ukraine identified 1,653 uncompleted state- from entering the budget, but it did allow ministries
level projects, of which 1,005 were currently suspended, to delay ongoing ones and to squeeze in new ones.
with no implementation taking place. • Lack of strategic guidance on how to prioritize proj-
The existence of two overlapping categories of ects complicated project selection.
public investment providing alternative financing
windows, coupled with weak or absent appraisal pro- The poorly performing PIM portfolio led to the
cedures, resulted in a portfolio in which more than adoption of some reforms to PIM procedures for the
90 percent of public capital investment projects had 2016 budget. A methodology for rationalizing the PIM
avoided any significant economic analysis. Additional portfolio, drafted by the World Bank in 2016, led to
quality issues included the following: improvements.
Sources: World Bank 2013, 2016.
• Increases in overall project costs. Significant delays in implementation tend to
drive up the costs of project implementation, as staff and other resources have
to be deployed for a longer time and contractors have to remobilize after sus-
pending or reducing activity.
• Lack of fiscal space for new projects irrespective of their merits. An excessive
number of poorly prepared ongoing projects could mean that fiscal space for
capital projects is fully used and funding is not available for new projects, even
if they show better prospects of achieving stronger development outcomes.
• Undermining of reforms to improve quality-at-entry processes. A poorly
performing project portfolio might prevent other public investment
management (PIM) and public financial management reforms from being
implemented. As an example, many countries aspire to strengthen their
multiyear budget planning through medium-term budgetary frameworks
(MTBFs); however, a prerequisite for a well-designed MTBF is the
establishment of a credible capital expenditure baseline that realistically
budgets for capital projects. Creating an expenditure baseline in the case of
an underresourced PIP will result in either a baseline that is not affordable
or a baseline that is disconnected from underlying project implementa-
tion schedules and therefore lacks credibility.
Problems with an overcommitted PIP may be resolved in the long run by
successfully implementing reforms to strengthen quality-at-entry processes, as
long as affordability issues and time constraints are addressed early on. As ongo-
ing projects are completed and fiscal space for new projects gradually builds,
successfully implemented reforms of quality-at-entry processes should prevent
poor project proposals and unaffordable project commitments from proceeding.
Reforms that address typical implementation bottlenecks and raise the capacity
200 | Public Investment Management Reference Guide
BOX 11.3
Implementation of public investment portfolio rationalization in Turkey
The Turkish government undertook a major follow-up measures to improve the performance of
PIP rationalization in 2001–02 that led to a leaner, the public investment portfolio:
better prioritized, and better financed portfolio.
• A moratorium on introducing new multiyear
It involved the following steps:
projects until the current portfolio was adequately
• Reassessment of sectoral investment portfolios taking funded
into consideration sectoral, regional, and project- • Further reprioritization of existing projects to
specific priorities. The process was used to identify identify those at an early stage of implementation,
projects that were no longer considered to reflect previously not considered urgent, or considered to
public investment priorities. be low priority, which enabled funding to be
• Screening of the portfolio. This screening identified redirected to projects that were a higher priority or
1,602 projects that were no longer considered a closer to completion
priority, were not economically feasible, or could not • Rescheduling of some multiyear projects to
be implemented due to insufficient funding. align their spending more closely with available
• Elimination of 1,702 projects and subprojects from resources
the portfolio. These projects represented a total • Halting of implementation on several major
investment of US$30 billion. projects to allow their feasibility to be reassessed
prior to deciding whether they should receive
The initial exercise to screen for and remove poorly
further funding.
performing projects was complemented by a series of
Source: Former Ministry of Development, Republic of Turkey.
of project managers and project teams can also reduce time and cost overruns.
However, such reforms are complex and demanding, and their full effect may
only materialize in the medium to long term. In the meantime, an underres-
ourced PIP can cause significant damage to PIM outcomes.
A short- to medium-term option is to initiate portfolio rationalization; this
process involves reviewing the portfolio, identifying poorly performing projects,
and creating a resolution procedure to restructure, curtail, or terminate
projects.
There are no international standards for rationalization, and the literature on
the subject is limited. Box 11.3 describes a successfully implemented portfolio
rationalization in Turkey. Previous World Bank diagnostics and technical assis-
tance projects have supported attempts to review or rationalize project portfo-
lios in several countries, including Belarus, Mongolia, Romania, and Ukraine.
MAIN FEATURES OF PORTFOLIO RATIONALIZATION
The overall objectives of portfolio rationalization are twofold: (a) to ensure that
projects remaining in the PIP are adequately financed to avoid delays and that
benefits from finalized projects accrue as soon as possible and (b) to free up
fiscal space to finance new high-priority projects instead of drip feeding ongoing
projects that are of poor quality or are strategically irrelevant.
Rationalizing a Nonperforming PIM Portfolio | 201
Within these objectives, a portfolio rationalization exercise consists of three
core steps: (a) use systemic features of nonperformance to identify projects that
are candidates for rationalization, (b) immediately suspend and remove from the
public investment portfolio projects that are identified and confirmed as non-
performing, and (c) enter a project removed from the public investment portfo-
lio into a procedure that assesses options for resolving its status and identifies a
preferred resolution.
Identifying nonperforming projects and removing them from the public
investment portfolio makes explicit those prioritization decisions that have
occurred implicitly by denying projects sufficient funding. Portfolio
rationalization often builds heavily on information about the level of funding
made available to projects, as funding is used as a proxy for information about
priorities. Where a project has been halted or is receiving only token levels of
funding over longer periods of time, it reveals that, implicitly, the relevant
authority does not consider it to be a high priority.
PIP rationalization is usually planned and conducted as a one-off, discrete
exercise. Rationalization is politically sensitive and resource demanding, and
should be reserved for significant portfolio issues. In general, PIP rationalization
should not be seen as a substitute for addressing reform issues, but as a comple-
mentary way to achieve results in the short term and to prepare for successful
implementation of more thorough reforms. In an ideal situation, fixing weak-
nesses in PIM procedures should happen before or at the same time as PIP ratio-
nalization, so as to avoid a recurrence of problems associated with an underfunded
public investment portfolio. Box 11.4 provides an example of how unreformed
procedures caused previous attempts at a much-needed rationalization to fail in
Bangladesh.
Rationalization should be conducted in an integrated manner covering all
ongoing projects irrespective of financing source and implementation modality,
as this would be in line with the general recommendation to harmonize proce-
dures and create a level playing field for all public investment projects. However,
the scope and design of a rationalization exercise will need to begin in the local
context, where the PIP is often divided by financing source or implementation
modality and different parts are subject to different procedures.
Differences in financing sources also affect the relevance of various criteria
for determining project and portfolio nonperformance. Nonperformance crite-
ria for budget-financed projects will to some extent build on the availability of
annual budget allocations, while criteria for loan-financed projects will rely on
information about disbursements within the financial plan agreed on for the
projects. These differences in criteria give rise to differences in interpretation.
For example, the availability of budget allocations reflects shifts in current polit-
ical priorities, while the level of disbursements reflects the extent of various
other constraints on implementation. These differences also mean that the tim-
ing of fiscal effects of rationalization decisions will vary depending on the financ-
ing source.2
Despite similarities and overlaps, donor-led portfolio reviews differ from
country-driven rationalizations in their scope, frequency, and objectives.
Donor-led portfolio reviews are commonly practiced; they are typically done
for each donor portfolio individually, although joint reviews of the loan-
financed portfolio may occur. Portfolio reviews are generally confined to loan-
and grant-financed portfolios, while reviews of budget-financed projects and
combined country-project portfolio reviews are rare. The objectives are also
202 | Public Investment Management Reference Guide
BOX 11.4
Unreformed procedures for approval and selection impede portfolio
rationalization in Bangladesh
The Annual Development Program (ADP) is the key overload of the key bodies involved in project design,
instrument for public investment in Bangladesh. appraisal, and approval. As a result, time and cost
The ADP document consists of several differently overruns and low returns on investment have
colored sections listing public investment projects historically been associated with management of the
based on various combinations of approval status ADP. The practice of including projects in the ADP
(approved by the National Economic Council, the documentation that have not been approved has cre-
planning minister, or the line ministry; or not ated expectations among project proponents and
approved), funding status (funded or unfunded), potential beneficiaries that these projects will eventu-
and mode of financing. Given that the ADP com- ally be approved and selected.
prises projects in very different stages of funding Past attempts to rationalize the ADP portfolio had
and approval, it constitutes a mix of a traditional only a limited effect. In fiscal year 2011, a rationaliza-
development budget (approved projects with tion exercise took place with the aim of reducing the
f unding), project pipelines, and even “pre-project number of unapproved projects included in the Green
pipelines” (the “Green Pages”). Pages. At the beginning of fiscal year 2011, the number
The standard practice of adding more new projects of unapproved projects in the ADP was considerably
to the ADP at the beginning of the fiscal year and lower than in previous fiscal years. However, after the
during the midyear revision than have actually been midyear revision of the ADP, the effect of this rational-
completed since the start of the year has stretched ization was almost neutralized, as many new unap-
scarce resources. The sheer number of approved and proved projects were added. At the same time, the
unapproved projects within the system strains project portfolio of approved projects with funding continued
implementation resources and is a reason for the to rise (see figure B11.4.1).
FIGURE B11.4.1
Number of approved and unapproved projects in the Annual Development Program (ADP) and
revised ADP
1,200
1,000
Number of projects
800
600
400
200
0
Fiscal year 9 Fiscal year10 Fiscal year11 Fiscal year12 Fiscal year13
Approved projects in ADP Approved projects in revised ADP
Unapproved projects in ADP Unapproved projects in revised ADP
Source: World Bank 2014.
Rationalizing a Nonperforming PIM Portfolio | 203
BOX 11.5
World Bank portfolio reviews
The World Bank conducts regular reviews of its Poorly performing projects are identified through
portfolio of loan-financed projects with a view to mon-
their designation as “problem projects.” A problem proj-
itoring project progress and addressing implementa- ect is a project with a performance rating of “moderately
tion issues. unsatisfactory” or below. This rating is given based on
Portfolio reviews are based on information from the likelihood that the project will achieve its objectives
the Bank’s operations portal, including: at project closure. Very low disbursement rates may also
be used to single out projects for further review.
• Disbursement rates as a percentage of total proj- Systemic issues affecting project implementation
ect cost and compared to the original disburse- are identified and discussed with government coun-
ment plan terparts in order to find solutions.
• Ratings of implementation progress and recom- Among the prerequisites for World Bank portfolio
mendations from regular (typically semiannual) reviews are the formulation of a comprehensive
implementation support missions conducted by results framework at project initiation and the ability
World Bank task teams to track and actively monitor project information
• Results of midterm reviews of projects. throughout a project’s lifetime.
Source: Based on World Bank 2017.
different: a rationalization aims to curtail, restructure, or terminate projects in
order to prioritize and save on fiscal space, while donor reviews have more
modest aims: they focus on monitoring and unblocking the implementation of
individual projects. If problems persist, project cancellation may be considered.
Portfolio reviews are somewhat regular, occurring annually or semiannually,
while portfolio rationalizations occur only when significant portfolio issues
arise. There are still opportunities to apply some knowledge gained from the
donor-driven reviews of loan-financed portfolios to broader-based portfolio
rationalizations. Box 11.5 summarizes features and experience from the World
Bank’s portfolio reviews.
STEPS IN PREPARING AND CONDUCTING PORTFOLIO
RATIONALIZATION
While practices naturally vary with country context, portfolio rationalization
involves conducting several procedural steps (see figure 11.1).
Step 1. Identification and verification of nonperforming projects
to be moved to the rationalization program
Projects primarily enter the rationalization program by being identified as
nonperforming according to specific criteria, as detailed below. This process
typically focuses on identifying (a) projects that have been in the PIP for a long
time, (b) projects that have received inadequate levels of funding over several
204 | Public Investment Management Reference Guide
FIGURE 11.1
Diagrammatic representation of the main steps in public investment portfolio (PIP) rationalization
1. Project assessed as Project continues in
nonperforming main PIP
2. Verification of Project considered
nonperforming status Status not confirmed
for funding
Project reappraised
Confirmed
and prioritized
Project can receive limited funding from
resolution facility budget
Project exits
3. Project enters resolution facility
resolution facility
Downsizing or 5. Development
full completion of resolution plan
4. Selection of
resolution strategy
Curtailment or Resolution plan
Development implemented until
closure or early
of resolution plan project completion
completion
or closure
Source: World Bank 2015.
years and are unlikely to be completed in the near future, and (c) projects that
have been suspended and have received no recent financing. Establishing objec-
tive criteria will help to avoid accusations of bias in the process and to ensure
that only the least necessary or worst-performing projects are identified as can-
didates for rationalization.
Projects also enter the rationalization process in other ways, including:
• Projects identified as poorly performing in periodic sectoral reviews, program
reviews, and evaluations. Such government reviews provide a broad assess-
ment to determine the likelihood that the project or program will achieve its
objectives and represent value for money.
• Projects requested to be brought to early closure. These requests may be based
on findings from ministries’ own internal monitoring and review processes or
from external audits.
Internal prioritization by line ministries can be a useful “preliminary step” for
identifying nonperforming projects. If there are conflicts of interest, line minis-
tries are usually well placed to understand the specific needs of the sector and
can bring an important perspective to decisions about their public investment
portfolio. Line ministries and agencies could be requested to prioritize and rank
their projects in order of priority; this ranking could make it easier to remove less
important projects from the PIP. This preliminary step should also help to relieve
political pressure on the central finance agency, which is an inevitable conse-
quence of a PIP rationalization.
Rationalizing a Nonperforming PIM Portfolio | 205
Verification of nonperformance is a critical component of portfolio
rationalization, as it typically relies on a limited number of indicators. Verification
should be done quickly and decisively to facilitate decision making, as
nonperforming projects would otherwise be allowed to remain in the portfolio
by default. Failure to make a decision has occurred with PIP rationalization
exercises in some countries, leading to relatively few projects leaving the
portfolio and resulting in an underfunded and poorly performing PIP.
Step 2. Transfer of nonperforming projects to a resolution facility
A resolution facility consists of projects identified and verified as nonperforming
and awaiting a resolution on their future status. It should be allocated funds
within the budget to cover unavoidable expenses such as settling outstanding
payments or protecting a partially completed physical asset. Such funding is best
provided through a separate (and rather small) budget allocation for portfolio
rationalization; spending related to the resolution procedure may be ring-fenced
and managed separately from PIP project funding.
Step 3. Determination of a resolution strategy for the project
This process would involve an initial assessment of options, including (a) full com-
pletion, (b) downscaling to enable early completion, and (c) closure. The assess-
ment should take into account the likelihood that the project or its components
will be able to achieve the original objectives. Projects identified for full comple-
tion and downscaling would then require reappraisal and reprioritization. The
share of total costs that nonperforming projects have incurred will be important in
influencing the resolution strategy. A least-cost option for project resolution
should be developed in each case and considered alongside the preferred option.
Step 4. Development and implementation of a resolution plan
for the project
The final step should be to formulate a resolution plan and set out the proposed
phases and costs of implementing the chosen option for each project. The plan
should include the following key elements:
• A technical assessment
• A legal assessment
• A social and environmental impact assessment
• A cost assessment
• Actions required to implement the chosen option for the project and the
responsibilities and arrangements for managing its realization
• A timetable for the required actions
• Potential causes of delay to the timetable, risks associated with delays and
cost overruns, and how these risks are to be managed and minimized.
To ensure that timely decisions are made on the implementation and conclu-
sion of the resolution plan, a time limit should be introduced after which the
project would automatically be closed down. Such a “sunset clause” for conclu-
sion of the resolution plan could provide a time limit of, say, three years, with a
possible extension to five years in exceptional cases endorsed by the central
finance agency and approved by the relevant cabinet committee.
206 | Public Investment Management Reference Guide
CRITERIA AND BENCHMARKS TO IDENTIFY
NONPERFORMING PROJECTS
A set of screening criteria for identifying nonperformance would help to
identify projects for inclusion in a rationalization program. An example of an
analytical framework to identify projects for a rationalization program is set
out below, based on experience from Mongolia, Romania, and Ukraine.3 The
criteria and benchmarks may also help to analyze portfolio performance,
even if no decision has been made to proceed with a rationalization, and to
serve as regular indicators for portfolio monitoring. The analytical frame-
work comprises three criteria for measuring historic performance and
financing adequacy. Benchmarks may be developed for each of these criteria
to define thresholds that would lead to a project being transferred to the
rationalization program. Benchmarks can also be used to highlight the extent
of nonperformance across the portfolio. The analytical framework includes
two criteria to indicate the feasibility and impact of including a project within
the rationalization program.
Historic performance and adequacy of financing
Period under implementation
This criterion is a simple measure of historical performance and is defined as
the number of years that a project has been under implementation.
Nonperformance at the project level is considered to be an issue if the project
has been under implementation for more than five years. If the project has
been under implementation for 10 years or more, then historic nonperfor-
mance would be assessed as critical; unless it is now being financed
adequately, the project should be included in the rationalization program.
Portfolio performance is assessed by the average number of years that
p rojects in the portfolio have been under implementation. If this
figure exceeds five years, then nonperformance could be considered an
historic and entrenched issue across the investment portfolio.
Time to complete at current levels of funding
This criterion measures financial credibility and sustainability of the investment
project or portfolio. It is defined in terms of the number of years that it would
take to complete projects at the level of budget allocation for the current fiscal
year. Projects started in the current or previous year may be excluded from the
assessment, as start-up funding tends to be a low proportion of total cost and its
inclusion would distort the picture.
Nonperformance at the project level could be an issue if it were to take
more than four years to complete the project at the current fiscal year level
of budget allocation. If this figure exceeds 8–10 years, then the project
could be considered to be significantly underfinanced and should be con-
sidered for automatic inclusion in the rationalization program. Portfolio
performance is measured by the number of years that it would take to com-
plete the current portfolio of projects at the current level of budget alloca-
tion. If this figure exceeds three to four years, then the current level of
financing could be considered inadequate and the investment project port-
folio is underfinanced.
Rationalizing a Nonperforming PIM Portfolio | 207
Dormancy
The idea behind this criterion is to identify inactive or dormant projects with
consistently low levels of funding. The extent of dormancy is measured by the
size of the budget in each of the last three years as a percentage of the balance
to complete the project at the end of the prior budget year.
At the project level, dormancy could be said to exist when budget allocations
in two of the last three years have fallen below 10 percent of total project costs
(in one of the last three years for projects started in the previous budget year).
A project that has been allocated less than 10 percent of its total project cost in
each of the last three years could be considered a severe case of dormancy and an
automatic candidate for inclusion in the rationalization program.
Nonperformance at the portfolio level is assessed by (a) the proportion of
projects classified as dormant and (b) the proportion of expenditures required
to complete all ongoing dormant projects.
Feasibility and impact
Implementation stage
This criterion divides projects into implementation stages based on the
percentage of total costs incurred. Nonperforming projects that are at an early
stage of implementation are likely to be easier and less costly to close down than
projects that have already incurred substantial expenditures. At the same time,
closing large projects at an early stage of implementation can result in a
significant reduction in forward financing demands on the PIP.
Projects in the middle stages of implementation (for example, 30–70 percent
of total project costs incurred) are more problematic because significant costs
have already been incurred. Where forward financing demands are significant,
projects should be subjected to reappraisal, on a sunk-cost basis, to determine
the most appropriate option. Significant resources are likely to be required to
update feasibility studies and to assess different options for resolving these
projects.
By contrast, closing down projects at an advanced stage of implementation (for
example, with more than 70 percent of total costs incurred) would have only a
limited impact on reducing forward financing demands.4 Most of these projects
should be completed, and the scope for possible cost savings should be identified.
Project-level indicators are the total expenditures incurred for the project to
date as a percentage of the total project cost. Portfolio-level indicators are the
number of projects at each stage of implementation and the proportion of the
forward investment program funding required for each stage of
implementation.
Relative size of forward spending requirements
This criterion assesses the funding required to complete the current invest-
ment portfolio. It helps to identify those sectors, ministry budgets, and
projects that have the greatest potential for reducing forward financing
demands on the PIP.
At the project level, it assesses the significance of forward spending require-
ments on a project within the ministry’s overall forward investment program.
At the portfolio level, it measures the relative size of each ministry-level
budget within the current PIP.
208 | Public Investment Management Reference Guide
Table 11.1 summarizes an example of criteria, indicators, and project-level
benchmarks that may be used to identify nonperforming projects. It illus-
trates the possible use of traffic lights to classify projects for inclusion in the
rationalization program in order of nonperformance: a red light signifies
serious nonperformance and a yellow light means that nonperformance is
likely. Projects with two red lights or one red light for dormancy could be
transferred to the rationalization program. Box 11.6 applies the framework to
Romania.
TABLE 11.1 Summary of possible project-level criteria, indicators, and performance benchmarks for identifying
nonperforming projects
NONPERFORMANCE
•
CRITERIA INDICATOR WHAT IT SHOWS? BENCHMARKS
A.1 Period under Number of years since project Extent of delay in > 10 years since project
implementation commenced implementation implementation; whether commenced
project is likely to require implementation
reappraisal or an updated
feasibility study • > 5 years since project
commenced
•
implementation
A.2 Time to complete ongoing Total project cost less Project credibility or > 10 years to complete
project(s) at current level of expenditures to the end of the sustainability: extent to which project at current budget
budgeted funding current fiscal year budget project is underfunded year’s level of funding
allocation divided by fiscal year (projects started in budget
budget allocation year 0 and budget year 1
are not included)
• > 4 years to complete
project at current budget
year’s level of funding
(> 5 years for projects
started in budget year 2;
projects started in budget
years 0 and 1 are not
•
included)
A.3 Evidence and extent of Budget in each of last three Whether project has been Budget in each of last
dormancy years as % of the balance to significantly underfunded for 3 years < 10% of balance
complete project at end of an extended period of expenditures to
prior budget year complete project at start
of the current budget year
• Budget in 2 of last 3 years
< 10% of balance of
expenditures to complete
project at start of current
budget year (in 1 of last
3 years for projects starting
in budget year 1, projects
starting in year 0 and
projects > 90% spent are
not considered)
B.1 Implementation stage Total expenditures on project Financial progress as a measure Not applicable
to end prior budget year / Total of the implementation stage of
project cost project
B.2 Relative size of forward Funding required to complete Relative significance of project Not applicable
spending requirements project (at beginning of in ministry or sector program
current budget year) as % of
total required for all projects of
a particular ministry or sector
Source: Based on development of criteria for a suggested rationalization procedure in Romania (World Bank 2015).
Rationalizing a Nonperforming PIM Portfolio | 209
BOX 11.6
Application of the analytical framework to three ministry PIPs in Romania
The rationalization criteria were tested on three major While the initial identification of nonperforming
ministries (transport, environment, and regional devel- projects focused on the red-light assessments,
opment), which together represented 66 percent of the the yellow-light scorings identified projects that
2015 investment budget (see figure B11.6.1). Of 157 proj- were of concern and might need to be looked at in
ects in the three ministries, 46 had two red lights and more detail.
were recommended for automatic removal from the It was calculated that the removal of projects
public investment portfolio. A further 11 projects had a
i dentified as nonperforming from the public
single red light for dormancy and were also recom- investment portfolio would reduce forward funding
mended for removal from the public investment portfo- requirements by US$12 billion, or five times the total
lio on the grounds that implicit prioritization decisions portfolio budget allocation for 2015. Their removal
had been made by not providing them with adequate would result in a significantly more affordable PIP, in
funding. Thus, 57 projects were considered “severely which existing and new projects could be financed
underresourced.” more adequately.
FIGURE B11.6.1
Analysis of public investment projects in three ministries in Romania
120
104
100
Number of projects
80
60
40 36
33
21
20
11
3
0
MoT MoEWF MoRDPA
Total Severely underresourced projects
Note: MoEWF = Ministry of Environment, Water, and Forestry. MoRDPA = Ministry of
Regional Development and Public Administration. MoT = Ministry of Transport.
Source: World Bank 2015.
MANAGING THE PORTFOLIO RATIONALIZATION PROGRAM
The relatively few examples of successful rationalization programs speak to
their political sensitivity and difficulty of implementation. To navigate the issues
associated with implementing a rationalization program, the responsible author-
ities need to identify and manage carefully potential impediments to successful
implementation by taking into account data issues, allocation of roles and
responsibilities, resistance and sensitivities of the implementing agency,
210 | Public Investment Management Reference Guide
legal issues associated with curtailment or closure of contracts, and the need
to ensure sustainability of the results of the program.
Data issues
A rationalization program based on clear criteria for nonperformance requires
data to be available for several dimensions of project status and progress.
Consistent data over at least a three- to five-year period are needed on total
project cost (project value), annual budget allocations and other financing,
annual expenditures and disbursements, project start dates, and original and
revised end dates. Projects should be identifiable by year, sector, ministry, and,
possibly, function; it is important to track information about a given project
from at least three to five years ago. A good monitoring system collects this
information; without it, rationalization is more difficult. If information is miss-
ing, rationalization could be a catalyst for establishing such a system.
An integrated project database is useful for ensuring that credible informa-
tion is available on which to formulate indicators of nonperformance and for
project-portfolio monitoring in general (see chapter 12). Without such informa-
tion, it may be necessary to conduct a survey specifically for the purpose of
project rationalization; however, data collection may be difficult, partly because
data will have to be extracted from different sources and partly because project
managers and line ministry officials will perceive that there is little to gain from
supplying the information.
Institutional setup
Given the difficulties of implementing a project rationalization, the institutional
setup and definition of roles and responsibilities should be considered carefully.
Because of the close linkages to the budget, management and oversight of the
rationalization program are usually the responsibility of a central finance agency.
Such management includes the responsibility to define (a) criteria for nonperfor-
mance, (b) guidelines for the resolution process, (c) monitoring of progress in the
rationalization process, and (d) recommendations on which resolution options to
use for a given project. The central finance agency often manages the budget for
the resolution facility, which makes the process all the more sensitive. Clear guide-
lines are needed to ensure clarity on the (limited) eligibility of funding within the
resolution budget. The central finance agency normally retains responsibility for
approving resolution plans, but development and execution of the plans are the
responsibility of the respective line ministries. Decisions on initiating a rational-
ization program, as well as decisions on choosing concrete options for resolving
individual projects, are normally subject to a high-level cabinet decision.
Legal issues
Concerns about possible financial and legal repercussions may create a
reluctance to close down poorly performing and inadequately financed
projects. While potential legal impediments to rationalization are strongly
tied to local legal, auditing, and contracting traditions and practices, specific
concerns may arise regarding the following:
• Provisions in contracts covering project changes, curtailment, and closure
• Legal status of assets already created by the project and what to do with them
Rationalizing a Nonperforming PIM Portfolio | 211
• Provision for costs and related accounting arrangements associated with
change, curtailment, or cancellation
• Possibility of audit-driven claims against the decision makers who authorized
the projects, particularly in countries where officials can be held personally
liable for their decisions and where separation of powers is weakly defined
• Potential size of settlements accepted by the courts for contractor claims.
Government liabilities may arise from a unilateral decision to close a contract.
Some countries may use standard contracts that allow for unilateral closure of a
project. This entitlement to unilateral termination may protect the government
from liabilities associated with compensating the contractor for the loss of profit.
In the absence of such clauses, unilateral termination could expose the govern-
ment to the payment of damages to the contractor.
Alternative solutions to avoid legal repercussions from rationalization include
negotiation and consultation with contracting partners and associations. If a
project has been inactive for a considerable time, a potential solution would be
to terminate the contract by mutual agreement. Governments could also consult
with contractors’ associations on the need for and implications of the closure of
nonperforming projects to develop a common understanding of the issues
involved. This dialogue should emphasize that the rationalization program is a
short-term measure and a step toward establishing a realistic and fully funded
PIP. Ensuring that such situations are addressed in public works contracts would
facilitate curtailment and closure and help to make the likely costs transparent.
Standardizing and improving the procedures for handling disputes are also
important.
Additional considerations in conducting rationalization
Project rationalization may offer a good opportunity to conduct a quick reassess-
ment of the strategic relevance of a given project. A typical issue faced by many
governments is that projects may have outlived their original objectives or may
no longer be relevant. This issue can arise as a result of delays in implementation
or changes in the policy landscape; it can be especially important if the screening
of projects for strategic relevance and quality is known to have been weak when
projects were originally selected.
Project rationalization may also be used to dispose of spending items that do
not fit commonly agreed-on definitions of a public investment project. Having
an unclear definition of what consitutes a public investment project may allow
noncapital spending items to be included in the PIP in order to circumvent
restrictions on recurrent spending. However, removing recurrent spending
items from the PIP will not necessarily alleviate the overall spending squeeze, as
recurrent items may still have to be funded outside of the PIP.
Projects that are “frozen” or put on hold could automatically be considered for
rationalization. Many countries have used the practice of “freezing” projects or
putting them on hold, which normally entails suspending their funding for a
given period of time. This practice has typically been used to cut capital spending
during periods of fiscal consolidation or to make room for new priority projects.
A lack of transparency is often evident in the criteria for the freeze as well as in the
timing and conditions for reentry into the PIP. Where a list of frozen projects
already exists, these projects should automatically be considered for the rational-
ization program, as the decision to freeze them indicates a low level of priority.
212 | Public Investment Management Reference Guide
Ensuring the sustainability of rationalization results
Consideration should be given to avoiding a recurrence of the problems that trig-
ger a portfolio rationalization. By far the best way to prevent the PIP from
becoming oversubscribed is to engage in a comprehensive reform of current
public investment planning and management practices, particularly selection
and budgeting. A successfully operating PIM system should render obsolete the
need to rationalize the PIP in future years. In the absence of a well-designed and
perfectly implemented PIM reform, prevention to ensure sustainability could
include the following measures:
• Actively monitor the portfolio, including implementation of just-in-time
measures to resolve implementation issues. Active monitoring would require a
comprehensive database with data similar to the requirements for a project
rationalization.
• Streamline the rationalization criteria into the relevant regulation. Streamlining
would ensure that projects under implementation are checked against
criteria for nonperformance on an ongoing basis.
• Introduce multiyear budget commitment ceilings or commitment appropria-
tions. If properly implemented and managed, such a system would guard
against overcommitting the PIP in the future.
NOTES
1. The envisaged implementation period for public investment projects rarely exceeds five
years. A snapshot at any point in time will reveal projects at different stages of
implementation. Three to four years is therefore a reasonable estimate for the time it
takes to complete a well-funded portfolio.
2. Portfolio rationalization should also apply to public-private partnerships (PPPs), although
relatively few PPPs are under implementation in most countries. The criteria for
nonperformance should be adjusted to reflect the external financing of project costs and
the effects on public debt, state guarantees, and the budget in the longer term.
3. The example is based on analysis of budget-financed projects, but can be adjusted to
include other parts of the portfolio.
4. The classification of implementation stages could vary with the country context.
For example, it could include the following six stages: (1) start-up, less than 10 percent of
total project costs incurred; (2) stage 1, 10–29 percent of costs incurred; (3) stage 2,
30–49 percent of costs incurred; (4) stage 3, 50–69 percent of costs incurred; (5) stage 4,
70–89 percent of costs incurred; and (6) completion, more than 90 percent of
project costs incurred.
REFERENCES
World Bank. 2013. “Ukraine Public Investment Management Performance Assessment 2012.”
World Bank, Washington, DC.
———. 2014. “A Public Investment Management Review and Reform Roadmap for Bangladesh.”
World Bank, Washington, DC.
———. 2015. “Romania: Advisory Services on Strengthening Public Investment Management—
Output 10: Rationalization of the Existing Public Investment Portfolio.” World Bank,
Washington, DC.
———. 2016. “Methodology for Public Investment Portfolio Cleaning.” World Bank, Washington, DC.
———. 2017. “Bank Guidance: Investment Project Financing: Implementation Support.”
World Bank, Washington, DC.
12
PIM Information Systems
REQUIREMENTS, OPTIONS, AND ISSUES
OVERVIEW
An effective public investment management (PIM) system needs to manage
complex information as it intersects with numerous public expenditure
management processes, including planning, budget formulation, budget execu-
tion, and ex post evaluation. Comprehensive data handling supports monitor-
ing and timely decision making, which require large amounts of data and
documents that need to be collected, stored, and processed into easily digest-
ible formats and made available to decision makers and project participants in
a timely manner.
A well-designed PIM information system can be very supportive of manage-
ment. However, levels of automation of PIM processes vary by country and may
reflect the degree to which decision making is centralized. Many countries with
advanced systems—including Denmark, Ireland, and the United Kingdom—do
not implement PIM information systems at the central level because decision
making for public investment projects is largely decentralized to line ministries
and agencies. And although central finance agencies need to monitor the prepa-
ration and implementation of capital projects, the scope is limited: automation is
generally confined to supporting budget formulation and execution functions as
part of a larger budget and financial management information system (FMIS).
Some countries with centralized PIM systems do not even have a simple database
to provide decision makers with an overview of the portfolio of projects under
implementation. In other countries, database information is fragmented or
incomplete; it may only cover projects from one financing source or may allow
project information to be tracked only through part of the cycle or just in the cur-
rent fiscal year. Relevant project data may be scattered across different systems
or data sources, which means that information requests regarding the status
of the portfolio will require ad hoc data surveys and inefficient manual
data processing.
A PIM information system may provide the following potential benefits:
• Serve as the one place of record for all public investment projects from
conception to fruition and, as such, encapsulate the project pipeline
213
214 | Public Investment Management Reference Guide
BOX 12.1
Guiding principles for developing and implementing a PIM information system
• A clear business case for developing the system • System design should consider issues that are
should be presented, including the chosen scope known to have a negative impact on system adop-
and system development strategy. The business tion and to reduce benefits. These impacts include
case should demonstrate that the system will deliver lack of incentives for timely provision of data and
economic benefits that outweigh the costs. inconsistency of data between different systems.
• System development should be based on reforms of • The choice of system architecture should balance
underlying business processes and formalization of the pros and cons of establishing a stand-alone
procedures through appropriate regulation. Simply PIM system that may need to interface with other
automating existing practices is not likely to yield systems versus a system that is integrated with
significant benefits. existing platforms.
• A clear and logical sequence is needed for formulat- • Planning for system implementation should factor
ing system requirements; functional (business) in the need for change management and solid gov-
requirements should be prioritized so that they can ernance arrangements to ensure communication
drive the choice of technological solutions, not the and effective decision-making procedures through-
other way around. out the project.
• Provide information for a consolidated overview and analysis of project and
portfolio performance
• Achieve efficiency gains through automation of PIM work flows and
processes—for example, performance monitoring and reporting
• Improve data quality and transparency.
This chapter provides an overview of requirements and options needed to
develop and implement PIM information systems and seeks to inspire the
country-level formulation of system development strategies and implementation
plans. Box 12.1 summarizes some guiding principles for the development and
implementation of PIM information systems based on country experiences and
previous World Bank support of system requirements.
CONCEPTUAL DESCRIPTION OF PIM INFORMATION SYSTEMS
Objective
The overall objectives of a PIM information system are to increase efficiency,
transparency, and accountability in public investment management.
Different countries may emphasize different aspects of these objectives. A PIM
information system would improve efficiency as it becomes the primary
mechanism for administering and managing PIM and could automate
information flows for many processes associated with the life-cycle stages of
public investment projects. It would potentially serve as the single place of
record for all public investment projects. It would improve accountability by
providing the tools to control, monitor, and evaluate process operations as well
PIM Information Systems | 215
as the performance of individual projects and the full project portfolio. Finally, it
would improve transparency by building in the ability to disclose information on
the project portfolio to the public, even allowing the public to interrogate the
information system.
Stakeholders
There is a potentially large and diverse group of stakeholders for PIM informa-
tion systems. Based on figure 12.1, the following is a general description of the
possible roles and responsibilities of information system stakeholders.
Key decision-making and financing bodies
These bodies include the legislature, the president or prime minister’s office,
central finance agencies, and international financing agencies and donors. All of
these stakeholders have overall decision-making or financing powers for the
PIM system. Their direct use of the system may vary, but each is important for
the efficiency, accountability, and transparency of the system.
Civil society organizations and the general public
As voters, taxpayers, and users of public services, the general public is interested
in the proper use of public funds and should be able to provide social oversight
of the public investment portfolio (PIP). Their direct use of the system will
FIGURE 12.1
Stakeholder map for a PIM information system
Key decision-making and financing bodies
Prime International
Central Civil society
minister or finance
Legislature finance organizations
president’s organizations
agency and public
office and donors
Project proponents Review and approval
and sponsors bodies
Line ministry or
agency Designated PIM
unit
Local
authorities Technical
assessment
State-owned PIM committee
enterprises information
system Cabinet review
Executing agencies
committee
Project manager
National audit
office
Project
implementation
unit
Information technology department and data centers
Central finance Line ministry,
Joint government
agency data agency, state-owned
data center
center enterprise data center
Sources: Adapted from World Bank 2016a, 2016b.
216 | Public Investment Management Reference Guide
depend on the availability of data and information in an open and transparent
manner, following the international trend toward increasing the transparency of
budget-related processes, including “open data.”
Project proponents and sponsors
Line ministries or their agencies, local authorities, or state-owned enterprises
formulate and propose investment projects. They commit their capital invest-
ment budget to particular projects and are ultimately responsible for project
monitoring and results. They use the PIM information system to support bud-
get planning, monitoring, and reporting of public investment projects under
their purview.
Executing agencies
Executing agencies are the organizational entities whose key staff within a line
ministry, local authority, or state-owned enterprise are responsible for project
implementation. Executing agencies can be designated project implementation
units or, in some cases, technical departments of the relevant ministry or agency.
Executing agencies designate the project manager for day-to-day management
of the investment project (see chapter 8). The executing agencies and their key
staff use the project-level capabilities of the PIM information system.
Approval and oversight bodies
Approval and oversight bodies include such bodies both within and external to
the government. Within government, they may include a designated PIM over-
sight unit or the relevant departments of central finance agencies if the oversight
and coordination functions have been streamlined into their work programs.
They may also include any technical committees established to review the
appraisal of project proposals and the cabinet or cabinet committees that issue
the final approval of projects. The government internal oversight bodies could
use data provided by the PIM information system for analysis in support of the
oversight function. Among external oversight bodies is the supreme audit insti-
tution, which may examine compliance with procurement and other regulations
and, in some cases, assess the broader analysis of the efficiency and effectiveness
of public investment.
Information technology departments and data centers
Information technology (IT) departments and data centers are important stake-
holders because they are responsible for operating and maintaining the PIM
information system itself or related systems, such as the budget system, FMIS, or
procurement system.
FUNCTIONAL SCOPE OF A PIM INFORMATION SYSTEM
The functional scope of a PIM system is potentially large and complex, and there
are sensitive trade-offs between advanced functionality and nonadoption risks.
PIM systems are inherently burdensome for project-executing agencies because
they entail reporting obligations and transparency risks. They may provide a
whole range of support functions for program management, project management,
and public information. Overreaching in one category may discourage adoption
and compliance in another. Clearly, a system designed to facilitate top-down
PIM Information Systems | 217
monitoring by program managers will not generate much enthusiasm among
project managers who are responsible for supplying the required information;
a system that adds value for project managers may be more successful.
Even within the same category of functionality, there may be significant
trade-offs. A system that indicates delays in a majority of projects in a ministry is
less useful than one that also enables users to analyze the reasons for the delays.
In addition to its more complex calculations, the more comprehensive system
may have higher adoption risk because it requires more periodic data entries to
function correctly. In addition, advanced PIM systems with rich functionality
for all categories of users are very complex and difficult to build in one go.
Some countries have taken a decade or longer to build them and make them
work reliably. The definition of the functional scope and coverage of a PIM
information system should start with addressing the following key points.
Database or work flow management
A comprehensive database is at the heart of any PIM information system, and
an essential question is whether to confine the system to providing database
functionality or whether to automate the work flows around proposals,
reviews, and approvals of project documentation. The extent to which work
flow functionality is covered varies by country. Whether automating work
flows constitutes a good investment depends on the number of new projects
under preparation and the existence of clear, formalized procedures on which
to base the work flow functionality.
If a government decides that the PIM information system should cover work
flow management, its reach—the number stakeholders it affects and the level of
detail of the tasks it performs—will have to be defined based on careful consulta-
tions with affected stakeholders. The required mapping of reformed PIM pro-
cesses will provide the basic input for this decision. Two key trade-offs are
involved in this decision:
• Increased project management capacity afforded by precise and timely data
collection versus the higher level of standardization and increased oversight
acceptable to stakeholders
• Increased speed, precision, and quality of PIM work processes versus the
increased complexity and risk in system specification, testing, and deployment.
These trade-offs sometimes lead to the system being implemented in phases—
for example, automation of higher-level work flows in a first phase and system
design and change management strategy in a more detailed second phase.
Project cycle coverage
Knowing which parts of the project cycle would be covered by the system will also
guide the functional requirements. Figure 12.2 summarizes three main options.
Project implementation focus
The minimum scope for a PIM information system is to collect, store, and
report data relating only to project implementation. Thus a project would enter
the system after a budget has been allocated and work begins, and it would exit
upon completion of the works and handover to the operational facility. This
scope would allow managers to focus support on reporting, monitoring, and
218 | Public Investment Management Reference Guide
FIGURE 12.2
Options for defining the functional scope of a PIM information system
Selection Project
Guidance and Formal Review of Project Facility Ex post
and implemen-
screening appraisal appraisal adjustment operation evaluation
budgeting tation
Project
implementation
Project identification,
preparation, and
implementation
Full project cycle
coverage
adjustments during implementation, which is the stage with the greatest need
for frequent and active monitoring. Unfortunately, many implementation
issues are rooted in poor planning and preparation of projects, which is why it
is highly preferable for the system to extend to planning and preparation.
Project identification, preparation, and implementation focus
This scope would allow the system to collect, store, and report information from
the initiation stage in order to cover first-level screening and appraisal of projects.
A project would enter the system after the relevant authority has approved the
project idea, and it would exit the system once implementation is completed.
This scope would allow all stages of project identification, preparation, and
implementation to be supported—including processes related to appraisal,
review of appraisal—as well as prioritization and selection for financing. The
system would be able to store relevant project documentation and maintain a
pipeline of ready-to-go projects. Centralized procedures to approve project pro-
posals at the project idea or concept note stage need to be in place for this option
to be viable. Many countries decentralize these approvals to line ministries or
other project proponent entities; in this case, a broad scope for the PIM informa-
tion system may not be appropriate.
Coverage of the full project cycle
A wider scope would cover the full project cycle, including functionality to sup-
port operations and ex post evaluation. Under this option, the project would
enter the system at project identification, and the system would track the project
through to ex post evaluation. However, this wider scope raises some issues: sup-
porting simple project completion reports is relatively easy, but including func-
tionality in support of service delivery monitoring or impact evaluations of
completed projects is less clear-cut. These aspects of PIM are typically among
the least developed and often do not have clear, formalized procedures; these
cases will not benefit from automation. Even if ex post evaluations are per-
formed, they typically cover only a sample of projects. A related technical chal-
lenge for automating these PIM stages is that the unit of analysis changes once a
project has been finalized and becomes a facility for service delivery.
PIM Information Systems | 219
Management levels
While portfolio-level management functionality is an essential feature of most
PIM information systems, the inclusion of functionality in support of proj-
ect-level management is more disputed. Two project-level management func-
tions—contract management and procurement management—are important.
Contract management
Adding a contract management module is a major decision in designing a PIM
information system. Many PIM systems in Latin America (Argentina, Chile,
Colombia, Guatemala, and Nicaragua) have such modules; other countries and
jurisdictions (Western Australia) have developed contract management mod-
ules as part of the electronic procurement system. Contract management is at
the heart of project management, but if it is implemented as part of a PIM infor-
mation system, this system will be skewed toward project-level rather than pro-
gram-level management. This skewing occurs because contract management
underpins other crucial project management functions, especially budgeting
and financial planning.
Procurement management
Procurement management is a crucial, specialized aspect of project manage-
ment. It involves monitoring all plans, steps, approvals, and results for all con-
tract procurement under the project. The lowest level of capability of a PIM
information system would be to keep track of bid submission and contract award
dates for each procurement process in order to calculate each project’s procure-
ment performance ranking in the public investment portfolio.
Public investment portfolio management versus program
management
PIP management is a different concept from program management as associated
with program budgeting. PIP management refers to management of a set of proj-
ects within the same line ministry or across the whole government portfolio;
program management refers to management of public sector activities that have
been structured into programs in order to better align the management of
activities with the government’s policies and priorities. Program management
also increases the transparency of planned and achieved results. If a methodol-
ogy for program budgeting has been implemented, the budget formulation sys-
tem is usually expected to include functionality to support program budgeting
and to store information on the nonfinancial performance of government pro-
grams. The systems of several countries in Latin America combine PIM with
program management, although this approach has made the systems more
complex. Boxes 12.2 and 12.3 present examples of comprehensive PIM informa-
tion systems from Chile and Colombia, respectively.
General capabilities
Under the greater of the three options for functional scope (see figure 12.2), the
general capabilities of a comprehensive PIM information system can be
described as follows:
• Maintain a comprehensive, official record of all data associated with invest-
ment projects throughout their life cycle, from prescreening of the initial
220 | Public Investment Management Reference Guide
BOX 12.2
The Integrated Bank of Projects in Chile
The Banco Integrado de Proyectos is a comprehensive The Integrated Bank of Projects includes informa-
PIM information system covering the full public tion stretching back some 25 years.
investment project cycle (see figure B12.2.1). • Subsystem for budget formulation. This subsystem
system has the following main features:
The tracks preparation of the next annual budget for
selected capital projects for internal government
• Comprehensive coverage of all sectors and project
discussion and for negotiations with congress.
stages, with more than 200,000 entries
It models and simulates different scenarios for a
• Shared responsibility between the Ministry of
three- to five-year period and accounts for dual
Social Development and the Ministry of Finance
budgeting (separates capital budgeting from the
within an integrated architecture
recurrent budget), and it separates baseline budgets
• Advanced functionality to support the medi-
from new-initiative budgets.
um-term budgetary framework (MTBF), including
• Subsystem for budget execution. This subsystem
scenario building based on capital baseline and
monitors the cash flow of every line item and proj-
“above baseline” spending
ect implemented within the current budget.
• Monitoring of financial and nonfinancial
It detects any cost overruns or underruns early on
performance
as well as any deviations from schedule, allowing
• Focus on ex post evaluation.
for timely corrective action. It also supports prog-
The system consists of four subsystems and corre- ress on nonfinancial indicators.
sponding relational databases: • Subsystem for ex post evaluation. This subsystem
supports ex post evaluation by documenting lessons
• Subsystem for technical-economic analysis. The
learned for future projects. It supports the Ministry
database tracks projects in various phases of prepa-
of Social Development in performing staff evalua-
ration—that is, project ideas, profiles, prefeasibility
tions and conducting project performance reviews,
studies, feasibility studies, design, and execution.
among others, of formally completed projects.
FIGURE B12.2.1
Diagrammatic representation of the Integrated Bank of Projects in Chile
Technical-economic
analysis (basic Budget
investment statistics formulation
system)
SNI
Ex post Budget
evaluation execution
Note: SNI = National Public Investment System.
Sources: USAID 2015, updated in response to comments by the Ministry of Social Development.
PIM Information Systems | 221
BOX 12.3
An integrated database of public investment projects in Colombia
The Unified System for Public Finance and During the execution phase, the use of public funds is
Investments (SUIFP) in Colombia captures updated automatically from the FMIS module, as are
information on public investment projects throughout any adjustments to the resources allocated in any
a project’s life cycle, from inception to completion and given year. The release of funds from the national
ex post evaluation. The system is made up of different budget can be put on hold if the project template is not
modules designed to address specific project cycle up-to-date. Moreover, the National Planning
issues. These modules have been developed for more Department can reject a request for budget
than 20 years and are integrated under a single reallocations if a line ministry has not provided the
platform. The SUIFP includes a database of projects required information.
with information on all public investments, a module The information in the database is also available for
used for budget programming, an FMIS used for use by different stakeholders, including the general
execution of the annual budget, and a monitoring public, who can search online for information on
platform used during project execution and after specific initiatives. Planning authorities can use
project completion. information in the database to decide which projects
The database of investment projects, Banco receive funding. For smaller projects, the stakeholders
Nacional de Programas y Proyectos, is a key component may only include the sponsoring agency, the National
of the system. It stores information on an investment Planning Department, and the Ministry of Finance.
project from the moment that the sponsoring entity For larger initiatives, especially those requiring
starts the approval process for the use of public funds multiyear funding, the final approval falls on the
through to project execution and evaluation. A project Consejo Nacional de Política Económica y Social,
template must be completed and updated regularly, which is headed by the president.
including different sets of information, including The information in this database is also used at the
name, code, start and end dates, responsible entity, project monitoring stage to track project execution.
geographic impact, links to the country’s development In particular, the National Planning Department
strategy, and value chain, as well as cost, financing, closely monitors activities and products proposed
and beneficiaries. during the project design stage to ensure that they
Before a project is formally approved, rigorous are being executed within the specified time frames
quality checks are conducted by the planning offices at and are delivering the expected outcomes and
all levels of government. Once project execution starts, outputs. The monitoring information is available to
the sponsoring agency updates the template to reflect the general public on the National Planning
progress in the project’s execution, especially how Department’s website and is also used as an input for
objectives and intermediate targets are being met and the budget reviews headed by the president during
whether any changes to the original plan are required. cabinet meetings.
Source: IMF 2011.
project idea or concepts by the relevant authority until the information is no
longer relevant for public financial management purposes
• Permit online and offline data entry
• Enforce rigorous control over the entry and modification of data, ensuring that
changes can be traced to authorized individual users of the system; alert the
project manager, project sponsor, program coordinator, and portfolio
administrator when important, authorized changes are made to project profile
(fiche) data; lock down data that should not be changed past a certain stage;
and keep a record of authorized changes for audit and historical analysis
222 | Public Investment Management Reference Guide
• Provide specialized, online interfaces (portals) authorizing primary stake-
holders to perform their functional responsibilities with respect to the PIP.
Portals should be logically distinct online interfaces, accessible only on a
properly authenticated, need-to-know basis, providing only the information
and functions authorized for each primary stakeholder
• Provide stakeholder-oriented monitoring dashboards with PIP performance
aggregates, indicators, and highlights by relevant classifications; provide
access to data analysis, graphic representation (tables, charts, maps), and data
drill-down tools for use in connection with these dashboards; and allow
production of data feeds for customized analysis using external applications
(for example, Excel)
• Allow online queries to scrutinize the PIP by any combination of variables
(sector, funding source, project status, executing agency, geographic location,
policy objective, value)
• Generate reports on project progress, budget execution, or performance
monitoring and evaluation using a configurable report-building facility
• Interoperate with the FMIS, budget system, and other relevant public finan-
cial management systems and provide a standard application programming
interface (API) with other systems
• Provide interfaces to project management software to allow project manag-
ers to upload work planning and performance data required by the PIM infor-
mation system database
• Automate the PIM work flow across all primary stakeholders
• Store, link to, and track key files and documents associated with the func-
tional work flows of the PIM information system. For all other documents
associated with portfolio and project management, provide reference
numbers that can be traced to the physical paper files kept at source.
Appendix C provides a list of possible functional support capabilities that the
PIM information system should provide at the project and program levels. While
project managers, project reviewers (project sponsors, auditors), and members
of project oversight committees are expected to be the primary users of
project-level capabilities, users may also include portfolio managers and sector
managers for drill-down examinations associated with their program-monitoring
responsibilities. Aggregate database elements are also required to provide
project-level capabilities for PIP management purposes.
SYSTEM DESIGN ISSUES AND OPTIONS
Once the high-level functional scope of the PIM information system has been
defined, detailed requirements for key design issues need to be addressed.
These measures include requirements for the identification and coding of proj-
ects, data collection, database and dashboard design, and project financial
accounting and reporting.
Identification and coding of projects
A critical requirement of a PIM system is the ability to identify a project with the
same number for the duration of the project. Therefore, the PIM information
system should generate a unique project identifier when a project is first entered
PIM Information Systems | 223
into the database and put that identifier on all financial and nonfinancial
transactions that determine the performance of the project. If identifiers already
exist for old projects, these projects may have to be given new numbers and the
linkage between new and old numbers has to be preserved.
Data collection
Collection of timely and correct information on investment project progress is
the Achilles’ heel of PIM systems. Lower-level managers have few incentives to
be exposed to open scrutiny on the progress of work and accomplishments, par-
ticularly when such scrutiny may lead to inquiries and sanctions instead of solu-
tions and rewards. This problem could trigger a vicious circle of no transparency,
delayed corrective action, poor performance, and economic losses in the PIP.
The solutions to this problem could involve some of the following:
• Collecting data only when fully justified by their value for decision making. This
approach requires a careful analysis of the burdens and potential benefits of
collecting particular data elements.
• Balancing the needs and interests of suppliers and consumers of information
at all levels of the institutional hierarchy. This approach is accomplished
mainly by regulating the timing and diffusion of data by the PIM informa-
tion system—for example, by restricting the access of line ministries or
other project sponsors to individual financial transactions or allowing
access only for financial aggregates. Collecting data only when justified is
a system design decision—for example, financial aggregates are calculated
only at particular intervals, as dictated by the budget calendar. Such mea-
sures give project managers effective confidentiality in day-to-day work
and expose them to top-down monitoring only at preagreed intervals and
in preagreed formats, as determined by regulation. Similar arrangements
could operate at higher levels—for example, by restricting real-time drill-
down access by top-level sector managers to detailed project transaction
data. These controversial measures require careful discussion, as their
purpose is to ensure that top-down visibility does not discourage bot-
tom-up data collection. The need of top-level managers or auditors to look
at detailed data can be met through system features such as ad hoc report-
ing under proper authentication.
• Designing incentives for timely, reliable data collection. PIM information
system design may embed positive and negative incentives for data collection.
The following are the most common incentives:
°° Rewiring the FMIS to stop accepting and processing financial transactions
of projects when it receives a command to this effect from the PIM infor-
mation system
°° Submitting budget appropriation proposals for new projects only upon
verification of quality-of-planning elements (financial plan, work plan,
performance plan, and procurement plan) in the PIM information system
database
°° Locking baseline plans to incentivize timely updating of actual plans. For
example, the system may trigger a delayed performance status when the
date associated with a baseline progress indicator has elapsed and the
actual completion date for that indicator has not been entered.
224 | Public Investment Management Reference Guide
Database requirements
The PIM information system database should capture data and information
related to the entire project life cycle in the format and to the extent necessary to
provide the functional capabilities of the system. Appendix D shows the possible
content of a database organized according to the project life-cycle stage when
the data elements are first created or used. The specific system design will need
to harmonize database content with system functionality and specify all data
elements in detail.
Data warehouse and dashboards
Dashboards are real-time, graphic visualizations of the status, dimensions, and
performance of the PIP, filtered by various criteria and key performance indi-
cators. They typically build on so-called data warehouse and business intelli-
gence solutions that can extract and transform data from different data sources
to produce powerful tools for rapid reporting, decision making, and analysis of
management information. Such data warehouse and business intelligence
solutions are disruptive technologies, which can significantly move the bound-
aries on how information on capital spending and public investment projects
can be presented and analyzed. Their capabilities are usually configured for
the specific interests of each category of authorized user (portfolio administra-
tor, program coordinators, project manager, the public).
PIM information system dashboards should allow the following types of data
operations:
• Filtering. Restricting the visualization to data that meet the chosen filter
values—for example, ministry, sector, subsector, location
• Drill down. Moving from aggregate to discrete data (bearing in mind the
provisos mentioned previously)
• Mapping. Visualizing data according to geographic location
• Analysis. Using analytical tools, such as tables and charts
• Data extraction, transformation, and loading. Extracting, transforming, and
loading data into customized formats (pivot tables) or spreadsheet files.
While these and other operations make dashboards powerful presenta-
tional tools, their value depends fundamentally on the data available. It is
better to target limited yet high-value data and apply powerful positive and
negative incentives to secure timely collection. As a first approximation, a
PIM information system could involve the collection of high-level data from
four project planning or project management instruments—namely, the
financial plan, the work plan, the performance plan, and the procurement
plan. As these plans are updated, they leave a history of project performance
during the implementation stage. The system locks the baseline version of
these plans when the project becomes effective and keeps track of the annual
budget allocation for the project. Using these plans and other basic project
data such as start time and project cost, the PIM information system can peri-
odically calculate various status indicators and performance rankings for
each project, as shown in table 12.1. Dashboard users can use the indicators
and performance rankings for any combination of filtered analyses over the
whole—or sections of the—PIP portfolio, according to their access rights.
PIM Information Systems | 225
TABLE 12.1 Examples of status indicators and performance rankings
available for dashboard operations
STATUS INDICATORS PERFORMANCE RANKINGS
• Project stage • Budgeting performance
• Implementation status: active, delayed, • Funding performance
dormant • Implementation performance
• Project risk: low, medium, high • Disbursement performance
• Procurement performance
Project financial accounting and reporting
Investment projects are complex managerial endeavors requiring special orga-
nizational arrangements, budgets, and financial accounts. Their financial
transactions need to be differentiated by project component and subcomponent,
in addition to all other segments of the budget classification structure and chart
of accounts. Project financial accounting involves monitoring commitments,
invoices, and disbursements for each source of financing and for each project
component and subcomponent.
A key design principle of public financial management systems is to have only
one “source of truth” for budget execution. Project accounts ideally should be
fully differentiated in the FMIS ledger by project component and subcompo-
nent, such that project financial reports can be obtained directly from the FMIS.
However, if project and project component codes do not exist in the budget
classification structure, project financial reporting becomes an ad hoc problem
within the FMIS and not amenable to the standard aggregation logic of all other
general ledger accounts.
Enhancing the budget classification structure is administratively and tech-
nically difficult and would be justified only in connection with more compre-
hensive FMIS redesign. One alternative is to maintain the budget classification
structure unchanged but to ensure that project-related transactions can be
distinguished from all others in the FMIS. If a program segment exists in the
budget classification structure, it can contain a unique project code that can be
distinguished automatically from a program code, allowing for project-level
accounting in the FMIS.1
SYSTEM ARCHITECTURE
A key consideration when designing a PIM information system is the system
architecture, including whether to integrate it with other systems or to build
or acquire it as a stand-alone system. An integrated model typically means
developing or adding the PIM information system as a module in a larger sys-
tem using the same database or the same technological platform. Two of the
most common integration models are to develop the PIM information system
either as a module of the budget system or an integrated FMIS (if it exists) or
as a module or enhancement of existing aid management platforms. A stand-
alone system means developing the system separately, with its own database
and technology, and relying purely on technical interfaces for exchanging data
with other systems. In practice, the difference between “integration” and
226 | Public Investment Management Reference Guide
“stand-alone” is not clear-cut: the nature of system integration is a continuum,
with interfaces between separate systems at the “low” end and a fully inte-
grated database at the “high” end.
Integration with budget system or FMIS
Some countries have chosen integration with existing budget or FMIS systems
due to the high volume and frequency of exchanges on budgetary and financial
aspects of public investment, especially for projects that are fully or partially
funded by the budget. A PIM information system could provide information on
budget requests and estimates for the out years of an MTBF to the budget sys-
tem, while receiving information about budget appropriations from the budget
or FMIS system. Likewise, during the budget execution stage, there would be
several data exchanges on financial transactions, reports, and budget vire-
ments. Some suppliers of commercial off-the-shelf budget solutions have
developed capital budgeting modules that can provide some of the sought-
after PIM capabilities.
Some of the disadvantages of integration with the budget system or FMIS
revolve around differences in logic and specifications. The specifications of an
already-developed budget system or FMIS may fall short of the requirements
of a PIM information system, or there may be little common logic between the
two systems: the database for the PIM information system may require unique
content that has little overlap with that of the budget system database. If the
architecture of the budget system or FMIS is not designed to integrate PIM
information system requirements from the start, this integration might become
a second-best technical solution and effectively result in two different,
unrelated systems running under the same name and technical environment
(see box 12.4 for the case of Romania).
BOX 12.4
Integration of a PIM module in the Romanian budget planning system
The Romanian PIP database is an example of a only to insiders and usually only with the help of
PIM database system developed as a module of IT experts. Neither senior g overnment officials
the budget system that has proven inadequate to nor the public can use the database for PIP mon-
provide the functionality of a reformed PIM sys- itoring. The PIP database lacks critical data ele-
tem. The
f unctionality of the PIP database was ments necessary for central PIP oversight by the
built with the purpose of supporting the annual Romanian Ministry of Public Finance. In addition,
budget process, but it does not help to establish a the assignment of unique project identifiers only at
link between strategic objectives and investment the stage of selection for financing excludes proj-
proposals or to track the financial, procurement, ect proposals from the d atabase, and the lack of
physical, or managerial performance of projects detailed historical performance data reduces the
over time. Its limited information is available opportunities for analysis.
Source: World Bank 2016b.
PIM Information Systems | 227
Integration with aid management platforms
Many countries that receive large amounts of foreign aid operate aid man-
agement platforms to support coordination and monitoring of aid programs
and initiatives. These platforms are typically designed as integrated data-
base systems that support collection, storing, and reporting of information
on aid initiatives. They often include interfaces for data input as well as
dashboards and graphical options to represent aid effectiveness in various
dimensions.
For countries that rely heavily on donor assistance to finance their PIPs,
the overlap with the requirements of a potential PIM information system may
be large. It is therefore relevant to explore the extent to which such a system,
with proper adjustments, could serve the purposes of a PIM information sys-
tem. Such systems generally have limited or no work flow management capa-
bilities and may be the best fit in situations where the focus is mainly on
monitoring and management during the project implementation stage. The
limitations include (a) inadequate procedures for the timely input of data,
which can depend heavily on the goodwill of donors where there are no
requirements to use national systems; and (b) the typical lack of automated
interfaces with the budget or FMIS system. In order to cover the PIP compre-
hensively, aid management p latforms should be customized to include not
only foreign-financed investment but also domestically financed investments.
Finally, the platform needs to be able to distinguish between capital invest-
ment and technical assistance and other types of activities. Some countries
have created PIM systems by customizing off-the-shelf aid management plat-
forms (see box 12.5).
BOX 12.5
PIM systems based on aid management platforms in Iraq and Mauritania
Iraq and Mauritania use platforms originally devel- from its initial request through the review and
oped for aid management that have been enhanced approval process involving the ministry of plan-
by the provider to cover public investment projects ning, line ministries, the council of ministers, and
irrespective of f ina ncing sources. The Iraq parliament.
Development Management System was launched in PIM implementation in Mauritania was
April 2016 and manages the entire cycle of govern- launched quite recently. The system supports the
ment and donor-funded development projects. The management aspects of programming (thanks to
system is f ully a lig ned w it h t he Nat iona l World Bank development policy financing) and
Development Plan and empowers the government consists of modules (projects, agreements, dis-
of Iraq to select, plan, and implement investment bursements, organizations) that have their own
projects. It includes all of the internal work flow separate work flows. It is a governmentwide
and business processes that a project goes through system.
Source: World Bank 2017a.
228 | Public Investment Management Reference Guide
Stand-alone PIM information systems
A stand-alone PIM information system can be considered in cases where
requirements exceed what can be delivered by integrating with existing systems
(see figure 12.3). An advantage of a stand-alone system is that it provides an
opportunity to design a first-best technological solution rather than adjusting to
fit an existing platform. A drawback is the potentially higher cost and the need
to define automated interfaces with other systems.
Examples of interfaces with external systems
Budget system
The PIM information system passes financing requests to the budget formu-
lation system, and the budget system passes the corresponding approved
appropriation to the PIM information system after the Budget Law has been
adopted by the government. Budget changes that may occur during the year
should be sent from the FMIS to the PIM information system. Functionality
to support the budget allocation and negotiation process may be placed in
either the budget system or the PIM information system.
FIGURE 12.3
Possible technical architecture of a stand-alone PIM information system
Portfolio administrator Line ministry or Project management
portal projects sponsor portal portal
Project and portfolio status Project documentation, Performance plans
performance, results status, performance, results and results Financial
transactions
Local government Sub
nat
project system ion
al p
roje FMIS
c ts Project financial
Budget requests performance
Budget system
Appropriations PIM information system
Project financial Local accounting
r data plan
Tende PIP
system
s
Public procurement r statu
Tende information
Work plan and progress data
portal
Project
management
system
Dashboard Dashboard
Public
for central for audit
dashboard
finance agency authority
Sources: Adapted from World Bank 2016a, 2016b.
Note: FMIS = financial management information system. PIP = project investment portfolio.
PIM Information Systems | 229
FMIS
The basic nature of the exchange that should take place between the PIM
information system and the FMIS is as follows:
• All project-related financial transactions carry a project code from the budget
classification structure.
• Project managers submit project financial transactions: commitment
requests, final commitments (signed contracts or purchase orders), and
payment requests through the FMIS.
• The FMIS sends completed budget execution transactions back to the
PIM information system after posting to the general ledger. These transac-
tions should be stored cumulatively by the PIM information system over
the lifetime of the projects and used for reporting on financial perfor-
mance and calculating periodic financial performance indicators and
rankings.
Procurement portal system
The current version of the procurement plan for each project should be
entered by the project manager into the PIM information system, which will
send the data to the public procurement portal to initiate a tender process.
The public procurement portal will keep the PIM information system
informed of the status of this process by sending updates every time the
process advances one step.
Project accounting system
Full project accounting and financial reporting needs to be done outside the PIM
information system and the FMIS by accrual accounting software. As this soft-
ware may range from a sophisticated financial management system to simple,
desktop accounting software, the most that can be expected is that the PIM
information system will offer an appropriate application programming interface
so that the project accounting system can feed financial planning data into it.
PLANNING FOR IMPLEMENTATION OF PIM
INFORMATION SYSTEMS
As with other information and communication technology projects,
implementing a PIM information system is a complex endeavor, the success of
which is affected by many technical and nontechnical factors. A solid
implementation process includes the following elements:
• Functional and technical requirements
• Detailed mapping of existing and future business processes
• System development strategy
• Change management strategy
• Project management and governance arrangements.
Functional and technical requirements
A critical initial step in implementation is to define functional and technical
requirements.2 As with other information systems, the definition of functional
230 | Public Investment Management Reference Guide
echnical
requirements should precede the technical requirements because the t
architecture and solutions often depend on the functional scope of
the system.
Business process mapping
Identification of high-level functional and technical requirements should be
followed by more detailed process mapping to ensure that requirements are
formulated comprehensively. Process mapping typically starts with the existing
(“as-is”) processes before identifying needed changes and defining future (“to-
be”) processes. Process mapping can be helpful in making sure that all needed
reforms of the current PIM system and processes have been identified and
documented at a detailed level.
System development strategy
A fundamental decision to be made is whether the PIM information system
will be built as bespoke software or on top of a commercial software package.
If it is custom made, it is necessary to evaluate whether a systems integration
approach would be a reasonable strategy for system development. Such an
approach would involve taking software that is already available and integrat-
ing it with open-source or commercial software for authentication, single sign
on, database, data warehousing, business intelligence, and so forth as a way to
build the PIM information system. If this approach is taken, it will be neces-
sary to conduct a market survey to identify existing software that can be
acquired from either commercial suppliers or other governments. As a rule of
thumb, to be considered, software packages should satisfy at least 80 percent
of the functional and technical requirements of a PIM information system
without requiring customization. If the software misses this mark, customiza-
tion may be prohibitively costly.
Change management strategy
Effective and timely implementation of a PIM information system may be
impeded by the uncertainty or resistance that it causes among affected staff and
other stakeholders. A change management strategy for some of the root causes
of such uncertainty or resistance is discussed below.
Informal procedures and “rent seeking”
Implementation of a PIM information system based on the reform of underlying
processes is likely to formalize and systematize procedures and to increase
transparency about how projects are reviewed, selected, and implemented.
Implementation of a PIM information system reduces the opportunities for
informal procedures and the flow of benefits emanating from an informal sys-
tem. Public investments are particularly prone to such informal mechanisms
because they involve very large transactions. In some countries, projects may be
selected as a result of pressure from certain beneficiary groups rather than any
measure of the socioeconomic merits of a project. For similar reasons, projects
may be initiated in spite of forward financing requirements that exceed what is
affordable. Faced with the prospect of reduced rents and increased scrutiny of
decision making, some stakeholders may resist the adoption of a PIM
PIM Information Systems | 231
information system. In some cases, systems either are not adopted or are subse-
quently abandoned even if technically sufficient. Box 12.6 summarizes the case
of the National Investment Planning system in Serbia.
Countering such resistance requires strong ownership and leadership from
top-level decision makers in government. A change management strategy should
focus on activating senior management, selecting “champions” among political
decision makers, and preparing them to push through system implementation.
Disincentives among primary data providers
A major challenge of PIM information systems is to ensure the receipt of timely
and accurate data from project managers, particularly during project implemen-
tation. Balancing incentives is important for successful PIP system deployment.
PIP systems are inherently burdensome for project-executing agencies, as they
entail primarily bottom-up reporting obligations and perceptions of more
detailed oversight and control. A PIM system designed to produce monitoring
and control information will not generate much motivation among project man-
agers. At a minimum, the system should be user-friendly and able to produce
automatically all reports and data feeds required by project sponsors and portfo-
lio administrators; data providers should not have to prepare ad hoc reports.
BOX 12.6
Learning from past failures: The National Investment Planning system in Serbia
A comprehensive PIM information system—the Coordination Network system, which had been cre-
National Investment Planning (NIP) system—was ated to manage projects developed for European
developed in Serbia in 2007 but was eventually aban- Union preaccession funds, and exchanged data elec-
doned. The system was developed by the NIP Office, tronically with that system. Similarly, the functional-
reporting directly to the prime minister and led by a ity of the NIP system aimed to be consistent with
NIP minister without portfolio. It was developed with project formulation and implementation guidelines
financial and conceptual support from the World Bank for World Bank–financed projects. A Serbian IT com-
and the European Union and followed extensive inter- pany developed the system as bespoke software.
national consultation on good practices. By 2008, it While the exact reasons for discontinuing the NIP
reportedly had achieved almost 100 percent coverage of system are not known, the comprehensiveness of the
central, regional, and local investment projects and had system’s functionality suggests that these reasons
some 17,000 projects in its database. The NIP system were mainly nontechnical. The institutional instabil-
was underpinned by formal regulations and associated ity of the NIP Office and lack of coordination with the
procedures for project selection and implementation. Ministry of Finance undoubtedly affected long-term
The functional specifications of the NIP system institutionalization of the NIP system. The system is
reflected clear guidelines for project registration, pre- presumably still operational at the data center of the
screening, feasibility study, selection, implementation, Administration for Joint Services of the Republic
progress reporting, and completion reporting. The Bodies. Lessons should be drawn from this past failure
NIP system also supported the NIP Office’s central- to make the system sustainable—in particular, the gov-
ized oversight of the PIP. The NIP system coopted the ernment needs to commit to the obligatory use of a
investment project screening procedures and forms of PIM information system as the official gateway for
the Intersectoral Development Assistance submitting and extracting project information.
Source: World Bank 2017b.
232 | Public Investment Management Reference Guide
General uncertainty among affected staff
Staff working on various aspects of PIM may be uncertain about what the system
might entail for them. Changes in processes may by themselves lead to discom-
fort among those affected. There may also be suspicions that any quoted objec-
tives to increase efficiency could lead to lay-offs or changes in job conditions.
However, the experience from the implementation of many information and
communication technology projects worldwide indicates that well-designed
communication campaigns can minimize such uncertainties.
Governance arrangements and project management
Sustained leadership and effective coordination and governance arrangements
are indispensable for successful implementation of a PIM information system.
Successful implementation requires a clear strategy, a political champion sup-
ported by a capable reform team, and well-established consultation and coordi-
nation mechanisms.
Starting and maintaining the implementation process requires the continuous
proactive engagement of senior management in the involved ministries.
The responsible central finance or planning agency should formally endorse an
implementation plan and launch initial implementation activities. Continued
political leadership is required to maintain the reform process and to guide stake-
holders through critical junctures, including conflicting opinions on the details of
reform as well as anxiety—and potentially even resistance—on the part of affected
staff or other stakeholders.
A project steering committee can provide oversight and facilitate continu-
ous and timely decision making. The committee could be chaired by a repre-
sentative from the responsible central finance or planning agency and comprise
senior officials from the main affected administrations. It should coordinate
closely with bodies overseeing the implementation of related public financial
management reforms; some overlap of key persons could be beneficial.
Depending on country circumstances, development of a PIM information sys-
tem may require mobilizing resources for technical assistance as well as some
investment. The committee should therefore map out the corresponding
financing needs, seek out funding options, and liaise with potential donors as
necessary.
At the project management and technical level, roles and responsibilities
need to be clearly designated. A full-time, experienced project manager
typically needs to be assigned for the duration of the project; this manager
would normally head up a project implementation team consisting of functional
specialists and IT specialists to carry out all project activities.
NOTES
1. Different countries have used different approaches to distinguish projects and to ensure
accounting at the project level. A typical program classification consists of programs,
subprograms, and activities. Some countries use activity codes for projects, although
activity codes will not by themselves distinguish between projects and other kinds
of activities. Another option is to create spending units for projects and map them to the
relevant programs.
2. Data and business needs of the main stakeholders.
PIM Information Systems | 233
REFERENCES
IMF (International Monetary Fund). 2011. “Manual de procedimientos del Banco Nacional de
Programas y Proyectos, Departamento Nacional de Planeacion.” IMF, Washington, DC.
USAID (U.S. Agency for International Development). 2015. “Main Features of an Integrated
Database of Capital Projects.” USAID, Washington, DC.
World Bank 2016a. “Public Investment Management in Serbia—Preliminary Requirements
for a Public Investment Management Information System (PIMIS).” World Bank,
Washington, DC.
———. 2016b. “Romania: Advisory Services Agreement on Support to Strengthening Public
Investment Management—Output 2: Draft Report Identifying Potential Improvements to
Information System for Monitoring the Public Investment Portfolio.” World Bank,
Washington, DC.
———. 2017a. “Public Investment Management Systems: Summary Note on PIM Systems.”
Report delivered to the Financial Management Information System Council of Parties,
World Bank, Washington, DC.
———. 2017b. “Republic of Serbia: Strengthening Public Investment Management; Summary
Assessment Report.” World Bank, Washington DC.
A
References for International
Guidance on Designing
Appraisal Methodologies
When designing appraisal methodologies and estimating national parameter
values, governments might find it useful to consult the following resources.
GENERAL GUIDANCE ON APPRAISAL METHODS
Commonwealth of Australia. 2006. Handbook of Cost-Benefit Analysis Canberra:
Department of Finance and Administration. http://www.finance.gov.au/sites
/default/files/Handbook_of_CB_analysis.pdf.
European Commission. 2014. Guide to Cost-Benefit Analysis of Investment
Projects: Economic Appraisal Tool for Cohesion Policy 2014–2020. Brussels:
Directorate General for Regional and Urban Policy. http://ec.europa.eu
/regional_policy/sources/docgener/studies/pdf/cba_guide.pdf.
Government of Northern Ireland. n.d. “Guide to Economic Appraisal: Carrying
out a Cost Benefit Analysis, Part D.03 of Public Spending Code.” Central
Expenditure and Evaluation Unit, Department of Public Expenditure and
Reform, Belfast. http://publicspendingcode.per.gov.ie/d-standard-analytical
-techniques/.
Government of Northern Ireland. n.d. “Northern Ireland Guide to Expenditure
Appraisal and Evaluation.” Department of Finance and Personnel, Belfast.
http://www.dfpni.gov.uk/eag and https://www.finance-ni.gov.uk/topics
/finance/northern-ireland-guide-expenditure-appraisal-and-evaluation
-nigeae.
HM Treasury. 2003. The Green Book: Appraisal and Evaluation in Central
Government. Updated in 2011. London: HM Treasury. https://www.gov.uk
/government/publications/the-green-book-appraisal-and-evaluation-in
-central-governent.
HM Treasury. 2013. Public Sector Business Cases Using the Five Case Model,
Supplementary Guidance to the Green Book London: HM Treasury. https://
www.gov.uk/government/publications/the-green-book-appraisal-and
-evaluation-in-central-governent.
New Zealand Treasury. 2015. “Guide to Social Cost-Benefit Analysis.” New
Zealand Treasury, Wellington. http://www.treasury.govt.nz/publications
/guidance/planning/costbenefitanalysis/guide.
235
236 | Public Investment Management Reference Guide
World Bank data on transport, water, energy, and telecommunications. https://
data.worldbank.org/topic/infrastructure.
World Bank road maintenance and planning data. http://siteresources.worldbank
.org/INTROADSHIGHWAYS/Resources/338993-1115316562809/10-poor_rd
_maint.pdf.
SECTOR-SPECIFIC GUIDANCE ON APPRAISAL METHODS
Multisector examples
Asian Development Bank. 2013. Cost-Benefit Analysis for Development: A
Practical Guide. Manila: Asian Development Bank. Includes water and sani-
tation as well as power generation and transmission. http://www.adb.org
/sites/default/files/institutional-document/33788/files/cost-benefit-analysis
-development.pdf.
European Investment Bank. 2013. Economic Appraisal of Investment Projects at
the EIB. Brussels: Projects Directorate. Includes water and sanitation, power
generation and transmission, ports, and energy efficiency. http://www.eib
.org/attachments/thematic/economic_appraisal_of_investment_projects
_en.pdf.
Education
Woodhall, M. 2005 Cost-Benefit Analysis in Educational Planning, 4th ed. Paris:
UNESCO, International Institute for Educational Planning. http://unesdoc
.unesco.org/images/0013/001390/139042e.pdf.
Culture
Arts Council England. 2016. Measuring the Economic Benefits of Arts and Culture:
Practical Guidance on Research Methodologies for Arts and Cultural
Organisations. London: Arts Council England. http://www.artscouncil.org.uk
/advice-and-guidance/browse-advice-and-guidance/measuring-economic
-benefits-arts-culture.
Transport: Land transport
New Zealand Transport Agency. 2013. Economic Evaluation Manual. Wellington: NZ
Transport Agency. http://www.nzta.govt.nz/resources/economicevaluation
-manual/economic-evaluation-manual/eem/.
Transport: Roads
Transport Infrastructure Ireland, Ireland. Various years. Project Appraisal
Guidelines for National Roads. Dublin: Transport Infrastructure Ireland.
http://www.tii.ie/.
Transport: Airports
U.S. Federal Aviation Administration. 1999. FAA Airport Benefit-Cost Analysis
Guidance. Washington, DC: Office of Aviation Policy and Plans. https://www
.faa.gov/regulations_policies/policy_guidance/benefit_cost/media/1999
_FAA_Airport_Benefit_Cost_Analysis_Guidance.pdf.
References for International Guidance on Designing Appraisal Methodologies | 237
Transport: Railways
European Investment Bank, RailPAG: Railway Project Appraisal Guidelines.
Luxembourg: European Investment Bank. http://www.eib.org/attachments
/pj/railpag_en.pdf.
Environment
OECD (Organisation for Economic Co-operation and Development). 2007.
Handbook for Appraisal of Environmental Projects Financed from Public
handbo
Funds. Paris: OECD Publishing. http://www.oecd.org/env/outreach/
okforappraisalofenvironmentalprojectsfinancedfrompublicfunds.htm.
Energy: Distribution
Giordano, V., and M. Sánchez Jiménez. 2012. Guidelines for Conducting a Cost
Benefit Analysis of Smart Grid Projects. JRC Reference Report. Petten, the
Netherlands: European Commission, Joint Research Centre. https://ses.jrc
.ec.europa.eu/sites/ses/files/documents/guidelines_for_conducting_a_cost
-benefit_analysis_of_smart_grid_projects.pdf.
Giordano, V., I. Onyeji, M. Sánchez Jiménez, and C. Filiou. Guidelines for Cost
Benefit Analysis of Smart Metering Deployment. JRC Science and Technological
Research. Petten, the Netherlands: European Commission, Joint Research
Centre. https://ses.jrc.ec.europa.eu/sites/ses/files/documents/guidelines
_for_cost_benefit_analysis_of_smart_metering_deployment.pdf.
Flood protection and coastal erosion
U.K. Environment Agency. 2018. Flood and Coastal Erosion Risk Management:
Appraisal Guidance. Rotherham: U.K. Environment Agency. https://www
.gov.uk/government/publications/flood-and-coastal-erosion-risk
-management-appraisal-guidance. Other appraisal tools are available at
https://www.gov.uk/flood-and-coastal-defence-appraisal-of-projects.
Information and communication technology
Australian Government, Information Management Office. 2019. “ICT Business
Case Guide.” Department of Finance, Canberra. https://www.finance.gov.au
/sites/default/files/2019-11/ICT_Business_Case_Guide.pdf.
Sources of information on the value transfer approach to
national parameter values
Where national values have not yet been calculated, values may potentially
be derived from some European and international studies, particularly for
the transport and environment sectors. This approach is generally known as
the value transfer method. The following are examples of potential data
sources:
Environment and Climate Change Canada and Department for Environment,
Food, and Rural Affairs, Environmental Valuation Reference Inventory
(EVRI), a searchable database of empirical studies on the economic value
of environmental assets and human health effects. https://evri.ca/en
/splashify-splash.
238 | Public Investment Management Reference Guide
European Commission. 2005. “Developing Harmonised European Approaches
for Transport Costing and Project Assessment (HEATCO): Current Practice
in Project Appraisal in Europe: Analysis of Country Reports.” European
Commission, Brussels. https://trimis.ec.europa.eu/sites/default/files
/project/documents/20130122_113558_74349_hd1final.pdf.
European Commission. 2013. Update of the Handbook on External Costs of
Transport: Final Report. London: RICARDO-AEA. http://ec.europa
.eu/transport/themes/sustainable/studies/doc/2014-handbook-external
-costs-transport.pdf.
U.K. Department for Transport. 2013. International Comparison of Transport
Appraisal Practice: Overview Report, specifically appendix B. London:
Department for Transport. https://www.gov.uk/government/publications /
international-comparisons-of-transport-appraisal-practice.
B
Further Issues in Developing
an Economic Appraisal
Methodology
This appendix deals with design issues where specific recommendations might
be useful for governments in the process of preparing methodological guidance
on economic appraisal. It covers the following topics in more detail than was
possible in the main report:
• Setting of national parameter values and consideration of conversion factors
• Decisions regarding estimation of the social discount rate
• Treatment of labor market distortions
• Allowance for the deadweight cost of taxation
• Approaches to estimating values for nonmarket benefits and costs
• Decisions regarding the required degree of sophistication of risk analysis.
SETTING OF NATIONAL PARAMETER VALUES AND
CONSIDERATION OF CONVERSION FACTORS
As well as providing general guidance on project appraisal methodology, govern-
ments should ensure that regularly updated, nationally applicable values for key
parameters, especially nonmarket effects, are available for preparing feasibility
studies. Having such information ensures that the valuation of costs and benefits
is consistent across projects, eliminating the need to estimate and reestimate val-
ues on a case-by-case basis. Having consistent information improves compara-
bility and delivers savings in analytical effort.
Box B.1 illustrates the parameter values provided as part of France’s national
methodological guidance. The United Kingdom takes a different approach,
allowing line ministries to determine the values for key parameters for their sec-
tors, subject to the finance ministry’s approval. Only the discount rate is set cen-
trally as part of the national methodological guidance and is updated when
necessary.1 The Republic of Korea has a similar system, with national parameter
values updated annually in online guidance.
Where national values have not yet been calculated, it is possible to derive
values from some European and international studies, particularly for the trans-
port and environment sectors. This approach is known as the “value transfer”
method of estimating parameters. When using such estimates, governments
239
240 | Public Investment Management Reference Guide
BOX B.1
National parameter values for social cost-benefit analysis in France
The following values are provided in the central guid- Environmental values
ance on social cost-benefit analysis for France:
• Value per ton of carbon dioxide emitted
• Cost of atmospheric pollution by mode of trans-
Transport-related values
port and population density
• Value of a statistical life
• Values for noise emissions by mode of transport
• Values for severe and minor injuries
and population density.
• Value of travel time by mode, purpose, location
(Ile de France and elsewhere), and distance In addition, guidance is given on how these values
• Value of freight time by type of cargo should change over time.
• Value of passenger waiting time.
Source: Office of the Prime Minister, France 2013.
need to ensure that they are adjusted for the national context and updated to the
relevant base year. Some examples of these data sources are given in appendix A of
this guide.
Even where a market exists for project inputs and outputs, market prices may
not represent the best basis for estimating the economic value of a project’s costs
and benefits. It may be necessary to adjust financial values to yield economic val-
ues (“social opportunity costs” or “shadow prices”) because of substantial distor-
tions in the economy. Such distortions can arise from taxes on trade, production
subsidies, or inefficient labor markets, for example. Early guidance on cost-
benefit analysis often recommended that the planning authorities estimate an
elaborate set of national conversion factors, covering major sectors of the econ-
omy, to transform market prices to economic values for use in social cost-benefit
analysis (SCBA). This guidance was developed when many economies were
much more severely distorted than they are today. It was rarely followed, and,
where it was followed, the factors were rarely employed in actual SCBA because
few planners knew of their existence or understood how to use them.
For practical reasons and considering the generally more efficient markets
now existing in many countries, it is not considered necessary to devote
significant planning resources to developing economywide conversion factors.
Good practice is to make adjustments for key inputs or outputs on a case-by-case
basis when the adjustment is considered likely to make a significant difference
to the findings of the SCBA.
Although it may not be necessary to estimate a full set of conversion factors
for individual goods and services, a general factor may be estimated to reflect
divergences in the relative economic values of internationally traded and
nontraded goods. These divergences can be severe in countries with restrictive
foreign exchange controls, which are rare nowadays; however, even when the
official exchange rate is allowed to move more freely, import duties, quantitative
restrictions, export subsidies, and export taxes impose their own distortions on
the foreign exchange market (as well as on markets for the goods and services
in question), affecting the relative prices of traded and nontraded goods.
Further Issues in Developing an Economic Appraisal Methodology | 241
The calculation of the relative price adjustment between traded and non-
traded goods depends on the numeraire chosen for project appraisal. The
numeraire is the unit of account used to measure all values in economic analysis.
The choice of numeraire is immaterial for the final results of the economic anal-
ysis, but for the sake of consistency all costs and benefits must be expressed in
terms of the same numeraire. There are other possibilities, but the choice of
numeraire is often between the domestic currency expressed at the interna-
tional price level and the domestic currency expressed at the domestic price
level.2 In the former case, a standard conversion factor (SCF) should be calcu-
lated to express the price of nontraded goods and services at the international
price level. The value of the SCF will be less than 1. In the latter case, a shadow
exchange rate factor (SERF) should be calculated to express the price of traded
goods and services at the domestic price level. The value of the SERF will be
more than 1.
Determining what is a traded good and what is a nontraded good is not
always straightforward. The final price of traded goods usually includes local
distribution costs, and the production of nontraded goods usually involves the
use of some traded inputs—for example, chemicals to treat drinking water. For
major project inputs and outputs, these components should be disaggregated
and adjusted by the SCF or SERF accordingly, but the amount of effort applied
needs to be balanced carefully against the likely effect on the final results of the
economic analysis. It is sufficient to categorize most inputs and outputs
as on-balance tradable or nontradable and to apply the appropriate factor
accordingly.
Most countries with advanced systems do not estimate these standardized
factors because their economies tend to be relatively open and undistorted and
the required correction to prices would therefore be negligible. National finan-
cial and planning authorities need to decide whether it is worth making the
implied adjustment, taking account of the relative openness of their economy.
One final area where a national parameter value may be specified is in rela-
tion to the deadweight cost of taxation. Using distortionary tax instruments to
finance projects results in a generalized loss of social welfare. In effect, a part
of general taxation is taken from consumers and transferred to no one; this
situation is known as the deadweight economic cost from general taxation or
the marginal cost of public funds. This issue is explored later in this appendix.
Suffice it to say, practice across countries with advanced PIM systems is not
consistent: some countries specify a factor to be applied to the project costs
funded out of taxation, and others do not.
DECISIONS REGARDING ESTIMATION OF THE SOCIAL
DISCOUNT RATE
Approach to the social discount rate
Social cost-benefit analysis involves discounting the estimated stream of net
benefits generated by a project (and its alternatives) to yield net present values
(NPVs) or net present costs (NPCs) in the case of cost-effective analysis. The
social discount rate (SDR) is therefore a critical variable in appraisal, and
governments need to decide how to determine a suitable value for their
country, since different perspectives and corresponding methodological
approaches are possible. Determining the SDR is not a purely technical matter;
242 | Public Investment Management Reference Guide
depending on the perspective adopted, it involves a degree of value judgment,
further complicating the decision.
Whichever theoretical approach is chosen, estimating the SDR is not techni-
cally straightforward; it requires capacity for economic analysis or access to it.
One provisional option, therefore, is to benchmark against other comparable
countries or to follow international guidance, where available.3 As an example,
box B.2 presents guidance from the European Union to beneficiaries of its
European Regional Development Fund and Cohesion Fund. Whatever the case,
it is always a good idea to carry out sensitivity tests of the robustness of the results
of the quantified SCBA using a higher value for the SDR than the base case.4
A project’s benefits and costs do not occur at the same point in time, and
values occurring in different time periods must be adjusted to reflect society’s
preference for consuming goods and services sooner rather than later. The social
discount rate is society’s rate of time preference and is used as a basis for con-
verting future values into present value equivalents. Expressing project benefits
and costs occurring in different years in the future as present values puts them
on a consistent basis and allows them to be added together and compared.
In economic terms, simply adding benefits and costs occurring at different times
without this adjustment would be as nonsensical as adding together values
expressed in euros and dollars without converting them to a common basis using
the exchange rate. Pursuing this analogy, the discount rate can be conceptual-
ized as being the basis for an “exchange rate” between values today and values in
the future.
There has been much debate among economists about which discount rate
should be used as the SDR. The two main perspectives are the social rate of time
preference (SRTP) and the social opportunity cost of capital (SOC):
• Social rate of time preference. The SRTP captures the way society values con-
sumption at different points in time. This perspective relies on interpreting
the discount rate as the minimum economic compensation per dollar invested
required for a representative consumer to be willing to forgo present
consumption in return for higher consumption one period later.
BOX B.2
European Commission guidance to member states on the social discount rate
“According to Annex III to the Implementing condition that i) justification is provided for this ref-
Regulation on application form and CBA [cost-bene- erence on the basis of an economic growth forecast
fit analysis] methodology, for the programming and other parameters; ii) their consistent application
period 2014–2020 the European Commission is ensured across similar projects in the same coun-
recommends that for the social discount rate 5% is try, region, or sector. The Commission encourages
used for major projects in Cohesion countries and 3% MSs to provide their own benchmarks for the SDR in
for the other Member States [MSs]. Member States their guidance documents, possibly at the start of the
may establish a benchmark for the SDR [social dis- operational programmes, and then to apply it
count rate], which is different from 5% or 3%, on the consistently in project appraisal at national level.”
Source: European Commission 2014.
Further Issues in Developing an Economic Appraisal Methodology | 243
• Social opportunity cost of capital. The SOC reflects the rate of return on invest-
ment and derives from returns in financial markets. This perspective
interprets the discount rate as a market-determined opportunity cost, which
represents the additional consumption that would have been achieved one
period later by investing a dollar in a financial instrument of equivalent risk
to the project instead of consuming it now.
The SRTP and SOC perspectives are related and, in special circumstances, are
equivalent. This relationship is illustrated in figure B.1, which shows, in simpli-
fied terms, the interaction between the supply of investible savings and the
demand for investment capital in a representative financial market. The vertical
axis represents the rate of return or interest, and the horizontal axis represents
the volume of funds saved and invested. The “Savings” curve captures the time
preference for consumption and shows people’s preferences for trading today’s
consumption for future consumption. It can be used to determine the SRTP. The
“Investment” curve captures the rate of return that capital must yield in order
for investors to decide to invest. It can be used to determine the SOC.
In an idealized world with no market imperfections, only one market interest
rate clears the market: this rate is defined as r0 at the intersection of the savings
supply and investment demand curves. At this rate, savings desires and invest-
ment demands are in balance and the SRTP and SOC are equivalent.
In the real world, where there are market distortions, a wedge is driven
between the expectations of savers and investors. Such distortions include
monopoly or oligopolistic power, positive or negative externalities, missing
markets, asymmetric information, and risk and uncertainty. In the presence of
market imperfections, the perspective of the individual as an investor and as a
consumer does not equate. As a result, the discount rate reflecting people’s pref-
erences for consuming in different time periods ends up being different from the
discount rate in the financial markets.
Table B.1 summarizes the perspectives taken by various governments in
countries with advanced systems and the corresponding SDRs. The table indi-
cates some variation between countries.
FIGURE B.1
Equilibrium and the impact of market imperfections
Savings
r (SOC)
Rate of return (%)
r0
R (SRTP)
Investment
Source: Young 2002.
244 | Public Investment Management Reference Guide
TABLE B.1 Social discount rate (SDR) perspective and discount rate,
by country
COUNTRY SDR PERSPECTIVE DISCOUNT RATE
France Risk-adjusted SRTP 4.5%
Germanya SRTP 3.0% for analysis periods of
20 years or less
Japan SOC 4.0%
Netherlands Risk-adjusted SRTP 4.0% for climate change effects
and 5.5% for other effects
New Zealand SOC 8.0%
Norwaya Risk-adjusted SRTP 4.0% for analysis periods of less
than 40 years
Sweden SRTP 3.5%
United Kingdoma SRTP 3.5% for analysis periods of 30
years or less
Source: OECD 2015.
Note: SOC = social opportunity cost of capital; SRTP = social rate of time preference.
a. These countries apply lower discount rates for long-term effects.
Declining social discount rates
When designing an appraisal methodology, governments should provide
guidance on the length of the period of analysis for projects. Ideally, the
analysis period should correspond to the useful life of the fixed asset created
and should be the same for all alternatives. In reality, some major infrastruc-
ture assets have almost indefinite lives, if a program of planned routine and
periodic maintenance is pursued. Until recently, it has been common practice
internationally to curtail the analysis period and include a residual value as a
benefit in the final year of the chosen analysis; however, this approach can be
crude, depending on the extent to which future values are discounted.5
Table B.2 presents the reference analysis periods by sector recommended by
the European Commission. The longest analysis period in table B.2 is 30 years,
with shorter periods specified for short-lived assets. European Commission
guidance recommends applying a residual value for assets with useful lives
exceeding 30 years.
In keeping with the approach now being adopted in some good-practice
countries, there may be advantages in placing less weight on residual values
and using an analysis period more closely reflecting the useful life of a long-
lived asset. The analysis period for major infrastructure projects involving a
large share of civil works—roads and ports, for example—may therefore be
extended beyond 30 years to as much as 60 years. Projects with significant
environmental benefits and costs that extend across generations may have
even longer analysis periods.
A strong theoretical argument for declining discount rates over the long
term can be made, and some countries have now adopted schedules of declining
rates for infrastructure assets with long lives or projects with long-lived effects,
particularly environmental externalities.6
The main reason for adopting declining discount rates is increasing uncer-
tainty about future consumption and the consequent impact on the marginal
utility of consumption (a component of the Ramsey equation). Because of the
declining marginal utility of consumption, benefits that occur when future con-
sumption is high are valued less than benefits that occur when future consump-
tion is low, so that the benefits of “upside” risk are outweighed by the costs of
Further Issues in Developing an Economic Appraisal Methodology | 245
TABLE B.2 Reference analysis periods for project, by sector
SECTOR ANALYSIS PERIOD (YEARS)
Railways 30
Roads 25–30
Ports and airports 25
Urban transport 25–30
Water supply and sanitation 30
Waste management 25–30
Energy 15–25
Broadband 15–20
Business infrastructure 10–15
Other sectors 10–15
Source: European Commission 2014.
TABLE B.3 Schedule of declining discount rates in the United Kingdom
DISCOUNT RATE (%) PERIOD (YEARS)
3.5 0–30
3.0 31–75
2.5 76–125
2.0 126–300
1.5 201–300
1.0 300+
Source: HM Treasury 2003.
“downside” risk, implying a declining discount rate as uncertainty about the
future increases.
France and the United Kingdom are among the countries that have adopted
declining discount rates. In France the SDR is 4 percent for the first 30 years and
then declines to a low of 2 percent over time. Table B.3 presents the schedule of
declining discount rates adopted by the United Kingdom.
Estimating a schedule of declining discount rates requires developed analyt-
ical and research skills, and governments may wish to consider whether this
work should be given priority in the early stages of improving their public invest-
ment management (PIM) systems and developing an appraisal methodology. It
seems more sensible to focus on this refinement when PIM fundamentals are in
place and functioning reasonably well.
TREATMENT OF LABOR MARKET DISTORTIONS
When labor markets work efficiently and there is no structural unemployment,
the market wage rate is the best measure of the social opportunity cost of labor—
that is, the marginal value to society of a unit of labor in its next best alternative
use, the appropriate measure for SCBA purposes. Imperfections in the way labor
markets are working, policy-induced rigidities—such as minimum wage legisla-
tion—or macroeconomic imbalances may result in the opportunity cost of labor
being less than the market rate. In these cases, an adjustment factor can be
applied to estimate what is usually referred to as a shadow wage rate. Box B.3
provides some examples of factors that could cause departures from an efficient
market. Some of these factors may be region specific, requiring a case-by-case
analysis (rather than the establishment of national parameters).
246 | Public Investment Management Reference Guide
BOX B.3
Possible causes of labor market distortions
• Government subsidies to employment, which may • Informal or illegal sectors with no formal
cause the costs of labor for private companies to wages, but with a positive opportunity cost
be less than the social opportunity cost of labor
• Legislation establishing a minimum wage, even if • Fundamental macroeconomic imbalances and
people are willing to work for less “stickiness” in wages.
Source: European Commission 2008.
The shadow wage rate may be obtained as the weighted average of the
following:
• The shadow wage for skilled and unskilled workers previously employed in
similar activities, which can be assumed to be equal or close to the market wage
• The shadow wage for unskilled workers drawn to the project from
unemployment, which can be assumed to be equal to or less than the value of
unemployment benefits
• The shadow wage for unskilled workers drawn to the project from informal
activities, which should be equal to the value of the forgone output in these
activities.
The weights applied should be proportional to the estimated amount of each
labor resource employed in the project.
Governments need to decide how they are going to treat the social
opportunity cost of labor. In making this decision, it is important to bear in
mind that calculating a shadow wage rate is technically demanding and poten-
tially costly. It is only worth considering if the resulting adjustment is likely to
have a significant bearing on investment decisions. In this respect, countries
with good PIM practices do not generally allow for the use of a shadow wage
rate. An exception is in European Union guidance applicable to European
Regional Fund and Cohesion Fund projects, which are directed toward regions
and countries with structural problems, including in labor markets.
ALLOWANCE FOR THE DEADWEIGHT COST OF TAXATION
Using distortionary tax instruments to finance projects results in a generalized
loss of social welfare. When the government raises revenues to pay for public
services and associated capital investment through taxation,7 it distorts price sig-
nals.8 Market participants change their behavior when facing altered price
incentives, consuming less of a taxed good than they otherwise would and, as a
result, experiencing lower welfare.9 In effect, a part of general taxation is taken
from consumers and transferred to no one; this situation is known as the dead-
weight economic cost of general taxation or the marginal cost of public funds.
In practice, this situation means that the resources mobilized by the public
sector are more costly in economic terms than in financial terms because of the
Further Issues in Developing an Economic Appraisal Methodology | 247
BOX B.4
International experience in adjusting for the deadweight economic losses from
general taxation
The New Zealand Treasury suggests using a default The Australian federal government recog-
adjustment factor of 1.2 to increase the value of public nizes that the economic cost of public investment is
expenditures to reflect the deadweight loss from tax- greater than the actual amount of funds used because
ation. At the same time, the guidance draws attention of the excess tax burden. It is therefore considered
to the weak evidence base, including estimates point- appropriate to adjust financial costs upward by a
ing to values in the range of 1.14–1.50. factor to ensure that the calculated net present value
France has also adopted a value of 1.2. is not biased. Similarly, it is considered appropriate
Ireland’s Public Spending Code recommends to adjust upward the financial value of any project
applying a factor of 1.3 to public expenditures to reflect revenue streams that will reduce the net financial
their true economic cost. A rule of thumb is that the cost of a project. An adjustment factor of 1.25 is
distortionary costs of taxation vary roughly in line suggested based on a study of the marginal excess
with the square of the marginal tax rate used to esti- tax burden for general taxation. However, in view of
mate this rate. The value previously stood at 1.5 but the uncertainty surrounding this estimate, it is not
was under review in 2012 to reflect tax reforms. mandatory, but could be used as a sensitivity test.
Sources: For Australia, Commonwealth of Australia 2006. For France, Office of the Prime Minister, France 2013. For Ireland, http://
publicspendingcode.per.gov.ie/technical-references/. For New Zealand, http://www.treasury.govt.nz/publications/guidance/planning/
costbenefitanalysis/guide.
social welfare losses implied by a non-neutral taxation policy. To reflect this
deadweight cost, costs incurred by the public sector should ideally be uplifted
by a factor prior to discounting, so that public costs and private benefits are put
on a comparable footing. This approach avoids an upward bias in the estimated
economic performance of the project.10 The other side of the coin is that the
benefits from projects that result in direct public expenditure savings and hence
lower taxation than would otherwise be the case should also be increased by the
same factor to reflect their true economic cost.
The deadweight cost of taxation is easier to conceptualize than to measure.
Box B.4 provides examples from Australia, France, Ireland, and New Zealand,
countries that allow for an adjustment factor. The United Kingdom as well as
Korea do not provide for this adjustment in their appraisal guidance, and the
European Commission has taken a similar stance. Given the difficulties in esti-
mating a factor to represent the deadweight cost of taxation, governments may
prefer to adopt a position similar to those of the European Commission, Korea,
and the United Kingdom, recognizing that this approach may lead to some
overestimation of economic performance and taking this overestimation into
account through sensitivity tests.
APPROACHES TO ESTIMATING VALUES FOR NONMARKET
BENEFITS AND COSTS
Taking account of nonmarket effects is a critical part of SCBA, but their valua-
tion is conceptually difficult for noneconomists to understand. Nonexperts in
government often need to consult experts outside of government, if more
248 | Public Investment Management Reference Guide
sophisticated valuation techniques are employed, but in doing so they need to be
able to specify the work and interpret the results. As such, it is very important to
provide good guidance in this area.
Valuation of project costs and benefits should always be based on real or esti-
mated market prices for the costs incurred or services produced by the project,
where these prices are observable. By their nature, many public services are,
however, free of charge, either because it is difficult or impossible to charge—for
example, in the case of public goods11—or because of a policy choice driven by
generally accepted equity or social concerns. Health, educational success, family
and community stability, and environmental amenity are the kinds of intangible
effects that fall into the category of benefits with no directly observable market
values. By definition, positive and negative externalities have no market values.
In cases where no markets exist and therefore no market prices exist for
valuation purposes, alternative, market-based means of estimating values for
costs and benefits can be used, when doing so is feasible. These approaches
hinge on estimating potential users’ willingness to pay (WTP) for the project’s
benefits or willingness to accept (WTA) negative consequences. WTP is the
maximum payment that a beneficiary would be willing to give up in order to
receive a public service12 and is therefore a measure of the “utility”13 that a
consumer expects to obtain. WTA is the minimum compensation that an
affected party would require to be willing to tolerate a negative economic out-
come, such as increased noise or pollution.
There are two approaches for estimating WTP:
• Revealed preference techniques
• Stated preference techniques.
Revealed preference techniques are generally considered to be more reliable
and should be favored where the required data are available. To produce
acceptable results, stated preference techniques need to be designed carefully
using advanced research methods. They should be employed judiciously. Project
promoters will need to make the choice of technique on a case-by-case basis,
usually on the basis of advice from experts. Sometimes both techniques may be
employed, and the results may be compared to check consistency.
Revealed preference techniques involve inferring willingness to pay by exam-
ining users’ past behavior in similar or related markets. Information on past
trade-offs made between costs and benefits in closely related contexts can be
used to indicate the readiness to pay for the kind of benefits that the project will
deliver. Three revealed preference methods are frequently used:
• Hedonic pricing. Involves deriving values by decomposing actual market prices
into their constituent characteristics to obtain insights into willingness to pay
for benefits for which there is no directly observable market. An example
would be using the difference between residential property prices at varying
distances from an environmental amenity—for example, a park or lake—to esti-
mate the inherent utility of such amenities and hence to estimate the benefit of
creating similar new amenities.14 Another approach might be to look at wage
rate differentials to infer the value that workers place on safety and, hence, to
estimate the value of a statistical life. This estimated value can then be used
to assess investments in improving transport safety, among other things.
• Travel cost analysis. Involves estimating the total costs that people are
willing to incur to access free amenities as a minimum estimate of what
they are willing to pay. For example, the generalized travel costs that
Further Issues in Developing an Economic Appraisal Methodology | 249
people bear in traveling to a park or recreation facility indicate the value
they place on the amenities provided.15 This value can then be used to
construct a demand relationship for an amenity, which then can be used
to value the potential welfare gain (“consumer surplus”) from similar new
amenities. Application of this technique requires the collection of good
survey data on distance traveled, journey times, mode of transport,
frequency of use, and income from a representative sample of users of
existing facilities similar to the proposed project. It is therefore demanding
in research effort.
• Defensive expenditures. Involves estimating the amount that households are
prepared to spend on restoring assets as a result of negative environmental or
other effects or on preventing these effects from occurring, which gives an
indication of WTP. Examples would be medical costs incurred because of
unsafe water or the costs of boiling the water to prevent disease.
Table B.4 provides some examples of appropriate revealed preference
methods for various types of public goods or benefits.
Stated preference techniques simulate a market by using specially designed
interviews or questionnaires to get users to state directly their willingness to
pay for a service or to make hypothetical choices from which WTP can be
inferred. Project promoters will almost certainly require specialized external
expertise to advise them on stated preference techniques, especially for choice
modeling, for which one of the following two general methods is potentially
applicable:
• Contingent valuation studies ask open-ended questions concerning the maxi-
mum amount a potential user would be willing to pay for a given service
through the project or offer a constrained choice of values from which the
respondent is asked to choose.
TABLE B.4 Use of revealed preference and stated preference methods, by the nature of the public good
or benefit
NATURE OF PUBLIC GOOD OR BENEFIT REVEALED PREFERENCE METHOD STATE PREFERENCE METHOD
Educational skills and training Increased market earnings
Public library services Prices of substitutes CV/CM
Value of life Hedonic wage analysis CV/CM
Defensive expenditures
Value of health Increased earnings CV/CM
Defensive expenditures
Savings in expenditures
Police protection and safety Hedonic property prices CV/CM
Travel time savings (work) Value of increased output
Travel time savings (leisure) Analysis of travel choices CV/CM
Reductions in vehicle operating costs Savings in expenditures
Active recreational areas Prices of substitutes CV/CM
Parks and passive recreational areas Travel cost analysis CV/CM
Environmental inputs to production Value of increased output
Savings in expenditures
Environmental amenities Hedonic property price analysis CV/CM
Flood and fire protection Hedonic property price analysis CV/CM
Savings in expenditures
Source: Commonwealth of Australia 2006.
Note: CV/CM = contingent valuation / choice modeling.
250 | Public Investment Management Reference Guide
TABLE B.5 Strengths and weaknesses of willingness to pay valuation methods
VALUATION METHOD MAIN STRENGTHS MAIN WEAKNESSES
Revealed preferences
Market data Is easily observable; provides important Does not measure nonmarket goods such
data on productivity impacts as quality of life
Hedonic wage method Provides market-based method of valuing Wages are not always a reliable indicator
safety of risk
Hedonic property or land prices Has many applications and is a reliable Requires extensive data
method
Travel cost analysis Produces reliable answers if site is Has to deal with multitrip purposes and
accessible and study is well done the value of travel time
Defensive expenditures Provides a useful lower bound to values Requires caution when expenditures have
several benefits
Stated preferences
Contingent valuation Has many applications Respondents often find it difficult to
express a monetary value for a nonmarket
good; answers may be biased
Choice modeling Respondents may give more accurate Requires substantial professional resources
answers than contingent valuation surveys
Source: Commonwealth of Australia 2006.
• Choice modeling presents potential users with a series of alternatives involv-
ing trade-offs between costs and benefits from which they are required to
indicate a preference. This method is better for valuing specific attributes of
a service than for valuing the service as a whole. It attempts to get around any
biases that can arise from asking direct questions concerning hypothetical
payments, but in doing so it adds more complexity.
Table B.3 indicates cases when stated preference methods might be applica-
ble. Drawing on Australian guidance, table B.5 summarizes the strengths and
weaknesses of the different valuation methods.
DEGREE OF SOPHISTICATION OF RISK ANALYSIS
Identification, analysis, and management of risks are critical for any project
appraisal; however, risk analysis can be complex and demanding on scarce
research and analytical capacities. Governments need to decide what degree of
sophistication their national appraisal methodologies require. The European
Commission has developed a stepped approach to risk analysis:
• Sensitivity analysis
• Qualitative risk analysis
• Quantitative risk analysis.
More complex quantitative risk analysis, the final step, is only required in cer-
tain defined circumstances. Governments may wish to consider adopting a sim-
ilarly pragmatic approach.
Step 1: Sensitivity analysis
Sensitivity analysis aims to identify those variables that have the largest impact
on the project’s social profitability (as measured by the economic NPV). The
European Commission defines “critical” variables as those for which a variation
Further Issues in Developing an Economic Appraisal Methodology | 251
of +/−1 percent has more than a 1 percent impact on the value of the NPV.
Sensitivity analysis is used to determine these critical variables. The analysis is
carried out by varying one variable at a time, on both the benefit and cost sides,
and calculating the resulting effect on the NPV. The calculation of switching
values is a variation on sensitivity analysis and involves estimating the change in
a particular variable required to reduce the NPV to 0.
Sensitivity analysis concludes with scenario analysis, by which combinations
of optimistic and pessimistic values of the critical variables (as previously
identified) are used to test the impact on the NPV. The values must be at the
extreme of what is judged to be a realistic range. Clearly, the pessimistic scenario
is the most interesting for testing the robustness of a project’s social profitability.
It is possible to draw conclusions about a project’s riskiness after this step if
social profitability remains strong in the face of the most adverse (realistic) sce-
nario. Even so, step 2 should be completed for all projects. Quantified SCBA may
not capture some important effects, and risks attaching to these effects should be
captured through step 2.
Step 2: Qualitative risk analysis
Qualitative risk analysis consists of the following elements:
• Listing adverse events to which the project is exposed
• Preparing a risk matrix, indicating the following for each adverse event:
–– The possible causes of the occurrence
–– The link with the sensitivity analysis, where this applies—for example,
where unexpected ground conditions lead to higher capital costs
–– The negative effects on the project that the adverse event would generate
–– The ranked levels of probability of occurrence16 and severity of impact17
–– The risk level combining probability of occurrence and severity of impact18
• Interpreting the risk matrix, including assessment of the acceptable levels of
risk. In the European Commission’s four levels of risk, “high risk” is deemed
unacceptable and requires a revision of the entire project design and prepa-
ration activities.
• Describing mitigation and prevention measures for the main risks and assess-
ing their impacts on the robustness of the project’s performance and the
residual risk. If the remaining risk exposure is judged acceptable—that is,
judged to be “low” or “moderate”—then the risk strategy based on qualitative
analysis may be adopted and there is no requirement to move to quantitative
risk assessment.
Step 3: Quantitative risk analysis
Probabilistic risk analysis is required where residual risk exposure remains
significant after step 2.19 This step involves establishing a probability distribution
for each of the critical variables identified in the sensitivity test in order to
estimate the expected value of the NPV.20 Once the probability distribution is
determined21—based on experience, experimentation, or expert guidance—a
Monte Carlo simulation may be performed using appropriate software to estab-
lish a probability distribution for the NPV itself. A Monte Carlo simulation allows
the expected NPV to be estimated and the probability of a negative NPV to be
determined.
252 | Public Investment Management Reference Guide
The advantage of the European Commission’s guidance is that it does not
require sophisticated risk analysis for all projects (although this analysis is not
precluded). It only applies to major projects (greater than €50 million) seeking
European Union funding. Governments may wish to consider limiting the
application of quantitative risk analysis to their largest projects. Steps 1 and 2 of
the European Commission’s risk analysis process are valuable in all cases, and
step 1 should be obligatory whenever SCBA is performed.
NOTES
1. See http://publicspendingcode.per.gov.ie/technical-references/.
2. This approach is proposed in the World Bank’s Handbook on Economic Analysis of
Investment Operations (World Bank 1998).
3. Even where a country-specific SDR is estimated, it is important to cross-check against
other country experience.
4. A test using a lower value for the SDR is of dubious worth. If the NPV is already positive
(the decision rule), it will still be positive at a lower rate. If the NPV is negative, using a
lower SDR may turn it positive, but proceeding with a marginal project is not advisable,
given the potential for optimism bias and other risks.
5. Reflecting the remaining service potential of a fixed asset that has not yet reached the end
of its economic life.
6. This discussion comes from World Bank (2016).
7. Even if the government borrows, interest and eventually the principal will have to be paid
through taxation.
8. In economic theory, nondistortionary lump-sum taxes with no impact on allocative
efficiency can be used. In the real world, they rarely are, because they are often politically
impractical or are incompatible with other distributional objectives that the government is
pursuing through taxation.
9. In the case of income tax on earned income, workers may face a reduced incentive to work
and therefore may consume more leisure than is socially optimal, resulting in an overall
social welfare loss.
10. If public costs and private benefits are treated as having equal worth, the net present value
of projects will be systematically overestimated.
11. A pure public good (or service) is one where it is not possible to exclude users from con-
suming the good (service) and consumption by one consumer does not diminish the
amount of the good (service) available for the others. These characteristics mean that there
is no incentive for the private sector to supply the good (service) because it is impossible to
earn revenues and make a profit.
12. WTA is a closely related alternative measure used to value negative impacts. This is the
minimum payment that a beneficiary would need to be compensated to forgo a benefit or
accept a negative impact.
13. “Utility” is a concept used in welfare economics meaning the satisfaction or change in
welfare that a person gets from consumption of a good or service.
14. Values would be expected to be higher the closer to the amenity.
15. Generalized travel costs include the value of personal time.
16. The European Commission proposes five categories of probability: A. Very unlikely (0–10
percent probability); B. Unlikely (10–33 percent); C. About as likely as not (33–66 percent);
D. Likely (66–90 percent); and E. Very likely (90–100 percent)
17. The European Commission proposes five ratings of severity: I. No relevant effect on social
welfare, even without remedial actions; II. Minor loss of social welfare, requiring remedial
actions; III. Moderate social welfare losses, which may be corrected by remedial actions;
IV. Critical social welfare losses, which are not avoidable through remedial actions; and
V. Catastrophic, indicating project failure.
18. The European Commission proposes four levels of risk: low, moderate, high, and very high.
Very high risk levels representing high-probability, high-severity events are deemed unac-
ceptable and require action.
Further Issues in Developing an Economic Appraisal Methodology | 253
19. In effect, “significant” means that the project is at a “high” risk level, since “very high”
requires redesign.
20. “Expected” in the strictly statistical sense of the word.
21. The simplest probability distribution is a triangular distribution. Estimating expected val-
ues using a triangular distribution is relatively straightforward and does not require a
Monte Carlo simulation.
REFERENCES
Commonwealth of Australia. 2006. “Handbook of Cost-Benefit Analysis.” Guidance Note,
Commonwealth of Australia, Canberra.
European Commission. 2008. “Guide to Cost Benefit Analysis of Investment Projects.”
Directorate General for Regional Policy, Brussels.
———. 2014. “Guide to Cost-Benefit Analysis of Investment Projects: Economic Appraisal Tool
for Cohesion Policy 2014–2020.” Directorate General for Regional and Urban Policy,
Brussels.
HM Treasury. 2003. The Green Book: Appraisal and Evaluation in Central Government. Updated
in 2013. London: HM Treasury.
OECD (Organisation for Economic Co-operation and Development). 2015. “Adapting Transport
Policy to Climate Change.” International Transport Forum Research Report, OECD, Paris.
Office of the Prime Minister, France. 2013. “Socio-economic Evaluation of Public Investment.”
Commissariat Générale à la Stratégie et a la Prospective (CGSP), Office of the Prime
Minister, Paris. http://www.strategie.gouv.fr/publications/levaluation-socioeconomique
-investissements-publics-tome1.
World Bank. 1998. Handbook on Economic Analysis of Investment Operations. Washington, DC:
World Bank. http://documents.worldbank.org/curated/en/749061468740206498
WWandbook-on-economic-analysis-of-investment-operations.
———. 2016. “Discounting of Costs and Benefits in Economic Analysis of World Bank Projects.”
Draft technical note, World Bank, Washington, DC.
Young, L. 2002. “Determining the Discount Rate for Government Projects.” Working Paper
02/21, New Zealand Treasury, Wellington.
C
Examples of Project- and
Portfolio-Level Management
Support Capabilities Provided
by a PIM Information System
TABLE C.1 Project- and portfolio-level support capabilities
PROJECT STAGE PROJECT-LEVEL CAPABILITY PORTFOLIO-LEVEL CAPABILITY
PIM general portfolio • Not applicable • Provide extensive capabilities to the portfolio administrator
administration to grant and revoke user access rights to the PIM information
system
Project identification • Exchange project data with local • Keep a record of investment policy objectives and priorities
and preappraisal government systems in accordance • Produce programwide historical analyses of financial
with agreed-on protocols performance, nonfinancial performance, and economic
• Record preappraisal approvals and impact against policy objectives and priorities
related documentation
Design and appraisal • Record project appraisal components • Keep a record of feasibility study results and produce analyses
and results of feasibility studies on various dimensions
as well as related documentation
Review of appraisal • Record independent review • Keep a record of independent review ratings and approvals
ratings, approvals, and related
documentation
Selection and • Calculate baseline financing require- • Record and store prioritization criteria and results and project
budgeting ments of each active investment rankings
project for the fiscal year and out • Pass to the budget system newly selected projects for
years as a function of expected inclusion in the Draft Budget Law
capital and operating expenses • Calculate baseline public investment portfolio (PIP) funding
(and operational income, if any) requirements for the fiscal year and for the medium term for
• Receive and record project-level individual sector ministries and across sectors
budget appropriations from the • Calculate fiscal space for individual sector ministries and in
budget system total as a function of overall PIP budget ceiling and baseline
• Record baseline implementation, requirements
financial, procurement, and perfor-
mance plans; lock these baseline
plans against modifications and
provide on-demand comparison with
corresponding appraisal stage plans
continued
255
256 | Public Investment Management Reference Guide
TABLE C.1, continued
PROJECT STAGE PROJECT-LEVEL CAPABILITY PORTFOLIO-LEVEL CAPABILITY
Project implementa- • Enforce submission of nonfinancial • Develop PIP status and performance charts for sector or
tion and monitoring and work performance information ministry (and other) groupings and produce analyses by
by project managers at agreed-on various classifications and key performance indicators as part
time intervals and update current of system dashboards
versions of implementation, • Carry out scripted analyses of performance charts and advise
procurement, and performance plans interested parties of results and recommended actions
• Maintain current version of the • Allow authorized managers at direct budget beneficiary level
procurement plan for each project or higher to drill down from PIP status or performance charts
through data exchanges with the to individual projects
public procurement portal and • Provide online search functions to visualize the PIP according
record all contracts signed to various filters
• Maintain current and historic • Calculate cost-to-completion for all or parts of the PIP and
financial performance balances from produce filtered analyses by various criteria (ministry,
completed financial transactions investment type, policy objective or priority, funding
received from the financial adequacy)
management information system • Develop statistics of program implementation time and delay
• Produce periodic and ad hoc project by project life-cycle stage to assess program management
financial performance reports effectiveness
• Produce reports and answer ad hoc • Calculate program implementation performance indicators
queries on physical implementation as a function of budget appropriation or financial or physical
and procurement progress performance trends; allow authorized users to drill down
• Link to periodic project financial to affected individual projects
statements produced by a subsidiary
project accounting system or
financial management information
system (FMIS)
Project adjustment • Allow reformulation of key project • Recalculate baseline public investment portfolio funding
appraisal components and lock requirements for the fiscal year and for the medium term for
previous versions of such compo- individual sector ministries and across sectors
nents for later comparison and • Recalculate fiscal space for individual sector ministries and in
assessment total as a function of overall PIP budget ceiling and baseline
• Recalculate baseline financing requirements
requirements of projects as a
function of needed project adjust-
ments
• Receive and record adjustments to
project-level budget appropriations
from the budget system
Operation • Calculate indicators, targets, and • Store indicators, targets, and results for service delivery from
results for monitoring service delivery project facilities and produce analyses and monitoring
Evaluation • Store ex post evaluation reports and • Calculate and store indicators, targets, and results for ex post
assemble key indicators from ex post evaluation of (samples of) projects
and ex ante studies for comparison
• Develop project evaluation ratings
based on above comparisons
D
Types of Content for a PIM
Information System Database
TABLE D.1 Elements of a PIM system database, by project stage
PROJECT STAGEa
DATA ELEMENT
Conceptualization and preliminary • Concept note or prescreening form data. Unique project number and name; project
screening objectives and outcomes, project cost, sector or subsector, sponsor(s); implementing
agency(ies); project manager; key dates, project locations, cofinancing requirements
• Link to concept note or prescreening document
• Eligibility. National or sector strategy code(s); coding of the strategic policy elements
allows filtering of public investment portfolio (PIP) statistics by eligibility criteria as part
of analytical dashboards
• Approval. Approval date; project score or ranking, if applicable
Design and appraisal • Link to final versions of feasibility study documents
• Economic and financial cost-benefit justification. Calculation parameters, net present
value, financial internal rate of return, economic internal rate of return, payback time,
switching values, or other, in accordance with sector-specific methodology; format
should allow automatic comparison with corresponding values calculated at project
evaluation time
• Preliminary work plan. Time-bound list of major activities and milestones over project
life cycle with their beginning and ending dates
• Cost tables. Link to spreadsheet files of cost tables developed for project appraisal
• Preliminary financial plan. Multiyear capital, operating expenses, and operating
income (if any)
• Performance plan. Time-bound progress, results, and impact indicators formulated
according to programwide or sector-specific framework
• Risk management plan. Risks, risk ratings, and mitigation measures formulated
in accordance with programwide or sector-specific framework
Independent review • Link to independent review document
Selection • Project appraisal and project selection approvals and dates by project proponent,
independent reviewers, and central finance agency representatives
• Project selection ratings. Final priority or point ranking in accordance with agreed-on
programwide standard or sector-specific methodology
Budgeting • Baseline budget request. Multiyear capital, operating expenses, and operating income
(if any); is also the baseline financial plan
• Baseline budget appropriation. Multiyear capital and operating budget appropriation
for initial project year that will be used to determine baseline funding adequacy for
the project, by comparison with baseline budget request
• Baseline procurement plan. Contract value and planned solicitation and award dates
for investment contracts under the project; not a detailed procurement plan as
needed for project management
• Baseline work plan. A modification of the preliminary work plan used for appraisal
• Baseline performance plan. May be the same or a modification of the performance
plan used for the appraisal stage
continued
257
258 | Public Investment Management Reference Guide
TABLE D.1, continued
PROJECT STAGEa DATA ELEMENTS
Implementation • Chronological links to project progress reports produced by project manager and to
project progress evaluation reports produced by project reviewers
• Current work plan. Current version of the baseline implementation plan with real dates
for completed activities and projected dates for future ones; is used for reporting
project progress and is not a detailed activity schedule as required for project
management
• Current financial plan. Projected capital, operating expenses, and operating income
(if any) by year for current and medium terms; is also the budget request for the year
• Financial performance history. Current year capital and operating budget appropria-
tions against actual commitments and expenses and the same information for past
years
• Nonfinancial performance. Current, time-bound list of completed and pending
nonfinancial performance indicators; completed indicator values and dates are locked
upon entry and thereafter serve to assess performance variance with corresponding
baseline indicators; pending indicators reflect currently estimated values and dates
and are used for performance projections, including possible shortcomings
• Current procurement plan. Contract value and actual solicitation and award dates
of investment contracts to date
Monitoringb Project status indicators. The following illustrates possible status indicators that could be
calculated by the PIM information system. Many others can be considered, and each may
be associated with more detailed conditions (for example, a “delayed” indicator may be
associated with codes for more specific conditions, such as “procurement delay” or
“effectiveness delay” or “implementation delay”:
• Project stage. Actual start and end dates for each investment project stage, along with
authorized user responsible for closing of each stage; normally, all stage-related data
are locked upon stage closing
• Implementation status. Active, delayed, dormant
• Project risk. Low, medium, high
• Performance rankings. The following are examples of types of performance rankings
that could be used in project monitoring dashboards. The derivation logic for each
indicator needs to be worked out in detail.
• Budgeting performance. Three-level project ranking as a function of project imple-
mentation delay induced by the average appropriation shortfall to date. This indicator
and the next one (“funding performance”) assess the efficiency of the treasury in
releasing budgetary and cash resources for PIM
• Funding performance. Three-level project ranking as a function of project implemen-
tation delay induced by average allocation shortfall to date
• Implementation performance. Stages of implementation, for example, (a) start-up,
< 10% of total project costs incurred; (b) stage 1, 10–29% of costs incurred; (c) stage
2, 30–49% of costs incurred; (d) stage 3, 50–69% of costs incurred; (e) stage 4,
70–89% of costs incurred; (f) completion, > 90% of project costs incurred
• Disbursement performance. Three-level project ranking as a function of variance
between planned (baseline) and completed disbursements to date
• Procurement performance. Three-level, value-weighted project ranking as a function
of delay to date between planned and actual solicitation and award dates, for
investment contracts under the project
Adjustment • Link to project adjustment documentation files
• Adjusted versions of performance, financial, work, and risk management plans
• Link to adjusted cost table files, if appropriate
Completion • Current versions of work plan, financial plan, performance plan, procurement plan
at completion date
• Project performance rankings as of project completion date
• Project performance evaluation ratings from completion report
• Link to project completion report
Evaluation • Economic and financial results: initial versus final net present value, financial internal
rate of return, economic internal rate of return, payback time, or other, in accordance
with sector-specific methodology
• Baseline and final result and impact indicators
• Link to project evaluation report
a. Project life-cycle stage at which data usually are first entered into PIM information system database.
b. Status indicators and performance rankings for project monitoring purposes calculated at predefined intervals, occurring after the corresponding
deadline for project status reporting.
ECO-AUDIT
Environmental Benefits Statement
The World Bank Group is committed to reducing its environmental footprint. In
support of this commitment, we leverage electronic publishing options and print-
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these initiatives enable print runs to be lowered and shipping distances decreased,
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More information about the Bank’s environmental philosophy can be found at
http://www.worldbank.org/corporateresponsibility.
T he Public Investment Management (PIM) Reference
Guide aims to convey country experiences and good
international practices as a basis for decisions on how to
• Management of multiyear capital budget allocations
and commitments
• Efforts to address effective implementation,
address a country-specific PIM reform agenda. The procurement, and monitoring of projects
country references are drawn largely from previous • Strengthening of asset management and ex post
diagnostics and technical assistance reports of the evaluation
World Bank. • Integration of PIM and public-private partnership
(PPP) in a unified framework
The application of country diagnostics and • Rationalization and prioritization of the existing PIM
assessments has revealed a need to address the following project portfolio
issues when undertaking a country reform in PIM: • Development of a PIM database and information
technology in the form of a PIM information
• Clarification of the definition and scope of public system.
investment and public investment management
• Establishment of a sound legal, regulatory, and The PIM Reference Guide does not seek to provide
institutional setting for PIM, making sure it is linked definitive answers or standard guidance for the common
to the budget process PIM issues facing countries. Nor does it seek to provide a
• Allocation of roles and responsibilities for key detailed template for replication across countries: this
players in PIM across government would be impossible given the diversity of country
• Strengthening of guidance on project preappraisal, situations. Instead, each chapter begins with an
appraisal, and selection-prioritization procedures overview of the specific reform issue, lists approaches
and deepening of project appraisal methodologies and experiences from different countries, and
• Integration of strategic planning, project appraisal- summarizes the references and good practices to be
selection, and capital budgeting considered in designing country-specific reform actions.
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