Friday, January 25
Mr. Gerd Schwartz, Deputy Director Fiscal Affairs Department, International Monetary Fund
On January 25, 2019, the JVI hosted a public lecture by Gerd Schwartz, deputy director of the IMF Fiscal Affairs Department, on “Strengthening Infrastructure Governance — From Aspiration to Action.” Acknowledging the massive economic and social infrastructure needs across the world, the lecture argued that there are massive efficiency losses in producing infrastructure that would need to be addressed by strengthening infrastructure governance (IG), i.e., the institutions involved with public infrastructure undertakings. Mr. Schwartz introduced the IMF’s framework for assessing IG on a country-by-country basis and presented initial results from applying the IMF framework in over 50 countries.
Mr. Schwartz began by underlining the huge global needs for and disparities in quality and access to infrastructure. Not surprisingly, low income and developing countries (LIDCs), trail emerging market economies (EMEs) and advanced economies (AEs) in terms of both access to infrastructure and its quality. The IMF estimates that, in order to reach selected UN Sustainable Development Goals, considerable additional spending will be necessary. For example, capital spending in EMEs should increase by 6 percentage points (pp) of GDP by 2030 to achieve selected SDGs for physical infrastructure (roads, electricity, and water) and human capital (education and health). For LIDCs, estimates imply additional spending of a staggering 14 pp of GDP. However, given historically high levels of public debt, more borrowing to finance additional infrastructure may neither be sustainable nor affordable. At the same time, the revenue mobilization potential is limited in many countries and private financing of infrastructure also entails additional fiscal risks and costs.
Mr. Schwartz emphasized that higher spending should go hand-in-hand with better spending. The IMF estimates that, compared to best practices, efficiency losses in LIDCs average 40 percent, in EMEs 27 percent, and in AEs 12 percent. However, merely knowing the magnitude of such losses is not enough to prevent them. The IMF has designed a framework — the Public Investment Management Assessment (PIMA) — to identify sources and areas of inefficiencies.
The PIMA, which was introduced in 2015, helps countries move toward best practice in infrastructure governance, that is, strengthen the efficiency and effectiveness of public investments. The PIMA evaluates 15 institutions that shape public investment decision-making at three stages: planning, allocation, and implementation (Figure 1). The planning stage focuses on fiscal sustainability and effective coordination across sectors. The second stage relates to sectoral allocation of infrastructure investments and selection of projects that have the highest productivity. The final stage relates to actual implementation of the projects, in particular keeping to schedules and within budget. For each institution, the PIMA framework distinguishes between institutional design (“institutional strength”) and actual application (“effectiveness”).
Figure 2 shows average PIMA scores of some countries in the JVI region. The scores imply that, on average, countries have particular weaknesses in project appraisal, selection, implementation, as well as managing/overseeing the portfolio of public infrastructure assets. On average, countries in the JVI region do better in terms of making project funding available and doing so in the context of a comprehensive budget framework. The granularity of PIMA findings helps to create a prioritized and well-sequenced action plan that is in line with macroeconomic sustainability and fiscal affordability.
The key takeaways from the discussion following the presentation can be summarized as follows: (1) Availability of good-quality data, both national and international, helps to ensure the precision of PIMA calculations; (2) it is important to build administrative capacity to assess the fiscal risks and costs of public investment; and (3) countries will find it helpful to engage with the IMF and use the PIMA methodology to improve the efficiency of public investment.
For more information please visit: www.imf.org/publicinvestment.
Maria Arakelyan, Junior Economist, JVI