February 2019- Number 173 PUBLIC INVESTMENT MANAGEMENT (PIM) IN CONTEXTS OF FRAGILITY, CONFLICT & VIOLENCE (FCV) - PART 1 Emmanuel Cuvillier, Rafika Chaouali, Fabienne Mroczka1 Rationale for Intervention: Efficiency in capital expenditures has become increasingly important Introduction: A government’s provision of given public funding constraints in FCV complementary public goods, such as roads and countries. Many arguments for creating fiscal bridges, facilitates the development of markets space are about better management of scarce leading to long-term economic growth. Private resources and boosting public investment in enterprise, by itself, is unlikely to provide such physical assets, such as public and/or social public works. Likewise, a government’s (health, education) infrastructure that investment in social infrastructure, such as contributes to improvements in human capital. education and health, is critical, particularly for Yet, despite recent progress in the quality of conflict-ridden populations deprived of adequate public investment in some countries, challenges services. Furthermore, scaling-up public in core functions remain (see also “World Bank investment is central to development, especially Governance Forum 2017 – Foundations and in in FCV contexts, which are often left with Frontiers”, May 15-19, 2017). These lead to many rudimentary or badly-damaged infrastructure. inappropriate projects, repeated cost overruns, implementation delays, poor investment Public investments in FCV countries are often outcomes, and confusion and duplication of PIM inefficient and ineffective, prone to waste, roles, responsibilities and processes, among other corruption and misappropriation. They are often issues. highly concentrated in a few units or agencies with weak institutional capacity. Thus, Today, FCV governments face the huge supporting better management of public governance and financial challenge of rebuilding investments in FCV countries is critical to war-torn infrastructure, as well as creating jobs (re)creating economic and social infrastructure. — and maintaining peace and security. Key to This infrastructure is key to quickly restore basic rebuilding will be reducing the significant services and the reestablishment of trust between infrastructure deficit so that these fragile the state and citizens. As such, it can allow for economies can grow. This challenge is citizens to reap early peace dividends and plant compounded by weak governance and the seeds for long-term stability. institutions. Hence, allocating scarce resources (natural, human and capital) toward obtaining This Middle East and North Africa (MENA) maximum social and economic benefits should Quick Note is a response to questions that Bank be at the top of their development agendas. To do teams face when addressing infrastructure and this, FCV countries need PIM systems that PIM deficiencies in FCV contexts. These include: perform well despite systemic capacity Is PIM in FCV different? How can weak PIM constraints. Governments should seek good-fit capacity be addressed? What are PIM starting projects, rather than “best practice” projects, points for spurring economic growth? informed by their own development priorities. 1 The authors work in the World Bank’s Governance Global Practice. cover policies on capital budgeting, and PPPs. In In FCV situations, public investment many FCV countries, the PIM system is very management must be adapted to the fragility limited or nonexistent and will need to be rebuilt. cycle. This requires a differentiated approach in In other cases, undertaking the Assessment can response to the fragility landscape. The approach be hazardous and/or impossible due to security to strengthening the PIM system would be issues. In the latter, a simple survey filled out by different for deeply fragile state with weak local authorities and/or development partners in institutions and poor governance as opposed to a the field would suffice for a better understanding state in transition with a peace agreement. of system priorities. Important Steps in a PIM System: Regardless of Where Bank teams can conduct an in-country the financing source of a public investment evaluation, a basic PIM Assessment should program, an adequate PIM system should combine analysis of the institutional structure, include the following elements: (i) an assessment process mapping, and the use of PIM diagnostic of the current PIM system (in cases where a full tools and indicators for an integrated review of assessment is infeasible or would not produce the existing PIM system’s performance. The PIM useful information, a one-off review of a project Assessment should also explain why identified portfolio of recently-completed projects or performance strengths, weaknesses and gaps projects still in implementation can be a rapid, matter in the FCV context. The analysis should cost-effective way to identify improvements in cover the linkages with procurement and wider the project planning and execution phase; closer PFM systems. The performance report should monitoring of project implementation can also also rely as extensively as possible on the generate useful information regarding the quantitative indicators collected or estimated as sources of weakness in the planning phase); (ii) part of the data gathering for PIM Assessment. the development of a PIM governance The subsequent Action Plan must consider a framework, including a PPP law and procedures; business process re-engineering (BPR) to help and (iii) the preparation of a three-year rolling organizations rethink PIM functions to improve PIM Action Plan — eventually moving to a service delivery, reduce operational costs, and Maximizing Finance for Development (MFD) achieve desired results. Strategy when appropriate. 2 These actions would go a long way in an FCV context to ensure The following examples illustrate the the steps clarity and coherence in the PIM process, leading necessary to (re-)establishing a functional PIM to a clear set of PIM priorities for the coming system. three years. The Action Plan areas of focus and implementation would be differentiated by the • Afghanistan: A preliminary PIM Assessment fragility context of countries. was conducted in late 2017, and a summary of major gaps and recommendations shared PIM/PPP Assessment: The first step in with the Government, forming the basis for addressing weaknesses in the PIM system is the government’s PIM reforms. Under the through a PIM Assessment for a good MoF-led effort, the current PIM work is understanding of the existing system. This aligned with the Fiscal Performance Assessment should identify strengths, Improvement Plan (FPIP) to strengthen core weaknesses and gaps in each stage of the whole- governmental systems3. Four key PIM issues of-government PIM process. This should include were identified to be addressed by the the PPP process as a subset of the PIM process government over the medium term: 1/ and governance framework. As such, it would Separating the budget cycle from the project 2 See also “Mashreq - Maximizing Finance for 3The goal of the Fiscal Performance Improvement Plan Development (MFD) Strategy FY 2019-2021” (World (FPIP) is to bring more of the funds and decision- Bank, July 2018). making under the budget to address the fragmentation and weak coordination that are typical of post-conflict contexts. February 2019 · Number 173· 2 cycle; 2/ Identifying criteria in selecting This includes the creation of the IDMS high-quality investments aligned with the interface within the Iraqi Financial country’s development vision; 3/ Management Information System (IFMIS) Upstreaming the harmonization of the PPP currently under development, with a unified and PIP pipelines; and 4/ Streamlining framework for both PIP and PPP operations. institutional arrangements, systems, The IDMS should improve and strengthen procedures, capacity, and management planning capacity and prioritizing and necessary for effective PIM. making better informed investment decisions for the federal government´s • Haiti: In 2014, a PIM Assessment was project portfolio. Also, it should improve the conducted by the government to better strategic allocation of resources, helping to understand the strengths, weaknesses and solve budget integration issues. gaps in each stage of the PIM process. The Assessment revealed that Haiti’s public PIM/PPP Governance Framework: When the investment management system is public investment decision framework leads to fragmented, with distinctive features PPPs, the agency will use the PIM–PPP common to aid-dependent countries — governance framework. FCV governments must including weak appraisal capacity, and strengthen their PIM/PPP governance reliance on donors to design good projects. framework for managing public investments to As such, there is insufficient support and improve the efficacy (each project must be basis for the development of a sustainable verified for strategic fit to determine eligibility), and robust PIM system. Furthermore, and efficiency (each project must undergo an domestically-funded capital expenditures economic cost–benefit analysis). This will ensure were improperly accounted for, tracked and that they achieve the best possible results in reported on, denoting lack of accountability terms of provision of goods and services. The and transparency - a potential risk of decision to establish a PIM governance mismanagement of scarce public resources. framework should encompass traditional public These are the key areas to be addressed by a investment project (PIP) financing and a PPP PIM improvement project in the short term. process to determine project prioritization (based on cost–benefit analysis and expenditure • Iraq: A PIM Assessment was conducted in efficiency), financing modalities (on-budget or 2015 and led to three key recommendations. through PPPs) and continuous monitoring of the The PIM policy and management fiscal affordability of all projects. weaknesses revealed by the Assessment up until 2014 include low economic returns on A formal system of public investment project the public investment portfolio, large capital appraisal must provide the basis for government budget allocations, and low levels of to move ahead with only those initiatives that are spending. They were due in part to poor the most economically attractive and beneficial. project design, planning and preparation. It should allow for the transformation of The recommendations were to: 1/ Improve “investment ideas” into “public investment the PIM system (PIMS); 2/ Implement a solid projects”, and then into “public investment PIMS as government capital spending decisions”. In the short term, given weak intensified, along with utilization of governance and capacity in FCV countries, where significant domestic financing; 3/ Install a possible, governments should consider PPPs. complete PIM training system to improve This entails the absolute necessity of conducting local capacity; and 4/ Integrate Iraq’s PIM risk analysis, which would provide a relatively System with the budgetary accounting quick infusion of capacity, and potentially of system through the Iraqi Development financing, to meet immediate requirements for Management Information System (IDMS), economic and social infrastructure. Hence, as a designed to become the information priority in the early post-conflict years, FCV technology (IT) backbone of the PIM System. governments should consider establishing the institutions and capacity to undertaken PPPs. February 2019 · Number 173· 3 o Afghanistan: Given the economic public investment projects. In 2019, the situation, a strengthened Afghan PIM federal government plans the preparation system needs to include: 1/ Increasing of an integrated PIM/PPP framework to investment spending by increasing the facilitate MFD implementation. share of infrastructure investments in the budget where possible, and reorienting budgetary allocations from poorly performing projects to well performers; 2/ Selecting investments likely to be the most effective in stimulating the economy and/or protecting vulnerable groups; 3/ Helping to accelerate investments between concept and implementation by building capacity to efficiently appraise proposals; 4/ Improving the quality of investment spending4 by regular M&E; 5/ Focusing public investments on the effective implementation of the Afghanistan National Peace and Development Framework (2017–2021 ANPDF); and 6/ Strengthening capacity building in project preparation, appraisal, selection and implementation. o Haiti: To address the fragmentation of the PIM system, the Assessment recommended clarification of the existing PIM regulatory framework for planning activities with clearly responsibilities from identification to implementation and project completion. This means a new procedures manual to simplify existing, often cumbersome procedures. o Iraq: Cabinet Decree 445 of October 18, 2015 adopted a PIM legal framework establishing a public investment decision- making process covering project concept, pre-feasibility, feasibility studies, capital investment prioritization, financing modalities, project execution, continuous monitoring of fiscal affordability, and ex- post evaluation. This is a key step in establishing a formal, uniform and consistent PIM process, mandatory for all 4 See “Methodology for Pre-Selection of Public Investment Projects in Afghanistan” (World Bank, February 2017). February 2019 · Number 173· 4