PEFA-Style Diagnostic Framework for PIM

[petagny]

Some of you might have seen reference on the PFM-Blog to a PEFA-style diagnostic framework for public investment management being developed by the World Bank.

http://blog-pfm.imf.org/pfmblog/2010/09/a-new-pefa-drill-down-diagnostic-emerges.html

The paper mentioned gives a broad overview of the diagnostic tool, which identifies certain 'must-have' features of an efficient PIM system. A scoring system has also been developed and is being tested in a sample of countries. Originally developed for 'resource-rich' countries it is being adapted for wider use.

The Bank also seems conscious of some of the criticisms of PEFA (see for example Richard Allen's recent piece on the IMF PFM-Blog http://blog-pfm.imf.org/pfmblog/2010/09/two-very-modest-proposals-for-making-technical-assistance-more-effective.html#more) and will probably be looking for ways to make sure that the assessment criteria do not contain an implicit prescription of institutional models used by a relatively small group of advanced countries. The emphasis should therefore be on the functions of a PIM system rather than the organisational arrangements for performing those functions. Turkey provides an example of what this means in practice: it's tripartite budgetary system may not seem ideal by comparison to the monolithic finance ministries found in other country contexts, but considerable progress has nevertheless been made in rationalising an investment programme that had been beset with many inefficiencies, with the State Planning Office taking the lead.

It would be good to get the views from other 'Boarders' on the pros and cons of a PIM assessment framework. That it might tell us something different from PEFA seems to be borne out by at least one country: Brazil does rather well by PEFA criteria, but it's PIM system does not seem to be functioning as well as the broader PFM system.

[John Short]

I dare say it all depends on what is meant by an MTEF!  If we look at PI-12 all dimensions as representing an MTEF, then PIM becomes a subset of the MTEF.  If it is just dimension (i) as implemented and described by many "MTEFs"(why they have failed),  then clearly PIM management and the appraisal methodology in the WB paper needs to be carried out in addition to dimension (i), (as does (ii) and (iii)).  No matter what organisational structure for investment, the appraisal process needs to be thorough and robust - the WB paper would do the job if implemented in assessing investment opportunities.  But it should not substitute for a properly designed MTEF.  That should be the challenge for the WB (and the EC and IMF, as well) - not just accepting that bald statement that there is an MTEF in place, but encouraging and using its (their) good offices to encourage all 4 dimensions of PI-12  to be worked on - not just (i) with (ii) added as separate item relating to debt (as is often the case). 

I am in the middle of visiting three contiguous countries - the first has a separate Ministry for Investment, but weak in dims (iii) and (iv) moderate in (i) and strong in (ii), the second has a PIP project, but is weak in dims (iii) and (iv) and moderate in (i) and (ii) and the third has invested over a number of years in an MTEF and is strong in all dimensions.  The MTEF has integrated investment decision-making into an holistic budget process, which the two other countries have not done despite having an institutional focus on investment.  Encouraging a return to a PIP emphasis would be a huge mistake, encouraging the development of a fully functioning and well specified MTEF would be a better use of their TA support.

Re Richard Allen’s dictum, TA advice has surely to be centred on the institutional framework that is in place or that can be adapted – if it can be adapted by the government as it sees fit.  If not, well those are the conditions under which the TA must operate and adapt itself to.
 
Memorandum Item:
PI-12. Multi-year perspective in fiscal planning, expenditure policy and budgeting
(i) Preparation of multi -year fiscal forecasts and functional allocations;
(ii) Scope and frequency of debt sustainability analysis
(iii) Existence of sector strategies with multi-year costing of recurrent and investment expenditure;
(iv) Linkages between investment budgets and forward expenditure estimates.

[petagny]

John Short's points about the relationship between PIM and and MTEF process (with the former subordinated to the latter) are important. The framework in the World Bank paper plays down the medium-term perspective, although it would seem to be an essential component of good public investment management. Thus, the requirements with respect to project budgeting and selection are:

i) Transparent criteria for selecting projects with reference to policy objectives at ministerial level.
ii) Well structured budget preparation process with scope to integrate investment and recurrent implications of projects.
iii) Effective gate-keeping to ensure that only appraised and approved projects are selected for budget financing.
iv) Ensuring adequate financing for selected projects, including recurrent needs on completion.

Of course, a good MTEF process would satisfy i), ii) and iv), but it is not mentioned explicitly. This seems to reflect a general caution about MTEFs that now permeates the World Bank. I designed my own assessment framework for a recent study of public investment practices in the Western Balkans: this gives greater emphasis to the medium-term budgetary perspective. The key features and related diagnostic questions concerning the project selection and budgeting stage of PIM are:

Key Features:
•   Capital spending clearly distinguished within a unitary budget .
•   A comprehensive coverage of capital expenditure in the budget.
•   Explicit recognition of future commitments to ongoing (multi-year) projects in the annual budget or accompanying supplementary information.
•   ‘Gate-keeping’ procedures to stop projects that have not been screened, i.e., passed through designated pre-implementation procedures , from entering the budget .
•   A budget preparation process that:
o   Provides the unique route for selecting projects for funding;
o   Is framed within a medium term perspective;
o   Establishes realistic, but hard, expenditure limits for public investment, enabling spending ministries to prioritize their capital expenditures effectively over time, selecting sound, new projects that address their strategic priorities, while continuing to implement ongoing projects efficiently; and
o   Ensures planning of expenditures required to operate and maintain existing fixed assets and additions to assets.
•   ‘Ready-to-go’ checks to ensure that plans (including procurement plans) are in place, for efficient and timely implementation before the budget year begins.
•   Robust procedures for rationalizing projects that have been stalled because of shortage of funding.

Questions on Budgeting for Capital Investment:
1.   Is capital expenditure captured and clearly identifiable within the framework of an integrated budget presentation? If not, explain how capital expenditure is dealt with in the budget.
2.   Is the budget comprehensive in its treatment of capital expenditure, notably foreign-financed capital projects? Is there significant capital expenditure by extra-budgetary funds? Are PPP projects and associated public sector liabilities (actual and contingent) represented in the budget or accompanying documentation?
3.   Does the budget presentation contain any information on the forward capital expenditure implications of ongoing and new projects - at a minimum, total estimated cost and balance to complete ?
4.   Does the budget process incorporate procedural safeguards to make sure that only projects that have been properly prepared and received a positive appraisal can be considered for budget funding? If such safeguards exist, which organization or organizations are responsible for applying them? How effective are the safeguards, e.g., is it difficult to stop politically motivated projects with shallow justifications from entering the budget at the expense of ongoing projects?
5.   Are final funding decisions for projects made through the budget process or are there other routes ?
6.   Does Parliament have the right to amend capital budget proposals or is its role confined to rejecting or approving the executive’s budget proposals? If this right exists, is it regularly exercised in relation to the composition of capital budgets?
7.   Does selection of projects for inclusion in the budget involve verifying the consistency of projects with strategic plans? Is account taken of spending commitments for ongoing projects before selecting new projects? What other factors are taken into account?
8.   Are realistic expenditure limits (‘ceilings’) established early in the budget preparation process and prior to prioritization and selection of projects for funding? Are separate ceilings set for current and capital expenditure ? Are ceilings set by sector or by main budget holder ? Are ceilings largely respected or are overloaded budget requests the norm?
9.   Is there a credible  MTEF (or equivalent) process that provides a framework for spending ministries to develop a project pipeline and program its implementation? If there is an MTEF, but it lacks credibility, is this because it is largely a parallel process, insufficiently integrated with budget preparation or are there other reasons?

This seems to me to be consistent with what John is saying.

There is more to PIM than can be captured in the PEFA assessment framework though, hence the need to drill down further in other areas, e.g., project preparation and appraisal, and ex post assessment. This is the aim of the PIM assessment framework.