Tuesday, January 3, 2012

Spending on Public Infrastructure: A Practitioner's Guide

The spending on public infrastructure (SPI) exercise is a methodological tool to support the collection and preparation of standardized, comprehensive information—comparable across countries—on public spending on infrastructure services. Particular attention is paid to the level, composition, and planning and  releasing mechanisms.

Originally, the SPI exercise was developed to support the Africa Infrastructure Country Diagnostic (AICD) study in recognition of the fact that the infrastructure data in the fiscal accounts as collected by the International Monetary Fund (IMF) were scattered and incomplete. While Africa‘s infrastructure needs are widely debated, very little was known about the existing levels and composition of public expenditure on infrastructure subsectors. Such information is important in order to structure financing options to close any funding gap. Infrastructure outlays—if at all—are reported in an aggregate manner without the economic breakdown that would delineate their nature: that is, fixed capital, operations and maintenance, interest, subsidies, the compensation of employees, and so on. In addition, such outlays are not reported by function, which would allow costs to be attributed to specific infrastructure subsectors, such as irrigation, water resource management, electricity, transport, and so on.

Between 2000 and 2005, the IMF Government Financial Statistics, under the general government section, reported infrastructure spending data for only Uganda out of the 42 Sub-Saharan African countries. These data indicated an implausibly low spending level of 0.2 percent of gross domestic product (GDP) in 2001. Since government statistics reported by the IMF focus primarily on central government accounts, they provide incomplete coverage of infrastructure expenditure, much of which is undertaken by subnational and parastatal entities. Delivery of infrastructure services relies heavily on public (or para-public) agencies outside the purview of the central government. A significant share—if not the majority—of public expenditure in infrastructure is channeled through nonfinancial public enterprises, local governments, and (other) off-budget vehicles (for example, special funds). Off-budget vehicles play an increasingly large role in mobilizing and protecting the infrastructure financing of several sectors, including roads (and rural infrastructure in general), even when part of their resources continue to be come via budget transfers.

At a time when the international community is committed to substantively increasing official development assistance (ODA) to Africa—and to infrastructure sectors in particular—it is of utmost importance to compare the level and quality of spending against the cost of attaining development targets. It is also critical to assess the scope for expenditure reallocation and efficiency gains, and to quantify the financing gap that can and should be targeted by donor support. These are first steps toward the more efficient and effective use of resources devoted to infrastructure, which will need to be followed by systematic monitoring. Policy makers and researchers are increasingly aware of the opportunity cost that compressing public investment in infrastructure can have on long-run growth potential.

In fact, insufficient information on public infrastructure spending—and of the institutional mechanisms that underlie infrastructure service delivery—may be, in effect, preventing the efficient allocation of limited public funds across infrastructure sectors and projects. Most of the analytical methods and tools used to assess overall costs and returns on capital are not documented, making it difficult to evaluate the potential trade-offs between different cross-sector allocations. Further, to identify spending inefficiencies within a given project or institution, it is necessary to understand the economic use of funds and their links to achieved outputs. Annual spending flows, at the very least, give a sense of cost-recovery capabilities and the institutional capacity required to transform allocations not only into actual spending but into productive assets. To develop sustainable funding mechanisms, policy makers 
must first map out spending flows and current funding channels across the relevant institutions. This is a necessary step to evaluate the fiscal implications of a myriad of funding mechanisms that include user fees, levies, and taxes, as well as quasi-fiscal activities such as underinvestment, underpricing, and postponed maintenance.

By developing a detailed and rigorous data collection methodology, the objective of the SPI exercise is to create a standardized database of public expenditure levels and performance in infrastructure, comparable across countries. With the aim of being as comprehensive as possible, the exercise covers central and subnational government expenditures, nonbudgetary vehicles (such as road funds and rural infrastructure funds), state-owned enterprises (SOEs), and public-private partnerships (PPPs) in which the asset ownership remains with the government. Although developed in the African context, the methodology is not specific to Africa but is relevant and applicable to any developing country. 

The purpose of this guide is to document the data collection methodology developed for and tested with the AICD, thereby making it available to a wider community of practitioners, and promoting its further application,  Any data collected using this framework can legitimately be benchmarked against the existing public expenditure database developed for Sub-Saharan Africa under the AICD. When applying this methodology, several issues should be kept in mind. First, the SPI exercise  focuses on the standardization of public spending across infrastructure sectors, aiming mostly at facilitating cross-sector aggregate analysis rather than providing tools for more nuanced sector-specific resource efficiency assessments. Second, despite heroic efforts by consultants in the field, some data may be missing. Even as public corporations and special funds are increasingly required to report their accounts, public records are not always comprehensive even when published. In particular, financial records for special funds financing rural infrastructure are frequently unavailable (for example, in  Uganda) and SOE accounts rarely report cash flows, limiting the public knowledge of actual  disbursements in capital projects.

Finally, emerging results from the testing of this methodology in pilot countries (Tanzania, Kenya Rwanda and Uganda) are already challenging the conventional wisdom on Africa public infrastructure spending. After adding up on-budget and nonbudgetary spending data, it is clear that most Sub-Saharan
countries might, in fact, be allocating large amounts of resources to infrastructure, relative to the size of their economies. These sometimes enormous spending efforts are, however, challenged by these countries‘ own purchasing power of large-scale infrastructure, high costs, under-developed construction capacity as much as by their institutional ability to efficiently and effectively spend scarce resources. 

World Bank. Autor: Briceño-Garmendia, Cecilia; Sarkodie, Afua. Fecha del documento: 01/12/2011.Tipo de documento: Policy Research Working Paper.Número del informe: WPS5905