Speech

Meeting the Challenges of Growth and Infrastructure Investment

December 2, 2016

Honorable Ministers, Ladies and Gentlemen, good morning.

I am very pleased to join you today, and would like to once again thank the Australian government and all the participants for coming together to discuss how to meet the challenges of growth and infrastructure investment.

In my talk today, I would like to address some key issues related to public infrastructure investment. Specifically, public investment management and management of fiscal risks. I will also outline what the IMF is doing in these areas.

But before getting into the specifics of public investment management and management of fiscal risks, I would like to briefly describe the macroeconomic setting.

Macroeconomic setting

First, I believe we can all agree that public investment is an important catalyst for growth. It supports the delivery of public services, and it connects citizens and companies to economic opportunities. It can also strengthen global growth and provide new economic opportunities for millions of people around the world. Indeed, globally, since the onset of the global financial crisis, growth has been too low, for too long, and benefitted too few.

Second, there is a growing consensus towards the need for more public investment.

• In advanced economies, the case for an infrastructure push is compelling. Public investment is at historic lows—it has steadily decreased from over 6 percent of GDP in the late 1960s to less than 4 percent more recently. Further, there is a demand slack, and money is cheap.

• Meanwhile, in emerging and developing Asia, public investment has been stronger than in the advanced economies—averaging 8 percent of GDP since 2008. But as you know, there are still large and persistent infrastructure gaps. The World Bank estimates that over 660 million people do not have access to clean drinking water while 1.3 billion people live without electricity.

Third, if properly formulated, more public infrastructure investment may enhance, rather than weaken, fiscal positions as shown in many countries. IMF research suggests that even debt-financed investment can reduce public-debt-to-GDP ratios because of the growth effects. But that investment needs to be effective and efficient. We estimate that, across countries, on average, about one-third of public investment is lost partly through waste, corruption or bad management. So improving the efficiency of public investment is essential—including for countries where fiscal space is limited. Fiscal space is concerned with whether governments can raise spending or can lower taxes, without endangering market access and debt sustainability.

In short, we need more public infrastructure investment. And more importantly, we need more, better, and smarter public infrastructure investment.

The key is whether and how a good framework can be implemented for public infrastructure investment management and management of fiscal risks.

First, why does public infrastructure investment need to be better managed?

Infrastructure investment is essential to create growth that is sustainable in economic, social, and environmental terms. Too much spending can be costly; too little can handicap growth. Therefore, given scarce resources, policymakers need to do a delicate balancing act: assess the advantages and disadvantages of choosing a particular project, and consider investment efficiency, volatility, regulation, and coordination. This requires public investment management.

Second, why do we need fiscal risks management? There are decisions on how increased spending could affect future fiscal spending and sustainability. This requires management of fiscal risks. In particular, substantial risks need to be managed well in the widely-practiced public-private partnership (PPP) initiatives.

Let me elaborate more on each of these two aspects. First, public investment management.

Public investment management

The Fund’s work has shown the advantages of strong institutions for public investment management. These advantages include: less volatile investment, more predictable composition of spending and better execution of capital budgets. There is also a political benefit: the public perception that corruption levels are lower.

Our work also shows that there is scope to improve public investment management across the entire investment cycle.

But some areas are particularly challenging. Project evaluation and selection are especially important, and there are lessons learnt. A recent study of Australian transportation projects found that almost all cost overruns occurred when projects were undertaken before assessments were completed. So better project selection is essential for effective execution.

Coordinating investment across different levels of government is necessary to harmonize plans and provide funding certainty. This is key in countries with federal systems or where decision making is decentralized. There is a useful model in Australia’s intergovernmental agreements, where key arrangements are defined in advance.

A useful way to provide transparency, and predictability is to make use of multi-year budgeting. In Korea, the rolling five-year National Fiscal Management Plan provides a medium-term budget framework for spending on major projects. This helps to encourage priorities and to develop a project pipeline.

Another area that can be challenging is the regulation of infrastructure companies. Good oversight can help promote open and competitive markets, and objective pricing. For example, Korea monitors investments by state-owned enterprises through its Open Information System for Public Entities. Singapore ensures SOE governance with increased competition, restructuring of loss-making enterprises, and enhanced management accountability.

The IMF has also assessed the outcomes when the systematic review of investment processes, outputs, and outcomes is absent. This has involved many countries, including China, Thailand, and Indonesia.

The conclusion is straightforward: there is almost no learning from mistakes if policy makers do not take the time to conduct performance assessments.

Let me now turn to the management of fiscal risks.

Management of fiscal risks

A large public investment program involves risks that need to be managed carefully. It is important that future fiscal implications are carefully assessed and built into the project financing. This might just sound like common sense, but too often it is forgotten.

These future liabilities can take various forms—some entirely predictable. For example, budgets sometimes fail to account for operational and maintenance expenditures. This can result in schools, and hospitals sitting idle after construction is completed.

Another issue is cost overruns due to overly optimistic or incomplete project appraisals. In the worst-case scenario, half-completed projects end up abandoned.

Other risks are less predictable. They can include incentives to private entities such as guarantees, indemnities or tax exemptions. But they also can have significant implications for public finances.

A particular source of risk relates to Public Private Partnerships, or PPP. As you know, these partnerships are very appealing when fiscal space is limited and public investment is hampered by inefficiencies. PPPs can increase that efficiency and provide value for money. They can enable the government to focus on project outputs while shifting some of the risks to the private sector.

But, there are significant fiscal risks. PPPs are not "infrastructure for free".

• First, they can be costly and reduce budget flexibility in the long term. For example, governments have to make annual payments after the infrastructure is delivered.

• Second, they can give rise to contingent liabilities such as guarantees to the private partner.

• Third, there are further risks if governments use PPPs to move debt off their balance sheets and create future liabilities.

For example, the 2008 global financial crisis led Portugal to reclassify its large PPP program developed through state-owned enterprises within the general government. This contributed to an increase in the ratio of public debt to GDP ratio in subsequent years.

So strengthening institutional frameworks for managing PPPs is an important pre-requisite to embarking on large programs in this area.

IMF’s role

How can the IMF help countries navigate through this fiscal minefield?

Our role is to help our members to promote growth and achieve macroeconomic stability. The three-prolonged approach remains essential—monetary, fiscal, and structural. In this approach, it is important to exploit synergies across policies and with countries to use fiscal space where available to support infrastructure investment.

This is at the center of our policy dialogue and analysis at both bilateral and multilateral levels. This is the case we have worked with countries like Canada, the US, India, etc.

At the same time, we fully understand the need to increase public investment and make it more efficient.

In this regard, we have developed various analytical approaches to assist our member counties.

Here, I would like to highlight two recent initiatives aimed at helping with the public infrastructure management and management of fiscal risks, respectively.

The first is the Public Investment Management Assessment Framework, PIMA. This is a new diagnostic tool that helps identify weaknesses in the investment process. It evaluates 15 factors that shape decision-making at three stages of the public investment cycle: planning, allocation of investment, and project implementation.

It then provides practical recommendations to enhance the efficiency and impact of public investment.

Together with the World Bank and several other development partners, we have conducted PIMA pilots in 18 countries in various regions. Governments find the assessment useful for shaping reform priorities, and donors value it as a guidepost for developing follow-up technical assistance.

The second initiative concerns about managing the fiscal risks of public investment. In collaboration with the World Bank, we have developed the PPP Fiscal Risk Assessment Model. It has been developed as an analytical tool to quantify the macro-fiscal implications of PPP projects for debt and deficits.

The tool generates the impact of a PPP on main fiscal aggregates, as well as sensitivity analyses to macroeconomic and project-specific changes. It also facilitates the identification of mitigation measures for fiscal risks. It can be used both for IMF and World Bank technical assistance, and by Ministries of Finance.

We are now at a level of detail that could absorb hours of our discussion time, so allow me to conclude by returning to my opening premise:

Infrastructure investment can close investment gaps and catalyze growth. Given scarce resources, the challenge is to make this investment as efficient and effective as possible.

The IMF is prepared to assist countries as they embark on investment programs—balancing the benefits and risks of infrastructure spending.

We believe that our joint efforts can make a difference—to help countries become more efficient public investors, to the benefit of their citizens.

Thank you.