Recent Experiences in Assessing Public Infrastructure Management in Sri Lanka Session II: Enhanced Framework For Public Investment Public Investment Processes And Benchmarking Tokyo Fiscal Forum 2018 June 4-5, 2018 A. R. Desapriya Deputy Secretary to the Treasury Sri Lanka 1
Outline Overview about Sri Lanka Trends in Public Investment in Sri Lanka Sri Lanka s Experience on Pubic Investment Management Assessment (PIMA) Summary of Findings (PIMA) Recommendations for Reforms (PIMA) Implementation of PIMA Recommendations and Challenges 2
Overview 3
About Sri Lanka Population - 21.4 million Size of the Economy - USD 87.2 billion Per Capita GDP - USD 4,065 In 2017 Budget Deficit (% of GDP) - 5.5 Debt to GDP Ratio (% of GDP) - 77.6 Govt. Revenue (% of GDP) - 13.8 Public Investment (% of GDP) - 5.4 Capital Investment share of Total Budget- 19% 4
Trends in Public Investment 5
Sri Lanka allocates relatively larger sums of funds for economic infrastructure development over social infrastructure Components of Public Investment (% GDP) 0.9 0.4 1.5 0.6 1.1 0.7 0.9 0.4 0.8 0.3 1.3 0.5 0.9 1.0 1.6 1.5 0.9 0.3 0.3 0.3 0.4 1.4 1.0 1.1 1.5 1.4 0.3 0.3 0.4 0.4 0.8 0.8 1.1 5.4 5.3 4.3 3.9 3.3 3.2 2.9 3.2 3.6 3.9 4.3 4.7 3.8 3.9 3.9 3.9 3.6 3.2 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Economic Infrastructure Social Infrastructure General Public Services Other 1.1 0.4 1.0 Public Investments 2016 (% GDP) Economic Infrastructure 3.6 Transport and Communication 1.7 Agriculture and Irrigation 0.6 Energy and Water Supply 0.4 Other 0.9 Social Infrastructure 1.0 Education 0.5 Health 0.3 Community Services 0.2 Housing 0.1 General Public Services 0.4 Civil Administration 0.4 Police and Public Security 0.0 Public investment on economic services account for 69% of total public investment on average during 2000-2016. Public investment on social services account for 21%, while General Public Services account for 8% of total public investment on average during 2000-2016. 6
1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Public investment averages around 5% of GDP in recent years as government revenue is on the decline and recurrent expenditure remains high 35.0 Revenue and Expenditure (% GDP) 30.0 25.0 24 20.0 15.0 17 16 16 15 15 15 14 14 14 12 10.0 5.0 7 7 7 8 6 6 6 7 8 6 8 7 7 6 6 6 8 10 7 10 9 10 7 8 8 7 6 6 7 7 6 6 5 5 4 6 6 6 6 7 5 6 5 5 5 5 5 - Revenue and Grants Capital Exp. (Net Lending) Recurrent Exp. % of GDP Period Revenue and Grants Recurrent Expenditure Capital Expenditure Total Expenditure I. 1959-1977 21.5 20.4 7.1 27.5 II. 1978-1995 22.9 20.4 12.8 33.2 III. 1996-2009 17.1 19.3 5.7 25.1 IV. 2010-2016 12.9 13.9 5.1 19.0 7
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Persistent budget deficits and relatively high levels of government debt limit the space for further borrowings for public investment Budget Deficit and Government Debt(% GDP) 110 100 90 80 70 60 50 40 11 10 9 8 7 6 5 4 Government Debt Budget Deficit (Right Axis) Public and Private Investment (% GDP) Pubic Investment Private Investment Total Investment 2012 4.9 34.2 39.1 2013 4.8 28.4 33.2 2014 4.6 27.7 32.3 2015 5.4 23.0 28.4 2016 4.9 26.6 31.5 8
Infrastructure Quality (Scale: 1-7) Infrastructure in Sri Lanka has improved but lags behind in several sectors Infrastructure quality indicators in Sri Lanka have been generally perceived well Perceived infrastructure quality Access to physical infrastructure in Sri Lanka is relatively comparable to emerging market economies but lags in several sectors Volume of Infrastructure per capita 6.0 Sri Lanka OECD Emerging Market Economies EMAsia 5.0 4.0 18.0 16.0 14.0 12.0 120 100 80 3.0 10.0 8.0 60 2.0 6.0 40 1.0 0.0 Sri Lanka Emerging Market Economies EMAsia OECD 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 4.0 2.0 0.0 Public education infrastructure Electricity production per capita Roads per capita Public health infrastructure Access to treated water (RHS) 20 0 Source: World Economic Forum and IMF estimates 9
The gap between planned and executed capital spending in Sri Lanka is higher than its neighbors Execution of Capital Expenditure Investment Volatility 1,400 1,200 Actual and Budgeted Expenditure (Rs.Bn) 80 70 Comparison of Investment Volatility*, 2010-2013 1,000 60 800 50 40 600 30 400 20 10 200 0-2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Prov Actual Expenditure Budgeted Expenditure *Volatility is calculated as the standard deviation of year-onyear growth of investment to GDP ratios (real, deflated, and ppp-adjusted). Around 19% of the budgeted expenditure remains unspent on average during 2000-2017. Sri Lanka is broadly comparable to its neighbors, and is more stable than Maldives and the Philippines. 10
Sri Lanka s Experience on PIMA 11
Why we needed a PIMA..? To achieve higher efficiency of public investment To further expand fiscal space available for economic and social infrastructure to boost economic growth To address shortcomings in the implementation phase of the capital budget To ensure public investment achieves the expected economic benefits To ensure achievement of set of targets such as SDGs by 2030 while managing scarce resources Therefore, we required to assess the quality and efficiency of the public investment and identify priorities for reforms 12
Summary of Findings 13
Regulatory Framework for Public Investment Management in Sri Lanka Sri Lanka s public investment management is of medium strength compared to Emerging Market Economies 14
Effectiveness of Public Investment Management in Sri Lanka Sri Lanka s public investment management with respect to its effectiveness is weaker compared to Emerging Market Economies. 15
Overall Strength of Public Investment Management Sri Lanka s strength of public investment management is generally comparable to emerging market economies (EMEs) in terms of regulatory framework but weaker in the effectiveness 16
Infrastructure index - Survey-based indicator (Output) Infrastructure index - Physical indicator (Output) Estimated efficiency of public investment in Sri Lanka is mixed Efficiency Frontier: Quality Indicator OECD All Other Countries Sri Lanka EMAsia Frontier Efficiency Frontier: Physical Indicator OECD All Other Countries Sri Lanka EMAsia Frontier 140 160 120 140 100 120 80 Sri Lanka 100 60 40 80 60 40 Sri Lanka 20 20 0 0 10,000 20,000 30,000 40,000 Public Capital Stock per Capita (Input) 0 0 10,000 20,000 30,000 40,000 Public Capital Stock per Capita (Input) 1/3 of potential impact of investment has been lost during the public investment management process of Sri Lanka When access to physical infrastructure is used as investment output, Sri Lanka is somewhat away from the frontier 17
PIMA Findings The efficiency of public investments needs to be improved Public investment is yet to deliver full potential to gain the expected economic benefits Sri Lanka is about 66 percent relatively efficient in translating public investment into infrastructure. About 1/3 of potential impact of public investment has been lost during the public investment management process of Sri Lanka. Increasing public investment efficiency to make the most of this spending is critical for Sri Lanka to achieve infrastructure needs over the medium to long term 18
PIMA Findings contd... Main issues with regard to implementation of projects lack of implementation methodology, weak cash management, and lack of a procurement monitoring and evaluation system. Main issues with regard to planning and budgeting... lack of realistic and effective expenditure ceilings, weak oversight of public investment by SOEs and PPPs weak project appraisal and selection. 19
Recommendations for Reforms 20
PIMA Recommendations 1. Introduce effective infrastructure implementation process measures to accelerate the implementation phase of mega and large projects 2. Adopt a risk-based approach to public investment management distinguish major, complex investment projects to be subject to more robust scrutiny while smaller projects would go through a simplified process. 3. Ensure better use of existing resources for capital spending replace the current imprest authorization with commitment ceilings to avoid cash rationing and accumulation of expenditure arrears 4. Strengthen the Medium-Term Fiscal Framework to provide multiyear guidance for the budget and public investment establish aggregate and ministerial expenditure ceilings by the Cabinet early in budget calendar 21
PIMA Recommendations (contd..) 5. Improve costing, project preparation, and project management a three-phase process covering pre-feasibility, feasibility, independent review for large and mega projects 6. Complete the roll-out of a new legal framework for public investment management within the public financial management law, new PPP regulation, and the various supporting regulations supporting project preparation, costings, PPP selection, value for money (VfM) evaluation and risk assessment; project appraisal and selection processes. 7. Develop an open and transparent procurement system - establish a monitoring and evaluation system at the National Procurement Commission and implementing eprocurement. 22
Implementation of PIMA Recommendations and Challenges 23
Implementation Measures and Challenges Actions in Progress Challenges 1. Well functioning System for Implementation of Medium/ Large Projects Strengthen appraisal system through 3-stage approval - Preliminary appraisal - Detailed appraisal - Committee & Cabinet Approval Strengthen the multi-year budgeting and Introduce ministerial expenditure ceilings Introduce system of cash releases based on the commitments Identification of pre-requisites Inadequate experts/ expertise knowledge for project appraisal/ assessment Pressure from line ministries requesting total allocation of the project prior to implementation Lack of project readiness before making allocations Achieving expected outcome of capital investments Fully utilization of the allocated provisions Obtaining timely and updated information on commitments/ liabilities 24
Actions in Progress Challenges 2. Roll out a new legal framework for Public Finance Management Drafted the public finance management bill 3. Strengthen the Procurement Process Introduce e-procurement Simplified the existing procurement procedure Ensuring compatibility with existing laws and regulations Development of physical infrastructure and human capital 4. Strengthen Selection and Oversight of Public Private Partnerships (PPP) Drafting the PPP Regulations Implementation Measures and Challenges Increase private sector participation and channel private funding 5. Strengthen Fiscal Oversight over SOEs Obtaining approval from the authorities Attracting private sector for PPP investments Introduce Price formula to minimize the fiscal risks of SOEs Social unrest /Strong labour unions Signed Statement of Corporate Intent (SCI) Difficulties in implementing reforms with the major SOEs 25
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