# **Annex B. Literature on measuring public investment quality and the effects of public investment quality**

This annex reviews two strands of the literature on public investment quality that focus on how to measure public investment quality and on the economic effects of public investment quality.

_Measuring of public investment quality_ A seminal paper in the literature aimed at measuring public investment quality is Dabla Norris et al. (2012) <mark>. This paper introduces a multi-dimensional index—t</mark> he Public Investment Management <mark>—</mark> Index, PIMI <mark>aimed at assessing the effectiveness of public investment management processes across 71 emerging market and developing economies. PIMI measures the efficiency of these processes by aggregating 17 indicators across four critical stages: (i) Strategic Guidance and Project Appraisal; (ii) Project Selection and Budgeting; (iii) Project Implementation; and (iv) Project Evaluation and Audit.</mark><sup>33</sup> <mark>PIMI’s primary objective is to spotlight institutional features that serve to minimize risks and ensure the proficient management of public investment. D</mark> abla Norris et al. (2012) show that <mark>there are w</mark> ide variations in the efficiency and effectiveness public investment management across middle- and low-income countries.

An inherent limitation of the PIMI pertains to its reliance on qualitative data, rendering replication and updates challenging. Furthermore, its dependence on secondary data sources and proxies restricts its ability to comprehensively evaluate crucial institutions pertinent to public investment (IMF 2015).<sup>34</sup> To address these issues, IMF (2015) builds a novel Public Investment Efficiency Index (PIE-X) and a Public Investment Management Assessment (PIMA) tool.

Public investment efficiency relates to the correlation between the value of public capital stock and the quantified coverage and quality of infrastructure assets. The IMF Public Investment Efficiency Index PIE-X is the vertical distance from an efficiency frontier delineated by countries

> 33 <mark>Assessment of the first stage is based on four indicators: Nature of strategic guidance and availability of sector strategies; (ii) Transparency of appraisal standards; (iii) Observed conduct of ex ante appraisals; (iv) Independent review of appraisals conducted. Assessment of the second stage is based on five indicators: (i) Existence of mediumterm planning framework and its integration to the budget; (ii) Inclusion in budget (or similar) for donor funded projects; (iii) Integration of recurrent and investment expenditures in budget; (iv) Nature of scrutiny and funding supplied by legislature, including its committees; and (v) Public access to key fiscal information. Assessment of the third stage is based on five indicators: (i) Degree of open competition for award of contracts; (ii) Nature of any complaints mechanism relating to procurement; (iii) Funding flows during budget execution; (iv) Existence and effectiveness of internal controls, such as commitment controls; and (v) Effectiveness of system of internal audit. Assessment of the fourth stage is based on two indicators: (i) Degree to which ex-post evaluations are conducted and (ii) Degree to which external audits are produced on a timely basis and scrutinized by the legislature.</mark>

> 34 Canela and Moreno-Brid (2022) build a “New PIMI” for sixteen Latin American countries and suggest that their methodology is better suited at evaluating the quality of public investment management than that used in the original PIMI.

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