a measure that explicitly focuses on public investment quality or efficiency. To the best of our knowledge, the only index that specifically focuses on public investment quality is the Public Investment Management Index (PIMI) developed by Dabla-Norris et al. (2012).<sup>3</sup> While PIMI is useful for cross-country comparisons and has been extensively used in the literature, its construction required a herculean effort in terms of data collection and relied on qualitative information partly based on “in-country discussion with country officials, review of published and unpublished material, and discussions with relevant stakeholders” (Dabla Norris et al. 2012, p. 244). Thus, the PIMI index is hard to replicate and costly to update.

Consequently, the index is only available for a subset of countries (71 economies) and has not been updated since the original data collection period in 2007-2010. Another potential drawback of the PIMI is its emphasis on public investment procedures rather than outcomes. It is thus a _de jure_ index of public investment quality rather than a _de facto_ index.

In this paper we address these issues by developing a novel index of public investment quality (PIQ) that measures _de facto_ aggregate country-level efficiency of public investment. The index is based on publicly available World Bank data on investment project performance evaluations. Rather than being based on public investment procedures, our index focuses on outcomes as it is based on impartial evaluations of specific investment projects conducted by experts in a consistent appraisal framework. As PIQ is constructed using publicly available data, it can be easily replicated and updated.

Our index covers 120 EMDEs over 2000-2021. It shows significant variation in public investment quality across EMDEs, with lower values of the index in commodity-exporting and low-income countries (LICs). We also find that the gap in public investment quality between low-income and higher-income countries, as well as between commodity-exporting and commodity-importing EMDEs, has widened over time.

We use the PIQ index to test whether public investment quality affects the relationship between public investment and sovereign risk. We conjecture that when the quality of public investment is high, an increase of public investment will increase future growth and fiscal revenues and thus reduce sovereign risk. We expect the opposite for countries with low public investment quality. In this case, scaling up of public investment should be associated with worse fiscal fundamentals and higher sovereign risk. The data support these hypotheses and show that the mediating effect of the PIQ index on the link between public investment and sovereign risk is especially important for sub-investment grade countries. We also show that increasing public investment leads to higher debt ratios in low-investment-quality countries and to lower debt ratios in high-investment-quality

> 3 PIMI is a composite index that focuses on the efficiency of public investment management based on 17 indicators evaluating the stages of the public investment management cycle: (i) strategic guidance and project appraisal; (ii) project selection; (iii) project management and implementation; and (iv) project evaluation and audit. Besides this index, there have also been a few attempts to develop a measure of public expenditure efficiency using a combination of proxy variables, a data envelopment analysis, or other methods (IMF 2015; IMF 2021; Afonso et al. 2022; Herrera and Ouedraogo 2018).

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