8 spending items as capital investments. Not all investments will be productive. Even if productive in the very long run, some might incur recurrent costs that will be difficult to cover for many years.

A balanced approach would be to screen proposed investments by their economic and financial returns according to their impact on the real return on wealth r.W. Following this reasoning, high-returning domestic investments are the most appropriate for an SWF because of the emphasis on managing them as a portfolio of national assets. Even if they open up fiscal space, the domestic investments of the SWF need to be coordinated under strong integrated expenditure management because of absorptive capacity constraints and the risk of inducing damaging “boom-bust” cycles.

The link between investment and growth is neither automatic nor guaranteed. Public investment poses significant management and governance challenges, including low capacity, weak governance and regulatory frameworks and lack of coordination among public entities. Furthermore multiple institutions can have overlapping investment mandates, leading to fragmented programs and inefficient use of public funds. Careful coordination is necessary when multiple entities carry out public investment programs (Box 4).

# **Box 4 Institutional Investment in Brazil**

A government’s institutional set-up is seldom straight forward and consequently activities –such as public investment management- are divided among multiple institutions, across levels of government and involve commercial and quasi-commercial corporations, banks and quasi-banks. Brazil provides an example of a large government with multiple actors engaged in public investment.

The management of public investment in Brazil takes places across the tiers of government (federal, state and municipal) and is divided among multiple institutions. Key institutions include the: Ministry of Finance; Ministry of Planning and Budgeting; Line Ministries; Congress; Chief of Staff Office (Casa Civil); Federal Control Office and Federal Court of Accounts.

Sub-national government is responsible for a significant proportion of public investment. Similarly to the Federal Government, State governments execute investments through both their budgets and through state owned enterprises (SOE). Municipal governments also play a role in managing typically smaller SOEs, and investing through the executive’s budget. This mirrors the situation across OECD countries where approximately two thirds of public investment takes place at the sub-national government level.

In addition several SOEs, at all levels of government not dependent on the Treasury are active and include Petrobras (a semi-public energy corporation) that invests directly from its own capital in pursuit of national goals. The Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social, or BNDES) also plays a key role by offering financial support mechanisms to public administration entities as well as the private sector.

Given that public investment is carried out across so many entities, there is a need for careful coordination in Brazil. For example, the Secretariat of Planning and Investment at the Ministry of Planning works closely with the Department of Coordination and Control of State Enterprises (in the same ministry), which is responsible for the preparation of the comprehensive plan of expenditures for SOEs. Approval is later sought at the Congress level. Strategies for public investment typically follow the political cycle and examples include the Programa de Aceleração do Crescimento (Growth Acceleration Program), better known as PAC, active from 2007 to 2010 and its successor ‘PAC-2’ for period 2011 to 2014 (forecast to spend $582 billion).

_Sources: Allain-Dupré, D. (2011), “Multi-level Governance of Public Investment: Lessons from the Crisis”, OECD - Regional Development Working Papers, 2011/05, OECD Publishing. See: http://dx.doi.org/10.1787/5kg87n3bp6jb_ _<u>en; accessed August 19, 2013</u>_ Many resource-exporting countries have launched massive investment programs to little effect (Gelb 1988). Box 5 summarizes the key features of effective public investment management arrangements. On average, countries tend to be relatively stronger in the early stages of strategic guidance and appraisal, and weaker in the later stages of project 8