9 implementation and especially in project audit and evaluation. An index of the quality of public investment management shows this to be markedly weaker in resource-exporting developing countries than in other countries (Dabla Norris et al. 2011). However, some resource-dependent countries, like Chile, offer good-practice examples (World Bank 2006).<sup>2</sup>

# **Box 5**

# **Effective Public Investment Management**

High-quality public investment is essential to growth (Gupta et al., 2011) but poor investment management may result in wasted resources and corruption. The risk is increased if investment is scaled up rapidly in the face of macroeconomic and institutional absorption constraints (Berg et al., 2012). Efficient public investment management can be divided into four consecutive phases, each with several individual components (Rajaram et al., 2010) and Dabla-Norris et al., 2011):

- _Strategic Guidance and Project Appraisal_ . Strategic guidance ensures that investment projects are selected based on synergy and growth outlook, and reflect development objectives and priorities. Projects that pass this first screening must then undergo scrutiny of financial and economic feasibility and sustainability. This requires several steps – financial and economic cost-benefit analyses, pre-feasibility and feasibility studies, environmental and social impact assessments -- all undertaken by staff trained in project evaluation skills. Furthermore, creating potential project lists strengthen accountability.

- _Project Selection and Budgeting_ . Vetting proposed projects requires a politically independent gate-keeping function. The participation of international experts, together with national technical experts, can enhance the quality and robustness of the review. Linking the process of selecting and appraising projects to the budget cycle is necessary to take account of recurrent costs and to ensure appropriate oversight and consistency with long-term fiscal and debt management objectives. This requires a medium-term fiscal framework that translates investment objectives into a multi-year forecast for fund and budget aggregates.

- _Project Implementation_ . This covers a wide range of aspects, including efficient procurement, timely budget execution, and sound internal budgetary monitoring and control. Clear organizational arrangements, sufficient managerial capacity and regular reporting and monitoring are essential to avoid under-execution of budgets, rent-seeking and corruption. Procurement needs to be competitive and transparent, including a complaints mechanism to provide checks and balances and a credible internal audit function.

- _Project Audit and Evaluation_ . Ex-post evaluation is in many developing countries a missing feature of public investment management systems, as are adequate asset registers. Registers are necessary to maintain and account for physical property, and should be subject to regular external audits.

_Sources: Berg, Portillo, Yang and Zanna (2012) and Dabla-Norris, Brumby, Kyobe, Mills and Papageorgiu (2011)._ The variable performance of countries in managing their public investment programs points to the fact that not all have strong central management of the level and quality of public spending, properly integrated into the budget and subject to oversight by parliament. Off-budget flows are often substantial. Sub-national governments or line ministries may have considerable scope for independent action, with little effective oversight. In many countries state-owned enterprises, including powerful national resource companies, may take on fragmented responsibility for a wide range of development activities, again often with little effective oversight, either from the market or from the state.

In addition, few resource exporters have managed to sustain countercyclical fiscal policy in the face of large swings in resource markets. This leaves their economies vulnerable to destructive “boom-bust” cycles, which have a direct impact on investment quality and returns. On the upside of the cycle, spending outruns management capacity, raising the prospect of poor-quality spending as well as creating bottle-necks that raise costs for all

> 2 World Bank Appraisal of Public Investment: Chile. 2006

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