Deciding on the type and scope of the PFI review

 

Choosing which chapters to include

A horizontal or sectoral approach?

One-off snapshot or on-going reveiw?

 

Choosing which chapters to include

The choice of chapters will depend on a prior assessment of the areas most likely to require reform. Without an earlier PFI assessment upon which the government might draw, the selection of chapters for inclusion will have to draw on a variety of sources.

  • Existing information on the state of the investment climate:
    • Diagnostic studies by international organisations (e.g. World Bank, UNCTAD, OECD)
    • Academic work on covering investment climate issues in the country concerned
    • Private sector assessment of the investment climate (e.g. EIU, law or consulting firms)
  • Existing peer reviews, such as within a regional grouping
  • Consultations with stakeholders, including the private sector
  • Intra-governmental discussions

The chapters on Investment policy and Investment promotion and facilitation have been included in all applications by those countries that have used the PFI to date, as they are essential for any investment climate reform.

Just as the type of PFI assessment can take many forms, so too can the depth of the assessment vary considerably from one PFI user to another. A government might, for example, make a preliminary, qualitative diagnosis based on the questions in Chapter 1 and then, later, with the help of the Toolkit move towards prioritising reforms.

PFI users to date have selected individual chapters. At some point, however, the experienced PFI user might want to make a broader use of the PFI, in which case this section can provide assistance.

 

A horizontal or sectoral approach?

The PFI takes a horizontal approach when identifying the factors influencing the investment climate. In each of the ten policy areas, policies and practices are examined to determine their impact on total investment in the economy and also the potential for discrimination among investors or sectors. But it is also possible within the Framework to take a sectoral approach where impediments to investment in a particular sector are considered in isolation.

For example, a government might wish to analyse only impediments to investment in manufacturing or even in a particular industry. In this case, only the most relevant policy chapters might be chosen. If the concern is for investment in sectors which are most likely to generate exports, for example, the Trade chapter might be particularly useful.

The PFI can assist in such sectoral assessments, but there is a risk that a sectoral approach would not embody the core principles of the PFI. Most of the policies and practices under scrutiny in a PFI assessment affect not only the overall level of investment but also – directly or indirectly – its sectoral distribution. Focusing only on one sector will raise many of the same issues as in a horizontal review but might not capture the full discriminatory impact of policies and practices. The strength of the PFI is its horizontal approach.

 

One-off snapshot or ongoing review?

Uses of the PFI can be divided into two general categories: a one-off snapshot to identify, recommend and implement policy reform in key areas and an on-going review involving a regular, transparent process of public scrutiny of rules, regulations and policies that shape the investment climate.

A snapshot can be qualitative or quantitative. It requires less institutional capacity and commitment than an on-going review but also offers less benefit. Given resource constraints, potential PFI users might start with a snapshot which could then be repeated if necessary, to capture some of the ‘dynamic’ qualities of the review approach. The only difficulty with using a snapshot approach iteratively (to monitor and re-evaluate) is that it would be difficult to measure progress unless it was also quantitative.

The on-going review lends itself to a more quantitative approach to the PFI assessment which, in turn, facilitates an economy-wide analysis – the key to exposing costs and benefits, and winners and losers, from policy reform. Exposing these elements is important for building a constituency for, and improving the political feasibility of, reform. A quantitative assessment is also particularly effective for establishing an on-going process of evaluating, monitoring and re-evaluating policies affecting the investment climate. It also allows progress over time to be measured, thus improving accountability.

A quantitative approach can also be used for a peer review of policies affecting the investment climate. One such example is the review of South East Europe where the PFI has been modified to introduce benchmarks to compare and score policies against.

Potential PFI users do not necessarily need to make a formal and binding choice between the two types of PFI: a quantitative assessment naturally builds upon the foundations of a qualitative one. A qualitative assessment can also be repeated to develop some of the features of the on-going approach.

To date, the snapshot approach has been more common, most likely because of the flexibility it allows and fewer resources it requires. Since it is not prescriptive, it is only as good as the quality of the responses to the PFI questions. Users have to determine how to structure their response to the PFI questions, which is particularly important for establishing the depth and quality of analysis.

 

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