Policy reforms leading to a better investment climate with better social and economic outcomes depend on the interplay of three elements:
The PFI can help in all three areas, with progress in one area feeding into the other two. In the first instance, the PFI questions and the Toolkit annotations provide guidance in assessing which policies and practices are most likely to create obstacles to domestic and foreign investment. This, in turn, helps to improve political feasibility, because a transparent and economy-wide assessment of policy options, through broad public consultations with all stakeholders about reform priorities, identifies what is in the national interest, exposes narrow vested interests and helps to build a constituency for reform.
Reform is also encouraged through the PFI by fostering the creation of groups within government, such as the competition authority or investment promotion agency or the taskforce implementing the review, that lobby in favour of improvements in the investment climate.
In addition, by diagnosing the factors impinging on the investment climate, the PFI helps identify where capacity constraints may exist so the aid community can respond.
But the PFI is more than a simple diagnostic tool; it also helps to develop administrative capacity through the process of undertaking PFI assessments itself and by serving as an information library for PFI users concerning international best practices in their respective areas of competence.