This online resource guides implementing the OECD Principles on Effective Public Investment Across Levels of Government. Gain a thorough understanding of the 12 Principles and compare indicators and best practices from diverse countries, regions, and municipalities. Evaluate your public investment capacity at the sub-national level, enabling policymakers to identify and prioritize areas for improvement.
In 2018, the OECD conducted a monitoring exercise to assess the implementation of the Recommendation in countries that have adhered to it. To date, 39 countries have complied with the Recommendation, including all OECD countries (36) and 3 non-OECD countries (i.e., Brazil, Colombia and Morocco).
A brochure was produced to provide a picture of the implementation of the Recommendation in adherent countries and compile a set of updated best practices implemented by countries.
Public investment choices should be linked to a development strategy based on an assessment of the potential opportunities for, and impediments to, growth in each region. Investment strategies should be results-oriented, realistic and well-informed, and forward-looking. The investment mix will inevitably vary among urban, rural or mixed regions to reflect the specificities and assets of different territories – and if they lead or lag in terms of growth.
Investments in both 'hard' and 'soft' infrastructure at the regional level are needed to maximise the potential for long-term growth. It is thus important to seek complementarities and reduce conflict among sectoral strategies. Such complementarities often need to be constructed and combined into integrated strategies.
Good data can support good decisions. Governments should encourage the production of data at the right territorial scale to inform investment strategies and produce evidence for decision-making.
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Effective public investment across levels of government requires substantial coordination to bridge a series of information, policy or fiscal gaps that may occur. Collaboration for public investment strategies across jurisdictions and levels of government is difficult, even in situations where the actors involved recognise the need for it. Transaction costs, competitive pressures, resource constraints, differing priorities and fears that the distribution of costs or benefits from cooperation will be one-sided, can all impede efforts to bring governments together.
The scale and positive (or negative) spillovers of public investment may require joint action, either to reduce the cost of the investment or to implement the complementary measures needed to make the most of that investment. While coordination on all aspects of public investment is not necessarily feasible, at a minimum, there is an aim to not opt for contradictory approaches across levels of government.
The scale and positive (or negative) spillovers of a public investment may require joint action, either to reduce the cost of the investment or to implement the complementary measures needed to make the most of that investment. While co-ordination on all aspects of public investment is not necessarily feasible, at a minimum, there is an aim to not opt for contradictory approaches across levels of government.
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There are many reasons why subnational horizontal co-ordination is essential to encourage investment. The small scale of public investment projects can result in lower returns on that public investment. The fragmentation may also result in an insufficient minimum scale for the investment to even be considered at all.
Subnational horizontal coordination helps increase efficiency thanks to economies of scale through joint investments. It is likely to be easier, for example, to encourage co-ordination around investments in basic infrastructure and service provision (e.g. water, sewage) and more difficult around “strategic” investments where sub-national governments might find themselves competing to secure public facilities, to attract intergovernmental grants, or to attract private investment and qualified persons.
There is some quantitative evidence that the benefits of public investment in neighbouring regions can be just as important, or more, than direct public investment in that region. For example, a rural region close to an urban region will strongly benefit from improved transportation infrastructure in the urban functional areas. In general, public investment externalities seem to be more relevant for regional growth than direct public investment in each region (Rodriguez Posé, 2012).
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A majority of OECD countries consider the lack of evidence for the choice of investment mix by sub-national governments to be a problem (OECD, 2013). Comprehensive, long-term assessments can help clarify goals and reveal information that can be used to refine investment selection. It is important for appraisals to be technically sound; identify social, environmental and economic impacts; and reveal which investment method is likely to yield the best value for money.
Policymakers should also consider policy and project complementarities, as well as alternatives to investment and the efficient use of existing investments to reach particular goals. Long-term operational and maintenance costs should be assessed from the early stage of the investment decision.
Integrating assessment of different types of risks and uncertainty associated with public investment (not only fiscal, such as contingent liabilities, but also financial, political, social and environmental risks), including longer-term impacts, is an important part of an appraisal.
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Public investment projects, especially if they concern large infrastructure projects, are often highly politicised and susceptible to being undermined by a lack of consensus building. Stakeholder consultation at different levels of government is of key importance to build consensus and ensure transparency as to how the project meets the needs of directly affected citizens and society at large. Public investment information, such as expenditure data, should be exposed to public scrutiny to promote transparency and accountability.
Public, private and civil society actors all have a stake in and a critical role to play in developing a vision and strategy for the economic future of a region or locality. All levels of government should involve stakeholders in priority-setting and needs assessment at early stages of the investment cycle, and feedback and evaluation at later stages. At a minimum, this involves identifying relevant stakeholders, designing sound consultation processes, communicating processes and results, and managing grievances.
Governments should also take steps to prevent 'capture' by special interest groups, such as seeking balance when incorporating stakeholder views, ensuring consultation processes are inclusive, open and transparent, and promoting transparency and integrity in lobbying.
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There are important and growing gaps in infrastructure development, in both developing and developed countries. To support a future global population of 9 billion people, the OECD has estimated the global infrastructure gap to be US$70 trillion by 2030, and that this gap will continue to grow. Neither governments nor multilateral development banks can finance large global infrastructure needs on their own, so greater private sector investment is needed (G20, 2014).
\ Governments should look to private actors, financing institutions and banks for more than just financing. Their involvement can strengthen the capacities of governments and bring expertise through better ex-ante assessment of projects, improved analysis of the market and credit risks, and identification of cost-effective projects.
Careful consideration of private engagement includes informed consideration of public-private partnerships at subnational levels of government in particular for small municipalities. Wrong financial decisions by sub-national governments to develop PPPs, for example, to hide bad financial health off-balance sheets, can have a significant financial impact over the longer term. PPPs should be treated soundly in the budget process, with proper accounting and disclosure of all costs, guarantees and other contingent liabilities.
To address the financing gap, new or innovative financing arrangements such as loans, bonds, specific investment funds, tax arrangements, or market-based mechanisms may be useful to finance infrastructures and green investments. Sub-national governments should use innovative financing instruments with an understanding of the capacities needed, as in some cases they could severely compromise local finances and cause risky dependence vis-à-vis financial markets.
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Sub-national governments are increasingly involved in complex tasks linked to public investment, such as supporting innovation, addressing challenges like climate change, or engaging in more complex financial instruments, which require new competencies and new more networking-type skills not previously held in many sub-national governments.
Large regions, particularly established ones with substantial autonomy and significant numbers of staff, can tap a diverse range of professional skills. The same is not necessarily true for small regions, municipalities, newly created regions, or sub-national governments where decentralisation has outpaced corresponding growth in administrative capacity. Such challenges can hit particularly hard rural areas. Attracting needed skills to the public sector is a challenge for many regions where salary scales are uncompetitive with the private sector. Local governments also compete with each other and central governments to attract talent.
This can be available through other governmental entities or outside of government through universities, technical consultants, and quasi-public agencies. This is particularly relevant for sophisticated projects, such as “mega-projects” or projects with network characteristics, technical requirements may extend beyond standard project appraisal skills and require specific types of expertise (e.g. engineering).
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Focusing on results includes, but is not limited to, investment strategies with well-defined policy goals, performance budgeting, well-designed tendering procedures and performance monitoring of procurement, technically sound project appraisals, effective investment monitoring systems and high-quality ex-post evaluation.
Monitoring the implementation progress of projects can be done in terms of inputs, activities, and outputs; and evaluation through intermediate and outcomes and their alignment with strategic goals. Outcomes of an investment may take three, five, or more years to be measurable, and thus the monitoring indicators need to be tracked years after the investment is made, and often beyond an election cycle. Indicator systems should balance comprehensiveness, usefulness and administrative burden.
Learning happens in a repeated game, but only if information produced in a first step is used in a subsequent one. The evaluation addresses the goals of investment, assessing if the intended outcomes were achieved and the role played by investment activities. Information that emerges from monitoring and evaluation systems should feed into decisions regarding investment in subsequent investment cycles.
To allow for some flexibility and reconsideration of initial priorities
to adjust to evolving priorities and context throughout the investment implementation.
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Choices regarding sub-national transfers, own revenues and borrowing should reflect good practice, fit a country’s institutional context and align with policy objectives. This may allow in certain cases for different fiscal arrangements across different territories (at least in a transitory manner) to better fit with the variety of local situations/capacities.
Higher levels of government should set enabling conditions for sub-national governments to be able to exploit their revenue-raising potential to finance investment, ensure financing for long-term operations and maintenance, and participate in co-financing arrangements.
Co-financing schemes should be more than a way for sub-national governments to secure funds. They can help to ensure the commitment of different actors to the success of a project and create collective ownership; to align investment priorities across levels of government; or incite sub-national authorities to engage in projects with positive spillover effects or to pool resources with neighbours.
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Proper costing and budgeting serve to prioritise and execute investment programmes effectively. Robust financial controls bolster accountability. Governments at all levels should therefore adopt good practices in favour of budgeting and financial accountability, as defined in the OECD Principles of Budgetary Governance, such as accurately costing public investment plans, reflecting them in budget strategies and allocation processes, fitting them into a medium-term budget framework and duly considering long-term operating and maintenance costs.
Such transparency applies to all levels of government. Budgeting transparency throughout the investment cycle provides visibility to investments, clarifies recurrent budgetary implications, and strengthens public accountability. Governments should make budgetary information regarding public investments publicly available to citizens and other stakeholders in a timely and user-friendly format. Transparency concerning local public enterprises, often recorded in separate budgets, is a critical element for a clear picture of sub-national finances.
Bad budgeting and financial practices at the sub-national level for investment can have a cascading effect on other sub-national governments and the national government. If sub-national governments accumulate unsustainable levels of debt, they may then require (and often obtain) implicit or explicit central bailouts to prevent a default.
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Procurement is critical for public investment, and at the same time, a governmental activity that is particularly vulnerable to waste, fraud and corruption. Corruption in public procurement can occur both at the national and sub-national levels. While decentralisation may narrow the scope for corruption as public officials might be more accountable to citizens, there can also be fewer obstacles to corruption at the subnational level due to weaker auditing functions or limited legal expertise or even greater closeness between public officials and business representatives.
In 2016, subnational governments accounted for almost 50% of public procurement in the OECD. However, subnational governments often lack procurement knowhow or specialised personnel. Problematic systems can compromise the integrity of the investment process, deter investors and compromise the achievement of policy objectives. Transparency throughout the procurement cycle, professionalisation of the procurement function, and clear accountability and control mechanisms are all required.
In addition, governments should use procurement to ensure effective public service delivery while pursuing strategic government objectives – not only value for money and integrity but also wider objectives such as greening public infrastructure, adapting to climate change, supporting innovation or SME development.
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Divergent, overlapping, contradictory or constantly changing regulations can impose costs, particularly for sub-national governments, reduce efficiency and deter investors. Regulatory coherence is of particular importance in network sectors, like power, telecommunications and water, owing to the greater degree of regulation to which such activities are typically subject. Even relatively basic public works projects may be impeded by a lack of regulatory clarity or coherence. The private sector may stay away, experience delays, or even abandon a project if there are issues in the regulatory framework or a problematic procurement process.
Sub-national capacity for regulatory quality is an integral aspect of effective public investment. Sub-national governments should be able to implement regulation from higher levels of government effectively, as well as to define and implement their strategy for regulatory management, including the assessment of regulatory impact and reforms needed. Special attention should be given to administrative simplification which could help involve private partners in public investment strategies.
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Sub-national governments were responsible for more than two thirds of total public investment in 2013 across the European Union. However, it is increasingly difficult for them to finance infrastructure projects in the current tight fiscal context. Given the huge infrastructure needs, it is important to have a better understanding of the challenges involved and to learn from good practices.
The OECD conducted a survey with the EU Committee of the Regions to better understand the challenges at stake. The questionnaire was organised around the key issues addressed in the OECD Recommendation on Effective Public Investment across Levels of Government adopted by the OECD in 2014 and endorsed by the Committee of the Regions.
The governance of public investment is complex because it is a shared responsibility across an increasing number of actors and levels of government. More than two-thirds of public investment is conducted at the sub-national government level in OECD countries, i.e. by states, regions, provinces, and municipalities.
Public investment figures
In 2012, OECD Member countries spent USD 1.17 trillion in direct public investment, representing 2.7% of OECD GDP. Looking across the OECD area, sub-national governments manage around 72% of direct public investment– with notable variation among countries. If well managed, public investment represents a potentially growth-enhancing form of public expenditure. However, poor investment choices and implementation not only waste limited public resources and erode public trust, but they may also hamper future growth opportunities.
The Principles on Effective Public Investment will help governments assess the strengths and weaknesses of their public investment capacity and set priorities for improvement. The Principles group 12 recommendations into 3 pillars representing systemic multi-level governance challenges for public investment.
For more information, please contact Isabelle Chatry (isabelle.chatry@oecd.org)
