SPB Newsfeed: Public Investments - The Importance of Planning and Integration in Budget Processes
Effective planning and implementation of public investments are important in ensuring a country’s social and economic development and its financial stability. In many transition countries budgeting for public investments is not yet fully integrated into the formal budget formulation processes. This results in decisions being taken on investments without due regard for long-term fiscal implications, including on borrowing and long-term maintenance costs. In an effort to understand good practices in managing public investments, we talked to Mr. Eivind Tandberg, a Municipality Director at the City of Oslo in Norway and former International Monetary Fund’s (IMF) Regional Public Financial Management Advisor for South East Europe (SEE).
Prior to joining the Municipality of Oslo and working as an IMF Advisor for SEE, Mr. Tandberg was a Deputy Division Chief in the Fiscal Affairs Department of the IMF for several years. He has provided technical assistance and strategic advice to more than 50 countries in different parts of the world, including many transition and emerging economies in Europe, Asia and Latin America. Before joining the IMF, Mr. Tandberg was Unit Chief in the World Bank and Deputy Director General in the Norwegian Ministry of Finance.
Mr. Tandberg lectured at the recent Capital Budgeting workshop and Urška Zrinski from the CEF talked to him during the event. The workshop was delivered as part of the European Union funded Strategic Planning and Budgeting project, managed by the CEF.
Mr. Tandberg, welcome back to the CEF after more than six years. Before leaving your post of IMF Advisor for South East Europe, you noted in one of your research papers that with the introduction of medium-term budgeting framework, countries in the region have formed an important basis for coordination of current and capital spending. You also mentioned that there was still a need for further strengthening of capacities in managing public investments. Talking to budget officials from the region at the workshop, to what extent would you say countries have overcome some of the challenges you identified at that time?
My impression is that there has been a lot of development over the last six to eight years. When I talked to the officials from the region at this workshop, it was quite striking that they now seem to be very aware of the issues and challenges. They have developed a better and a more mature understanding of the innovations in public financial management, such as medium-term budgeting, and program and performance budgeting. I know that at least some of the countries in South East Europe have put in place mechanisms for implementation of these innovations and aim to assure better integration of capital and current budgets.
Talking to the workshop participants, I got a feeling that many countries are still at what I would call a second stage. They have systems in place in a formal way but are still struggling with how to get them to work efficiently and how to actually benefit from them. It is quite common in reform processes that at the starting point you get the formal systems in place, but a lot of it is done on a ritualistic basis, and underneath people continue to do pretty much what they did in the past. But I think many of them have tried to take it further – we saw at the workshop the example of Albania – where they clearly have a number of mechanisms in place and they are working to get them working properly. So it will probably still take a few years before they have fully-fledged systems, yet there has been quite a bit of progress since I left the region.
The majority of CEF members are EU candidate and potential candidate countries. Do you think that the European Union is an important anchor in reforming public financial management systems in the region, including when it comes to strengthening the process of managing public investments?
There are different sources influencing reform processes in the region, and of course EU accession is a major driver for a number of things. Ten years back SEE countries were all struggling with utilizing and accessing various EU funding mechanisms. At the beginning they set up lots of parallel structures in order to handle EU funding. Obviously that is not a sustainable solution in the long run. They have started developing their national systems, so that these systems in combination with some specialized mechanisms for certification, reporting etc. for the different funding mechanisms largely meet the requirements of external financing sources.
In the IMF book “Public Financial Management and Its Emerging Architecture”, published last year, you co-authored a chapter on public investments. You point out there that what you call the old approach of dual capital vs. current budgeting has been abandoned in favor of a more integrated approach. And, although this first proved to be successful, it somehow ended up diminishing the strategic role of public investments. In your view, how can countries solve this dilemma and assure that public investments are well planned, fully integrated into the budget and effectively and efficiently executed?
This is partly related to my assessment of progress made in the region in managing public investments in the last six to eight years. When the countries abandoned dual budgeting, they also, to some degree, forgot the specific challenges related to capital budgeting. So they began treating it like any other spending item that was just put into the budget proposal at more or less last minute. The whole planning process and the need to put public investment projects into a preparatory pipeline was partly forgotten.
What we see now is that countries have been revamping their planning systems in a more modern way. In the past they designed separately their national development plans and often failed to connect them to the budgets, while these days countries have a much more focused planning processes for capital spending. This is especially true for large infrastructure projects which often combine capital and current budgets. So the planning processes these days are more linked to budgeting than in the past.
A key success element in managing public investments is that if you want to have a meaningful planning process in place, it has to be directly linked to the budget process and you have to plan it within a realistic resource envelope. If you prepare a plan which amounts to five times what you will actually be able to finance, it is of no value. Now I see that countries are moving forward in this respect, putting in place proper capital planning processes and focusing on quality at entry, with the aim that when the projects go into the budget decision making process they are well drafted and analyzed.
Even some OECD countries have troubles in planning public investments and ensuring that capital budget is well integrated into the formal budget process. So I guess it is no surprise that transition countries still face many challenges in both planning and executing public investments.
All these processes take a lot of time. In the IMF Working Paper that you mentioned at the beginning of our interview, I propose the distinction between basic and advanced budget reforms. I believe that countries in the region have had quite some success with basic reforms, sometimes taking ten, fifteen or twenty years. And now they are involved in what I call more advanced reforms, which might take another ten, fifteen or twenty years. Frontrunners will enjoy success with these reforms pretty soon, while others will still have to work on them for years. We know now that major reforms usually take a couple of decades to complete.
This is similar to OECD countries, as you mentioned. In Western Europe we began to address capital budget process issues at the beginning of the 1990s and it is only in recent years that we have really started to witness the results of this.
When abandoning dual budgeting, a lot of strategic thinking around capital spending disappeared and became more like a regular spending initiative. Obviously this is something which is improving in SEE, as we see in Albania’s case, but clearly there is more to do in order for these systems to be robust and used to the full extent. In ten years’ time, however, a lot of them will be in place.
So what exactly do countries in the SEE region still lack compared to the good practice in managing public investments?
The notion of gateways and the focus on discussions about whether you should start developing a project are not there yet. Similar can be said about the importance of the external assurance mechanism that should be in place throughout the process. When I talked to one workshop participant and asked him whether they do external quality assurance, he said that they have a committee which meets and discusses a project. I was surprised to hear that such a meeting only lasts around two hours. In our case quality assurance usually takes three to six months for a fairly standard project. So there is a completely different level of external scrutiny involved in the public investment process.
Countries in the region still largely focus on the last stage of the process where they submit a proposal for financing. This is far too late to do any changes in a meaningful way. Another thing is that countries tend to underestimate the resource requirements of proper planning.
At the start of your career, you worked as Deputy Director General in the Norwegian Ministry of Finance, and you now hold the position of Municipality Director at the City of Oslo in Norway. Having had the experience of working for a municipality, is there anything you would do differently in terms of managing a public investment program, if you were to be asked to work for a finance ministry again?
Obviously it has given me a much more in-depth perspective because it is very different to manage capital budget from the finance ministry than to actually be responsible for developing and proposing investment projects. However, the basics are the same – it really boils down to quality at entry, well-defined processes, and exploring all options.
If I were to take a finance position again, I would be even more focused on the importance of lifecycle costs. At the finance ministry we are very focused on what will happen over the next few years. But when you analyze and select public investment projects, especially large infrastructure projects, what really matters are lifecycle costs. I believe that in Oslo we have a good practice in place: we do not only think of investment funding but also of the operational costs of a project’s lifetime. This is something to be emulated all the way to the national level.
Second, I would put even more emphasis on external assurances because there are a lot of skewed incentives in the investment business. Typically project proponents have strong incentives to underestimate costs and overestimate benefits. Having been responsible for this myself, I see that those incentives are even stronger than expected. There are a number of steps and stakeholders involved in the process, whereas none of them have any incentive to make sure that costs are realistic and that benefits are carefully assessed. Everyone has strong incentives to exaggerate in this process.
Many countries with gateway processes underway make sure to have external review not just at the end of the process but also at the starting point and somewhere half-way. This is of utmost importance, as I see now.
The City of Oslo and the Norwegian Olympic and Paralympic Committee and Confederation of Sports are now bidding for Oslo to host the 2022 Winter Olympic Games. Can you share some of your experience in organizing a team to design such a project and the costs and sources of finance for such a big event?
The key success factor in Oslo was that we decided at the very start to do the bid very thoroughly: to deliver the best analyzed and drafted bid in the history of the Olympics. We wanted to follow all the different steps that we had set in the investment process. It was quite a challenge because at that time there were different political forces involved and most discussions focused on things like where one or another sports stadium should be located. We told the stakeholders that they could actually discuss such things in about one year after we would have completed the options analysis. What happened is that they got quite upset and could not see why that was necessary. But in the end I think everyone agreed that we did a very thorough job in looking at all the options and analyzing different elements relevant for this project, and that this was worth doing so.
Another important thing that we did was to assure sufficient resources right from the start. We set up a specialized agency to prepare the whole process. They only had a small team but fairly solid funding, so they could hire or retain consultants on a running basis. We also told politicians that if we want to do this project well, we would have to spend dozens of millions of euros just on planning the event, before we could submit a proposal to the national government. That was quite a shock for some of them because they thought we could just quickly put together something and submit the project proposal. But we said that if we were to win this bid, we would need to have top-quality project management from the beginning.
We said in the first year that we need twenty million euros for planning, which is way more than in any other type of regular investment process. That was sufficient to put together the first proposal for submission to the government. Now the work is continuing at the same level of quality, so by the time the International Olympic Committee will make its decision in the summer of 2015, we will probably have spent around 50 million euros on the preparation process.
How long is the total planning phase for the City of Oslo, before the International Olympic Committee will choose the host of the Winter Olympic Games 2022 next year?
We started at the end of 2011 by establishing a project group to do a pre-feasibility study. The group worked from January to June 2012. We then continued with the first feasibility assessment and in June 2012 we decided to go ahead with planning and set up the agency. So we put a lot of effort in proper planning and analysis. We have heard from the technical assessment group of the International Olympic Committee that our bid is one of the best they have ever seen in terms of technical efforts.
Perhaps I should also mention that in general the people of Oslo really want to organize the Olympics, while the rest of Norwegians feel that they have to pay for the event but will not benefit from it. Currently there is quite a lot of debate whether we should host the Olympic Games or not. Our national government has to decide by the end of 2014, whether they will give the necessary guarantees. So I am looking forward to seeing how that will work out.
You used to be based here at the CEF, working as the IMF Public Financial Management Advisor for South East Europe and also lecturing at CEF’s regional workshops. Looking back at your experience then and being back to the CEF now, how do you see the work of institutions such as ours with a mandate of serving as a knowledge hub in public financial management for the region?
The CEF does a number of very important things. Obviously, the most fundamental factor is that you provide all these courses for the region and you see a continuous flow of people coming here to be trained and share their experience. Clearly, the CEF has been a major catalyst for knowledge sharing and development in the region. During those three years that I spent here, I also noticed that many training participants returned to the CEF for new courses. Through my work in providing technical assistance to the countries, I got to know a lot of people working in the sector. They come from fairly small countries, which means that even a small institution, like the CEF is, can have a major impact on what happens in the countries and the whole region.
Another incredibly important thing for your training participants is that the CEF gives them a platform to meet each other. So the subsidiary value of the training events and other activities are the networks that the CEF helps create. SEE is probably one of the regions in the world where there is most contact across countries in the area of public financial management. In the Nordic countries there used to be quite a bit of that, but less these days. When I went to Bulgaria in the late 1990s, I asked them whether they had a lot of cooperation with Romania, which I thought would be natural, as they neighbor each other and are roughly at the same level of development. However, they looked very puzzled by the notion that they should be in contact with the neighboring country. Thus, the networking aspect of the CEF is very important.
Thirdly, the CEF in many ways also serves as an example of a professional organization. For various countries, particularly in the early days when things were still slightly disorganized, having an example of a well-functioning and professional institution has been inspiring and, as a result, they have set up their own training institutions.
I was coincidently in Slovenia when the CEF was being founded, and I remember that its name – Center of Excellence in Finance – sounded a bit strange to me. I was not sure what the purpose of such an institution should be, especially taking into consideration other similar institutions in Vienna and elsewhere. But the CEF very soon demonstrated its important role in the region, and I am glad that the IMF has been very supportive of the CEF since its beginning. It has been a very effective and cost-efficient way for the IMF to be involved in the countries in question. By having one resident advisor here, the IMF can effectively cover ten countries.
