Managing Public Investment

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Managing Public Investment

• Overview of Irelands Experience of Public
  Investment Management with particular emphasis
  on Transport Projects

Tom FerrisPublic Investment Workshop Istanbul,
Turkey February 29, 2008
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Content of Presentation

• Background to Irish Economy
• Planning and Appraisal of Investment Projects
  (ex-ante)
• Budgeting for Public Investment
• Monitoring and Implementation
• Influence of Politics on Project Decisions
• On-going Capacity Building

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1. Background to Irish Economy

• Population 4.3 million (2007)
• Independence 1922
• EU member since 1973
• Real GDP growth 5.7 (2006)
• Unemployment 4.5 (2007)
• Exports 80 of GDP (2006)
• Imports 69 of GDP (2006)
• Exports and imports of goods and services

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Irelands Economic Transformation GDP per
capita, EU15100 PPP exchange rates
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Irelands Rapid Growthnot a Silver Bullet

• Policy-driven
• - embrace openness most important factor
• - industrial policyattract Foreign Direct Inv.
• - education policy1967/1996 (2nd/3rd free fees)
• - fiscal policyeventually
• - incomes policy
• Enabling factors
• US economy
• high technology boom
• elastic labour supply
• Role of the EU
• governance
• funding------
• See Reference 2 Honohan/Walsh

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EU Membership very important for Ireland

• Market access
• - greater trading opportunities
• - trade diversification
• - reduced dependence on UK economy
• Completion of Single Market
• EMU and Euro
• EU structural reform agenda
• Access to EU funding

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2. Planning and Appraisal of Investment Projects

• Investment focus of 1980s/early1990s was on human
  capital, skills and education
• Little infrastructure investment in 1980s and
  early 1990s (and rapid economic growth in 2000s),
  put serious pressure on infrastructure
• Need to build-up technical, financial and
  managerial capacity to cope with growth
• EU funds provided capital. Under EU regulations,
  a better planning and evaluation culture and
  capacity was introduced in Ireland
• Some project problems erroneous initial
  estimates construction cost inflation design
  changes and project management weaknesses
• See ESRI Reports (Reference 1 and Reference 4)

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Overview of Planning Cycle

• Capital Appraisal Guidelines provide for a
  4-stage project cycle
• Appraisal and planning stages may overlap in
  practice (and also involve mid-term evaluation)

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Evaluation Cycle involving

• Cycle built around EU requirements
• Ex-ante evaluation
• Interim evaluation
• Mid-term evaluation
• Ex-post evaluation
• ---Economic Social Research Institute (ESRI)
  used to do Ex-ante Evaluations and Mid-term
  Evaluations for each 5-year National Development
  Plan (linked-to EU cycles)
• ---Most Operational Programmes had an ongoing
  evaluator presence (either an independent
  internal evaluation unit or an external
  evaluator)

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Basic Questions developedfor Project Evaluation

• Rationale
• Is there a market failure?
• Continued relevance
• What are the implications of external
  developments?
• Effectiveness
• Are we meeting our objectives?
• Efficiency
• Are benefits commensurate with costs?
• Could it be delivered more economically?
• Impact
• What difference, if any, has it made?
• Overall question Do we get value for money?

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Central Evaluation Unit set-up

• Main problem
• No common understanding of purpose or focus of
  evaluation
• Independent Evaluation Unit under Finance
  Ministry, set-up in 1996, to
• Assist Ministries with performance indicators
• Responsible for interim evaluation of plans
• Advisory role on wider evaluation issues
• Advisory/standard-setting role re Cost Benefit
  Analysis
• Promoting best practice in evaluation and
  appraisal, e.g. Working Rules on Cost-Benefit
  Analysis, June 1999

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Learning from EU-driven Management/Implementation
Process
E.U. Commission
CSF Managing Authority/ Dept of Finance
Guidelines Regulations Policy
Reports Information on
Progress Reporting on Expenditure
Operational Programme Managing Authorities
Implementing Bodies (Grant Approving Bodies)
Final Recipients
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Capital Appraisal Guidelines

• Designed to be rigorous in their approach to
  management and evaluation of capital programmes
  and projects
• Reflect best practice
• Introduce greater proportionality into project
  assessment.

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New Capital Appraisal Guidelines

• Guidelines 2005 do Ex-Ante Appraisal of all
  Capital Projects
• Proportionate to the value of the projects
• Guidelines 2005 specify following thresholds
• m 0.5
• m 5
• 30 million do Cost-Benefit Analysis
• Above take account of revisions announced in
  Department of Finance letter of Jan. 2006
• Sponsoring Agency responsible for Appraisal
  (using in-house or bought-in expertise)
• Pre-requisite to get approval from the
  Sanctioning Authority
• See Reference 5 Department of Finances
  Circulars of February 2006 and of January 2006

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Key Issues in Appraisal

• Guidelines 2005 identify following steps
• Definition of project needs and objectives
• Options analysis
• Constraints
• Quantification of costs
• Analysis of options
• Appraisal techniques (Cost Benefit Analysis, Cost
  Effectiveness and Multi-criteria Analysis)
• Uncertainty, risk and sensitivity analysis

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Clear-cut responsibilities

• Clear distinction has to be made between those
  authorising investment projects and those
  delivering
• 2005 Capital Appraisal Guidelines require this
  distinction to be made,within project appraisal,
  planning, implementation and project management
• Sponsoring Agency primary responsibility for
  project appraisal and management (Page 10)
• Sanctioning Authority approves sponsoring
  agency proposals at various stages (Page 11)
• Separation of functional responsibility

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Sanctioning Authorities responsibilities...

• Approving in principle the capital projects to
  be funded with public assistance
• Reviewing conditions under which a project may
  proceed through stages of development to
  ultimately becoming fully operational
• Paying the public assistance to the Sponsoring
  Agency and ensuring the projects delivery as
  approved

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Sponsoring Agencies responsibilities..

• State Bodies, who plan and manage projects, have
  the responsibility of quantifying financial
  costs, and specifying funding sources
• Cost quantification is required to cover ongoing
  capital and life cycle costs relating to the
  operation/maintenance of projects, and receipts
  generated by use of capital assets, as well as
  the costs involved in their creation
• Costs of projects are required to be expected
  outturn cost, including construction costs,
  property acquisition, risk and contingency (and
  include the cost of possible future price
  increases and variations in project outputs)

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Sponsoring Agencies do what Transport Projects?

• National Road Projects are done under the
  supervision of the National Roads Authority
  (NRA). The Department of Transport channels funds
  for national roads through the NRA which
  allocates them to the relevant local authorities
•  
• Light Rail Projects in Dublin are undertaken by
  the Railway Procurement Agency (RPA). The RPA is
  responsible for the procurement of light rail
  (LUAS) and metro
•  
• National Rail Projects are undertaken by Irish
  Rail, the operator of the Irish rail network and
  the sole provider of passenger rail services in
  Ireland

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Risk and Uncertainty

• We live in an uncertain world
• Risks should be clearer through project cycle
• Analyse risks and probability of occurrence
• Use experience with comparable projects
• Include some estimates for risks
• Reduce optimism bias with adjustments
• Adjust cost assumptions up
• Adjust benefit assumptions down
• Tackle uncertainties with use of sensitivity
  analysis

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3. Strategic Planning and Budgeting

• In the past, Ireland planned investment on an
  annual budgetary basis
• Annual planning meant a stop-go approach to
  public investment
• During the past twenty years, planning for
  investment has moved onto a medium-term footing

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Move away from Annual Investment Planning

• Specifically, Irish Government has moved from
  annual budgets to rolling investment programmes
  or financial envelopes
• Rolling 5-year multi-annual envelopes are now in
  place for all investment areas
• For TRANSPORT, the Irish Government decided in
  November 2005 to go further and to provide for a
  ten-year multi-annual envelope - called Transport
  21 - to tackle transport infrastructure deficit
• see Reference 13 Ferris

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Medium-term Budgeting means..

• Medium-term envelopes put overall limits on the
  amount of investment that can take place
  annually.
• Carry-over facility allows under-investment to be
  carried forward, under certain limits set-by the
  Department of Finance
• Line Departments having to meet certain
  conditions, e.g. each required to make a
  contingency provision within overall envelope to
  meet any unforeseen demands/additional costs
• In providing for projects, Departments must plan
  not just for contract price, but provision for
  likely price increases, variations in
  specifications and other factors which might
  arise during project construction

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Rolling 5 year multi annual capital envelopes
conditions

• Vote Section (Dept. Finance) determines nature of
  responsibility delegated to Department
• General conditions of Department of Finance
  sanction
• Additional local/sectoral conditions, if any
• Requirements of capital appraisal guidelines
  responsibilities of sponsoring agency and
  sanctioning authority
• PPP requirements
• Appropriate balance between increased delegation
  and effective and efficient management of public
  capital

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Conditions involve....

• General conditions of Department of Finance
  sanction to spend under the envelopes
  requirements on Departments/Agencies
• Contractual arrangements for grants of public
  funding to private companies and individuals or
  community groups to safeguard the States
  interest in the asset
• Provision for programme and project contingencies
  to meet any unforeseen demands or additional
  costs
• Comply with D/Finance capital appraisal
  guidelines, and carry out spot checks of projects
  for compliance and report findings to D/Finance
• Comply with PPP guidelines, public procurement
  and tax clearance requirements
• Report to their Management Boards regularly on
  evaluation of capital projects and progress on
  capital programmes and projects
• Report to D/Finance annually

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Medium-term Transport Investment Programmes (with
EU Funding)

• Peripherality Operational Programme, 1989/93
• Transport Operational Programme, 1994/99
• Economic and Social Infrastructure Operational
  Programme, 2000/06
• TRANSPORT 21 (2006-2015) within National
  Development Plan, 2007-2013
• (with minimum EU funds see Reference 7
  Transport 21)
• These Transport Programmes have been part of
  overall National Development Plans covering the
  same periods

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Transport 21 10 Year 34.4 bn. Investment
Programme

• National Strategy
• To develop a high quality national roads and
  public transport network and improve regional
  public transport
• Greater Dublin Area Strategy
• To transform the transport system in the Greater
  Dublin Area
• Reference 7 Transport 21 (1 November 2005)

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Minister for Finance on Transport Investment

• The launch of this ten year capital investment
  framework represents a massive and necessary
  commitment of resourcesinvolves investment of
  over 34 billion in current prices in .2006 to
  2015. All projectswill be appraised and
  implemented in line with my Departments Capital
  Appraisal Guidelines and the additional Value for
  Money initiativesThere will be intensive system
  of monitoring put in place and much enhanced
  project management skills in the agencies
  providereassurance that Value for Money will be
  provided
• see Reference 6
  Minister for Finance

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4. Monitoring and Implementation

• Ireland has developed an effective evaluation
  system to ensure that projects are monitored on
  their implementation
• National Development Plan (NDP) for 2007/2013
  states Robust monitoring and reporting
  arrangementsin relation to performance on
  implementationThis will include reporting on NDP
  outputs and impacts and will incorporate the
  preparation of an Annual Report on NDP progress
  which will be submitted to the Oireachtas
  Parliament. A Monitoring Committee, including
  regional and social partner representation, will
  be established to monitor Plan implementation.se
  e Reference 10 NDP

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Procurement at Appraisal Stage of Projects

• At appraisal stage a decision on form of
  procurement traditional or PPP
• Project manager for all projects above 30
  million with individual responsibility for
• Managing project
• Monitoring progress against contract
• Reporting progress to Project Board

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Governments Value for money/effectiveness
framework

• Reforms to public procurement including roll out
  of PPPs
• Value for money measures in relation to capital
  appraisal, public procurement, ICT projects and
  consultancies announced by the Government on 11
  October 2005 and the Minister for Finance on 20th
  October, 2005
• Planned improvements to the operation of the
  expenditure review initiative
• Government reform of the Estimates and Budgetary
  process announced in Budget 2006

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Conditions for successful project implementation

• Clear understanding of rules and regulations
• Systems in place to communicate rules
• Systems in place to ensure compliance with rules
  and regulations
• Need to pay particular attention to eligibility
  rules in certification of expenditure
• Good working relationship with European
  Commission Desk Officers
• Central Coordination at heart of process

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Management by Project

• Appointment of an individual within the
  organisation as Project Manager for each capital
  project
• Vigorous Competition for Public Sector Contracts
• Fixed Price Construction Contracts
• Formal Contracts Review
• Monitor to ensure project objectives, performance
  criteria and milestones are achieved
• Regular Progress Reports to Project Board
• Projects 30m, separate quarterly progress
  reports for each project to Management Board and
  Minister
• see Reference 9 Department of Finance Circular
  (27 October 2006)

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Drive for Compliance

• Need to ensure compliance with all the rules and
  regulations
• A new Central Expenditure Evaluation Unit (CEEU),
  at Finance Ministry, recently given important
  oversight role
• CEEUs overall objective is to inculcate best
  practice in the appraisal and the management of
  projects and programmes by those delivering
  investment
• CEEUs Unit to carry out spot checks at project
  level to verify compliance with the various rules

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EU-driven Financial Controls in Ireland
E.U. Commission
Paying Authority Dept. of Finance
Certificates of Expenditure

• ERDF and Cohesion
• Control Fund Unit
• Control Checks
• System Audit Checks
• Annual Reports of
• Checks
• Programme
• Closure Declarations

O.P. Managing Authority
Intermediate Bodies
Grant Approving Bodies
Final Recipients
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Doing the Back-check

• Post Project Review to be completed by Sponsoring
  Agency
• All Projects 30m
• Representative sample of at least 5 of all
  projects
• Annual Report on capital envelope programmes to
  Department of Finance
• Performance table project outcomes vs. budgets
  for all projects over 30m
• Included in Annual Report on Capital, and
• Annual Report on Statement of Strategy
• See
  Reference 11 Ferris

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Monitoring Transport Projects

• Department of Transport reviews projects
  progress on a monthly basis with its Sponsoring
  Agencies and results are used to update financial
  allocations on a regular basis.
• Funds are transferred between sectors where it
  can facilitate an acceleration of projects or
  where progress is slower than anticipated
• Transport 21 Monitoring Group assisted by
  professional companies engaged to carry out
  audits of compliance with Guidelines and audits
  of progress in project implementation
• Projects selected for audit by the Monitoring
  Group, and auditors submit a detailed report of
  all audits carried out, setting out their
  findings and making recommendations, where needed

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Budget Over-runs world-wide experience of
transport projects
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5. Influence of Politics on Project Decisions

• Ireland is a parliamentary democracy, with each
  coalition government lasting about five-years
• Each new coalition government sets its Five Year
  Programme at start of period of government
• Such Five Year Programmes include overall
  commitments for planned investments
• Such commitments are in the public arena for
  checking
• Naturally, there may be potential to front-load
  or back-load projects within Plans (but now all
  Capital Projects have to go through the new
  Ex-Ante Appraisal process)

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Extracts from An Agreed Programme for
Government, FIANNA FAIL, GREEN PARTY and
PROGRESSIVE DEMOCRATS, June 2007

• Overall, to implement a programme under
  Transport 21 of investment and service
  development which will
•  
•         Cut travelling times
•         Improve safety
•         Deliver real commuting choice
•         Reduce congestion
•         Protect the environment
•  
• .committed to the implementation of Transport
  21 on time and on budget.
•  
•  ..Public Transport, recognising the importance
  of long-term planning in public transport
  investment, the Government will, in 2011,
  commence preparation of a successor to the
  2006-2015 Transport 21 programme
• .Dublin Transport AuthorityIntegrated Public
  Transport SystemRoadsRoad Safety
• 
  -- see Reference 13 Ferris

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Control on Expenditure

• Government has collective responsibility for
  formulating overall budgetary policy
• Government agrees annual aggregate levels of
  expenditure for the different Ministries, within
  this overall framework
• Expenditure is required to be submitted for
  Parliamentary approval
• Government also approves capital investment
  envelopes, while Ministers have delegated
  sanction from the Minister for Finance (but
  subject to certain checks)

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Spot Checks imperative

• Departments to ensure annual spot checks on a
  representative sample of all capital projects
• Report annually to Department of Finance on spot
  checks carried out and on findings
• Guidelines in place that have to be adhered to
• see Reference 12 Department of Finance
  Compliance Circular, 15 May 2007

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Checking-up on Spot Checks

• CEEU to review Departments spot checks reports
  and report back on conclusions/findings
• CEEU may carry out its own spot checks
• To verify the quality and systems in place in
  Departments and Agencies for spot checking, or
• On an ad hoc basis in respect of specific
  programmes/projects
• Project Progress Reports and Contract Reviews may
  also be subject to spot-checking by the CEEU
• CEEU Central Expenditure Evaluation Unit _at_
  Department of Finance

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Departments provide Annual Report to Department
Finance

• Delegated responsibility means increased
  accountability for line Departments and their
  agencies
• By end January each year
• Outline priorities for capital programme
  consistent with capital envelope
• Provide statement showing consistency with
  National Development Plan, National Spatial
  Strategy, Government programmes
• For PPP projects an estimate of the unitary
  payments with breakdown between components
• Total level of contractual commitment by year
• Progress report on projects and programmes

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6. Capacity Building

• In 1990, little prior tradition of formal
  evaluation of public expenditure programmes in
  the Irish public administrative system
• Ireland learned quickly to develop an extensive
  experience with the evaluation of EU structural
  fund programmes during three successive
  programming rounds (1989/93 1994/99 2000/2006)
• Ireland is consolidating evaluation experience
  with current National Development Plan
  (2007/2013)
• see Reference 3 Hegarty

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Specific Steps taken

• Ireland has been developing an extensive
  experience during past 20 years, through
• Learning from EU processes
• Developing its own systems, e.g. Central
  Evaluation Unit and Evaluations, e.g. ESRI
• Putting in place Guidelines
• --Working Rules on Cost-Benefit Analysis, June
  1999,
• -- Capital Appraisal Guidelines, February 2005
• While the foregoing are necessary, they are not
  sufficient there has to be effective and
  efficient delivery on-the-ground

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Importance of Training

• Specialised training is being provided in the
  public sector
• Ensures that officials are properly trained in
  areas such as procurement, project management,
  project appraisal and policy analysis
• Professional courses and training are provided on
  three fronts
• Civil Service Training Development Centres
  Courses
• Masters in Policy Analysis
• Higher Diploma in Policy Analysis

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7- Some Key Lessons

• A well-organised and adequately resourced
  evaluation system, underpinned by appropriate
  structures and a clear sense of purpose or focus,
  is the key to maximising the benefits of
  investment
• Evaluations carried out at right time by
  experienced and detached evaluators, with a focus
  on appropriate questions and support of key
  stakeholders, can make a difference
• Important to develop networks for officials to
  share experience and best practice, including
  on-going EU liaison

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Keep up the Momentum !

• In 2006, ESRI called for the quality of project
  appraisal to be enhanced, by having Cost-Benefit
  Analysis (CBA) of projects conducted rigorously
  and independently of project promoters, and
  having central commissioning of CBAs and the
  exercise of quality control on studies delegated
  to Departments and agencies
• In 2008, Ferris called for the early
  establishment of fully operational Dublin
  Transport Authority to allow for much greater
  co-ordination in the planning of transport
  investment in Dublin, and the delivery of a
  supporting detailed traffic management plan for
  the GDA
• See Reference 8 (ESRI) and Reference 14
  (Ferris)

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Thomas Jefferson (1743/1826)

• The price of freedom
• is eternal vigilance
• ? the delivery of successful
• projects depends on focussed
• planning, efficient implementation
• and effective monitoring

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• Questions?