How can public investment management (PIM) frameworks help governments in the GCC get more out of their investments?

Why is the efficiency of public investment management important?

Sound public investment management is about doing the right investments and implementing them the right way. It is about ensuring that there is a demonstrable need for investments, that investments align with national and sectoral strategies, that government entities coordinate with each other to maximise synergies and that risks are managed effectively.

Analysis by the International Monetary Fund (IMF) suggests that the average country loses about 30% of returns on its investments to inefficiencies in PIM processes. One example is when governments end up with an over-committed portfolio of public investments. This can happen when governments have ineffective “quality-at-entry” processes and poor multi-year portfolio planning, resulting in a lack of fiscal space for much-needed investments. Governments are then forced to resort to “drip funding”, where funds are thinly stretched across portfolios, which can result in under-financed, delayed and low-to-no-impact investments.

In the GCC, the following challenges are particularly relevant^[2]:

• Non-standardised processes for the appraisal of proposed investments

• Mismatched funding needs and budget allocations

• Limited inter-agency coordination

• Weak ex-post evaluations of investments

• Inadequate performance data and reporting

Combined, these challenges are holding back governments’ ability to optimise the allocation of public resources, and in some cases, have led to poorly performing or distressed investments.

One way of assessing public investment efficiency is to compare the quality of infrastructure (a major component of public investment spend) against capital stock per capita. GCC countries have a high level of capital stock per capita, and are in the top quartile globally on this measure. However, this isn’t necessarily translating into infrastructure quality that is commensurate with the amounts invested. Compared to other regions, the GCC has room to catch up with countries such as Singapore and the USA that score more highly on the Global Competitiveness Index’s infrastructure quality score. These countries are also closer to the “efficiency frontier”, which is the indicative highest level of attainable efficiency amongst the countries measured^[3], with relatively similar levels of capital stock per capita as the GCC.

Figure 1: How do GCC countries’ public investment infrastructure efficiency scores compare to other countries?*

Global Competitiveness Index (GCI) infrastructure pillar score^[4] (log-scale); Capital stock in USD; 2019^[5]

_{* Excludes data for Qatar}

Improving performance is key, given the scale of planned investments. Among the GCC countries, Saudi Arabia recorded the highest value of construction contracts awarded at USD 24.6bn in the first half of 2022, with UAE, Qatar, Kuwait, and Oman recording contract awards at USD 7.4bn, 4.0bn, 1.7bn, and 1.6bn respectively^[6]. It is important that GCC countries make sure that their public investment management policy frameworks are integrated, comprehensive and future-ready so that they can drive up their efficiency levels.

What are the benefits of a PIM framework for governments in the GCC?

If designed and implemented in the right way, a PIM framework can deliver significant positive impacts.  

We identify three benefits of a PIM framework: 

1. It can contribute to fiscal stability and the credibility of fiscal strategy: A PIM framework provides a link between the budget cycle and the strategic planning process, whereby the “quality at entry” of investments into budgets is improved and duplication is minimised. It helps increase the predictability of investment cost profiles, which is essential to building credible and feasible medium-term budget plans. It improves the quality of reporting, which helps governments identify and rectify poorly performing investments. A PIM framework can also help improve the findings from independent public financial management diagnostic studies. 
   
2. It can help support the economic diversification agenda: PIM frameworks can help governments diversify their economies, which is a strategic priority for most GCC countries. Economic diversification can be embedded as a required assessment dimension for building investment rationales, assessing different potential investment options, developing economic cases at the appraisal stage, prioritising planned investments and evaluating investments ex-post. It provides governments with the policy and procedural platform for integrating formal economic diversification criteria across the investment lifecycle.
   
3. It can help governments progress against their sustainability targets: PIM frameworks can support GCC governments in making progress against their national sustainable development targets^{[7] [8] [9]}. Governments can use PIM frameworks to integrate sustainability controls into the investment lifecycle. For example, spending entities can be required to meet sustainability criteria in the business case and independent review process. They can also be required to report on sustainability performance in the implementation and ex-post stages of the lifecycle. PIM frameworks provide a useful policy tool for GCC governments to help ensure that their investments are contributing to - and not hindering - progress against their national sustainability commitments.

Acknowledgements

James Walton is a Senior Manager in the Economics and Sustainability consulting practice at Pricewaterhouse Coopers (PwC) in the Middle East. James drives large-scale PFM reforms across the region, with a focus on public investment management policy.

The author would like to thank Zuhdi Hashweh, Sajeda Sajjad Ali Khwaja, Ali Ayyad, Essa Hamdan, Fahad Alkahtani, Faisal Soudi, Gerd Schwartz, Kenny Linn, Geoffrey Kebbell, Mahmoud Arafah, Abdullah Tamer, Richard Boxshall and Jing Teow for their contributions and support.