Bridging the Efficiency Gap: Overcoming Investment Challenges in Low-Income Countries

The IMF study identifies key bottlenecks in public investment management that lead to substantial inefficiencies in low-income countries, with recommendations to strengthen project management, appraisal, procurement, funding availability, and project selection for better infrastructure outcomes. These targeted reforms could significantly improve investment returns, boost infrastructure quality, and enhance governance.

In the recent IMF working paper researchers Khaled Eltokhy, Nicoletta Feruglio, Kezhou Miao, Arturo Navarro, and Eivind Tandberg from the Fiscal Affairs Department of the IMF examine the critical barriers that hinder effective public investment management (PIM) in low-income developing countries (LIDCs). Public infrastructure, particularly in these nations, is a cornerstone for providing essential services, fostering economic growth, and achieving broader goals like climate resilience and sustainable development. However, the efficiency of public investment is often compromised by severe management challenges, leading to substantial wastage. The paper finds that LIDCs lose around 53% of their investment efficiency, implying that more than half of their resources devoted to public investment projects do not yield the expected outcomes. This loss often results in the creation of inefficient infrastructure, or "white elephant" projects, which are costly, fail to deliver benefits, and reflect poorly on public governance.

Identifying the Biggest Obstacles to Investment Efficiency

The researchers employ principal component analysis (PCA) alongside insights from over 80 Public Investment Management Assessments (PIMAs) conducted in various countries to identify specific PIM institutions that have the greatest influence on investment efficiency. These assessments cover both the institutional design (how projects are theoretically managed) and their effectiveness (how management practices are implemented in reality). The PIMA framework divides the PIM process into planning, allocation, and implementation phases, each consisting of several institutions that theoretically contribute to the smooth progression of public investment projects. Across all phases, the research identifies five primary PIM institutions with the strongest correlation to investment efficiency: project management, project appraisal, procurement, availability of funding, and project selection. These five elements consistently appear across various PCA models, indicating their universal importance in enhancing investment outcomes. The analysis underscores that LIDCs, on average, perform better in terms of institutional design than effectiveness, highlighting a gap between intended and actual implementation.

The Disconnect Between Policy and Practice

At the core of the inefficiencies observed is the fact that LIDCs struggle to translate policy frameworks into practice. While some LIDCs perform relatively well in project planning, they often falter in the allocation and implementation phases, where issues such as funding bottlenecks, poor procurement processes, and weak project oversight prevail. Project management and project appraisal are particularly vital, as they ensure that projects are initiated with accurate cost assessments, clear objectives, and appropriate timelines. Without these, projects frequently encounter unexpected delays and cost escalations, undermining their intended impact. Similarly, procurement, which plays a critical role in selecting contractors and acquiring necessary resources, often suffers from non-competitive practices or inadequate oversight in many LIDCs. These issues not only delay projects but can lead to corruption and substandard outcomes, eroding public trust and squandering funds meant for development.

Quantitative Validation of Key Institutions

The paper's quantitative findings further validate the significance of these institutions in enhancing investment efficiency. Regression analysis reveals that project management, appraisal, and procurement strongly predict investment outcomes, particularly in terms of physical infrastructure outputs and quality. Project selection, or the process of prioritizing projects based on their potential impact, also emerged as a crucial factor. When selection is poorly managed, projects with lesser strategic value often proceed at the expense of those that would better serve the population or align with developmental goals. Availability of funding, often a bottleneck due to fiscal constraints or unreliable budget forecasts, is another critical factor. In many LIDCs, capital budgets serve as a fiscal buffer, with funds often diverted or cut mid-project due to revenue shortfalls or unforeseen expenses. This unpredictability can force project delays, lead to cash shortages, and weaken the capacity to maintain consistent investment in necessary infrastructure.

Prioritizing Strategic Reforms for Effective Investment

While the research confirms that the highlighted institutions are critical, the PCA and regressions also identify other variables with potential relevance, albeit less universally impactful across all LIDCs. These include medium-term budgeting, maintenance funding, alternative infrastructure financing, and asset monitoring. For example, medium-term budgeting is essential for enabling governments to plan multi-year projects with a stable funding outlook, while maintenance funding ensures that infrastructure remains functional and valuable over time. However, the significance of these factors varies, suggesting that while some PIM improvements will benefit all LIDCs, others should be prioritized based on each country’s specific circumstances and institutional maturity. The authors caution that for some LIDCs, such as those with weaker fiscal capacity, maintenance funding or alternative infrastructure financing may require a tailored approach rather than broad reforms.

The findings indicate that strengthening these key institutions—project management, appraisal, procurement, funding availability, and selection—could unlock significant gains in investment efficiency, leading to improved infrastructure that aligns with developmental goals. Yet, building capacity in these areas requires specialized skills that are often lacking in LIDCs, particularly as capital project management differs considerably from managing regular government expenditures. Major infrastructure projects are complex, high-cost, and infrequent, meaning that countries have limited opportunities to build expertise through experience. Furthermore, infrastructure projects carry unique risks, such as fluctuating exchange rates and financing challenges, which add layers of complexity to budgeting and procurement processes.

Ultimately, the IMF researchers recommend prioritizing reforms in the five identified institutions, with a focus on long-term capacity building and realistic implementation goals. They also recognize the role of external stakeholders, including international development agencies and regional organizations, in supporting LIDCs as they work to close the efficiency gap in public investment. By addressing these institutional bottlenecks, LIDCs could achieve more substantial returns on public investments, improve governance, and deliver infrastructure that effectively serves their populations. This paper is an important call to action, highlighting that while political and economic constraints remain, strategic institutional improvements could significantly enhance the quality and efficiency of public investment in low-income settings.