Presentation on "Effective public investment at subnational level in times of fiscal constraints" made at the Workshop on Ex-Ante Conditionalities in Cohesion Policies held on 29 November 2016, by Dorothée Allain-Dupré, Senior Project Manager, Public Investment and Multi-level Governance, Regional Development Policy Division, OECD. More information: www.oecd.org/regional/regional-policy/multi-levelgovernance.htm

1. Effective public investment at
subnational level in times of
fiscal constraints
Dorothée Allain-Dupré
Senior Policy Analyst
OECD
29/11/2016 Presentation for the Committee on Regional Development 1

2. Outline of the Presentation
1. More effective public investment: the
governance levers
2. The use of conditionalities as one
example of instrument to enhance
effectiveness of funding
Presentation for the Committee on Regional Development 2

3. The context
Prolonged decline in sub-national public investment in the OECD
3
Source: OECD national accounts
Trends in public and private investment in OECD countries since 1995
-15%
-10%
-5%
0%
5%
10%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
% change private investment (GFCF) % change public investment (GFCF)
Presentation for the Committee on Regional Development

4. • OECD & IMF: the effect of public investment on growth is sizeable
• The effect of public investment depends on circumstances. It is the
highest in fields that are associated with large externalities, such as
research and development or health. (OECD, 2016).
• Good governance of public investment is directly to PI impact. Sound
institutional and governance frameworks enhance the efficiency of public
investment
 Critical framework conditions at the national level
 Subnational governance often under-estimated – but critically important
 Policy complementarities across investment priorities are critical  require
governance tools to manage them
4
Effective Public Investment:
Some key messages
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5. Subnational governments are key actors for public
investment in OECD countries
5
Source: OECD national accounts
Share of public investment at subnational level (2014 data)
60% 59% 56% 55%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Subnational government Central government and social security
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6. 6
Public investment at the sub-national level used as an adjustment variable (Base 100 = 2005)
EU sub-
national
The context: prolonged decline in sub-national public
investment in the OECD
The decline is particularly marked in the EU at the sub-national level
90
95
100
105
110
115
120
2006 2007 2008 2009 2010 2011 2012 2013 2014
Intermediary consumption Staff expenditures
Social expenditure Investment
Total public expenditures PIB

7. OECD-CoR survey results
Governance challenges appear prominent for SNGs
7
19%
21%
25%
24%
25%
25%
24%
26%
32%
35%
34%
36%
33%
33%
37%
42%
50%
53%
34%
35%
40%
42%
40%
42%
45%
44%
40%
40%
42%
41%
45%
46%
41%
42%
36%
37%
No relevant up-to-date data available at local level
Lack of adequate own expertise to design projects
Lack of long-term/strategic planning capacity
Ex-ante analyses/appraisals not consistently used in decision making
Insufficient involvement of civil society in the choice of projects
Monitoring not used as a tool for planning and decision making
Ex-ante analyses not adequately take into account the full life-cycle of…
Lack of (ex-post) impact evaluations
Multiple contact points (absence of a one-stop shop)
Lack of joint investment strategy with neighbouring SNGs
Lack of incentive to cooperate across jurisdictions
Lack of political will to work across different levels of government
Lack of coordination across sectors
Co-financing requirements for central government/EU are too high
Lack of long-term strategy at central level
Local needs are different from those given priority at central level
Lenghty procurement procedures
Excessive administrative procedures and red tape
Major challenge Somewhat of a challenge

8. Learning from good practices
Policies for more effective public investment across levels
of government:
Subnational governments should:
 Improve medium-term planning for infrastructure investment
 Multi-year
 Linked with budget
 Credible enforcement mechanisms
 Adopt investment strategies that cross existing jurisdictional boundaries
 Mutualise functions [Procurement, capital funding to have access to finance]
National governments should:
 Adopt national strategies for infrastructure investment which help guide the strategic
priorities for the country – beyond policy silos
 Develop some platforms of coordination with SNGs/instruments to foster joint
investment/co-financing with SNGs
 Provide incentives for SNGs to cooperate on infrastructure development
 Clarify the allocation of competencies in the field of infrastructure
Presentation for the Committee on Regional Development

9. • Invest using an integrated strategy tailored to different places
• Adopt effective co-ordination instruments across levels of government
• Co-ordinate across SNGs to invest at the relevant scale
Pillar 1
Co-ordinate across
governments and policy
areas
• Assess upfront long term impacts and risks
• Encourage stakeholder involvement throughout investment cycle
• Mobilise private actors and financing institutions
• Reinforce the expertise of public officials & institutions
• Focus on results and promote learning
Pillar 2
Strengthen capacities
and promote policy
learning across levels of
government
• Develop a fiscal framework adapted to the objectives pursued
• Require sound, transparent financial management
• Promote transparency and strategic use of procurement
• Strive for quality and consistency in regulatory systems across levels of
government
Pillar 3
Ensure sound framework
conditions at all levels of
government
OECD instrument on MLG
Systemic approach on multi-level governance of public
investment
OECD Council Recommendation on Effective Public Investment
across Levels of Government:

10. 1
0
Implementation Toolkit –
http://www.oecd.org/effective-public-investment-toolkit/

11. 2. The use of conditionalities as one
example of instrument to enhance
effectiveness of funding
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12. • Ex-ante conditionalities: conditions which must be fulfilled before
any contractual arrangement is agreed to.
• Ex-post conditionalities occur once a contractual relation is
established. With ex-post conditionality, funds are frequently
dispersed in tranches, which are not released if conditions are not
met (or if waivers for unmet conditions are not provided
12
A broad concept: an element of any financial
transfer that is not pure gift
Presentation for the Committee on Regional Development

13. Experience from IMF & World Bank: some lessons
• Until the early 1980s, IMF conditionality largely focused on macroeconomic policies.
• Significant increase in the use of conditionalities in the 1980s/1990s
• Traditional IFI conditionalities are frequently criticised as ineffective, particularly with
respect to promoting economic growth and social welfare
• Assessments of the efficacy of IMF and World Bank conditionality = where too many
detailed conditions apply, programmes become unwieldy, conflictive, time-consuming to
negotiate and administer, and ineffectual
Changes since the late 2000s:
• Objective of reduction in the number of conditionalities applied – principle of
“appropriation” promoted
• More flexibility from the IMF in the way it engages with countries on issues related to
structural reform of their economies.
• Conditionalities better tailored to individual country needs, more streamlined, less rigid,
greater flexibly to changing economic circumstances
• Greater focus on governance and institutional criteria, environmental and social issues
• Greater focus of the WB on ex-post conditionalities
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14. 14
Most OECD countries use some forms of conditionalities
for grants to subnational governments
0 2 4 6 8 10 12 14
Private sector involved in design of PI strategy
Private sector involved in financing PI strategy
Minimum involvment of other municipalities
Use of economic evaluation
Implementation of reforms/legislations/regulations
Additionality
Use of environmental assesment
Earmarking to specific priorities
Timeframe
Reporting
Matching
Examples of conditionalities used for public investment grants to subnational
governments (sample: 20 countries)

15. Some general lessons from international
experience:
 Conditionalities alone are rarely sufficient to achieve lasting change
 Conditionalities must not be overly prescriptive, given the need for
bottom-up input
 They must also be accompanied by “strong domestic leadership and
political support
 They should be evidence-based and be observable, allowing in
process and ex post verification.
 Credibility is key (enforcement mechanisms, capacity to monitor the
implementation).
 Rewards more likely to work than pure sanctions
15Presentation for the Committee on Regional Development

16. Thank you!
Dorothee.allain-dupre@oecd.org
http://www.oecd.org/effective-public-
investment-toolkit/
16Presentation for the Committee on Regional Development