PEMPAL Budgeting Community of Practice

“Capital Budgeting in Ireland”

Tom Ferris Minsk, Belarus,

June 14-16, 2011

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Content of Presentation *

1. Background to Irish Economy 2. Capital Budgeting Procedures 3. Strategic Planning 4. Project Appraisal 5. Budget Process 6. Implementation 7. Monitoring and Evaluation, Audits 8. Some conclusions ------------------------------------------------------------------------------ * This Presentation is complemented by three short papers prepared by Tom Ferris

2

1. Background to Ireland (Ireland a Member State of EU since 1973)

Candidate

countries

IRELAND

EU 27 (2008)

3

Programme for Government : Fine Gael & Labour Parties, March 2011 “To deal with ...

unprecedented national emergency, our country needs an unprecedented level

of political resolve” www.taoiseach.gov.ie

4

Genesis of Ireland’s Economic crisis, 2007

• External: Global Financial Crisis impacted significantly on Ireland‟s small open economy

• Domestic: Construction „bubble‟ burst, following overreliance on construction sector

• Some policies failed to counter the crisis

-- Irish Government's pro-cyclical fiscal stance

- - Regulatory policies „too light‟

- - Membership of Eurozone ( fixed exchange

rate and monetary policy externally driven)

5

Consequences of crisis

• Domestic economy has contracted significantly

• Large Budget Deficits recorded

• Banking crisis unfolded

• Cut-back in Public Investment *

----------------all since 2007 * See article on Public Investment by Tom Ferris

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Highs/Lows in Real GDP

Sources: CSO, Department of Finance

Department of Finance real GDP forecasts

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

% c

han

ge

average 2011 - 2014 = 2¾% p.a.

7

Ireland’s Stability Programme*

• Stability Programme takes account of National Recovery Plan, Budget 2011, Programme for Government and the Joint EU/IMF Programme (“Bail-out“)

• Irish Government is committed to restoring sustainability to the public finances through the implementation of budgetary consolidation, by reducing the deficit below 3% of GDP Stability and Growth Pact threshold by end-2015

• For 2011, a consolidation package of €6 billion is being implemented, with significant reductions to both current and capital expenditure and a widening of the tax base. For 2012, a consolidation package of €3.6 billion is planned

• The ratio of General Government Debt to GDP is forecast to be 111% at the end of 2011; peaking at 118% at end-2013 and declining to 111% by end-2015

* Submitted to European Commission in April 2011 ( www.finance.gov.ie )

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Good Physical Infrastructure

Source: European Commission

Capital Investment as a % of GDP

0

1

2

3

4

5

6

2001 2002 2003 2004 2005 2006 2007 2008 2009

Ireland

Euro Area 16

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Capital Investment, € mn * see article on Public investment by Tom Ferris

Departments Year 2011 Total

2011/14

Agriculture, fisheries & Food 269 699

Communications, Energy & Natural Resources 139 469

Community, Equality & Gaeltacht (Irish) Affairs 86 298

Defence 12 50

Education & Skills 491 1879

Enterprise, Trade & Employment 508 2182

Environment, Heritage & Local Government 1002 3493

Finance & Office of Public Works 122 497

Foreign Affairs 4 19

Health & Children 399 1587

Justice 80 330

Social Protection 8 31

Tourism, Culture & Sport 96 361

Transport 1438 4843

TOTAL 4654 16354 10

2. Capital Budgeting Procedures

• Irish Government has collective responsibility for formulating overall budgetary policy

• Within this overall framework, the Government agrees annual aggregate levels of expenditure for Departments, which have to be submitted for approval to Parliament (i.e. the Dáil)

• Government also approves capital investment envelopes. Since 2004, public capital investment has been set out in five-year rolling multi-annual capital envelopes

• Ministers /Departments have extensive delegated sanction from Minister for Finance in relation to capital allocations, although specific approval of Minister for Finance or Government is required in some instances*

* Responsibility for management of overall Departmental expenditure including the management of the annual estimates process and general sanctioning powers in relation to expenditure will transfer to from the Minister for Finance to the Minister for Public Expenditure and Reform, under legislative proposals of May 2011

•

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Budgetary Reform • Ireland has a long-established budgetary framework which has

undergone a series of reforms in recent years to assist in making the budgetary process more transparent and effective

• Multi-year capital envelopes in 2004 and guidelines 2005/2007 • 2007 saw introduction of a Unified Budget, so that spending and

revenue decisions are announced together on Budget day • 2007 also saw the introduction of Annual Output Statements to

provide a link between performance and resource allocation • However, there are weaknesses in the traditional domestic

framework as it relates to multi-annual fiscal planning and management

• Reforms now being planned, with discussion document, “Reforming Ireland’s Budgetary Framework; a Discussion Document” (March 2011) -- and Comprehensive Review of all Expenditure now underway, for capital and current expenditure

http://www.finance.gov.ie/documents/guidelines/co2capapprais.pdf

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3. Strategic Planning • Irish Government has collective responsibility for planning.

It has established a Government Economic Management Council with the status of a Cabinet committee, and dealing with economic planning and budgetary matters, and with the economic recovery programme.

– Infrastructure Investment Priorities (July 2010)

- National Recovery Plan (November 2010)

- Joint EU/IMF Programme (November 2010)

- Budget 2011 (December 2010) and

- Programme for Government (March 2011) *

- Reforming Ireland’s Budgetary Framework; a Discussion Document” (March 2011)

* see article by Tom Ferris on Programme for Government)

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Capital Investment Review

• New Government has launched a comprehensive review of capital investment, in parallel with the comprehensive review of current expenditure

• This is to inform a new capital investment framework for the next number of years,

• It will focus on investment in infrastructure that will promote economic recovery and employment

• The review will take full account of Ireland‟s current economic and budgetary challenges and will address those infrastructure priorities most crucial to helping Ireland‟s economy return to a path of sustainable growth

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• Government Appraisal Guidelines provide for a four-stage “project cycle”*

• Appraisal and Planning stages may overlap in practice

• Mid-term evaluation part of the cycle

* See “Guidelines for the Appraisal and

Management of Capital Expenditure Proposals in the Public Sector” February 2005

www.finance.gov.ie

Appraisal

Implementation

Post-Project

Review

Planning/Approval

4. Project Appraisal

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Capital Appraisal Guidelines, 2005

Designed to be rigorous in their approach to management and evaluation of capital programmes and projects

Reflects best practice (updating the previous 1994 Guidelines)

Introduces greater proportionality into project assessment

Access on www.finance.gov.ie (having accessed this website, go “Policy Areas and Publications”, then go to “Guidelines” and then pick year “2005”)

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Key Issues in Guidelines

• Guidelines 2005 identify following steps

– Definition of project needs and objectives

– Options analysis

– Constraints

– Quantification of costs and benefits

– Analysis of options

• Appraisal techniques (Cost Benefit Analysis, Cost Effectiveness and Multi-criteria Analysis)

– Uncertainty, risk and sensitivity analysis

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Proposal for Expenditure

Undertake

preliminary appraisal

of life cycle of project

Proceed to

Detailed

Appraisal?

Abandon Proposal

Undertake detailed

Appraisal of life cycle of

project

Approve Proposal

In Principle?

Different Stages of

Appraisal/Evaluation

Go to Planning Stage

Abandon Proposal

NO

YES

NO

YES

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Capital Appraisal: Proportionality

• 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: do “Simple Assessment”

– €m 0.5 < €m 5: do “Single Appraisal”

– €m 5 < €m 30: do Multi-Criteria Analysis

– Over €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

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5. Budget Process

• National Recovery Plan, 2011-2014 , with fixed targets for tax and expenditure policy over 4-years, moves towards full medium-term budgetary planning and fiscal reform

-- including a reformed annual budget process, with draft

medium-term plans submitted with the annual Budget in December, and subject to a process of consultation before final plans are submitted to the EU each April; the subsequent Budget would then be framed on the basis of the medium-term plans

-- including an enhanced Medium Term Expenditure Framework

with multi-annual ceilings for expenditure in each area, to ensure that public expenditure is managed within fixed, sustainable limits and to guide planning and delivery of structural reforms

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Interesting innovations

• National Recovery Plan, 2011-2014 , plans some interesting innovations

• An independent Fiscal Advisory Council to provide an independent commentary on the Government’s budgetary plans and forecasts

• Introduction of “performance budgeting” to set out more clearly public service outputs and impacts of spending programmes in annual Estimates, and to show the totality of financial and staffing resources associated with each programme

• Fiscal Responsibility Law to put key reform measures on statutory basis and to put principle, of keeping public finances on a sustainable footing, into law

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Criteria for Prioritising

• Infrastructure Investment Priorities, 2010-2016 reassessed investment priorities in light of both changes in demand for infrastructure and affordability constraints given the very challenging fiscal position

• Major multi-annual investment programmes of Government Departments were evaluated against factors such as:-

-- the rationale for Government spending in each area;

-- progress in each sector in recent years in developing capacity

-- anticipated medium term demand for infrastructure given the contraction in aggregate economic activity; and

-- required outputs and outcomes over the medium-term

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6. Implementation

• IMPLEMENTATION requires clear arrangements for monitoring progress and cost control, securing project standards and timely delivery

• 2005 Capital Appraisal Guidelines require a clear distinction, between those “authorising” investment projects and those “delivering” projects, during the different stages - project appraisal, planning, implementation and project management

• Separation of functional responsibility

Sponsoring Agency (“authorising”) – primary responsibility for project appraisal and management

Sanctioning Authority (“delivering”)– approves sponsoring agency proposals at various stages

Note: Procurement reform is being supported centrally by the National

Public Procurement Policy Unit (NPPPU) in the Department of Finance through capacity-building and training and education measures, in tandem with incremental and suitable e-procurement measures

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E.U. Commission

Dept. Finance

(Top Managing Authority)

Managing Authorities

(Sectoral Ministries)

Implementing Bodies

(Grant Approving Bodies)

Final Recipients

Implementation (learning from EU)

Direction

•Guidelines

•Regulations

•Policy

Reports

•Evaluations

•Information on

Progress

•Reporting on

Expenditure

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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 set conditions

Department of Finance determines nature of responsibility delegated to Departments General conditions of Department of Finance

sanction have to be met Additional local/sectoral conditions, if any Requirements of capital appraisal guidelines –

responsibilities of sponsoring agency and sanctioning authority

PPP requirements, if any Appropriate balance between increased delegation

and effective and efficient management of public capital

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7. Monitoring, Implementation and Audit

• Ireland has developed an effective evaluation system to ensure that projects are monitored on their implementation

• National Development Plan (NDP) for 2007/2013 refers to “Robust monitoring and reporting arrangements…in relation to performance on implementation…”

• Controller & Auditor General provides independent assurance that public money is properly managed and spent to good effect

• Government Departments have to have audit committees which review Departments’ corporate governance regime including its internal control environment and risk management; as well as monitoring the work of the internal audit function

• Consultants are also engaged by Departments to do audit work

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Value for Money Initiative

• ‘Value for money’ initiative complements the ‘Capital

Appraisal Guidelines’ • A carefully considered appraisal system and culture takes into

account, as objectively as possible, the overall benefits and costs of a given project and seeks to make sure that budget estimates are met

• The Department of Finance Manual ( 7 March 2007) outlines a Government framework to secure improved value for money from public expenditure

• Departments have to undertake VfM studies under a programme agreed with the Department of Finance

Go to www.finance.gov.ie (once on website, go “Policy Areas and Publications”, then go to “Guidelines”, then pick year “2007”)

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Doing the “Back-check”

• Post Project Review to be completed by Sponsoring Agencies

– All Projects > €30m – Representative sample of at least 5% of all projects

• Annual Report on capital envelope programmes have to be

submitted to Central Expenditure Evaluation Unit, at the Department of Finance

• Performance table – project outcomes versus budgets – for all projects over €30m* – Included in Annual Report on Capital, and – Annual Report on Statement of Strategy

* See Note on Compliance Checks by Tom Ferris

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Spot Checks imperative

• Departments to ensure annual spot checks on a representative sample of all capital projects

• Report annually to Central Expenditure Evaluation Unit (CEEU), in Department of Finance, on spot checks carried out and on findings

• 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

• Guidelines in place that have to be adhered to*

* see Note on Compliance Checks by Tom Ferris

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Departments provide Annual Reports to the Department Finance

Delegated responsibility means increased accountability for line Departments and their agencies

By end January each year, Departments must Outline priorities for capital programme consistent with

capital envelope Provide statement showing consistency with Government

programmes For PPP projects give an estimate of the unitary

payments with breakdown between components Record total level of contractual commitment by year Provide progress report on projects and programmes

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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 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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Department of Transport Spot-checks, 2009

Department of Transport in its 2009 Annual Report reported the following in relation to spot-checks on capital projects

• Task: Carry out a rolling programme of project and programme audits to assess compliance with the relevant guidelines and efficient delivery of Transport 21 Projects and Programmes

• Outcome 2009: Consultants Steer Davies Gleave and Booz & Company were engaged by the Department of Transport in 2007 to review respectively (i) the appraisal and (ii) the financial and physical progress of selected Transport 21 projects. Six audits were conducted during 2009. The audits carried out relate to projects that have a total estimated capital cost of €1.931billion.

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Much done –more to do • Government is committed to sharpening focus on

performance at organisational level

• Existing process of resource allocation is heavily focused on financial inputs (‘how much money is being spent?’) rather than on outputs and impacts (‘what is being achieved and delivered with this money?’)

• While reforms, such as the introduction of Annual Output Statements, have improved the expenditure framework, there is much scope for further progress

• The introduction of a new system of ‘performance budgeting’ should bring a sharper focus on the actual outputs and outcomes delivered with scarce public resources

• We await independent Fiscal Advisory Council and Fiscal Responsibility Law

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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 between Department of Finance and Line Ministries

Central Coordination at “heart of process”

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8. Some Conclusions

Ireland has been developing an extensive experience in capital investment delivery during past 20 years, through:

1. Learning from EU processes

2. Developing its own systems, e.g. Central Evaluation Unit and External Evaluations, e.g. Economic & Social Research institute

3. 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 of projects “on-the-ground”

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Importance of Training • Specialised training is a very important requirement in the

successful appraisal, planning and delivery of public investment projects

• There is need to ensure that officials are properly trained in areas such as procurement, project management, project appraisal and policy analysis

• Important to develop networks for officials to share

experience and best practice, including on-going international liaison, e.g. World Bank and EU

• External professional advice should be obtained if Ministries have not got the relevant expertise – and it should be acquired on a “knowledge-transfer” basis

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Conditions for Growth

Department of Finance points out that Ireland’s national recovery requires not just the measures necessary to put the public finances in order, it also

• Identifies the areas of economic activity that be called-on to provide growth and employment in the next phase of Ireland’s economic development ,and

• specifies the reforms the Government will have to implement to accelerate growth in these key sectors........> see next slide

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Essential conditions

Anticipated outcomes

Policies for GrowthInfrastructure,

Human Capital

Credit

availability

Favourable

taxation

Sustainable

public

finances

1. Horizontal Measures

(a) Labour market reform

(b) Steps to reduce costs

(c) Public administration

improvements

2. Specific sectoral

initiatives

Employment

increases,

Unemployment

stabilises

Exports

recover

Consumption

improves

Employment gains,

Tax revenue

increases,

Unemployment falls

Thomas Jefferson (1743/1826)

“The price of freedom

is eternal vigilance”

In short, delivery of successful capital

investment depends on well-trained officials

focussed planning, efficient implementation,

effective monitoring and regular review of

processes/procedures

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Have I done my

Capital Budgeting?

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