In a recent post on our blog, we raised a number of issues relating to the management of public infrastructure in the city Tbilisi. They noted that the consequences of poor management practices in the past were very visible. Some of these consequences, however, are less obvious or immediate. Take schooling as an example. If the authorities fail to plan for the expected increase in the city’s population over the next few years and neglect to build an adequate number of kindergartens/pre-schools, the results will be overcrowded, fast decaying pre-schools and eventually poor educational outcomes. As the number of vehicles increases, authorities will need to plan new roads, and improve their maintenance.
In general, the challenge is to strike the right balance between the new investments and the rehabilitation and maintenance existing ones. Due to the importance of infrastructure costs for the budget and the links that exist between these costs over the lifetime of the infrastructure, this should be done in a medium-term framework.
Georgia has, on paper at least, invested more in infrastructure compared to, say, Estonia. Infrastructure investment (building of new infrastructure) is clearly a key factor in development. As Ari, et. al. argued. (2020) can have significant multiplier effects. In the case of Georgia it is a key element in speeding up the convergence with Europe. Georgia has done well from a strictly economic perspective. Between 2003 and 2007, public investment increased sharply, from 3% to 8 % of GDP. It was then maintained at this level until around 2012. The public investment rate then dropped a little, but rose to a respectable 6% in 2017 (see PIMA Geo).
A comparison with Estonia confirms this positive impression. Estonia’s public investment fell below 4% in 2004, peaked at 6% by 2012, then dropped back to 4% by 2015. This is still high when compared to advanced economies, Nordic countries, or even the EU median (see PIMA, p.14). It is not surprising that the public investment in Georgia has resulted in a higher public capital stock. In Estonia it rose from 47 to 57% between 2004 and 2015. This was a successful catch-up with comparator countries, such as the EU, advanced economies, Nordic Countries. However, in Georgia it has stabilised at around 90% of GDP after a decline that began in 2000.
Is Estonia an appropriate comparison for Georgia? Yes! Both countries share many features, including the common economic and social legacy of the Soviet Union. Both countries have a relatively small population. Estonia has a population of just 1.3 millions, with 46% of them living in Tallinn, the capital. Georgia has a larger population (3.72 million), but a large share (one-third) of that population lives in the capital, Tbilisi3. Both capital cities generate more than half the GDP of their respective countries. Estonia is seen by Georgia as a role model in reform. Georgia, for example, adopted the Estonian model in 2017 to abolish taxation of non-distributed profits from corporations. Georgia is also one of the priority countries for Estonian bilateral aid. But there are some major differences. Estonia’s GDP is $23,787 per capita, which is way above Georgia’s (4,765 in 2019). Estonia is a NATO and EU member, while Georgia aspires for membership in both clubs. As we have just discussed, capital investments in Estonia are significantly lower than in Georgia.
How good is the infrastructure of Estonia? Despite the high numbers of capital investments in Georgia, Estonia has a better infrastructure than Georgia. This is another difference that is evident empirically with Estonia.
Why is it better than the other? It’s simple: management, and especially maintenance! Both countries have recently undergone a Public Investment Management Assessment, a comprehensive framework created by the IMF for assessing infrastructure governance. This includes key institutions, public investments practices, IT systems, legal frameworks, and staff capacities. The Georgian system is characterized by relative weaknesses in the areas budgeting, planning and maintenance. PIMA has given Georgia low scores for both institutional design and effectiveness of its national and sectoral plans. This is primarily because Georgian sectoral strategies are geared towards new initiatives and public investment goals are “not consistent” with effective investment.
Poor management of public infrastructure has high costs. Recent book by G. Schwartz et al. Inefficiencies are the reason why countries waste up to 1/3 of their infrastructure budgets (and in some cases even more). Poor management can lead to the waste of major budgetary investments in infrastructure (see also Allen et al. 2020).
In Georgia, the involvement of donors in infrastructure projects tends to improve their management quality, which is a good thing. The 60% of projects that are not funded with donor money tend to not follow the standard appraisal procedure, so it is difficult to know if a planned investment will be cost-effective, necessary or implemented efficiently. Ex-post audits also are not done regularly (the PIMA shows that SAO did not complete any individual project audits between 2015 and 2017). Another area where there are differences is maintenance funding. In Estonia, maintenance is “costed and planned, monitored and accounted for.” In Georgia, PIMA reports that there is “no standard method to track maintenance funding or to track maintenance requirements.”
But maintenance, rehabilitation, and new investments are all intrinsically linked. Figure 1 (from Thi Hoai Le et al. 2019) illustrates how too much planned infrastructure maintenance can lead to wasteful expenditure. When planned maintenance activities are not carried out (such as planned repairs, upkeep and so on), then the infrastructure will deteriorate quickly. Insufficient planned maintenance activities (such as planned repair, upkeep, etc.) will cause the infrastructure to deteriorate quickly and incur high unplanned costs. The costs of fixing or replacing components that fail will be high. This leads to a high total cost of maintaining the system (the area on the left of blue line, near the y-axis in Figure 1). Unplanned costs can be low if the planned maintenance activities are excessive, but the overall cost will be higher than ideal.
To achieve the optimal balance, it is important to have just enough planned maintenance to ensure that infrastructure service life is extended while keeping total maintenance costs to a minimum. Georgia, which does not plan maintenance funding in a standard way, would fall in the leftmost area of the chart, the “insufficient scheduled maintenance” zone. Estonia would fall in the middle “optimal maintenance” zone.
Unfortunately, this bias is also reflected in public accounting rules. Capital investment looks good on paper, as we said at the beginning of our blog. Rehabilitation is also reported under the investment category. In the GFS budget presentation, maintenance is a current expense item. Spending more money on maintenance is not a good idea in the first place because it will reduce government savings.
What should we do? There are answers to this question.
* All investments must be evaluated in terms of their costs over the medium term. These costs should form one of the cornerstones of budget preparation for a medium-term framework.
* Donors who want to help Georgia and other countries should consider the need to build new infrastructure, and to perform regular assessments on the management of existing project (PIMA).
* The authorities of Georgia should pay greater attention to infrastructure management and give the word “maintenance” a higher priority than the word “investment” in the country’s dictionary for development.
In short, preventive maintenance is the first step. Rehabilitate as needed and only start again when necessary. This should lead to cheaper and better investments.
By Yasya Babch & Luc Leruth
Read More @ georgiatoday.ge