BELARUS: STRENGTHENING PUBLIC INVESTMENT AND PUBLIC PRIVATE PARTNERSHIPS (P160080) ASSESSMENT REPORT September 2018 Governance Global Practice ACKNOWLEDGEMENTS This assessment report was prepared by a World Bank team led by Jonas Arp Fallov, (Sr. Public Sector Specialist), and comprising Iryna Shcherbyna (Public Sector Specialist), Simon Groom (PIM expert), Martin Darcy (PIM and PPP expert), Yelena Slizhevskaya, Andrei Pinigin and Aleksei Budsko (local consultants). The team received valuable advice from Satu Kähkönen, World Bank Country Director for Belarus, Moldova and Ukraine; Young Chul-Kim, Former Country Manager for the World Bank in Belarus; Alexander Kremer, Country Manager for the World Bank in Belarus; and Adrian Fozzard, Practice Manager, Governance, Europe and Central Asia Region. The team also benefitted from helpful peer review comments received from Oleksii Balabushko (Sr. Public Finance Specialist), Richard A. Claudet (Sr. Financial sector Specialist) and Elvira Anadolu (Sr. Health Specialist). The team is grateful for the support from and collaboration with a wide range of Belarusian officials. In particular, the team would like to recognize the leadership exercised by senior management of the Ministry of Economy – Minister of Economy Mr. Dmitry Krutoi and Deputy Minister Mr. Yury Chebotar, as well as former 1st Deputy Minister Alexander Zaborovsky and former Deputy Ministers Mr. Alexander Yaroshenko and Mr. Pavel Utyupin – throughout the assessment process in spite of several institutional changes in the ministry. The team appreciates contributions of all participants who took part in the interviews, including the officials of the Ministry of Economy, Ministry of Finance, Ministry of Architecture and Construction, Ministry of Antimonopoly Regulation and Trade, Ministry of Health, Ministry of Education, Ministry of Transport and Communications, Ministry of Informatization, Ministry of Energy, Development Bank, State Control Committee, State Property Committee, National Cadastral Agency, National Agency for Investment and Privatization of the Ministry of Economy, Brest Oblast Executive Committee and representatives from the nine sample projects used as case studies in the report. The team acknowledges excellent support provided by Mrs. Alina Gres, Belarus World Bank Country Office Executive Assistant, during the preparation stage and excellent facilitation of meetings held in Brest Oblast by Mr. Vladimir Parashko, the Chairman of the Committee for Architecture and Construction, Brest Oblast Executive Committee. ii ABBREVIATIONS Belstat National Statistical Committee BYR Belarusian Ruble (before July 1, 2016 denomination) BYN Belarusian Ruble (after July 1, 2016 denomination) CBA Cost Benefit Analysis CEA Cost Effectiveness Analysis CoM Council of Ministers DB Development Bank DCSR Debt Service Cover Ratios EU European Union FS Feasibility Study FY Financial Year GDP Gross Domestic Product GFMIS Government Financial Management Information System GFSM Government Finance Statistics Manual GoB Government of the Republic of Belarus IAICC Inter-Agency Infrastructure Coordination Council ICT Information and Communications Technologies IFIs International Financial Institutions IMF International Monetary Fund MART Ministry of Anti-Monopoly Regulation and Trade MCA Multi-criteria analysis MDAs Ministries, departments, agencies MoE Ministry of Economy MoAC Ministry of Architecture and Construction MoF Ministry of Finance MTBF Medium Term Budget Framework NAIP National Agency for Investments and Privatization NCA National Cadastral Agency NIS National Infrastructure Strategy OECD Organization for Economic Cooperation and Development PFS Pre-Feasibility Study PEFA Public Expenditure and Financial Accountability PFM Public Financial Management PIM Public Investment Management PIMA Public Investment Management Assessment PIMIS Public Investment Management Information System PPP Public Private Partnerships R&D Research and Development RIP Regional Investment Program SCC State Control Committee SCBA Social Cost Benefit Analysis SPC State Property Committee SIP State Investment Program iii SNG Subnational Government SOE State-owned enterprise TA Technical Assistance TIP Traditional Public Investment Project UK United Kingdom UNCITRAL United Nations Commission on International Trade Law UNECE United Nations Economic Commission for Europe WB World Bank iv TABLE OF CONTENTS SUMMARY, CONCLUSIONS AND RECOMMENDATIONS............................................ IX A. Introduction ................................................................................................................ ix B. Assessment of the Current Systems and Procedures for Public Investment .............. ix C. Recommendations and Next Steps .......................................................................... xxii I. INTRODUCTION AND METHOD OF ASSESSMENT .............................................. 1 A. Background, Context and Rationale............................................................................ 1 B. Approach ..................................................................................................................... 4 C. Scope and Coverage .................................................................................................... 9 D. Outline of the Report ................................................................................................. 11 II. OVERVIEW OF PIM IN BELARUS........................................................................... 12 A. Introduction ............................................................................................................... 12 B. Institutional Framework and Overview of PIM Roles and Responsibilities............. 12 C. Overview of Legal and Regulatory Framework ........................................................ 15 D. Public Investment Trends .......................................................................................... 24 E. Databases and Information Management .................................................................. 35 III. ASSESSMENT OF INDIVIDUAL PIM STAGES: STRATEGIC GUIDANCE, PROJECT APPRAISAL AND REVIEW, SELECTION AND BUDGETING ...................... 37 A. Introduction ............................................................................................................... 37 B. Strategic Guidance and First-Level Screening .......................................................... 37 C. Project Appraisal ....................................................................................................... 47 D. Independent Review of Project Appraisal ................................................................. 62 E. Selection and Budgeting............................................................................................ 71 IV. PROJECT IMPLEMENTATION, MONITORING AND ADJUSTMENT ..................... 85 A. Introduction ............................................................................................................... 85 B. Project Implementation ............................................................................................. 85 C. Project Adjustment .................................................................................................. 102 V. FACILITY OPERATION, COMPLETION REPORTING AND EX-POST EVALUATION 110 A. Introduction ............................................................................................................. 110 B. Project Operation..................................................................................................... 110 C. Project Evaluation ................................................................................................... 118 VI. PUBLIC PRIVATE PARTNERSHIPS ........................................................................... 124 A. Introduction ............................................................................................................. 124 B. Current status of PPP in Belarus ............................................................................. 125 C. Legal and regulatory framework for PPP ................................................................ 127 D. Institutional arrangements for PPP.......................................................................... 130 E. Managing Fiscal Risks of PPP ................................................................................ 132 F. Unsolicited Proposals .............................................................................................. 133 G. PPP and the Development Bank.............................................................................. 134 H. Alignment of PPP with PIM processes ................................................................... 135 I. Recommendations ................................................................................................... 136 v ANNEX 1............................................................................................................................... 141 ANNEX 2............................................................................................................................... 153 LIST OF TABLES Table 1: Profile of the Sample of Public Investment Projects ................................................... 8 Table 2: Overview of Roles and Responsibilities of the Main PIM Stakeholders .................. 12 Table 3: Current Roles and Responsibilities by PIM Stage/Function ..................................... 14 Table 4: Overview of Main Laws and Regulations Governing PIM in Belarus ...................... 16 Table 5: Selected Definitions for Main Public Investment Concepts ...................................... 18 Table 6: Key Fiscal Indicators, % to GDP ............................................................................... 25 Table 7: Functional Composition of Capital Expenditures for Construction, Republican and SNG Levels, percent to GDP ..................................................................................... 26 Table 8: Number of Cases When Only Project Design Was Financed.................................... 29 Table 9: SIP’s Portfolio Distribution by Number of Projects and by MDAs .......................... 30 Table 10: Republican Budget Allocations in Revised SIPs, in mBYR and % ........................ 31 Table 11: Execution Rates for SIP Expenditures of Selected Budget Funds Administrators, percent to originally approved budget ....................................................................... 33 Table 12: In-Year Changing of Project Numbers, by Selected MDAs.................................... 33 Table 13: “Dormancy” in SIP Portfolio, 2013-15 ................................................................... 89 Table 14: Accounts Payable and Arrears as a Share of Total Capital Spending, percent ....... 90 Table 15: PPP Pilot Projects by January 2017 ....................................................................... 127 Table 16: Alignment of Early Stage PIM and PPP Practices ................................................ 136 Table 17: PPP Specific Interventions in the Project Cycle .................................................... 140 LIST OF FIGURES Figure 1: Investment levels 2011-15.......................................................................................... 2 Figure 2: World Bank’s PIM Diagnosis Scheme: Eight Must-Have Features .......................... 4 Figure 3: Capital Expenditure, Public Investment and National Capital Investment .............. 21 Figure 4: Structure of Total National Investment by Sources, percent to GDP ...................... 24 Figure 5: Structure of Total National Investment by Type of Organization, percent to GDP . 25 Figure 6: Composition of Capital Expenditures for Construction - Republican and SNG Budgets, percent to GDP ........................................................................................... 26 Figure 7: Capital Expenditure Execution Rates, Republican Budget, ..................................... 27 Figure 8: Capital Expenditure Execution Rates, Subnational Budget, .................................... 28 Figure 9: Average In-year Distribution of Republican Budget Capital Construction Spending in 2011-2015, %......................................................................................................... 29 Figure 10: New and On-Going SIP Projects, number of projects .......................................... 31 Figure 11: New and On-Going SIP Projects, % of total number of projects .......................... 31 Figure 12: Actual Financing of SIP by Sources of Finance, % ............................................... 32 Figure 13: Public Sector Investment 2011-15 by Levels of Government, % of GDP ............ 34 Figure 14: Actual Expenditures under RIPs, % of Gross Regional Product ........................... 34 Figure 15: Ireland’s Pre-Appraisal and Appraisal Processes ................................................... 59 vi Figure 16: Capital Baseline and Fiscal Space for New Public Investment Projects ................ 77 Figure 17: Estimated Time Overrun (percent to originally estimated duration) of 2011-15 SIP Portfolio, number of projects ..................................................................................... 87 Figure 18: Estimated Time Overrun (number of years) of 2011-15 SIP Portfolio, number of projects ....................................................................................................................... 87 Figure 19: Time to Complete at Current Levels of Funding, years ......................................... 88 Figure 20: Procurement Roles and Responsibilities of MART and MAC .............................. 97 Figure 21: Scale and Nature of Public Procurement in Belarus, 2015 (by volume) ................ 98 Figure 22: Institutional Arrangements for Data Collection and Management ...................... 113 Figure 23: Institutional Organization for PPP from September 1, 2016................................ 131 Figure 24: Four Key Roles to Address in Fiscal Risk for PPP Contracts .............................. 133 LIST OF BOXES Box 1: Headline Recommendations..................................................................................... xxiii Box 2: Design of a Communication Plan in Support of Administrative Reforms...............xxvii Box 3: Objectives and Scope of the Technical Assistance to Strengthening Public Investment Management and PPP in Belarus ................................................................................... 3 Box 4: Eight Must-Have Features of a Good PIM System ........................................................ 5 Box 5: Indicators of Public Investment Portfolio Performance ................................................. 7 Box 6: Budget Classification in Belarus .................................................................................. 22 Box 7: Aim of the National Infrastructure Strategy................................................................. 42 Box 8: Australian Infrastructure Plan 2016-2031 .................................................................... 44 Box 9: Examples of Formats for Project Profiles/Concept Notes ........................................... 45 Box 10: Social Cost-Benefit Analysis ..................................................................................... 49 Box 11: Multi-Criteria Analysis .............................................................................................. 50 Box 12: Main Differences between Financial and Economic Analysis .................................. 53 Box 13: Chile’s Sector Guidelines on Analytical Methods ..................................................... 56 Box 14: The Netherlands’ General Guidance for Social Cost-Benefit Analysis ..................... 57 Box 15: Questions for Independent Reviewers in France ....................................................... 62 Box 16: The Problem of Optimism Bias in Projects................................................................ 63 Box 17: Country Differences in the Depth of Independent Review ........................................ 64 Box 18: Country Variations in Outcome of Independent Review ........................................... 65 Box 19: Contents of a Project Management Handbook........................................................... 93 Box 20: United Kingdom Major Projects Authority.............................................................. 103 Box 21: Re-assessment and Adjustment in South Korea...................................................... 104 Box 22: Extracting Value from Asset Registers ................................................................... 114 Box 23: Ireland’s Approach to Ex Post Evaluation ............................................................... 119 Box 24: The BelToll Project .................................................................................................. 126 Box 25: No-one Agrees on a Common Definition for PPP… ............................................... 128 Box 26: Efficiency comparisons of PPP always rely on subjective inputs............................ 130 Box 27: Accumulating Fiscal Commitments through PPP .................................................... 132 vii SUMMARY, CONCLUSIONS AND RECOMMENDATIONS A. Introduction 1. Faced with a prolonged economic downturn and resulting fiscal constraints, the Government of Belarus is looking to increase the efficiency of public funds spent on public investment. As the total envelope on public capital spending is likely to stagnate or even decrease further in the coming years, it becomes important to increase the output for each ruble spent on infrastructure and other public investment. 2. Several international studies point to a significant payoff from improving Public Investment Management (PIM) – the institutions, systems, and processes guiding decisions on how to prepare and implement public investment projects. The International Monetary Fund (IMF) estimates – based on a survey of the efficiency of PIM systems in a range of countries having gone through PIM assessments – suggest that an average country obtains 30 percent less output in terms of physical infrastructure for a given expenditure than the most efficient countries. Up to two-thirds of this efficiency gap could be clawed back through improved PIM institutions (IMF, 2015). 3. At the same time, alternative modalities have developed for procuring and implementing public investment projects through the involvement of private partners. Such Public Private Partnerships (PPPs) can in some cases increase the efficiency of project implementation and likelihood of achieving project outcomes, although attention must be devoted to properly identifying and managing significant fiscal and other project-related risks. 4. Against this background, the Government of the Republic of Belarus (GoB) has requested the World Bank to provide technical assistance to strengthen PIM and PPPs. As a first step, this report assesses the current systems and procedures for public investment against good international practice using a diagnostic methodology developed by the World Bank and tested in a large number of countries worldwide. The analysis identifies gaps in the current system, and options for improvement are provided as a basis for further discussion and prioritization by the GoB. B. Assessment of the Current Systems and Procedures for Public Investment 5. Belarus has a strong tradition for the timely delivery of good quality infrastructure and other public goods. A strong engineering tradition, a focus on technical and financial implementation readiness as a prerequisite for financing, and detailed technical oversight mechanisms to control the quality and timeliness of project delivery have contributed to turning historically significant capital budgets into strong outputs. A strong point of the Belarus system is also the state of the art procedures for turning projects over to the operational entities responsible for service delivery and the recently developed comprehensive asset registry. 6. While downstream procedures are fairly strong, upstream quality control of project proposals is insufficient to ensure that selection is firmly based on strategic relevance and socioeconomic profitability. The legal and institutional framework for PIM ix reflects the emphasis on technical aspects of construction projects with a long list of detailed provisions to ensure technical compliance, good quality of construction objects and good financial discipline. At the same time, several quality control points of a modern PIM system are not formalized and institutionalized and, as a result, clear responsibilities have not been allocated for proposing, reviewing and deciding on project proposals at various stages. As detailed further below, this prevents the Belarus PIM system from ensuring that selection of all projects for financing is firmly based on their strategic relevance and potential to improve social and economic development. 7. The Belarus PIM system is founded on a narrow concept of what constitutes a public investment project. In practice, public investment projects are equated with objects of construction, or construction contracts, which leaves out ICT and other non-construction objects from the scope of PIM. Even more importantly, this is at odds with definitions of “projects” used internationally, which tend to group together all activities which contribute to delivering the same output or outcome. Objects in Belarus are sometimes closer to components of projects or artificial stages, determined more by financial conditions than technical efficiency. A broadened definition of projects will be a prerequisite for defining a relevant unit of analysis for a modernized project appraisal, selection, monitoring and evaluation system. 8. There is currently no consolidated overview of the public investment portfolio and no information system exists to support various stakeholders in project and portfolio level management. Project information is scattered across a number of lists and databases according to responsible level of government and sources of financing. The lion’s share of investment projects for general government are covered by the State Investment Program (SIP) and Regional Investment Programs (RIPs), but projects funded by State Owned enterprises’ (SOE’s) own sources, the Development Bank, International Financial Institutions (IFIs) or bilateral donors are managed and monitored separately from the SIP and RIPs, and a new channel of information is being formed for PPPs. Even within the SIP and RIPs, information support systems are weak and do not allow tracking projects across fiscal years and throughout the various stages of their lifecycles. On the whole, the lack of a consolidated overview weakens the ability of the Ministry of Economy (MoE) and Ministry of Finance (MoF) to manage the portfolio, including the important public finance function related to the overall matching of project opportunities with budget sources, grants, loans or other financing sources. 9. Procedures for preparation and selection also vary according to sources of financing and character of the projects. As is seen in many countries, some external donors impose their own rules and procedures for project preparation and implementation, which differ from – and in many cases exceed – the procedures used for projects financed by domestic budget sources. Likewise, there are different requirements for projects according to whether they are commercially or socially oriented. As a result, there is not one unified concept of what constitutes a “good” public investment project. x Assessment of Individual PIM Functions Strategic Guidance and First-Level Screening 10. It is good practice for project identification to be directed by actionable strategic guidance and for there to be a first-level screening of project concepts - as summarized in a short project profile - to verify their strategic relevance, rationale and, to the extent possible, affordability. In effective PIM systems, a significant share of new project ideas does not progress beyond this stage to preparation and appraisal. 11. Belarus has an array of regulated strategic planning instruments with the potential to guide investment directions and choices, comprising: • Long-, medium- and short-term national socio-economic development strategies and programs; • Medium- and long-term sector policies and plans, mainly in economic infrastructure sectors; • Medium-term state programs; • A National Infrastructure Strategy, which is a new instrument. 12. While potentially useful for investment identification purposes, these instruments have been less well coordinated than they might have been in terms of their timing and content, and are not prepared with realistic financial constraints in mind. Sector plans tend to be supply-driven with less attention to the demand for public services and, up until recently, state programs have been too numerous and too diverse in their aims to be considered as providing a coherent strategic basis for public investment. In name at least, the recently prepared National Infrastructure Strategy (NIS) 1 sounds like it could meet the requirement for actionable strategic guidance, but it suffers from having been developed for a different purpose – identification of PPP opportunities – through a largely resource-unconstrained, bottom-up process, making its achievement unlikely. It also has no relationship with mainstream planning and budgeting processes, and no legal status. 13. Overall, some streamlining of strategic planning is indicated, with more cognizance of the likely financial constraints. The recent rationalization and extension of state programs – there are now 21 state programs instead of over 100, covering a much larger share of public expenditure – offers some opportunity for providing stronger strategic guidance for public investment; however, there is more work to be done in terms of integration with higher level instruments, linking static state programs to rolling medium-term budgeting and determining the relationship with the State Investment Program (SIP) financing instrument. An overhauled NIS also has the potential to be a valuable instrument for strategic planning of major projects – and there is some useful international experience in this area that merits examination – but its legal status and relationship with other instruments, including state programs, would need to be worked out. 14. Systematic first-level screening of projects based on a standardised project profile is absent, and there is therefore no basis for a formal decision to proceed to the next stage of project preparation. An early opportunity to vet project concepts and filter out those with 1 This name of the document was introduced by the Resolution of the CoM № 611 from August 4, 2018. The initial name of the document was National Infrastructure Plan (Resolution of the CoM № 508 from May 27, 2014). xi a weak strategic case or flimsy rationale, as is common practice in stronger systems, is therefore being missed. Project Appraisal 15. Project appraisal is the point in the PIM system when a decision is made – based on thorough analysis – whether a public investment project has the potential to be a good use of public financial resources. This decision should be based on the findings of a wide- ranging feasibility study, which looks at both economic feasibility – which might be better understood as ‘social profitability’ by non-economists – and technical feasibility, as well as examining sustainability from financial, fiscal, social and environmental perspectives. The robustness of the findings in the face of identified risks should also be assessed. The default tool for determining social profitability is social cost-benefit analysis (SCBA), but the PIM system needs to be flexible enough to take account of effects that cannot be captured by SCBA and to adapt the approach to the nature and scale of the project, by using other tools like cost- effectiveness analysis (CEA) or multi-criteria analysis (MCA), either to supplement or replace SCBA. A feasibility study is usually based on a preliminary project design, and a positive appraisal decision is a necessary, but not sufficient, condition for detailed design to proceed. 16. Belarus already has some components of a good appraisal process, however the existing process moves too quickly to detailed engineering design, without an intermediate step involving examination of alternative approaches and a considered assessment of technical feasibility based on preliminary design work. Assessment of environmental impacts, technical feasibility and estimation of construction costs are well regulated. Guidelines for analyzing the financial performance of projects with a commercial orientation – through preparation of a ‘business plan’ – exist and are applied. There is also a disciplined system for ensuring the qualification of the experts involved in engineering assessments. Further strengthening of elements of financial assessments is desirable, including refinements to the guidelines on financial analysis. 17. A key weakness of the current system is in relation to the assessment of the wider, non-market effects of projects – both commercial and non-commercial – through the application of SCBA or complementary socio-economic tools, like CEA or MCA. There is some reference in the legal framework to a different analytical approach to ‘non-profit’ projects, but this is neither supported by detailed methodological guidelines, covering all sectors, nor enforced. It is evident from discussions and from the sample projects that comprehensive feasibility studies, as commonly understood in international practice, are generally not being prepared, and appraisal decisions are often made without a systematic assessment of the social profitability and sustainability of projects. There are exceptions, such as the roads sector, where guidelines on the application of SCBA have been developed and are being applied. 18. There is room for increasing the understanding of the theoretical underpinnings and practical application of economic analysis. In particular the distinction between economic and financial analysis is not always well articulated in the existing legal framework, and therefore not always well understood. With the exception of the transport sector, the application of SCBA has not been addressed in the legislation, which impedes carrying out xii such an analysis. Republican state bodies, in particular, the Ministry of Economy, have expressed interest in the development, promotion and application of SCBA together with the development of sector-specific methodologies. However, without a solid legal foundation and supporting capacity building, it is difficult to progress on this agenda. 19. While there are significant benefits from the wider application of SCBA for more systematic decision-making, expectations need to be realistic: • SCBA is not easily applied to projects where the valuation of benefits is more difficult, as is often the case for some social sector projects. In these cases, alternative methods, like CEA and/or MCA, are likely to be more suitable; • The tool is expensive in its use of scarce human resources and it may not be worth applying to lower value projects, where the use of other tools may be more cost- effective or more practical as the requisite skills for SCBA are still being developed; and • SCBA is not a budgeting tool, although it helps in deciding what investments should be eligible to be considered for budget funding, and it will not resolve the difficult inter- sectoral trade-offs that are always part of budgeting. 20. The wider application of SCBA (and other less sophisticated or supplementary methods) would need a stronger legal and regulatory basis. It would also require the elaboration of national methodological guidelines and the estimation of certain national parameter values, most importantly the social discount rate. Development of methodological guidelines could borrow from a large body of international experience. Responsibilities for developing sector-specific guidance – the MoE or line ministries – would need to be decided, since there is no standard approach. As mentioned above, improvements to project appraisal will require defining the unit of analysis more carefully. Independent Review of Project Appraisal 21. It is good practice to subject appraisal findings and recommendations, together with the underlying feasibility studies, to review by an objective third party. This is to counter the widespread problem of optimism bias among planners, as well as to allow the case for projects with strong political momentum to be verified. The underlying assumptions, forecasts and conclusions put forward by a project sponsoring entity need to be scrutinized and challenged during the review to test their robustness and realism. Ideally, the depth of the review should be proportionate, so that smaller or repeat projects may be subject to a lesser degree of external scrutiny. 22. Independent review of engineering designs and the underlying parameters is presently performed in Belarus by the State Agency for Expertise in Construction and its subsidiaries in oblasts and in the City of Minsk (hereinafter – state expertise authorities). ‘State examination’ is a rigorous process, focused on safety and technical dimensions of the project in line with the legal mandate of the state expertise authorities. While fulfilling a useful purpose, state examination does not involve reviewing broader aspects of feasibility, including social profitability and sustainability. This is an important gap in the current institutional framework. The review also takes place when the detailed design has been completed, which xiii is usually too late to influence the fundamental design parameters, like capacity and choice of technology. The MoE also carries out a ‘comprehensive examination’ of investment only for projects supported from external government borrowings, from government guaranteed external borrowings, from government guaranteed bank loans, or investment agreements supported with state preferences or privileges. And this examination has some qualities of independent review.. 23. Synchronized with a strengthened appraisal process, there is scope for Belarus to develop a stronger independent review function, which builds on some of the good practice already in place. International practice in the design of the independent review function varies and issues to consider when designing such a process should include: • The degree of independence required – should the external reviewers cover all projects or only major projects, relying on ‘local examination’ by line ministries and regional technical committees for less significant projects; • The depth of the review – independent analysis, scrutiny of assumptions and risks, or quality controlling application of defined methods? and the length of time allowed; and • The impact of the review on decision-making – should review findings be definitive or advisory? 24. Projects that have been positively appraised and successfully passed through some form of independent scrutiny should be assembled in a pipeline of quality controlled projects, which are eligible to be considered for public funding (but not assured it). To an extent, such a pipeline already exists in Belarus, as there is a ‘reserve list’ of projects eligible for funding from the SIP. The issues concern the analytical rigor of the processes by which projects join the list and the fact that the reserve list does not represent a unique route to SIP funding. Additionally, the ‘reserve list’ does not include public investment projects that are planned for alternative funding sources. Therefore, it cannot justifiably be called a ‘pipeline’. Project Selection and Budgeting 25. Project selection and budgeting is where the project cycle interfaces with broader budgetary processes, and when funding for individual projects must be considered in the context of competing claims on expenditure, both capital investment and recurrent. Good practice in selection and budgeting of public investment projects is usually seen as having four main components: • Transparent criteria for selecting projects with reference to strategic policy objectives and social profitability; • Well-structured budget preparation process with scope to integrate investment and recurrent cost implications of projects; • Effective gatekeeping to ensure only appraised and approved projects are selected for budget financing; and • Ensuring adequate financing required to complete selected projects, including recurrent needs on completion. 26. The highly-regulated nature of Belarus’s existing PIM system means that it would be difficult for projects to ‘jump the fence’ and obtain budget funding without having been prepared and approved in line with requirements. This is a strength of the system, xiv which should be retained, even as these requirements evolve. 27. Selection and budgeting for capital investment projects, many of which take more than one budget cycle to complete and most of which will entail future recurrent expenditures, is performed more effectively using a medium-term budget framework (MTBF). Although an MTBF has been prepared for 2017-19, it cannot yet be considered to be functioning properly, not least because it was approved after the 2017 budget. Even without an MTBF though, it is important for annual budgeting to have a consolidated perspective on the future funding needs of investment projects under implementation, including externally funded projects incurring budgetary commitments. This view is currently missing in Belarus. 28. Through the SIP, Belarus effectively has a capital budget at the central level that is prepared separately from the recurrent budget, with only the main funding lines being approved through the annual Law on Republican Budget. A similar separation is found at local level in the form of the RIPs. The disadvantage of this de facto dual budget, combined with the absence of a fully functioning medium-term budget framework (MTBF), is that it makes it more difficult to budget for the future recurrent financing needs of completed projects. 29. The principles used for formulating the SIP and RIPs entail ongoing projects competing with new projects for funding on an annual basis (even though they are supposed to be given priority in this competition). A more appropriate approach would be to start by funding the baseline for the public investment program – the funding required to meet financial commitments to ongoing projects (properly defined) – and then, in a second and distinct step, allocate the remaining fiscal space to new projects. In this way, there would be no opportunity for new projects to dilute the funding available to ongoing projects, as seems to have been occurring in Belarus (as evidenced by the overhang of 50 ‘frozen’ ongoing projects). Such an approach requires a credible MTBF to be put in place and for the investment program to be rationalized so that the baseline is affordable. 30. There is room for strengthening the principles used for selecting new projects for budget funding. Assuming a strengthened appraisal system is developed, a positive appraisal decision based on SCBA (or other suitable method) would be a precondition for SIP funding. Alignment with government and sector policy objectives would then be the critical factors in determining funding priorities, together with readiness for implementation and the fit of the project disbursement profile with the available fiscal space. Within certain sub-sectors, roads for example, SCBA can be used to assist prioritization for budgeting, but it is by no means a universal prioritization tool capable of generating an ‘optimized’ capital budget. Expectations must therefore be managed in this regard. 31. A drawback of the SIP is that it provides only a partial view of project expenditure for projects with multiple funding sources. This fragmented picture of project financing is not conducive to a transparent overview of the overall public investment program. In the extreme, projects may be financed through the SIP in one year and then by a different source in a subsequent year, making it impossible to keep track of total project expenditure and implementation progress. RIPs also fail to disclose financing coming from other sources at the level of individual projects, although they do have the advantage over the SIP by identifying xv aggregate financing from each other source. 32. A policy has been adopted to dissolve the SIP into state programs and dispense it with a separate investment programming instrument. Such an approach would have advantages from the perspective of program budgeting and integrated planning of capital and recurrent expenditure, especially if accompanied by a more credible MTBF. On the other hand, it would weaken centralized prioritization of public investment projects. This is a trade-off that government might wish to consider, particularly with respect to decisions concerning major projects. Dispensing with the SIP, before a strong performance culture is embedded in budget entities responsible for state program management, also runs the risk of too many under-funded new projects being approved, diluting funding for completion of new projects. 33. There are several options that authorities might consider for reducing the potentially negative effects of doing away with the SIP, including: • Setting separate ceilings for capital and recurrent spending within state programs, and to strengthening scrutiny of state program proposals, especially capital, by the MoE and MoF; • Retaining some form of SIP, while limiting its scope to the portfolio of projects of national significance - rather than projects of all sizes as at present - and ensuring close coordination with the preparation of state programs. In some ways, this would resemble the UK’s Government Major Projects Portfolio. Project Implementation 34. Once a decision has been made to fund implementation, PIM systems need to ensure that the project is delivered as planned. The most important dimensions of a good project implementation process are: • Comprehensive guidance on managing project implementation; • A detailed implementation plan and clear designation of responsibilities for delivering it; • Procurement arrangements that incentivize the achievement of value for money when awarding contracts; • Timely and predictable flow of funds during the budget year; and • Regular and appropriately detailed reporting on implementation. 35. Belarus has a well-defined legal and regulatory framework for implementation of construction projects, which has recently been strengthened. As mandated through the law, the Ministry of Architecture and Construction (MoAC) has issued a regulation setting out the functions of project clients/developers and project managers, and an instruction on the procedures for performing these functions. One area where project roles and responsibilities could be more clearly defined is the relationship between the developer and client in those cases where the client role has been delegated to a different entity. International experience indicates that delegating too much responsibility to a ‘client’ who represents the developer can weaken accountability for project delivery and that the developer should retain ultimate decision-making responsibilities and accountability for project performance. This would be particularly important in the event of any need for significant project adjustments, decisions about which should not be delegated. xvi 36. The MoAC has also provided formal guidance on project management by means of detailed recommendations on the contents and substance of a project implementation plan, which is consistent with international good practice. Guidance is provided in the form of detailed work flow charts for different parts of the planning and implementation process. While this guidance represents a satisfactory starting point, there may be scope for improving it by developing a more detailed project management handbook(s). This could be done by the MoAC or by line ministries for specific sectors. 37. Important steps have been taken to make project implementation more professional, with strengthened requirements for both project clients and project managers to demonstrate that they possess the necessary expertise. In addition, a strong inspection and control regime, involving the Control and Inspection Department of the MoF and the State Control Committee, ensures strong accountability during project implementation, although the emphasis is more on financial and legal compliance, than management performance. 38. Oversight of policy and practice of public procurement in general is the responsibility of the Ministry of Anti-Monopoly Regulation and Trade (MART); however, there are separate legal instruments and institutional arrangements for construction procurement and procurement of PPP projects, with the former coming under the MoAC. Procurement requirements are currently determined by the source of the finance rather than the nature of the contracting authority. This is the opposite of the requirement under World Trade Organization (WTO) rules. 39. While the basic legal and regulatory framework for procurement is reasonably solid, there are too many legally allowable exceptions to open competitive bidding, with a significant amount of procurement activity done through single source procedures. This has the potential to reduce value for money. Evidence from the project sample indicates that procurement operations are completed in a timely fashion and do not represent a source of delay. 40. There is an over-emphasis on price as the determining factor in competitive procurement decisions, and the scope for taking account of the capacities of the contractor is limited. This has potentially detrimental effects on the quality of works and the implementation timetable if a weak contractor bids a low tender price and there is some evidence of this occurring. Project Monitoring and Adjustment 41. An effective PIM system requires processes to identify and make justified adjustments to projects during implementation. This needs to be neither too rigid nor too flexible. The three dimensions of project adjustment are: • A responsive monitoring system to ensure that problems and emerging risks are identified in a timely fashion, and that solutions are devised and then followed up. • Flexibility within the budget year to reallocate budgets, within sensible limits, from slower to faster moving projects. xvii • Procedures for re-assessment of projects where significant adjustments in terms of costs, timetable and specification could potentially affect the social profitability of projects. 42. Monitoring in Belarus is largely decentralized to specialized organizations acting as client entities. This works well enough for day-to-day implementation issues, but the absence of monitoring by the project sponsor or a higher authority to which it might be subordinated could create difficulties should more serious implementation problems begin to occur, requiring policy decisions. Active monitoring is not performed in any meaningful way by the three ministries – MoE, MoF and MoAC – responsible for central coordination of the SIP. Reporting on progress to the central planning and financial authorities is largely for information purposes, not part of a responsive monitoring system for identifying and responding to emerging risks or implementation problems. The MoAC reports on the SIP on a quarterly basis to the Council of Ministers using information provided by line ministries. These reports are light on analytical depth and on insights into the implementation of the portfolio as a whole. There are no recommendations and little expectation of action to follow. In terms of managing the information flow, there is no dynamic project database to assist reporting on the consolidated portfolio of investment projects since all reporting is presently handled in Word format. 43. The legislation governing the SIP allows the Council of Ministers and the President to make reallocations between projects as necessary. It does not foresee the right to authorize adjustments at a level below the Council of Ministers, either by the MoE or MoF. This makes for a somewhat inflexible management of the investment program, because the Council of Ministers is probably too senior a decision-making body to be concerned with the smaller and more frequent adjustments required to optimize annual implementation performance. In practice, the SIP is revised several times a year to take account of differential execution rates, and other more significant adjustments. 44. In a technical sense, there is a version of a fundamental review process, because all adjustments, whether of engineering parameters or costs, must be reflected in revised project documentation and subjected to the same state expert review and approval process as for a new project. Reflecting the limitations of the existing appraisal process, this review does not involve re-examining the social profitability of a project to reflect soaring costs or a slump in projected demand. There are formal procedures for terminating projects, but these are rarely used and the reasons for applying them relate largely to technical issues, rather than questions about the fundamental feasibility of a project from a societal perspective. Project Operations 45. The sustainable operation of new facilities requires: • Formal handover of assets, including verification of fitness for purpose; • Maintenance of comprehensive and up-to-date asset registers; • Provision of adequate resources for sustainable operations and maintenance; and • Monitoring of service delivery. xviii 46. Belarus has disciplined and well-functioning arrangements for acceptance and handover of newly created assets to operating entities. The legal and regulatory framework for commissioning of new facilities is clearly defined and appears to be applied consistently. The workflow charts issued by the MoAC, have a dedicated chart showing the activities and decisions involved in accepting a complete facility, together with more detailed instructions on the specific features of different types of construction. 47. Belarus can rightly claim to have a public asset register which encompasses significant aspects of international good practice. The newly created asset register (or ‘Unified Register of State Property’) collects information on both financial and non-financial assets of state and municipal entities, including SOEs, so it goes beyond the scope of a register of non-financial assets, as required for PIM purposes. The National Cadastral Agency (NCA) operates the register under the auspices of the State Property Committee (SPC). Both are confident that the register captures data on ‘very close to 100%’ of all public property. Surveys of stocks, values and conditions of public assets are regularly conducted by the government, so the register can be considered as up to date. 48. Under-funding of operations does not appear to be an issue. Detailed investigations of the adequacy of operational funding for new facilities were not undertaken, but the anecdotal (and visual) evidence is that maintenance is generally not neglected and that financing is forthcoming to cover staffing and the other goods and services required to deliver services. No evidence was found of facilities being underutilized because of a shortage of recurrent funding. Project Evaluation 49. There are three desirable institutional arrangements for a good process for evaluation of completed projects: • Availability of a policy and methodological guidance on the performance of ex post studies; • Basic completion review for all projects carried out soon after completion; and • Impact evaluations undertaken for all major projects and a sample of smaller projects 50. This is the weakest area of PIM in Belarus and none of the above dimensions are represented. The project acceptance report is lacking any analytical content and lesson- learning for implementation of future projects, so falls short of a completion review. Impact evaluations of completed projects after they have been operating for a while are not generally performed, as confirmed by the project sample. Improvements at project appraisal stage, including the definition of suitable monitoring indicators, will be required before a useful ex post evaluation process can be launched. Assessment of the Framework for Public Private Partnerships (PPP) 51. PPP has gained prominence in Belarus in recent times with the first project having been brought into operation and a second major project about to enter the procurement phase. Recent political messages have emphasized the importance attached to PPPs by the government. Current proposals to encourage all oblast level regions to develop at least one project proposal for PPP appear to be unsustainable within the current capacity constraints. xix Therefore, it is timely to assess whether the conditions are right for ensuring that these projects can be implemented efficiently and effectively as well as ensuring that the fiscal risks that come through PPP contracts are understood. The overall framework for PPP has been in development in Belarus for almost three years and this has produced a workable legal framework that could lay the foundations for the delivery of several PPP implemented investment projects. However, further development work is essential to ensure that PPP contracts are concluded in the interests of efficiency, effectiveness and fiscal sustainability. 52. PPP should be seen as a form of implementation of public investment projects rather than an end in itself. The principal challenges revolve around the need to attract suitable investors, funders and operators on a cost/value basis that is more efficient than implementation through conventional means. Resolution of the Ministry of Economy No. 49 (2016) represents a break with good international practice in that it regulates PPP projects in a different way to other public investment projects. PPP laws, regulations and instructions are best when they deal with the specific issues that relate only to PPP implementation. This suggests unified procedures and methods for all public investment projects, supplemented by additional processes for PPPs to determine the potential for PPP and confirm its advantages over TIP. In most countries that have gained experience in the PPP area, work is underway to integrate PPP into the PIM system; similarly, it would be useful to undertake such activities in the future in the Republic of Belarus. 53. Developing PPP capability through a small number of ‘pilot projects’ represents good international practice, but the criteria and process for selection of pilots in Belarus could be further developed. The pilot projects were formally approved by the Council of Ministers on advice from the Inter-Agency Infrastructure Coordination Council (IAICC), but without any transparent or published criteria. Independent reviews of appraisals could be established as a short-term measure while further developing a formal assessment methodology to determine the best or most efficient implementation route for the concerned projects. Given the early stage of PPP development in Belarus, the GoB should first focus its efforts on two or three PPP implementations to build credibility among investors and learn the lessons from the process of completing them. 54. The legal definition of PPP emphasizes efficiency, thereby making the basis for choosing PPP clear, but the process for assessing this implementation modality is currently over-reliant on a quantitative approach. Resolution 49 sets out a quantitative efficiency test for assessing value for money from PPP compared to TIP. More advanced users of PPP combine quantitative and qualitative assessment techniques, with a growing emphasis towards reflecting increasing recognition of the difficulties in establishing a realistic public sector comparator. A particular issue in the case of Belarus is the absence of guidance on how to calculate expected payments to the private partner in the case of Availability Model (Government-Pay) PPP projects. This makes quantitative assessment of this, usually more common, PPP model difficult. 55. A future efficiency test might include a more qualitative assessment which would seek the answers to fundamental questions such as: • Is a PPP implementation possible and deliverable? xx • In which ways might a PPP implementation be able to offer benefits over and above more conventional methods? • Are the fiscal risks involved in a PPP contract understood and acceptable to the government? 56. Technical advice on PPP is vested in the PPP Unit of the National Agency for Investment and Privatization (NAIP). According to the PPP Unit’s legal mandate the PPP Unit is expected to ‘promote’ PPP which may create a natural bias for giving a preference to one form of implementation over another, whether this is the intention or not. In a mature PIM system, the decision on the most appropriate implementation methodology (budget/donor/PPP etc.) should be made objectively after analysis of the options at the feasibility stage. Assigning the PPP Unit an equal responsibility for advising on the risks involved in PPP implementation and not just the benefits, as well as separating the advisory role on feasibility studies from the advisory role on implementation could improve objectivity of its advice. 57. PPP Units in general exist to provide advice and expertise to governments on those elements of the project cycle that need to be considered in a different way in PPP to other forms of implementation. However, the policy note appears to provide the PPP Unit with a significantly wider remit than would be expected, which includes “the function of an Agency for planning infrastructure development’. It is difficult to reconcile the narrow and specific remit of a PPP Unit with the much broader and wide-ranging remit of an infrastructure planning agency. To do so would also signify a significant bias towards PPP implemention. This could, if implemented, have a profound effect on the institutional structure of the entire PIM system. 58. Project proposers at MDA level and particularly the MoF need to be acutely aware of the fiscal risks that come with PPP contracts and they need to have the capacity for monitoring and managing them. In line with international experience, the MoF has a vital role to play in the sphere of PPP. However, discussions revealed a limited knowledge on the fiscal sustainability of PPP projects, but at the same time revealed a strong desire for more detailed understanding of the subject in the future. This will be vital if the GoB is to take forward a measured and responsible series of PPP projects as currently envisaged. 59. Discussions with MDAs revealed pressure from a significant number of unsolicited proposals from private entities, but no means of testing whether they represent value for money. Unsolicited proposals are a reality, so an effective means of addressing them is essential in the interests of efficiency and transparency. However, a balance needs to be struck between essential protections against corruption and ensuring efficiency and encouraging the private sector to continue to come forward with innovative ideas that may be of value to the nation. 60. The Development Bank of Belarus expects to have a growing role in the financing of PPP implemented projects. Up to the present time, the Development Bank has not had a role in any PPP activity, but it expects to be actively involved in the future. Among the reasons for this, are various legal acts giving the Development Bank greater room for manoeuvre in its lending. Potentially this makes the Development Bank a significant player in lending to PPP projects, subject to the constraints of its own resource base and other restrictions on its activities xxi as established by state bodies in line with agreements with IFIs. 61. Excessive lending to PPP projects poses some important risks. Almost all PPP contracts contain financial liabilities for the government – either explicit or contingent. Therefore, the government is likely to come under some external pressure to reference the value of the loans in the national accounts. MDAs should be informed that there are ceilings on loans to PPP projects, so that they do not skew their implementation choices towards PPPs. This could help to prevent increased demand for loans to PPP projects prior to the establishment of the necessary human capacity to assess them. C. Recommendations and Next Steps 62. Based on the gap assessment of the Belarus PIM system, several recommendations are provided below on how to further strengthen the PIM system and the PPP-framework in Belarus (Box 1). These recommendations are “headline” recommendations meaning that many of them can be further divided into several concrete actions. Annex 1 presents a full picture of the headline recommendations and underlying actions for the short, medium and longer term, responsible ministries and necessary prior actions. Chapters II-VI provide further analysis and motivation for the individual recommendations. As a basis for further prioritization and discussion with the Government, the rest of this section also offers advice on key priorities and next steps in managing the emerging PIM reform agenda. xxii Headline Recommendations Box 1: Headline Recommendations 1. Strengthen the strategic guidance for public investment by improving the coherence and realism of strategic planning instruments. 2. Formalise project identification so that it becomes a key decision point for developing a project further. 3. Make project appraisal more rigorous for all projects, whether commercially or socially oriented, through tailored use of social cost-benefit analysis or other appropriate methods. 4. Enhance the scope of the independent review of project appraisal. 5. Introduce a credible medium-term perspective to budgeting for public investment projects to assist programming of multi-annual commitments and expenditures as well as to ensure sustainability of project financing. 6. Consolidate project implementation arrangements to enable responsive and accountable project management, while ensuring adequate monitoring and oversight. 7. Optimize the value-for-money potential from competitive procurement. 8. Introduce and operationalize a formal process for triggering re-appraisal of projects where costs or benefits deviate by more than defined margins. 9. Reinforce the long-run sustainability of projects once operating. 10. Operationalize the lesson-learning process on project completion and incorporate it into decision making process. 11. Review and strengthen the legal and institutional framework for PIM and develop workable refinements where needed. 12. Provide comprehensive guidance and capacity building of all relevant stakeholders to enable sustained reform of the PIM system. 13. Develop a PIM Information System and ensure its interface or integration with the Government Financial Management Information System (GFMIS) being developed by the MoF 14. Focus scarce PPP capacity on a small number of high quality priority pilot projects 15. Simplify the comparative assessment of PPPs and harmonize appraisal processes with mainstream PIM. 16. Appreciate and manage the fiscal consequences that are created through PPP contracts. 17. Make SIP information available to the general public Key Priorities for the First Year 63. While the headline recommendations constitute an ambitious PIM reform plan, it is necessary to identify a smaller number of actions that could be prioritized for the short term, i.e. within a year or so. Subject to available funding, the priority actions proposed below are actionable immediately or with limited preparation and their implementation could therefore quickly lead to further improvements in Belarus PIM system. 64. Priority Action 1: Drawing on international experience, examine options for developing the NIS as a strategic long-term document which is linked with state programs and subject to fiscal constraints, and decide on a suitable model for Belarus. The aim xxiii would be for the MoE to arrive at an authoritative strategic instrument that gives clear guidance to identifying and screening project ideas and which also incorporates major investment projects, including those based on the PPP principles. Technical assistance for a more detailed review and assessment of alternative international models could be sought, followed by follow- up support for implementation. 65. Priority Action 2: Develop and adopt a comprehensive PIM process guideline covering all PIM stages. Drafting of a comprehensive guideline would consolidate many of the reform actions mentioned in Annex 1 and constitute the basis for targeted capacity building of main stakeholders. The guideline would include definitions of concepts, roles and responsibilities, and new processes, procedures and checklists, thereby becoming the main reference document for the reformed PIM system. In the process of drafting the guideline, the GoB would need to address and think through issues and design options for main aspects of the new systems, including – but not limited to – project identification and first-level screening, project appraisal, an enhanced scope of independent review, selection criteria and procedures, budget procedures related to establishing a capital baseline budget, more systematic monitoring, and completion reporting. 66. The guideline should include further methodological guidance on areas of priority for the GoB. These include the development and implementation of methods for assessing social costs and benefits (assessment of social profitability) for pre-selection and appraisal of projects, as well as preparation of methodological guidelines for one or two specific sectors. The guideline could further incorporate PPP procedures for those aspects which deviate from the overall procedures for public investment projects and development of specific criteria for selection of projects for their implementation based on the PPP principles, methods for their appraisal, alternative approaches for assessing comparative advantage, in particular with the use of qualitative approaches. 67. Priority Action 3: Undertake an assessment of capacity building needs and develop a phased training program and on-the-job technical assistance program. Building the capacity of government officials to appreciate and operate in a reformed PIM system will be a prerequisite for successfully adopting the new procedures. Several aspects of the reformed PIM system will require specific technical training, for example: in the methodologies for first- level screening and for project appraisal based on SCBA or similar methods to assess the social profitability of project proposals; or in assessing the relative benefits of choosing PPP compared to other implementation modalities of appraised projects and in how to identify fiscal risks in PPP contracts. The PIM guideline will in itself provide a useful framework for targeted capacity building and training. In addition, a successfully targeted capacity building program should start with identifying target groups and mapping their capacity building needs based on current and future functions in the PIM system and outlining a phased training and on-the-job technical assistance program. 68. Priority Action 4: Formulate functional and technical requirements for a PIM Information System to support workflows, monitoring and oversight throughout the PIM cycle. The lack of a consolidated overview of public investment projects throughout their life cycles and across financing sources and sectors justifies an immediate effort towards xxiv automating workflows and improving data availability and quality. A PIM information system – whether implemented as a stand-alone system or integrated with existing systems – holds the potential to significantly improving project and portfolio management as well increasing transparency through opening up PIM data for the general public. Building on the reformed processes and procedures defined in new regulation and guidelines, the essential first step in this direction would be to define the functional and technical requirements for such a system. Functional requirements should include a system of classification and encoding of state investment projects based on an expanded and internationally recognized project definition with the assignment of a unique project code to track projects throughout the life cycle. A functioning information system could enable the implementation of a strategy for dealing with frozen or very slow moving projects. Recent technical assistance to PIM in Romania may provide useful direction for how to review and rationalize the portfolio of public investment projects. 2 69. Priority Action 5: Adjust the PPP piloting process. The approach to piloting of PPP should continue by selecting pilot projects that are small in number, relatively modest in scale, and diverse in nature, so that mistakes are manageable and suitability by sector can be assessed. The selection of pilots is constrained in the short term by the lack of a fully developed appraisal system for public investment projects. Without a pool of already appraised projects to choose from, the MoE is forced to pre-select potential PPPs and arrange for appraisal separately. There are however some short-term actions which could help to ensure against optimism bias in the selection of PPPs during the pilot phase: • Amend the Terms of Reference for the PPP Unit to give an equal responsibility for advising on the risks as well as the benefits involved in PPP implementation. • Separate the advisory role on feasibility from the advisory role on implementation • Arrange for independent reviews of feasibility studies for the pilot projects 70. Priority Action 6: Develop methodology and process guidelines as well as capacity for identifying and managing fiscal risks and long term budgeting for PPP. The potentially significant fiscal risks associated with PPPs call for a strengthened engagement of the Ministry of Finance in identifying and closely managing sources of risk. PPP contracts should not be agreed before the Ministry of Finance has had the opportunity to assess and price explicit and contingent liabilities in PPP contracts and has indicated that these commitments are acceptable. A ceiling on accumulated financial obligations related to PPP contracts could be a further safeguard against unaffordable future budget commitments. A first step in building an enhanced system for managing fiscal risks associated with PPPs is to develop the methodology and process guidelines and consider regulatory changes. These would define the requirements, roles and interception points for the MoF and other stakeholders as well as some guidance on the methodology to be used for the assessments. Such a methodology and guideline should be formulated in parallel to the overall PIM guidelines to ensure coordination and could benefit from several recently developed IMF and World Bank reference guidelines and tools. 2 Romania: Rationalizing the Public Investment Portfolio, Romania PIM RAS, output 10, World Bank 2015. xxv Managing the Reform 71. Establishing effective consultation and coordination mechanisms is a pre-requisite for a successful reform. Any reform effort requires a clear strategy, a political champion supported by a capable reform team and well-established consultation and coordination mechanisms to ensure a high level of coordination among all relevant stakeholders. 72. Starting and maintaining an institutional reform process requires the continuous pro-active engagement of the senior management in the involved ministries. In this case, the Minister of Economy should formally endorse a reform implementation plan and launch initial reform activities. The formulation of the reform action plan could take its starting point in the set of recommendations offered in this report. Continued political leadership is required to maintain the reform process and to guide involved stakeholders through critical junctures, including conflicting opinions on reform details, as well as anxiety – and potentially even resistance – by affected staff or other stakeholders. 73. A Reform Steering Committee comprising senior officials across the involved ministries should be established. Even after the implementation plan has been approved, decisions on how to implement specific aspects of the plan will have to be taken on a continuous basis. This could be facilitated by establishing a Reform Steering Committee to lead the necessary dialogue and decision-making on reform priorities and to oversee their implementation. The Committee could be chaired by a representative from the MoE senior management, e.g. the Deputy Minister, and comprise senior officials from the main affected administrations. The Committee should coordinate closely with the bodies overseeing PFM reform implementation and some overlap of key persons could be beneficial. 74. In addition, there is a need for continuous technical support. While the Committee would provide high-level leadership and ensure consultation across administrations, a dedicated group of experienced mid-level officials is required to spearhead and monitor new initiatives, make suggestions and provide technical support to the Committee, guide specific areas of reform through both organizational and procedural change processes and organize capacity-building. 75. It will be of particular importance for the Committee and technical support group to consider financing and sequencing of activities. It is evident that the envisaged upgrade of PIM systems and procedures will require mobilizing resources for technical assistance as well as some investment. The Committee should therefore map out the corresponding financing needs, seek out funding options and liaise with potential donors as necessary. 76. A reform monitoring mechanism should be established. Once the implementation plan has been endorsed, a corresponding monitoring plan should be formulated. The plan should specify how progress towards achieving reform objectives will be measured and by whom. This would involve formulation of indicators for the expected results, as well as corresponding means of verification. The task of monitoring reform progress could be assigned to the technical support group mentioned above. In most cases, monitoring progress should be straight forward, since the implementation plan already defines time-bound activities. In some instances, it might be required to break down actions into individual steps and define deadlines xxvi by when respective steps should have been taken. The group responsible for monitoring should regularly inform the Steering Committee about the progress and identified challenges and bottlenecks. 77. A well-designed communication strategy could further facilitate the implementation plan. Every reform inevitably results in change, which may be welcomed by some stakeholders and rejected by others. Different factors may foster a general tendency to maintain the status quo. For example, staff might personally benefit from existing procedures in terms of professional status or be afraid of reforms resulting in increased workload or reduction in staff. A well-designed communication campaign providing information about objectives, timelines and potential reform benefits, as well as the consequences of doing nothing, could help to address potential anxieties among stakeholders and to prepare the ground for change. Box 2 below provides further ideas for the design of a communication plan. Box 2: Design of a Communication Plan in Support of Administrative Reforms The starting point for the development of a communication strategy in support of a change process is the definition of clear reform objectives. The type and scope of required communication largely depends on the type and scope of the envisioned change. Based on the reform objectives and strategy, the main stakeholders of the reform should be identified. Following a stakeholder analysis, which helps to determine the importance of each stakeholder for the reform in terms of its level of interest in and influence on the reform, specific target audiences should be identified and core messages be developed. Depending on the target audience and the level of available resources, a range of communication tools and channels should then be selected to communicate the core messages to the key stakeholders. The effect of communication activities should be constantly monitored, for example by measuring the changes in people’s attitude towards ongoing reform. Below is an illustration of the main steps in developing a communication strategy. Steps in Developing a Communication Strategy Identify & Select Develop Monitor Define reform analyze communica- core communica- objectives target tion tools/ messages tion results audiences channels xxvii I. INTRODUCTION AND METHOD OF ASSESSMENT A. Background, Context and Rationale 1. In the context of a deteriorating macroeconomic and fiscal outlook, the Government of Belarus emphasizes the importance of improving efficiency of public spending. The Public Expenditure and Financial Accountability (PEFA) assessment, carried out by the World Bank in 2014, provided the Government with analysis of the performance of the PFM system and highlighted areas for improvement. The Government’s PFM Reform Strategy approved in 2015 responded to the PEFA assessment with an ambitious reform program in the areas of medium term budgeting, program budgeting, treasury, debt management, and public accounting. The Strategy aims at improving the efficiency of PFM systems across the whole PFM cycle, including the need for integration of decision-making on public capital expenditures into the overall budget process. 2. A declining trend in public investment has increased pressures to improve the efficiency of capital spending. Since independence, public capital expenditures have been an important instrument for the state in fostering economic growth and the share of public investment to GDP has generally been high compared to other countries in the region. With 2012 and 2013 as notable exceptions – in part due to a mega project in nuclear energy – public investment levels are now on a declining trend falling to just over 3 percent of GDP in 2016 (Figure 1). Public sector capital spending has also fallen as a share of the total budget. Due to its discretionary nature, capital budgets have proven vulnerable to spending cuts as the government aims to identify savings to prevent a further worsening of the short term fiscal situation. 3. The GoB recognizes that there is a potential to improve Public Investment Management (PIM) to ensure good project outcomes. The PIM system means the processes, rules, capabilities, information and behaviours that work together to bring discipline to the way investments are managed throughout their life cycles. With the expectation that the level of public capital spending will continue to stagnate, increasing attention is being devoted to the timeliness and quality of public investment projects. 4. International experience suggests that the gains from improving PIM can be significant. IMF estimates based on a survey of the efficiency of PIM systems in a range of countries suggest that countries with the most efficient systems have significantly higher growth impact for each dollar spent on public infrastructure investment than the least efficient countries. The same study estimates that an average country obtains 30 percent less in terms of physical infrastructure for a given expenditure than the most efficient countries. Up to two thirds of this efficiency gap could be clawed back through improved PIM institutions (IMF, 2015). 1 Figure 1: Investment levels 2011-15 3 35 30 25 Budget Capex (% of 20 total budget) Total National 15 Investment (% of GDP) Public Sector Capex (% 10 of GDP) 5 0 2011 2012 2013 2014 2015 Source: National Statistical Committee of the Republic of Belarus 5. No comprehensive assessment of PIM has been made to date, but there are clear indications that management of public investment projects could be further improved. A 2007 World Bank Policy Note on Selected Issues in Capital Budgeting in Belarus highlighted a number of strengths, which together contribute to operational efficiency: a timely preparation of project implementation plans; relatively strong administrative procedures and capacity for execution; and high-level fiduciary controls. At the same time, the Policy Note identified some important weaknesses, mainly relating to upstream processes. These are: • Investment strategy documents that are not fully integrated and lack a multi-year perspective; • Capital expenditure choices that are largely driven by bottom-up requests and/or politicized decisions; and • Weak links between recurrent and capital budgets. 6. The 2014 PEFA repeat assessment also pointed to a number of weaknesses. The process of identifying and costing priority investments is separate from the main budget process, and the recurrent cost implications of investments are not systematically linked to medium-term forward expenditure estimates 4. The planning environment is further weakened by the low level of funding predictability for public investment. The authorities prepare some medium-term forward estimates but these are not linked to the annual budget allocations and therefore not respected in practice 5. 3 Calculated based on the data from Statistical Committee. Data for capital expenditures reported by the MoF includes purchase of equipment (separate from construction projects) and some other repairs so numbers for this indicator would be higher by 3-4 percentage points, depending on the year, if MoF data were used for calculations 4 Scored “D” on PI-12 (iii): ”Existence of costed sector strategies” and (iv): ”Linkages between investment budgets and forward expenditure estimates”. 5 Scored ”C” on PI-12 (i) ”Multiyear fiscal forecasts and functional allocations”. 2 7. The difficult fiscal situation has also led the GoB to widen the scope of financing and implementation options for public investment. In particular, there has been a surge of interest in Public Private Partnerships (PPP), which the Government understands as a mechanism to finance infrastructure. However, the legal and institutional framework for PPP is at an early stage of development. The Beltoll Project for administering tolls on the national roads is the only project that may be considered, under some definitions, as a PPP project. The GoB would like to improve the legal and institutional framework for PPPs. 8. Against this background, the Ministry of Economy has requested World Bank support in the area of PIM and PPP, beginning with a diagnostic assessment. The Ministry has also emphasized the need to enhance institutional arrangements relating to PIM and PPP in order to facilitate strategic allocation of funds between traditional public investment projects (TIPs) and PPP projects. Box 3 below summarizes the objectives, scope and components of the Bank led technical assistance project responding to the request of the Ministry of Economy. Box 3: Objectives and Scope of the Technical Assistance to Strengthening Public Investment Management and PPP in Belarus Objective: The objective of the engagement is to assist the GoB develop a strategy to strengthen PIM. The longer-term goal to which this project will contribute is the delivery of efficient, effective and fiscally sustainable public investment, which supports the balanced, long-term economic growth of the Republic of Belarus. Components: Component 1: Assessment of the efficiency of the PIM system, including both traditional public investments and PPPs. This component will assist the MoE to identify strengths, weakness and gaps in the PIM system in Belarus through an assessment carried out by Bank staff and international and local experts. The Bank will provide the MoE with a comprehensive review of the performance of the PIM system pertaining to traditional public investment projects throughout the whole PIM cycle and across key government agencies. The Belarus PIM system will be assessed in relation to international good practice in each of the core PIM functional areas. The assessment will be based on the Bank’s methodology for PIM diagnostics. Component 2: Roadmap for strengthening the PIM system. This component will assist the MoE in developing the medium-term roadmap for enhancing the capability of the PIM system. Component 3: Stakeholder consultation and dissemination. This component will involve the consultation of and dissemination to stakeholders about the scope and results of the PIM/PPP diagnostic assessment, technical assistance on institutional strengthening and roadmap. Component 4: TA on institutional strengthening. Based on the assessment of gaps in the PIM system and recommendations for improvement, this component will advise the GoB on further strengthening the institutional set up for PIM and PPP. 3 B. Approach Analytical Framework 9. The PIM assessment has been prepared following the World Bank Group’s PIM Diagnostic Framework as formalized in the 2014 publication, ‘The Power of Public Investment’ 6. This framework analyzes the presence and quality of institutional arrangements required to support performance of eight “must-have functions” across the project and capital budgeting cycles 7, thus enabling a gap assessment against good international practice. The framework yields a qualitative assessment of a country’s PIM system, rather than an indicator- based assessment (similar to PEFA). An indicator-led, scoring tool has been developed by the Bank and piloted in Ukraine; however, mirroring the coverage of PEFA, this tool has a scope that extends beyond the eight core functions identified as essential for a minimally effective PIM system. The value added from implementing a more wide-ranging (and more information- intensive) assessment approach, is seen as limited in the particular context of Belarus, where the immediate priority is on the core PIM functionality, particularly upstream functions. Also, the process of scoring may itself detract from the more important task of cataloguing deficiencies and identifying remedies in a collaborative way with the authorities. Figure 2 below illustrates the framework and Box 4 below summarizes each of the “must-have features”. Figure 2: World Bank’s PIM Diagnosis Scheme: Eight Must-Have Features 6 ‘The Power of Public Investment: Transforming Resources into Assets for Growth’, Anand Rajaram, Tuan Minh Le, Kai Kaiser, Jay-Hyung Kim, and Jonas Frank, Editors, World Bank, 2014 7 The eight must have functions are: investment guidance, formal appraisal, independent review, project selection and budgeting, project implementation, project adjustment, facility operation, and completion review and evaluation 4 Box 4: Eight Must-Have Features of a Good PIM System The World Bank PIM diagnostic identifies eight stages of the PIM cycle and, based on country experience, suggests desirable features for each stage to achieve PIM efficiency. Each of these features is described as follows: Stage 1: Strategic Guidance and First Level Screening: National and/or sector strategy documents are specific enough, and have sufficient coherence and authority to guide public investment, and are used systematically to screen new projects (with at least some projects dropped at the preliminary screening stage). Stage 2: Project Appraisal: Project development follows a standardized and well-defined set of procedures, and projects are appraised using the full range of techniques as appropriate. There are comprehensive central guidelines on project appraisal, including specific detailed guidance on the appraisal of PPPs. Stage 3: Independent Appraisal Review: The risk of line ministries “cooking the numbers” to ensure that a project passes appraisal is limited by an independent review of the project. This is a key feature which can be implemented in various ways and with various degrees of “independence” of the entity in charge of the reviews. Stage 4: Project Selection and Budgeting: In general, only projects that have been subject to thorough appraisal, and have been independently reviewed, are selected for funding in the budget. Multi-year budget authority with adequate financing and funding predictability supports effective project implementation. Stage 5: Project Implementation: There is a strong focus on managing the total project costs over the life-time of each project. Clear roles and responsibilities are in place for project implementation, with regular reporting on financial and non-financial progress and close monitoring by the Central Finance Agencies (CFA). Sound procurement systems are in place and are consistently implemented, with advanced techniques for allocating risks between government and contractor. Stage 6: Project monitoring and adjustment: Specific mechanisms are in place to trigger a review of a project’s continued justification if there are material changes to project costs, schedule, or expected benefits. Stage 7: Facility Operation and Maintenance: Financing and other resources for operation of the facility is planned for and made available by the relevant authority. Comprehensive and reliable asset registers are maintained and are subject to external audit. Stage 8: Basic Completion Review and Evaluation: All advanced countries put significant effort into ex post review. Investment projects are subject to audit by the supreme audit institution, including value-for-money audits. Source: Based on The Power of Public Investment Management, World Bank, 2014, with adaptations by the team 10. Since the institutional framework for PPP is at an early stage of development in Belarus, PPPs have been assessed on a selective basis as an “overlay” to the PIM assessment framework. Although the World Bank has developed an elaborate indicator-led assessment framework for analyzing the system for PPPs within the broader PIM system 8, its use was not considered at this stage. This is because many of the indicators would be rendered irrelevant by the nascent status of legal, regulatory and organizational arrangements for PPP in Belarus. At the same time, many aspects of project planning, design and appraisal are similar, regardless of whether projects are implemented as PPPs or through traditional means, and there would be some benefit from analyzing these using a harmonized assessment framework. It was 8 “PIM4PPP: Analytical Framework and Assessment Tool”, the World Bank, December, 2015 5 therefore decided to incorporate the assessment of the existing institutional arrangements and methods for PPP into the broader PIM assessment. This involves highlighting the special characteristics of PPPs at different stages, and identifying the resulting needs for particular tools and approaches. Data Collection 11. The PIM assessment is based on a triangulation of findings based on four main data sources: • Desk reviews of relevant laws, regulations, procedures as well as previous diagnostic reports on Belarus and international experiences; • Interviews with key stakeholders across government; • Portfolio level data on the State Investment Program (SIP) and trends in capital spending; and • Evidence on procedures used in a sample of 9 public investment projects 12. A desk review of previous diagnostic studies and of legal and regulatory documentation was carried out. In addition to previous diagnostic work (2007 Policy Note and PEFA 2014), the following documents were reviewed: • Budget Code; • Council of Minister’s Resolutions on State Programs; • Presidential edicts on state investment program preparation and approval; • Laws, regulation, and guidelines on fiscal budgetary planning, including Council of Minister’s resolutions on fiscal policy guidelines and on forecasting procedures; • Laws, regulation and guidelines on physical and spatial planning; • PPP law and relevant draft regulations; • Laws, regulation, and guidelines on strategic planning and policy coordination; • Public procurement law; and • Relevant regulations and guidelines (national – government, MOF, MOE, Ministry of Construction, other) on various stages of project preparation and implementation. 13. Key stakeholders across government were interviewed to validate findings from desk reviews. In addition to the relevant internal departments of the Ministry of Economy, interviewees included the Ministry of Finance, Ministry of Transport and Communications, Ministry of Energy, Ministry of Health, Ministry of Education, State Control Committee (supreme audit institution), National Agency for Investment and Privatization and the Brest Oblast government and technical departments. 14. Portfolio-level data has been collected to assess the scale, composition and performance of public investment. The main element of portfolio data is a consolidation of data and analysis of the SIP for the five-year period 2011-15 based on the presidential edicts approving/revising SIP for each year and the annual reports from Belstat on the actual SIP spending. By consolidating data from these sources, the team has built a database allowing to track the portfolio over the 5-year period with respect to, among others, the number of projects and their distribution across size and ministries, overall project values, start and end dates, annual allocations and actual spending, and financing sources. Several indicators have been 6 calculated on the performance of the portfolio with respect to the adequacy of funding, ability to absorb allocations and timeliness of implementation (Box 5): Box 5: Indicators of Public Investment Portfolio Performance Annual disbursement Ratios (the actual spending as a % of the original and revised budget allocations): the indicator shows the ability to spend according to the financial plan and can illustrate absorption problems due to planning/preparation or implementation issues (or both). Time to complete at current level of funding (financial balance to complete project divided by the allocation for latest year): the indicator shows the degree to which the portfolio is adequately funded. If the average time to complete at current level of funding exceeds 4 years, it can be considered “underfunded”. Time for implementation (number of years that projects have been under implementation): the indicator measures historical performance by the average number of years that projects have been under implementation. If this exceeds 5 years, then under-performance is a historic and entrenched issue across the investment portfolio. Time Overruns (time overrun as a % of the originally estimated project duration): the indicator shows the degree to which projects are implemented in a timely fashion. Dormancy (the number or % of projects with at least 3 years’ implementation time for which actual budget spending for the 3 last years were 10 % or less of the balance to complete): the indicator shows the degree to which projects are consistently receiving inadequate or “token” funding, thus preventing timely implementation and revealing a lack of priority for finalization. 15. In addition to the SIP, data also includes analysis of trends in capital budgets and spending based on data collected from the Ministry of Finance: • Budget capital spending by line ministry, function and source of funding; • Capital spending by levels of government; • Spending arrears for capital expenditure of the consolidated budget to test the effectiveness of commitment controls applied; • Distribution of in-year republican budget capital spending by month; and • Ratio of actual outturn of republican budget capital spending to i) original budget and ii) final budget. The results of portfolio level data analysis are summarized in Chapters II and IV. 16. To complement the portfolio level data, interviews and written documentation on regulations and procedures, a project-level evidence base has been assembled by sampling 9 case studies of on-going or completed public investment projects. Despite a small size of the sample, and therefore the statistical significance of findings, project-level information was triangulated against the other data sources, to either confirm findings or indicate areas for further investigation or clarification. 17. Criteria for selection of the project sample were established in collaboration with the Ministry of Economy to reflect mainly national procedures and processes. The sample includes a range of on-going or recently completed projects from both the state level, through 7 the State Investment Program (SIP) and the regional level, through Regional Investment Programs (RIPs). Since the focus of the assessment is upon national procedures and processes, the sample consists of projects that are wholly funded using domestic financing sources, with the exception of one project that was also funded externally. A profile of the project sample is given in Table 1 below. Table 1: Profile of the Sample of Public Investment Projects N Authority Project Years Project value Financing sources Location (million BYR) 1. Ministry of Republican 2011- 240,165 SIP Minsk Health Laboratory of 2015 Oblast Molecular-Genetic Carcinogenesis 2. Ministry of Republican Center 2012- 451,197 SIP (86 %), other (14 Minsk Health for Positron 2015 %) Oblast Emission Tomography 3. Ministry of Reconstruction of 2006- n.a. SIP and other sources Minsk Education children’s summer of financing Oblast recreation camp “Zubryonok” 4. Ministry of Conversion of a 2011- 38,309 SIP (48.9 %); BSUIR Minsk Education two-storied 2017 own funds (51.1 %) cafeteria unit into five story classroom and laboratory building (Belorusian State University of Informatics and Radioelectronics) 5. Ministry of Road R-23 Minsk- 2011- 389,125 SIP (32.6 %), credits Minsk Transport Mikashevichi 2016 (67.4 %) Oblast and Communic ations 6. Ministry of Reconstruction of 2012- 52,035 SIP Brest Oblast Transport Dnieper-Bug Canal 2015 and facilities. Shipping Communic lock at Waterworks ations No. 8 "Zaluze" 7. Brest Surgery building of 2010- 296,791 Local budget (60.6 %) Brest Oblast Oblast the Oblast 2014 Subventions (37.6 %) Executive Oncology Centre in Indexation (0.2 %) Committee the City of Brest Loans (1.6 %) 8. Ministry of Construction of 2015- 356,100 Belarusbank credits Grodno Energy wind park near the 2016 (71 %) Oblast Village of Own funds (29 %) Grabniki, 8 Novogrudok rayon 9. Ministry of Construction of 2014- 418,565 SIP (29 %) Brest Oblast Energy Overhead Power 2015 Loans (61 %) Transmission Line Own funds (10 %) “Berezovskaya GRES-Ross” Note: An additional project under the Brest Oblast Executive committee, “Construction of a bridge over the Mukhovets river” was originally proposed, but subsequently dropped due to lack of data. 18. To assist in analyzing the selected projects in a consistent way, a detailed questionnaire has been developed. Aside from background information on the project value, scope, duration, cost and financing of the projects, the questionnaire includes a set of 46 questions structured around the World Bank diagnostic approach on the procedures used throughout the main stages of the PIM cycle. The questionnaire finally covers the duration of various phases and subphases of the PIM cycle with the aim to identify and analyze the reasons for possible bottlenecks. The responses on the questionnaires were validated by interviews with representatives of the 9 projects. The findings of the case studies are brought into the gap analysis of the current PIM system in Chapters III and IV. The responses to the questionnaire and summary tables are presented at Annex 2. C. Scope and Coverage Defining Public Investment 19. A conceptual definition of public investment is helpful for determining boundaries of the PIM system and the scope of the assessment. Public investment has been variously defined internationally to cover a narrower or broader range of expenditure types depending on country context. The working definition adopted for this assessment recognizes that public investment has multiple conceptual foundations - accounting, fiscal and economic - and should therefore meet a number of criteria at the same time to be classified as such. Accordingly, public investment should: • Give rise to financial obligations or potential financial obligations for general government; • Be intended to serve a specific welfare-improving public policy objective, including natural monopoly arguments; and • Lead to the acquisition or major improvement of a fixed capital asset (usually referred to as capital expenditure), which should have balance sheet implications for a public sector body at some point in time. Ultimately, it will be the legal/regulatory definition adopted by the GoB that is important, but the assessment is guided by the above. Chapter II further elaborates on different options for defining public investment in Belarus. In consultation with the authorities and bearing in mind the four above criteria for guiding what expenditure should usually be expected to come under the PIM system, the scope of the assessment has been established in relation to: levels of government; financing sources; and public investment originating from SOEs. 9 Levels of Government 20. Consistent with the general government financing criteria above and based on the distribution of public investment spending across levels of government, regional level investments have been included in the assessment. Public investments financed from domestic budget sources (budget allocations) are primarily channeled through Investment Programs at the national level - State Investment Program (SIP) - and regional level - Regional Investment Programs (RIP). Investments in RIPs of Minsk and oblast governments were consistently higher than the level of investment through SIP in the period 2011-15. In 2015, public investment in local government budgets totaled 2% of GDP while the SIP accounted for 1.2 %. Planning, preparation and implementation of regional investments follow similar procedures, but are subject to different institutional frameworks. Due to the significance of RIPs and to capture the specificity of the regional institutions, the regional level has been included in the assessment. 21. The scope is confined to investments funded through budgets at the different levels of government. While some investments could be financed from own source revenues of public entities, these are expected to be relatively insignificant compared to those financed from budgetary resources. Likewise, there are investment financed through extra-budgetary funds, but these are also relatively minor (see Chapter II). Financing Sources 22. There is significant financing of public investment by externally financed grants and loans in Belarus. The national program for international cooperation for 2011-2016 managed by the Ministry of Economy includes grants for US $ 412 million. As of January 1, 2015, the stock of liabilities under Russian, Chinese and World Bank loans was US $ 10.5 billion. While not all the foreign grants and loans are for public investment purposes, it is clear that public investment makes up a significant share. External grants are managed by the MoE, while loans are recorded and tracked by the MoF. While the focus of the PIM assessment is on the national system, rather than donor led practices, donor financed investment is included in the scope, firstly, to achieve, as much as possible, a full picture of the portfolio of public investment. In many cases, financing of projects is blended between domestic and external sources. Secondly, because financing sources might be identified only late in the process after identification and first level strategic screening of projects have taken place. This would imply that these initial stages are in many cases similar across projects with different financing sources. Thirdly, the overall management of selection and budgeting processes across financing sources, including choices between budget allocations, grants and loans is an important PIM function, and to address it in the assessment means that donor financing should be taken into account. Finally, externally-financed projects may provide a useful benchmark in terms of good practices of, e.g., appraisal and project management techniques. As shown in Table 1, the case studies of specific projects include a project with donor financing to facilitate such a comparison. 10 Public Investment Originating from SOEs 23. SOEs benefit from a wide range of state subsidies and directed lending, including for public investment. Public investment prepared and implemented by SOEs could in principle be included in the scope of the work. On the other hand, SOEs operate under a corporate governance framework giving only indirect influence to ministers, and senior officials of ministries on the selection and approval of individual investments through approval of SOE business plans, board discussions and similar. The latter would suggest that investment from SOEs wholly engaged in “economic activities” 9 should ordinarily be excluded from the coverage of the PIM system, because specific institutional arrangements exist or are being developed for considering SOEs’ investment plans within the broader frame of their businesses. This is the case with the ‘market-facing’ SOEs, but consistent with the second criterion of the definition above, investment expenditures by SOEs with non-commercial, ‘public policy’ motivations should come under the PIM system. The assessment considers such investment to the extent possible when analyzing such PIM aspects as project appraisal and independent review, while data limitations narrow the focus of portfolio analysis to SIP and public investment trends analysis to the general government sector. D. Outline of the Report 24. Following this introduction, the remainder of this report is structured as follows: • Chapter II provides an overview of the public investment system in Belarus and discusses the institutional roles and responsibilities for PIM; • Chapter III assesses the “upstream” stages of the PIM-cycle in Belarus using the World Bank diagnostic framework: strategic guidance and first level screening, project appraisal and independent review; selection and budgeting: • Chapter IV assesses project implementation, monitoring and adjustment: • Chapter V provides a gap assessment of the procedures for facility operation, project completion and ex-post evaluation; and • Chapter VI reviews the legal and institutional framework for PPP in Belarus as well as the management arrangement for the initiated piloting of PPP. 9 ‘…an economic activity is one that involves offering goods or services on a given market and which could, at least in principle, be carried out by a private operator in order to make profits.’ : OECD Guidelines on Corporate Governance of State-Owned Enterprises, 2015 edition 11 II. OVERVIEW OF PIM IN BELARUS A. Introduction 25. This chapter aims to provide an overview of PIM in Belarus, thereby putting the detailed stage-by-stage assessment of PIM into context. The overview includes the institutional and legal framework for PIM and the roles and responsibilities of the key stakeholders. The chapter also describes public investment trends and analyzes portfolio level data of the SIP. Finally, the chapter provides a high-level overview of the existing data bases and information exchanges and discusses public accessibility of PIM information. B. Institutional Framework and Overview of PIM Roles and Responsibilities 26. The institutional framework for PIM is a reflection of the general PFM Framework and is characterized by a strongly centralized decision making process, compliance-orientation of procedures and practices and a strong control system. 10 Belarus is a unitary presidential republic. As the head of state, the President of Belarus is vested with significant powers, including those directly related to PFM and PIM. In particular, the President endorses the Parliamentary approval of the annual Law on the Republican Budget, authorizes reallocations of appropriations set out in the annual republican budget for the current fiscal year, and approves the SIP. The President also has the authority to issue edicts (decrees) to establish, amend or cancel certain legal norms, and to provide exemptions. Table 1 below summarizes the roles and responsibilities of main PIM stakeholders. Table 2: Overview of Roles and Responsibilities of the Main PIM Stakeholders Institution Description President Signs laws, including on approval of the Republican Budget; authorizes reallocation of appropriations set out in the annual budget for the current fiscal year; determines procedures for SIP preparation and implementation; approves the SIP for the next FY; reviews the annual report on the execution of SIP. Parliament Approves annual laws on the Republican Budget and laws on approving budget execution for the reporting period. Government Approves state programs; approves reallocation of appropriations within SIP allocations; approves an annual report on the execution of SIP and submits it to the President. Ministry of Economy (MoE) Responsible for forecasting, monitoring and analysis of social and economic development of the country; prepares macroeconomic forecasts to be used as a basis for next FY budget estimates; 10 According to the 2014 PEFA, the institutional arrangements in Belarus for management of budget resources can be described as highly centralized, with some operational controls devolved to MDAs and subnational governments. A strong overarching regulatory framework is set centrally, and budget planning is predominantly top down including in relation to investments (although MDAs and subnational governments are consulted and contribute to budget deliberations). PFM procedures used at the central and local level are largely uniform and determined by the central authorities. MDAs do have some flexibility to determine detailed spending plans (ROSPICE), however, once set, these become hard budget execution controls in the centralized treasury system, which can only be amended with the approval of the Ministry of Finance (or the Financial Departments of the Executive Committee in the case of subnational governments). Central controls are supplemented by a range of centralized inspection functions including the State Control Committee and Department of Control and Inspection (KRU) in the MoF. 12 prepares a draft SIP breakdown and a report on its execution. Ministry of Finance (MoF) Responsible for formulation and implementation of general fiscal policy, including setting overall budget ceilings and determining SIP envelope; drafting annual laws on the Republican Budget and laws on approving budget execution for the reporting period; preparing consolidated budget estimates; republican budget execution; domestic and external state debt management; accounting, reporting and audit methodology; etc. Ministry of Architecture and Responsible for overall coordination and supervision of the Construction implementation of the SIP in cooperation with the Ministry of Economy The State Construction Oversight of the construction quality based on compliance-with- Inspectorate standards approach; has a right to stop a construction in case of- violation of standards. Line Ministries and State Prepare State Programs; provide investment project proposals for Agencies inclusion in the SIP; implement investment projects; act as “customers” in construction projects or delegate this function to a subordinated organization or dedicated entity. Regional and Local Develop and implement local investment projects, including for Authorities inclusion into the Regional Investment Programs (RIP). Manage and oversee RIP implementation. Ministry of Antimonopoly Develops and enforces state policies related to procurement, Regulation and Trade including public procurement; handles complaints in procurement (MART) Republican Unitary Responsible for independent review of the detailed design Enterprise documents of construction objects “GlavGosStroiEkspertiza” and its subsidiaries in oblasts and in the City of Minsk State Control Committee Controls for effective and efficient use of budgetary funds and state property, and observance of the acts of the President of the Republic of Belarus, the Parliament, and the Government; reviews annual budget execution reports; submits conclusions to the President and informs Government and Parliament on the findings, including SIP related issues. State Property Committee Registers real estate assets; keeps a Unified Register of the Public Property Source: World Bank staff based on the legislation of Belarus. 27. The MoE plays a key role in strategic planning. The MoE is responsible for the state policy on analysis, forecasting and monitoring of social and economic development and for formulating the overall strategy and main directions of socio-economic development in the country; the development and implementation of public investment policy; and for developing the state policies for state property management and privatization. The MoE coordinates the activities of public administration bodies, and other state organizations subordinated to the Government of the Republic of Belarus in these areas. 13 28. The MoE is charged with the development and implementation of the overall state investment policy, while the responsibility for preparation and implementation of individual projects are separated across ministries based on asset ownership. According to the MoE’s Statute, 11 it must ensure the implementation of the unified state investment policy through: • coordination of all stakeholders at the national and local levels; • investment analysis and forecasting; • promotion and attraction of local and foreign investments; • cooperation with investors; and • state expertise on investment projects. 29. The MoE is also responsible for justification of the volume of capital spending financed from the budget (including from SIP) and other sources of investments. As part of the budget process, the MoE consolidates MDA requests for financing of construction projects and balances those requests with the available fiscal envelope for the SIP negotiated with the MoF on an annual basis. In the course of the fiscal year, the MoE collects MDA proposals for amending SIP allocations and submits them to the Government for approval. 30. The MoF is responsible for the overall planning and execution of the Republican Budget. This includes development of the main directions of the fiscal policy, registration and recording of loan agreements and state guarantees, including for public investment projects, public debt management, etc. 31. Monitoring of SIP project implementation is performed by the MoAC based on information submitted by the respective MDAs. 32. The State Control Committee reviews proposed SIPs to ensure their correspondence with the President’s Orders, reviews annual reports on SIP execution and can be involved in reviews of project implementation on a selected basis. In case of such involvement, the Committee takes a leadership role. 33. A mapping of the description of roles and responsibilities to the PIM cycle reveals several gaps with no clear allocation of responsibilities for proposing, reviewing and deciding on project proposals at various stages (Table 3). Thus, there is no entity responsible for first level screening and review of project appraisal except for technical quality checks related to construction. Similarly, some stages, such as ex-post evaluation are not formalized in the regulation and, as a result, no institutional responsibility is assigned. Table 3: Current Roles and Responsibilities by PIM Stage/Function Process Stage/ Responsible Body/ Reviewed by: Approved by: Function Proposer Strategic Policy Central level MoE The Government and Guidance authorities (for state programs) Project Any authorities, None None Identification and including local 11 The Government’s Resolution #967 (July 29,2006). 14 first level screening governments, corporate and public sectors Project Appraisal Project “GlavGosStroiEkspertiza” None & Independent Initiator/developer, The and its subsidiaries in Review State Authority, oblasts and in the City of Agency, SOE, others Minsk (for design of from corporate and construction technical public sectors documentation) Ministry of Natural Resources and Protection of Environment (before 2017) and its subordinated agencies (starting with 2017) – for state ecological examination Selection and The MoF and The MoE None The President Budgeting (for SIP) Procurement Project Implementer None The President, the Parliament Implementation Project Initiator or The State Construction The Government subordinated Inspectorate (for specialized body constructions); Project Implementer State Control Committee (proper use of budget funds), MoAC (timelines of SIP’s project implementation); Operation Owner of an object, State Control Committee None Project Initiator (proper use of budget funds); Ex-post Evaluation Does not exist Does not exist Does not exist C. Overview of Legal and Regulatory Framework 34. The compliance-oriented approach and detailed attention to the technical aspects of construction result in an extensive and itemized legal framework for construction, while the project management framework is less developed. The current framework regulates all aspects of construction, including the development of design and technical documentation, several kinds of mandatory expertise, general and specific procurement rules, monitoring of implementation, facility operation and reporting. At the same time, however, the current legislation does not include definitions of basic concepts such as “public investment” and “public investment project”, the project cycle and its individual stages. Correspondingly, some stages and elements of the project cycle, as understood internationally, are missing or are at early stages of development in Belarus. Among these are independent review of project appraisal, criteria based selection, and monitoring and evaluation (Table 4). 15 Table 4: Overview of Main Laws and Regulations Governing PIM in Belarus Area Description Basic Definitions None General rules Edict No. 299 of the President on Preparing, Executing and Reporting on State Investment Program (2006), Edict No. 106 of the President on State Programs and Provision of State Financial Support of March 23, 2016 Strategic and Annual Planning • The 15-year National Strategy for Sustainable Development, which covers a 15-year period (current one is for 2016-2030); • The 5-year Program for Social and Economic Development, which covers 5 years (current one for 2016-2020); • The annual forecast for social and economic development (though in the few last years this annual forecast has also included estimates for the next 2 years); • The Council of Ministers’ Resolution No. 148 On List of the State Programs for 2016-2020 (2016); and • The 5-year State Programs representing key areas of sectoral and cross-sectoral development, including general assessment of investment needs Budget and Extra Budgetary Funds’ • The Budget Code (2008); Allocations • Annual Budget Laws; • The annual State Investment Program (SIP); • Presidential Edicts and Council of Ministers Resolutions on establishment and operation of various extra-budgetary funds Fiscal Rules Aimed at the Financial None Sustainability of Public Investments Project Appraisal: - pre-feasibility study None - feasibility study Resolution of the MoAC No. 17 of March 27, 2014 On the approval of the Book of Diagrams determining the sequence of actions in the implementation of the investment project in construction; Technical Code of Established Practice (2014) - for construction only. Independent Review These regulations cover only reviews of technical aspects of construction: Resolution of the Council of Ministers No. 791 (2016) on the state examination of urban planning and design documentation; ii) Regulation of the State Committee for Standardization No. 65 on Approving the Instructions on the Organization of the State Examination, 2011 Regulations covering state ecological examination: Law on State Ecological Examination, Strategic Environmental Assessment, and Environmental Impact Assessment (2016); Law on Protection of Environment (1992); Resolution of the Council of Ministers No.47 (2017) on approval of procedures of state 16 ecological examination, environmental impact assessment and strategic environmental assessment; Resolution of the Council of Ministers No. 1592 (2010) on the procedure of public environmental expert review; Law on State Ecological Examination (2009) – dormant; Resolution of the Council of Ministers No. 755 (2010) on approval of procedures of state ecological examination and environmental impact assessment – dormant. Criteria based project selection Edict No. 299 of the President on SIP formulates general criteria Project Implementation Law "On architectural, town-planning and construction activities in the Republic of Belarus"; Presidential Edict No. 26 dated January 14, 2014 “On measures to improve construction activities” Some aspects are covered by: Resolution of the MoA No.17 of March 27, 2014 On the approval of the Book of Diagrams determining the sequence of actions in the implementation of the investment project in construction Monitoring None, but Presidential Edict No. 299 gives the Council of Ministers the authority to determine ‘the procedure of control over the implementation of the Program and submission of the required reporting’. External Control and Audit The Constitution (1994) • Law on State Control Committee (2010); • Presidential Edict No. 510 “On improvement of the control (supervision) in the Republic of Belarus” (2009). Ex-post evaluation of achieved None results Technical aspects of construction • The Regulation of the Ministry of Architecture and Construction of Belarus No. 4 (2014) “On the establishment of the list functions for customer, developer, manager of the projects for construction, reconstruction, repair, restoration and service facilities construction, and on the Procedure for their implementing activities”; • The Council of Ministers’ Resolution No. 1476 (2008) “On Approval of the Procedure of State Examination of urban, architectural, construction projects and the order of development, coordination and approval of urban development project documentation”; • The Council of Ministers’ Resolution No. 755 (2010) “On some measures to implement the Law of 9 November 2009 On State Ecological Expertise"; • The Council of Ministers’ Resolution No. 992 (2014) “On the Republican commission on questions of justification of the cost of construction, reconstruction and restoration of objects of construction, import substitution of building materials and equipment”; 17 • The State Committee for Standardization’s Resolution No. 65 (2011) “On approving the instruction on organizing state review of construction projects”; • The Council of Ministers’ Resolution No. 297 (2014) “On Rules for making and execution of contractors’ agreement on design works and field supervision”; • The Council of Ministers’ Resolution No. 716 (2011) “On approval of the procedure for acceptance in service construction”; • The Council of Ministers’ Resolution No. 1450 (1998) “On approval of rules conclusion and execution of construction contracts”; • The Order of the Ministry of Architecture and Construction No. 158 (1995) “On the suspension of construction and maintenance objects which are under construction”. Source: World Bank staff based on the legislation of Belarus. Defining Public Investment 35. Definitions of public investment concepts and activities in many cases deviate from those used internationally. Once established in the legal and regulatory framework, those definitions establish the “unit of analysis” for project appraisal and selection. In the absence of clear definitions of public investments and investment projects, the general practice is to identify “objects of construction” financed by the state budget as investment projects. In practice, this definition equates the scope of public investment projects with that of construction contracts. By comparison, the definitions of public investment projects used internationally would go beyond the construction of the main assets and encompass all the related groups of activities that are carried out to achieve a common set of outputs or outcomes. Hence, what is in good practice countries considered to be within one and the same project can in Belarus be divided into several objects, each with a separate main contract. Please refer to Table 5 for examples of definitions of main public investment concepts and activities. Table 5: Selected Definitions for Main Public Investment Concepts Concept (act) Definition Comments Investment project A set of documents and other materials The term “project” is equated (CoM Resolution (hereinafter - the documents) which with a set of documents. The No 506, dated May determine feasibility, conditions and Resolution only relates to 26, 2014) methods of investments, amounts and procedures for development, sources of funding, are time-bound and approval and review of aimed at achieving a given result for the business plans for investment investment project participants during a projects applying for state certain period of time support 12. Selection of projects for financing from the SIP does not fall under the requirements of this Resolution Scope of SIP The Program shall include the objects, The SIPs scope is limited to 12 Following the adoption of Presidential Edict No. 106 of March 23, 2016 on State Programs and the Provision of State Financial Support, the term ‘state support’ is expected to be revised. 18 (Presidential Edict construction, reconstruction, restoration construction objects. Other No 299, dated (hereafter – the construction) of which are fixed assets, ICT for example, carried out in order to create and develop are not covered by SIP material and technical facilities of branches of the economy and social sphere of the Republic of Belarus Capital Capital budget expenditures are the part of In general, the definition is expenditures of a the budget expenditures which support consistent with the government budget (Budget innovative and investment activity, finance statistics definition of Code, article 40) including under public-private partnership acquisition and fixed assets, agreements, which comprises expenditures excluding creation of state intended for investments in the existing or stocks and reserves, acquisition new entities, expenditures on of land modernization, reconstruction and other expenditures associated with the increase of the value of capital assets, intangible assets and material reserves as well as expenditures related to creation or enlargement of assets of entities. Capital budget expenditures also include expenditures on creation of state stocks and reserves, acquisition of land and intellectual property rights. 36. The focus on construction objects provides for a rather narrow concept of public investment projects. Edict No. 299 specifies procedures for preparation and implementation of SIP and states that “the program shall include the objects, construction, reconstruction, restoration (hereafter – the construction) of which are carried out in order to create and develop material and technical facilities of branches of the economy and social sphere of the Republic of Belarus”. The Edict also states that “financing of the construction […] shall be performed on a non-repayable basis from the resources envisaged in the Law on the Republican Budget for the coming financial year for financing capital investments, road facilities and in the state earmarked budgetary fund of the national development, and also from the resources allocated from the reserve fund of the President of the Republic of Belarus”. This concept may cause problems for modernizing project appraisal in line with good international practice according to which a project should be defined based on the ultimate goal of the investment and that its scope should be broad enough to encompass all the components of expenditures required to deliver benefits to the target beneficiaries on a sustainable basis. Projects as defined in Belarus are sometimes closer to project components or artificial project stages determined more by financial conditions than technical efficiency. 37. In addition to introducing a broadened concept of “projects”, the legislation should include a clear definition of “investment” and “public”. There is no standard international definition of public investment and different countries have different understanding of its scope. This is why it is important for Belarus to have its own definition, which is fixed in the legal and regulatory framework, and thus defines the scope of the PIM system. 38. There is general agreement that PIM systems should be concerned with investment in fixed capital assets. Fixed capital assets extend beyond construction, to include 19 plant and equipment, and associated fixtures and fittings. Fixed assets also include IT systems. Some countries have minimum values for capital assets to avoid PIM systems being ‘cluttered’ with minor capital expenditures. Investment in financial assets is, however, clearly excluded from the definition of public investment. 39. The ‘public’ part of the definition is where there is more room for different interpretations. Four different perspectives on the ‘public’ part of public investment are given below, with a key decision being the extent to which SOEs are captured within the scope of the definition. 40. Public Investment: Balance Sheet Perspective. The balance sheet perspective defines public investment in terms of the impact of the acquisition of fixed assets on the general government’s balance sheet. Consistent with this perspective, this is the definition provided by the IMF 13: Public investment is measured as general government gross fixed capital formation (GFCF) and comprises the total net value of general government acquisitions of fixed assets during the accounting period, plus variations in the valuation of non-produced assets (e.g., subsoil assets). The general government comprises central and subnational governments, but excludes other public entities, such as state-owned enterprises (SOEs) and public-private partnership (PPP) arrangements. 41. Public Investment: Public Ownership Perspective. The ownership perspective would include all fixed asset creation (including in SOEs) that is directly funded by general government, through capital transfers or subsidies, or creates a contingent liability for general government, e.g., through a loan guarantee, which is directly related to the asset created. In this case, ‘public’ means that the asset created is owned by the public sector. This perspective is set out in Figure 3, which makes a distinction between budgetary investment and public investment. 13 ‘Making Public Investment More Efficient’, IMF Staff Report, June 2015 20 Figure 3: Capital Expenditure, Public Investment and National Capital Investment Source: ‘Belarus Policy Note: Selected Issues in Capital Budgeting’, World Bank 2007 42. Public Investment: Public Policy Perspective. The public policy perspective looks more closely at the purpose of investment, so that the PIM system would be concerned with publicly funded investment in fixed assets by general government and SOEs that have been created for the pursuit of welfare-improving, public policy objectives. Under this definition, the PIM system would apply to a subset of the expenditures indicated in Figure 3, and those relating to SOEs pursuing ‘economic activities’ would be excluded. 43. Public Investment: A Hybrid Perspective. Many countries may be some way from achieving the optimal corporate governance framework for SOEs envisaged in the OECD guidelines. In such cases, governments may be heavily involved in day-to-day management of SOEs and in providing preferential financing for investment through the budget. Assuming that the long-term goal would be to arrive at an improved corporate governance framework resembling that proposed by the OECD, in the interim, the key questions in relation to the coverage of the PIM system with respect to SOEs are: • To what extent should the government be directly involved in improving the investment decision-making of SOEs, as opposed to addressing the general corporate governance framework for SOEs? • If direct involvement is foreseen, to what extent should this come - at least, temporarily - within the scope of the PIM system, as opposed to being a component part of broader efforts to improve the corporate governance of SOEs? The answers will depend on country preferences, the level of government commitment to improving the corporate governance framework for SOEs and the state of advancement of reforms. These are all issues for the authorities to consider, but probably at this stage some sort of hybrid definition recognizing the multiple conceptual foundations for public investment - accounting, fiscal and economic - and meeting several criteria at the same time – has most merit. Accordingly, public investment should: • Give rise to financial obligations or potential financial obligations for general 21 government; • Be intended to serve a specific welfare-improving public policy objective, including natural monopoly arguments; and • Lead to the acquisition or major improvement of a fixed capital asset (usually referred to as capital expenditure), which should have balance sheet implications for a public sector body at some point in time. Budget Classification 44. The current budget classification does not capture “projects” which makes it more difficult to enable project level monitoring and management. The Budget Code provides guidance on the requirements for the budget classification, which is further detailed in the MoF’s Resolution no. 208 (December 31, 2008). The budget classification consists of seven segments, some of them explained below (Box 6). Box 6: Budget Classification in Belarus Administrative: This is a single level structure which is effectively the first level for budget appropriation control. It includes ministries and other recipients of budget funds including some state-owned enterprises and subnational government entities; Functional: The functional segment is largely in direct alignment with the classification of the functions of government (CoFoG), including functions, sub-functions and classes. The authorities have also added a fourth level, termed paragraph, which provides a more detailed breakdown by spending unit or other specific government activities. As a result, this fourth level is independent of the CoFoG structure with paragraphs able to apply to more than one third level CoFoG account; Programs: This is a two-level structure with programs and sub-programs. Programs generally represent a sector based descriptor with sub-programs detailing them further. Economic: the economic segment is a four-level structure reflecting payments (outflows) and therefore is more akin to the IMF 1986 Government Finance Statistics Manual Approach (GFSM1986) approach. The structure of economic classification’s codes consists of category, article, sub-article and element. Category 2 is capital expenditures and includes four articles: investments in fixed assets, creation of state stocks and reserves, acquisition of land and intangible assets, capital budget transfers. Investments in fixed assets contain three sub- articles: acquisition of equipment and other fixed assets, construction (six elements) and capital repair. Debt Types: – this is a three-digit segment which defines the specific debt instruments including guarantees along with whether it is central or subnational government debt. Source: PEFA Repeat Assessment, World Bank 2014 45. The paragraph classification under the functional segment contains some codes for individual projects. For example, specific codes were given for public investment projects financed by IFIs and for tracking capital expenditures financed by subvention aimed at mitigation Chernobyl’s aftermaths. Some codes were established to help ministries track capital expenditures under SIP projects. No specific guidelines exist on the use of these codes but since paragraph classification is independent from other levels of the functional classification, the same code could be used for different projects implemented by different ministries. 22 46. The program classification reflects the list and the structure of state programs by subprograms. It does not provide project level information. 47. Some of the components of the current budget classification could be expanded to provide for the codification of specific projects. The program classification looks to be the most relevant, given the program based strategic planning used in Belarus. The program classification already consists of subprograms. For example, the program code may be added with one unified index at the subprogram level (for instance, code of subprogram could include index “00”) which means that the subprogram includes investment projects only. Then, those investment projects could be represented under so called activity level of the subprogram. In that case, index 00 could be detailed from 01 to 09. However, this would require significant changes in strategic planning to ensure its coordination with budgeting of the public investment projects. For this purpose, the SIP would have to include all proposed investment projects, not only the ones specified in state programs. Investment projects which were selected for the SIP would be coded as described above, while investment projects developed by the President’s Orders would require the creation of specific programs, which are not directly linked to the State Programs. Fiscal Principles and Rules 48. The current legislation does not provide any specific fiscal rules aimed at sustainability of public investments. Article 85 of the Budget Code lists the mandatory information to be included into the “Key Directions of Fiscal Tax Policy of the Republic of Belarus” for the upcoming and the next planning periods. This document is a basis for development of an annual Budget Law and a mid-term Financial Program. The document consists of the key macro-economic indicators, forecast deficit, debt limit, the indicative levels of intergovernmental transfers and key legal changes aimed at the achievement of the fiscal policy’s goals. A mid-term Financial Program should be developed after the approval of an annual law and provide more detailed information on budget revenues and key expenditure priorities. None of those documents provide forecasts on public investments policy and (or) priority of allocations. There is no specific legal requirement for protecting the financing of ongoing projects until the end of project implementation, restricting in-year reallocation or reduction. 49. There is no system for fiscal risk assessment, nor a definition of what constitutes contingent liabilities. The Budget Code does not provide restrictions on public debt, limits for direct and guaranteed domestic and external debt are set in the annual budget law. Direct and guaranteed domestic and external debts of the central government are accounted by the MoF, direct and guaranteed debts of subnational governments are accounted by regional executive committees. 50. Fiscal principles and rules should support sustainable development and implementation of public investment projects. For future changes to the fiscal and budgetary framework, the following changes could be considered: • Establishment of specific budget rules for sustainable project financing. The Budget Code should introduce a mid-term forecasts of public investment financing and define rules for protecting the financing of ongoing projects until the end of project implementation. Clear rules for managing virements should accompany the above- 23 mentioned provisions to protect financing of the on-going capital project portfolio while allowing flexible to reallocate funds between slow and faster moving projects (see further in Chapter IV); • Introduction of basic fiscal risk provisions for sufficient budget balancing. The Budget Code and regulatory framework should introduce systemic fiscal risk assessment of public investment projects, define a concept of contingent liabilities, including those from the state guarantees provided for investment projects. D. Public Investment Trends Trends in Total National Investment 51. High economic growth rates during the period 2001-2008 were interrupted by the global financial crisis in 2009 and have since then remained low. While demand management measures led to a short-term growth rebound in 2010–11, the annual growth remained relatively low in the following years, and in 2015 the economy entered a recession for the first time since 1995. 52. The key trends of national investments since 2011 mirrors the slump in the country economy. During 2011-2015 the share of total national investment to GDP decreased from 33.2 to 24.2 %. The share of investment financed by the republican and local budgets decreased by 0.7 and 0.2 percent points, respectively (Figure 4). Figure 4: Structure of Total National Investment by Financing Sources, percent to GDP Own funds of organizations 2015 Bank loans 2014 Republican budget Local budgets 2013 Extrabudgetary funds Funds of individuals 2012 Funds borrowed from other organizations 2011 Foreign investment (excl foreign bank loans) 0% 5% 10% 15% 20% 25% 30% 35% Source: World Bank staff calculations based on Belstat data Note: Bank loans include bank loans to both public and private investment 53. As a result of decreasing capital spending financed from budget and own sources of public entities, the public sector significantly decreased its contribution to the total national investment. The contribution decreased by 8.3 % of GDP during 2011-2015, including 3.1 percent, 3.2 percent and 2 percent decreases for republican, municipal and private organization with public share, respectively (Figure 5). 24 Figure 5: Structure of Total National Investment by Type of Organization, percent to GDP 2015 2014 2013 2012 2011 0% 5% 10% 15% 20% 25% 30% 35% Republican organizations Municipal organizations Private with public share Private with foreign share Foreign organizations Other Source: World Bank staff calculations based on rearranged Belstat data Trends in Capital Budget Expenditures 54. As a result of the crisis-induced fiscal consolidation, capital expenditures have declined significantly both as a share of total expenditures and as a share of GDP. As shown in Table 6, capital expenditures have fallen from 8.3 % of GDP in 2010 to 3 % of GDP in 2016. Table 6: Key Fiscal Indicators, % to GDP 2010 2011 2012 2013 2014 2015 2016 Real GDP, % change 7.7 5.5 1.7 1.0 1.7 -3.8 -2.6 Gross fixed investment, % change 17.5 13.9 -11.3 9.6 -5.3 -15.9 -18.4 GG revenues, % GDP 41.6 38.8 40.5 40.1 37.8 39.9 39.7 GG expenditures, % GDP 42.1 34.5 38.9 39.9 36.7 38.7 38.1 Current expenditures, % GDP 24.0 21.5 22.8 22.5 21.1 23.0 24.1 Capital expenditures, % GDP 8.3 5.1 6.4 6.8 5.5 4.2 3.0 Public and guaranteed debt, % GDP 39.5 46.0 39.1 37.6 38.8 47.7 47.7 Source: WB, Belarus SCD (draft as of March 15, 2017) 55. Investments in capital construction make up the lion’s share of public investments in fixed assets, ranging from 72 to 77 % during 2011-2015. Within capital expenditures for construction, “Other construction”, which includes capital intensive sectors such as roads, constituted between 0.45 to 0.64 % of GDP at the republican level and 0.7 to 1.6 % of GDP at the subnational level. Another significant part of construction expenditures of subnational governments is construction of social and cultural facilities, which during 2011-2015 varied between 0.73 to 1.73 percent of GDP (Figure 6). 25 Figure 6: Composition of Capital Expenditures for Construction - Republican and SNG Budgets, percent to GDP Other 2015 construction 2014 Housing SNG construction 2013 Construction of 2012 social/cultural facilities 2011 Construction of 2015 production facilities 2014 Construction of administrative facilities RB 2013 Design and 2012 survey operations 2011 Other 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% Source: World Bank staff calculations based on MoF data 56. The functional composition of the budget has changed due to a significant contraction of public expenditures. General government expenditure fell from 49.2 % of GDP in 2008 to 40 % of GDP in 2012. This reduction was mainly owing to cuts in the capital budget, which resulted in lower spending on the economic affairs sector, which includes many capital-intensive sectors such as transport and energy. Social sectors, including social protection, education and health, on the other hand, were largely protected from spending cuts and continue to absorb a significant share of public expenditures. 57. The share of construction expenditures allocated to the national economy sector remains at a relatively high level. In 2011-2015 it averaged around 0.3 and 0.4 percent of GDP for the republican and subnational budgets, respectively. At the republican level the biggest share of these expenditures belongs to roads, agriculture, and fuel and energy, while at subnational level these expenditures are mostly represented by agriculture and transport sectors (Table 7). Table 7: Functional Composition of Capital Expenditures for Construction, Republican and SNG Levels, percent to GDP Function Republican Budget Subnational Budgets 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 General Public Activities 0.08 0.14 0.20 0.07 0.04 0.26 0.32 0.41 0.23 0.18 National Defense 0.01 0.01 0.01 0.01 0.00 0.00 0.00 0.00 0.00 0.00 Judicial Power, Law Enforcement and Security 0.11 0.11 0.09 0.12 0.08 0.01 0.01 0.01 0.01 0.00 National Economy 0.27 0.30 0.28 0.23 0.23 0.29 0.47 0.58 0.35 0.32 Environmental Protection 0.02 0.02 0.01 0.01 0.01 0.04 0.03 0.02 0.01 0.01 Housing and Utilities, And 0.12 0.12 0.12 0.13 0.10 0.59 1.00 1.60 1.39 1.00 26 Housing Construction Healthcare 0.05 0.07 0.04 0.05 0.05 0.18 0.17 0.19 0.19 0.23 Physical Culture, Sport, Culture, and Mass Media 0.12 0.14 0.13 0.14 0.09 0.34 0.43 0.54 0.27 0.12 Education 0.05 0.02 0.02 0.05 0.01 0.18 0.20 0.19 0.21 0.13 Social Policy 0.01 0.00 0.01 0.01 0.00 0.02 0.04 0.02 0.02 0.03 Total 0.85 0.94 0.90 0.83 0.61 1.91 2.67 3.56 2.67 2.03 Source: World Bank staff calculations based on MoF data 58. Capital budget execution rates are traditionally high in Belarus and even significantly overshooting the originally approved budgets. 14 During 2011-2015 capital expenditures of the republican budget were over-executed on average by 11 % compared to the originally approved budget while the over-execution of the total republican budget expenditures was 5 %. For the subnational budgets, deviations were even higher – 25 and 10 %, respectively. 2013 was the only year when the republican capital expenditures were under- executed taking the brunt of fiscal adjustment. In the following years the fiscal situation allowed the Government to increase capital repairs and construction (including expenditures for construction of the nuclear power plant), which led to over-execution of republican capital expenditures by 23 percentage points in 2015. Over-execution of subnational governments’ capital expenditures fell from 48 % in 2011 to 7 % in 2015 (Figures 7 and 8). Figure 7: Capital Expenditure Execution Rates, Republican Budget, % to original and revised budgets 180% 170% CapEx in % to approved 160% budget 150% CapEx in % to revised 140% budget 130% 120% Investments in fixed assets in % to approved 110% budget 100% Investments in fixed 90% assets in % to revised 80% budget 2011 2012 2013 2014 2015 Source: World Bank staff calculations based on MoF data Note: Capital expenditure includes investments in fixed assets and capital transfers. For the purposes of this table expenditure on state reserves and land acquisition is excluded. 59. The significant over-execution of the original budgets is indicative of the lack of credibility of the budget. Budgets have initially been limited to what is considered affordable based on conservative macroeconomic assumptions and have in many cases been increased as the economy exceeded original expectations. The frequent in-year budget revisions up to a late stage of the fiscal year mean that execution rates in percentage of revised budgets are very close to 100 %. It is less clear what can be concluded in relation to the ability of the PIM system 14 http://minfin.gov.by/ru/budgetary_policy/analytical_reports/ 27 to ensures efficient and timely project implementation (see further in Chapter IV). Figure 8: Capital Expenditure Execution Rates, Subnational Budget, % to original and revised budget 160% 150% CapEx in % to approved budget 140% 130% CapEx in % to revised budget 120% Investments in fixed 110% assets in % to approved budget 100% Investments in fixed 90% assets in % to revised budget 80% 2011 2012 2013 2014 2015 Source: World Bank staff calculations based on MoF data Note: Capital expenditure include investments in fixed assets and capital transfers. For the purposes of this table they are taken without expenditure on state reserves and land acquisition 60. In-year disbursement rates for capital spending are slightly skewed towards the end of the year. Traditionally, low disbursement profiles in the first few month of a fiscal year can be explained not only by weather conditions, but also by late approvals of SIPs, when only few priority projects get financing. For capital spending on construction in 2011-15, 19 % on average took place in the last month of the fiscal year (December). This is partially due to the absence of active cash management with cash being heavily rationed during the year and end-of-the-year revisions of the budget allowing for a high utilization of the remaining budget funds, so as not to lose them in the next budget year (Figure 9). 28 Figure 9: Average In-year Distribution of Republican Budget Capital Construction Spending in 2011-2015, % 20% 19% 18% 16% 14% 11% 11% 12% 10% 10% 8% 8% 8% 8% 8% 7% 6% 6% 4% 4% 1% 2% 0% Source: World Bank staff calculations based on MoF data Overview of the SIP Portfolio 61. The analysis of the SIP portfolio for 2011-2015 indicates that a total of 72015 projects received SIP allocations during this period with an average of 316 projects per year. 16 Another 30 projects were mentioned in Belstat’s reports, but no budget allocations were identified for them in the SIP 17. At the same time, the analysis identified 186 cases where budget allocations were separately provided for project design (Table 8). In 19 of these cases, the team was not able to identify the projects in the SIPs for subsequent years. It is possible that these projects were still implemented, including under a different name or through different financing mechanisms. Table 8: Number of Cases When Only Project Design Was Financed Year Revised SIP, number Allocations in revised SIP, mBYR 2011 60 28,221 2012 32 28,068 2013 37 69,690 2014 30 93,459 2015 27 166,245 Total 186 385,682 Source: World Bank staff calculations based on analysis of Presidential Edicts on revised SIPs for 2011- 2015 62. The number of projects in the SIP portfolio decreased slightly up until 2014 and was sharply reduced in 2015 due to the freezing of about one third of the portfolio. From 15 Including projects, frozen in 2015. 16 The lowest level of SIP detail for which appropriations are opened are “construction objects”. These construction objects are often further broken down within the SIP which includes a number of “start-up facilities”. For the purposes of the analysis the term “project” is used for “construction objects”, while the “start-up facilities” are not included in the project count. 17 One of the reasons for deviation could be that statistical report can be less accurate compared to SIP legislation 29 2011 to 14, the number of projects fell from 380 to 308, while the number of projects in 2015 was only 182. This year 92 projects were put on hold and their allocations suspended to make room for government priorities within a reduced budget envelope (Table 9). Table 9: SIP’s Portfolio Distribution by Number of Projects and by MDAs 2011 2012 2013 2014 2015 2011-15 2011-15 Frozen av. av. (%) in 2015 Executive Committees of 64 65 57 54 41 56 17.8 12 Oblasts and the City of Minsk Ministry of Internal Affairs 57 44 31 28 13 34 10.8 10 Ministry of Transport and 27 24 19 19 14 21 6.7 5 Communications State Committee for Border 20 24 24 21 10 20 6.4 7 Troops Ministry of Sports and 23 23 18 17 5 17 5.4 8 Tourism Ministry of Culture 18 16 18 18 10 16 5.1 4 Ministry of Education 18 18 16 15 5 14 4.5 10 Ministry of Defense 20 16 14 13 9 14 4.5 2 Ministry of Emergencies 14 12 10 12 9 11 3.5 3 State Customs Committee 8 13 12 11 6 10 3.2 3 Other 120 103 122 100 60 101 32.1 28 Total 389 358 341 308 182 315 100.0 92 Source: World Bank staff calculations based on analysis of the Presidential Edicts on revised SIPs for 2011-2015. Note: The number of projects corresponds to the number of projects included into SIP which have budget allocations in at least one of the columns – “Approved budget allocations” or “Settlement of accunts payable”. The analysis revealed few cases when projects were included into SIP without any allocations – such projects were not included into calculations. 63. The project portfolio is dispersed across a large number of entities, both in terms of number of projects and budget (Tables 9 and 10). In 2011-2015 seven ministries and oblast level authorities accounted for 66 % of the SIP budget and 56.5 % of the projects. During the analyzed five-year period, the biggest amount of SIP expenditures was allocated for Executive Committees of Oblasts and the City of Minsk (15.9 % of the total allocation), Ministry of Transport and Communications (12.7 %), Ministry of Energy (9.2 %), Ministry of Sports and Tourism (6.8 %), Ministry of Health (6.1 %), Ministry of Culture (5.4 %), Ministry of Education (5 %) and Ministry of Internal Affairs (4.9 %). The biggest number of projects was implemented by the Executive Committees of Oblasts and the City of Minsk (55 on average corresponding to 15.9 % of 2011-15 SIP budget). The Ministry of Internal Affairs implemented 14.6 % of projects in 2011 and 7.1 % in 2015, inspite of the lowest amounts of financing. 30 Table 10: Republican Budget Allocations in Revised SIPs, in mBYR and % 2011-2015 mBYR % Executive Committees of Oblasts and the City of Minsk 3410.8 15.9 Ministry of Transport and Communications 2722.4 12.7 Ministry of Energy 1965.5 9.2 Ministry of Sports and Tourism 1464.1 6.8 Ministry of Health 1301.9 6.1 Ministry of Culture 1149.8 5.4 Ministry of Education 1062.4 5.0 Ministry of Internal Affairs 1049.8 4.9 Ministry of Defense 960.1 4.5 State Customs Committee 480.1 2.2 Other 5818.1 27.2 Total 21385.0 100.0 Source: World Bank staff calculations based on analysis of the Presidential Edicts on revised SIPs for 2011-2015. 64. The portfolio was relatively stable over the 5-year period although the number of new projects has decreased in absolute terms due to fiscal constraints. Between 75 and 90 % of projects were on-going in the period 2011-15, while the share of new projects ranged from 10 to 25 % (Figures 10 and 11). As seen in Figure 10, the number of new projects has decreased in absolute terms from 97 new projects in 2011 to only 31 and 33 new projects in 2014 and 2015, respectively. Figure 10: New and On-Going SIP Projects, Figure 11: New and On-Going SIP Projects, % number of projects of total number of projects 450 100 400 90 350 80 97 47 300 65 70 31 60 250 50 200 33 40 150 30 100 20 50 10 25 19 18 13 10 0 0 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 On-going New New On-going Source: World Bank staff calculations based on analysis of the Presidential Edicts on revised SIPs for 2011-2015. Notes: (i) A project was considered “new” if at its first mentioning in the database the field "Start of the project" was equal to the year of SIP, all other projects in SIP were considered to be "on-going"; (ii) During 2011-15, the number of one-year projects (projects started and finalized within the same year) increased from 14 to 22, and their share in the subset of “new” projects increased from 14 to 65 percent respectively; (iii) The number of projects for 2015 does not include 92 frozen projects. 31 65. The Republican Budget is the key source of SIP-financing. Its average share was about 75% for the analyzed years. Co-financing from local budgets gradually increased from 14.3 % in 2011 to 25.8 % in 2014, but significantly decreased in 2015 (4.9%), while shares of the bank loans and other budgetary sources increased (Figure 12). Figure 12: Actual Financing of SIP by Sources of Finance, % 100 Republican budget 90 14.3 10.2 4.9 19.9 25.8 80 Bank loans 70 Local budgets 60 Other budgetary % 50 sources 40 83.6 82.1 70.8 75.1 Private entities funds 30 60.6 20 Foreign sources excluding foreign 10 banks loans Extra-budgetary funds 0 2011 2012 2013 2014 2015 Source: World Bank staff calculations based on analysis of Belstat reports on financing objects of construction, included into the SIP. 66. Similarly to total capital expenditures, execution of SIP expenditures is subject to substantial fluctuations. Table 11 provides information on execution of the SIP by selected budget funds administrators. In addition to pro-cyclical changes to expenditures, execution rates for SIP expenditures are also influenced by revisions to the SIP in line with physical progress of individual construction objects. Edict No. 299 gives the Government the authority to reallocate funds between the ministries within the overall SIP appropriations, therefore ministries’ SIP allocations are usually adjusted in line with the ministry’s capacity to absorb allocations. 32 Table 11: Execution Rates for SIP Expenditures of Selected Budget Funds Administrators, percent to originally approved budget 2011 2012 2013 2014 2015 Average Ministry of Energy 65.9 95.5 81.8 96.2 93.9 87 Ministry of Health 112.1 285.4 136.2 98.1 241.4 175 Ministry of Culture 99.3 108.1 127.3 113.1 188.2 127 Ministry of Education 77.1 87.6 72.2 85.9 94.1 83 Ministry of Agriculture 110.5 193.2 88.4 98.1 107.1 119 Ministry of Transport and 118.3 102.8 56.7 97.6 159.8 107 Communications Ministry of Sports and Tourism 91.5 130.7 78.7 169.6 121.5 118 Ministry of Defense 103.4 171.7 117.7 91.3 132.9 123 Regional Executive Committees 84.1 105.1 85.2 110.9 92.2 95 Free Economic Zones 104.8 155.4 58.1 81.2 88.7 98 Administrations Source: World Bank staff calculations based on MoF data Note: Execution rates are calculated based on SIP expenditures in part relating to financing from republican budget, reserve fund of the President and National Development Fund. 67. The practice of frequent in-year changes to the SIP is reflected in changes to the number of projects. Edict No. 299 gives the President the authority to add projects to the SIP. During 2011-2015, the biggest changes on a net basis occurred in 2011, 2013 and 2015. Among the MDAs most frequent revisions to the number of projects were observed in the Ministry of Internal Affairs, Ministry of Defense, and State Committee for Border Troops (Table 12). Table 12: In-Year Changing of Project Numbers, by Selected MDAs 2011 2012 2013 2014 2015 Frozen in 2015 Total (on a net basis) +38 +7 -17 -9 +19 -15 Ministry of Internal Affairs (27) +19 -1 -2 -4 +1 -3 Ministry of Health (5) +1 0 -1 -2 +1 -1 Ministry of Transport and 0 1 0 1 +2 0 Communications (4) Ministry of Education (4) 0 1 -1 -2 0 0 Ministry of Culture (2) 1 -1 0 0 0 -1 State Committee for Border Troops (9) +3 +2 -2 -1 +1 0 Ministry of Defense (10) +3 +1 -1 +1 +4 -1 State Customs Committee (6) 0 2 -2 -1 +1 -1 Source: World Bank staff calculations based on analysis of the Presidential Edicts on approved and revised SIPs for 2011-2015. Regional Capital Expenditure Trends 68. Public Investments at the regional level are primarily channeled through the Regional Investment Programs 18 (RIP). As shown in Figure 13, RIPs of Minsk and Oblast 18 RIPs have somewhat wider scope compared to SIP – usually the regions include not only construction, but major capital repairs in RIPs 33 governments were consistently higher than the level of investment through SIP in the period 2011-15. In 2015, public investment through local government budgets totaled 2 % of GDP while the SIP accounted for 1.2 %. Figure 13: Public Sector Investment 2011-15 by Levels of Government, % of GDP 4 3.5 Republican budget 3 2.5 Local budgets 2 1.5 Extra-budgetary funds 1 0.5 0 2011 2012 2013 2014 2015 Source: World Bank staff calculations based on Belstat data 69. Investment expenditures of SNGs vary significantly across the regions spanning from 0.1 percent of the Gross Regional Product (GRP) in Minsk Oblast in 2015 to 5.9 percent of GRP in the City of Minsk in 2013. Brest – and to some extent Mogilev – Oblasts show relatively stable financing ratios, while the share of RIP expenditures in other regions varies significantly during the years under analysis suggesting low predictability of public investment expenditures in the medium term (Figure 14). Figure 14: Actual Expenditures under RIPs, % of Gross Regional Product Source: World Bank staff calculations based on Belstat and regional authorities data Note: No data was provided by Grodno Oblast Executive Committee 34 E. Databases and Information Management 70. The construction-object-based approach to PIM limits the MoE in delivering on a broader set of PIM functions. While the MoE is responsible for planning the SIP, there is a broader public investment portfolio which includes projects financed from various budget and extra-budgetary Funds, funds from SOE’s, the Development Bank of Belarus, state subsidies, and external borrowing. However, there is no unified database covering the entire public investment project portfolio, which is – partly for this reason – not subject to monitoring and analysis. According to 2015 Belstat data on the structure of total national investment by types of organizations, the investments by republican, municipal and private organizations with public share totaled 16.1 % of GDP (Figure 5). In the same year, total national investments from republican and local budget were only 3.2 % to GDP (Figure 4). It is hard to assess how much of this 12.9 percentage point difference can be attributed to public investments as understood internationally, but it can be assumed to be quite large. 71. There is no specific IT solution (software) for SIP preparation and monitoring. As a result, project developers submit SIP requests in paper or Excel formats and the MoE completes the SIP data in Excel. Since the work processes related to the SIP are not supported by a cross-year database, the MoE is prevented from tracking projects over their lifecycle covering all aspects of project delivery, and to analyze performance, including planned and actual indicators for timing and cost. Information on SIP projects currently exists in fragmented datasets 19, which cannot easily be consolidated even for a small project sample. The SIP datasets are not connected with the treasury data on actual financing. Data on borrowing and state guarantees is recorded by Public Debt Department of the MoF (using specialized software developed by the IT Center of the MoF) with disbursement and other inputs submitted by the designated banks. There is no link between this and MoE’s SIP data. 72. A PIM information system could significantly advance data collection, maintenance and analysis in support of PIM reforms. Web-based information exchange helps in improving the timeliness and fulfilment of information and supports the regular and more active monitoring of project performance. The development or modernization of any IT tools would require proper investments. To ensure the efficiency of needed investments, a special IT study is recommended. Such a study could be narrower than an IT audit, but should investigate in more detail existing and necessary information exchange flows as well as existing technical capacity, including the hardware and software of the key PIM stakeholders. The study should identify the general functionality of an IT tool and provide a market survey. The study should be used to inform the further development of a PIM IT Strategy and an Action Plan. An important aspect of the PIM IT Strategy would be to analyze and decide on the scope, functionality and technical options for the PIM information system, including whether to develop a stand-alone system with proper interfaces with other systems or to integrate the system with existing systems, notably the GFMIS currently being developed. Public Access to PIM Information 73. The Government could benefit from increasing the access to information on public investments, using it as a source of independent information and a basis for the bilateral dialogue with civil society. The MoE does not make SIP data openly available. The SIP is published in legal databases (allocations only) and once a year full SIP’s execution report is to 19 One for each of the sources of financing, e.g. reserve fund of the President, National Development Fund, etc. 35 be send to the President. Quarterly reports provide information on priority construction projects and ones that are scheduled to commissioning. If an object is not finished in the planned time, the Minister of Economy (and/or the Minister of an appropriate ministry) may be asked to personally report to the President. SIP’s implementation reports are not published. 36 III. ASSESSMENT OF INDIVIDUAL PIM STAGES: STRATEGIC GUIDANCE, PROJECT APPRAISAL AND REVIEW, SELECTION AND BUDGETING A. Introduction 74. This chapter provides a “stage-by-stage” gap assessment covering the upstream functionalities of the PIM system based on the World Bank methodology described in Chapter I: Strategic guidance and first-level screening; project appraisal; independent review of project appraisal; and selection and budgeting. Each section starts with a summary of good international practice and then provides an assessment of current practice in Belarus, a summary comparing with international practice and finally relevant recommendations. B. Strategic Guidance and First-Level Screening What Does Good Practice Look Like? 75. There are four main components of good practice in strategic guidance and first- level screening for public investment projects: • A published national development strategy or vision with unambiguous authority; • Centralized approval by planning or finance ministry, on the basis of a project profile, for further development of proposals for major projects; • Clarity of strategic objectives in terms of project outputs and outcomes; and • Consideration of alternative approaches to achieving objectives. 76. The minimum requirement is for a high-level and authoritative statement of the government’s economic and social strategies. This is important so that investment planning can be aligned with medium to long term national economic and social priorities. The national strategic framework should ideally be supported by more detailed, operational and annually- updated sector planning documents to guide identification of new project ideas and prioritization of capital spending decisions. 77. Projects should then be initiated through a formal process that involves preparation of a profile of the project idea (or ‘project concept note’) situating any new project idea within the strategic context. In particular, the profile should indicate the reasons why the project is being undertaken, identify any alternatives that might warrant further analysis in the feasibility study, and set out the expected outputs and outcomes. 78. The project profile needs to be screened by higher level authorities for policy relevance, among other things, leading to an approval to proceed with project preparation and appraisal. Major projects should be screened by the planning or finance ministries. This process is the first, and perhaps the most important, line of defense against poorly conceived investment proposals which, if not stopped, risk gaining ‘planning momentum’ and ending up wasting public money. 37 Assessment of Strategic Guidance for Public Investment in Belarus 79. Belarus has an array of strategic planning instruments with the potential to guide investment directions and choices, but the relationships between the different instruments are sometimes tenuous. Strategic guidance comes in the following forms: • Long-, medium- and short-term national socio-economic development strategies and programs; • Medium- and long-term sector policies and plans, mainly in economic infrastructure sectors; • Medium-term state programs; and • A National Infrastructure Strategy, which is a new instrument. 80. National socio-economic development strategies and programs are the highest level of the planning system and should, in theory, guide the levels below. These instruments do not identify specific areas for investment, but set high-level socio-economic development targets towards which sector plans and state programs should contribute. The strategies and programs are wide-ranging, covering areas of intervention for both budget entities and SOEs, and even for the private sector. This part of the planning system is governed by its own legislation 20, which describes four instruments of various durations, as follows: • For the long term: the national strategy for sustainable socio-economic development for 15 years (currently 2016-2030) and the basic directions of socio-economic development for 10 years; • For the medium term: the program for socio-economic development for five years (currently 2016-2020); and • For the short term; the annual forecast of socio-economic development, which has in recent years been extended to cover two additional years. Of these three instruments, the 5-year programs for socio-economic development seem, from discussions with budget entities, to be the most important in driving project identification. 81. Based on information from the energy and transport sectors, there appears to be comprehensive strategic guidance for economic infrastructure, but there may be some issues with consistency and realism. The sector plans can be seen as supply – or engineering – led and seem to have been prepared with less attention to the demand for public services than would normally be desirable and without reference to an assessment of realistic funding possibilities. Sector planning is less structured in the social sectors, like education and culture, and probably even more supply-led than for economic infrastructure. This supply-driven orientation raises some doubts about the usefulness of these strategic plans for project identification and strategic prioritisation purposes, where unmet demand for public services together with realistic resource projections should be an important driver of choices. To give one example, the Ministry of Energy mentioned a number of applicable documents as a starting point for developing project ideas. These are: • Conceptual Framework of Energy Security 2015-2035; 20 Law No. 157/1998 On state forecasting and programs for the socio-economic development of the Republic of Belarus. 38 • Comprehensive Plan for Energy Sector Development to 2025; • Sector Program of Energy Sector Development to 2020; and • 5-Year Energy Sector Development Plan. Some of these plans, which were prepared at different times, do not have harmonised timeframes, suggesting the risk of duplication and/or inconsistency. The relationship between these plans and the state programs discussed below is also not entirely clear. All this points toward an opportunity for rationalizing and streamlining elements of the planning system, so that more focused, realistic and consistent strategic guidance is provided for identification and screening of public investment projects. 82. One of the strategic foundations for public investment projects comes from their appearance in state programs. Historically, state programs were developed with no direct linkages with the strategic planning or budgeting systems. All the same, designated budget allocations could be secured for their implementation, and inclusion in a state program is a condition for a project to receive state budget funding allocated through the State Investment Program (see the section on Selection and Budgeting). 83. Before 2016, there was a proliferation of state programs. These could be initiated by ministries and then approved by the Council of Ministers or President, with limited control from the central planning and financial authorities – Ministry of Economy and Ministry of Finance - particularly over the fiscal consequences 21. Although they are notionally planning instruments covering a range of measures, state programs have often been used as vehicles for discrete initiatives, including individual investment projects. Numerous new projects were programmed and commenced through state programs, which were also the main mechanism for allocating short-term financial support from the state budget to SOEs, many of which were financially ailing. While the number of state programs was large - over 100 - their share of the budget was relatively small – only 13.6% of general government expenditure in 2015 22. Even so, the economic downturn and resulting fiscal contraction revealed the frailty of the system, making it apparent that commitments to ongoing projects (and failing SOEs) had become fiscally unsustainable. 84. Reforms to the strategic planning and budgeting system are now under way which could potentially strengthen the strategic orientation of public investment through rationalization of state programs. In order to exercise greater central control over the number and strategic focus of state programs, a stronger system for designing and approving state programs has recently been introduced 23 and a list of 21 reformed state programs approved by the Council of Ministers for 2016-2020 24. Some state programs correspond more or less with sectors, e.g., energy and education and youth, while others are cross-cutting, e.g., comfortable accommodation and enabling environment, and digital economy and information society. So far, 20 state programs have been formalized and approved through individual resolutions of the Council of Ministers. 21 MoE and MoF reviewed state programs, but did not exercise a veto. 22 MoE. 23 Presidential Edict No. 106 on State Programs and the Provision of State Financial Support (23. Mar. 2016) 24 Resolution of the Council of Ministers No. 148 (23 Feb. 2016) 39 85. Rationalized state programs are now seen as a basis for giving a stronger strategic orientation to budgeting, and for rationalizing and containing state support to the productive sector of the economy. The legislation envisages state programs as instruments for delivering the priorities and public policy objectives of the Government’s overarching socio-economic development program (2016-2020), with the list of approved programs intended to be developed simultaneously. Documentation for state programs is expected to include program goals and objectives, a set of time-bound and costed measures, and an indication of funding sources, which extend beyond the budget to include lending and own- resources. In theory, therefore, state programs should represent comprehensive five-year expenditure strategies; however, they should not be confused with budgetary instruments, because they are approved individually by separate legislation, outside the budget process and calendar. 86. The detailed implementation of the reforms to state programs is still evolving and remains uneven with respect to investment content and requirements. The Government’s PFM Reform Strategy foresees state programs as being the basis for a performance-oriented budget system, driven by an improved strategic planning process. This is, however, some way off and the extent to which the newly reformed state programs are currently providing the strategic impetus for investment choices and decisions (as well as for other expenditure decisions) varies. The Ministry of Transport has pointed to the two state programs within their mandate25 as being important for driving proposals for funding through the SIP, and the documentation for the programs does identify specific areas for investment and individual priority projects. On the other hand, the investment content of other state programs, education and youth policy for example, is sparser, with investment requirements needing to be inferred from broader statements about priorities. 87. Variations in the scope and detail of state programs suggest the need for much stronger guidance and coordination on the part of the Ministry of Economy. Such guidance needs to cover implementation of the reforms generally, together with specific instructions in relation to treatment of public investment. Overall, it can be said that the quality of the reformed state programs varies considerably 26, partly reflecting the speed with which they have been introduced 27 and partly reflecting the sparsity of detailed guidance and capacity building for their preparation. It is probably too soon to come to a final conclusion on the quality though. 88. The static programming period and the absence of a fiscal constraint within which to prioritize measures represent continuing shortcomings of the state programs. A static programming period, reducing the room for adjustment, means the potential for a growing 25 The State Program for Construction and Maintenance of Roads and the State Program for Transport Complex Development. 26 The report on state programs by the German Economic Team identifies considerable variation in the quality and coverage of output, outcome and impact indicators between programs. 27 Presidential Decree No. 289 setting forth the procedure for developing and implementing state programs was approved on July 25, 2016, i.e. following the approval of 19 out of 21 state programs. 40 dislocation between plan and implementation as time elapses. While implementation of state programs is expected to be in accordance with the (rolling) medium-term (3-year) fiscal program 28, their design does not seem to be subject to binding financial constraints for the 5- year programming period. The absence of constraints on total expenditure over the programming period casts some doubt on the realism of state programs even before they begin. This will make it harder for state programs, as currently conceived, to be the basis for a performance-oriented, program-based budgeting system. Rolling programs conceived within an annually adjusted medium-term fiscal constraint are required for this to happen. 89. The timetables for preparing state programs and the national socio-economic development program have not been well coordinated, especially for the 2016-2020 planning period. Although a draft existed, the National Socio-economic Development Program was finally approved by the Government in December 2016, one year later than planned, and well after the individual state programs were approved. Since the state programs are intended as the instruments for implementing the objectives of the national program, this reversal in the intended chronology represents a potential inefficiency in the implementation of the reforms that will need to be addressed in future rounds. The usefulness of the state programs in guiding investment choices is also diluted if they are then subject to major revisions after approval. 90. In the regions (oblasts), districts (raions) and cities, some strategic direction for infrastructure investment is given through long-term urban development master plans. For any project to proceed to the pre-investment processes, it must be consistent with the relevant master plan. The plans are, however, wide-ranging, developed with no fiscal constraints and infrequently updated 29, so that their strategic focus is not particularly strong. Five-year plans – for the region as a whole and for sectors within the region - are prepared within the framework of the master plans and give more direction for investment choices, but these are static and not subject to fiscal constraints, so they too have limitations. In the future, the new state programs, which include local government spending plans, have the potential to be a stronger source of guidance for identifying and prioritizing public investment projects. 91. Belarus has recently elaborated a long-term National Infrastructure Strategy (NIS) 30 for 2015-2030, but it plays a limited role in giving strategic guidance for project identification and prioritization. Preparation of the NIS was instigated through a resolution of the Council of Ministers 31, which established the Inter-Ministerial Infrastructure Coordinating Board and tasked it with coordinating the preparation of the plan. Box 7 summarizes the stated aims of the NIS. Indicating priority sectors for public investment and identifying 100 priority projects within these areas, the NIS was completed and published in 2015, with the technical work being led from within the Ministry of Economy. The NIS is costed at the level of priority sectors and identifies total public investment expenditure needs 28 Article 1.4 of Presidential Edict No. 106 on State Programs and the Provision of State Financial Support (2016). It is also notable that the medium-term fiscal program has been approved for the first time in December 2016 for 2017-2019, although it has been a requirement of the Budget Code for some time. 29 The master plan for Brest City dates from 2003 and will be updated in 2017. 30 This name of the document was introduced by the Resolution of the CoM № 611 from August 4, 2018. The initial name of the document was National Infrastructure Plan (Resolution of the CoM № 508 from May 27, 2014). 31 Resolution of the Council of Ministers No. 508 of 27 May 2014 41 averaging US$ 4.158 Billion per year between 2016 and 2030 in the social, transport, energy, and housing and utilities sectors. Box 7: Aim of the National Infrastructure Strategy ‘The aim of the NIS development is to prioritize infrastructure projects to ensure their optimal compliance with the state requirements in rational use of public funds with the provision of economic, social and environmental benefits to society, the acceleration of fiscal consolidation and significant cuts in budget expenditure. The NIS gives the possibility to determine the amount of financing required for infrastructure construction, to compare these figures with the budget and determine the financing gap that should be covered by other sources, including private investment under PPP.’ Source: National Infrastructure Strategy 2016-2030 92. The NIS has a number of significant drawbacks when it comes to providing strategic guidance for public investment. While the NIS goes some way as a potential starting point for identifying and prioritizing projects – by identifying focal areas for public investment within the four sectors - the fact that it was put together through a largely needs- driven, ‘bottom-up’ process 32, without any overarching fiscal constraint, means that it is unlikely to be an achievable plan 33. Indeed, one of its features is the identification of a significant gap between funding ‘needs’ and financing possibilities: for example, existing financing possibilities are estimated at US$ 2.0 billion annually for the period 2016-20, compared to projected ‘needs’ of US$ 3.58. The unconstrained scope of the NIS undermines its potential usefulness for screening and prioritization purposes. 93. The NIS has no relationship with mainstream planning and budgeting processes, meaning that it currently lacks the authoritative status required to provide strategic guidance for project identification. Although the NIS was prepared under the specially constituted Inter-Ministerial Infrastructure Coordination Board, its authoritativeness and legal basis are obscure. The NIS has no relationship with state programs nor with the State Investment Program (SIP) funding instrument (see the section on selection and budgeting below). MDAs are not using the NIS as a basis for deciding which projects to develop and submit for SIP funding, and decisions on SIP funding are not made using the priorities set out in the NIS as a reference point. There may be some correlation between the NIS and the SIP, but this is purely as a result of their ‘bottom-up’ beginnings, rather than any direct influence of the NIS on the SIP. There is no mention of supporting sector investment plans in the NIS, and the relationship between these plans and the state program instrument (see discussion below) is not made apparent in the governing legislation. 32 ‘…the national bodies of state administration and other state organizations subordinated to the Government of the Republic of Belarus, the oblast executive committees and the Minsk city executive committee, other entities (hereinafter referred to as the state bodies and organizations) interested in infrastructure development were tasked to provide the Ministry of Economy with offers for including infrastructure facilities into the NIS and information on the volume of financing and planned territorial location of these facilities.’ National Infrastructure Strategy. 33 It is interesting to note that in some countries, e.g., Canada, nothing can be called a ‘plan’ unless funding is assured. 42 94. A central motivation of the NIS has been to identify PPP opportunities and select a subset of projects for piloting. Reflecting this, the preparation of the NIS was led by the Public-Private Partnership Center of Belarus 34.The 100 ‘priority’ projects in the NIS are, in fact, priorities for implementation using the PPP modality, although the analytical basis for determining suitability for PPP is not discussed in depth. It is a weakness of the NIS that it lacks clear project prioritization methodology including for PPPs. The NIS should first identify the most important projects in terms of their public policy impact, and only then consider potential implementation modalities, such as TIP or PPP. The choice of the PPP modality seems to have been largely driven by a desire to circumvent fiscal constraints and close the identified financing gap. 35 This points to a narrow view of the advantages of PPP and the need to pay close attention to the actual and potential fiscal impacts of PPP projects in the long run. As explored elsewhere in the report (see Chapter VI), the apparent short-term fiscal advantages of PPP will, in the end, be outweighed by higher financing costs, and the rationale for PPP should be sought in the other advantages offered by this modality. While there is room for a ‘PPP prospectus’ to attract investors, this should be distinguished from a formal planning document: in the current NIS, the two purposes are confused. 95. The Government plans to update the NIS present an opportunity to enhance it in line with emerging practice in some advanced countries. Long-term national infrastructure investment plans or strategies are becoming increasingly common internationally with a variety of models having been adopted. Australia’s long-term rolling plan has already been mentioned (see Box 8). The UK has also developed a national infrastructure plan, and Sweden and Norway have long-term (10 year) rolling (every 4 years) plans, but for transport infrastructure only. If Belarus were to go down this route, it would require further in-depth examination of international experience and an assessment of the suitability of the available options. Irrespective of the model adopted, an enhanced NIS would require closer integration of its preparation and implementation with existing planning and budgeting processes, and with the ongoing reform of state programs. It would also need closer attention to be paid to identifying investment priorities within realistic fiscal constraints. A clear separation between the strategic planning purposes of the NIS and the solicitation of PPP investors would be required, probably involving the preparation of separate documents. 34 Part of the Economic Research Institute of the MoE that developed the National Infrastructure Plan approved by IAICC in December 2015. 35 As evidenced by this quote from the National Infrastructure Strategy, “The NIS gives the possibility to determine the amount of financing required for infrastructure construction, to compare these figures with the budget and determine the financing gap that should be covered by other sources, including private investment under PPP”. 43 Box 8: Australian Infrastructure Plan 2016-2031 Created in 2008, Infrastructure Australia is an independent statutory body with a mandate to prioritise and progress nationally significant infrastructure. It provides research and advice to governments and the community on the projects and reforms Australia needs to fill the infrastructure gap. In 2014, Infrastructure Australia’s was tasked with preparing of a rolling, long-term national infrastructure plan. This Australian Infrastructure Plan 2016-2031 was developed through a collaborative 18- month process of research and consultation. To underpin the planning process, two infrastructure audits were performed, the Northern Australia Audit and the Australian Infrastructure Audit. The latter represents the nation’s first comprehensive examination of infrastructure across the energy, telecommunications, water and transport sectors. Together, the two audits provide the primary evidence base for the plan. They set out the case for substantially enhancing the quality, capacity and efficiency of infrastructure and overhauling the way infrastructure is planned, funded, constructed, operated and maintained. Following release of these audits, Infrastructure Australia received more than 100 formal submissions from jurisdictions, a wide range of industry associations, public interest groups, local government bodies and individuals. More than 500 stakeholders were consulted in every state and territory, and worked closely with representatives from all levels of government, as well as businesses, industry, peak bodies and the wider community. The plan lays out a comprehensive package of reforms focused on improving the way Australia invests in, delivers and uses its infrastructure. The aim is to focus on extracting the greatest value from existing infrastructure, while sustainably funding new investments to deliver better services for all Australians. The reforms in the plan are intended to be guided by four headline aspirations: • Productive cities, productive regions; • Efficient infrastructure markets; • Sustainable and equitable infrastructure; and • Better decisions and better delivery. The result is a long-term strategy that aims to lay the foundation for a more productive Australia over the coming 15 years and beyond. Sources: ‘Australian Infrastructure Plan’, Infrastructure Australia, 2016 and http://infrastructureaustralia.gov.au/ 96. Formalized screening of project ideas for strategic relevance on the basis of a standardized project profile, or its equivalent, is missing in Belarus. As a result, few projects are stopped at identification stage on the basis of a weak strategic case or poorly developed rationale, and identification does not represent a critical decision point. The absence of scrutiny at this stage also means that an opportunity is being missed to ensure that alternative ways of addressing an identified need are examined. This finding is supported by evidence from the nine sample projects, none of which had a project profile (or something like it) prepared before moving to more detailed project preparatory work. Various less formalized justifications 36 for proceeding with in-depth assessment and preparation of a project exist and 36 For example, the team was familiarized with a ‘concept dossier’ for a health sector project in Brest Oblast. This 44 are considered, but these are not systematic enough to be considered as a genuine first-level screening to verify strategic relevance. Concepts for major projects are not reviewed by the central planning and financial agencies - the Ministries of Economy and Finance - and decisions to proceed are taken at the level of responsible line ministries in central government or committees in the regions. In good practice systems, this is the stage at which project ideas with lower strategic relevance, doubtful rationale, or high cost in relation to potential demand would normally be screened out, and this usually represents a substantial proportion of project ideas. The intention is to avoid wasting resources on more in-depth project preparation. Box 9 illustrates the contents of project concept notes in two countries, Colombia and South Korea. Box 9: Examples of Formats for Project Profiles/Concept Notes Although the detail varies between countries, information requirements for project concept notes are generally similar, covering the nature of the problem to be addressed, the urgency of the need, the rationale for the proposed solution, and the links with national and sector strategies. Colombia, and South Korea provide two examples formats for a project concept notes, with the former probably representing the minimum requirement. Colombia: (Identification Stage): • Identification of the current situation and the expected future situation; • Diagnosis of the problem or need to be addressed, including identification of target population and their social and economic characteristics; • Rationale for the project solution and its objectives; • Identification of alternative solutions. South Korea (Written Request for Preliminary Feasibility Study): • Draft project plan, including: o Project purpose; o Related developments and scale of the project; o Estimated total project costs; o Implementation system; o Financing method; o Anticipated benefits; • Need for project implementation; • Adequacy of likely central government subsidy [affordability]; • Amount and financing method of necessary resources; • Potential contribution to balanced regional development (‘need for technological development’ in the case of an R&D project); • Risks associated with project implementation and mitigation measures. contained a letter from the Executive Committee Health Department to the Deputy Chair of the Oblast Executive Committee, setting out the justification for proceeding with the project idea. But the letter does not follow any regulated format or procedure. 45 Summary Assessment of Strategic Guidance and First-level Screening (WBG Stage 1) Key Feature Desirable Institutional Institutional Arrangements in Belarus Arrangements Projects are subject to 1. Published development Medium-term strategic direction is provided through the Government’s Socio- actionable strategic guidance strategy or vision with Economic Development Program which is implemented through 20 strategic and project proposals are unambiguous authority. state programs, approved at the level of the Council of Ministers. State subject to first-level screening programs are costed but not subject to a disciplined multi-year fiscal in relation to this guidance constraint, so realism is questionable. The National Infrastructure Plan/Strategy has a longer-term horizon, but does not fully satisfy the requirement for strategic guidance, since it was prepared for a different purpose (promotion of PPP) and its position in the planning hierarchy is ambiguous. 2. Centralized approval by Formal project profiles are not developed prior to project preparation, planning or finance ministry although there are less formal processes in place. Project ideas are approved for developing proposals. for further development (preparation and appraisal) at the level of the responsible line ministry (or department at regional level), and there is no first- level screening of major projects by central planning and financial agencies. The initial scrutiny of project ideas is not, therefore, particularly strong or very effective in filtering out those project ideas with lower strategic relevance, doubtful rationale, or high cost in relation to potential demand. 3. Clarity of strategic objectives (Reformed) state programs are expected to include measurable targets for in terms of outputs and outputs and outcomes, but these are at the program level and not systematically outcomes. linked to projects. State programs are not very consistent in whether they include output and/or outcome targets. 4. Consideration of alternative There are no requirements to examine a range of possible solutions at an early approaches to achieving stage and little to no evidence that alternative solutions (as opposed to objectives. technical variants) are explored as a matter of course. 46 Recommendations 97. Recommendations on strategic guidance can be broken down into those that relate to strategic planning in general, and those that relate to PIM specifically. The former will facilitate PIM, but have wider implications. Recommendations concerning strategic planning in general are: • Streamline medium-term and long-term strategic planning so as to remove any potential duplication and to align planning horizons; • Sequence the preparation and approval of the national program for socio-economic development and the state programs, so that the objectives and outputs of state programs can be more easily aligned with national objectives; • Strengthen the guidance and coordination for state program preparation coming from the MoE, including guidance on expectations concerning the coverage of public investment; • MoE to work with MoF to develop realistic, but non-binding, financial projections for strategic planning purposes, and consider aligning the approval of state programs more closely with the budget cycle. Recommendations concerning strategic guidance and decision-making for PIM are: • Examine the options for development of a more operational long-term NIS - harmonized with other planning instruments in terms of scope, timing and financial framework, and rolled forward periodically – and adopt a model that is suitable for Belarus; • Introduce a formal decision – linked to a first-level screening process – to proceed to preliminary design and feasibility study, based on information on the project justification to be provided in an obligatory project profile. Decision-making rights should be allocated according to the expected value/complexity of the project, with decisions on only the most complex projects escalated to the highest levels. Consistency with an enhanced NIS would be one of the more important criteria for first-level screening; • Ensure sufficient attention to exploring project alternatives at identification stage, beginning with a diagnosis of the problem/issue to be resolved, before identifying potential solutions. The proposed project profile should capture reasons for choosing the preferred project over alternatives and identify any options that would be worth exploring further at feasibility stage. C. Project Appraisal What Does Good Practice Look Like? 98. Project appraisal is the PIM stage when the investment case for a project is analyzed in depth and a decision made on the project’s overall feasibility, and not just its technical feasibility. The preparation of a high-quality feasibility study, or its equivalent, is therefore central to project appraisal. A feasibility study involves examining both technical and economic feasibility, where economic feasibility requires that the net benefits (benefits minus 47 costs) from the point of view of society as a whole, whether financial or otherwise, are positive. Conceptually, economic feasibility might be best conceived as ‘social profitability’ 37. For commercially-oriented projects, it is also important to determine financial feasibility, or the profitability of the investment from the point of view of operating entity. For all projects, financial, environmental and social sustainability are also elements of feasibility, as is the robustness of all dimensions of feasibility in the face of adverse risks. The appraisal decision is a decision to proceed to detailed design 38; it is not a decision to proceed to implementation, which will depend on confirmation of cost estimates at detailed design and the availability of funding. The basis for the decision is also subject to independent review, as discussed in the next section. 99. A strong appraisal process is a good ‘investment’. Appraisal is the stage of the project cycle when flexibility is highest and amendment costs are lowest, so from an efficiency perspective it makes sense to focus planning and management effort at this stage 100. There are three main components of good practice in project appraisal: • Publicized and transparent methodological guidance on project appraisal; • Effective training and deployment of staff in project appraisal methods; and • Disciplined, but proportionate, application of guidance on project appraisal, leading to a decision on economic and technical feasibility, and financial, environmental and social sustainability. 101. The default analytical approach at appraisal stage should involve the application of social cost-benefit analysis (SCBA – see Box 10), but there needs to be some flexibility. This is to allow: i) adoption of other methodological approaches - cost-effectiveness analysis and/or multi-criteria analysis (MCA) - when it is not feasible to place monetary values on benefits and/or external costs; or ii) waiving of the requirement for SCBA in favor of less sophisticated qualitatively-based, economic analysis (like MCA or other ranking tools), for lower value or repeat projects where complex analysis may not be required or may not be an efficient use of scarce analytical skills. Requirements for SCBA can also be less onerous as capacities are developed and subsequently extended as the specialist skills are built up. Usually this approach involved requiring SCBA for the largest projects only to begin with, and then lowering the threshold over time 39. 37 Because there is some blurring of the difference between economic and financial feasibility in Belarus, the term ‘social profitability’ will be used in this report to denote economic feasibility, as commonly understood in the international PIM literature. 38 Feasibility studies are usually based on a preliminary design and costings. 39 Ireland is the best example of this approach. 48 Box 10: Social Cost-Benefit Analysis Social cost-benefit analysis (SCBA) aims to quantify in monetary terms as many of the costs and benefits of an investment proposal as feasible, including items for which the market does not provide a satisfactory measure of economic value. The purpose is to provide the information necessary to answer two key questions relating to efficiency and effectiveness: - Does the project represent the best way of achieving the stated objective? - Does the project represent the best use of the economic resources involved? SCBA is a methodology for assessing the net benefits accruing to society as a whole (not just the operating entity) as a result of a project or program. It considers the flow of real resource costs and benefits over a project’s life and includes estimating costs and benefits that are ‘un-priced’ and not subject to normal market transactions, (e.g., public goods and negative and positive externalities). Allowances are made for distortions to market prices (through monopoly power, trade restrictions, labour market rigidities) and the value of indirect taxes and subsidies are excluded as these represent transfers within society and not the real use of resources. Costs and benefits occurring at different points in time are quantified on a comparable basis by discounting to arrive at present values. SCBA is usually a very important part of project preparation in advanced PIM systems and a key input into the appraisal stage. Its principle use is as a screening tool for identifying the set of good projects that can be then be considered for funding. It is also useful for prioritising projects within specific sub-sector investment programs, e.g., inter-urban roads, irrigation, power, and for choosing between different project design options. Because of its intensive use of skilled human resources, it is often better practice to subject only the largest projects (where mistakes are more costly) to economic analysis. Where benefits are difficult to quantify, cost effectiveness analysis (CEA) of projects should be performed. This is analysis that compares the costs of alternative ways of producing the same or similar outputs and aims to determine the costs of achieving a specific physical target. Benefits are expressed in physical units and not money values; costs are expressed in money terms and discounted to determine present value. The results of the analysis are usually expressed as cost per unit output (or outcome if possible). CEA is useful in areas like health and education where it is more difficult (but not necessarily impossible) to quantify benefits in monetary terms. 102. Even where a project is amenable to SCBA, the appraisal decision still needs to take into account important effects that are not captured. These will include consideration of benefits and costs that have not been valued, environmental impacts, for example, and of differential impacts on disadvantaged groups, such as people in living in poverty or regions that are lagging economically. MCA can be a useful supplementary tool to take account of aspects of the project which are not captured through SCBA. Box 11 provides an overview of MCA. Financial and fiscal analyses are also important to determine a project’s financial sustainability and the net impact on the public finances, both important factors to take into account when making the appraisal decision. 49 Box 11: Multi-Criteria Analysis MCA is a useful tool for organising the assessment of the various factors impacting on project performance in a more systematic way, particularly when there is a complex array of such effects, to arrive at a subjective judgement on the project alternative that has the most merit. Using MCA, the importance of multiple non-monetised benefits and costs and of environmental and social sustainability factors can be assessed qualitatively for the different project alternatives. It involves identifying the criteria - project effects - that are judged to be the most important for decision-making and making a structured assessment of their individual and relative importance, using an agreed scoring and weighting system to arrive at an aggregate score for each project alternative. Project alternatives are then ranked on the basis of their scores to find the preferred one. In the end, the process of identifying critical factors, agreeing weights, deciding on scores and reaching consensus can be as important as the end result. More formally, MCA involves: • Identifying (generally non-monetised) project effects that are judged important enough to be decision criteria. • Scoring project alternatives against these criteria - using quantitative measures of effects upon which to base scores wherever possible. • Determining weights reflecting the relative importance of the criteria • Combining the weights and scores for each of the alternatives to derive an overall value - multiplying the value score on each criterion by the weight of that criterion, and then adding all the weighted scores together. • Comparing the weighted, aggregate scores of each project alternative so derived to determine the preferred alternative. • Performing a sensitivity analysis to test the sensitivity of the results to changes in the scores and weights. Care is required when providing methodological guidance though, because the results of MCA do not provide an absolute measure of costs or benefits - only a ranking of alternatives according to pre-determined criteria - and should not, therefore, be combined directly with the results of SCBA to form a single indicator. However scientific its design might appear and whatever guidance is given on limiting subjectivity, MCA is also based on subjective assessments against specified criteria. MCA should therefore be seen as providing an Assessment of Appraisal in Belarus 103. Belarus already has some elements of an appraisal process, notably with respect to the appraisal of technical feasibility and the systematic costing of construction projects. This process has been strengthened in recent years through the creation of a more consolidated legal, regulatory and procedural basis (as discussed in more detail in Chapter II). In 2014, a presidential edict 40 formalized the requirement for pre-investment documentation, including 40 Edict of the President on Measures Towards Improvement of Construction Activities, No. 26, January 2014 50 preparation of a feasibility study, and gave the MoAC a mandate to issue more detailed guidelines in respect of these requirements 41. Consequently, the ministry issued a technical code on the content of pre-investment documentation and the procedures for developing and approving it 42. In principle, the code applies to all areas of construction activity, but complementary codes have also been developed for certain specialist areas, namely nuclear power, petro-chemicals and roads. 104. The existing appraisal process is relatively strong when it comes to requirements for assessing the financial performance of commercially-oriented projects. The aforementioned technical code has annexes 43 setting out the recommended analytical formats and technical and ‘economic’ 44 performance indicators for the ‘business plan’ for an investment. The Council of Ministers has also issued a resolution 45 governing the development, approval and review of business plans for development projects, which also requires the Ministry of Economy to issue methodological guidance on the development and examination of business plans. The Ministry of Economy approved a model form for the financial and ‘economic’ study of investment projects 46 for project appraisal when considering the issue of concluding investment agreements on the basis of the state body’s or the executive committee’s decision, which can be seen as complementing earlier guidance 47. Reflecting the strong and continuing presence of the state in the productive sector of the economy, these guidelines are designed primarily for analysis of state financial support for developing the productive capacity of market-facing state-owned enterprises, which would usually be considered out of the scope of public investment (depending on the definition being applied - see discussion in Chapter II). Nevertheless, they are also relevant for preparing investment projects in different sectors and of any ownership. 105. The qualifications of experts able to work on preparing documentation for appraisal are well regulated. A resolution of the Council of Ministers 48 established the qualifications and certification of the experts who are allowed to work on the pre-design and design documentation of projects. The regulatory regime is a useful tool for ensuring high quality project preparation, but there were some concerns within government that it may be too restrictive when it comes to control of experts involved in pre-design work, and some relaxations were introduced. The skills required of experts do not currently extend to those required for preparing the kind of comprehensive feasibility studies required at appraisal stage 41 Article 29 of Presidential Edict No. 26 42 Technical Code for the Composition and Procedure for Development and Approval of Construction Pre-Design (Pre-Investment) Documentation, Ministry of Architecture and Construction, 2014. 43 See Annex B and Annex D. 44 The indicators are labelled ‘economic’ but they are largely financial. See the discussion below about the distinction between economic and financial analysis. 45 Resolution of the Council of Ministers about Business Plans of Investment Projects, No. 506, May 2014 46 Resolution of the Ministry of Economy on the Establishment of Model Forms of Financial and Economic Study of the Investment Project, No. 48, July 2016. Although the title mentions ‘economic study’ the forms deal with analysis of the project from the perspective of the operating entity rather than from the perspective of the welfare of society as a whole, which is the internationally accepted definition. 47 Including Resolution of the Ministry Economy on Approval of the Rules for the Development of Business Plans for Investment Projects, No. 158, August 2005. 48 Resolution of the Council of Ministers No. 252, March 2014 “On selected issues of attestation of managers and specialists of legal entities as well as individual entrepreneurs engaged in construction activities”. 51 in good-practice countries. The absence of this requirement means that there is no reason to make training in these skills available on an organized basis. 106. Pre-investment documentation and design documents include the results of environmental impact assessments and state ecological examinations. Legislation on state ecological examinations contains detailed requirements on the scope, objects, and procedures of such examinations. Prior to submission for technical review by state expertise authorities (‘state examination’), construction project design documents must pass the state ecological examination. The examination is conducted by the subordinated agencies of the Ministry of Natural Resources and Protection of Environment 49. The state ecological examination is designed to take into account the opinions of public environmental experts (if available) and the results of the public consultations on environmental impact of the project (if applicable). If the examination results in a negative opinion, the customer or the design organization is obliged to revise project documentation and resubmit it for a repeat state ecological examination. Social impact assessments, on the other hand, are less common. References to social impacts assessments exist in a few legal acts, but with very limited guidance. 107. Although the existing guidance on financial analysis is one of the strongpoints of the existing process, there are some opportunities for further strengthening. While such improvements would relate to commercially oriented projects in general, in the context of the narrower definition of public investment adopted for this assessment, their specific relevance would be in relation to capital investment by infrastructure SOEs. Potential areas for improvement are in: • Indicators: the central indicator used for decision-making is the amount of time taken to pay back the initial investment from net revenues. Although interesting, this is an imperfect indicator because it fails to take account of the significance of revenues accruing after the payback date. A more reliable indicator for decision-making would be the financial net present value; • Financial analysis of the operating entity: financial analysis currently examines the individual project, whereas the overall financial position of the operating entity is also important for the sustainability of the investment. A good project undertaken by a financially weak enterprise may fail because of the lack of sustainability of the overall operation. Ideally, financial analysis should cover both dimensions and include projections of financial statements for the operating entity; and • Demand forecasting: preparing the business plan requires making forecasts of the sales of the good or services provided by the project; however, there is anecdotal evidence that demand forecasts can sometimes be over-optimistic, paying insufficient attention to potential competition and price and income effects. A deepening of the analytical foundations of demand forecasts for non-commercial projects also represents an opportunity to enhance the appraisal process. 49 Before 2017 state ecological examinations were conducted by the staff of the ministry 52 Box 12: Main Differences between Financial and Economic Analysis Financial Analysis – as Economic Analysis – as applied in financial CBA applied in social CBA Perspective Agency/organization/firm Economy/society Objective Analysis of the net financial Maximising the social returns impact of the proposal on the to the economy’s resources agency Pricing Market prices Shadow prices to correct for distortions and/or opportunity costs Transfer payments (taxes & Included Usually excluded subsidies) Equity/distributional effects Excluded Can be included, but usually treated qualitatively Externalities/Values of Excluded Included Public Goods Depreciation Excluded (from discounted Excluded cash flow analysis, but included in financial statements. Source: Adapted from ‘Introduction to Cost-Benefit Analysis and Alternative Evaluation Methodologies’, Commonwealth of Australia, 2006 108. Notwithstanding some of the existing strengths, the current appraisal process falls short of good practice when it comes to the systematic analysis of the social profitability of projects, as determined through the application of SCBA. Some requirements to analyze effects not directly reflected in the cash flow of an operating entity can be found in the legal and regulatory framework, but these are not explained in any detail, resulting in no practical impact on the appraisal process. Resolution No. 506 of the Council of Ministers, for example, recognizes the difficulty of preparing a business plan for certain kinds of ‘non-profit’ infrastructure investments 50 and requires instead the preparation of a feasibility study ‘in accordance with industry-specific and (or) international approaches’, while providing no further guidance on these approaches. Similarly, in Presidential Edict No. 26, assessment of economic feasibility is established as a component of a feasibility study, but this is not distinguished from financial feasibility in the supporting technical code from the MoAC. 109. Evidence from the sample survey supports the conclusion that the current appraisal process does not generally include systematic analysis of the social profitability of public investment projects. Economic analysis (as defined in Box 12 and discussed in the next paragraph) was not undertaken for seven out of nine of the projects in the sample. The nature of some of the projects might have made it more difficult (or expensive in research time) to carry out SCBA, but others involving transport and energy infrastructure should be amenable to this kind of analysis. A well-designed appraisal process should also involve analysis of alternative ways of achieving the project’s objectives (when defined in terms of outcomes or intermediate outcomes), but again only in one case were alternative options, both technical and non-technical, identified as having been considered. Consistent with the earlier conclusion that 50 Engineering, social, environmental and transport investments are mentioned specifically. 53 appraisal of commercially oriented projects is stronger than for projects with less tangible benefits, one of the two projects which met the requirements of good appraisal was a project with an identifiable revenue stream, a wind farm. The other project, the Minsk-Mikashevichi road, is in a sub-sector where some progress has been made in the use of economic analysis techniques, notably through the development and application of guidelines which include relevant methodologies 51. 110. The shortage of detailed procedural and methodological guidance is accompanied by incomplete understanding across government of the conceptual difference between financial analysis and economic analysis, as commonly understood (see Box 12 for a summary of the different perspectives). The result is that social welfare effects, which are not directly reflected in market transactions, are mostly dealt with in qualitative terms in the pre- investment documentation, and the perceived strategic importance of a project becomes the main driver of decision-making 52, rather than the results of a SCBA. It would, however, be misleading to say that quantitative approaches to valuing wider social effects are entirely unknown in Belarus: SCBA has been applied in certain sectors, such as roads (as evidenced in the project sample), to guide investment decisions, but not necessarily on a consistent basis. 111. Even for commercially-oriented projects, social profitability, as distinct from financial profitability, should be assessed when there are significant distortions in the economy, as seems to be the case in Belarus. The use of economic analysis methods need not be confined to assessing the costs and benefits of ‘non-profit’ investments: through shadow pricing and other adjustments, such methods attempt to correct for market distortions when valuing the costs and revenues of productive investments from the perspective of the welfare of society as a whole. In economies where market distortions are not significant, the differences between the results of financial and economic analysis may be negligible; where the exchange rate is managed, utility tariffs are subsidized and prices are controlled, as seems to the case in Belarus 53, the difference may be more important and may alter the decision. For example, if the financial profitability of a commercial project relies on subsidized energy prices, economic analysis might indicate that such a project would not be socially profitable. There is currently no concept of the use of economic analysis in this way. 112. There is room for improvement in the current appraisal process by adopting internationally recognized methods for economic analysis of projects, but expectations should be kept realistic. The wider use of social cost-benefit analysis (SCBA) offers the opportunity for improved decision-making based on a more holistic assessment of the societal effects of public investment projects, both non-commercial and commercial. While the wider application of economic analysis methods has undoubted advantages, it would, however, be mistaken to expect that such methods could be, or should be, applied to all projects, or that they can capture all dimensions of a project. If a decision is taken to apply SCBA more widely, the authorities will need to take account of the following factors: 51 Technical Code of Practice (TKP) 45-1.02-100-2008, ‘Project documentation for the construction of roads. Design guidelines’. 52 Strategic relevance is important for project identification and prioritisation. Strategic relevance is usually seen as a necessary, but not sufficient condition for a positive appraisal decision: strategically relevant projects also need be demonstrated to be socially profitable. 53 IMF Article IV Consultation, September 2016. 54 • There are some non-market effects, particularly for social sector projects, where valuation is very difficult. In such cases the use of cost-effectiveness analysis (CEA), perhaps supported by a qualitative tool like multi-criteria analysis, will be more appropriate. The disadvantage of CEA compared to SCBA is that it does not provide an absolute measure of project worth, only a relative measure. Box 13 shows how one country, Chile, distinguishes between SCBA and CEA according to sector/sub-sector; • Even where SCBA might be applied in theory, the research costs in valuing some effects, suggests the need to apply this method proportionately, confining its use to major, complex or innovative projects, as is the case in other countries, e.g., Ireland. The principle of proportionality is already accepted practice in Belarus - the technical code only applies to the more complex projects 54 and the pre-investment process for model or replicated projects 55 is less onerous than for entirely new projects - and could easily be extended to economic analysis. The proportionality principle should be retained, but made explicit through the definition of thresholds and concretized through the development and introduction of less sophisticated analytical tools, like MCA or other ranking tools that take account of economic costs and benefits and other impacts in a qualitative way. Proportionality may also be exercised in the early stages of introducing more sophisticated methods, so that limited capacities in SCBA are not over-stretched through blanket requirements for its application; • Finally, while the use of money values in SCBA has its advantages, it can also give a false sense of accuracy, and there is a danger of ignoring costs or benefits that are not easy or too expensive to quantify. MCA can be a useful tool for making sure that the relative importance of non-monetized costs and benefits and other impacts is assessed and presented to decision-makers in a systematic way. 113. The wider application of SCBA and other less sophisticated alternative or supplementary methods would require stronger legal backing, the elaboration of national methodological guidance and the estimation of national parameter values. Belarus’s legal culture suggests that the legislation already in place 56 will need to be made more explicit if economic analysis methods for project appraisal are to be widely adopted. Elaboration of a national methodology and accompanying sectoral guidance, based on international good practice, would also ensure a more consistent application of any strengthened legislation. In order to make the guidance operational, estimates of key parameter values, like the social discount rate and the value of time, would also need to be made and periodically updated. 54 The Technical Code for Pre-Investment Documentation applies to Categories I-IV of project complexity. 55 Presidential Edict No. 26 allows for a one-stage design process for model designs or designs recommended for replication (for which there is a procedure, involving state expert review – see note to Article 1.1) 56 The aforementioned Edict of the President (No. 26) and Resolution of the Council of Ministers (No.506). 55 Box 13: Chile’s Sector Guidelines on Analytical Methods Chile’s general methodology for the presentation and appraisal of projects is supported by 32 sub- sector specific guidelines. As indicated in the table below, 18 of these guidelines concern the application of social cost-benefit analysis (SCBA) to projects in the sub-sector, 12 concern the application of cost-effectiveness analysis (CEA) and 2 offer the option of SCBA or CEA. Prescribed Type of Project Covered by Guideline Methodological Approach Social cost-benefit analysis 1. Airports 2. Fishing ports 3. Low standard roads 4. Bicycle paths 5. Fluvial defences 6. Public buildings 7. Rural electrification 8. Multipurpose dams 9. Traffic management 10. Ancillary investments related to roads 11. Small airfields 12. Equipment replacement 13. Burying electric cables 14. National network of community telecenters 15. Rural telephony 16. Interurban transport 17. Intermediate roads 18. Urban roads Cost-effectiveness analysis 1. Drinking water 2. Replacement street lighting 3. Primary healthcare 4. Sports facilities 5. Educational projects 6. Juvenile housing and detention centers 7. Police infrastructure and equipment 8. Regional development master plans 9. Jails 10. Sustainable reconstruction plans 11. Information technology 12. Police surveillance SCBA or CEA 1. Rainwater drainage 2. Residential waste management Source: ‘Institutional Safeguards for Cost-Benefit Analysis: Lessons from the Chilean National Investment System’, Andres Gomez-Lobo, Journal of Benefit-Cost Analysis, Volume 3, Issue 1, 2012 114. Based on international experience, various options are available for establishing the methodological basis for SCBA. Some countries, like the United Kingdom (UK) and Ireland, have an overarching national methodology and allow sector ministries to develop their own methodologies, provided these remain consistent with the national guidance. At the other extreme, Chile has an elaborate system of sector-specific methodologies developed by central government (see Box 13). In between these two cases, the Netherlands and the European 56 Commission 57 amalgamate the global and sector guidance, although the latter is much less detailed than can be provided in individual guidelines. As an illustrative example, Box 14 gives the content of the Netherlands’ methodological guidance for SCBA. Box 14: The Netherlands’ General Guidance for Social Cost-Benefit Analysis The main contents of the General Guidance for Social Cost-Benefit Analysis are: 1. Introduction; 2. Role of social cost-benefit analysis (SCBA) in decision-making (and its limitations); 3. Principles of social cost-benefit analysis, including the concept of consumer surplus (and its measurement), market failure and public goods; 4. Research steps for preparing SCBA – 8 steps in the preparation of a SCBA; 5. Preparation of a SCBA – including identification of the base case and project alternatives; 6. Impact assessment - including methods for determining effects; 7. Determining the benefits – including valuation principles for goods/services for which there is no market and discounting; 8. [Short] Sector-specific guidance: • Transport and mobility; • Spatial development; • Care and health; • Flood protection; • Energy and environment; • Natural environment; • Education; • Labor market; 9. Cost estimates – including differences between market and social values, and valuation principles; 10. Uncertainty and risk – including risk analysis and valuation; 11. Reporting, presenting and interpreting the results of SCBA. 115. To reflect an increased emphasis on economic analysis, as is suggested, the regulated contents of a feasibility study would need to be extended beyond what is already established in the technical code. Although the outline contents in the technical code could be interpreted as encompassing economic analysis (under the existing heading ‘economic efficiency’), it would be helpful to provide more detail on the expected coverage, making the distinction between financial and economic analysis more apparent. A possible outline for a typical feasibility study, incorporating SCBA, might look as follows: 57 ‘Guide to Cost-Benefit Analysis of Investment Projects’, Directorate General for Regional and Urban Policy, European Commission, 2014. Gives general guidance on principles followed by specific guidance on: transport, environment (including water); energy; broadband; and research & development. 57 • Executive summary; • Analysis of the existing context for the project; • Examination of project alternatives; • Market assessment and demand analysis; • Summary of technical studies and project costs (full technical studies presented as annexes to the main report); • Spatial planning dimensions of the project; • Environmental and social impacts; • Financial and fiscal analysis; • Economic analysis – SCBA; • Risk analysis and management; • Implementation and operational arrangements; • Conclusions on project feasibility 116. There is limited central support to the appraisal process from central agencies. Neither the MoE nor the MoAC currently provide direct technical support to project promoters during project preparation and appraisal. There is also no capacity building provided by these central agencies. Lessons from good practice countries demonstrate that bringing about an increased emphasis on social profitability and introducing new methodological approaches will require an initial capacity building effort of some significance, followed by continuous training and technical assistance thereafter. At present, the capacity to deliver this is absent and would need to be planned and created in time to support agreed reforms in the appraisal process. 117. The decision-making process at appraisal stage is insufficiently detailed in the PIM system as currently defined. As mandated by Presidential Edict No. 26, the MoAC has developed work-flow charts setting out the detailed activities and decisions that constitute Belarus’s project cycle, applicable to all construction projects whether purely commercially or public-policy oriented. While these are very important in describing the system as a whole and detailing most of the main stages, particularly during the investment phase, the work-flow charts give less depth on the appraisal process. It would be advisable to map out the activities and decisions involved in appraisal, including any agreed improvements. To illustrate what a structured appraisal process might look like, Figure 15 gives an example of the work-flow chart describing the appraisal stage of Ireland’s PIM system. 118. The ‘object’ definition used in Belarus does not always conform to the internationally recognized definition of a project, leading to potential deficiencies in the scope of appraisal. Appraisal, properly applied, requires a holistic view of the project and, while there are many variations in wording, the international definition of a project usually takes something like the following form: ‘…a series of works, activities or services intended to accomplish an indivisible task of a precise economic and technical nature which has clearly identified goals…’ 58 58 ‘Guide to Cost-Benefit Analysis of Investment Projects’, Directorate General for Regional and Urban Policy, European Commission, 2014. 58 The important part of the definition is that the project boundary should be defined in such a way that it includes all the activities required to achieve the identified goal, usually defined in terms of delivery of sustainable benefits to target beneficiaries. This means that a properly defined project should include the main construction and all associated capital works, together with all related plant and equipment 59. An example, would be a bridge forming part of a new city bypass. The bridge cannot deliver benefits to the population without the rest of the investment in road infrastructure: the bridge cannot, therefore, be appraised in isolation from the rest of the investment, even if different contractors, funding sources and timings are involved. Figure 15: Ireland’s Pre-Appraisal and Appraisal Processes Source: Department of Public Expenditure and Reform, Government of Ireland (http://publicspendingcode.per.gov.ie/) 59 In terms of the analysis of a project, this definition also means that life-cycle operating and maintenance costs need to be considered. 59 Summary Assessment of Formal Project Appraisal (WBG Stage 2) Key Feature Desirable Institutional Arrangements Institutional Arrangements in Belarus Projects that pass strategic 1. Publicized and There is guidance in some areas of appraisal, including transparent screening (WBG Stage 1) methodological guidance financial analysis, but no comprehensive guidance undergo more rigorous scrutiny covering internationally recognised approaches to of their social profitability (cost- economic analysis (as distinguished from financial benefit) or cost-effectiveness. analysis) and other dimensions of project appraisal, such as assessment of risk and of the various dimensions of sustainability. This shortfall is particularly important for projects where public policy, rather than commercial, objectives are dominant. Sparsity of guidance on demand forecasting is a particular gap, both for financial and economic analysis. 2. Effective training and deployment of There are strict requirements concerned the qualifications staff in project appraisal methods of experts involved in pre-design stages of project development, however, these requirements are narrowly specified to engineering aspects of appraisal and do not extend to broader project appraisal skills, such as social cost-benefit analysis. Lack of demand means that there is no training in more broadly defined appraisal methods 3. Disciplined, but proportionate, Existing guidance is applied rigorously, insofar as it goes, application of guidance on project but this still means that important dimensions of projects, appraisal particularly for projects in social sectors or with significant externalities, are going unassessed. Recent strengthening of the appraisal process – mainly in relation to commercially-oriented projects - has come at the same time as a freeze on new projects, so the impact is yet to be fully revealed. 60 Recommendations 119. On the basis of the preceding analysis of the existing system, the following recommendations for strengthening appraisal are proposed, distinguishing between those that apply to the legal and regulatory framework and those applying to methods: Recommendations for strengthening the legal and regulatory framework • Consider making amendments to the relevant legal and regulatory instruments to introduce a stronger appraisal process involving greater use of economic analysis tools, including SCBA, as part of feasibility studies of public investment projects. This should apply both to those public projects with a commercial orientation, e.g., utilities and certain transport services, and those without, e.g., social facilities; • Ensure that any revised legal and regulatory framework is clear about the allocation of roles and responsibilities - proposer, appraiser, reviewer, and decision-maker - in both the appraisal process and the independent review process that should follow (see next section); • The authorities may consider it useful to rationalize the legal and regulatory framework in a single instrument for PIM. This could be useful, provided it is done at the right level in the legislative hierarchy; establishing the details of the PIM system through primary legislation or its equivalent can introduce unhelpful rigidities and is not common practice. Recommendations for improving methods • Develop and disseminate formal national technical guidance on methodologies for feasibility studies of public investment projects, incorporating SCBA and other supplementary or less sophisticated economic analysis techniques, like CEA and MCA. This guidance could draw from other similar guidance prepared by other countries or international bodies. European Commission guidance is one potentially useful example 60, which could be adapted to Belarus’s needs and context, by excluding guidance and references specific to the EU; • Tailor the new methodological requirements to scale and complexity of projects, and to the capacities of those required to implement them. This may mean limiting SCBA to the largest and most complex projects, at least to begin with, while capacities are being built, and using less sophisticated qualitative analysis techniques, like MCA, for the majority of projects; • Operationalize the technical guidance by estimating and disseminating national parameter values for use in SCBA and CEA. At a minimum, this requires estimation and approval of a social discount rate for Belarus. Other values that it is useful to determine centrally are the value of time and the value of a statistical life; • Review existing guidelines for financial analysis of business cases for commercially- oriented projects to bring them into line with international good practice; • Undertake an assessment of capacity building needs and develop a phased training program and on-the-job technical assistance program to support gradual roll-out of an improved process. 60 'Guide to Cost-Benefit Analysis of Investment Projects', Directorate General for Regional and Urban Policy, European Commission, 2014 61 D. Independent Review of Project Appraisal What Does Good Practice Look Like? 120. It is good practice to subject appraisal findings and recommendations, together with the underlying studies, to review by an independent party. The underlying assumptions, forecasts and conclusions, including with respect to the social profitability and sustainability of the investment, put forward by a project sponsoring entity need to be challenged to test their robustness and realism. Box 15 is a summary of the kinds of question that are asked of projects during independent review in France. Ideally, independent review should be proportionate, so the depth of the review for small or repeat projects may be lower. Box 15: Questions for Independent Reviewers in France The independent review (‘second opinion’) in France should respond to the following questions: • Does the project documentation respond to the documentary requirements of a socio-economic evaluation? • Have the methodological guidelines and ministerial instructions, where these exist, been properly followed. Have the prescribed parameter values for appraisal been respected? • How have the non-monetized effects of the project been taken into account where these are critical for the evaluation of the project? • Is the scope of the evaluation appropriate to the project? • What method has been used and how does this compare with recognized practices in other comparable sectors and in other countries? • Are the input parameters realistic and coherent? Source: ‘Évaluation des grands projets d’investissements publics’ Annexe au Projet de Loi de Finances 2015 121. There are three reasons for performing independent reviews: • The incentives for a sponsoring entity to deliver a high-quality project proposal may be weak, even though it may be in possession of the best information to formulate and analyze such a proposal; • Officials in an agency sponsoring a project may find it difficult to challenge ‘momentum’ projects that have been championed by the political leadership of that agency; and • There is a demonstrated tendency across countries and through time for project planners to over-estimate the benefits and under-estimate the costs of their proposals – and thus exaggerate the financial and/or social profitability of an investment. This is known as ‘optimism bias’ (see Box 16), and impartial review is one of the few ways to check it. 122. There are four main components of good practice at independent review stage, as follows: • Independent checks to ensure objectivity and quality of appraisals; 62 • Disciplined completion of projects appraisals prior to budget preparation, so that independent review is not rushed and squeezed by the budget preparation calendar; • Identifying and maintaining an inventory of appraised projects ranked by priority for budgetary consideration; and • Clarity of roles for independent review, between projects that are minor and may be dealt with at the departmental level and those that require additional scrutiny. Box 16: The Problem of Optimism Bias in Projects Optimism bias is the systematic tendency for project costs to be under-estimated and for project benefits to be over-estimated. A research group on large infrastructure at Aalborg University (Denmark) tried to quantify the extent of the problem and offer explanations, working from a large sample of major transport projects. This research (summarized in Flyvbjerg, 2005) finds that significant cost over-runs were seen across a sample of 258 major transportation projects, irrespective of country, continent or transport mode, and with no tendency to diminish. Nine out of 10 projects had a cost over-run, and the average (real) cost over-run was 45 percent for rail, 34 percent for bridges and tunnels and 20 percent for roads. From a sample of 208 rail and road projects, nine out of 10 rail projects had overestimated traffic, with actual passenger traffic 51 percent lower on average than forecast. Further research on large dams found that three out of every four large dams suffered a cost overrun in constant local currency terms and that actual costs were on average 96% higher than estimated costs. The research also found that systematic cost overruns were experienced in every region of the world. Because errors are systematically biased in one direction, poor techniques cannot explain the bias. The plausible explanation is that project promoters and planners systematically make projects look better than they are to obtain funding approval. Sources: ‘Policy and Planning for Large Infrastructure Projects: Problems, Causes and Cures’, Bent Flyvbjerg, World Bank Policy Research Working Paper, no. 3781, 2005. ‘Should We Build More Large Dams? The Actual Costs of Hydropower Megaproject Development’, A. Ansar, B. Flyvbjerg, A. Budzier, and D. Lunn, Energy Policy, 2014 123. Issues for Design of the Independent Review Function: • Meaning of ‘independence’: Independence does not mean external to the government. The independent reviewer function should be performed by an objective body with nothing to gain from the project going ahead. Ideally, this body should be external to the proposer or appraiser, but still within the public sector. The public sector body charged with independent review may make use of private sector consultants or experts from elsewhere within the public sector; • Coverage of independent review: Appraisals for all projects should be subject to some form of objective review. It may not be practical for this to be carried out by the nominated organization for independent review, which may need to specialize in major and riskier projects because of capacity constraints. If the latter is the case, the appraisal 63 for lower value projects should at least be reviewed by a part of the proposing/appraising organization that has no interest in the project going ahead; • Depth of review: Independent review varies from country to country in the depth of the analysis performed as illustrated in Box 17. Box 17: Country Differences in the Depth of Independent Review • In the United Kingdom, where the economics and finance ministry only reviews major projects, a checklist approach is used to ensure that the fundamentals of the appraisal methodology have been followed and to question critically the appraisal findings and underlying assumptions. For all projects, the Gateway Review System, which is internal to the agency sponsoring the project, provides for review by external peer reviewers from elsewhere in the public sector. • In Chile, all projects are subject to review by the planning ministry but, because of the scale of the task, this is essentially a quality control process – and less of a ‘second opinion’ - to ensure that the highly detailed methodologies have been applied properly. • In France, the General Commission for Investment organizes a second opinion on appraisals of major projects (>€20 million), which critically examines both the methodological approach (to ensure conformity with guidelines), the calculation of parameters used in the appraisal and the appraisal findings. • Unusually, in South Korea, independent review precedes appraisal and involves the preparation of a preliminary feasibility study for major projects (>US$ 50 million) as a basis for making a decision to proceed to appraisal. This involves much deeper analysis by the independent reviewer, PIMAC, than in other countries, but, combined with a system for controlling cost escalation, it has proved remarkably effective. • Outcome of independent review: It should be difficult for a project to proceed further if it has been the subject of a negative independent review. This being said, completion of an independent review is not necessarily a decision point and the independent reviewer will often only advise the final decision-maker. Country variations in the authority attaching to independent review findings are illustrated in Box 18; and • Timing of independent review: Independent review should take place any time during the year and should not be driven by the exigencies of the budget preparation calendar. The time usually taken for independent review varies considerably between countries and reflects the depth of the analysis performed (see above). In Chile, the planning ministry responds in 10 days once the project has been assessed as admissible (for which decision 5 days are allowed). In the United Kingdom, the turnaround time for a decision at a Treasury Approval Point is 28 days. France allows 1-4 months for a second opinion to be prepared once the project documentation is received. South Korea’s much more elaborate preliminary feasibility study takes around 4 months and may be extended if the work on the preliminary feasibility study indicates some alterations to the project concept. 64 Box 18: Country Variations in Outcome of Independent Review • Chile’s system is recognized as being rather strict, but even here some projects proceed each year without positive reviews from the planning ministry. • In France, the General Commission for Investment prepares an opinion for the Prime Minister, which goes also to the minister proposing the project and to parliament. • In Ireland, the review by the Central Expenditure Evaluation Unit is purely advisory for the minister proposing the project. • In the Netherlands, it is specified that the findings of independent review should be taken into account in the final decision, but there is no requirement for the decision to be determined by the review findings. • In the United Kingdom, independent review is closely tied to a decision point (‘Treasury Approval Point’) and projects will not proceed further if negatively reviewed. • In South Korea, it is legislated in the Public Finance Law that the independent review by PIMAC is mandatory in major projects (>US$ 50 million) for the decision making of the Ministry of Strategy and Finance, and the decision is closely tied to the result of the independent review in practice. Assessment of Independent Review in Belarus 124. Technical review and review of a project’s justification are kept separate in Belarus, in terms of the governing legislation, timing, scope and responsible parties. state expertise authorities are responsible for technical reviews (‘state examination’) of construction projects, and the MoE undertakes reviews of the financial cases for commercially-oriented projects and the review of the justification for the more typical public investment projects financed with external loans or supported through issuance of state guarantees. The MoE’s independent review role for projects with a public policy purpose is not yet well defined. This is confirmed by the project sample, where eight out of nine projects in the sample examined for this study were not subject to independent review – as understood in the PIM assessment framework – beyond state examination. The ninth project was commercially-oriented and was reviewed by the MoE from the perspective of financial performance only. 125. An independent technical review by the state expertise authorities is a legal requirement for publicly funded construction projects 61, but only for completed detailed designs. It is a condition of budget funding (through the SIP) that pre-design work be finalized and that the detailed design be completed and reviewed. State examination is performed as part 61 State expert review by the state expertise authorities is governed by: i) Resolution of the Council of Ministers No. 791/2016 (replacing Resolution No. 1476/2008) on the state examination of urban planning and design documentation; ii) Regulation of the State Committee for Standardization No. 65 on Approving the Instructions on the Organization of the State Examination, 2011. Resolution No. 791 requires state examination for land use plans and for construction projects which are fully or partially financed from: the budget; extra-budgetary funds; external loans; external guaranties; and centrally or locally guaranteed loans. 65 of issuing an approval of the detailed design for construction projects and is aimed mainly at ensuring compliance with national safety standards. Independent review of the design documentation of a project is a very useful step, but this is usually too late in the pre-investment process to address any fundamental questions raised about the technical feasibility of a project or its costs. An earlier independent technical review is, therefore, generally to be recommended to ensure that technical solutions proposed at pre-design stage are appropriate, preliminary cost estimates are realistic for appraisal purposes and that the rejection of any project alternatives on technical grounds is justified. 126. Notwithstanding its late involvement, the State Agency for Expertise in Construction claims that state expertise authorities deliver cost savings of around 10 per cent of estimated capital costs, on balance 62. These cost savings derive from mistakes, incorrect application of norms and standards, and over-design, i.e., beyond the requirements of norms. This finding is interesting, because analysis of international experience tends to reveal a systematic bias towards under-estimation of capital costs compared to realized costs, at least for major projects (see Box 16). Consistent with the legislation, the state expertise authorities’ reviews, for which fees are charged, are compliance-oriented, examining the project design with respect to the legislation governing: i) safety; ii) sustainability; iii) fire; iv) labor laws; v) noise; and vi) energy efficiency. The conclusions of the review, issued in a standardized format, provide the basis for approval of project documents and for obtaining permits for implementation. The state expertise authorities have a role in apportioning blame for mistakes and thus in determining which body is financially accountable for correcting them. The state expertise authorities perform a useful function, but according to the legislation in place, they have no remit to examine the robustness of the fundamental case for the project, i.e., its social profitability, sustainability and riskiness. 127. The governing legislation 63 foresees the review of the project justification through ‘local examination’ and ‘comprehensive examination’. The procedure is as follows: 1. The initiator submits the proposal to the respective sector ministry; 2. This ministry performs ‘local examination’ of the proposal, then sends it for review to the State Committee for Science and Technology (if applicable) and the MoF. These also count as ‘local examinations’; 3. After clearing with these agencies, the ministry sends the proposal to the MoE, which performs the ‘comprehensive examination’; 4. If the result is positive the MoE sends the proposal to CoM. In the context of the Resolution No. 506 this could often be issuance of a guarantee, or decision to provide preferential loan, etc. The reviews at step 2 by the State Committee for Science Technology and the MoF have some of the characteristics of independent review, since they are carried out by bodies with nothing to gain from the project proceeding. The ‘comprehensive examination’ carried out by the MoE comes closer to the concept of an independent review of appraisal findings as embodied in the model PIM system. 62 Over-estimation of costs was indicated to be as frequent as under-estimation, but the average over-estimate - 14-15% - is significantly higher than the average under-estimate – 3-4% 63 Resolution of the Council of Ministers about Business Plans of Investment Projects, No. 506, May 2014 66 128. The Ministry of Economy is responsible for carrying out a comprehensive examination of the business plans for commercially-oriented projects and of the feasibility studies of non-profit projects, for which business plans are not foreseen 64. Comprehensive examination of investment projects (when it is prescribed by the legislation) extends to both commercial and non-commercial projects. Apart from transport projects (for which SCBA may be carried out, although not necessarily to international standards), non- commercial projects are subject to qualitative analysis of their social and economic effects, but not subject to any sort of quantitative SCBA, in line with international practice. The social effects of commercially oriented projects are also assessed in qualitative terms only. Examinations are carried out by specialists of the dedicated division within the Investment Policy Department, involving sector departments of the Ministry of Economy and cover 65: • Investment costs and marketing plan; • Optimal choice of technology; • Proposed funding schemes; • Likelihood of timely repayment of any loans; • The scale of state support; • Evaluation of financial feasibility and efficacy of the investment project; and • Sensitivity to changes in key parameters and impact of risks during implementation. Grounds for a negative conclusion from the examination are 66: • Insufficient substantiation for investment costs; • Financial unviability; and • Inefficiency of the project, with the exception of non-profit projects. 129. Comprehensive examination by the MoE does not yet include sufficiently well- developed methods when it comes to examining the effects of non-commercial projects, which are the main focus of public investment 67. The comprehensive examination of projects by the Ministry of Economy meets the requirement of independence, but it falls short of the good practice model. This is because there are no relevant review criteria for socially-oriented investment projects or those with significant externalities. Even commercial projects should ideally be reviewed from the social/economic perspective, particularly in an economy with some significant distortions, including subsidization of some important factors of production. In effect then, comprehensive examination is probably not comprehensive enough. It is notable, for example, that the criteria for a negative conclusion (see paragraph 128) exclude non-profit investment projects from assessment of efficiency, while in international practice, economic inefficiency, determined through the application of SCBA, would be considered a valid reason for rejecting a non-profit project. 130. The division of responsibilities between the state expertise authorities and the MoE results in a fragmented review process, which is missing some elements. A more cohesive review process is probably required at the end of the pre-design stage, bringing 64 Resolution of the Council of Ministers about Business Plans of Investment Projects, No. 506, May 2014 65 Article 20 of Resolution No. 506. 66 Article 21 of Resolution No. 506. 67 When defining public investment as publicly funded capital investment with a public policy purpose. 67 together a review of technical aspects of the project and costs, with a review of project feasibility, including economic feasibility/social profitability and reliability of demand forecasts. Without prejudice to its existing and useful role at design stage, the state expert authorities could be involved in a reinforced pre-design review process. It might be more efficient, though, for the Ministry of Economy to be fully responsible for a more comprehensive pre-design review, drawing on external technical expertise as and when necessary. The Ministry would need to develop more specialist skills in project analysis to fulfil this function though. 131. Line ministries and regional technical committees also have a role to play in first- level independent review. It will probably not be feasible for the Ministry of Economy to carry out a comprehensive independent review of all projects. This means that line ministries and technical departments of oblast executive committees should review projects coming from subordinated bodies, using the same criteria as the Ministry of Economy. This should happen for all projects, including the more important ones, which would then be reviewed by the Ministry of Economy. At present, such a review - the local examination - is foreseen but, like the comprehensive examination, its scope is too narrow, focusing more on the feasibility of financing a project than on a rigorous or quantified assessment of its expected social profitability, sensitivity to risks and sustainability. Local examination is also limited in coverage, applying only to certain cases as specified in the legislation. There is therefore room for strengthening local examination, which, in principle, is a useful instrument for objectively reviewing the public value of projects at this level.. 132. There is a de facto pipeline of appraised projects awaiting funding through the SIP, but it is not a formal part of the PIM system. The database on the SIP maintained by the MoE has a reserve list of projects. In addition, the database contains a list of 100 ‘frozen’ projects, of which 50 have not yet been commenced 68. Projects in both the reserve list and the ‘frozen list’ have all the necessary documentation for implementation. Projects in the reserve list do not have presidential approval for funding, whereas the frozen projects do, as they had been included in the SIP at some time in the past, but did not commence for one reason or another. The drawback of the pipeline is that it does not represent a systematic step in the route to budget funding: a project can enter the SIP without first having been in the reserve list. Also, since there are questions concerning the completeness of the appraisal and independent review processes compared to international standards (see Chapters IV and V), the reserve list does not yet provide any guarantee of project quality, particularly with respect to social profitability. 68 The other 50 are stalled, ongoing projects and are discussed below. 68 Summary Assessment of Independent Review of Appraisal Findings and Recommendations (WBG Stage 3) Key Feature Desirable Institutional Institutional Arrangements in Belarus Arrangements An independent review 1. Independent checks to ensure There are some independent checks on the objectivity and quality of checks any subjective, objectivity and quality of appraisals, but timing is not ideal and scope – type of project and content self-serving bias in appraisals. - is too narrow. Technical aspects of a project are scrutinised after detailed appraisal. design, but this is probably too late to influence significantly the design, costs or the choice of alternative. Review of the financial case for commercially oriented investments is foreseen, but it does not extend to examination of the economic/social case for non-commercial projects or for commercial projects with significant externalities. Given the shortcomings at appraisal stage, it is not surprising that these aspects are not covered in independent review. 2. Disciplined completion of Pre-investment procedures are generally conducive to independent projects appraisals prior to review, and there is no evident conflict with the budget calendar that budget preparation. might curtail their application. It is a condition of budget funding (through the SIP) that pre-design work be finalised and that detailed design be completed and reviewed by state expertise authorities. Exceptions are allowed only through decision of the President. 3. Identifying and maintaining an There is a reserve list of projects for SIP funding. Projects in the list have inventory of appraised projects had documentation approved and reviewed, but lack formal approval for ranked by priority for budgetary funding. The list is not prioritised and does not represent a unique gateway consideration. to public funding. 4. Clarity of roles between projects There is no proportionality in the application of the current review that are minor and may be dealt procedures. There is scope for introducing different procedures for minor with at the departmental level projects compared to major projects, by possibly reserving and those that require additional ‘comprehensive examination’ for high value and/or risky projects and scrutiny. relying on enhanced ‘local examination’ alone for others. 69 Recommendations 133. The analysis of the current system for independent review of project proposals suggests the need for improvements to ensure an earlier review covering a wider range of criteria. The following recommendations are intended to reinforce independent review in Belarus: • Extend the existing independent review process - ‘comprehensive examination’ – to include examination by the MoE of the robustness of the case for non-commercial, public investment projects, in particular with respect to social profitability and sustainability, and consider limiting it to high value and/or risky projects; • Devise a checklist of review criteria for assessing the quality of feasibility studies and appraisal decisions for non-commercial, public investment projects; • Reinforce procedures and capacities for internal review - ‘local examination’ -in higher- level organizations to which project promoters may be subordinated, e.g., line ministries and oblast technical committees; • Assess the capacities of MoE to perform the independent review function and identify capacity building needs; • Ensure that projects in the reserve list have been subject to independent review and that all projects must be subjected to independent review to be eligible for public funding. Implementation of the above recommendations should follow introduction of a more rigorous appraisal process. 70 E. Selection and Budgeting What Does Good Practice Look Like? 134. There are four main components of good practice in selection and budgeting of public investment projects: • Transparent criteria for selecting projects with reference to policy objectives at ministerial level; • Well-structured budget preparation process with scope to integrate investment and recurrent implications of projects; • Effective gatekeeping to ensure only appraised and approved projects are selected for budget financing; and • Ensuring adequate financing for selected projects, including recurrent needs on completion. 135. Once new projects are properly prepared and appraised, it is important that they are prioritized in a transparent way for inclusion in the budget. Good public investment management systems also ensure first that adequate funding for efficient physical completion of ongoing projects is provided through the budget, before considering the allocation of funding to new projects. 136. New projects must also be verified as having been well prepared and carefully appraised. This is the ‘gatekeeping’ role. In weaker systems, inadequately prepared projects often slip through the net during budget preparation. 137. Even in the best systems, there are likely to be more positively appraised new projects than there is funding and explicit prioritization criteria must be applied reflecting national and sectoral priorities and practical factors, like readiness to go. In the more advanced systems, prioritization of new projects is generally done by spending ministries within sector expenditure limits approved by the government on the basis of technical advice from the finance ministry. Ideally, credible expenditure limits should be set for the medium- term to aid implementation planning for multi-year projects. Increasingly, a strong central role in prioritizing major or mega projects, i.e., projects of national significance, has been assumed. 138. Major infrastructure projects usually take several years to complete and efficient implementation demands that the implementing agency be able to enter into multi-year contracts. There should be knowledge that budgetary resources will be made available in future years to meet these contractual commitments. This can be handled in various ways without undermining the annuality of the budget. Adequate funding for project preparation should also be assured through the budget and for major infrastructure projects this may extend over more than one budget year. 139. The capital budgeting process should be set up in such a way as to ensure efficient funding of ongoing projects. In weaker systems, ongoing projects compete directly against new projects for available financial resources, which often results in a dilution of funding for efficient implementation, or even ‘drip funding’ when there is overwhelming pressure from new projects. The budget process should support, as much as possible, intertemporal 71 consistency in prioritization, which is best served by making a decision on funding for ongoing projects, before allocating funding to new projects, which should then be prioritized within the fiscal space. A frequent ploy of budget entities in less disciplined systems is to try to include new, ‘stealth’ projects, with a small allocation in the first year, and then for the funding requirements to ‘mushroom’ in subsequent years squeezing more mature projects under implementation: a medium-term budget planning perspective can help prevent this. 140. Inadequate budgetary funding for the recurrent expenditure needs of newly completed capital investment projects is a frequent problem of less well-developed budgeting systems. The budgetary process must be sufficiently integrated to allow capital and recurrent expenditures to be planned together. This is often best done within a medium-term horizon for expenditure planning. Assessment of Selection and Budgeting in Belarus 141. To all practical effect, Belarus has separate capital budgets at central and local levels. Although the aggregates are approved through the state budget, the project-by-project detail of central government capital expenditure is, for the most part, approved by presidential edict through a separate instrument, the State Investment Programme (SIP). This is governed by its own legislation 69 and financed through the state budget, including a number of earmarked budgetary funds and sources (such as the President’s Reserve Fund, the Republican Road Fund, the Fund for National Development, etc). Prepared in parallel with the budget, the SIP is usually approved about 2 months after the state budget approval. At the regional level capital investment expenditures are represented by regional investment programs (RIPs). 142. The SIP provides what are in effect annual investment appropriations by project. Projections for a second year are also given as a reference, but have no significance for the preparation of the following year’s SIP. The SIP also gives the total project costs for individual projects, which are expressed not in nominal terms, but in constant, baseline construction prices 70. This is however not particularly helpful for decision-makers, as the base year is very outdated. 143. The majority of projects in the SIP have pure public policy objectives and fit within a narrower definition of public investment. Funding is directed towards projects that conform to a narrower role for the state in the economy. While in the past state budget funding (outside the SIP) was used to finance commercial projects by SOEs (and their operating deficits), the Development Bank is now expected to finance commercial projects, even if on subsidized terms. This is a positive development, in line with the Government’s aim of creating greater financial transparency and a level playing field for SOEs and the private sector, while using budgetary resources to pursue wider social objectives. 144. The process of preparing the SIP is distinct from budget preparation and approval, with the MoE taking the technical lead, the Council of Ministers (CoM) providing policy direction and the President making the final decisions. SIP preparation 69 Edict of the President No. 299 (2006) 70 Regulation for establishing fixed contract prices for construction of facilities, approved by the CoM Resolution No 1553, from November 18, 2011 72 begins in May when the MoE makes a call for prioritized requests from MDAs using the formats – requiring mostly financial information - set out in the governing legislation. Having reviewed the submissions, the MoE then prepares a preliminary draft for discussion with the MoF. In July/August, the MoF confirms the available financing for the SIP and the MoE begins the process of adjusting the SIP to fit within the financial constraints. Inter-sectoral prioritization involves consultation with the CoM, firstly in terms of the priority areas for investment – proposed by the MoE and confirmed by the CoM – and secondly on the final composition of the draft SIP for submission to the President’s Administration. The MoE does not generally take a strong view on priorities within sectors and during the process of prioritizing projects within financial limits, the ministry holds bilateral negotiations with MDAs requesting SIP funding to (re)confirm their priorities and decide what can be afforded within the available financing. Continuous collaboration on financial programming takes place with the MoF during the prioritization process. The SIP gets approved by the President in January-March, i.e. long after the republican budget is approved. 145. The dislocation between the preparation of the state budget and the SIP hampers an integrated approach to planning recurrent and capital expenditures. There is no formal requirement for the recurrent expenditure implications to be taken into consideration when selecting projects for the SIP (see the principles set out below) and, in practice, the parallel process does not make this easy. On the other hand, direct evidence of underfunding of operations and/or maintenance expenditures for newly completed projects is hard to come by, and it seems that operating entities generally make adequate budgetary provision for the recurrent consequences of projects to be commissioned during the budget year. 146. The recent policy decision to dispense with the SIP and dissolve it into the state programs, could offer an opportunity for a more integrated approach to budgeting, but also carries with it a potential drawback. Originally proposed by the MoE, this reform is now included in the recently adopted Program for Social and Economic Development of the Republic of Belarus for 2016-2020. This change would, however, reduce the decision-making role of the central authorities over the composition of the public investment program, giving more autonomy to individual program managers to decide which projects to fund within program expenditure limits. The decision to go down this path therefore requires careful consideration: many governments wish to keep some central control over the public investment program, at least as far as major projects are concerned. Dispensing with the SIP, before a strong performance culture is embedded in budget entities responsible for state program management, also runs the risk of too many under-funded new projects being approved, diluting funding for completion of new projects. 147. There are several options that authorities might consider for reducing the potentially negative effects of doing away with the SIP, including: • Setting separate ceilings for capital and recurrent spending within state programs, and to strengthening scrutiny of state program proposals, especially capital, by the MoE and MoF; • Retaining some form of SIP, while limiting its scope to the portfolio of projects of national significance - rather than projects of all sizes as at present - and ensuring close 73 coordination with the preparation of state programs. In some ways, this would resemble the UK’s Government Major Projects Portfolio. 148. Published criteria exist for selection of projects for inclusion in the SIP, but some of these are rather general and may be open to interpretation. According to the Edict of the President governing the SIP, project must be included in approved state programs envisaging the construction of socially important facilities 71 or the subject of a special presidential decision 72. The edict also defines the following criteria, or ‘principles’, for formulating the SIP 73: • Ensuring maximum social and economic efficiency of the budget investment expenditures; • Concentration of funds on objects to be commissioned in the current year and on objects with the high degree of completion to be commissioned in subsequent years; • Minimization of costs of detailed design documentation when including new objects into the Program; • Reduction of excess volume of construction in progress; • Cutting the estimated cost of objects under construction with a long term of construction – determining priority construction start up facilities with the indication of their commissioning deadlines, exclusion of overhead costs. 149. For the most part 74, these principles form a sound starting point for selecting projects for funding through the SIP and other instruments, but they would benefit from greater specificity and some possible additions. In particular, the basis for ensuring social and economic efficiency could be more clearly defined. In good practice systems, a decision confirming a positive appraisal (based on SCBA or another applicable tool) would be a necessary, but not sufficient, condition for selection. The degree to which a project supports implementation of the government’s policy priorities would then be a key criterion for selecting from among the pool of positively appraised projects. Readiness of the project to proceed is generally an important condition for selection from among those projects seen as being critical for achieving policy goals. Finally, practical financial programming issues come into play as financial plans for major projects are matched to medium-term financial constraints. 150. Regardless of possible areas for refining the existing selection criteria, it is important not to expect too much of economic appraisal methods when it comes to budgeting. SCBA is useful in quality controlling projects and ensuring that those projects that go forward into the budget arbitrage are socially profitable and sustainable. Even if it could be applied to all projects, which it cannot, SCBA is not, however, a universal prioritization tool capable of providing a scientific ranking of all projects across all sectors as a basis for budgeting. The relative importance of unvalued benefits and costs differs between sectors (and even sub-sectors), as does the reliability of benefit estimation techniques, making it difficult to 71 Article 6 of the Edict of the President. 72 Article 7 of the Edict of the President. 73 Article 5 of the Edict of the President. 74 The third principle, while having some merits needs to be interpreted carefully: achieving efficiency in design is an important aim, but minimising costs on design documentation might be a false economy if it leads to implementation problems later. Achieving ‘best value’ in design could be a more appropriate principle. 74 make cross-sector comparisons. And in those sectors where SCBA is not readily applicable because of difficulties in valuing benefits, CEA does not produce an absolute indicator of net project worth for comparison with other projects. In fact, there are no examples of good practice countries where economic appraisal findings are used as the main means of determining budget priorities, although these can form one piece of information in the decision-making process. 151. The selection principles for the SIP suggest that ongoing and new projects are expected to compete directly against each other for funding. The priority given to early completion of ongoing projects over starting new projects, which is embodied in the principles, is an important feature of good practice PIM systems. Prioritization currently involves dividing projects competing for SIP funding into three groups: i) ongoing projects that will be completed and commissioned in the coming budget year; ii) ongoing projects that will not be completed and commissioned in the coming budget year; and iii) new projects. Priority is given to the first group when allocating funding and, notionally, other ongoing projects (the second group) are prioritized over new projects; nevertheless, the prioritization process, which involves several iterations, still allows for trade-offs between ongoing and new projects to be made. Whether at central level (SIP) or local level (RIPs), it is not good practice to allow room for such a trade- off to be made. 152. The fact that there are 50 “frozen” ongoing projects 75 in the public investment portfolio suggests that prioritization of ongoing over new projects has not always worked in practice, in spite of good intentions. These frozen projects were under implementation, but have been put on hold because of shortage of funds. Commencing with the 2015 SIP, when the frozen projects also first appeared 76, an informal brake on commencing new projects has been initiated to complete the backlog of under-funded ongoing projects, confirming this as an issue. Part of the explanation for the brake lies in the political priority given to the construction of the new nuclear power plant, combined with the unexpectedly severe deterioration in the public finances as a result of the economic downturn; however, it seems likely that the issue has a longer history than this, as suggested by the extended implementation periods of some of the projects in the sample. While the assessment does not have direct evidence of this, it is believed that the same issues also exist with regards to many of the RIPs. 153. A two-step selection process set within a medium-term financial framework would be a useful refinement to the budgeting process at both central and local levels, allowing a more disciplined prioritization of ongoing over new projects. One approach to avoiding the underfunding of ongoing projects would be to begin the capital budgeting process by first establishing a capital baseline - defined as the funding needs for efficient implementation of the portfolio of ongoing projects. Funding for the capital baseline should then be agreed and assured as a first step, before calculating the remaining fiscal space within which new projects can be selected. 154. By segregating and sequencing funding decisions for new and ongoing projects 75 According to the Ministry of Economy, there are about 100 projects in the portfolio of frozen projects, but around 50 of these are new projects, not ongoing as discussed above. 76 Around 47% of allocations were officially frozen in the 2015 SIP 75 direct competition can be avoided. Under normal circumstances, budget financing for the capital baseline would be automatic and not subject to the trade-offs involved in project selection; however, for this approach to work the capital baseline should be affordable. This may or may not be the case in Belarus, depending on the status accorded to ‘frozen’ projects 77 when establishing the baseline. There may therefore be some requirement for a prior rationalization of the project portfolio, before introducing a two-step process for allocating financing to projects. Preparation of a capital baseline also needs good financial reporting and accurate in-year forecasting of financial and physical progress. These are in turn dependent on the existence of a reliable and comprehensive public investment information system, which does not yet exist in Belarus (see Chapter II, Section D). 155. There are no restrictions on signing multi-year contracts for major projects taking several years to complete. Contracting arrangements have flexibility built in, so that implementation can be adjusted to the availability of funding. Effectively, a kind of ‘framework contract’ is signed with a contractor for construction of a facility and then annual addenda are signed in line with the funding agreed through the relevant financing instrument. While this represents a practical solution to the year-to-year unpredictability of funding, it does not necessarily provide a helpful incentive environment for efficient funding and completion. 156. There is potential for further streamlining of the selection and budgeting of investment projects now that Belarus has started to introduce a medium-term perspective on budget planning e. The SIP already has a financial estimate for one outer year, but this has not, in the past, been derived from an overarching fiscal framework and lacks credibility as a result. Two years is also too short a perspective. Accordingly, the recent approval of the first medium-term budget framework (MTBF), including indicative ceilings for aggregate SIP expenditure for two years beyond the forthcoming budget year, is a very positive development. Provided outer year allocations are reasonably reliable, programming new and ongoing multi-year projects will be much easier within such a multi-year financial perspective, where future commitments can be matched against available resources. Specifically, the two- step budgeting process described above will only work effectively where there is a good indication of financial resources availability over the medium-term, within which provision can be made to meet commitments to ongoing projects and then allocate fiscal space to new projects, as illustrated in Figure 16. As indicated in the figure, the fiscal space for new projects can be expected to open out towards the end of the perspective as ongoing projects are completed. 77 Since these are stalled projects, rather than ongoing, usual practice would be not to include them in the baseline. These projects should ideally be re-appraised as new projects, but appraisal of their social worth should be on a sunk cost basis. If they are shown to be socially profitable, they should then compete with new projects for fiscal space. 76 Figure 16: Capital Baseline and Fiscal Space for New Public Investment Projects Year t Year t+1 Year t+2 Year t+3 Contingency Fiscal space for new projects Resource envelope for public investment Capital baseline Note: The figure illustrates a 4-year perspective, but the idea applies equally to a 3-year or 5- year perspective. 157. The newly approved MTBF still has certain drawbacks and further work will be required to make it into a solid basis for budgeting, in general, and public investment programming, in particular. The MTBF was approved in December 2016, two months after the 2017 budget was approved. This sequencing, which is as envisaged in the Budget Code, prevents the MTBF from providing discipline during budget preparation, although the circulation of a draft does help frame the budget discussions. 158. A more conventional budget process generally begins with the formulation of a medium-term fiscal framework, followed by the preparation of an MTBF These instruments are rolling medium-term frameworks, where the outer years are used as the starting point for the following year’s budget proposal, and where deviations in allocations from one year to the next are made transparent and explained. These steps usually precede and provide the strategic financial resource framework for the preparation of the detailed annual budget (although there may be a requirement to amend the allocations in the MTBF depending on the final allocations finally agreed in the budget). This implies that improvements in the design and application of the budget calendar may be required in Belarus. Also, Belarus’s MTBF remains at a high level of aggregation and provides no indication of investment ceilings either by MDAs or by state program. In fact, investment is specifically omitted from the indicative allocations to state programs. Thus, the MTBF provides no firm guidance on the sectoral allocation of investment expenditures, an area which would need to be improved for the MTBF to provide a solid basis for project selection and budgeting. 159. There could be important efficiency gains from issuing annual and medium-term financial limits for investment expenditure earlier in the budget cycle. At present the MoE issues a call for requests for SIP financing before the MoF has estimated the total available financing. The result of this ‘bottom-up’ process is a very significant gap between requests and available resources 78 and wasted effort in preparing requests. This could be forestalled by 78 Requests for SIP funding for 2017 exceeded available resources by five times – BYN 20.7 trillion compared to BYN 3.8 trillion. 77 earlier estimation of the annual investment allocation by the MoF and the issuing of ministry or program investment expenditure ceilings by the MoE before the call for SIP requests. More worryingly, to be eligible for SIP funding, projects need to be fully prepared, including detailed design, so that they are ready to be implemented if selected, leading to projects being designed that may not be implemented. In actual fact, the analysis of SIP databases reveals the SIP itself provides financing for preparing detailed design for construction projects in some instances (Table 8 in Chapter II). The number of such case varies from 60 in 2011 to 27 in 2015. This could at least give an opportunity to verify that the project is socially profitable and affordable, before allocating SIP funding for design (and thus avoiding potentially wasted effort), but there’s no evidence that the process works in this way, and many projects are anyway prepared without SIP funding. 160. While ‘readiness-to-go’ should normally be an important selection criterion, there is some concern that more projects are prepared than can be realistically implemented, resulting in a waste of resources, both financial and human. The evidence from the SIP analysis suggests that SIP financed expenditures on preparing detailed design could have varied from as low as 0.6 percent of total SIP allocations in 2012 to as high as 4.5 percent in 2015 79. A more discriminating appraisal process (see Chapter IV), combined with a formal approval as a prerequisite to move from identification to appraisal, will help in limiting the number of such projects, but a clearer indication of financing over the medium- to long-term, through the MTBF, could also assist in restraining the size of the project pipeline. Unfortunately, the fragmented picture of the investment program, including its financing, does not allow the scale of this issue to be assessed: some prepared projects that fail to secure SIP financing may be implemented using other sources. 161. The SIP does not include all the central government capital expenditure in the state budget. Certain capital expenditures are financed through normal state budget allocations to budget entities. Expenditure on equipment that is not integral to the facility being constructed, medical equipment and ICT equipment, for example, is financed directly through the state budget. These omissions may, in some cases, mean that the full costs of a project - using a definition that goes wider than ‘object’ (see Chapter II) - may not be transparent. Dedicated ICT projects are also not included within the SIP, which is also out of alignment with much international practice when it comes to defining the scope of public investment 80. Although comparable figures are hard to come by, the total value of capital investment expenditures in the state budget, but not in the SIP, could represent as much as 20 per cent of the total. 162. The SIP and the state budget are not comprehensive in their coverage of public investment from all funding sources. Investments by a number of extra-budgetary funds 81, and donor-financed projects, including projects financed by loans from IFIs, are not captured in either the republican budget law or the SIP. This information is captured neither by the state 79 It could have been the case that in a later years these projects went into construction with financing from SIP or other sources 80 GFSM 2014 classifies intellectual property such as databases and software as fixed assets 81 These are Social Protection Fund, State Extrabudgetary Fund for Civil Aviation, State Extra-Budgetary Fund of the Penitentiary Department of the Ministry of Internal Affairs, State Extra-Budgetary Fund of Universal Services, Extrabudgetary Centralized Investment Funds and own funds of budget organizations 78 budget, nor in information accompanying the budget. 163. The SIP only gives a partial picture of project expenditure for projects with multiple funding sources. If, for example, a budget entity uses own-resources to finance an investment project, alongside SIP financing, these amounts will not be shown in the SIP. Similarly, if a budgetary contribution to a donor-financed project is required this will be captured, but the donor contribution will not be. Likewise, when the SIP co-funds regional projects – where matching funding in the ratio 50:50 is required – only the central government share will be shown. This fragmented picture of project financing is not conducive to a transparent overview of the overall public investment program. In the extreme, projects may be financed through the SIP in one year and then by a different source in a subsequent year, making it impossible to keep track of total project expenditure and implementation progress. Examples of this in the project sample are: • National pioneer camp “Zubryonok”: funded from the SIP and various other sources over time, according to the year in question; • Belorusian State University of Informatics and Radioelectronics: originally funded from SIP, then from own-sources; and • Road R-23 Minsk-Mikashevichi: originally funded from SIP, then by borrowing from the Development Bank. 164. Central government selection and budgeting processes are more or less mirrored at the regional level, but there are some differences, which reflect positively on regional processes. The RIP is the equivalent of the SIP at the local government level 82, and is prepared at both oblast and rayon level. RIPs have a wider scope than the SIP, encompassing rehabilitation and capital repair projects. As indicated elsewhere in the current report, capital expenditures of the regional governments represent on average 70% of total general government capital expenditure 83, although individual projects tend to be smaller and more numerous. RIPs are approved by the Regional Councils of Deputies as a total envelope for a given year, much as the SIP allocation is approved in the state budget. The detailed allocation of this envelope is the responsibility of the Regional Executive Committees. The chronology is different from the SIP, however, offering the potential for more closely integrated planning of capital and recurrent spending; whereas there is some delay between the approval of the SIP by the President following approval of the state budget, the RIP allocations are decided simultaneously with regional budget preparation and budget entities are aware of individual project allocations from the beginning of the financial year. An additional positive feature of the RIP is that it gives a comprehensive overview of the financing sources for the whole RIP (but not individual projects) and is not just limited to the allocation from the regional budget. This is important information for decision-makers and avoids the partial picture of aggregate financing that is presented in the SIP. 82 There is no equivalent of the President’s Edict No. 299 for RIPs. The RIPs are adopted by regional governments based on the Law on Local Governance and Self-Governance, which mentions regional authorities’ competence for investment programs. The Ministry of Economy issued guidance on the preparation of RIPS - Resolution of the Ministry of Economy No. 167, 2007 - but this has now become out-dated. 83 Source: MoF data. The share ranged from 66-74% between 2011 and 2015, depending on year. 79 165. The highly regulated project preparation process, combined with onerous sanctions for irregularities, ensures that it is highly unlikely that a project would be able to ‘jump the fence’ into the budget, although there are some exceptions. Neither the MoE nor the MoF performs a distinct ‘gate-keeping’ role, whereby projects are verified to ensure that they have been properly ‘quality controlled’ according to the pre-investment procedures in place 84. The presumption is that MDAs will have done what is necessary before submitting funding requests and the information submitted at this stage is, anyway, insufficient for any sort of in-depth review. The State Control Committee confirms the legal compliance of projects included in the SIP, before it is submitted to the Administration of the President (after approval by the CoM), but does not go beyond this. Projects financed through the President’s Reserve Fund (part of the SIP) are subject to less stringent procedures, e.g. allowing their inclusion in the SIP before detailed design work has been completed. The presidential edict governing the SIP also allows the President some discretion in allowing projects from other SIP funding sources to be included in the SIP, even if the necessary preparatory documentation has not been completed in time. Belarus is not alone in allowing exceptions to pre-investment procedures because of emergencies, but in the good practice countries these rights are rarely exercised and very few projects enter the budget through unconventional routes. 84 The usefulness of a formal gatekeeping function is also in doubt when there are questions about the completeness of the methodological basis for project appraisal (see Chapter 4). 80 Summary Assessment of Project Selection and Budgeting (WBG Stage 4) Desirable Institutional Arrangements Institutional Arrangements in Belarus The process of appraising and selecting 1. Transparent criteria for selecting There are defined criteria - ‘principles’ - for selecting public investment projects is linked projects with reference to policy projects for inclusion in the State Investment Program appropriately to the budget cycle. objectives at ministerial level. (SIP); however, the criteria are quite general and leave scope for broad interpretation. Regional governments are responsible for their own investment programs (RIPs), but tend to apply similar principles, although these are not explicitly stated. 2. Well-structured budget preparation Weak top down budget procedures negatively affect the process with adequate provision for preparation of investment budgets as the process is multi-year projects and scope to initiated without a clear budget limit having been integrate investment and recurrent communicated to the MoE and passed on to line implications of projects. ministries. A multi-year budget and financial planning perspective is still in the early stages of development. There is no rolling multi-year financial planning in place and no effective segregation of on-going from new investment projects. Recurrent and capital investment budgeting are effectively separate processes. Preparation of the SIP is intended to be done in parallel with preparation of the State Budget, but in practice has tended to lag, the process is somewhat better with RIPs. The policy decision to introduce an integrated approach to funding state programs, with capital investment brought firmly within state programs, have the potential to improve integration, while at the same time running the risk of making it easier for under-funded new projects to squeeze into the budget and dilute funding for ongoing projects (one of the reasons 81 why the SIP was originally created). Lack of budget comprehensiveness is an issue: externally funded projects are not included in the budget; the Development Bank is involved in providing subsidised lending to traditional public investment projects; and there is not always a clear picture of all the funding for projects benefiting from multiple financing sources. 3. Effective gatekeeping to ensure only There are strict rules about the documentation and appraised and approved projects are approvals required for projects to be eligible for selected for budget financing. consideration for the SIP and RIPs, and gatekeeping is relatively strong. The President may approve departures from this practice in certain cases, where justified. This authority is not used frequently, but more frequently than would be desirable in a good practice system. 4. Ensuring adequate financing for Priority is now being given to completion of ongoing selected projects, including recurrent projects and there are no evident signs of underfunding of needs on completion. recurrent financing needs. The recent economic crisis and ensuing fiscal consolidation, exposed an overloaded public investment portfolio, resulting in a significant number of projects being ‘frozen’ and a brake on new projects. This indicates that there is a latent underfunding of the portfolio, when interrupted projects are taken into consideration, as demonstrated by the analysis of SIP data over the years. Little attention is paid to future recurrent financing needs when a project first enters the budget. Only in the year of commissioning is consideration given to the financing of operating and maintenance expenditures. 82 Recommendations 166. Recommendations on selection and budgeting can be broken down into those that relate to budgeting in general, and those that relate to PIM specifically. The former will facilitate PIM, but have wider implications. A distinction between short-term and long-term recommendations should also be made. Short term recommendations • Budget/MTBF development: o Strengthen the reliability of the medium-term fiscal framework and ensure that it is approved at the beginning of the budgeting process and that it is only subject to technical revision on the basis of new information thereafter; o Review the criteria/principles for selecting projects for inclusion in the SIP, so as to make them more specific and more operational; • Capital budgeting: o Synchronize the calendars for preparing and approving the state budget and the SIP, so as to improve integration of recurrent and capital expenditure; o Introduce a system of forward baseline estimates for ongoing public investment projects, by which decision-makers have a full picture (by year) of the forward funding requirements for the efficient implementation of ongoing projects, before they make decisions concerning new projects, for which forward estimates should also be available. . Medium term recommendations • Budget/MTBF development: o Introduce a credible, rolling medium-term budget framework (MTBF). When rolling over the MTBF, use the second and third years of the previous year’s MTBF as starting point for updating and extending expenditure plans; • Capital budgeting: o Once a more rigorous appraisal process is established, introduce a formal gatekeeping function, whereby all projects included in budget requests are reviewed centrally to ensure that they have been properly appraised, have obtained the necessary approvals and are directly aligned with the priorities of their respective state programs. The gatekeeper should also verify that any new information available since appraisal has been taken into account. This function could be performed by either the MoE or MoF, but the former is probably best placed to do it; o Develop a strategy for dealing with projects that continue to be frozen or very slow moving projects over the medium term. If additional financing is not available in a reasonable timescale, reviewing and potentially rationalizing the portfolio of on- going projects could bring significant benefits in freeing up fiscal space that would otherwise be blocked by projects which are slow moving or unlikely to deliver the originally envisaged outcomes. The strategy should define the criteria for triggering reassessment, the scope of the reassessment and required follow-up actions and should involve reassessing frozen projects in the same way as new projects to 83 confirm social profitability, but on a sunk cost basis; o Prioritize new projects separately from ongoing projects, after the capital baseline has been established and agreed, and the fiscal space remaining for new projects has been determined. Make firm decisions about medium-term allocations of funding for ongoing projects before allocating any remaining funding for new projects; o Review future options for the level of centralized involvement in the composition of the investment program in the context of the rationalized system of state programs and a functioning medium-term fiscal framework. The options are: A. Provide aggregate expenditure ceilings for state programs and allow program managers to decide on the allocation for capital investment within the ceiling. In this case, the investment program is derived, rather than being an active instrument of policy; B. Provide expenditure ceilings that differentiate between capital and recurrent expenditure. This way the central authorities retain some control over the size of the investment program, if not its composition; C. Combine B with an investment program for major investment projects only, retaining a role for the center in allocation decisions for important projects. In reality, the difference between A and B is not as great as it might seem, as the ceiling setting process for A would require the central authorities to take into account the funding requirements of ongoing major projects and to allocate adequate space for new major projects: ceilings should not be set in isolation from a view on the composition of the investment program, at least as far as major projects are concerned. Similarly, for B, setting the capital expenditure ceiling could not be ad hoc, but would need to take account of funding requirements for ongoing projects, both in the forthcoming budget year and over the medium-term. o Require budget requests for investment projects to include projections of operating and maintenance expenditures for the new facilities once commissioned. 84 IV. PROJECT IMPLEMENTATION, MONITORING AND ADJUSTMENT A. Introduction 167. This chapter extends the gap assessment to project implementation, monitoring and adjustment. The sections follow the same overall structure as in the previous chapter (summary of good international practice; assessment of current practice in Belarus; a summary comparing with international practice; recommendations), while incorporating a section to bring in the evidence of project implementation performance from the analysis of SIP data and a section devoted to issues of procurement. B. Project Implementation What Does Good Practice Look Like? 168. There are five main components of good practice in project implementation: • Guidance on implementation: Comprehensive guidelines on project implementation and management should exist; • Implementation plans and clear accountability: There should be clear organizational and management responsibilities for delivering on a detailed project implementation plan; • Procurement arrangements that incentivize achieving value for money through contracting: Procurement should be efficient, competitive and transparent, and there should be fair recourse; • Timeliness and predictability of in-year funding: There should be predictability in the availability of funds for commitment and payment of project expenditures, and funds should be released in a timely and efficient way over the year so as not to impede efficient implementation; • Regular and appropriately detailed reporting on implementation: A responsive monitoring system requires sufficiently regular and detailed reporting, according to the focus of the monitoring – project-level or portfolio-level. For multi-year projects, financial reporting should be against total project costs and not just annual allocations. 169. Effective management arrangements are necessary to make sure that capital investment projects are delivered on time, to budget and to specification once a firm funding decision has been made. Good guidance on implementing projects is important. This can either be issued centrally or, as is more usually the case, at the sector-level by line ministries or subordinated agencies. Some of the required information could be available elsewhere, in procurement or accounting legislation and regulations for example, but in the better PIM systems these would be referenced in a single document that is continually updated. Ideally, basic guidance should cover: • The roles of project managers and supervisors; • Delegations of authority for certifying works and making decisions for deviations from plan; • Overview of government procurement policies and practices; • Financial management and reporting requirements; 85 • Monitoring of implementation progress; • Procedures for making project adjustments; and • Arrangements for project completion and post-completion reporting. 170. Projects need to have comprehensive implementation plans and a clear allocation of responsibilities for delivering on them. Plans should incorporate a timeline, critical path (for major projects) and key milestones, procurement plans and an expenditure cash flow forecast. Systems need to be in place to monitor and manage total project costs, not just annual allocations and individual contracts within larger projects. 171. A sound public procurement system is vital for public investment management because capital projects are generally implemented on behalf of government by contractors. Such a system needs a well-defined legal framework that embodies transparency and competition as the means to obtaining fair and reasonable prices, and overall value for money. It also requires the submission and resolution of complaints in a fair, open, independent and timely manner. Public dissemination of information on procurement processes and outcomes is an important element of transparency. Procurement processes should not be overly complex so as to add delays to the overall PIM cycle. Once signed, contracts need to be managed in a professional and disciplined way. 172. Efficient project implementation requires that the funds approved in the budget be made available in-year to the responsible budget entity in a predictable and timely fashion. An unpredictable flow of funds makes it difficult to enter into and honor commitments. Overly complex and detailed budget execution controls could also slow down implementation by delaying funds releases and the necessary authority to commit or spend funds. Slowing down implementation puts back the time when the benefits of the project start flowing. Severe cash shortages leading to a stop-go implementation can increase total project costs because of remobilization charges. 173. Reporting needs to be calibrated to the needs of monitoring at different levels in the system. Project managers need more detailed and more regular reports than those monitoring the portfolio as a whole. Day-to-day monitoring – and the associated reports - are vital for efficient implementation; at the same time, less detailed, less regular, but more analytical reports need to arrive at higher levels in the system so that portfolio managers can take a view on progress in implementing the investment program as a whole and identify at- risk projects requiring attention from senior decision-makers and further follow-up. Overview of Evidence on Implementation Performance 174. Data issues makes it challenging to present a coherent picure of implementation performance in Belarus. Budget execution rates for public investment projects are typically used as a central indicator of implementation performance, but as discussed in Chapter II, the low credibility of the original budget and the frequent budget revisions up until late in the fiscal year seriously reduce the value of this indicator in relation an assessment of project implementation performance. For other indicators – time overruns, time to implementation at current levels of funding, and dormancy – the scope of data in SIP limits their use. These indicators are discussed below with relevant qualifications. 86 175. A significant portion of projects exhibit some time overrun, but long delays seem relatively rare. Figures 17 and 18 show estimated time overruns for 2011-15 SIP projects, i.e. the revisions of the projects duration compared to original expectations. More than 50 % of the projects adhered to the initial schedule 85, while a small proportion, 1 %, were accelerated. Around 46 % of projects were delayed by 10 % or more compared to the originally estimated duration, while about 30 % of projects were subject to delays of 2 years or more. Figure 17: Estimated Time Overrun Figure 18: Estimated Time Overrun (percent to originally estimated duration) (number of years) of 2011-15 SIP Portfolio, of 2011-15 SIP Portfolio, number of number of projects projects 15 3 10 10 78 40 59 73 322 316 212 106 underrun up to 10% 10% - 50% > 50% -1 0 1 2 3 4 5 6 Source: World Bank staff calculations based on analysis of the Presidential Edicts on approved and revised SIPs for 2011-2015. Notes: Estimates for time overrun were calculated as the difference between the original and latest estimates of project duration (the difference between the fields “Project Start” and “Project End”) within the 2011-15 period. This analysis was performed based on data from 622 out of 720 projects in the database. The remaining 98 projects did not contain the full set of needed data. Part of this information gap could be explained by detailed designs being financed without subsequent project financing (as mentioned in paragraph 62 in Chapter II). Another explanation could be incompleteness of the SIP data. 176. Analysis of the levels of budget financing in the SIP portfolio indicates some level of under-funding which may aggravate implementation delays in future if the situation is not corrected. Figure 19 shows the estimated time to complete projects in each year (2011- 2015) if the current levels of annual budget financing were to be maintained. This can be seen as a ‘rough-and-ready’ measure of any under-funding of the investment program. Years to complete were calculated by dividing the balance to complete by actual financing from the SIP funds. The figure shows that a significant proportion of projects in each year (37 % in 2015) 85 In reality this number will be somewhat lower, as the team only used SIP data starting with 2011. Projects completed in 2011 will therefore count as implemented in line with the schedule (as the team does not have information on the history of project revisions prior to 2011). This bias will also apply to data for projects completed in 2012 and onwards, but to a lesser extent. 87 would have taken longer than 10 years to complete, suggesting that the ongoing investment program has been under-funded for some time. On the other hand, as illustrated by Figure 12 in Chapter II, the republican budget is not the only source of financing SIP projects. Its average share was about 75% in the analysed years, while about 25 % were financed by local budgets, bank loans, extrabudgetary funds and etc. If these sources of financing were taken into account the picture would be somewhat different. Figure 19: Time to Complete at Current Levels of Funding, years 100 90 80 70 60 50 40 30 20 10 - 2011 2012 2013 2014 2015 Up to 1 year 1-3 years to complete 3-5 years to complete 5-10 years to complete More than 10 yrs to complete Source: World Bank Analysis of Approved SIPs and Belstat reports on SIP Execution Note: Estimates presented in the figure should be treated as a proxy for time to complete at current levels of funding due to absence of some SIP project related data. The analysis was performed based on a sample of between 46 and 71 % of projects in 2011-15. 177. Further confirmation of significant underfunding of ongoing projects is given by the number of “dormant” projects. For the purpose of this analysis, dormancy is defined as projects which have have been under implementation for at least three years and received 10 % or less of their balance left to complete in the last three years. Table 13 indicates that in 2014 there were a total of 69 dormant projects (78 in 2013) when defined in this way. The total value of dormant projects in 2014 was BYR 20,108,348 million or 55% of the total SIP portfolio value. The figures were little different in 2013. The picture is somewhat different in 2015 because a decision was taken to ‘freeze’ a certain number of projects, so only 34 projects are classified as dormant. Even so, the total project value of the projects meeting the dormancy criteria rose to 66 % of the total SIP portfolio cost, although falling in absolute terms compared to 2014. When the balance to complete of frozen projects in 2015 (BYR 14,623,689 million) is taken into account alongside the figure for dormant projects, the scale of the funding shortfall becomes apparent. 88 Table 13: “Dormancy” in SIP Portfolio, 2013-15 2013 2014 2015 (without frozen projects) number % of total number % of total number % of total Dormant projects - Number 78 23 % 69 22 % 34 19 % - allocations, mBYR 316,594 6% 831,069 14 % 1,375,265 37 % - total project values, 19,863,071 53 % 20,108,348 55 % 16,866,861 66 % mBYR Non-dormant projects - number 263 77 % 239 78 % 148 81 % - allocations, mBYR 4,989,037 94 % 5,064,791 86 % 2,348,241 63 % - total project value, 17,886,767 47 % 16,360,804 45 % 8,640,940 34 % mBYR Source: World Bank Analysis of Approved SIPs and Belstat reports on SIP execution Note: The number of dormant projects in a certain year could only be calculated for projects having complete data in both SIPs and Belstat reports, while the number of non-dormant projects was calculated as the difference between total number of projects and number of dormant projects. Therefore, projects which have data gaps for one or more field would automatically fall into the category of non-dormant projects. On the other hand, as mentioned in paragraph 172 above, some projects receive additional financing from other sources, which were not captured by this analysis. If other sources of financing were added to the database, the level of dormancy would have declined. 178. While some bunching of capital spending towards the end of the year can be observed, the rates are not alarming and seem to indicate a relatively smooth implementation throughout the year. Figure 9 in Chapter II shows 2011-2015 average shares of construction spending from the republican budget distributed by month. It shows some bunching of expenditure in the last quarter (38 percent of total disbursement) as well as in the last month of the year (during 2011-2015 19 percent of total disbursement took place in December). 179. Accounts payable and arrears as a share of the capital budget are generally low, although rising in 2015. Table 14 indicates accounts payable and arrears as a share of total capital spending for general government (the republican budget and sub-national governments). Both accounts payable and arrears rose in 2015, to 3.5% and 1.2%, respectively, of total general government capital spending. These shares are not in themselves alarming, but the driver seems to be at the sub-national government level - where accounts payable and arrears rose to 4.1% and 1.8%, respectively, of total capital spending - which could be a sign of emerging capital budgetary control issues at this level. Since two thirds of total capital spending takes place at the level of sub-national government, what happens here has a significant impact on the figures for general government. 89 Table 14: Accounts Payable and Arrears as a Share of Total Capital Spending, percent 2011 2012 2013 2014 2015 Accounts Payable General Government 3.1 1.9 1.8 1.3 3.5 Republican Budget 1.3 1.0 3.0 2.1 2.1 Sub-national Government 4.1 1.8 1.3 1.0 4.1 Arrears General Government 0.4 0.1 0.2 0.3 1.2 Republican Budget 0.2 0.0 0.2 0.5 0.0 Sub-national Government 0.6 0.2 0.2 0.2 1.8 Source: MoF data Note: Social Security Fund and extra-budgetary funds are omitted, but these represent a very small share of general government capital expenditure. Assessment of Project Implementation in Belarus 86 180. Robust procedures are in place to ensure that projects are ‘ready-to-go’ when they are budgeted, so delays in commencing implementation seem to be rare. Apart from the cases of single-stage design and exceptions granted by presidential decision, a pre-condition for obtaining funding is that detailed design has already been completed. All necessary permissions, including land allocation must also be acquired before preparation of the detailed design. The work flowcharts issued by the MoAC 87 include one setting out the procedures for obtaining these permissions and another showing the process for preparing the required pre- investment documentation, so the procedures for ensuring that projects are ready to go are well defined. 181. After formal approval of the SIP, further verification of the readiness of projects for implementation is carried out. The MoAc and the MoE prepare a resolution indicating the projects (objects) that will be commenced in the forthcoming budget year and those that will be completed and commissioned. This gives a further opportunity to scrutinize new projects for implementation readiness. The procurement process can only begin after the resolution is issued. Since the SIP is usually approved after the beginning of the budget year and the resolution takes some time to prepare 88, this means that implementation of new projects can only begin several months into the year. With the procurement process taking two to three months, works can only usually begin around mid-year. While the resolution also includes ongoing projects, their financing is not contingent on its issuance, and expenditure can begin as soon as the SIP is approved. 182. There is a well-defined legal and regulatory framework for implementation of construction projects in Belarus, which has recently been strengthened. The Law on Architecture, Urban Planning and Construction (2004) provides the legal foundations for 86 Procurement is a very important issue and is dealt with separately below. 87 Regulation of the Ministry of Architecture and Construction No. 17 (2014) on Approval of Album Schemas Defining the Workflow for the Implementation of Investment Projects in Building. 88 It is usually issued around March/April. 90 project implementation activities, among other aspects of the project cycle 89. The law has more recently been reinforced by a presidential edict 90, which, among other things 91, gives specific authority to the MoAC to define the functions and operational procedures for project clients/developers and project managers, which it has done through a regulation on functions 92 and an instruction on procedures. The perceived need to strengthen the legal framework suggests some previous concerns about its clarity and depth, but these now seem to have been addressed through the edict and the regulation. 183. Through the regulation, allocation of responsibilities for project implementation between the project client and the project manager has been defined clearly by the Ministry of Architecture and Construction. Covering the whole project cycle, including implementation, the previously mentioned regulation sets out the functions of the project client/developer 93 in relation to: • Pre-investment activities; • Development of the construction site; • Preparation of design documentation; • Construction; • Finance, accounting and reporting; • Logistics; • Acceptance of the completed project; and • The warranty period. 184. Further, the regulation establishes the responsibilities of the project manager, appointed by the project client, which cover, among other things: • Organizing the work of preparing and implementing the project; • Organizing the preparation of pre-investment documentation; • Developing a project management plan and ensuring its implementation; • Ensuring compliance with the construction cost estimate; • Organizing procurement of contractors; • Monitoring execution of the project; • Etc. 185. While the roles and responsibilities of the project client and project manager are clear, the relationship between the project client and the developer is less so. As discussed below, the developer and project client may be different if the developer delegates the client role to a better qualified provider of the necessary services. In these cases, there still needs to 89 The Law governs control and supervision in construction (Chapter 6), and construction activity itself (Chapters 10 and 11). Chapter 6 sets out the responsibilities and rights of state construction supervision and technical supervision by the project client/developer, including supervision of construction by contracted engineers. Chapter 11 (Article 55) deals with the implementation of the functions of the project client/developer, assigning to the Ministry of Architecture the authority to list the functions and the procedures for carrying out these functions. It also deals with the possible functions, during construction, of contracted providers of engineering services. 90 Edict of the President No. 26 (2014) on Measures for Improving Construction Activities. 91 The Edict is wide-ranging, covering different aspects of the project cycle as already mentioned in Chapter 4. 92 Regulation of the Ministry of Architecture and Construction No. 4 (2014). 93 The client and developer will be the same if the developer has adequate in-house skills to perform the role of client. If not, the developer must appoint a qualified client. See the discussion below in relation to certification. 91 be interaction between the developer and the delegated project client, with the former retaining ultimate decision-making responsibilities and accountability for project performance (in the broadest sense, i.e. achievement of outcomes or intermediate outcomes). This would be particularly important in the event of any need for significant project adjustments, decisions about which should not be delegated. In some systems, e.g., the UK, there is a designated ‘senior project client’ within the developer (organization promoting the project) who, supported by a project board, retains ultimate authority. 186. The MoAC has also issued formal guidance on project management, which is consistent with international good practice. As established in the regulation, summarized above, one of the main responsibilities of the project manager is to develop and execute the project management plan. The technical code mentioned in Chapter IV94 contains detailed recommendations on the content and substance of such a plan, as applicable to major projects 95, arranged according to the following structure: • Registry of project stakeholders; • Composition - positions and skills - of the project management team; • Schedule for implementation of the project; • Costs plan (budget) of the project; • Human resource plan; • Quality management plan for the project; • Risk management plan; • Procurement management plan; • Reporting on and monitoring implementation; • Communications management plan; and • Managing changes in the project management plan. 187. Through the medium of this guidance on the preparation of the plan, the ministry provides more general guidance on project management. Further procedural guidance for project management is provided through the workflow charts issued by the ministry 96, which indicate the sequence of project management activities and decisions for a number of different implementation modalities in construction. One of these workflow charts indicates the major activities involved in project implementation - excluding active monitoring and adjustment, which are discussed in the next section - and the allocation of responsibilities between the different parties involved. 188. The MoAC may wish to consider developing the guidance on project management further or supporting ministries in developing sector-specific guidance. Existing regulations and guidance already provide a solid base for managing project implementation, but there may be room for deepening advice and presenting it in the form of a manual or handbook to make it more operational. This is probably best done at the sector level to take 94 Appendix E of the Technical Code for the Composition and Procedure for Development and Approval of Construction Pre-Design (Pre-Investment) Documentation, Ministry of Architecture and Construction, 2014. 95 Projects of the first and second classes of complexity. 96 Regulation of the Ministry of Architecture and Construction No. 17 (2014) on Approval of Album Schemas Defining the Workflow for the Implementation of Investment Projects in Building. 92 account of the particularities of different sectors. To give some perspective on the depth of guidance that may be useful Box 19 summarizes the contents of the Construction Project Management Handbook issued by the US Federal Transit Authority. This handbook is 166 pages long and compares in length with similar guidance issued for other sectors in other countries. Box 19: Contents of a Project Management Handbook 1. Introduction (p1-11) 2. Capital Projects Planning (p12-19) 3. Project Initiation (p20-37) 4. Planning Environmental Clearance, Real Estate Acquisition (p38-55) 5. Design (p56-76) 6. Construction (p77-92) 7. Commissioning (p93-103) 8. Project Closeout (p104-107) 9. Project Support (p108-128) 10. Appendices (p129-166) Source: Construction Project Management Handbook, US Federal Transit Authority, 2016 189. Important steps have been taken to make project implementation more professional, with strengthened requirements for both project clients and project managers to demonstrate that they possess the necessary expertise. Project clients and project managers must now be certified by the MoAC in order to perform these roles 97, and the certification requirements are more stringent the more complex the project. Ministries with significant construction activity already had, or else created, their own specialist departments to act as project client; thus, the entities responsible for the different modes of transport under the Ministry of Transport and Communications already had capable departments that were certified, whereas the Ministry of Health has created such a specialist body, the Directorate of Projects under Construction 98. Ministries and oblast departments, without in-house expertise, must contract in the necessary services from certified providers, such as the directorates of capital construction in Minsk and oblasts. Similarly, project managers (individuals or companies) contracted by project clients to supervise project implementation must also be duly certified. The fact that these steps have been taken, suggests that there may have been some previous concerns about the professional capacities of those previously involved, but these now appear to have been addressed. 190. A strong inspection and control regime ensures strong accountability during project implementation. Coordinating their activities to avoid duplication, the Control and Inspection Department of the MoF and the State Control Committee exercise, jointly, an important role in inspecting and controlling projects during implementation. Both bodies have 97 As required by the Edict of the President No. 26 (2014) on Measures for Improving Construction Activities (relates to project clients) and Resolution of the Council of Ministers No. 252 (2014) on Some Questions of Certification of Legal Entities and Individual Entrepreneurs, Managers, Specialists of Organizations and Individual Entrepreneurs Operating in the Construction Industry (relates to project managers). 98 There is a separate entity for procurement of medical equipment. 93 regional offices and inspection includes site visits and visual inspections of works completed. The main focus of attention of the Control and Inspection Department is on financial and legal compliance, rather than management performance. The State Control Committee has similar concerns, but also examines progress in implementing decisions made by the President, which includes the SIP and the projects within it. 191. The efficiency of project implementation is not affected in any significant way by any in-year delays or shortfalls in budget funding. Budget holders can expect to have timely access to annual appropriations for projects made through the SIP and RIPS to make payments as and when required. Payments are executed through the automated State Treasury system, which is used for both central government and local government projects. There is a disciplined payment process for construction works and repairs 99, whereby budget holders submit certified payment requests for completed works (with supporting documentation) to the State Treasury for payment. The Treasury Department performs preliminary controls to ensure that the documentation is in order and then authorizes payments, provided these are covered by remaining appropriations. This can usually be done in 3-4 days. For SIP projects, payment requests can be submitted at any time in the year, so as to be consistent with the flow of certificated works, and do not need to be in line with quarterly cash flow forecasts (provided the total of requests does not exceed the annual appropriation for the project). The Treasury only tracks budget funds and contracts must spell out the different sources of funding. Treasury payments are made pro rata with the share of the budget in total project financing, e.g., if the republican budget is covering 50% of total costs, with SNG covering other 50%, then the Treasury will release its share after the SNG sources have been released. There is no carryover of unused allocations between financial years, although works completed in the final month of the year but not certified by the end of the financial year can be paid out of a special line in the next year SIP for accounts payable. 192. Annual works and the related payments for multi-year contracts are agreed with contractors on the basis of annual addenda to the main contract, after approval of the SIP/RIPs. This is a practical approach to discontinuities in funding between years, but is not desirable; it is not needed in countries with more stable capital budgeting systems. Contract addenda are verified by the State Treasury for legality and budget coverage, and then entered into the treasury system, which automatically prevents their values exceeding the annual appropriations in the system. There is no automatic system for ensuring total commitments for multi-year projects stay within the total contract value. This is done manually outside the treasury system. It is made more difficult and less transparent by the use of constant prices in the main contract and inflation-adjusted price in contract addenda. 193. There is a good system for forecasting the cash flow requirements for execution of projects. At the same time as preparing the resolution on the commencement and commissioning of projects, the Ministry of Architecture and Construction, working with the MoF and MoE, prepares an annual schedule of financing for new and ongoing projects, broken down by quarter and month and consistent with the approved funding for the year in the SIP. 99 At the highest level the system is governed by the Budget Code. Below the system is Resolution of the Ministry of Finance No. 120 (2001) regulates a uniform procedure for payment of expenses for the construction and repair work at the expense of the budget through the accounts of the State Treasury. 94 The financing is agreed with line ministries and, for ongoing projects, with contractors. A similar process takes place at regional level. The State Treasury therefore has a reasonable forecast of cash flow requirements around which to plan liquidity needs. 194. Reporting on progress to the central planning and financial authorities is largely for information purposes, not part of a responsive monitoring system, and active monitoring is largely decentralized to project clients. Consistent with the legislation 100, the MoAC prepares a quarterly consolidated report on the implementation of the SIP for submission to the Council of Ministers, but the report is light on analytical depth and on insights into implementation of the portfolio as a whole. Line ministries report monthly and quarterly to the MoAC on the financial and physical progress of their ongoing projects, on the commissioning of completed projects and on the commencement of new projects. More in- depth reporting is required for projects intended to be commissioned in the budget year. 101 On the basis of monthly submissions, the ministry prepares a quarterly monitoring report. The team responsible for this work are few in number and do not have the capacities for follow-up or deeper analysis of submissions; in effect, they have a passive, collating role, rather than being involved in actively monitoring the implementation of the investment portfolio. 195. There is no electronic information system - no dynamic project database - to assist reporting on the consolidated portfolio of investment projects, with all reporting being handled in Word format. This is a further technical constraint on active monitoring at the center. In terms of financial reporting, there is no coordination between the MoAC and the MoF, which has information on financial execution through the treasury system. The difficulties in assembling consolidated data on the SIP encountered in the preparation of the current report are indicative of some of the gaps in monitoring of the overall investment portfolio at the central level. 196. At regional level, there is a similar approach to central government, with project clients being primarily responsible for monitoring implementation on a day-to-day basis. Project clients report to the Architecture and Construction Committee on financial and physical progress on a monthly and quarterly basis. The Architecture and Construction Committee in turn reports to the Financial Department. Reporting to higher levels in the administration is, however, largely for information purposes: the project client is seen as being primarily responsible for monitoring implementation against plan and initiating any required actions. Assessment of Current Arrangements and Practices for Procurement 197. Oversight of policy and practice of public procurement in Belarus is the responsibility of the Ministry of Anti-Monopoly Regulation and Trade102 (MART). The law defines public procurement as the acquisition of goods, works or services which is partly or fully financed from the budget and (or) state extra-budgetary funds, and performed by the recipients of these funds. Public procurement legislation regulates procurement financed from both central and local budgets. Thus, institutional responsibility is currently determined by the 100 Edict of the President No. 299/2006 gives the Council of Ministers the authority to determine ‘the procedure of control over the implementation of the Program and submission of the required reporting’. 101 There were 36 such projects in 2016. 102 Presidential Edict No. 591 of 31 December 2013 95 source of the finance rather than the nature of the contracting authority. This is the opposite of the requirement under WTO rules. 198. Only a small fraction of public procurement activity (by volume) relates to investment projects. The inclusion of SOE investment projects in the numbers makes it impossible to identify those procurements that are specifically connected to public investment projects. This highlights the difficulties in correctly identifying the true scale and nature of public investment in Belarus. Due to the diverse nature of the subject and the fact that most procurement activity does not involve public investment projects, it is not the intention of this assessment to cover the wider subject area of public procurement – only those aspects of it that affect public investment projects. 199. The sample of projects revealed consistency in procurement lead times. In the case of these nine sample investment projects, the assumption has been made that the procurement data provided relates to the main construction contract, although several other procurement processes normally accompany an investment projects to acquire related goods, services and equipment. Whilst 4 of these projects were unable to provide adequate information, those that did showed remarkable consistency in the time taken from i) advertisement to receiving bids with a range of 1 – 1.5 months and an average of 1.1 months and ii) in the time taken between receiving bids and the award of contract with an average of 1.2 months – most took 1 month to award but one project took 2 months thus skewing the average. There are clearly no issues of delays being created by the procurement process but this is no measure of the quality of the results achieved. If anything, the time allowed for bidding may appear relatively short for contracts of more than 3½ years duration 103. 200. There are separate legal instruments and institutional arrangements in place for construction procurement and procurement for PPP projects. The Law on Public Procurement of July 13, 2012 refers to the ‘Procurement of Goods, Works, Services’. However, construction procurement was regulated by the Presidential Edict No.591 of December 31, 2013 “On construction procurement procedures” and Council of Ministers Resolution No.88 of January 31, 2014. 104 This was replaced by Edict 380 on 20 October 2016. Furthermore, the procurement of the only completed procedure to date that has been described as a PPP (the BelTol project) was governed by a separate Presidential decree. The M10 project currently under preparation may also be granted a Presidential decree allowing an exemption from standard procurement procedures. The likely prospect of involvement by international organizations in PPP projects will lead to the procurement rules of those bodies being followed. This is already permitted under current legislation. The same applies for public investment projects that enjoy the financial support of the international institutions but which are being implemented through conventional means. The legal and institutional roles and responsibilities for both MART and MAC are shown in Figure 20. According to CoM Resolution No 973 on MAC functions, in addition to determining policies and technical norms in construction, the ministry: 103 Average contract duration was 43.1 months 104 Of 31 January 2014 and amended 30 July 2015 96 • provides within its competence clarification on the application of legislative acts on the procedure of formation of the contract prices and payments between the customer and the contractor during construction, and the organization and conduct of procurement procedures in the construction of facilities; • determines the list of functions of the customer, developer, manager of the project for the construction, reconstruction, major repairs, restoration and improvement of the facility, the order of the customer's activities, developer, manager of the project, as well as the procedure for the provision of engineering services in construction. All other procurement functions are under MART. Figure 20: Procurement Roles and Responsibilities of MART and MAC MART MAC * Procurement Legislation * Develops policies related to * Interpretation of legislation construction procurement * Control *Legislation regarding * Monitoring construction procurement * On-site inspections * Interpretation of legislation *Administration of regarding construction complaints * Applying Sanctions Source: MART 201. A significant amount of procurement activity is undertaken by single source procedures rather than through competitive procedures. This includes a number of permitted exceptions under the law which include low value purchases; defense and security related procurements as well as those that are considered to be in the economic interests of the country. This leaves substantial scope for the law to be interpreted in a flexible manner. Also included in the statistics for single source procurement are those that were originally advertised and, for whatever reason, only attracted a single bid. Non-competitive procurements account for 53 % of all procurements as measured by value and 63 % as measured by the volume of procurements (Figure 21). 97 Figure 21: Scale and Nature of Public Procurement in Belarus, 2015 (by volume) 180,000 300,000 300 1,000 1,000 Competitive Single Complaints Complaints Procedures 2015 2016 (est) Source: MART Notes: Numbers are rounded approximations to indicate scale. Numbers include SOEs. The indicative number of Single Source lots includes those that were originally advertised but only resulted in a single bid. 202. The number of complaints on procurement procedures has risen from 300 in 2015 to an estimated 1,000 in 2016. Measures from 2013 that aimed to reduce pressure on the courts by making the complaints process more administrative through MART has made it easier to lodge a complaint and may thereby have increased the numbers. According to MART, some 45 % of all complaints relate to various aspects of construction procurement including some that have multiple complaints against them. 203. The requirement for lowest price to be the only criterion for award of contracts places the quality of projects at risk. MART officials provided an illustrative example of a project that involved the construction of apartments. Following a competitive procedure, a very low price to complete the works was bid. Since lowest price was the only criterion, the contract had to be awarded to this bidder. After some delays, it transpired that the contractor was unable to finish the works and abandoned the contract forcing the contracting authority to go back out to tender. Not only does this practice cause delays in implementation but it places the entire project at risk since all contractors are naturally concerned about inheriting the risk of poor quality work from a previous (failed) contractor. Sometimes this risk has to be passed to the contracting authority creating a contingent liability. Policies and practices that encourage the fullest possible participation on a combination of price and quality will promote better outcomes. 204. The emerging practice of e-tendering should be encouraged and further developed. Although all tenders are published electronically, many bidders have to inspect some tender documentation physically putting many potential bidders at a competitive disadvantage. Given the relatively long travel times that might be involved, those bidders that are not physically close to the offices of the contracting authority are at a natural disadvantage when hoping to participate. There are two electronic platforms for e-tendering, one hosted by the Belarus Universal Commodity Exchange and the other by the Ministry of Foreign Affairs. 98 Summary Assessment of Project Implementation (WBG Stage 5) Key Feature Desirable Institutional Arrangements Institutional Arrangements in Belarus Projects are scrutinised for 1. Comprehensive implementation Project implementation is well regulated in Belarus, through a implementation realism and guidelines. specific law, supporting ministerial resolutions and technical codes. then implemented with regard One weakness may be a shortage of detailed operational guidance to efficiency. on practical aspects of implementation. 2. Implementation plans, clear Projects are generally planned to a high level of detail before accountability for delivery and implementation begins. Detailed design documents and checks on readiness to go. implementation plans - financial and physical - are a prerequisite for a project to be considered for funding. Permits and approvals are acquired before detailed design begins, ensuring that projects are ready to be implemented once funding is agreed. Further checks are made before authorisation to commence a new project is given. There is provision for exceptions to the requirement for detailed design to be completed before funding approval, whereby projects are designed and constructed simultaneously. These exceptions are not infrequent, especially where project ideas are initiated through a decision of the President. The legal and regulatory framework sets out clearly the responsibilities of the different parties involved in implementation - notably for the project client and the project manager - and enforcement through the control and inspection regime is strong. If there is one grey area, it is with respect to the relationship between the project developer and the project client, where these are different. 3. Procurement arrangements that While the basic legal and regulatory framework for procurement is incentivize value for money in reasonably solid, there are too many legally allowable exceptions to contracting. open competitive bidding. There is an over-emphasis on price as the determining factor in procurement decisions, with potentially 99 detrimental effects on quality. Institutional responsibility is currently determined by the source of the finance or the nature of the requirement rather than the nature of the contracting authority. This is the opposite of the requirement under WTO rules. 4. Timeliness and predictability of in- Approved funding is delivered efficiently within the budget year year funding. through the automated State Treasury system. There is a disciplined payment process and budget entities can expect to have certified payments made in a timely fashion, provided the supporting documentation is compliant and an appropriation exists. Annual commitments for multi-year contracts are made through contract addenda in line with approved annual appropriations. The treasury system has strong controls to ensure that payments in excess of annual appropriations are prevented. Total commitments for multi- year projects are controlled manually against the approved total project costs. 5. Timely and appropriately detailed There is regular reporting on implementation progress – financial reporting on project and portfolio and physical - for individual SIP projects. Project clients receive implementation. detailed reports from project managers. Less detailed reports are submitted monthly and quarterly to the Ministry of Architecture and Construction, which prepares a quarterly consolidated report for the Council of Ministers. Reporting at this level is largely for information purposes only, carried out to meet procedural requirements, and neither the MoAC nor the MoE performs an active monitoring function for the SIP as a whole. There is no information system to support the monitoring of public investment projects in the SIP portfolio – or public investment projects generally. 100 Recommendations 205. Suggestions for improving implementation processes are as follows: • Introduce more detailed operational guidance on project implementation, probably at sector level; • Formalize high-level roles and responsibilities within project promoters/developers to ensure supervision of delegated project clients; • Explore ways of making open, competitive bidding a more frequently used procurement modality. The GoB should aim to improve significantly the ratio of procurement activity that is concluded competitively. Whilst it is recognized that a large portion of single source tenders are the result of competitive tenders that only produce one bidder, efforts should be directed at understanding and acting upon the underlying reasons why such situations arise. An improvement in the competitive environment would result in lower costs for the government with an inevitable improvement in the Benefit Cost Ratio of public investment projects; • Examine ways of ensuring ‘best-value’ procurement, allowing some account to be taken of factors other price in arriving at a decision on winning tenders; • Avoid special rules for PPP procurement. The procurement processes related to PPP implementation should not need special rules. MART officials believed that the forthcoming flurry of PPP implementation would result in special procurement rules that were separated from the existing public procurement rules. Investors and funders normally prefer a stable, reliable and known set of rules through which PPP implementation is conducted. The possibility of ‘different rules’ without knowing what they are, only engenders uncertainty among investors and funders and is likely to result in some reluctance to participate in tenders at the outset. If GoB officials believe that the public procurement rules are currently unsuitable then it is better that their efforts are targeted at correcting any known deficiencies in the existing system; • Introduce stronger and more systematic approach for controlling commitments against total contract value for multi-year projects; and • Introduce information systems to support more responsive monitoring. C. Project Adjustment What Does Good Practice Look Like? 206. There are three features of a good process for managing adjustments to projects during implementation: • Responsive monitoring: Implementation progress should be actively followed105, resulting in early detection of deviations from plan and their resolution at a level in the hierarchy of decision-making that balances efficiency against oversight and accountability considerations; • Judicious use of virement: To facilitate high rates of execution, transfers of annual budget allocations between budget headings should be possible, subject to an approval process that balances efficiency against oversight and accountability considerations; and • Fundamental review: There should be a clear mechanism for triggering fundamental reviews of failing projects or those where baseline conditions have changed unfavorably. 207. Responsive monitoring involves putting in place systems to ensure problems and emerging risks are identified in a timely fashion, devising solutions and then following up. Regular, accurate and informative reporting is a prerequisite of responsive monitoring, but reporting alone is not very useful if it is not embedded in a reactive system. Monitoring needs to be formalized procedurally so that problems and potential problems are registered, corrective actions are designed and implemented, and their success verified (and further actions taken if unsuccessful). Not all implementation problems need to be escalated to higher levels of decision-making, although these superior levels should be kept informed. In an efficient monitoring system, authority is delegated to the level best equipped to address implementation issues, and only unresolved problems and major problems requiring high-level guidance or decisions are escalated. Not all systems have centralized monitoring of project implementation by planning or finance ministries, but there is an increasing recognition that for major projects this is a prerequisite, as recent reforms in the UK, involving the creation of the Major Projects Authority, illustrate (see Box 20). At this level in the system, monitoring portfolio aggregates, e.g., portfolio execution rates and share of the portfolio at risk of delivery shortfalls, and resolution of systemic issues are also important, along with project specific issues that cannot be satisfactorily resolved at lower levels. 105 On the basis of comprehensive, regular and timely reporting [Project Implementation Stage]. 102 Box 20: United Kingdom Major Projects Authority Created in 2011 and with a staff of 68 (May 2014), the Major Projects Authority (MPA)# focuses on the successful delivery of large and complex projects. It has no direct involvement in project implementation and no approval/decision-making role. Instead, it coordinates a system that provides ‘assurance’ – planned and ‘consequential’ - over progress of projects against plan, from identification to completion, and makes sure problems are addressed promptly at the appropriate level. The MPA is also charged with improving transparency and openness, and addressing capacity constraints in high-level project leadership within government. The main functions of the MPA are: • Develop and maintain the first system for monitoring Government Major Project Portfolio (GMPP): – Annual Report on progress – around 200 projects; – ‘Traffic-light’ warning system for delivery confidence; • Instigate mandatory ‘Starting Gate Review’ process – decision-step before any public announcement; • Introduce system of Integrated Assurance and Approval Plans – schedule of assurance assessments to support decision-making and inform approvals by Ministry & Treasury; • Carry out and support ‘consequential assurance’ and escalate issues that cannot be resolved to higher levels of authority (accounting officers and ministers); • Work with ministries to build capability in project management, including setting up Major Projects Leadership Academy; • Promote transparency concerning major projects through public information flow. # On 1 January 2016, the MPA was merged with Infrastructure UK and renamed the Infrastructure and Projects Authority. The same functions, along with others, are still being performed. 208. Disciplined budget execution is important, but excessive rigidity can hinder efficient portfolio implementation by preventing transfers from slower to faster moving projects within the budget year. The better performing systems allow budget holders to make smaller reallocations between projects in their portfolios, subject to a designated maximum threshold. More significant reallocations would be referred to the planning or finance ministries for approval, while the most significant transfers would usually require government and legislative approval (usually through an in-year supplementary budget). Reallocations between budget holders would usually require government and legislative approval. Virement rules - including the thresholds for different levels of decision-making over in-year transfers - are usually set out in a country’s budget systems law or budget code. It is also usually good practice for the legislation to safeguard capital spending by preventing in-year transfers from capital to recurrent allocations. 209. Significant adjustments to projects in terms of costs, timetable and specification can, along with changes to demand conditions, affect the social profitability of projects 103 and procedures should be in place for re-assessment of such projects. Re-assessment should be on a sunk cost basis 106 and the costs of terminating the project also need to be taken into account. If a fundamental review indicates that a project is no longer socially profitable, procedures should exist for initiating a redesign of the project to reduce costs or for terminating the project should no such solution be found. Fundamental reviews are usually triggered when costs (expressed in constant prices) exceed a predetermined threshold or when forecast benefits seem likely to fall short of appraisal estimates. Good reporting and monitoring are therefore essential to ensuring that reviews are triggered when required. Fundamental reviews happen between appraisal and implementation, if factors emerge that change the original basis for the feasibility study, and during implementation. South Korea represents one of the better examples of a systematic process for carrying out reassessments of major projects (see Box 21). This is supported by a system for tracking actual against approved total costs – the Total Project Cost Management System – which provides the information required to trigger a review. Over the years, it has resulted in significant cost savings through realigning projects within affordable cost estimates and through cancellation of projects that no longer represented good value for public money. Box 21: Re-assessment and Adjustment in South Korea In South Korea both a re-assessment of demand and a reassessment of feasibility can be triggered by significant changes in project conditions that risk undermining the forecast economic returns from the investment: Re-assessment of Demand Forecast (RDF – introduced in 2006) Demand forecasts for major projects are re-examined when there are important changes in the project environment that could affect the continued adequacy of the forecasts. The RDF can be carried out during any phase of the project cycle from planning to construction. Re-assessment Study of Feasibility (RSF – introduced in 1999 and strengthened 2006) A RSF is performed for projects in the Total Project Cost Management System if: • The total cost for a project increases by more than 20 percent in real terms (excluding land acquisition) compared to the previously approved cost; • When the demand forecast for a project falls by 30 percent or more (on the basis of the RDF). On the basis of the results of the new RFS, a decision is taken on whether to continue, re-scope or stop the project. Re-scoping involves looking at ways of reducing the size and cost of the project to achieve continued viability and avoid cancellation. 24 out of 140 projects subject to RSF were stopped during the period 2006-2010. Total project cost savings of 18% were made (compared to requested increase) on projects that continued. Sources: Presentation by Korean Development Institute to International Conference on Public Investment Management in Hanoi, 2010; ‘Public Investment Management Functionality’, presentation given in Mongolia by James Brumby, World Bank, 2010; and Guidelines for Total Project Cost Management, Ministry of Strategy and Finance, 2009. 106 It is important in any re-assessment of feasibility to use costs that are net of sunk costs. Sunk costs are resources that have already been used up in project implementation and can no longer be used for any other purpose, i.e., their opportunity costs is zero. For example, if a bridge project has been partially constructed (in physical terms), the costs associated with the completed works should not be counted in the new economic feasibility study. 104 Assessment of Project Implementation in Belarus 210. Monitoring in Belarus is largely decentralized to specialized organizations acting as client entities. This system works well for dealing with standard implementation issues, which do not need to be escalated to higher authorities; however, the impression is that monitoring by project promoters, and by any higher level budget organization to which the project promoter is subordinated, is largely ad hoc and unstructured. Generally, this is not problematic - and professionalization of the client entity function is definitely a positive feature - but when there are important emerging risks, it is not obvious that these, and any proposed solutions, will be automatically transmitted to higher decision-making authorities in a systematic and timely fashion for consideration and action. This is not really an issue in infrastructure intensive sectors, like transport, where promoter and client are part of the same organization, but it is more of an issue for those ministries or regional departments with no internal expertise, where the client function is outsourced. The UK is a case where excessive outsourcing of the client role was seen to have been detrimental to project delivery, and there has been a strong effort to correct for this by training senior officials in budget organizations in project leadership 107. 211. Active monitoring is not performed in any meaningful way by the three ministries responsible for central coordination of the SIP. The MoAC acts as a repository for progress reports which are consolidated for information purposes for the Council of Ministers; however, the ministry does not conduct active monitoring of implementation, in the sense of identifying and following up on emerging implementation risks and significant implementation problems. The MoF monitors financial execution as part of its normal budgetary functions, but there is no specific monitoring of investment projects with the intent of spotting and acting on emerging difficulties in execution. The MoE is involved in preparing the SIP, but has little to do with its implementation, once approved. The Presidium of the Council of Ministers reviews the implementation of the SIP at least every six months 108, but this infrequent intervention cannot be seen as corresponding to an active monitoring role. The Council of Ministers submits a report on the annual execution of the SIP to the President before 20th February of the following year. This is useful for accountability purposes, but comes too late to have a practical impact on SIP preparation or implementation. 212. In-year adjustment of the SIP is governed by the presidential edict on the SIP109 which allows the Council of Ministers to make budget-neutral reallocations between projects as necessary and requires Presidential approval for more significant adjustments. If timely and accurate monitoring information were to be available at the level of the Council of Ministers, this would allow adjustments to be made to reflect differential rates of progress and optimize the execution rate of the SIP as a whole. The exact formulation 110 is that the Council of Ministers has the right to adjust: 107 A total of 120 obtained qualifications from the Project Leadership Academy between 2012 and 2014, with a further 200 enrolled. 108 On the basis of the report submitted by the Ministry of Architecture and Construction, according to Edict of the President No. 299. 109 Edict of the President No. 299 on the Approval of the Regulation on the Procedure of Formation and Approval of the State Investment Program and Reporting on its Implementation. 110 Paragraph 16.2 of Edict No. 299. 105 If necessary, the amounts of financing of construction of the objects of the Program of the current year within the limits of the funds envisaged by the Law on the Republican Budget for the coming financial year. The edict does not foresee the right to authorise adjustments at a level below the Council of Ministers, either by the MoE or MoF. This makes for somewhat inflexible management of the investment program, because the Council of Ministers is probably too senior a decision-making body to be concerned with smaller and more frequent adjustments that might ideally be required to optimise annual implementation performance. 213. In practice, edicts on approval of the SIP are revised once or twice a year to take account of differential execution rates, and other more significant adjustments. As described, the revision process is not as a result of a structured monitoring exercise, but involves the MoE, in consultation with the Ministry of Architecture and Construction, adjusting allocations on the basis of ad hoc requests made by line ministries. As well as applying to re- allocate between their own projects, line ministries can also apply to have their total allocations ‘topped up’ from the allocations of ministries where overall execution is moving more slowly. According to the Ministry of Architecture and Construction, the progress reports received from implementing entities are not particularly helpful in guiding these reallocations. The MoE and MoAC prepare a draft of a resolution indicating the new allocations for approval by the Council of Ministers in line with the authority bestowed by the presidential edict on the SIP. If the adjustments are not budget neutral, i.e., they require resources beyond the aggregate SIP allocations in the budget (which is frequently the case as confirmed by the statistical analysis performed for this study), then approval of the President would be required, according to the presidential edict on the SIP and the relevant provisions of the Budget Code 111. 214. In a technical sense, there is a version of a fundamental review process, because all adjustments, whether of engineering parameters or costs, must be reflected in revised project documentation and subjected to the same state expert review and approval process as for a new project 112. This review fulfils an important function in confirming technical feasibility and the realism of costings; however, the limitations of the underlying analysis in the project documentation and the lack of emphasis on value for money issues in the state expert review, as already identified in the previous sections, mean that it is of limited value in reconfirming the social profitability of projects with escalating costs. There is also no attention to the demand side of the social profitability calculation. The fact that all adjustments must be subject to this technical review, also suggests a rigid process, which allows limited discretion to project implementers. It would be better to specify cost increase triggers, above which fundamental review would be a requirement. 215. There are formal procedures for terminating projects, but these are rarely used. 111 Article 111 of the Budget Code on ‘Adjustment of certain indicators of the republican budget during the fiscal year’. 112 Resolution of the Council of Ministers No. 687 (2011) on Several Measures to Implement the Act of the Republic of Belarus on the Insertion of Additions and Amendments into Several Acts of the Republic of Belarus on Architectural, Urban Planning and Construction Activity. 106 The State Agency for Supervision of Construction Works has the mandate to stop construction works. This largely relates to technical issues rather than questions about the fundamental feasibility of a project from a societal perspective. For budgetary reasons, projects may be ‘frozen’ for extended periods, and there are regulations governing this process and the preservation of any incomplete works 113, but this is not the same as terminating failing projects. 113 Resolution of the Council of Ministers No 683 (2003) on the Procedure for Conservation of Fixed Assets and Order of the Ministry of Architecture and Construction No. 158 (1995 amended 2004) on Instructions for Suspension of Construction and the Maintenance of Objects under Construction 107 Summary Assessment of Project Adjustment (WBG Stage 6) Key Feature Desirable Institutional Arrangements Institutional Arrangements in Belarus Project implementation review has 1. Responsive monitoring Monitoring is largely decentralised and for everyday flexibility to allow for necessary implementation issues, the system serves its purpose well. adjustments due to changes in project Responsive monitoring of the implementation of circumstances that would either change individual projects and of the portfolio as a whole is the disbursement profile or require largely missing in the coordinating ministries and at the project termination centre of government. This does not mean that there are no mechanisms for dealing with severe implementation difficulties, just that they are largely ad hoc, leading to reactions that are not necessarily timely. And there is no early warning of emerging difficulties. 2. Virement rules that balance There are indications that rules for in-year financial efficiency with accountability adjustments between projects may be too strict for efficient implementation, with most in-year revisions to project budgets being made through revisions to the SIP approved at the level of the Council of Ministers or the President. 3. Procedures for fundamental review Technically there is a review process for project of projects that are seriously off- adjustments, but this does not distinguish between minor track and termination, where and major adjustments, and largely concerns technical justified. feasibility and the realism of costings. Since the initial assessment of value for money at appraisal is insufficiently developed, there is no baseline against which to re-assess projects where costs have escalated or benefit projections slumped, or methodology for doing so. Recommendations 216. The following recommendations on improving the project adjustment processes flow from the preceding analysis: • Put in place arrangements to ensure that where the role of project client is outsourced, the project promoter retains a high-level monitoring role and has the ultimate say on critical implementation issues that will affect project success; • Consider developing stronger central monitoring of individual major projects and of the investment portfolio as a whole, with the purpose of identifying, responding to and following up on any emerging risks or significant problems in a timely fashion. Stronger centralized monitoring should become more responsive - involving analysis, identification of problem/at-risk projects, pursuit of solutions and follow-up – and give high-level decision makers a better picture of delivery of the overall portfolio; • Examine organizational arrangements for centralized monitoring. As lead agency in reviewing submissions and preparing the SIP, the MoE appears to be best placed to lead on monitoring, but would need to coordinate closely with the MoF for information on financial information and the MoAC for physical implementation. Establishment of parallel systems should be avoided and, ideally, exchange existing and new information should be done electronically. The aim would be to facilitate medium-term programming and annual budgeting for the investment program and to identify at-risk projects early on so that corrective measures can be instigated and follow-up; • The SIP monitoring group - which should involve the MoE, the MoF and the MoAC - might be charged with classifying projects according to delivery risk and deciding which projects should then be escalated to the level of the Council of Ministers for closer scrutiny and decisions on the way forward. This ensures that only critical problems and decisions are put before the Council of Ministers; • Assess whether some loosening of in-year adjustment rules for major projects might facilitate more efficient program implementation. This loosening could entail minor, budget-neutral reallocations to be decided below the level of the Council of Ministers, by the MoE for example. Such an approach would require definition of what constitutes a minor adjustment (5% of the annual allocation, for example) and enhanced monitoring on the part of the MoE. If a less restrictive adjustment process is adopted, consideration could then be given to limiting major revisions to the SIP (at the level of the Council of Ministers) to once per year; • In the longer term, an automatic review of projects with excessive cost overruns or revisions to expected benefit streams could be an important part of a sound public investment management system for the country. At this stage, though, it should not be seen as the first priority when project preparation and appraisal systems for nationally funded projects are in need of further development and project implementation systems, are by comparison, reasonably strong. A fundamental review needs sound feasibility analysis against which to gauge the impacts of new conditions: this does not at present exist in a fully developed form for national capital investment projects. V. FACILITY OPERATION, COMPLETION REPORTING AND EX- POST EVALUATION A. Introduction 217. This chapter assesses those stages of the public investment project cycle, where projects are transferred to the operational facilities, and where procedures for completion reporting and ex-post evaluation are put in place. B. Project Operation What Does Good Practice Look Like? 218. There are four features of a good process for sustainable operation of the new facilities created through capital investment projects: • Formal handover of assets, including verification of fitness for purpose; • Maintenance of comprehensive and up-to-date asset registers; • Provision of adequate resources for sustainable operations and maintenance; and • Monitoring of service delivery. 219. A model PIM system includes the institutional arrangements necessary to ensure sustainable facility operation. The main purpose of much public capital investment is to deliver new or better public services or sustain the delivery of existing ones. So as well as focusing on project management – whether projects are being delivered on time and to budget – a broader emphasis includes assessing the extent to which newly created assets are delivering the expected public services in the right quantity and at the right quality. A good system requires a formal handover of assets to those with management responsibility for operating and managing them, Verification that facilities are fit for the purpose intended, have not required significant adaptation or are not experiencing dramatic underutilization - is also an important element of ensuring facilities are operating as planned. Adequate provision of financial resources for operations and maintenance is also vital for sustainable service delivery from a new facility. Once a facility is completed, it is good practice to continue monitoring service delivery - volumes and quality – to verify that the investment continues to perform as expected. This information can feed into a later impact assessment (see next section). 220. There needs to be together a systemic process for registering new assets in appropriately informative asset registers, which are then kept up-to-date. Asset registers are a record of the property owned by the government. They are an essential tool that allows planning of future public investments; namely to understand the condition of public assets, the likely timeframe by which they might need replacing (or capital renovation) and whether new requirements might be fulfilled by assets that already exist elsewhere and could be re-used. More sophisticated asset registers are also useful for understanding geographical areas of service coverage in important areas such healthcare and education. This information too can be used to inform investment decisions. Under-used or unwanted assets can be readily identified and can be sold off with the receipts potentially going for investment in to more productive assets. 110 Assessment of Project Operation in Belarus Project Handover 221. Belarus has disciplined and well-functioning arrangements for acceptance and handover of newly created assets to operating entities. The legal and regulatory framework 114 for commissioning of new facilities is clearly defined and appears to be applied consistently. The workflow charts issued by the Ministry of Architecture and Construction 115, have a dedicated chart showing the activities and decisions involved in accepting a complete facility, together with more detailed instructions on specific features of different types of construction. The process is that around one month before completion of works, an acceptance committee is established by the client entity to establish if a facility has been built according to the design and whether it is ready to be put into service. The committee consists of representatives of the client, the contractor and the user. In addition, opinions from other relevant stakeholders - energy supervision, health and safety, etc. - are collected to inform the committee. An acceptance report is prepared for the facility by the committee and, assuming that this is positive, the facility is allowed to begin delivering services. Asset Registration 222. The Government of Belarus can rightly claim to have a public asset register which encompasses significant aspects of international good practice. The newly created asset register (or ‘Unified Register of State Property’) contains variety of information about financial and non-financial assets of public (state and municipal) property and takes the form of an Oracle based software database that can readily be managed and interrogated by officials that might want to use the information collected. Since the database operates in ‘real-time’, all users are able to access the same information at the same time. Data is often updated by authorized users on a daily basis so has a high degree of currency. The database is open to ‘authorized users’ in central and local government but it was not clear which officials qualify and how authorization could be obtained. It is currently not available for viewing by citizens. However, it should be noted that the real estate section is open access. State Property Committee Resolution No.16 of April 15, 2013 – Para 4.7 requires the use of categorization codes for each registered asset. This is good practice and it allows users of the database to quickly identify assets that are not being used (Code 06) or those that are being used inefficiently (code 07) meaning that these are readily highlighted and decisions can readily be made regarding their future. The asset register does not include residential property, roads, drainage and sewerage systems or mineral deposits. Nor does it include sea or river vessels but at the same time it does include civilian aircraft. 223. The competent body, the State Property Committee (SPC), and the operator, the National Cadastral Agency (NCA), both appear to be constantly looking for ways to improve the register/database further. According to officials, the register has been substantially complete only during 2016 and therefore they are only just being able to realize 114 See Article 59-1 of Law No. 300-W (2004) on Architectural, Urban Planning and Construction Activity and Resolution of the Council of Ministers No. 716 (2011) on Approval of the Procedure for Acceptance into Service of Construction Objects. 115 Regulation of the Ministry of Architecture and Construction No. 17 (2014) on Approval of Album Schemas Defining the Workflow for the Implementation of Investment Projects in Building. 111 the full benefits of the system; even so there is active discussion on options to further improve what could already be considered a good system. Both the SPC and the NCA were confident that their work has resulted in the capture of data on ‘very close to 100%’ of all State Property in Belarus. 224. The main legal instruments governing the requirement to create and maintain asset registers are as follows: • Council of Ministers Resolution No.958 of July 29, 2006 which describes the duties and functions of the State Property Committee, including with regard to the creation and maintenance of a State Asset Register; • Presidential Edict No.68 of February 16, 2012 which establishes the legal basis for ‘a single registry of state property’ – hereinafter the ‘Unified Register’; • Council of Ministers Resolution No.686 of July 26, 2012 which contains measures for the implementation of the Presidential Edict 68 / 2012; and • State Property Committee Resolution 16 of April 15, 2013 which provides instructions on how to record information in the Unified Register and how to keep it up to date. 225. Despite legal definitions of ‘asset’ and ‘state property’ certain sectors are excluded from the unified register. Edict 68/2012 – Para 2.8 states: ‘For the purposes of this Decree…real estate refers to state-owned capital structures (buildings, constructions) except residential buildings; transmission devices, isolated premises, except dwellings; parking lots, unfinished construction of permanent structures, with the exception of not completed construction of residential houses and premises; civil aviation aircraft.’ This points the way to a more formal definition but leaves some ambiguity that would preferably be clarified in the future. 226. The only notable discrepancy in the legal framework is the explicit intention to create a single or unified register of state property but which, at the same time, includes a number of exceptions. Paragraph 2.2 of the Decree 68 specifically excludes the following assets that can reasonably be expected to be excluded: ‘defense, special regime and regime objects, objects of military and special purpose, information about which constitutes state secrets’, but it also excludes assets such as ‘public roads, drainage systems and separately located hydraulic facilities, sea and river vessels’. The explanation for this is that the bodies responsible for these assets, such as the Ministry of Transport and Communications, already operate and maintain their own asset registers. The reality therefore is that, rather than there being a single unified register, there are a number of asset registers. 227. The SPC is a governmental body, funded by the Republican budget and it also holds a number of roles and responsibilities outside its asset management role. Institutionally the SPC owns the Unified Register of State Property and determines policy and direction regarding state assets whilst the National Cadastral Agency116 implements and operates the unified register on behalf of the SPC. The costs associated with operating and maintaining the Unified Register are covered by the Republican Budget 117. It appeared to the assessors that there is a good working relationship between these two public bodies in respect of the register. 116 Full name: State Scientific and Production Republican Unitary Enterprise “National Cadastral Agency” 117 Edict 68/2012 – Para 2.7 112 The SPC coordinates the executive committees of the regions (including the city of Minsk) and the districts in formulating the required information in respect of state property in their geographical area and also assets owned by the regional, district and rural authorities as shown in Figure 22. Data is uploaded by the entities responsible and periodic physical checks are made by the SPC to ensure completeness and accuracy. Figure 22: Institutional Arrangements for Data Collection and Management Source: Authors from information provided by SPC 228. The Unified State Asset Register collects information about financial and non- financial assets of the state or municipal entities so it goes beyond the scope of what is often considered an asset register which records non-financial assets only. The categories of data currently gathered in Belarus include the following 118: • Legal Entities (including stocks and shares held by those legal entities); • Registered companies; • Types of economic activity; • Principal or beneficial owner(s); • Real Estate 119: o buildings; o structures; o land; o empty property; • Aircraft; • Lease agreements covering state property (these number in excess of 2000): 118 Source: Presentation to mission team by SPC and NCA officials 119 Whilst noting the exceptions according to Decree 68/2012 113 o Involving payment (revenues are recorded); o Not involving payment (usually social objects); • Balance sheet value of the object / property. Each object that is added to the Unified Register is assigned a unique reference number. It is a requirement that the data recorded is reviewed, as a minimum, each year prior to 1st April or whenever a change in circumstances occurs 120. The balance sheet value of all assets should be adjusted appropriately prior to 1st April. Box 22: Extracting Value from Asset Registers The devolved governments of Scotland, Wales and Northern Ireland in the UK have benefitted from various asset management initiatives over the past 15 years. • Wales for example was able to target a 30% reduction in government office running costs due to the availability of better asset data; • The Northern Ireland asset data revealed that the operational and maintenance cost of assets was the second largest individual cost to central government after staff costs. It was this fact that helped elevate the importance of the subject matter, winning political support that led to targeting savings of GBP 33-54 million per year in the costs of government office accommodation; • In England with its much larger stock of built assets, savings in the cost of the government estate are estimated at GBP 818 million (or 45 % saving on the previous cost) when a program of more efficient use of available floor space is concluded; • In the Republic of Ireland, a commitment to sell surplus or un-used assets is expected to raise significant amounts of capital that can be re-invested in the economy. All these initiatives become possible through the intelligent use of Asset Registers. 229. Surveys of stocks, values and conditions of public assets are regularly conducted by the government. Accounting and reporting for nonfinancial assets are regulated by Resolutions of the MoF No. 60 from October 31, 2012 (fixed assets) and No. 25 from April 30, 2012 (intangible assets). Nonfinancial assets and revaluated on an annual basis, depreciation of fixed assets in the public sector is calculated by the linear method based on the estimated time of using the asset (Edict of the President No622 from October 20, 2006 and Resolution of the MoE, MoF, MoArch No37/18/6 from February 27, 2009). 230. Nonfinancial asset values are recorded in the balance sheets of individual MDAs. Consolidated government’s balance sheet does not contain these assets, but their value is calculated manually for reporting under IMF’s Government Finance Statistics. Depreciation of fixed assets is not recorded in government’s operating statements. 120 Resolution 16 / 2013 – Chapter 3 114 Operations and Maintenance 231. The evidence points to the operation and maintenance of newly created social assets being adequately funded. It is beyond the scope of this study to undertake detailed investigations of the adequacy of operational funding for new facilities, but the anecdotal (and visual) evidence is that maintenance is generally not neglected and that financing is forthcoming to cover staffing, and the other goods and services required to deliver services. No evidence was found of facilities being underutilized because of a shortage of recurrent funding. 232. Tariffs for utility services 121 do not yet reflect full cost recovery, which can only have long term effects on the sustainability of these services and of any newly created assets. The average cost recovery rate in utilities has been estimated at only 48.5% in 2015 122. A medium-term plan for bringing tariffs in line with full cost recovery by 2018 is, however, being implemented by the government. Some efforts to take tariff setting out of the political arena have been made, notably with the enhance role of the Ministry of Anti-Monopoly Regulation and Trade, but this remains a sensitive issue and the political dimension needs careful management, particularly with respect to impacts on vulnerable groups in society; hence the gradual approach to raising tariffs. 233. There is no formal monitoring of service delivery of new facilities once commissioned. In the longer term, this is an area which could warrant further development, particularly as it is consistent with the government’s overall move towards a stronger performance orientation in policy-making and budgeting. An improved information base on project operating performance would also be a very useful input for ex post impact assessment, when this PIM stage is further developed (see next section). 121 Heating, natural gas, electricity, sewerage, water supply, elevator usage, technical maintenance, and solid waste. 122 Article IV Consultations, IMF, September 2016. Cost recovery varied from a high of 83% in solid waste to a low of 32% in heating. 115 Summary Assessment of Project Operation (WBG Stage 7) Key Feature Desirable Institutional Arrangements Institutional Arrangements in Belarus Process for ensuring that a facility is 1. Formal handover of assets, including There is a good process for commissioning of new ready for service delivery should be in verification of fitness for purpose facilities, which includes an assessment of whether design place, and asset registers are maintained specifications have been met and whether the facility is and asset values recorded. ready to begin operating as intended. 2. Maintenance of comprehensive and There is an asset register which incorporates significant up-to-date asset registers elements of international good practice. 3. Provision of adequate resources for The indications are that social sector investments are sustainable operations and being provided with adequate financial resources for maintenance sustainable operations and maintenance. There are concerns about utilities though, because tariffs are only around half of what would be required for full cost recovery. This is not a sustainable situation, unless there are accompanying transfers from the budget, but there is a plan to gradually raise tariffs to achieve cost recovery by 2018. 4. Monitoring of service delivery There is no formal monitoring of service delivery once newly completed assets begin operating. Recommendations 234. The following recommendations for improving project operations flow from the analysis above: • Consider establishing closer monitoring of projects once they begin operating to collect information on demand and service quality. This might be done on a sample basis only for smaller projects; • Extend the asset register to include the presently excluded assets. From the text of various legal instruments, it might appear that there is a strategic aim to create a Unified State Property Register but at the present time some sectors, such as residential and roads, are still excluded. Since the scale of the task of registering all assets is significant, this might be understandable. However now that the task of collating all other assets is complete, consideration could be given to merging all other assets 123 into the unified register; • Explore geographical manipulation of the asset data. The GoB may find it useful to develop the database in a way that allows the data to be presented in a geographical manner, perhaps initially by region or oblast and, as a later development, at a district or rayon level. This would allow public investment planners to identify areas of under- provision (or over-provision) for certain public services such as education or healthcare allowing them to better target future investments based on empirical data. It would also identify opportunities for non-fixed assets to be moved from an area of over-provision to one of under-provision. Furthermore, opportunities for sharing of facilities among public entities (rather than building new ones) might be more readily identified and costed; • Examine ways of obtaining further benefits from including data on the annual operating costs of each asset in the asset register. As Box 21 demonstrates, the costs of running and maintaining assets is one of governments’ most significant costs. It is sensible therefore to examine in what ways these costs can be managed most efficiently. Information about operating costs would assist budget holders to plan future demand on resources and allow them to compare costs when choices have to be made. It will also help them make ‘whole-life cost’ comparisons when assessing the potential to renovate, upgrade or replace assets. Estimates of predicted maintenance costs or replacement costs would help planners make more informed choices about budgetary demands in future years; • Learn ways of identifying and extracting value from the data contained in the register. As Box 21 highlights, information alone is useful but it can also be used to generate financial benefits if governments learn ways to identify the opportunities for using the data to develop initiatives which are able to save running costs and to identify unwanted assets that could be sold in order to realize capital that might be re-invested into more productive assets. The GoB may want to consider learning the lessons of other countries that have this type of experience and apply it to the national context. 123 With the exclusion of those that might be considered ‘state secrets’ C. Project Evaluation What Does Good Practice Look Like? 235. There are three desirable institutional arrangements for a good process for evaluation of completed projects: • Availability of a policy and methodological guidance on the performance of ex post studies; • Basic completion review for all projects carried out soon after completion; and • Impact evaluations undertaken for all major projects and a sample of smaller projects. 236. A properly functioning PIM system requires a systematic review of projects once completed as a basis for lesson learning, at both project and strategic levels. In its simplest form, this would be a project completion report that verifies whether a project has been completed on time, to budget and to specification. To be useful though, this needs to be more than a certification process: as well as identifying departures from plan, a project completion report should analyze the reasons for these departures and suggest corrective action applicable to future projects. The completion report would also include the results of an analysis of service delivery surveys. 237. In its more advanced form, systematic review extends to an impact evaluation of whether a project has delivered the forecast social benefits and whether value for money has been achieved. For a sample of projects, this might involve re-running any social cost- benefit analysis, on the basis of achieved costs and benefits rather than forecasts. Evaluation would normally be conducted some years after completion so as to allow sufficient time for impacts to be assessed and attributed to a project. To ensure objectivity, impact evaluation is best performed by independent evaluators. Ireland represents an example of good practice in impact evaluation (referred to as post-project review) as illustrated in Box 23. Assessment of Project Ex Post Evaluation in Belarus 238. The project acceptance report discussed in the previous section of the assessment has some of the elements of a basic completion report, but it is not analytical enough to meet the full requirements and does not fit into a systematic lesson-learning process. There is a difference between ensuring that a project is fit for purpose (as the project acceptance report currently does) and assessing implementation performance with a view to making improvements in future projects. Both are important activities, but the latter needs to be more analytical, exploring reasons for successes and failures, and deciding what lessons might be applicable for future projects. Completion reports also need to feed into a process for disseminating these lessons. This broader view of the reporting requirements on project completion does not yet exist in Belarus as evidenced by the project sample, none of which have been subject to review (while all satisfied legislated reporting requirements associated with commissioning). 118 Box 23: Ireland’s Approach to Ex Post Evaluation Post-Project Review ‘All large capital projects and a proportion of other capital projects have to be subjected to a post-project review to see if the predicted benefits of the project were realised. Post- project reviews should be undertaken once sufficient time has elapsed to allow the project to be properly evaluated with sufficient evidence of the flow of benefits/costs from it. There are two separate focuses of review – (i) project outturn and (ii) appraisal and management procedures. The second element can be done after project completion as it involves reviewing administrative and management procedures. The timing of the first element will depend on the nature of the project i.e. the period required to observe the expected benefits. This period should be no longer than one third of the timeframe used in the Appraisal. The detailed appraisal provides the base against which the outturn review is made. The aim of a review of project outturn is to determine whether: – The basis on which a project was undertaken proved correct; – The expected benefits and outcomes materialised; – The planned outcomes were the appropriate responses to actual public needs; – The appraisal and management procedures adopted were satisfactory; – Conclusions can be drawn which are applicable to other projects; to the ongoing use of the asset; or to associated policies. Mandatory Evaluation/Post-Project Review Requirements  …  All Capital Projects costing > €20m are to be subject of a post-project review;  At least 5% of other capital projects should be reviewed;  … Additional Evaluation/Post-Project Review Requirements Departments and agencies should not restrict themselves to the mandatory evaluation or post-project review requirements. From time to time it may be apparent that while not mandatory, an area of expenditure would benefit from a more in-depth review based on the picture the performance indicators paint or maybe because the performance indicators are not as informative as originally thought. Communicating lessons learned As with all parts of the Public Spending Code any significant lessons should be translated into changes in the Sponsoring Agency’s practices and communicated within the organization and to the sanctioning authority so that it can apply any general lessons learned to this Code or to supplementary information. Responsibility for Evaluation/Review It is the responsibility of the Sponsoring Agency to carry out the evaluations or post project reviews. Those conducting reviews and evaluations should not be the same people as conducted the appraisal or managed the implementation.’ Source: Ireland’s Public Spending Code 119 http://publicspendingcode.per.gov.ie/c-03-periodic-evaluationpost-project-review/ 239. Apart from the regulatory framework for project commissioning, there is no formal policy or guidance on ex post reviews of projects. The need for performance analysis and lesson-learning on project completion is recognized in the workflow charts prepared by the Ministry of Architecture and Construction 124, but has not yet been fully operationalized through guidelines. 240. Impact evaluations of completed projects are not performed. This is not altogether surprising as this is often the last stage of the PIM system to be fully developed, although a few countries, e.g., Ireland, have led PIM reform through a rigorous evaluation process, using it to drive reforms at earlier stages. Generally, improvements in planning and appraisal are the forerunner of better impact evaluation, because it is important to have well defined objectives - at outcome and intermediate outcome level, not just outputs – and the results of social cost- benefit analysis, as a starting point for assessing actual project achievements, compared to targets and projections. 124 See Chart 1.2, ‘Project Management for General Contracting’, in the Regulation of the Ministry of Architecture and Construction No. 17 (2014) on Approval of Album Schemas Defining the Workflow for the Implementation of Investment Projects in Building. 120 Summary Assessment of Project Evaluation (WBG Stage 8) Key Feature Desirable Institutional Arrangements Institutional Arrangements in Belarus Basic completion review and ex post 1. Policy and guidance on ex post There is no formal policy or guidance on ex post review evaluation of completed projects are review of projects, beyond that which establishes the project conducted. commissioning process. 2. Implementation of basic completion Current reporting on project completion falls short of a review for all projects full project completion review focused on lesson-learning and does not feed into an organized structure for disseminating lessons. 3. Performance of impact evaluation of No impact evaluations - looking at both efficiency and a sample for projects effectiveness- are carried out. Recommendations 241. Based on the preceding analysis, implementation of the following short, medium and long-term recommendations could improve the evaluation stage of the PIM system: Short-medium term recommendation • Develop a more systematic lesson learning process based on an analysis of project implementation performance. This would involve an extended project completion report format, guidance on implementing the performance analysis and lesson learning indicated in the workflow charts, and establishment of a structured approach to disseminating lessons. The Ministry of Economy is best placed to take the lead and should do its own periodic analysis of extended completion reports to develop global lessons for the PIM system as a whole. Medium term recommendation • In the medium-term, carry out a pilot ex post evaluation of two major projects - perhaps one successful project and one more problematic - as a basis for developing a replicable methodology. Long-term recommendation • In the longer term, introduce systematic evaluation of the impacts of completed projects. This is a longer-term priority because it will require significant capacity building in performance evaluation and also because evaluation relies on solid project planning, including the identification of monitoring and evaluation indicators against which performance can be judged. Few countries carry out evaluations of all projects, but usually a sample is taken. This is the recommended approach for Belarus, probably beginning with the largest or most problematic projects. 123 VI. PUBLIC PRIVATE PARTNERSHIPS A. Introduction 242. In this chapter the subject of Public Private Partnerships (PPP) is considered. It is a subject that has gained prominence in Belarus in recent times with the first PPP having been brought into operation and a second major project – the M10 Highway – about to enter the procurement phase. Recent political messages have emphasized the importance attached to PPPs by the government. Current proposals to encourage all oblast level SNGs to conclude at least one project proposal for PPP by 2020 appear to be unsustainable with the current capacity constraints. Therefore, the time is right for assessing that the conditions are right for ensuring that these projects are able to be implemented efficiently and effectively as well as ensuring that the fiscal risks that come through PPP contracts are understood, managed and monitored. What Does Good Practice Looks Like? 243. Public Private Partnerships (PPPs) are public investment projects that are implemented using an alternative methodology. As elaborated in Chapter II, public investment projects are defined broadly as projects which i) give rise to financial obligations or potential financial obligations for general government; ii) are intended to serve a specific welfare-improving public policy objective, and; iii) lead to the acquisition or major improvement of a fixed capital asset, which should have balance sheet implications for a public sector body at some point in time. This definition includes PPPs. The principal challenges for PPPs revolve around the need to attract suitable investors, funders and operators on a cost/value basis that is more efficient than the implementation modality traditionally used in the public sector. Therefore, PPP is a form of implementation rather than an end in itself. While the implementation modality give rise to some technical differences at the design stage, PPPs should be based on the same overall principles of strategic context, project design and appraisal as any other public investment project. 244. The legal framework for PPP should be clear and avoid ambiguous overlaps with existing legislation but at the same time needs to retain enough flexibility to allow innovation. Laws and regulations should not be re-written wholesale, because doing so risks ambiguity. An example would be a PPP Law that details the procurement process but may then fall foul of existing procurement legislation. Instead legislation should only be written to cover the areas of law that are silent on the particular subjects. 245. There needs to be institutional clarity too. Investors and funders will expect to experience a joined-up approach between public sector entities with a role to play in the project and with sufficient implementing capacity to engender confidence in the process. 246. Decisions on whether or not to implement through PPP should be taken on the basis of value for money. Over recent years this has consistently become the stated policy position on PPP in best practice countries such as the UK, Ireland, Canada, Chile, South Korea and New Zealand. 124 247. Project proposers at MDA level and particularly ministries of finance need to be acutely aware of the fiscal risks that come with PPP contracts and they need to have strategies and the capacity for monitoring and managing them. B. Current Status of PPP in Belarus 248. The overall framework for PPP has been in development in Belarus for almost three years and has reached an important milestone as it embarks upon its first major PPP implementation. The GoB has recognized the benefits that can flow from external investment in its infrastructure and the innovations and potential improvements in the efficiency of implementation that the private sector might bring. It has worked therefore with several international and multi-lateral partners in the PPP framework development process. The results have produced a workable legal framework and a set of institutional arrangements 125 that can lay the foundations for the delivery of several well-produced PPP implemented investment projects. In addition to the development of the legal and regulatory framework, several press releases have raised the awareness of PPP by stating its importance to the government. However further important development work to ensure that PPP contracts are concluded in the interests of efficiency, effectiveness and fiscal responsibility is essential. 249. At the time of the assessment there was only one fully implemented and operational project that might be considered as a PPP. This is the BelToll project which became operational on August 1, 2013 and is an electronic highway toll collection system covering 815 km of Belorusian highways (see Box 24). Since the project was already prepared, procured and became operational before most of the current PPP legal instruments were in force, its relevance to an assessment of the current situation is limited particularly as it was implemented outside the regular procurement system through a Presidential edict. Therefore, no review of this project was carried out. 250. Developing PPP capability through a small number of ‘pilot projects’ represents good international practice. The GoB created the Inter-Agency Infrastructure Coordination Council (IAICC) through CoM Resolution 508 as a ‘permanent collegial body established to coordinate the issues of long-term development of infrastructure projects, including public- private partnerships’ with a mandate to consider and approve the National Infrastructure Strategy (or the National Infrastructure Plan as initially specified in the first edition of CoM Resolution No. 508). It is chaired by the Minister of Economy and has a wide membership of over 30 senior figures from central and local government. On this basis, the IAICC was tasked with the authorization of the list of pilot projects for PPP implementation. 125 Specific references in legislation include: Law of the Republic of Belarus on Public-Private Partnerships (2015); CoM Resolution No 532 (2016) On measures to implement the Law of 30 December 2015 On public- private partnerships; CoM Resolution No 508 (2016) About infrastructural interdepartmental coordination council; MoE Resolution No 49 (2016) ‘About Public Private Partnership Projects’. 125 Box 24: The BelToll Project BelToll provides a proven electronic toll collection system on a number of major highways in Belarus. Direct communication between in-vehicle units and the toll gantries allows automatic calculation of the toll when vehicles pass through the toll portals. The legal basis for the introduction of the BelToll system is Presidential Edict No. 426 of 27th September 2012 ‘On Individual Issues Concerning the Collection of Tolls for the Use of the Toll Road Network in the Republic of Belarus’. Owner: Belavtostrada State Institution Operator: Kapsch Telematic Services Initial Investment Value: EUR 267 million Kapsch installed 56 tolling and enforcement gantries along the whole length of tolled roads, set up 48 Customer Service Points, created two data centers, produced and supplied 500,000 on-board units and 16 enforcement vehicles. Since the contract became operational on 1st August 2013, the coverage of the road system in Belarus has grown from 815 to 1,613 km through an addendum to the original contract. Source: Kapsch 251. Pilot projects proposed for PPP implementation have been selected in an unconventional manner compared with international good practice. There are currently a number of projects in various stages of preparation which have been assigned a PPP implementation methodology. The pilot projects were formally approved by the Council of Ministers on advice from the IAICC, which itself was based on recommendations of the expert group of the United Nations Economic Commission for Europe (UNECE), without any transparent or published criteria. The initial seven projects chosen were all taken from the National Infrastructure Strategy. 126 Since then, the number of pilots has been reduced to four. Officials informed the assessment team that other (presumably more conventional) implementation methodologies had been selected for these projects. No formal assessment methodology to determine the best or most efficient implementation route was used in the process. The current chosen pilot projects are shown in Table 15. 126 All pilot projects are subject to additional review, including with the focus on feasibility of their implementation as PPPs and their comparative advantage. 126 Table 15: PPP Pilot Projects by January 2017 Project Description Sector Investment Value Status (USD) M10 – 85km highway Transport 350 million FS Complete (supported by EBRD) upgrade Procurement to begin Q2/18 3 x Kindergarten in the Education 13 million FS completed and the PPP Minsk Region agreement drafted Oncology Centre Healthcare Unknown Concept stage (<15 million) Medical Facilities in Healthcare Unknown Concept Stage Baranovichi (<15 million) Source: PPP Unit C. Legal and regulatory framework for PPP 252. There appears to be nothing in the overall legal framework that could present a substantial obstacle to implementation through PPP. The Law itself and the supporting Resolutions have been prepared with foreign assistance. The concept of PPP appears to be embedded in the several pieces of legislation with the suffix ‘…including public-private partnerships...’ appearing regularly in more recent legal texts in the context of ‘infrastructure projects’, thereby demonstrating that PPP features in current and future implementation plans of the GoB. Secondary legislation may need further development as the PPP framework evolves, although the need for distinct regulation should be carefully considered against the alternative of mainstreaming provisions into existing regulation. For example, tendering for PPPs might be captured in the national procurement legislation and regulatory framework. 253. The legal definition emphasizes the efficiency objectives of PPP. PPP is defined in Article 1 of the Law as ‘a legally executed, time-line specific, mutually beneficial cooperation between public partner and private entities with the aim of pooling of resources and risk sharing that meets the goals, objectives and principles set forth herein’. 127 Comparator definitions, including the definition used in the international PPP Reference Guide, are shown in Box 25. The Law is clear that PPP projects relate to ‘infrastructural assets that meet the goals, objectives and principles set forth herein’ These goals objectives and principles are set out in Articles 2 and 3 and under ‘principles’ with the words ‘efficiency of public private projects’ which is written with emphasis. This implies that efficiency has a special status among the other principles. CoM Resolution 508/2014 which regulates the work of the Inter- Agency Infrastructure Coordination Council states in Chapter 1.3 that the National Infrastructure Plan should use ‘…cost-benefit analysis in choosing the optimal model of financing…’ and furthermore in Chapter 1.5 ‘…[in developing the National Infrastructure Plan] assessment of the costs and benefits of risk sharing to make effective decisions when selecting investment options…{including]…engaging the private partner on the basis of public-private partnership…’ 254. While the legal basis for selecting a PPP form of implementation is clear, the process by which the choice is made could be improved by introducing qualitative 127 It is worth pointing out that there are other slightly different definitions available such as the one in Chapter 1 of the CoM Resolution 508/2014. 127 criteria. Understanding relative efficiencies between PPP implementation and conventional implementation is an uncertain and often subjective undertaking and involves taking into account a wider range of considerations than can be captured in a quantitative approach, as countries at the leading edge of PPP, like the UK, have discovered. Box 25: No-one Agrees on a Common Definition for PPP… ‘’There is no overarching definition for public-private partnerships. PPP is an umbrella notion covering a wide range of economic activity and is in constant evolution.’’ (Speech by Commissioner Frits Bolkenstein, DG Int Market, European Commission) A Typical Definition: Ministry of Finance, Czech Republic A Public Private Partnership (PPP) is a partnership between the public and private sector for the purpose of delivering a project or service traditionally provided by the public sector. Public Private Partnership recognises that both the public sector and the private sector have certain advantages relative to the other in the performance of specific tasks. By allowing each sector to do what it does best, public services and infrastructure can be provided in the most economically efficient manner. The PPP Reference Guide issued by the Multinational Development Banks provides a broad definition of a PPP as: “a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, considerable private capital is involved, and remuneration is linked to performance”. Sources: European Commission; Law on Public Private Partnerships, Czech Republic; PPP Reference Guide, Version 3 128 255. The legal framework that deals with estimating the ‘efficiency’ of PPP projects is heavily reliant on the calculation of quantitative parameters. Ministry of Economy Resolution No. 49 was approved on July 27, 2016 (hereinafter referred to as ‘Resolution 49’). This also includes Annex 1 – Concept Note; Annex 2 - Requirements for the feasibility study of the proposals for the implementation of public-private partnership projects; Annex 3 – Public Private Partnership Project Passport; Annex 4 – Requirements for bidding documents. The documents have all been written with the intention of providing further substance and instructions on implementing the Law. 256. The quantitative approach set out in the legal framework could be made simpler. . The guidance and instructions provided in Resolution 49 are dedicated to measuring the possible efficiency of a PPP implementation but they are complex and could be made simpler. The risk in highly detailed quantitative analysis is that because costs can only be estimated they can be manipulated to suit a preferred outcome: the more complicated the methodology, the harder it is for independent reviewers and decision-makers to identify any such manipulation and its impact on the efficiency case for PPP. Similarly, assessing the value of risks can lead to subjective manipulation. One example is the section on Debt Service Cover Ratios (DSCR) in Chapter 2, Paragraph 11. It is not public bodies that would determine an appropriate DSCR but the senior lenders to the project. The risk in having such detailed and prescriptive instructions is that the senior lenders in a specific project may require a DSCR which is outside 128 https://ppp.worldbank.org/public-private-partnership/library/ppp-reference-guide-3-0 128 of the range prescribed in the instructions. If this happened, it would effectively make a project administratively ‘unbankable’, whereas there could still be scope for private financing outside the narrow scope of the regulated parameters. 257. There are no references to any elements of the broader PIM system anywhere in the text of the legal instruments for PPP, giving the impression of a separate system for PPP. This is reinforced by the implicit assumption in Resolution 49 that PPP projects do not follow the normal preparation and appraisal procedures that apply to all public investment projects, thus predetermining the choice of PPP as the eventual implementation modality. This creates a real risk of PPP implementation being allowed to develop as a parallel system rather than one that is holistic and integrated with the overall PIM system. PPP laws, regulations and instructions are best conceived and drafted when they deal with the specific issues that relate only to PPP implementation. Most countries with more experience of PPP than Belarus are now in the process of integrating PPP into their regular PIM framework, if they have not already done so. Neighboring Lithuania provides a good example of how the PPP framework has become an integrated part of the PIM framework. All public investment activity, whether it is state funded, implemented through donor institutions or PPP, is coordinated and monitored through a single public body – the Central Project Management Agency (CPVA) – which is part of the Ministry of Finance. This allows it to generate a holistic view of all development activity in the country and ensures that resources, irrespective of source are targeted at the most appropriate project proposals. 258. A future ‘Value for Money test’ might include a ‘should-cost model’ to act as a benchmark, but a more qualitative based assessment should also form part of this future test, as is becoming common practice elsewhere. A qualitative test would seek the answers to questions such as: • Is a PPP implementation possible and deliverable? • In which ways might a PPP implementation be able to offer benefits over and above more conventional methods? • Are the fiscal risks involved in a PPP contract understood and acceptable to the government? Positive answers to these questions should be understood as critical to the prospects of success for a prospective PPP implementation. Therefore, officials will need to develop the skills required to allow them to assess these questions. 259. In the case of Availability Model 129 PPP projects there appears to be no guidance on how to calculate expected payments to the private partner (which would in any case be subject to a competitive process). Due to this, it is difficult to know how a meaningful comparison might be made on a quantitative basis alone. As Availability (Government-pay) models of PPP are significantly more common than User-pay models there is a strong likelihood that some or all of the costs of the PPP project will fall to the government in the majority of situations. 129 There are two main types of payment mechanism in PPP contracts. One is the ‘User-Pay’ model whereby the users of the service pay directly through fees or tolls. The second is the ‘Availability’ model where the costs of the project are paid directly by the government. There are also hybrid models that combine both. 129 Box 26: Efficiency comparisons of PPP always rely on subjective inputs A comparative assessment of the respective merits of both PPP and conventional implementation options is an essential element in making decisions based on efficiency. However, these exercises are riddled with potential distortions through their (necessarily) subjective nature. Skilled officials and consultants can manipulate the inputs in order to achieve the results they prefer. This exercise although often referred to as a ‘Public Sector Comparator’ should not be seen as anything more than an approximate value for money or efficiency assessment between the two implementing options. There is significant scope for managing a pre-judged conclusion (so-called ‘case making’) depending on the preferences of the authority or its advisers or both. In order to ensure consistency across projects, governments should issue written guidance with a formalized procedure for pricing these risks. Set against this need for centralized guidance, is the concern that such a comparative assessment should not create an administrative burden by being too complex. Comparative assessments can be slow and involve substantial bureaucracy if not designed well. D. Institutional arrangements for PPP 260. The Law permits all public entities, including smaller local government administrations, to enter into PPP contracts. It also sets out the institutional arrangements for PPP in Chapter 2 (Articles 7-14) ranging from the ‘Scope of Competence of the President…’ to the ‘Scope of Competence of Local Deputy Councils, Local Executive and Administrative Bodies…’. According to Article 16 of the Law only the President can make a decision about the realization of a PPP project in the case of state bodies and state organizations. The Council of Ministers can approve a PPP project in the case of a state administration body or organization and in the case of local administrative bodies, Local Deputy Councils are authorized to make decisions about the realization of projects implemented by PPP. 261. The Law itself makes no mention of the role of the Inter-Agency Infrastructure Coordination Council (IAICC). This may be because it appears to have only a coordinating and advisory role but it does nonetheless have an important role to play particularly in the case of PPP. CoM Resolution 508/2014 in Chapter 2 assigns two tasks to the IAICC that are pivotal to PPP development, namely the development and implementation of the legal and policy framework on PPP and the organization of inter-agency cooperation. The IAICC is obliged by law to meet at least once every 6 months but as frequently as it requires. The task of organizing such meetings might seem a challenging one since there are more than 30 members all of whom hold relatively senior positions. Role of the PPP Unit and Institutional Relationships 262. Technical PPP internal advice in Belarus is vested in the PPP Unit of the National Agency for Investment and Privatization (NAIP) which is an agency of the Ministry of Economy. NAIP took over responsibility for PPP coordination on 1st September 2016 but at the time only had one full time member of staff at the rank of Deputy Head. A total of five full time members of the Unit are planned as well as some part-time support. At least two junior 130 members of the Unit had been appointed towards the end of the assessment although there was no further news on the appointment of a Unit Head. Figure 23: Institutional Organization for PPP from September 1, 2016 Source: NAIP and PPP Unit 263. According to a document entitled ‘Policy on the Public-Private Partnership Division’, presented to the assessment team for comment, the PPP Unit is expected to ‘promote’ PPP. The difficulty with promoting one form of implementation over another is that it implies a preference or bias over other means of implementation, whether this is the intention or not. In a mature PIM system, the decision on the most appropriate implementing methodology (budget/donor/PPP etc.) should be made objectively after analysis of the options at the pre-feasibility stage. If there is one institution actively promoting one form of implementation over other options, this is likely to lead to mistakes. 264. PPP Units in general exist to provide advice and expertise to governments on those elements of the project cycle that need to be considered in a different way in PPP to other forms of implementation. However, the policy note appears to provide the PPP Unit with a significantly wider remit than would be expected. This extended remit is expressed as ‘The Division shall peform the function of an infrastructure development planning agency”. It is difficult to reconcile the narrow and specific remit of a PPP Unit with the much broader and wide-ranging remit of an Infrastructure Planning Agency. To do so would also signify significant bias towards PPP implemention. This could, if implemented, have a profound effect on the institutional structure of the entire PIM system. 265. Ministries of Finance should (and often do) play a vital role in the sustainability of PPP portfolios - in many cases PPP Units are agencies or divisions of ministries of finance. Crucial roles in relation to PPP include: value for money tests, issuance of guarantees that may lead to financial obligations, fiscal risk manageent and monitoring, debt management and overall affordability. It is striking that the terms of reference for the Unit barely mentions the Ministry of Finance, even though the institutional relationship between the PPP unit and the MoF is arguably the key one in terms of fiscal sustainability. Furthermore international investors considering engaging in PPP projects expect to see a fully working and harmonious relationship between a PPP unit and its corresponding MoF. 131 E. Managing Fiscal Risks of PPP 266. Fiscal risks that come with PPP Contracts appear to be little understood in Belarus at the present time. Discussions with officials engaged in PPP activity during the assessment and at the workshop requested by the MoE on the subject, revealed a limited knowledge on the fiscal sustainability of PPP programs and projects. The same officials expressed a strong desire for more detailed understanding of the subject in the future. This will be vital if the GoB is to take forward a measured and responsible series of PPP projects as currently envisaged. 267. Fiscal risk associated with PPP are often overlooked or underestimated. When the subject of risk is raised in the context of PPP, the discussion turns immediately and often entirely to the subject of project risk: that is the risks contained within the project itself from the perspective of the private sector. However, there are a number of additional risks that can be (and often are) transferred in the process of negotiation between public and private entities and subsequently appear in the contract between the parties. Often overlooked, perhaps because they are rarely raised as issues by the investors, are the risks that only the government can absorb. Since PPP projects are entirely governed by the ‘Project Agreement’ and the associated financing documents, the way in which risks are apportioned is a matter for highly skilled and experienced negotiators. That is why countries that have little experience of the subject (or even if they do, placing officials in charge with little or no experience) are at risk when faced with highly experienced and motivated private sector counterparts. It is rarely a negotiation conducted on a level playing field. As a result of this imbalance in negotiation and often through ill-thought-out policies towards PPP, governments when entering into PPP contracts can unwittingly expose themselves to significant fiscal risk by agreeing to explicit guarantees and contingent liabilities. Box 27: Accumulating Fiscal Commitments through PPP By 2009, Chile with a long track record of implementing projects through PPP had a total stock of guarantees related to PPP of 3.72% of GDP A large number of significant sized PPP contracts were agreed by the UK’s Highways Agency in the late 1990s and early 2000s. The result of this was a belated realization that the accumulated explicit commitments and contingent liabilities would consume a significant slice of their expected annual budget allocation in future years. Subsequently a decision was taken to halt further implementation of highway projects by PPP – regardless of whether it was the most sensible option or not. In South Africa for example, in order to avoid such problems, the Treasury has to give approval at four different stages: after the feasibility study; when the tender documents and draft contract have been prepared; appointment of the preferred bidder and prior to contract signatures. Source: Ministry of Finance, Chile; Ministry of Finance Republic of South Africa. 268. Shown below are some types of instruments in Project Agreements that can create fiscal risks: a) State Guarantees on the debt raised against the project b) Guaranteed payments against minimum levels of demand (volume of traffic, MW of generated power through ‘take or pay’ agreements etc.) c) Minimum Revenue Guarantee System d) Viability Gap Funding (VGF) 132 e) Termination provisions that require the state to buy back the assets at either ‘market value’ or write down value f) Other ‘Buy back’ clauses 269. It is not wrong for governments to accumulate contingent liabilities through PPP contracts. It is wrong, however, to fail to recognize them, manage them and monitor the changes in the conditions that might affect their realization. The information should be either collated by – or made available to – the Ministry of Finance and updated on a regular basis. Officials in spending ministries and their agencies should also monitor the situation at their own level of authority. 270. Governments (usually meaning ministries of finance) need to fulfil four key roles with respect to fiscal risk in PPP projects illustrated in Figure 24: Figure 24: Four Key Roles to Address in Fiscal Risk for PPP Contracts 271. The recently produced IMF tool for assessing PPP fiscal costs and risks, the Public-Private Fiscal Risk Assessment Model (P-FRAM), available for MoFs to conduct self-assessments, might be a useful option for the Belarus MoF. P-FRAM provides a structured and guided process for gathering relevant PPP project data, quantifying the impact of a PPP project on government’s deficit and debt under both cash and accrual-based reporting standards; and performing sensitivity analysis of the potential fiscal impact of a PPP project to changes in key macroeconomic and project-specific parameters. F. Unsolicited Proposals 272. Discussions with officials revealed pressure from a significant number of unsolicited proposals from private entities. Unsolicited proposals are project ideas that come from an entity that is not a public body – usually a private investor or operator. Article 15.1 of the Law permits such unsolicited proposals. The definition of ‘private partner’ in Article 1 of the Law includes the possibility of ‘an individual entrepreneur’. Resolution 532 also provides the definition of ‘private initiator’ which states ‘legal entities, foreign entities which are not 133 legal persons, individual entrepreneurs, initiating a project of public private partnerships’. It is this Resolution that lays out the procedures for handling these unsolicited proposals in Chapters 3 and 4. 273. There is no means of testing whether unsolicited proposals represent value for money through a form of competition or at the very least a form of ‘benchmarking’. All proposals have to comply with the same rules and must be prepared and presented in the same way as proposals that have been made by public bodies 274. The criteria for choosing a PPP implemented project are the same regardless of their origin (public or private), but the formulation in the Resolution are imprecise. The Resolution uses the words ‘…may include…’ The criteria that may be included are: the capacity of the initiator; validity of the commitments assumed and ‘appropriate’ risk distribution. Guidance to officials on how to interpret these measures would be helpful. 275. Unsolicited proposals are a reality, so an effective means of addressing them is essential in the interests of efficiency and transparency. However, a balance needs to be struck between essential protections against corruption and ensuring efficiency and encouraging the private sector to continue to come forward with innovative ideas that may be of value to the nation. It is proposed that the UNCITRAL text 130 on the subject is used as a benchmark. This was the result of consideration of the needs for transparency and efficiency for governments but still retaining the motivations for the private sector to make innovative approaches to those governments. The text was based on research done by government nominated experts from many countries and approved by more than 70 UN member states. G. PPP and the Development Bank 276. The Development Bank (DB) of Belarus expects to have a growing role in the financing of PPP implemented projects. Up to the present time the DB has not had a role in any PPP activity but it expects to be actively involved in the future and potentially become an important player. Among the reasons for this, are various legal acts 131 giving the Development Bank greater room for manoeuvre in its lending, at the cost of losing explicit state guarantees. 277. Excessive lending to PPP projects poses some important risks. Almost all PPP contracts contain financial obligations for the government, either explicit or contingent 132, therefore the government is likely to come under some external pressure to reference the value of the loans in the national accounts. MDAs should be informed that there are ceilings on loans to PPP projects, so that they do not skew their implementation choices towards PPPs. This could help to prevent increased demand for loans to PPP projects prior to the establishment of the necessary human capacity to assess the merits of the projects being presented. 278. The involvement of the DB also presents some opportunities. It is clear from discussions with DB officials that they already have a strong role in assessing projects prior to 130 UNCITRAL (2001) Legislative Guide on Privately Financed Infrastructure Projects P91-93 131 Presidential Decree No. 261 of June 21 2011 and CoM’s Resolution No.1102 of December 29 2016 and No. 1046 of December 29 2017. 132 See also section on managing fiscal risks of PPP 134 lending – even to the extent of holding funding competitions with the strongest proposals getting the funding. Whilst this role is still under development, it could emerge as an important quality assurer of PPP proposals through providing the ‘due diligence’ function. Furthermore, the DB will need to develop its capacity in PPP to meet future demand and since its staff is outside the constraints of the civil service, it may find it easier to attract highly specialized new entrants due to the ability to pay better salaries. 279. A project quality assurance system should ideally be developed as a cross cutting government function applicable for public investment projects irrespective of the particular project implementation modality considered, i.e. not only PPP projects. Until such a cross cutting system can be established, the DB may provide the GoB with an opportunity for the interim development of some of the necessary functions, although the risk of ultimately creating a parallel quality assurance system for PPP in the DB should be carefully monitored. It is worth noting that the much admired and mimicked UK Gateway Review® system that covers most public investment projects developed directly from the lessons learned in the due diligence function by banks in early PPP projects. H. Alignment of PPP with PIM processes 280. Most PPP development activity is aligned with current PIM practices, but important aspects of appraisal and selection remain differentiated according to implementation modality. It was agreed from before the start of the assessment that the use of the Bank’s PIM4PPP assessment tool would not be appropriate, since PPP implementation is at an early stage and most PPP functions would therefore not have had any track record upon which to base a meaningful assessment. Table 16 highlights the early stages of the PIM process – from Strategic Guidance through to Project Selection – comparing what is intended to happen in a PPP context and a conventional PIM scenario given the current regulation. The table highlights the four main areas of differential between conventional and PPP processes: ‘Appraisal’ and ‘Selection’ (see also Chapter III). 135 Table 16: Alignment of Early Stage PIM and PPP Practices Process Step PIM Conventional Scenario PIM PPP Scenario Strategic Projects should be identified Projects should be identified and included in one of Guidance and included in one of the the strategic planning documents strategic planning documents Edict 299 Project Presidential Decree 26 Resolution 49 also applies Appraisal Edict 299 Resolution 532 Independent Review of technical aspects of Review of technical aspects of Construction, but no Review of Construction, but no checking checking for overall quality and possible bias in Appraisal for overall quality and possible appraisal. bias in appraisal. Project By the Head of State, CoM, or Legally this is done by the Head of State, CoM, or Selection the relevant local executive the relevant local executive depending on the origin. depending on the origin However, in practice, projects have been designated for PPP implementation prior to appraisal. I. Recommendations Managing the Piloting Process 281. Given the early stage of PPP development in Belarus, it is recommended that the GoB first focusses all its efforts on two or three PPP implementations. Trying to implement multiple projects in a short space of time will undermine credibility within the investor community and stretch fragile resources to breaking point. Given that a country’s first PPP deal is never its best, it is surely better to concentrate on doing a small number of projects really well, building credibility among investors and learning the lessons from the process of completing them. 282. Pilot projects should remain small in number, diverse in nature, so that suitability by sector can be assessed; and relatively modest in scale so that mistakes are manageable. 283. The GoB should be alert to the possibilities of conflicts of interest and bias in the identification of projects for PPP implementation. The PPP Unit’s legal mandate to ‘promote’ PPP creates a natural bias and this mandate should be modified to a neutral, advisory role to ensure objectivity. The Unit should have an equal responsibility for advising on the risks involved in PPP implementation and not just the benefits. Equally, international organizations that have a clear mandate for PPP promotion are unlikely to provide the most objective advice to the GoB and for that reason they should not be relied upon as the only source of advice or even the principal source of advice. A stronger separation between advice on the feasibility and implementation stages could be considered to ensure that advice on appraisal is unbiased and provides an adequate assessment of project risks, particularly fiscal risks. 284. A complete ex-post evaluation of the results of the first few pilot projects should be undertaken as soon as it is practical to do so. Findings should be fed back in to the preparation work for any new PPP implementations. A project should be reviewed both post- construction in the form of a completion report focusing on timeliness and results at the output 136 level, and after a suitable period of operation, where the evaluation could include results at an intermediate outcome level, for example based on monitoring of service delivery from the project facility. Project Selection (Efficiency assessment) – Making the Right Implementation Choices 285. Efficiency testing should, in the medium term, transition to a more qualitative assessment rather than the current quantitative test. This would align Belarus with emerging best practice in other countries with long track records on PPP delivery. It is recognized that the main issue with doing this now is that there is no domestic track record against which these qualitative comparisons can be made. This is one good reason why ex-post evaluation of projects adds value to a fully functioning PIM system 133. The lessons learned from PPP implementation should be studied in depth. Currently, qualitative assessments would mean comparisons with results from similar sectors in different countries making the results somewhat unpredictable but not without value. It should be pointed out that the same could be said about quantitative assessments too. As an interim measure the strict quantitative formulae used presently could be simplified so that greater focus can be given to issues such as risk pricing and risk transfer. A specific PPP stakeholder analysis outlining risks and benefits should be conducted as part of the assessment. It should be clear that a ‘benefit’ to a private sector partner is an additional cost to the project for which government (and taxpayers) and users will need to see more than compensatory benefits in various forms. 286. A ‘decision tree’ with associated guidance should be developed to assist in the transition to a qualitative system. This would further develop the capacity of officials in understanding the subject matter. The guidance would specify the criteria that should be used in making decisions on whether PPP should be used as a form of implementation in any project setting. The MoE should consider seeking international technical assistance to work with the relevant staff in developing the guidance and increasing the overall capacity to guide the evaluation of PPPs. In the medium term when the capacity has been developed to understand the issues, these criteria could be embedded in a new resolution (or revision of MoE’s Resolution No 49). Managing fiscal commitments and risks 287. The role of the Ministry of Finance in the PPP framework should be enhanced by allocating and agreeing specific roles. Article 10 of the PPP Act already permits this in principle as follows: ‘Within its scope of competence in the field of public-private partnerships, Ministry of Finance of the Republic of Belarus: - considers and evaluates offers concerning realization of public-private partnership project; - considers and clears tender documents; - participates in commission for tendering process by sending its representatives; - exercises other powers under the Constitution of the Republic of Belarus, this Law, and other legislative acts of the Republic of Belarus’. Ministries of finance in best practice countries have key roles to play in the delivery and 133 See also section on project evaluation in Chapter V of this assessment 137 monitoring of PPP programs and projects. These include value for money tests, issuance of guarantees that may lead to financial obligations, fiscal risk management and monitoring, debt management and overall affordability of direct payments in the context of MTEFs. Since a number of these typical roles have not been fully developed in Belarus, the time would appear to be right to do so. 288. Explicit and contingent liabilities should be assessed, recorded and managed within the budget system. Both explicit and contingent liabilities in PPP contracts should be assessed and priced throughout the development of the project from initial concept to the point just before commitments are made through signed contracts. PPP contracts should not be agreed before the Ministry of Finance has had the opportunity to do this and indicated that these commitments are acceptable. A register of PPP contracts signed should be created and regularly monitored by the Ministry of Finance. It should contain enough relevant information to allow it to monitor and manage the risks involved. The status of these risks changes from time to time so it is important that regular updating and monitoring is carried out. The P-FRAM tool should be considered by the MoF to strengthen the analysis of the potential fiscal impact of a PPP project. 289. Accumulated fiscal risk related to increasing numbers of PPP commitments should be monitored and a consideration of the cumulative impact should be given in the selection process for future PPP implementation134. 290. The government should introduce a ‘fiscal ceiling’ for accumulated financial obligations related to PPP contracts as a safeguard against unaffordable future budget commitments. The origin or scale of these obligations should not make them immune from scrutiny and transparency. Human Capacity Development 291. In order to achieve consistently good outcomes on PPP projects it will be necessary to improve and develop human capacity. Reliance on consultants to do the technical work of project preparation and appraisal is likely to remain necessary for the medium term at least. However, in order to avoid a situation where the consultants may end up managing the government client, the GoB needs to develop the capacity to become an ‘intelligent client’ in the subject matter. In the case of PPP there is much to be said about ‘learning by doing’ or in other words that the best form of learning is through experience. This is the current policy and follows the path taken by most countries that have engaged in PPP projects including many that are now considered ‘good practice’ countries. 134 Useful guidance on fiscal risk can be found at: http://www.imf.org/external/np/fad/publicinvestment/pdf/pframmanual.pdf 138 292. Given the recent political impetus through recent legislative publications 135 and press briefings, it is particularly important that the GoB quickly develops its capacity to identify good candidate projects for PPP implementation based on clear criteria and develops capacity in understanding and managing the related fiscal risks. The ‘Social and Economic Development of Belarus for 2016-2020’ tasks all oblast level governments to conclude at least one PPP project agreement by the end of 2020 and this will place unsustainable demands on the existing capacity. Without this capacity, there is a real risk that unsuitable projects are selected as PPP candidates or that fiscal risks will start to accumulate over the medium term without any safeguards. A program of training and awareness should cover all the possible public institutions that have the legal authority to enter into PPP contracts as well as with central institutions, particularly the Ministry of Finance. Such a program could be developed and delivered relatively quickly. Training could be formed in two parts: the first to train on the qualitative aspects of choosing and appraising the PPP implementation option and the second part to train on how these can be processed through the specific mathematical requirements of Resolution 49. It is also recommended that the GoB engages with international partners to develop an urgent and comprehensive program of capacity building in PPP knowledge. Institutionalizing PPP within the PIM Framework 293. There is currently some uncertainty to what extent PPP will be integrated into the overall PIM framework. The notion that the PPP unit should promote PPP implies a bias over other forms of implementation. The expectation that the Unit should become an infrastructure planning unit goes beyond what is required for PPP management and may conflict with an overall harmonization. Furthermore, Resolution 49 represents a break with good international practice in that it attempts to regulate PPP projects in a different way to other public investment projects. The best PPP regulations only cover those subjects that need to be considered in the specific case of PPP and do not attempt to repeat subjects already featured in existing legal instruments. It should be remembered that PPPs are de facto public investment projects. Separate rules on the form of project appraisal and/or procurement, for example, are likely to lead to confusion or expensive mistakes. Table 17 shows the points in the project cycle where specific interventions should be made. 294. It is recommended, therefore, that decisions on the form of implementation should not be taken prior to the point where a pre-feasibility study has demonstrated that the project has enough merit to proceed as a project in its own right. The means of implementation is a result of a strategy option appraisal – an essential part of the appraisal process – that considers PPP implementation alongside other means of achieving the objectives of the project. Electing projects for PPP implementation before this stage could be considered as ‘case-making’ whereby those doing the appraisal simply select the type of evidence that suits a pre-determined outcome. Case-making is poor international practice. 135 Edict of the President No 466 from December 15, 2016 “On Approval of the Program for Social and Economic Development of the Republic of Belarus for 2016-2020”; Resolution of the CoM No18 from January 12, 2017 “On Approval of the Plan for Implementation of the Program for Social and Economic Development of the Republic of Belarus for 2016-2020” (points 127 and 128) 139 Table 17: PPP Specific Interventions in the Project Cycle Stage of the Process Additional Actions for PPP Questions Project Identification Projects should not be identified as PPP candidates without appraisal Phase Pre-Feasibility Study Assessment of possibility of 1. Are there any precedents for this type PPP Implementation as part of of project being implemented by PPP? Strategic Option Appraisal 2. What can we learn from any precedents? 3. What would be the likely conditions for investors? Guarantees etc? 4. Would the fiscal implications of the project be acceptable to the MOF? Feasibility Study • A ‘soft market test’ on the Assess: likely consequences of a 1. What would be the investor/operator PPP implementation appetite for the project/country and • Establish a ‘should-cost’ likely conditions? model as a benchmark 2. What would be the likely lending • Establish qualitative reasons conditions? Guarantees? why PPP implementation 3. What would be the necessary would be preferable payment mechanism? • Establish risks to the MDA 4. What would be the fiscal and government in PPP consequences of the necessary payment implementation. mechanism? Procurement Assess the competition as to Are the bidders credible enough to whether it can generate deliver the finance, assets and services? sufficient competition/vfm Is there more than one credible bidder? Clarifications/Nego- Be alert to ‘negotiation creep’, To what extent has the risk profile tiations i.e. shifts in risks during altered during negotiations? Are there negotiation. any fiscal implications? Immediately prior to Final assessment of the Are the financial obligations clear and commitment financial obligations contained understood? in the final draft of the contract Are the contingent liabilities clear and and related documents. fully understood? Have procedures for recording and monitoring them been put in place? 295. Resolution No 49 should in the medium term be modified to deal only with those aspects of the project cycle that have PPP specific elements. Everything else should be processed as any other public investment project up to and including the procurement processes required by the laws of Belarus. This will lead to clarity of thought in the identification, appraisal and selection of projects as well as deeper understanding of the impact that PPP implemented projects have on the MTEF. 140 ANNEX 1: RECOMMENDATIONS FOR IMPROVING PIM IN BELARUS FOR THE SHORT, MEDIUM AND LONG TERM No Headline Recommendation Short Term Medium Term Long Term Responsibility Requirements STRATEGIC GUIDANCE AND FIRST-LEVEL SCREENING 1 Strengthen the strategic Strengthen the guidance and Streamline medium-term and Ministry of Preparation and guidance for public coordination for state long-term strategic planning to Economy approval of the investment by improving the program preparation coming remove any potential duplication national program for coherence and realism of from the MoE, including and to align planning horizons. socio-economic strategic planning guidance on expectations development instruments concerning the coverage of completed in public investment. advance of the finalization of state programs, so that the objectives and outputs of state programs can be more easily aligned with national objectives Develop realistic, but non- Ministry of binding, financial projections for Economy and state programs, and consider Ministry of Finance aligning the approval of state programs more closely with the budget cycle. Develop a more operational Ministry of long-term National Economy Infrastructure Strategy, which is harmonized with other planning instruments No Headline Recommendation Short Term Medium Term Long Term Responsibility Requirements in terms of scope, timing and financial framework and which is rolled forward periodically. Review future options for the Ministry of level of centralized involvement Economy and in the composition of the Ministry of Finance investment program in the context of the rationalized system of state programs and a functioning medium-term fiscal framework (see chapter 4 for options). 2. Formalize project Introduce a formal decision Ministry of identification so that it to proceed to preliminary Economy becomes a key decision design and feasibility study, point for developing a based on information on the project further project justification provided in an obligatory project profile. Define decision-making rights according to the expected value/complexity of the project. PROJECT APPRAISAL AND INDEPENDENT REVIEW 3. Make project appraisal more Develop and disseminate Amend the relevant legal and Ministry of rigorous for all projects, formal national technical regulatory instruments to Economy, Ministry whether commercially or guidance on methodologies introduce greater use of of Finance, and socially oriented, through for feasibility studies of economic analysis tools in Ministry of tailored use of social cost- public investment projects, appraisal, including SCBA, as Architecture benefit analysis or other incorporating SCBA and part of feasibility studies. This appropriate methods other techniques, and should apply both to commercial 142 No Headline Recommendation Short Term Medium Term Long Term Responsibility Requirements tailored to the scale and and social public investment complexity of projects. projects as long as serious distortions persist for markets for inputs and outputs of commercial projects. Introduce a formal gatekeeping Ministry of function, whereby all projects Economy and included in budget requests are Ministry of Finance reviewed centrally to ensure that they have been properly appraised, have obtained the necessary approvals and are directly aligned with the priorities of their respective state programs. Estimate and disseminate a Estimate and disseminate further Ministry of Estimation of a social discount rate for national parameter values for use Economy, value for statistical Belarus. in SCBA and CEA, including BELSTAT life requires the the value of a statistical life design of sophisticated “willingness to pay” surveys 4. Enhance the scope of the Extend the existing Ministry of Formal project independent review of independent review process Economy and appraisal enhanced project appraisal to include examination of Ministry of Finance the robustness of the case for non-commercial, public investment projects based on a checklist, in particular with respect to social profitability and sustainability. 143 No Headline Recommendation Short Term Medium Term Long Term Responsibility Requirements Ensure that projects in the Ministry of reserve list have been Economy subject to independent review to be eligible for public funding PROJECT SELECTION AND BUDGETING 5. Introduce a credible Lock in budget funding for Ministry of The reliability of the medium-term perspective to ongoing projects before Economy and medium-term fiscal budgeting of public deciding on funding for new Ministry of Finance framework should investment to assist projects. be strengthened and programming of multi- Develop a medium-term strategy it should be ensured annual commitments and for finalizing frozen or slow- that it is approved at resulting expenditures as moving projects, or closing them the beginning of the well as to ensure down for good. This should budgeting process. sustainability of project involve reassessing frozen financing projects in the same way as new The MTBF should projects to confirm social be made a credible, profitability, but on a sunk cost rolling framework. basis. When rolling over Within the MTBF, introduce a the MTBF, the system of forward baseline second and third estimates for ongoing public years of the previous investment projects, by which year’s MTBF should decision-makers have a full be used as starting picture (by year) of the forward points for updating funding requirements for the and extending efficient implementation of expenditure plans. ongoing projects. Introduce budget formulation procedures to prioritize new projects separately from ongoing projects, after the capital 144 No Headline Recommendation Short Term Medium Term Long Term Responsibility Requirements baseline has been established and agreed, and the fiscal space remaining for new projects has been determined. Synchronise the calendars Ministry of for preparing and approving Economy and the state budget and the SIP, Ministry of Finance as a first step to improve integration of recurrent and capital expenditure. Require budget requests for Ministry of Finance investment projects to and Ministry of include projections of Economy operating and maintenance expenditures for the new facilities once commissioned. Review the Ministry of Finance criteria/principles for and Ministry of selecting projects for Economy inclusion in the SIP, so as to make them more specific and more operational. Introduce a contract Ministry of Finance management/project module or system for more systematically controlling commitments against total contract value for multi-year projects. 145 No Headline Recommendation Short Term Medium Term Long Term Responsibility Requirements PROJECT IMPLEMENTATION, MONITORING AND ADJUSTMENT 6. Consolidate project Introduce more detailed Put in place arrangements to Ministry of implementation operational guidance on ensure that where the role of Architecture and arrangements to enable project implementation, project client is outsourced, the Construction, responsive and accountable probably at sector level. project promoter retains a high- Ministry of project management, while level monitoring role and has the Economy ensuring adequate ultimate say on critical monitoring and oversight implementation issues that will affect project success. Reinforce centralized Establish an SIP monitoring Ministry of monitoring so it becomes group charged with classifying Economy and more responsive in projects according to delivery Ministry of Finance identifying and responding risk and deciding which projects to any emerging risks in a should be escalated to the level timely fashion (involving of the Council of Ministers for analysis, identification of closer scrutiny and decisions. problem/at-risk projects, pursuit of solutions and follow-up) and gives high- level decision makers a better picture of delivery of the overall portfolio. Revisit in-year adjustment rules, including minor budget-neutral reallocations to be decided below the level of the Council of Ministers. If a less restrictive adjustment process is adopted, consider limiting major revisions to the SIP (at the level of the 146 No Headline Recommendation Short Term Medium Term Long Term Responsibility Requirements Council of Ministers) to once per year. 7. Optimize the value-for- Avoid special rules for PPP Examine ways of ensuring ‘best- Ministry of Anti- Would require money potential from procurement. value’ procurement, allowing Monopoly cooperation and competitive procurement some account to be taken of Regulation and agreement of PPP factors other than price in Trade (MART) Unit and Ministry of arriving at a decision on winning Economy tenders 8. Introduce and operationalize Introduce an automatic Ministry of a formal process for review of projects with Economy and triggering re-appraisal of excessive cost overruns or Ministry of Finance projects where costs or revisions to expected benefit benefits deviate by more streams. than defined margins PROJECT OPERATION 9. Reinforce the long-run Extend the asset register to State Property Information already sustainability of projects include the presently Committee and exists but on other once operating excluded assets and data on National Cadastral registers. the annual operating costs Agency of each asset to assist budget holders to plan future demand on resources and compare costs when choices have to be made. Explore geographical State Property Probably requires manipulation of the asset Committee and software data, including to allow National Cadastral development. public investment planners Agency to identify areas of under- provision (or over- 147 No Headline Recommendation Short Term Medium Term Long Term Responsibility Requirements provision) for certain public services and opportunities for sharing of facilities among public entities. PROJECT EVALUATION 10 Operationalize the lesson- Develop an extended project Establish closer monitoring of Introduce systematic MDAs, Ministry of learning process on project completion report format projects once they begin evaluation of the impacts of Economy completion and incorporate and guidance on operating to collect information a sample of completed it into decision making implementing the on demand and service quality. projects beginning with the process performance analysis and This might be done on a sample largest or most problematic lesson learning indicated in basis only, for smaller projects. projects. the workflow charts, and establishment of a structured approach to disseminating lessons. Carry out a pilot ex post Ministry of evaluation of two major projects Economy - perhaps one successful project and one more problematic - as a basis for developing a replicable methodology. INSTITUTIONAL AND STAFF CAPACITY IN PIM 11 Strengthen the legal and Develop definitions for the Introduce main public Ministry of institutional framework for main missing public investment definitions in the Economy, Ministry PIM investment concepts, national legislation of Finance, Ministry including the definition of of Architecture and public investment project Construction 148 No Headline Recommendation Short Term Medium Term Long Term Responsibility Requirements Introduce a classification Ministry of and coding system for Economy, Ministry public investment projects of Finance based on a broadened and internationally accepted definition of projects providing a unique project code to follow projects throughout their life cycle Rationalize the legal and Ministry of regulatory framework in a Economy, Ministry single instrument for PIM, of Architecture and including clarified roles and Construction responsibilities of main stakeholders 12 Provide comprehensive Develop a comprehensive Ministry of Adoption may guidance and capacity guideline covering all PIM Economy, Ministry require formalization building of all relevant stages of Architecture and through revised stakeholders to enable Construction, regulation sustained reform of the PIM Ministry of Finance system Undertake an assessment of Initiate training and capacity Ministry of capacity building needs and building program Economy develop a phased training program and on-the-job technical assistance program to support gradual roll-out of an improved PIM process. 13 Develop a PIM Information Formulate functional and Introduce a PIM information Ministry of System technical requirements and a system to support workflows, Economy and system development monitoring and oversight Ministry of Finance strategy for a PIM throughout the PIM cycle. Information System to Ensure that PIM System 149 No Headline Recommendation Short Term Medium Term Long Term Responsibility Requirements support workflows, interfaces – or integrates – with monitoring and oversight the GFMIS being developed by throughout the PIM cycle the MoF. PUBLIC-PRIVATE PARTNERSHIPS 14 Learn lessons for PPP roll- Select pilot projects that are Ministry of out from an optimized small in number and Economy piloting exercise relatively modest in scale - so that mistakes are manageable - and that are diverse in nature - so that suitability by sector can be assessed. Seek advice from Ministry of international organizations Economy that do not have a clear mandate for PPP promotion in order to achieve balanced advice on fiscal risks of PPPs. Undertake a complete ex- Ministry of Complete ex-post post evaluation of the results Economy evaluation requires of the first few pilot projects PPP projects to and feed results back into reach operational the preparation work for any maturity new PPP implementations. 15 Simplify the comparative Modify Resolution 49 to deal Ministry of assessment of PPPs and only with those aspects of the Economy harmonize appraisal project cycle that have PPP processes with mainstream specific elements. PIM Revise process for PPP-selection Ministry of to ensure that decisions on the Economy form of implementation is taken 150 No Headline Recommendation Short Term Medium Term Long Term Responsibility Requirements after a feasibility study has demonstrated that the project has enough merit to proceed as a project in its own right, whatever the procurement and financing modality. Review the quantitative Ministry of approach set out in Economy Resolution 49 with a view to simplification and supplement it with qualitative criteria dealing with assessment of risk pricing and risk transfer. Develop a ‘decision tree’ with Ministry of Requires the associated guidance to assist in Economy development of the transition to a qualitative guidance plus system of efficiency testing. implementation training 16 Appreciate and manage the Amend the Terms of Ministry of fiscal consequences that are Reference for the PPP Unit Economy created through PPP to give an equal contracts responsibility for advising on the risks and benefits involved in PPP implementation. Separate the advisory role Ministry of May also require the on feasibility from the Economy support of Deputy advisory role on Prime Ministers implementation so as to ensure that advice on option appraisal is unbiased and 151 No Headline Recommendation Short Term Medium Term Long Term Responsibility Requirements provides an adequate assessment of project risks. Develop methodology for Enhance the role of the Ministry Ministry of Finance May require managing fiscal risks and of Finance in the PPP framework and Ministry of agreement and long terms budgeting for in managing fiscal risk and long Economy support of the PPP term budgeting by defining Ministry of specific decision points for Economy to amend Ministry of Finance review the PPP Law. Introduce a ‘fiscal ceiling’ Assess, record and manage Ministry of Finance Requires signed PPP for accumulated financial explicit and contingent liabilities contracts. obligations, including those within the budget system. Once related to PPP contracts, as PPPs increase in numbers, Requires amendment a safeguard against introduce monitoring of to Budget Law or unaffordable future budget accumulated fiscal risk. new Resolution commitments. 17 Make SIP information Start publishing Presidential Develop a user-friendly Ministry of Should build on available to general public Edicts on approval of SIPs summary, illustrating main Economy; information linkages trends in SIP expenditures and Presidential to PIM Information publish the SIP approval and Administration System amendment 152 ANNEX 2: SUMMARY INFORMATION ABOUT PROJECTS INCLUDED INTO ASSESSMENT CASE STUDY A: Profile of Project Sample 136 No Project Customer Years Sources of financing 1. Republican Laboratory of Molecular Genetic Carcinogenesis Ministry of Health 2011-2015 100% SIP 2. Republican Center for Positron Emission Tomography Ministry of Health 2012-2015 100% SIP 3. Children’s summer recreation camp “Zubrenok” Ministry of Education 2006-ongoing SIP and other sources Conversion of a two-storied cafeteria unit in Kozlov Str. into five story Ministry of Education 2011-2017 49% SIP, 51% - own funds of 4. classroom and laboratory building ("Belarusian State University of BSUIR Informatics and Radioelectronics") Ministry of Transport 2011-2016 5. Motor road P-23 "Minsk -Mikashevichi" 32.6% - SIP, 67.4% -loans and Communication Reconstruction of Dnieper-Bug Canal facilities. Shipping lock at Ministry of Transport 2012-2015 6. 100% SIP Waterworks # 8 “Zaluzie” and Communication Brest Oblast Executive 2010-2014 60.6% - local budget, 37.6% - 7. Surgery building of the Oblast Oncology Center in the City of Brest Committee subventions, 1.6% - loans, 0.2% - other Ministry of Energy 2015-2016 71% - loans (including credit line Construction of a wind park near the Village of Grabniki, Novogrudok 8. of the China Development Bank), rayon 29% own funds Construction of Overhead Power Transmission Line “Berezovskaya Ministry of Energy 2014-2015 29% SIP, 61% - loans, 10% - own 9. GRES-Ross” funds 136 Criteria for selection of projects: (i) Number of projects: around ten projects of which the majority should be already completed within last 1-2 years, (ii) 1-2 projects should be from local government; (iii) selected projects should represent 3-4 significant sectors in terms of public sector capital spending; (iv) selected projects should represent significant project values within the ministry / local government portfolio of investments; (v) majority of projects should be financed from the budget; (vi) already completed projects should be a fair representation of the ministry portfolio in terms of the “success”, i.e. timeliness and efficiency with which the projects were implemented 153 B. Selected Sample Projects Background Republican Laboratory of Molecular Genetic Carcinogenesis The Concept for construction of the Republican Molecular Genetic Carcinogenesis Laboratory at the premises of SI “NN Alexandrov Republican Scientific and Practical Center of Oncology and Medical Radiology" covers construction of both projects: this one as well as the Republican Center for Positron Emission Tomography. The SIP covers the civil engineering part of the construction, while provision of equipment for the facility was financed from other sources. Republican Center for Positron Emission Tomography The project was included into SIP by the Order of the President of the Republic of Belarus № 09/204-1 P22 dated January 9, 2012. The SIP covers the civil engineering part of the construction, while provision of equipment for the facility was financed from other sources. Children’s summer recreation camp “Zubrenok” The first concept of the reconstruction of Camp “Zubrenok” dates back to 1988. Active reconstruction and construction efforts began in 1992 and are still ongoing. Key investment areas: construction and equipment of new accommodation buildings and development of the camp infrastructure. The investments were financed from the SIP, various state programs, international projects as well as from the camp’s own funds. Being a commercially viable holiday destination, the camp has significant own financial resources of its own, earned by selling tours. Conversion of a two-storied cafeteria unit in Kozlov Str. into five story classroom and laboratory building ("Belarusian State University of Informatics and Radioelectronics") The object was included into State Program for Development of Higher Education for 2011-2015 and into 2011 SIP. After the disbursement of funds envisaged under the SIP for 2011 (50% of the project cost), the construction was financed from the own resources of the Belarusian State University of Information Science and Radioelectronics (BSUIR). The object was officially commissioned in early 2017. The detailed design did not envisage funds for the provision of furniture and equipment for the new building. They were purchased by BSUIR at their own cost. Motor road P-23 “Minsk –Mikashevichi” The design for reconstruction of the section of the republican motor road P-23 “Minsk – Mikashevichi” to Category I parameters with arrangement of a new lane in parallel will the existing one was based on Instruction of the President of the Republic of Belarus №. 09/740-149 dated April 11, 2013. The project was included in the List of Reconstruction and Construction Objects on the Republican Roads for 2006- 2015, approved by the Resolution of the Council of Ministers of the Republic of Belarus No. 468 dated April 6, 2006 On Approval of the Program “Roads of Belarus” for 2006-2015”. Large-scale reconstruction of road P-23 began in 2012. Initially the financing was provided by SIP, later - by the Development Bank of the Republic of Belarus. In 2014, the road section “km 67.2 - km 74” was commissioned. The road section of 28 km (km 74 - km 102) was opened in November 2016. The road reconstruction plan includes a total of 6 construction stages covering a 52.3 km-long road section. In 2017, reconstruction of the road P-23 “Minsk-Mikashevichi” will continue. Surgery building of the Oblast Oncology Center in the City of Brest The surgery building of the Oblast Oncology Center in the City of Brest is the only construction project in the sample which was implemented using “turn-key” approach (includes provision of furniture and medical equipment). It is only project in the sample that was financed from the regional investment program, so no financing from the SIP is implied. 154 Construction of a wind park near the Village of Grabniki, Novogrudok rayon This is the only commercial project in the sample, therefore it was not financed from the SIP. A business plan was prepared to implement the project. Development of the business plan was required in connection with the commercial nature of the object, as well as to attract a tied Chinese loan through the "Belarusbank". This document is part of the mandatory package of documents to be reviewed when applying for a loan. 155 C: Summary of the Qualitative Information on Sample Projects (in line with responses of interviewed respondents) Questions Project # 1 Project # 2 Project # 3 Project #4 Project # 5 Project # 6 Project # 7 Project # 8 Project # 9 Number of Republican Republican National Belorusian Road R-23 Reconstructio Surgical Construction Construction laboratory for positron pioneer camp State Minsk- n of facilities Department of of wind power of high molecular- emission “Zubryonok” University of Mikashevichi Dnieper-Bug Brest park in voltage power genetic tomography Informatics Canal. Regional Grabniki, line carcinogenesis center and Navigable Oncology Novogrudok “Berezovskay Radioelectroni gateway Centre region a GRES- cs hydro N 8 Ross” "Zaluzye" Rationale for the project demonstrates Yes Yes Yes Yes Yes Yes Yes Yes Yes 9 /9 links to relevant government strategies The demand for the project is clearly Yes Yes Yes Yes Yes Yes Yes Yes No 8 /9 explained using statistical evidence Objective(s) and required result(s) of Yes Yes Yes Yes Yes Yes Yes Yes Yes 9 /9 the project is/are clear 137? A number of options for achieving the No No No No Yes No No Yes No 2 /9 objectives were considered? Both technical and non-technical No No No No No No No Yes No 1 /9 options were considered? The consequences of doing nothing No No No No Yes No No No No 1 /9 were also assessed as an option? Capital costs were identified to within Yes Yes Yes Yes Yes Yes Yes Yes No 8 /9 ±10% of contract value? Benefits were clear and quantified? No No No No Yes No No No No 1 /9 137 In the context of respondents’ answers objectives relate to construction of facilities in line with investment idea. The results relate to construction of facilities and putting them into operation. The objectives of construction itself and results of the facility operation are not covered. 156 Recurrent costs of the projects were No No No No Yes No No Yes No 2 /9 identified? The authenticity and accuracy of the N/A N/A N/A N/A N/A N/A N/A Yes N/A 1 /9 identified recurrent costs were independently checked? Schedule for the project is included in Yes Yes Yes Yes Yes Yes Yes Yes Yes 9 /9 the documentation? A standardized procedure based on Yes Yes Yes Yes Yes Yes Yes Yes Yes 9 /9 procedural rules and methodological guidance was used for appraisal? A financial value was estimated? (e.g. No No No No No No No Yes No 0 /9 positive financial NPV or internal rate of return) A positive socio-economic value was No No No No Yes No No Yes No 2 /9 estimated? (e.g. positive economic NPV or economic internal rate of return) The impact of the project on the Yes Yes Yes Yes Yes Yes Yes Yes Yes 9 /9 environment were identified? Environmental mitigation measures Yes Yes Yes Yes Yes Yes Yes Yes Yes 9 /9 were included in the project? There was a project implementation Yes Yes Yes Yes Yes Yes Yes Yes Yes 9 /9 plan? The project documentation was Yes Yes Yes Yes Yes Yes Yes Yes Yes 9 /9 assessed by a body/party independent from the proposing entity? 138 Independent review included broader No No No No Yes No No Yes No 7 /9 aspects of project’s feasibility, 138 Answer for this question relates to state review of the project design documents performed by GlavGosStroiEkspertiza and its subsidiaries in oblasts and in the City of Minsk 157 including social profitability and sustainabitily? Stakeholders in the project were Yes Yes Yes Yes Yes Yes Yes Yes Yes 9 /9 consulted? Risks to the implementation were No No No No Yes No No No No 1 /9 identified with a mitigation plan? The project was selected for financing Yes Yes Yes Yes Yes Yes Yes Yes Yes 9 /9 based on clear objective criteria? The project needed to be significantly No No Yes Yes Yes Yes No No No 4 /9 adjusted or changed during implementation? A report on lessons learned report No No No No No No No No No 0/9 was done? The completion report examined the No No No No No No No No No 0 /9 quality and ‘fitness for purpose’ of the project? An ex-post evaluation review of the No No No No No No No No No 0 /9 extent to which the project achieved its objectives and results was carried out? 158 D: Time (in months) Taken to Complete Key Process Steps Questions Project #1 Project #2 Project #3 Project #4 Project #5 Project #6 Project #7 Project #8 Project #9 Average Time from project idea until completion of 11 8 N/A 140 28 141 6 Н.д 30 142 46 38 26,4 documentation / feasibility study 139 and its submission Time from submission of feasibility study 2 3 N/A 20 6 н\д 1 12 1 6,4 to formal approval Time from formal approval to budgeting 1 1 N/A 24 1 1 0 5 2 4,4 (first day of fiscal year in which project is selected for funds) Time expired from submission to approval Data not Data not Data not Data not Data not Data not Data not Data not Data not - of construction and other enabling permits collected collected collected collected collected collected collected collected collected Time from advertisement of contract to N/A 143 1 N/A 1 N/A N/A 0,5 1,5 1 1,1 receiving bids (procurement) Time from receiving bids to award N/A 1 N/A 1 N/A N/A 0,5 1 2 1,2 Time from award to commencement of N/A 0,5 0,5 0,5 N/A N/A 0,5 0,5 0,5 0,5 work Time from commencement of work to 45 39 N/A 72 70 38 50 11 20 43,1 completion of project Time from completion of the project to 0 0 0 0 0 0 0 0 0 0 commencement of service 139 Detailed project design 140 Design was prepared for each of the stages starting with project idea till nowadays. 141 Time of ‘freezing’ the project after first version of the detailed design (1989) till decision to amend the detailed design and proceed to construction (August 1, 2008) was not taken into consideration 142 Time of ‘freezing’ the project after first version of the detailed design (1989) till decision to amend the detailed design and proceed to construction (September 29, 2006) 143 There was no tender. Contract was concluded based on the decision of the Council of Ministers 159 E: Time and Cost Deviations in Sample Projects Time deviation Cost deviation Estimated Time Time deviation in % Originally estimated cost Latest revised estimated Cost deviations in % of duration of deviation of originally of project (BYR) cost (BYR) originally estimated project (months) (months) estimated duration cost Project #1 38,273,424,000 31,642,352,946 44 0 0 (2006 construction prices) (2006 construction prices) -17% Project #2 36 3 8,3 490,607,198,000 451,197,411,000 -8% Project #3 2,871,294 n\a n\a n\a (2001 construction prices) n\a n\a Project #4 3,439,752,000 3,137,735,000 12 48 400 (1991 construction prices) (1991 construction prices) -9% Project #5 318,256,087,665 389,125,770,700 60 12 20 (prices of March 2015) (current prices of 2016) n\a Project #6 11,959,305 6,855,731 26 10 38 (2006 construction prices) (2006 construction prices) -43 Project #7 30,644,648,000 50,928,551,000 39 11 28 (2006 construction prices) (2006 construction prices) 66% Project #8 12 0 0 31,682,549 USD 22,446,173 USD -29% Project #9 68,169,253,000 67,081,676,000 38 0 0 (2006 construction prices) (2006 construction prices) -0.2% 160 F: Sample Projects Consolidated Responses Project #1 Project #2 Project #3 Project #4 Project #5 Project #6 Project #7 Project #8 Project #9 Republican laboratory Republican positron National pioneer Belorusian State Road R-23 Minsk- Reconstruction of Surgical Department Construction of wind Construction of high for molecular-genetic emission camp “Zubryonok” University of Mikashevichi Dnieper-Bug Canal of Brest Regional power park in voltage power line carcinogenesis tomography center Informatics and facilities. Navigable Oncology Centre Grabniki, “Berezovskaya Radioelectronics gateway N 8 Novogrudok region GRES-Ross” "Zaluzye" Project Profile Screening 1. Was a profile of the project (e.g., project concept note or similar) prepared before a decision was made to proceed to feasibility study and appraisal? No No No No No No No Yes. No 2. What were the contents of the profile? - - - - - - - A technical and - economic capacity assessment of a wind park construction in Novogrudok Raion, Grodno Oblast including an express analysis of the wind capacity 3. Who prepared the project profile? - - - - - - - BelnipiEnergoProm, - commissioned by Grodnoenergo RUE 4. If there was a profile, did it identify any potential for a public-private partnership (BOT, BT, etc.)? No. No. No No No Yes No No No 5. Who made the final decision to proceed to appraisal? MoH. President of the Director of Rector of BSUIR. Ministry of Transport Ministry of Transport Deputy Chairperson Grodnoenergo RUE Brestenergo RUE Republic of Belarus; Zubrionok Camp. and Communications and Communications of the Brest Oblast Order of the Executive Committee President of the Republic of Belarus No. 09/204-1 P22 of January 9, 2012 6. Was the profile, if any, used as a basis for a decision to proceed to appraisal? No No No No No No No Yes No 7. What were the roles, if any, of the Ministry of Economy (MoE) and Ministry of Finance (MOF) in the decision? Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Formal Appraisal Procedures and Guidelines 8. Has a feasibility study or similar in-depth analysis been prepared that goes beyond examination of technical feasibility and estimation of capital costs? No. The project No. The project No. An No. An architectural Yes. Evaluation of No. An architectural No. A construction Yes. The business No. A construction architectural concept architectural concept architectural concept design was economic efficiency concept design was design was developed plan of the design was and construction and construction concept design was developed for the was carried out on the developed for the for the facility Grodnoenergo developed for the designs were prepared designs were developed for the facility (including facility (including (including design and investment project facility (including 161 Project #1 Project #2 Project #3 Project #4 Project #5 Project #6 Project #7 Project #8 Project #9 (including design and prepared (including facility (including design and estimate basis of TKP 45-1.02- design and estimate estimate "Wind Park design and estimate estimate design and estimate design and estimate documentation), 100-2008 documentation), which documentation), Construction at documentation), documentation) that documentation) that documentation), which does not does not provide for a which does not Grabniki, which does not do not provide for a do not provide for a which does not provide for a feasibility study in the provide for a Novogrudok Raion, provide for a technical feasibility technical feasibility provide for a feasibility study in the context of this survey. approved by V.V. feasibility study in the feasibility study in study within the study within the feasibility study in context of this survey. context of this survey.Shaternik, General the context of this context of this meaning of this the context of this Director of survey. research. research. survey. Grodnoenergo RUE on 02.12.2015 and cleared by Belenergo SPA on 20.12.2014 9. If yes, does the scope of the more detailed feasibility study extend to: identification of project alternatives, including the option of doing nothing, demand or market analysis, analysis of economic feasibility (clearly differentiated from financial analysis), financial analysis (clearly differentiated from economic analysis), budgetary analysis – net impact on State budget over project life, risk analysis, distributional analysis, looking at the distribution of impacts – both good and bad, and including environmental impacts - on key stakeholders, analysis of capacities for implementing the project, analysis of operational sustainability of the project No No No No Yes. The investment No No Yes. The project No justification was business plan and its developed in financial analysis accordance with 457- were developed in 2012 (02191) “The accordance with the procedure for the Rules of development, Development of coordination, approval Investment Project and investment Business Plans justification for the approved by the construction of roads”. Ministry of Economy The economic Resolution No. 158 of feasibility study was 31.08.2005. An conducted, the economic feasibility effectiveness of the study and the project project was evaluated, performance and the analysis of assessment were uncertainty and risks carried out. The was carried out. impact assessment was based on the Grodnoenergo savings of fuel and energy in power and heat generation and CO2 emission reduction after the project (environmental impact). 10. If the project has been identified as having potential for a public-private partnership, have the advantages/disadvantages of PPP over traditional procurement been assessed? Not applicable. Not applicable. Not applicable. Not applicable. Not applicable. Not applicable. Not applicable. No. Not applicable. 162 Project #1 Project #2 Project #3 Project #4 Project #5 Project #6 Project #7 Project #8 Project #9 11. What methodological guidance [manuals], if any, has been followed in preparing the feasibility study? Not applicable. The Not applicable. The Not applicable. The Not applicable. The The investment Not applicable. The Not applicable. The The project business Not applicable. The Project feasibility Project feasibility Project feasibility Project feasibility justification was Project feasibility Project feasibility plan and its financial Project feasibility study was not carried study was not study was not study was not carried developed in study was not carried study was not carried analysis were study was not out carried out carried out out accordance with TKP out out developed in carried out 457-2012 (02191) “The accordance with the procedure for the Rules of development, Development of coordination, approval Investment Project and investment Business Plans justification for the approved by the construction of roads” Ministry of Economy “Methods for Resolution No. 158 of determining the 31.08.2005. efficiency of investment in construction, reconstruction, repair and maintenance of roads”, agreed with the Ministry of Economy and approved by the Order of Belavtodor Department of the Ministry of Transport and Communications No. 209 dated October 21, 2005. 12. Has the feasibility of the project been re-examined following detailed design and/or before contract signature Not applicable. The Not applicable. The Not applicable. The Not applicable. The Yes. As part of the Not applicable. The Not applicable. The Yes. A part of an Not applicable. The Project feasibility Project feasibility Project feasibility Project feasibility revisions, the Project feasibility Project feasibility architectural concept Project feasibility study was not carried study was not study was not study was not carried investment justification. study was not carried study was not carried design of study was not out carried out carried out out out out BelEnergoSetProyekt carried out RUE. 13. Have the findings of the feasibility study (or its equivalent) been taken into account in the decision to proceed with the project? Not applicable. The Not applicable. The Not applicable. The Not applicable. The Yes. Positive Not applicable. The Not applicable. The Yes. A positive Not applicable. The Project feasibility Project feasibility Project feasibility Project feasibility conclusions of state Project feasibility Project feasibility opinion of Project feasibility study was not carried study was not study was not study was not carried environmental and non- study was not carried study was not carried GlavGosStroyExperti study was not out carried out carried out out departmental expert out out za No. 827-17/14 of carried out reviews: 25.02.2015. The conclusion of the state Project was environmental expert recommended for review No. 9 dated approval. January 28, 2014; conclusion of the state non-departmental expert 163 Project #1 Project #2 Project #3 Project #4 Project #5 Project #6 Project #7 Project #8 Project #9 review No. 385-17/13 dated September 23, 2013; conclusions on the revisions: No. 358- 17/15 dated July 24, 2015 and No. 320-17/15 dated September 25, 2015. 14. Who was responsible for making the final decision to proceed to next stage - within the organization/agency investing in the project? outside the organization/agency investing in the project, if subordinated to a higher level organization? Not applicable. The Not applicable. The Not applicable. The Not applicable. The RUE Minskavtodor- Not applicable. The Not applicable. The Grodnoenergo RUE. Not applicable. The Project feasibility Project feasibility Project feasibility Project feasibility Center. Project feasibility Project feasibility Project feasibility study was not carried study was not study was not study was not carried study was not carried study was not carried study was not out carried out carried out out out out carried out Independent Review of Appraisal 15. Were the methods, data sources, and results of the project feasibility study (or equivalent) subject to independent review and confirmation by an entity independent of the agency investing in the project? Yes. By state expertise Yes. By state Yes. By state Yes. By state Yes. By state expertise Yes. By state expertise Yes. By state Yes. By state Yes. By state authorities expertise authorities expertise authorities expertise authorities authorities authorities expertise authorities expertise authorities expertise authorities 16. If there was a review, was it: largely analytical, involving scrutiny of data, methods and results; largely concerned with compliance; or some combination of the two? Mostly concerned with Mostly concerned Mostly concerned Mostly concerned Combination of the two Mostly concerned with Mostly concerned Yes. A combination Mostly concerned safety and technical with safety and with safety and with safety and safety and technical with safety and of both approaches. with safety and compliance technical technical technical compliance compliance technical compliance technical compliance compliance compliance 17. If there was a review, were the results taken into account in the project as finally approved? Yes. Yes. Yes. Yes. Yes. Yes. Yes. Yes. Yes. Project Selection and Budgeting 18. Was the approval of the project’s feasibility checked before budget funding was appropriated or other funding approved? Not applicable. The Not applicable. The Not applicable. The Not applicable. The Yes, by RUE Not applicable. The Yes. The Brest Oblast The business plan was Not applicable. The Ministry of Economy Ministry of Project feasibility Project feasibility Minskavtodor-Center Project feasibility Executive Committee reviewed by Project feasibility checked availability of Economy checked study was not study was not carried and the Ministry of study was not carried approved the design Belarusbank within study was not design/cost estimate availability of carried out. out. Transport and out. and estimate the documentation carried out. documentation. This design/cost estimate Communications. documentation package n in the documentation did not documentation. This including subsequent process of credit include an investment documentation did adjustments decision-making justification/feasibility not include an study investment justification/feasibili ty study 19. Was the project’s readiness for implementation verified before budget funding was appropriated or other funding approved? No No Yes. An Yes. An architectural Yes. An architectural Yes. An architectural Not applicable Yes. Belarusbank Yes. Design and architectural concept design was concept design was concept design was took into account estimate concept design was developed for the developed for the developed for the availability of design documentation was developed for the project (including project. Availability of project (including and estimate developed for the project (including design and estimate the document was design and estimate documentation, project. Availability 164 Project #1 Project #2 Project #3 Project #4 Project #5 Project #6 Project #7 Project #8 Project #9 design and estimate documentation). checked in the process documentation). construction permits, of the document was documentation). Availability of the of public funds Availability of the EIA completion checked during Availability fo these document was allocation from the document was checked public funds documents was checked in the State Investment in the process of allocation from the inspected in the process of public Program. public funds allocation State Investment process of public funds allocation from from the State Program. funds allocation the State Investment Investment Program. from the State Program. Investment Program. 20. Are the criteria used when deciding to include the project in the budget clear and transparent? Yes. The criteria were Yes. The criteria Yes. Yes. Yes. Yes. Yes. The facility is Not applicable. The Yes. set forth in the State were set forth in the socially significant Project was not Investment Program State Investment financed from the Development, Program public budget Approval and Progress Development, Reporting Procedure Approval and approved by Edict of Progress Reporting the President of the Procedure approved Republic of Belarus by Edict of the No. 299 of May 5, President of the 2006. Republic of Belarus No. 299 of May 5, 2006. 21. Was the approved budget allocated to the project adequate for technically optimal implementation? Yes. Yes. Yes. However, the Yes. However, the Yes. However, the Yes. However, the Yes. However, the Yes Yes project budget was project budget was project budget was project budget was project budget was adjusted according adjusted according to adjusted according to adjusted according to adjusted according to to subsequent subsequent subsequent adjustments. subsequent subsequent adjustments. adjustments. adjustments. adjustments. 22. Is there any evidence that post-completion operating and maintenance costs were explicitly taken into account when the funding decision was made? No No No evidence was No evidence was Yes, in the investment No. No evidence was No. No evidence was Yes. The Project No provided. provided. justification, operating provided. provided. business plan costs for repairs and maintenance are calculated for the twenty-year calculation term. Project Implementation Arrangements 23. Is there any evidence that formal guidelines in project implementation procedures and project management are being/have been published and followed? Not applicable Not applicable Yes. Yes. Yes. Yes. Yes Not applicable. No 24. Is there a clear hierarchy of responsibilities for delivering the project on time, to budget and to specification? Yes. RUE Yes. RUE Yes. Yes. BSUIR acted as Yes. Minskavtodor- Information not Yes, the Yes. S.V. No "Construction "Construction the project owner; the Center RUE acted as the available responsibility for Skovorodtsev, Deputy Directorate of the Directorate of the BSU Ongoing project owner. timely General Director, 165 Project #1 Project #2 Project #3 Project #4 Project #5 Project #6 Project #7 Project #8 Project #9 Ministry of Health of Ministry of Health Construction implementation is Grodnoenergo RUE the Republic of of the Republic of Directorate acted as borne by the V.V. Ryzhikov, Belarus" acts as the Belarus" acts as the the developer agent customer, for the Capital Construction construction project construction project (performing the budget – Committee Department Head, owner and customer owner and customer functions of the for Architecture and Grodnoenergo RUE supervisor over supervisor over developer and Construction of the V.A. Vasko, construction. It construction. It customer supervisor Regional Executive Logistical Support comprises the comprises the over the Committee, Main Unit Head, following offices:- following offices:- construction), Financial Department Grodnoenergo RUE Accounting/Reporting Accounting/Reporti Stroitelny Trest No. 7 of the Regional L.G. Raik, Financial Office- Logistics and ng Office- Logistics – as the prime Executive Committee. and Economic Special Services and Special Services contractor. Department Head, Office- Technical Office- Technical Grodnoenergo RUE Supervision Office- Supervision Office- Industrial Engineering Industrial Office Engineering Office 25. Is there a steering committee or other similar body for the project implementation? Yes. RUE Yes. RUE Yes. Yes. The BSU Yes. Minskavtodor- Yes. Yes. Individual Yes. A contract for No "Construction "Construction Ongoing Construction Center RUE appoints Dneprobugvodput acts assignment of engineering services Directorate of the Directorate of the Directorate acts as the personnel in charge of as the project owner personnel in charge of was awarded to the Ministry of Health of Ministry of Health project owner and technical supervision and customer overall construction Novogrudok Capital the Republic of of the Republic of customer supervision and other construction supervisor of the supervision, power Construction Belarus" acts as the Belarus" acts as the over the construction. aspects. construction. supply Department. construction project construction project owner and customer owner and customer supervisor over supervisor over construction. construction. 26. Was a detailed implementation plan, including financial plan and project milestones, prepared before the project commenced? No No No No No No Yes. No flaws were Yes. A business plan. No identified 27. Was a procurement plan prepared before the project commenced? No No No No No No Yes Yes. A business plan. No 28. Are/were movements in total project costs regularly updated and tracked against the originally approved budget? Yes. RUE Yes. RUE Yes. Yes. Yes. Yes. Yes Yes No "Construction "Construction Directorate of the Directorate of the Ministry of Health of Ministry of Health the Republic of of the Republic of Belarus" submits Belarus" submits monthly reports to the monthly reports to MoH the MoH 29. Do/did the project management team prepare regular forecasts of in-year funding requirements for onward transmission to the Ministry of Finance? Yes. RUE Yes. RUE Yes. 12 months Yes. Monthly Yes. Monthly Yes. Monthly Yes Not applicable. The No "Construction "Construction Project is commercial, Directorate of the Directorate of the 166 Project #1 Project #2 Project #3 Project #4 Project #5 Project #6 Project #7 Project #8 Project #9 Ministry of Health of Ministry of Health without government the Republic of of the Republic of financing. Belarus", on a monthly Belarus", on a basis. monthly basis. 30. Have there been any problems concerning the reliability of the flow of funds during the budget year? No No No No No No No Not applicable. No 31. Has there ever been a shortfall in funding at the end of the budget year compared to the initial budget allocation? No No No No No No No No. No 32. Has there been any arrears accumulated during project implementation? No No No No No No No No. No 33. Over the implementation period has the amount budgeted for the project ever been below the amount initially planned for technically optimal implementation? No No No No No No No No. No Project Monitoring and Adjustment 34. Have regular progress reports been prepared? Yes. 1-page Yes. 1-page Yes. 1-page Yes. 1-page Yes. 1-page Yes. 1-page Yes. Quarterly reports Yes. Yes. Weekly at disbursement report disbursement report disbursement report disbursement report disbursement report and disbursement report to the Committee of Belenergo SPA and construction scope and construction and scope of and scope of scope of construction in and scope of Architecture and scope construction in construction in relation to the State construction in relation Construction of the relation to the State relation to the State Investment Program to the State Investment Brest Oblast Investment Program Investment Program funds. Program funds. Executive Committee funds. funds. 35. If reports are prepared, do they cover both financial and physical progress? Yes. See Cl.34 Yes. See Cl.34 Yes. See Cl.34 Yes. See Cl.34 Yes. See Cl.34 Yes. See Cl.34 Yes. % of Yes. Yes (both factors) completion/milestone s/both factors 36. If reports are prepared, do they include explanations for variances between plan and outturn? Yes. A summary of Yes. A summary of Yes. % of Yes. % of Yes. % of Yes. % of Yes Yes. No discrepancies and discrepancies and completion/milesto completion/milestone completion/milestones/b completion/milestones recommendations on recommendations on nes/both factors s/both factors oth factors /both factors solution of identified solution of identified problems. problems. 37. Have the provisions of the legislation in force been followed as far as concerns reporting, supervision/inspection, assessments and adjustment? Yes Yes Yes. Yes. Yes. Yes. Yes Yes. There were no deviations 38. Have there been any significant adjustments to project scope, specification, costs or timing during implementation? Yes. Within 10% of Yes. Within 10% of Yes. Yes. Yes. No information is Yes. The project was No. No the cost the cost available. subject to substantial adjustments in view of the factors described in Cl. 39 39. If there have been significant adjustments, to what extent could these adjustments have been foreseen by better planning and to what extent were they due to unforeseeable factors? Not identified Not identified Yes. The project Yes. The project was Yes. The project was No information is In view of 2 factors: No. – was subject to subject to adjustments subject to adjustments available. i) construction adjustments due to due to the factors due to the factors suspension in 1989- described in Cl.40. described in Cl.40. 2006; ii) increased 167 Project #1 Project #2 Project #3 Project #4 Project #5 Project #6 Project #7 Project #8 Project #9 the factors requirements to the described in Cl.40. facility of the end user – the Brest Oblast Cancer Screening Center, that where not taken into account during the design and estimate development phase. 40. Have there been any in-depth reviews of the justification for the project during implementation? No No In view of the 2 In view of the 2 Adjustments were made No information is Not applicable due to No. No factors: i) factors: i) in view of design available. absence of a construction construction concepts arising in in feasibility study. suspension in 1988- suspension in 1989- the process of 2006; ii) division of 2002; ii) construction reconstruction. construction into 4 division into two launch complexes. launch complexes; iii) increased requirements that were not taken into account at the architectural concept design development phase in 2007. Project Completion 41. Was there a formal acceptance that the project had been completed to specification and that the asset created by the project was fit for purpose? Yes. Certificate of Yes. Certificate of Yes. Certificate of Yes. Certificate of Yes. Finished Yes. No information Yes. Certificate of Yes. Grodnoenergo Yes. Certificate of acceptance of acceptance of acceptance of acceptance of Reconstruction Project about the name, date acceptance of Order № 850 of acceptance 28.08.2015 issued by 29.09.2015 issued 17.04.2013 18.01.2017 Acceptance Report of and organization 31.12.2014 16.06.2016 approved approved by RUE "Construction by RUE 03.11.2016 responsible for the a certificate of Brestenergo Order Directorate of the "Construction occupancy permit acceptance of the No. 76 of Ministry of Health of Directorate of the certificate is available project on wind park 30.01.2015 the Republic of Ministry of Health construction at Belarus" and of the Republic of Grabniki, Compliance Statement Belarus" Novogrudok Raion of 26.08.2015 issued by RUE "Construction Directorate of the Ministry of Health of the Republic of Belarus" 42. Has the asset subsequently proved to be fit for purpose Yes. Yes. Yes Yes Yes Yes Yes Yes Yes 43. Was there a formal hand-over of responsibility for ongoing operation and maintenance of the newly created asset? 168 Project #1 Project #2 Project #3 Project #4 Project #5 Project #6 Project #7 Project #8 Project #9 Yes. 2015 order of the Yes. Order of the Yes. Yes. Yes. Yes. No information Yes. Certificate of Yes. Grodnoenergo Yes. Certificate of Minister of Health on Minister of Health about the name, date construction cost Order № 850 of acceptance transferring fixed asset on transferring fixed and organization transfer from the 16.06.2016 approved by titles to RARCOMR asset titles to responsible for the Brest City Capital Brestenergo Order RARCOMR, No. transfer certificate and Construction No. 76 of 288 of 23.03.2015 the organization to Department to the 30.01.2015 which the asset was Brest Oblast Cancer transferred is Screening Center of available. 27.02.2015 44. On completion, were the capital assets created by the project added to an asset registry? Yes. RARCOMR. Yes Yes. Not applicable. Not applicable. Yes. Information Yes. Brest Oblast Yes. Yes Asset records are BSUIR acted as both Minskavtodor-Center about the name and the Cancer Screening updated in compliance the developer/project RUE acted as both the asset registry holder, Center. with requirements for owner and operator. developer/project owner the nature of registry accounting and and operator. data including recording. updating frequency and whether the registry contains updates on the asset condition is not available 45. Was a formal project completion report prepared when the project was finished? No Yes. RARCOMR. No. No. No. No information is Yes Yes. A report No Asset records are available supporting the updated in estimated project compliance with implementation cost requirements for was prepared and accounting and submitted to the recording. Grodno Oblast Executive Committee. 46. Has there been any sort of systematic evaluation of the impact of the project once operating? No. Not applicable No. Not applicable No. No. No. No information is Not available Yes No due to the recent due to the recent available closure of the Project. completion of the Project. 169