Ukraine’s Strategic Investment Council Needs Its Own Professional Staff to Make It Truly Operational

All stakeholders – from bilateral donors and international financial institutions to non-governmental organizations  and territorial communities – look at the recently adopted Roadmap for Reforming the Public Investment Management as the reliable gauge to set up priorities in a non-politicized manner  and an antidote for corruption. Most also hope it would replace the notorious Fund of Regional Development – except, of course, those vested interests who milked that budget program for years to finance their “pork” and pet projects (e.g. stadium in Kivertsi), and white elephants, such as Chyhyryn nuclear power plant.  

The new framework introduces several essential components of a contemporary system, which is championed by international institutions and bolstered by the practices of nations that exemplify good governance. The document envisages a Strategic Investment Council led by the prime minister to keep capital spending in line with political priorities, a complete update of all the legally prescribed methodologies to create a level playing field in the competition for public funding, a single project pipeline to make sure that all proposals have to enter the same competition, an overarching IT system to facilitate monitoring and financing of the projects to avoid bottlenecks, and a training system for civil servants to increase the quality of project design including the related impact assessments. These all are clearly necessary, but certainly not sufficient preconditions for a successful reconstruction program expected to last for about a decade, to eat up public funds equivalent to several full years of GDP but allocated among thousands of individual projects.

Think about the fiscal impact assessment. Estimating how a particular project or policy measure might influence the budget balance and government debt over the next 3, 5, or even 30 years can be quite a complicated issue. Experts have to consider not only prevailing laws and regulations as well as micro- and macroeconomic expectations, but in most cases knowledge from other sciences ranging from engineering to medicine (to be acquired from field experts). The presentation format for the final results submitted to the government must be standardized, but the appropriate scientific method of impact assessment cannot be legislated for all possible circumstances. Experts have to have freedom to apply their knowledge (not personal preferences), coupled with personal responsibility. Similarly, to account for changing circumstances during implementation, project managers should have some degree of freedom in choosing the best way to achieve policy goals under the new conditions.

A training program designed to equip civil servants with the skills to be effective public investment managers—rather than just administrators—is certainly a vital step, but probably too little too late. There aren’t many experienced public sector managers and most of them grew up in the culture of the past. Many of them are quite unlikely to change their managerial standards, including their legalistic attitude and the tacit acceptance to some degree of corruption as a necessary lubricant for the machine to run. Young professionals, including those working for local governments, whose managerial habits might be easier to shape will learn a lot but still not become experienced PIM gurus by the end of a 120-hour distance learning course. Therefore, getting expertise from the private sector is necessary.

For this, I propose two additional bricks to the edifice of PIM for the coming years: to operationalize the work of the Strategic Investment Council with supporting advisory agencies woven into the fabric of civil service. For the sake of this text below, let’s call these two agencies the Government Economist Service (GES) and Public Investment Management Advisory Service (PIMAS). The first one is not a new idea, somewhat similar agencies are working in the UK, in Ireland, Canada, and Australia. The second one is a bit more novel in the sense that in the UK there is a private sector service offered by KPMG covering only a part of the topics I consider essential.

In most countries, it is a major challenge for government agencies to attract and retain well-trained economists who are able to produce high-quality fiscal impact assessments and other analytical papers under time pressure. When their number is very limited, it is better to pool them (legally if not physically) into one agency so that they can be deployed rapidly whenever and wherever there is an urgent need for help. They could work together with the employees of the agency sponsoring the proposal, so the field-specific knowledge would be provided automatically, while the GES-delegate would bring in the know-how of impact assessment and cost-benefit analysis, including quantitative methods and presentational skills. Moreover, while working together, knowledge from the GES will quite naturally flow into the partner agencies, probably in a more efficient way than in the frame of classroom teaching. If needed, international technical assistance could also be easily channeled via a single “window” into the whole of government. GES would simply be a better substitute for the omniscient methodologies.

If GES assists in the preparation of investment projects, then PIMAS’s role is in the implementation phase. The PIMAS, or more precisely the expert dedicated to the case, would listen to the manager who initiated the advisory service, help him/her to formulate the problem, separate the professional part of the problem from the political one, propose possible solutions highlighting their pros and cons, preconditions and risks, and eventually formulate the paper on the political part to be tabled at the government for political decisions or advise about the necessity of stakeholder consultations.

PIMAS would be a strictly advisory body, i.e. it would not take responsibility for any decision to be made by the manager of the project. The manager will bear full responsibility for the project. However, by thinking through the problem together, the manager would get from PIMAS arguments to defend his/her decisions should they be questioned by either the State Audit Office or politicians. The managers could even ask the PIMAS to put on paper their advice so that in case of any ex-post conflict with third parties, the manager cannot be accused of negligence or malfeasance. 

For this service, PIMAS has to be staffed with very experienced, well communicating, and morally unquestionable gurus. If Ukraine has five such persons, they should not be given any specific project, however important those are, but they should strengthen PIMAS. As there are many different types of problems, from technical through legal to HR, PIMAS also has to have a diverse expert portfolio. Both for capacity enhancement and quality assurance purposes it would be good if international partners could delegate experienced (possibly even retired) managers and coaches as resident advisors. Foreigners could help maintain the integrity of the organization, to some extent protect it from eventual political and lobby interference, and, of course, transfer knowledge related to a new managerial culture.

While the economist service might look like a small ornament, the management advisory service would mean a much more fundamental change of culture.

First, it would empower managers to take charge of professional decisions rather than escalating every issue to higher-ups who may lack the time to fully consider the implications. By this, practice would draw the line separating political and professional decisions over time. 

To give an example, in the case of any major project, at least 12 months elapse between the submission of the government’s budget proposal that is based on the feasibility study and cost estimate of the project and the most optimistic time of contracting around next autumn. During this time, a lot of external shocks may affect both the microenvironment of the project and the macroeconomic parameters in general. Monetary indicators like the rate of inflation, the exchange rate, or the interest rate may significantly deviate from their planned value, but a shortage of labor force with the necessary skills might turn out to be unexpectedly high as well (possibly due to other public investment projects that were supposed to be finished by the time when the new project should have started). Under such circumstances, it is impossible to stick to the originally planned price, quality, and deadline parameters at once. The question is, in which dimensions and up to what point the manager should be able to make decisions about the best mix of deviations, and when it is necessary to go back to the government or the parliament for a new political mandate, which would solve the old problems at the price of opening the door for new ones.

A very similar situation can arise when the budget law and the government decision underlying the proposal aren’t specific enough about the time-quality-price triangle, and the implementing manager needs to make some decisions. What the laws and government decisions hardly ever talk about are the subtleties of the contract, which will provide the right or wrong incentives to the suppliers in the dimensions of time, quality, and price. The right balance in this triangle and its enforcement via efficient contracts is one of the most important managerial skills. PIMAS would be in a position to publish notes about good practices in this aspect of public investment management.

Second, it would significantly accelerate the activation of a new generation of managers. As in the case of cars in some countries, 17-year-old newly licensed drivers can drive if another person with a “mature” driving license is sitting beside them; relatively young managers could be trusted with more complex or risky projects because they have fast and easy access to seniors.

Third, if the system works well, PIMAS will soon become a knowledge hub and a prime source of proposals (with very little risk of embedded self-interest) about how to adapt the regulatory framework or the strategic investment plan to the changing or just unforeseen needs.

When talking about advisory services to managers of public investment projects, a natural question is, “why increase the number of public employees again”? Why not contract some well-established private sector consulting company like the big4 or similar? (I’m sure they would happily apply for such a role.) I have two arguments for this. First, it is very difficult to predict the demand for this service. One would hope for a big demand, implying that managers are seeking external help and knowledge, and double-checking their first reactions in order to enhance the quality of their own work, but even with the best hopes, this will start with a learning curve. Private companies will certainly charge a visible price for the capacity “on standby”. However, this is the less important argument. The more important one is to create a new, supportive climate in which public sector managers are encouraged to talk openly about their problems, dilemmas, without being afraid of ex-post accusations about wasting public money for the high hourly fee of private consultants or disclosing information to market participants who might want to misuse it later or might already be somehow involved in the project at hand. PIMAS employees should not necessarily be Ukrainian citizens, they should have full access to information and internationally acceptable remuneration.

Currently, there are units across three ministries whose areas of responsibility partially overlap with the functions of the proposed new agencies. The Ministry of Finance (MoF), the Ministry for Development of Economy and Trade (MoDET), and the Ministry of Infrastructure (MoInfr) all have some capacity related to public investment management. The core competences are as follows: 

• the Ministry of Finance, having a Public Investment Management unit, is responsible for the role of public investments in the broader context of fiscal policy both on an annual and a medium-term basis. This means that funds available for investment (including international aid and credit) are determined by the MoF.
• the MoDET  (supervising Ukraine Invest), is responsible for the development of the real economy, i.e. its role is (or at least used to be) to attract foreign direct investment and decide on the key projects where the funds allocated by the MoF should be invested. In the future, this latter function will be moved to the new Strategic Investment Council. Under the MoDET there was a separate agency called “State Agency for Investment and National Project Management”, but the most recent news on its webpage is from 2010; 
• the Ministry of Infrastructure (supervising State Agency on Infrastructure Development, Ukrzaliznytsia, etc.) is responsible for the implementation of the projects in the area of public transport and communication infrastructure while permanently monitoring the status of the related assets in order to determine any need for future investment.

When designing the optimum allocation of responsibilities and human resources in the new settings, we have to take into account the following aspects:

• There should be no unnecessary duplication of functions, but still, the MoF has to be able to challenge the methodology of the cost estimates produced by other agencies, i.e. the agency that developed a project should justify the choice of methodology which it used for cost estimates and prove to the Ministry of Finance that this methodology was optimal; 
• The supervising ministry itself has to have some people with the skills necessary to assess the performance of its agency, yet, it should not interfere with the daily professional work of the agency.
• The agencies as employers have to be able to attract at least well-trained junior people from the private sector. On the one hand, this is an opportunity for the supervising ministries to become highly competent and influential in one of their core activities. On the other hand, this is a threat to „lose” their best people from similar other areas (because they might also move to the new agencies). The overall effect is clearly positive in the long run, but it has to be positive even on a relatively short horizon.
• There is a chance that sometime in the future, a new ministry for reconstruction will be set up, or some other significant change will take place in the structure of the government. The two independent agencies have to be internally “immune” to such changes.

On the whole the best option seems to be that GES goes under the MoF and the PIMAS under the MoDET. As both agencies should be dealing with public investment in all possible areas, there is no point in allocating them to the MoInfr. At the same time, the agencies should have a rather high degree of independence: the reasons for dismissal of an agency’s head or reorganization of agencies should be few and clearly specified by the law.

If GES is under the MoF, it can deal with all sorts of quantitative analytical work, not just the infrastructure projects proposed by the MoDET. Moreover, it can function as a “think tank” for the Strategic Investment Council (SIC), yet its service can be offered to the MoDET, while MoF can utilize GES to contest any calculations submitted to the government that were done without GES’s involvement. The PIM unit of the MoF can be merged into GES but the MoF will not have to be afraid of losing skilled experts, because they will remain under the same umbrella and continue dealing with the same problems, just at a higher quality.

MoDET and other spending ministries will not have the opportunity to interfere with the daily work of GES in order to produce biased estimates, while they still retain the right and responsibility for individual project proposals.

If PIMAS is under the MoDET, it can deal with the implementation of all sorts of projects, not just infrastructure projects under the supervision of MoInfr. Second, it can channel back practical experiences to both the MoDET and the SIC. As described above, managers implementing specific projects can look at PIMAS as a service and be more open with the experts of the PIMAS, because PIMAS will not have any legal power over the managers, as large projects are typically implemented by other ministries such as infrastructure, energy, agriculture, etc.

Moreover, the MoDET doesn’t need to worry about losing skilled experts, as they typically don’t have such individuals on their team at the moment. MoInfr and other implementing ministries will not have the opportunity to interfere with the daily work of PIMAS in order to divert funds towards suboptimal (potentially corrupt) channels, while they still retain the right and responsibility for the implementation of individual projects.

By establishing a Government Economist Service along with a Public Investment Management Advisory Service, Ukraine could greatly improve its prospects for a successful, sustainable, and inclusive reconstruction. This approach would not only help recover what was lost but also lay the groundwork for a stronger and more prosperous future.