This chapter summarises the recommendations for Bulgaria to improve the effectiveness and efficiency of its public investment processes, focusing on infrastructure planning, investment and delivery. The recommendations cover the following topics: long-term strategic vision and planning, coordination across sectors and between levels of government, project selection, prioritisation and appraisal processes, capital budgeting and fiscal sustainability, value for money for public and private investment in infrastructure and integrating stakeholder engagement into planning and decision making.
Public Investment in Bulgaria
Planning and Delivering Infrastructure
OECD Public Governance Reviews
1. Recommendations
Abstract
This section sets out the OECD’s recommendations to strengthen the public sector’s capacity to plan and deliver more efficient and effective public investments. These recommendations are based on the findings described in chapters 2 – 7.
1.1. Long-term strategic vision and planning
Adopt a methodology that gives Bulgaria a consistent, best-practice approach for identifying public investments that will be most effective at addressing genuine public needs. The Five Case Model (see Box 2.1) is a good template, noting that it will need refining for the Bulgarian context. OECD will provide more guidance on this as part of the training manual on project selection (activity 2.2).
At the national and subnational levels, monitor whether key performance indicators (KPIs) set in strategic direction, such as Bulgaria2030 and other strategic direction documents, are reflected in spatial plans, cost benefit analysis, programme plans and project plans. While the KPIs should become more specific further down the planning hierarchy, there should be a clear visibility of a KPI set in a national strategy down to the project level, and all stages in between. This change also requires putting in place appropriate sanctions or disincentives for when KPIs are not met.
External audits of all national-funded projects must include checks of whether projects are meeting their KPIs, with the results made publicly available. If alignment with KPIs cannot be demonstrated immediately, the responsible line ministry, delivery body or municipality should be set a deadline for reporting back on how the project is achieving its KPIs. The process should follow a similar administrative procedure used by the European Commission and Executive Agency for the Audit of European Union Funds.
Ensure the actions relating to public investment in the National Climate Change Adaptation Strategy and Action Plan are accompanied with more detailed actions that are specific, measurable, achievable, realistic and timebound (SMART). This will ensure infrastructure practitioners know precisely what is required to deliver more climate-resilient infrastructure.
Ensure that actions to reduce carbon emissions stated in the Integrated Energy and Climate Plan 2021 – 2030 and the Integrated Transport Strategy for the period until 2030 are also SMART.
1.2. Coordination across sectors and between levels of government
Currently, one of the European Commission’s criteria for funding projects up to five years is that they are included in relevant spatial plans. The national government should adopt this policy, applying it to all state-funded projects at the national and sub-national levels, assuming those projects also meet all relevant quality control and assurance requirements. Committing funds to projects shown in spatial plans provides a visible, credible and reliable pipeline of future investments.
When auditing state-funded projects, confirm whether the relevant project is included in all relevant land-planning instruments, such as general spatial plans, detailed spatial plans, integrated territorial development strategies and municipal integrated development plans under the Regional Development Act, Spatial Development Act and other legislation. The responsible national-level body should adopt the administrative procedures used by the European Commission and Executive Agency for the Audit of European Union Funds, which they use to monitor and enforce similar requirements. The national-level body responsible for the audit should also make the results made publicly available.
Reform the Regional Development Act so that municipalities, when preparing municipal integrated development plans (MIDP), must consult with:
relevant line ministries on economic and social considerations, in addition to environmental and cultural heritage considerations, which is currently required
all relevant ministries when preparing the first draft of the MIDP, as well as after a first draft has been developed, which is the current requirement
directly-affected property owners, communities, non-governmental organisations and private organisations that represent environmental, social and economic interests.
Direct a suitable line ministry to review and report back on new reforms needed at the national and sub-national levels that would enable and encourage line ministries, delivery bodies and municipalities to enter new arrangements to share services, either vertically or horizontally. The review should include any incentives the national government can create that would encourage more sharing of services, such as making co-funding available for infrastructure delivery, operations and maintenance that have cross-institutional governance arrangements. The review should draw from lessons learned from previous efforts to create inter-municipal cooperation in waste and water management.
Note: there are additional recommendations relevant to coordination across sectors in the capital budgeting and fiscal sustainability section below.
1.3. Project selection, prioritisation and appraisal processes
Create a formal requirement for ministries, delivery bodies and municipalities to follow a single, consistent project selection methodology, which also captures wider economic benefits and supported by other project selection tools, such as multi-criteria assessment. The methodology should be required for all projects, including resilience projects. The methodology must include regular reviews to ensure it is being implemented properly and that objectives are being met at key stages of the lifecycle. The project selection methodology should replace all existing criteria that do not establish public value, such as “state of urgency, readiness, compliance with estimated budget ceilings”.
All investments valued above EUR 1 million in capital expenditure must follow all steps of the Guide to Risk Management and Project Selection and Appraisal, provided by the OECD under activity 2.2. Because project selection can be a resource-intensive exercise, the degree of information-gathering and analysis needed when following these steps needs to be proportionate to the scale and risk of the proposed investment. The authorities responsible for approving expenditure will need to judge whether the steps set out in the manual have been adequately meet, according to the scale and risk. The risk heat map in Figure 1.2 below should be used to determine the appropriate level of proportionality.
Establish a centre of excellence that can promote and oversee the implementation of the mandated project selection methodology described above. The centre of excellence would develop and deliver training and guidance for line ministries, delivery bodies and municipalities and report on compliance with project selection requirements. We recommend the centre of excellence is housed in the MoF, given it already provides some guidance to line ministries on project selection.
Audits of all state-funded projects must include checks of whether the mandated project selection methodology described above is being properly applied and has demonstrated that the project in question will generate sufficient net benefits to justify its investment. The responsible national-level body should adopt the administrative procedures used by the European Commission and Executive Agency for the Audit of European Union Funds, which audits cost benefit analysis processes for projects that generate revenue. The responsible national-level body should also make the results publicly available.
1.4. Capital budgeting and fiscal sustainability
As part of capital budgeting and project selection processes, line ministries, delivery bodies and municipalities need to demonstrate the full estimated life-cycle costs of a project across the construction, operations, maintenance phases and, when relevant, the decommissioning phase.
Life-cycle costs should include:
up-front costs for constructing and/or purchasing a new asset or related resources, such as land;
preparatory costs related to undertaking the project, such as economic analysis, feasibility studies and obtaining environmental approvals;
costs incurred to operate the service (such as service payments, lease payments, personnel costs which would not otherwise be incurred);
expenditure required across the lifecycle for maintenance and renewals;
Life-cycle costs do not include:
depreciation (should be included in the capital cost, so would be double-counted if included);
costs that would be incurred regardless of the investment selected, such as existing corporate overheads;
inflation over the investment cycle (cash flows and discount rates in real, not nominal terms);
value-added tax.
The authorities should ensure that projects which are selected for implementation are not only providing value for money but are affordable within a multi-annual capital framework. In this regard the following should be noted:
Capital budgeting requires that all investment projects be subject not only to value for money considerations but also financial appraisal, where the primary focus is on affordability and impact on the public finances. This is different to a value for money focus because there is no point in pursuing a worthy project if it cannot be paid for.
Good practice requires capital allocations to be made on a multi-annual basis, so that ministries can undertake proper medium-term planning for the cost-effective delivery of investment projects. To create greater certainty regarding the funding of projects, the authorities should introduce reforms that facilitate a genuine multi-annual approach to capital budgeting rather than the annual approach that applies currently. Accordingly, the MoF must ensure that multi-annual estimates for the costs of projects are robust and credible. As many capital projects can take many years to complete, the multi-annual approach should encompass a five-year framework for capital expenditure.
There should be safeguards against cost over-runs. Therefore, even where there is agreement on a ministry’s multi-annual allocation, there should be a limit on contractual commitments or binding agreements. This limitation would ensure that the value of binding agreements made by a line ministry in the current year would not exceed in respect of each of the subsequent three year’s allocation, for instance, 75% in the first year, 60% in the second year and 50% in the third year. These limits would be rolled over each year. If the ministry believes the limits need to be exceeded, they should be discussed with the MoF to ascertain whether the limit should be exceeded on an exceptional basis.
The affordability of a proposed project must be regularly assessed considering:
New cost information and timing of payments which emerges during the tendering process
The up-to-date position regarding the Medium-Term Expenditure Framework
Wider priorities with which the proposal under consideration must compete for scarce resources
Ability to secure value for money in the context of the wider external environment
The authorities should ensure that the reports on capital expenditures are analyzed and that both expenditure and physical progress are monitored.
The reporting format should ensure that all projects are monitored to ensure they are being completed to the required quality standard, on time and within budget.
The reporting format should ensure that throughout the project lifecycle, line ministries pay careful attention to costs and report on the potential risks which may impact viability and deliverability.
Reports should provide an up-to-date assessment of progress against scheduled costs and delivery timeframes.
Where cost changes occur, these need to be analyzed and factored into the multi-annual expenditure framework.
Physical progress should be kept under review so that changes in circumstances can be taken into account.
The MoF should be responsible for the overall coordinating role. Responsibility for managing the implementation of a project rests with the managing authority but the MoF Directorates with responsibility for monitoring expenditures should ensure that managing authorities fulfil this role and that cost changes are factored into the multi-annual expenditure framework. These Directorates, therefore, should analyze reports (provided by the Treasury Directorate), ask follow-up questions of the managing authorities and inform the Budget Directorate about cost changes impacting on the Budget.
State budget entities should be allowed to carry at least some unspent capital moneys forward into the following year. This will reinforce a multi-annual approach to investment, create greater certainty around funding and encourage entities to manage projects beyond the annual horizon. It could mitigate any risk that projects are selected in the first instance mainly to avoid underspend on the budget units’ capital allocation.
Carryover should be limited to a level that is consistent with good project management. Therefore, any proposal by a public budgeting authority (PBA) to carry over unspent capital should be subject to a ceiling of 10% of the budget year’s capital allocation for that PBA.
The sum carried forward would be in respect of expenditure approved by the National Assembly for the previous year and would not be deducted from the allocation for the new budget year.
Any sum that is carried over and not spent in the following year will be surrendered to the Treasury Account.
Capital carryover will not be allowed into the following year where a PBA has received a significant supplementary budget allocation in the first year. In such a case, unspent capital should in the first instance be used to reduce the burden of the supplementary budget on the Treasury Account.
Develop a unified framework for managing fiscal risks, which will include the fiscal risks associated with public investment projects
Establish a legal basis that underpins the regular identification, disclosure and mitigation of fiscal risks.
Ensure that the fiscal reserve that is established in the annual State Budget Law takes account of fiscal risks.
Provide that the MoF will actively manage fiscal risks on an ongoing basis by:
Maintaining and updating a register of fiscal risks
Coordinating risk management with line ministries, including agreement about methodologies
Assessing the likely impact and the probability of particular risks occurring, taking account of historical experiences
Defining the amount of the fiscal safety reserve in legislation so that there is a minimum amount put aside each year
Incorporate the risks associated with capital investment projects into the fiscal risks framework so that any contingency will take account of these risks.
The MoF should fulfil an active role in coordinating and monitoring public capital expenditures. The MoF already has such a role but once the multi-annual ceilings and the budget allocation has been agreed there is minimal monitoring. The Ministry should:
Report actual aggregate spending against monthly expenditure profiles using information submitted by PBAs to the MoF in their monthly reports
Maintain and update the multi-annual expenditure framework within which PBAs operate to ensure that changes in costs are tracked and reflected
Ensure that appraisal, implementation and reporting by the PBAs comply with the regulatory framework
Ensure greater coordination of budget decisions across line ministries to capture greater efficiencies and avoid duplication and lost opportunities.
Internal audit units of PBAs with high capital expenditure should focus more on investment projects. Given that capital projects can incur significant costs, it would be worthwhile focusing on the procedures for agreeing contracts and managing these types of projects. In this regard, internal audit should try to build capacity so that they can address issues raised elsewhere in these recommendations, including the use of KPIs, whether the project is included in other land-planning projects, and whether the mandated project selection methodology described above is being properly applied.
1.5. Value for money for public and private investment in infrastructure
Create a legal requirement that all projects valued above EUR 50 million in capital cost be considered for the concession contract model. This strengthens the EUR 50 million threshold rule, which already exists but only on a voluntary basis. This requirement should be monitored, enforced and reported on by the Policy Coordination and Concessions Directorate in the Administration of Council of Ministers, given their existing role in overseeing the Concessions Act. As part of this requirement, the Policy Coordination and Concessions Directorate should publicly report on the numbers of projects considered for the PPP/concession model, with an explanation from the relevant line ministry as to why the model was or was not adopted for each procurement that meets the threshold. The Policy Coordination and Concessions Directorate should use this information to analyse whether opportunities to use the concessions contract model to get better value for money and public outcomes are being missed, and subsequently make their findings publicly available.
Review the institutional arrangements that support implementing PPPs and concession contracts, focusing on the Concessions Coordination Council and Economic and Social Policy Directorate in the Administration of Council of Ministers. The purpose of the review is to ensure that the agencies that play a role in implementing the Concessions Strategy are adequately structured, resourced and have necessary access to decision-makers in order and achieve maximum efficacy.
Ensure there is regular training and upskilling on the latest developments in best practice and changes to procurement legislation. Training could also focus on providing advice for sourcing suppliers, best-practice market engagement, establishing networks for sharing best practices among public purchasers and other forms of guidance. One option for delivering this could be greater support given to the Institute of Public Administration to deliver training sessions to officials at the national and sub-national levels.
Expand the information and education campaign focused on upskilling municipalities on the appointment and management of concession contracts to national-level officials. The content would need to be reviewed and updated to ensure it is also applicable to national-level officials. Information and education campaigns should focus on how PPPs and concession contracts can be used to deliver value for money and quality public investment outcomes. Training should also address a widespread misconception among public authorities and the public that concessions are a source of revenue for the state and municipal budgets.
Invite the Ministry of Finance to work closely with the Public Procurement Agency of Bulgaria to assess how processes, methodologies and contracts for conventional public procurement can be more standardized to help make procurement of public investments more efficient and reduce errors, while recognizing the need for bespoke contracts in some instances to allow for unanticipated scenarios or outcomes. The Ministry of Finance could identify a pilot national investment project, together with PPA, where an improved procurement framework could be applied to validate its appropriateness.
1.6. Integrating stakeholder engagement into planning and decision-making
All stakeholder groups that inform and monitor public investments must have transparent criteria showing how a diverse range of representatives are selected and all real, potential and perceived conflicts of interest are managed. For example, the Council of Ministers’ process for selecting the institutions that participate on stakeholder groups that inform and monitor EC-funded investments, and the process for managing conflicts of interest amongst the members, must be made visible to the public.
Review the laws, policies and regulations governing the process of acquiring land to finds ways to make the process quicker while upholding legal requirements. As part of the review, officials should consider adopting the following initiatives:
Reduce the amount of documentation required
Set time-limits within which an application must be approved or declined
Specify as early in the process as possible the information required of project proponents and landowners, including lists of permits, decisions and legal opinions required and details of the authorities and stakeholders to be involved in the application process
Train officers responsible for assessing land acquisition applications so they can process requests more quickly
Other initiatives that may make the process more efficient.
Line ministries, delivery bodies and municipalities should emulate the best practice stakeholder engagement and consultation practices being used by Sofia Municipal Council used as part of the strategic vision-setting and long-term planning (see details under Section 8: Integrating Stakeholder Engagement into Planning and Decision-making). These practices need to be tailored to the unique circumstances of each sector, project, population size and geographic area.
1.7. Risk management
The Ministry of Finance should adopt a robust risk management framework that ensures risks across all stages of the investment lifecycle are adequately identified, assessed, controlled, monitored and communicated to critical decision-makers and stakeholders. The MoF should require that agencies and municipalities follow the requirements of the risk management framework as a condition of national funding. The OECD will develop and present a risk management framework, in the form of a manual, as part of Output 2 of this project.
As required as part of activity 2.1 (drafting of recommendations), OECD recommends a grid for risk assessment for investment projects that covers all stages of the investment cycle. An important step of the risk management process is to assess risks by evaluating their likelihood and severity. An assessment of risk should ask the following questions:
What is the likelihood the risk will occur? Depending on the risk, this likelihood may be defined or measured qualitatively or quantitatively and expressed mathematically or descriptively.
If the risk occurs, how severe will the consequences be? Similarly, the severity of the risk can be expressed qualitatively or quantitatively.
How do existing control measures affect the likelihood and the severity of the risk?
These questions can be answered using internal knowledge and experience, external resources such as audit reports, or by consulting qualified and experienced outside experts. In determining both likelihood and severity, assessments should account for existing risk management measures and distinguish between inherent and net risk. These are defined as follows:
Inherent risk is the level of risk before the application of any risk management activities or control measures to reduce its likelihood or severity
Net risk is the level of risk following the application of any existing control measures or actions
Residual risk is the level of remaining risk following the application of new control measures or actions that may be under consideration.
Distinguishing between inherent, net and residual risk allows for an appropriate assessment of risk on an ongoing basis, as well as an evaluation of the appropriateness and value of control measures (see Figure 1.1).
Figure 1.1. Mitigation of inherent risk to residual risk
Source: (OECD, 2020[1])
The risk heat map shown in Figure 1.2 has been developed by the OECD to assess the criticality of risks at all stages of the infrastructure lifecycle. The likelihood (L) and the severity (S) estimate a risk’s criticality (C) as the following formular depicts: (C = L x S). For example, if the likelihood is 4 and the severity is 3, then the overall criticality is (4 x 3) = 12. A risk’s criticality rating can then be plotted on a risk matrix tool, which helps to compare between risks and track their criticality over time. Risk matrices should be regularly reviewed and updated to reflect the impact of the risk control and mitigation measures put in place.
The impact of risks can vary at different stages of the lifecycle, which means a risk assessment should be applied to each lifecycle stage.
Figure 1.2. Risk heat map or matrix
Source: (OECD, 2020[1])
1.7.1. Improving public sector resourcing across national and municipal government
Widen opportunities for mid-career recruitment into the public sector and create opportunities for people to move in and out of the public sector. This can mean creating new contract structures that allow for people to enter for specific needs or projects, without requiring extensive experience in the public service.
Evaluate minimum requirements, such as strict qualification or examination requirements, which may be unnecessarily excluding some candidates.
Reduce the need to source skills externally by developing skills and competencies in existing staff.
Attract and retain skilled staff and create attractive employment opportunities by:
Enhancing employee mobility so staff can move within or between governments at either the international, national and sub-national levels
Developing programmes that encourage professional and personal growth in the workplace that are tailored to the needs and aspirations of the individual supporting further education and research interests that align with organisation needs and goals, such as graduate and post-graduate study for certain staff. For example, ministries and agencies should ensure they are meeting their legal requirement under Article 35(1) of the Civil Servants Act, which is to ensure they are providing opportunities for civil servants to receive new qualifications and be retrained.
Embrace flexible working arrangements, which can be a large benefit for many employees at a low cost.
During recruitment, emphasise the unique opportunities that only a career in public service can offer, such as the opportunity to contribute to society and impact people’s lives.
Reference
[1] OECD (2020), Guide de management des risques dans les marchés publics en Tunisie, https://www.oecd.org/gov/public-procurement/publications/Guide-de-management-des-risques-dans-les-marches-publics-en-Tunisie-comp.pdf.