The Need for Evaluation Mechanisms in the Public Sector
Ethiopia’s public-led growth model, while partly responsible for the country’s rapid economic growth, isn’t without its faults. Project delays, cost overruns, and potential corruption all plague large-scale public infrastructure projects. Some economists recommend an evaluation mechanism that allows public entities to better track the progress of their projects. But these, too, aren’t always foolproof. EBR’s Ashenafi Endale spoke with experts to learn more about the promise and limits of employing evaluation mechanisms in the local context.
Although large-scale public sector infrastructure projects are complicated, making it difficult to track the public monies used to complete them, there is rising demand for accountability in developing countries like Ethiopia that follow a public investment-driven growth model.
In recent years, the government has invested significant funds in many different infrastructural projects, especially roads, dams and power plants. For example, the Addis Ababa to Adama Toll Road is one such large-scale project. Currently, thousands of cars pass through the road per day, on average.
The six-lane toll road, which stretches between Addis Ababa and Adama, 84km outside the capital, was inaugurated in 2014. The China Communications and Construction Company built it at a cost of ETB11.2 billion, with 57Pct of the cost covered by a loan from the EXIM Bank of China.
The economic and logistical importance of the road cannot be overstated: Adama is the main stepping stone for the import-export logistics line between Addis Ababa and the Port of Djibouti, as well as for agricultural supply and tourism in the Oromia and Southern regions. With the exception of government officials, the armed forces and diplomat vehicles, the Ethiopian Toll Roads Enterprise (ETRE), which administers the expressway, collects fees from vehicles that use the road.
The ETRE collects ETB16 to ETB17 million from the vehicles, per month, on average, according to Abayneh Feleke, the Enterprise’s Finance Coordinator. With this income, the expressway is expected to return its cost, which is ETB20 billion including the interest, within 100 years.
Considering the extended payback period of such projects, some experts argue that the return on investment is sluggish at best. Their concerns are exacerbated by the fact that investment in the infrastructure sector has been taking large amounts of the sparse liquidity available in the market. In Ethiopia, over 65Pct of the annual budget goes to infrastructure on average, according to data obtained from the Ministry of Finance and Economic Cooperation (MoFEC).
Suzanne Schell, CEO of the ROI Institute Canada, a company engaged in measuring the success of projects and programmes, in her study entitled ‘Measuring Value in the Public Sector’, argues that since financial resources available for public spending are limited, it’s imperative that they be cost-effective and efficient. She recommends there be a mechanism to assess the viability of public projects by focusing on results before deciding to allocate funds.
The mechanism Schell is talking about is a public return on investment (ROI), which is a performance measurement developed by SAP Software Solutions in collaboration with the Centre for Technology in Government. The public ROI methodology consists of cost-benefit analysis by comparing monetary benefits to the programme costs.
Schell identified some of the factors that influence the government to measure the ROI of public projects. The first factor comes with the need to create accountability in the public sector to keep taxpayers informed about the monies that are spent, which are usually collected from taxes. The way public projects are managed and executed, resulting in inconsistent outcomes, is the second factor.
Scholars argue that a growth model that revolves around massive public investment has been neglected worldwide ever since the 1970s, replaced by a free-market growth model that gives way to a robust private sector through market liberalisation.
For instance, development economists like John Williamson, who is best known for coining the term ‘Washington Consensus’, which is a set of 10 economic policy prescriptions that promote private sector investment as a key driver of growth and development, believe that the wealth generated and accumulated by the private sector will have a tremendous capacity to uplift economic growth and prosperity.
However, economists like Dani Rodrik, Professor of Political Economy at Harvard University, stress it may be time to reconsider a public investment-driven growth model. In his commentary entitled ‘The Return of Public Investment’, he argues that “[i]f one looks at the countries that, despite strengthening global economic headwinds, are still growing very rapidly, one will [see] public investment is doing a lot of the work.”
This has been the case locally for the last few years. By pursuing a public investment-driven growth model, which increased public investment from 5Pct of GDP in the 1990s to close to 20Pct of GDP currently, Ethiopia has registered astounding growth in the last decade. Beginning in 2004, according to the World Bank’s annual report, Ethiopia’s economy grew by 10Pct on average annually, which has a significant effect on poverty reduction efforts.
However, Rodrik warns that since it is difficult to predict how the experiment with public investment-driven growth models in countries like Ethiopia, India and Bolivia will eventually turn out, there must be caution while undertaking public infrastructural projects. The World Bank echoes these sentiments, noting that projects fuelled by public monies in Ethiopia are highly susceptible to corrupt practices, which may weaken the public’s trust in the government and economic development.
The need for caution and oversight is especially pertinent for the local context, where public investment is particularly high. The country’s public investment as percentage of GDP stood three times higher than the sub-Saharan average, which is 6Pct of GDP, according to the World Bank. It also holds the third position in terms of public investment in the world.
Six Abrar, an economist and Road Network Planning Team Leader at the Ethiopian Roads Authority (ERA), says there is no quick return on infrastructure because its costs are massive. “The return of investment of gravel road can be 15 years maximum,” he explains. “On the other hand, the return on investment of asphalt roads can reach 20 years.”
However, Six argues that investments in infrastructure have far greater benefits than the direct financial return, especially for roads. “First, developments of new road networks facilitate access to markets for farmers, save time and encourage farmers to produce more,” he argues. “This will help the farmer to accumulate capital and use more technologies in the farming system and modernise the agriculture sector, which will help farmers produce a surplus instead of solely working to satisfy consumption.”
This, he argues, will allow for capital to accumulate and create raw materials that can be used for agro-processing industries: “This will help Ethiopia’s quest [to industrialise]. This decreased dependency on agriculture and wealth accumulation will boost the demand for quality services, which will open the door for the private sector.”
He continues: “Evenly developed infrastructure throughout country will help to diversify manufacturing industries to the regions, which have been saturated in and around Addis Ababa so far because of a lack of adequate infrastructure in the regions.” Six adds that it also plays a role in employment and poverty reduction.
Since the inception of the Road Sector Development Programme (RSDP) in 1997, Ethiopia has invested ETB266 billion in the sector, of which 81.2Pct was covered by local funds and the rest through external loans, according to data from the ERA. The total expenditure of the sector as of 2014/15 was ETB158 billion, up from ETB7.2 billion by 2002/03.
As a result, the road sector has been growing at 8.2Pct on average annually and currently the road network reached 113,000km throughout the country. This means the road network expanded by 275Pct between 1997/98 and 2014/15 and the share of roads in good condition rose from 22Pct to 70Pct.
As part of regional integration with East African countries, Ethiopia launched the construction of a second expressway in December 2015, which extends from Modjo, near Adama, to Hawassa in the southern region. This project, which will be constructed at a cost of USD700 million, is part of the Trans-African Highway network expected to stretch from Cairo, Egypt to Cape Town, South Africa.
Another area showered with public investment is the railway sector. The 656km-long railway between Addis Ababa and Djibouti, which was inaugurated on October 05, 2016, was the ice breaker for this new investment frontier. This project is one of five railway lines to be networked within the next five years. The Ethio-Djibouti railway was built at a cost of ETB3.4 billion, of which 70Pct was covered by soft loans obtained from the Chinese government.
“Soft loans finance most of the infrastructure projects, which will be paid within the next 30 years, and will not have a big impact on the country’s economic growth,” says Dereje Tefera, Communications Manager at the Ethiopian Railway Corporation (ERC).
The Ethio-Djibouti Railway has 1,100 cargo wagons, which can carry 3,500 tonnes at once, according to Dereje. The bigger wagons for cargo can operate at speeds up to 80km per hour, while the wagons for transportation can function at 120km per hour.
Ten of the wagons also have refrigerators, which are used for the export of perishable products. The construction of this railway network, which took place between 2011 and 2016, has employed 17,000 people. Over 90Pct of Ethiopia’s external trade is facilitated through the Djibouti port, to which Ethiopian cargo trucks could not effectively access for many years.
“The new railway will save money that has been paid for demurrage, speed up the import-export trade and economic growth. Reasonably priced, modern and safe airways, railways, road and telecommunication networks are necessary to have a fast-growing economy,” said Dereje. “Especially the Ethio-Djibouti Railway will have a shorter returning time once the tariff is set, since there is big logistics demand in that line.”
However, Dereje admits the Light Railway (LRT), which was completed last year at a cost of USD475 million, with loans from China covering 75Pct of the cost. “The LRT was built in order to relieve the transport problem in the capital as opposed to gaining a financial benefit,” he explains. “It is a big return if children and employees can get to school and work on time.”
There are 41 trains allotted for the 34km railway in the capital, with ten of them kept as reserve. However, a few of the operational trains are stationed due to maintenance issues, according to sources. In addition to building the LRT, the Chinese have contracted the administration for the next three years, which includes maintenance issues.
The LRT currently transports more than 100,000 commuters per hour and generates ETB350,000 to ETB400,000 per day, according to data from the ERC. “The technology transfer will also help Ethiopia in the future,” added Dereje.
However, many agree that none of the government’s efforts to solve the transport challenge in the capital have brought significant changes. Moreover, although the expressway makes it possible to travel from Adama to Addis within an hour, vehicles still has to wait for a long time after they enter the capital due to traffic congestion.
This is why experts like Schell argue that public sector programming should move to results-based rather than activity-based metrics. Activity based programming uses indicators like hours and costs as performance measurements, which is input-focused instead of output-focused. According to Schell, public sector programming becomes efficient and effective when it employs a results-based management system.
Results-based management is a systematic tool used to plan, monitor and evaluate activities, projects and programmes and streamline them from beginning to end. Literatures reveal that it was initially developed by the United States Department of Defence and after the 1960s it was adopted by many government agencies throughout the world.
In Ethiopia, the public sector has attempted to adopt and use a results-based management system in order to improve the capacity of government institutions that enables the creation of favourable environment for trade, investment and economic growth.
In 2004, the government introduced Business Process Reengineering (BPR) in public institutions to lay the foundation for results-based performance management in the public sector. According to Ranganathan Chandraskaren, Director of the Management Information Systems Programme at the University of Illinois, BPR is a mechanism to bring dramatic change in a given organisation by improving the management systems, performance measurements, employee tasks, skills improvement, motivation systems and the use of information technology.
An initial performance assessment by Getachew Hailemariam and Richard Common, reveals that notable transformation of service delivery was observed in some organisations. Based on the experiences of the then Ministry of Trade and Industry, the Ethiopian Investment Commission, and the Ethiopian Revenues and Customs Authority were cited as examples of how institutions can be transformed to be more responsive, efficient and effective. Increased user satisfaction and performance were also recorded as a result of the introduction and implementation of BPR.
Even though the improvements in some government institutions seemed promising, the change and successes that were registered eventually faded. According to an evaluation by Hailekiros Sibhato and Ajit Pal Singh at Mekelle University in 2012 regarding the success of BPR, factors like unrealistic reports that hide the actual progress of implementation, lack of management determination, low employee productivity, lack of employee training and leadership to confront major business risks were mentioned as major problems that arise in the government offices tasked with managing large public infrastructure projects.
Government officials, however, say institutions will manage their own development processes efficiently in order to use their resources for the greatest development impact and implement results-based management and programming in the public sector. “In relation to this, more routes are planned under next phases of the LRT, which will solve the transport challenges in the capital,” Dereje anticipates. “The next phase will start as soon as we find a funder.” The ERC plans to increase the LRT coverage to 100km under the second phase.
Infrastructural projects such as the second phase of the LRT, along with other activities that will be executed in the future, will not be successful unless there is a reliable electricity supply, which requires heavy public investment in the power sector.
To satisfy the growing power needs, Ethiopia is currently building the Great Renaissance Dam (GERD) on the Nile River at a cost of ETB80 billion, which will produce 6,525MW and is expected to fulfil the power demand of the country and generate foreign exchange from exporting to neighbouring countries. The Gilgel Gibe III power project, which is the biggest after GERD, and near completion at a cost of EUR1.5 billion, will also generate close to 1,780MW.
Gilgel Gibe III is an example of the lack of a mechanism to assess the viability of public projects by focusing on results. The delayed project, located on the Omo River in the Southern Regional State, began in 2008 and was expected to be finalised 2011. However, the project is not yet complete.
Currently the Gilgel Gibe III is 98Pct complete and already started trial production, while the GERD is 54Pct completed, according to Azeb Asnake, CEO of Ethiopian Electric Power (EEP). The utility has planned to increase the power generation capacity to 17,000 MW by the end of the second phase of the Growth and Transformation Plan period in 2019/20.
Azeb justifies the huge investment that is flowing towards the power sector. “There is a big demand for power in the local economy as well as in neighbouring countries,” she argues. “The biggest return of the investment in the power sector will be fulfilling the local demand, which will have big impact across all other sectors.’
She also says that the financial return that will come in the form of foreign currency from exporting power will be secondary benefit. “The EEP has planned to export power to Kenya, Djibouti, Sudan and Tanzania, which has both economic and political returns,” she stresses.
Government officials like Azeb argue that the direct and indirect returns of investment of public projects can uplift and improve the productivity of Ethiopia’s economy as well as catalyse and support private sector investment.
However, scholars like Schell stress that since every investment decision requires a leap of faith, there needs to be a mechanism to evaluate public projects with a focus on results as decisions are being made to allocate funds. EBR
5th Year • November 16 2016 – December 15 2016 • No. 45