How to improve public investment efficiency in Ukraine?

Public investment can both serve socially useful purposes and be growth enhancing, if sufficient levels are allocated efficiently and if budgeting is managed properly. Public investment in Ukraine has recently risen from low to sufficient levels. Private participation in investment for socially useful purposes, such as road construction and other infrastructure investment, is still small. Activities with doubtful rationale for long-term state intervention (economic activities, utilities) receive one third of all public capital expenditure. More than half of this is aid in form of capital transfers to public enterprises, allocated in long bargaining processes. Public investment budgeting rules suffer from a lack of integrated treatment with respect to decision-making bodies, components of capital expenditures, and planning horizons. At current public investment levels, the impact on the economy can nevertheless be increased. • Socially useful investment can be boosted by more private sector involvement in the financing of roads and other infrastructure, including utilities, by concession schemes. • Improved investment budgeting requires o transparent priorities and rules-based selection criteria (cost-benefit analysis); o smoother integration of capital expenditures in the budgeting process; capital and maintenance budgeting can be harmonized by multi-year controls. o Resource ceilings in project selection should be set early, to minimize demand for public funds and to avoid long bargaining processes for public aid. • In the medium term, state aid in form of capital transfers to public enterprises can be re-allocated towards core public activities, education, and health.