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Published in the United States of America by
IGI Global
Business Science Reference (an imprint of IGI Global)
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Hershey PA, USA 17033
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Copyright © 2019 by IGI Global. All rights reserved. No part of this publication may be reproduced, stored or distributed in
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Library of Congress Cataloging-in-Publication Data
British Cataloguing in Publication Data
A Cataloguing in Publication record for this book is available from the British Library.
All work contributed to this book is new, previously-unpublished material. The views expressed in this book are those of the
authors, but not necessarily of the publisher.
For electronic access to this publication, please contact: [email protected].
Names: Srithongrung, Arwiphawee, editor. | Ermasova, Natalia, editor. |
Yusuf, Juita-Elena Wie, 1976- editor.
Title: Capital management and budgeting in the public sector / Arwiphawee
Srithongrung, Natalia B. Ermasova, and Juita-Elena (Wie) Yusuf, editors.
Description: Hershey, PA : Business Science Reference, [2019]
Identifiers: LCCN 2018023856| ISBN 9781522573296 (hardcover) | ISBN
9781522573302 (ebook)
Subjects: LCSH: Budget. | Capital budget. | Public investments. | Finance,
Public.
Classification: LCC HJ2005 .C358 2019 | DDC 352.4/8--dc23 LC record available at https://lccn.loc.gov/2018023856
This book is published in the IGI Global book series Advances in Public Policy and Administration (APPA) (ISSN: 2475-
6644; eISSN: 2475-6652)
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Preface .................................................................................................................................................. xv
Acknowledgment ................................................................................................................................. xx
Section 1
Capital Management and Budgeting in Developed Economies
Chapter 1
A Systematic Public Capital Management and Budgeting Process ........................................................ 1
Arwiphawee Srithongrung, University of Illinois at Springfield, USA
Juita-Elena (Wie) Yusuf, Old Dominion University, USA
Kenneth A. Kriz, University of Illinois at Springfield, USA
Chapter 2
The Case of Public Capital Budgeting and Management Processes in the United States .................... 23
Natalia B. Ermasova, Governors State University, USA
Carol Ebdon, University of Nebraska at Omaha, USA
Chapter 3
The Case of Public Capital Budgeting and Management Process in Germany .................................... 49
Natalia B. Ermasova, Governors State University, USA
Section 2
Capital Management and Budgeting in Transitioning Economies
Chapter 4
Capital Budgeting, Infrastructure, and Capital Investment in the Republic of Uzbekistan .................. 74
Tatyana Guzman, Cleveland State University, USA
Chapter 5
Capital Budgeting and Public Investment Projects in Ukraine ............................................................. 93
Olha Krupa, Seattle University, USA
Chapter 6
Public Capital Budgeting and Management Process in Russia ........................................................... 113
Natalia B. Ermasova, Governors State University, USA
Polina Ermasova, DePaul University, USA
Chapter 7
Public Capital Budgeting and Management Process in Moldova ....................................................... 134
Erica Ceka, Northern Illinois University, USA
Chapter 8
Capital Management and Budgeting Processes in Albania ................................................................ 157
Jane Beckett-Camarata, Pennsylvania State University – Harrisburg, USA
Section 3
Capital Management and Budgeting in Other Economies
Chapter 9
Infrastructure Development in Burkina Faso: The Story of Public Capital Budgeting ...................... 181
Kouliga Koala, Old Dominion University, USA
Joshua Steinfeld, Old Dominion University, USA
Chapter 10
Thai Public Capital Budget and Management Process ....................................................................... 206
Arwiphawee Srithongrung, University of Illinois at Springfield, USA
Kenneth A. Kriz, University of Illinois at Springfield, USA
Chapter 11
Capital Management and Budgeting Practices in Republic of Korea ................................................. 236
Jiseul Kim, University of Nebraska at Omaha, USA
Chapter 12
Capital Management and Budgeting in Taiwan .................................................................................. 258
Wei-Jie Liao, University of Nebraska at Omaha, USA
Nai-Ling Kuo, National Taiwan University, Taiwan
Chapter 13
The Vietnam Capital Management and Budgeting Case Study .......................................................... 280
Lien Nguyen, Old Dominion University, USA
Meagan M. Jordan, Old Dominion University, USA
Thuy Thi Nguyen, Ministry of Finance of Vietnam, Vietnam
Section 4
Conclusion
Chapter 14
Summary, Initial Observations, and Getting to a Tentative Theory of Public Investment
Behavior .............................................................................................................................................. 311
Arwiphawee Srithongrung, University of Illinois at Springfield, USA
Juita-Elena (Wie) Yusuf, Old Dominion University, USA
Compilation of References ............................................................................................................... 337
About the Contributors .................................................................................................................... 372
Index ................................................................................................................................................... 377
Copyright © 2019, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
&KDSWHU
DOI: 10.4018/978-1-5225-7329-6.ch014
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This chapter evaluates the 12 countries’ capital management practices according to the systematic pub-
lic capital management and budgeting process described in Chapter 1. The chapter characterizes and
classifies the management practices of the twelve countries based on the authors’ evaluation using the
case study descriptions. The authors offer some initial observations based on comparisons across the
case study countries and analysis of relationships between capital management and budgeting practices
and political, economic, and public sector variables. The chapter proposes a tentative theory of public
investment behavior and offers five propositions regarding the factors driving different practices across
the case study countries and the consequences of a systematic capital management and budgeting process.
,1752'8&7,21
In addition to describing how public capital management and budgeting is practiced in different countries,
another purpose of this book is to propose a tentative theory of public investment to add to the public
finance literature. The previous chapters describe public capital management and budgeting practices in
twelve case study countries. An understanding of the differences in public capital budgeting and manage-
ment practices across the twelve countries should provide a foundation toward theory building in public
capital management to explain factors that contribute to variations in public capital management. The
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Arwiphawee Srithongrung
University of Illinois at Springfield, USA
Juita-Elena (Wie) Yusuf
https://orcid.org/0000-0003-3599-1417
Old Dominion University, USA
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individual country case studies presented in this book suggest that capital management and budgeting
practices vary regardless of geographical location and government regimes.
This chapter evaluates the twelve countries’ capital management practices according to the systematic
public capital management and budgeting process described in Chapter 1. The chapter then characterizes
and classifies the management practices of the twelve countries based on the editors’ evaluation using
the case study descriptions. Finally, based on existing frameworks and theories from public finance and
entrepreneurial finance (such as information asymmetry, expected utility, transaction cost, prospect theory
and investment bias) the chapter proposes a tentative theory of the factors driving different practices
across the case study countries.
Note that the tentative theory proposed in this chapter is just a starting point in developing public capital
management theory at the international level. This proposed theory needs a larger sample of countries
to improve its descriptive and predictive capacity. Despite the important roles of public infrastructure
on a country’s economic growth, less is known regarding the causes of different capital management
practices in providing and arranging public infrastructure systems. Thus, we hope that this book will
inspire comparative public administration and international development theorists to build a stronger
knowledge base.
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As described in Chapter 1, the normative public finance literature recommends systematic public capital
management and budgeting practices for a public infrastructure system that is useful and responsive to
the public’s capital needs and has reasonable cost compared to its useful life. The systematic process
includes long-term capital planning, budgeting and financial management, centralized execution and
project management, and infrastructure maintenance. Long-term capital planning includes establishing
strategic and fiscal plans based on a government jurisdiction’s comprehensive planning and public in-
frastructure need analyses. The comprehensive plan is a master plan that spells out broad policies for the
community’s long-term land use, expansion, and containment. The strategic plan describes policies and
management practices that will make the best use of available resources to implement the community’s
vision as stated in the master plan. Long-term fiscal planning is about projecting revenue and expenditure
in order to understand future capital financing capacity and capital needs. Long-term fiscal planning
may not and cannot be completely accurate given that projections will be subject to error, especially for
those in the far out-years. However, the projected results give a rough idea in terms of resources avail-
able and the future of a community. Capital inventory and needs analysis identify gaps between existing
public infrastructure and future needs based on community growth and socio-economic profiles. If these
planning practices are implemented, the community should have a Capital Improvement Program (CIP)
which is a comprehensive list of capital projects a community will need within the next 5-7 years along
with plans to finance the projects and the impacts of the projects on future budgets. This component
will enhance allocative efficiency of public capital investment since the systematic review suggests what
projects to invest in based on the community’s needs and vision, and how to finance the projects based
on available resources and the community’s projected growth.
The second component is budgeting and financial management, which includes having a separate
capital budget, debt management policies, and capital financing policies. The separate capital budget
contains appropriation and recommendations for capital projects along with available resources. The
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recommended capital projects in the capital budget are usually the projects listed in the first-year of the
CIP. Given that capital needs tend to exceed available resources, the first-year CIP projects will need to be
systematically prioritized using such techniques as cost-benefit analyses or project ranking systems. The
separate capital budget is useful in that it provides a special review of the recommended capital projects
relative to available capital financing sources in the next fiscal year. If capital projects are included in
the operational budget, the two types of public spending (i.e., investment and consumption) will compete
for limited resources. With a separate capital budget (i.e., a dual budgeting system) decisionmakers and
appointed officials can balance between consumption and investment. In this second component of the
systematic capital management and budgeting process, sound financial management practices includ-
ing debt capacity analysis, long-term budget forecasts, and maintaining some operational reserve funds
should be adopted and practiced in order to help enhance the community’s credit rating, thus yielding
low capital costs. Overall, this component will enhance scale economy for public investment since the
recommended practices ensure that the community invests in its public infrastructure at the optimal level
commensurate with current and future financing capacity as well as future needs.
The third component is centralized execution and project management, which emphasizes establishing
a central unit or agency responsible for project management, monitoring contractor performance, and
executing the capital budget. The centralized capital project management agency maintains, updates, and
discloses the capital budget status indicating how much appropriated funds have been expended and how
much are left. The managers in the centralized capital project management agency should perform simple
internal audits such as budget variance analysis to identify whether capital spending is implemented as
planned. The focus is on preventing waste, fraud, and cost overruns that can severely affect financial
status of a jurisdiction. The goal of this component is to ensure that public infrastructure is acquired at
the lowest cost possible (economic efficiency).
The last component of the systematic capital management and budgeting process focuses on main-
tenance planning and maintenance funding. Maintenance planning involves asset management and
determining what public facilities should be repaired or replaced based on physical condition and cur-
rent and future use. Major repairs may be considered when it will extend the facility’s useful life for a
significant number of years. Replacement may be considered when repair will not yield cost savings and
demands are projected to increase. Maintenance funding involves setting aside funds to pay for repair
and replacement. These two activities help government avoid infrastructure backlogs and reduce the
need to finance repair and replacement projects on an emergency basis.
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As described in the previous chapters, public capital management and budgeting practices vary from
country to country regardless of their geographical locations and government regimes. In this section,
the systematic capital management and budgeting process described in Chapter 1 is used as a yardstick
to evaluate the twelve case study countries’ practices.
Table 1 presents performance evaluation results in which the case study countries’ capital manage-
ment and budgeting practices are compared with the normative practices in the four components of the
systematic capital management and budgeting process. The evaluations were performed according to
the rubric described below.
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• An ‘excellent’ rating suggests that all of the recommended activities in a component are adopted
and fully implemented. While there may be small deviations from the normative practices, such
deviations do not severely affect the quality of management. The important practices across the
four components of the systematic process include having a CIP (component 1), having a separate
capital budget (component 2), practicing centralized project management and monitoring (com-
ponent 3), and practicing maintenance planning and funding (component 4). For any component,
if the important practices are designated by written policies or laws and are reported by the case
study authors as being implemented, an ‘excellent’ rating is assigned. These written rules, poli-
cies, and laws ensure that the recommended practices are adopted and implemented regardless of
fiscal or political conditions. The authors of the case studies may mention political involvement
and even some corruptions, but as long as the practices are designated by laws, such negative as-
pects may have only a marginal effect.
• A rating of ‘good’ suggests that the majority of the systematic practices recommended in a com-
ponent are adopted and fully implemented. The adopted practices are well adhered to the system-
atic capital management and budgeting process and are clearly stated in a country’s management
policies or laws. Only a minority of practices deviate from those of the systematic process and
are not designated by written policies or laws, and as a result, such practices may or may not be
executed depending on the current administration and available expertise. The case study authors
may mention political intervention in the resource allocation process or some corruption in imple-
mentation, which may affect the quality of capital management and budgeting.
• A ‘fair’ rating suggests that a minority of the systematic practices recommended for a component
are adopted. The adopted practices may not completely adhere to the systematic capital man-
Table 1. Evaluation of case study countries’ capital management and budgeting practices
Country
Component
Long-term Capital
Planning
Capital Budgeting
and Financial
Management
Centralized
Execution
and Project
Management
Infrastructure
Maintenance
Total Score
Albania Fair Fair Excellent Poor 9
Burkina Faso Fair Poor Poor Poor 5
Germany Good Good Good Fair 11
Korea Fair Good Excellent Good 12
Moldova Fair Fair Fair Good 9
Russia Fair Poor Poor Poor 5
Taiwan Fair Good Excellent Poor 10
Thailand Fair Good Fair Good 10
Ukraine Poor Fair Poor Fair 6
United States
(Subnational)
Good Good Good Poor 10
Uzbekistan Poor Fair Good Fair 8
Vietnam Good Excellent Fair Good 12
Source: Evaluation by the authors
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agement and budgeting process and are not clearly stated in a country’s management policies
or required by laws. However, the adopted practices as described by the case study authors are
considered evidence of implementation. Most of the practices in the component deviate from
those of the systematic process and are not designated by written policies or laws. As a result, the
important practices may or may not be executed depending on current administration and avail-
able expertise. Sometimes the authors explicitly mention lack of administrative and management
expertise as an obstacle to completely implementing the recommended practices. The authors may
mention political intervention in the resource allocation process or high levels of corruptions in
implementation. Such practices, as documented in the country case studies, appear to significantly
affect the efficiency of public capital spending.
• A rating of ‘poor’ suggests that none of the systematic practices recommended in a component are
adopted and implemented. Laws and management policies governing important practices in the
component do not exist and there is no description by the case study authors of the implementa-
tion of such practices. The authors primarily mention the lack of administrative and management
practices, high levels of corruptions, and high degrees of political involvement in the budgeting
process. Such negative aspects likely affect both the quality of the public capital management
process and efficiency of public capital spending, especially since countries with poor capital
management practices tend to obtain capital projects with relatively high costs due to corruption
or mismanagement.
Each element of the rating scale was given a corresponding score; excellent, good, fair and poor
were given scores of 4, 3, 2, and 1, respectively. For each country a total score was calculated across
all components (shown in the last column of Table 1). The maximum points possible is 16, indicating
that the country’s process fully adheres to the systematic capital management and budgeting process
discussed in Chapter 1. The minimum total point possible of 4 indicates that the country’s process devi-
ates extensively from normative practices. For these countries, political issues, lack of administrative
expertise, and corruption can easily penetrate the process.
As presented in Table 1, Vietnam and Korea received the highest scores with 12 total points, fol-
lowed by Germany (11 points). This indicates close adherence to the systematic capital management
and budgeting process recommended by the literature. Taiwan, Thailand and USA had 10 total points.
At the other end, Burkina Faso and Russia had the lowest scores (5 points). Based on these scores, we
can organize the countries into quartiles:
• Fourth quartile: Vietnam, Korea, and Germany.
• Third quartile: USA, Taiwan, and Thailand.
• Second quartile: Albania, Moldova, and Uzbekistan.
• First quartile: Ukraine, Russia and Burkina Faso.
Note that even within the quartiles, the countries may not have the same government regime or may
not be geographically located in close proximity. For example, in the fourth quartile Vietnam and Korea
are both in Asia, but the former is a communist state while the latter is a presidential republic. In the third
quartile, the United States is a federal republic located on the American continent while Thailand and
Taiwan are in Asia. Thailand, while under a Monarchy System where the national government has the
most power, is presently under military regime. Taiwan is a semi-presidential republic. Similar differ-
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ences exist across the remaining groups. These simple comparisons suggest that the level of sophistica-
tion in public capital management and budgeting practices may not be simply explained by a country’s
geographical location or government regime. But, if the geographical location and government regimes
do not explain capital management and budgeting practices, then what is driving the differences shown
in Table 1? This chapter is focused on tentatively answering this question.
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For the long-term capital planning component of the systematic process, Vietnam, USA, and Germany
were rated as good; Albania, Burkina Faso, Korea, Moldova, Russia, Taiwan, and Thailand were rated
as fair; and Ukraine and Uzbekistan were rated as poor. The countries rated good have a CIP in which
physical planning is well integrated with fiscal planning. The CIP in Vietnam and Germany are des-
ignated by public investment laws. Vietnam’s CIP, referred to as the Public Investment Program, lists
and classifies capital projects following Articles 7-10 of the Public Investment Act of 2014. The USA
and Germany have federal systems in which the national governments distribute capital planning and
budgeting powers to subnational levels. While the United States does not have a CIP at the national
level, Germany has a national CIP that is designated by law (The Act to Promote Economic Stability and
Growth) that requires the government to establish a 5-year rolling capital plan based on budget forecasts.
Furthermore, as required by law, the German government must present the annually rolling CIP to the
Ministry of Finance so that the capital project plan can be actualized instead of being just a wish list.
The majority of the state and local governments in the USA have a CIP (Ebdon, 2004; Ermasova,
2013). Although these CIPs are not designated by laws like those of Vietnam and Germany, they tend
to be based on long-term fiscal planning (Ebdon, 2004). Like the USA and Germany, the Vietnamese
government uses budget forecasts in long-term planning by integrating forecasts into comprehensive
plans. However, unlike those of subnational governments in the USA, the long-term capital plans in
Germany and Vietnam are not integrated. Instead, they have multiple sectoral plans based on the num-
bers of infrastructure sectors or service functions (i.e., transportation, water and sewerage, energy).
Such unintegrated plans may result in duplicative and uncoordinated projects. Having sectoral instead
of integrated capital plans is the only flaw keeping Vietnam and Germany from receiving an excellent
rating for this component. However, despite not having integrated plans, Germany has a National De-
velopment Policy for executing and coordinating investment projects across the Länders and municipal-
ity levels. Furthermore, in practice, the impacts of capital projects (e.g., future operational savings or
increasing future operational costs) are incorporated into the CIP and approved by the federal Ministry
of Finance. Capital resources are equally allocated among the Länders and the national and subnational
levels. Furthermore, Germany is the only case study country study that conducts capital needs analysis
based on future demands.
Among the countries rated as fair (Albania, Burkina Faso, Korea, Moldova, Russia, Taiwan, and
Thailand), only Korea and Burkina Faso have an informal CIP that is not required by law. Korea’s CIP
(the Comprehensive National Territorial Plan or CNTP), has been used since 1971, but does not inte-
grate capital planning with fiscal planning. The Korean government practices medium-term expenditure
forecast and integrates its results into an operational budget plan. From the case study, however, it is
unclear whether forecasting results are integrated into the CNTP. Burkina Faso’s CIP, also known as the
Public Investment Program, is required by international donors, prepared based on simple fiscal capacity
projections (i.e., donors’ plans), and is used as a tool to consolidate international aid.
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All countries in the fair category, with the exception of Russia and Burkina Faso, have comprehensive
plans, but the governments seem to have difficulty integrating plans across sectors and sorting through
the responsibility for public infrastructure provision between national and subnational levels. The latter
may be a consequence of having a strong national government or lacking expertise at the subnational
governments. For example, the author of the Korea case study notes that Korean subnational govern-
ments do not have much autonomy in public administration functions.
To illustrate this point, Korea has five types of comprehensive plans: the CNTP, the Seoul Metro-
politan Area Readjustment Plan, Metropolitan Area Plan, City Management Plan and Basic City Plan.
Thailand has at least eight comprehensive infrastructure plans including the Transportation Infrastructure
Plan (2015-2022), Second Industrial Logistics Master Plans (2017-2021), Thailand Power Efficiency
Plan (2015-2016), Alternative Energy Development Plan (2015-2036), Digital Economy and Society
Development Plan (2015-2036), Metropolitan Waterworks Authority Water Supply Infrastructure De-
velopment Plan (2018-2047), and Third Provincial Waterworks Authority Strategic Plan (2017-2021).
Moldova, Taiwan and Albania have more integrated comprehensive plans. Moldova’s current long-
term comprehensive plan, it’s National Development Strategy “Moldova 2020,” covers two sectors –
transportation and energy – and spells out the objectives of infrastructure development. The Albanian
comprehensive plan integrates all sectors into the plan. However, the comprehensive plan is part of the
strategic plan which has a shorter time-frame and, as a result, the comprehensive plan automatically
adopts this short-term framework and is not useful in spelling out long-term vision and goals.
Taiwan has a unique comprehensive planning practice in that it sorts public infrastructure provision
between national and subnational levels. As implied by the case study author, this practice may be a
consequence of the nationally-elected officials’ need to be involved in the country’s long-term infra-
structure planning based on their campaign promises and re-election expectation. The President or Prime
Minister prepares the Capital Improvement Program (e.g., Prime Minister Chiang Ching-kuo’s Ten Major
Construction Projects 1974-1979; President Ma Ying-jeou’s i-Taiwan 12 Projects 2009-2011) that cover
only large-scale capital projects and are associated with political campaign promises. These plans seem
to have relatively short time frames. In addition, the Taiwanese national government is responsible for
multi-year comprehensive planning (covering relatively large-scale capital projects) such as the Economic
Development and National Development Plans. Meanwhile, local governments have autonomy to prepare
their own comprehensive plans and have the capacity to finance their own smaller-scale capital projects.
Like Albania, Taiwan’s comprehensive planning is contained within strategic planning, resulting in a
comprehensive plan that does not address long-term vision and public infrastructure needs.
Burkina Faso and Thailand each have a separate strategic plan that applies economic analyses to
make decisions about social and economic development policies (which tend to involve public infra-
structure). The Moldovan Ministry of Finance develops a strategic plan that identifies how budgetary
resources should be used (e.g., budget allocation should be related to the country’s strategic priorities).
However, none of the case study countries categorized as fair in terms of long-term capital planning
conduct capital needs analysis.
Uzbekistan and Ukraine were rated as poor. Based on the case study, Ukraine appears to not adopt
any long-term capital planning activities recommended by the systematic process. The case study author
notes that the country has a long wish list of capital projects but since comprehensive planning, long-term
fiscal planning, and strategic planning do not exist, it is difficult to realize the wish list. Uzbekistan is a
strong authoritarian state, and its plans tend to be developed based on the President’s views. The Invest-
ment Program of the Republic of Uzbekistan has a one-year time frame; the plan is revised annually,
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signed by the President and becomes law. Uzbekistan has an informal CIP that is produced infrequently
since it is not required by law. The most recent CIP was issued in 2010 and covered project needs for
the period 2011-2015. Periodically, the President issues a large-scale capital improvement program as
a special CIP that is signed into law. The most recent special CIP (Measures on Continuing Improve-
ment of Ameliorated Condition of Irrigated Lands and Rational Usage of Water Resource: 2013-2017)
focused only on the water sector and was not comprehensive.
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For the budgeting and financial management component, Vietnam received an excellent rating, exhibiting
the best practices among all case study countries. Vietnam has a dual budget system including separate
capital and operational budgets. The country has established financial policies related to debt affordability
analysis, designating that public infrastructure be financed by domestic bonds (rather than international
capital markets), and setting aside budgetary resources for debt services incurred for public infrastructure
acquisition. Although the country presently uses only a small amount of long-term debt, the policy clearly
sets a foundation for future capital spending that corresponds with the country’s growth and debt capac-
ity. The State Budget Law of 2015 mandates that Vietnamese central and local governments maintain an
operating reserve of 2% to 4% of the total budget to cover natural disasters and emergencies. This policy
implies that the Vietnamese government is putting some effort into maintaining financial discipline.
Project prioritization criteria for projects financed by domestic bonds are designed to improve the standard
of living. The criteria, listed according to their priority order, include capital projects serving those in
mountainous areas, those who are ethnic minority, and those in remote areas; capital projects support-
ing health and hospital services; transportation projects; irrigation projects; and education projects. The
authors of the Vietnam case study note that although the prioritization criteria are set, project selection
and prioritization is still affected by politics. However, we note that the establishment of management
institutions and laws may alleviate some concerns regarding politics and corruptions. The Vietnamese
government is innovative in its approach to capital financing. Through the Vietnam Development Bank,
the government borrows money supplies from the domestic capital market and then allocates directly
to local governments and state-owned enterprises for capital projects. The case study authors note that
this motivates private partners to work with local governments and, as a result, local governments can
invest in more capital projects. PPPs are used often in Vietnam, especially for information technology
and electricity-related projects. As mentioned in the case study, Vietnam does have corruption and an
administrative expertise problem; however, in our view, the country is putting a good amount of effort
into establishing systematic capital budgeting and financial management practices.
Germany, Korea, Taiwan, Thailand and the United States were rated good in terms of budgeting and
financial management. Taiwan and Thailand are similar in that although they do not have separate capital
budgets, their capital resource allocation is conducted through a built-in capital budgeting process. The
built-in capital budgeting process is supported by a combination of traditional practices and some laws
(e.g., a law requiring debt capacity analysis). The laws are helpful in shielding capital spending from
competing with operational programs. Both countries include small-scale capital projects (e.g., less than
THB 1 million for Thailand) in the annual budgeting process so these projects must compete for resources
with operational programs. Large-scale capital projects have their own approval and financing paths. In
Taiwan large capital projects are proposed and approved separately from the annual capital budgeting
process and financed through long-term debt and a multi-year process. In Thailand, large capital proj-
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ects are financed through long-term debt issued by the Ministry of Finance and debt proceeds are sent
directly to the responsible ministries and state-owned enterprises. Budgeting and financial management
practices are better in Taiwan compared to Thailand because the Taiwanese national government has
special capital project funds to finance large-scale capital projects allowing the government to pay some
project costs with current revenue. Such practices can significantly reduce the amount of debt.
Given that these built-in practices tend to allow flexibility in capital financing, both Taiwan and
Thailand have relatively strong financial management laws compared to other case study countries. In
Taiwan, Article 5 of the Public Debt Management Act designates that national debt must not exceed
40.6% of the country GDP and local governments cannot incur debt in excess of 50% of total annul
expenditure proposed in their budgets. Article 10 of the same act mandates that governments must
periodically publicly disclose their debt. In Thailand, the Fiscal Discipline Act of 2018 designates that
the national government must appoint fiscal committees that mainly comprise of Ministry of Finance
Directors, Bureau of Budget Director, Bank of Thailand’s President and board members, and National
Social and Economic Development board members to determine annual debt amounts based on long-
and medium-term budget forecasts. The act does not require public disclosure of debt. Furthermore,
this act allows local governments, public agencies, and state-owned enterprises to borrow directly from
international and domestic capital markets without reporting to or sending debt proceeds to the Ministry
of Finance. While this practice expedites capital project acquisition, it is not transparent and the lack
of consolidation of public debt makes it difficult to monitor. The Fiscal Discipline Act of 2018 creates
some opaqueness in the country’s financial system.
Germany and Korea do not have a separate capital budget, but more than half of state and local govern-
ments in the USA have separate capital budgets. In Germany and the USA subnational governments, the
executive branches or those responsible for preparing budget documents propose capital projects based on
policy priorities. According to the authors of the USA country case study, a majority of state governments
have debt limits and practice debt affordability analysis. Germany has public investment funds (from
debt proceeds of bond issuances) which attract private partners for PPP projects. The European Stability
and Growth Pact requires that Germany’s Council of Economic Experts conducts financial forecasts to
identify future resources especially those needed for capital projects. In Korea, debt affordability analysis
for the central government and local governments is determined by the Ministry of Finance and Ministry
of Interior, respectively. According to Korea’s Local Finance Act, local governments’ debts limit must
be annually determined and legislated based on the annual fiscal situations of the jurisdiction.
Among the countries rated as good, only Korea has a systematic project prioritization process. At
the national level, Korea uses criteria stated in the Preliminary Feasibility Study to systematically pri-
oritize large capital projects. At the local level, the country uses criteria stated in the Local Finance Act.
In Taiwan and Germany, the ministries proposing capital projects are responsible for prioritizing their
capital projects based on policy priorities of top management and political leaders.
Taiwan and Germany have operational reserves that are designated by law. Taiwan’s Article 22 of the
Budget Act requires that the national government set aside resources in general revenue funds as budget
reserves. The Disaster Prevention and Protection Act of Taiwan requires that local governments prepare
reserve funds. In Germany, the Stability and Growth Act requires that the federal government establish
reserve funds. According to the author of the Korean case study, operational reserves are designated by
law but are not set aside for capital projects.
Albania, Moldova, Ukraine and Uzbekistan are in the same group receiving a rating of fair for this
component. Albania is the only country in this group with a dual budgeting system and separate capital
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budget. However, the case study author notes that public capital spending is severely inadequate com-
pared to the country’s needs. Furthermore, the capital resource allocation process is severely affected
by national politics. The Albanian Prime Minister’s Office develops the long-term expenditure forecast
(6-7 years) and the Ministry of Finance forecasts medium-term expenditures that are the basis for the
CIP. However, Albania severely lacks financial expertise in forecasting and has no laws enforcing good
financial practices such as maintaining operational reserves, conducting debt capacity analysis, and en-
forcing debt limits. As a result, operational reserves, debt affordability analysis, and debt management
policies and practices do not exist.
In Moldova, the Public Finance and Fiscal Responsibility Act does not require a separate capital
budget; operational spending competes directly with capital spending. The Moldovan and Ukrainian
governments similarly lack technical expertise in budget forecasting and have no financial management
laws or policies requiring operational reserves, debt affordability analysis, debt limit, and debt disclosure.
According to the Moldova case study, the capital project prioritization process appears to be relatively
systematic compared to those of Albania and Ukraine. Moldova’s government adheres to the country’s
strategic plan and allocates capital resource based on the predicted usefulness of the projects. However,
the national government tends to not distribute powers to its local governments.
Uzbekistan also does not have financial management laws or policies to enforce fiscal discipline,
and the country case study does not document the presence of strong financial management practices.
The government has a capital financing policy designating that resources in all funds including the
General Fund are used as current revenue to finance capital projects while resources in the Fund for
Reconstruction and Development (FRD) are used for capital project debt financing, which generally
is in the form of commercial bank loans and private sector lending. The Uzbek government combines
capital projects serving citizens and those supporting national oil and gas production, which can result
in lopsided resource allocation toward national gas and oil production facilities and inadequate capital
projects servicing citizens and enhancing quality of life.
Russia and Burkina Faso were assigned ratings of poor for their budgeting and financial management
practices. Both countries do not have a separate capital budget. They do not have laws or written policies
enforcing fiscal discipline or guiding capital financing and debt management. Burkina Faso’s public debt
is monitored by the West African Economic and Monetary Union, and the country’s debt level (37% of
GDP) is well below the Union’s debt limit (70% of GDP). According to the authors of the Russia case
study, the government used to have a formal definition of capital expenditure (as real-estate and other
long-term investments that will increase the value of federal properties) and a separate capital budget,
but such practices no longer exist. There is no specific information on whether the Russian government
systematically prioritizes public capital projects and no information on the overall financial management
as it applies to capital expenditures.
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Albania, Korea and Taiwan received excellent ratings in this component given that the national govern-
ments in these countries centralize the monitoring process for project acquisition. The Korean government
manages and monitors capital project acquisition and capital resource disbursement across all acquisition
phases to ensure efficiency and prevent waste and fraud. In Albania, Article 65 of the Organic Budget
Law designates that the Ministry of Finance prepares and presents budget monitoring results to the
Council of Ministers and Legislature on a quarterly basis. The Capital Investment Department and Public
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Investment Management Committees track all capital projects and report budget disbursements to the
Ministry of Finance. In addition to the internal fiscal audit, performance auditing is practiced with the
Capital Investment Department frequently reviewing the progress of project acquisition and comparing
progression against plans. However, these auditing practices apply only to road and highway projects.
Taiwan is the best performer in this group, primarily because it integrates information technology
into project management and monitoring. Different ministries, agencies and state-owned enterprises
are responsible for project execution, but there is a central Public Construction Committee (PCC) that
supervises and monitors project acquisition and capital budget disbursement. In 2001, the PCC estab-
lished the Public Construction Management Information system which integrates information technology
with project execution and monitoring to improve capacity for internal control. Information related to
public construction including contractors, contracting amount, budgetary resources and disbursement,
expected time to complete, and progress toward completion are periodically updated and available in an
online clearinghouse for all approved capital projects. Such progressive practice is important for public
scrutiny and centralized monitoring to detect waste and fraud prior to project completion. In terms of
contract management Article 18 of the Government Procurement Act requires that the government
use open tendering procedures for capital projects valued at or more than NT$1 million. According to
Article 52 of the same act, the contract must be awarded based on the principles of lowest cost or most
advantageous tender. These examples show that Taiwanese project execution activities closely conform
to those recommended by the systematic process. While the case study authors mention corruption as a
possible concern, we note that the laws regarding public procurement and the relatively high degrees of
public disclosure for project implementation should alleviate some of the consequences of corruption
in procurement processes.
Germany, USA, and Uzbekistan received ratings of good for this component. The Budget Code of
the Republic of Uzbekistan requires that the Ministry of Finance monitor and track all projects financed
by the national budget on a quarterly basis. The Ministry compiles capital disbursement and project
acquisition information by requiring all agencies receiving resources from national budgetary funds to
report, on a monthly basis, project acquisition progress and disbursement information and activities. In
the USA, most subnational governments do not have a central committee or agency monitoring public
capital project acquisition; however, in practice, local governments are subject to state laws requiring
financial audits and financial statements at the conclusion of the fiscal year. For example, the Government
Accounting Standards Board recommends financial audit practices for states and localities according to
Generally Accepted Accounting Principles. Note, however, that these financial audits are ex-post con-
trols that take place after the fiscal year is over, and therefore may not be able to help these subnational
governments detect waste and fraud in the early stages of capital project acquisition. Germany’s system
is similar to those of the subnational governments in the USA except that Germany’s federal government
also prepares an annual financial report in addition to those of its local jurisdictions.
Moldova, Thailand and Vietnam received ratings of fair. The three countries have line agencies and
ministries responsible for monitoring capital projects, supervising project acquisition, and reporting
progress to the central government. This ex-post auditing, however, is inferior to ex-ante auditing that
can detect waste and fraud early. Thailand is the only country in this group that requires line agencies
and ministries to report capital disbursements to the Bureau of Budget which then displays project status
reports online. However, public capital projects financed through the annual budgeting process (monitored
by the Bureau of Budget) is only a small percentage of total capital spending. Large capital projects are
subject to a special built-in capital budgeting and approval process, but Thailand does not have a central
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unit that tracks capital project acquisition and disbursement for these projects. In practice, the Ministry
of Finance monitors large-scale projects financed by long-term debt, but the monitoring and tracking
of progress is dispersed. There is no clearinghouse that provides information about approved capital
projects, contributing to opaqueness and lack of transparency to the public.
The Moldovan and Thai governments have specific acts governing the public procurement process.
In Thailand, Article 22 of the Privatization Act requires that line agencies responsible for public projects
establish Monitoring Committees to monitor project execution. In Moldova, the Public Procurement
Act created a public procurement agency to monitor contracted projects, verify that all public procure-
ment processes comply with the procedures designated by the act, and provide reports on procurement
contracts. The Moldovan government can improve its performance in this component by establishing a
central agency to compile, track, and report all approved capital projects, not just those that are contracted
out. Vietnam does not have a centralized committee or agency to monitor public projects and does not
have any public procurement laws such as those in Thailand and Moldova. Like the USA, Vietnam’s
fiscal audit is an ex-post audit and is implemented for only large-scale capital projects.
Burkina Faso, Russia and Ukraine rank last among the case study countries in terms of centralized
execution and project management practices, receiving ratings of poor. Burkina Faso and Russia simply do
not any have any centralized project monitoring processes, internal auditing practices, or public procure-
ment rules or laws. The Ukrainian government has put in place internal auditing and project acquisition
monitoring; the Accounting Chamber, Anti-Monopoly Committee and State Financial Inspection are
responsible for tracking and supervising public project acquisition and capital disbursement nationwide.
However, in practice, the Ukraine case study author notes that these three units do not perform these
assigned functions. The Ministry of Economic Development and Trade is responsible for developing
and maintaining project status reports for all investment programs. However, the case study author notes
that once projects are started, they are rarely monitored or assessed. As a result, Ukraine is notorious
for having projects that are rarely completed causing significant amounts of sunk costs in acquiring
public infrastructure. As noted by the case study author, the World Bank (1997) estimated that since
1970, 60,000 projects were not finished and about 15,000 projects took at least 10 years to accomplish.
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Vietnam, Korea, Thailand and Moldova received good ratings for the infrastructure maintenance
component. These four countries have maintenance planning established; however, asset management
practices in Vietnam and Korea are not very sophisticated. With the assistance of the European Union,
the Moldovan government is currently developing an information system and inventory of all capital
projects. For maintenance planning, the Thai government is the most sophisticated. Its National Social
and Economic Development Board (NSEDB) compiles, estimates and reports public infrastructure stock
based on a perpetual inventory method. The NSEDB uses this information and projections of future
demand as a starting point for recommending the types of public investment for the country. However,
as mentioned by the authors of the Thailand case study, in practice ministries and agencies tend to make
projects appear to be consistent with the NSEDB’s plans so that the projects can be funded, making the
NSEDB project selection criteria ineffective. Thailand’s maintenance funding process is also incomplete.
While there are public resources available each year for repair, these resources are incorporated into the
annual operating budget instead of being set aside for maintenance.
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The Moldovan government integrates maintenance funding into the annual budgeting process with
maintenance funding annually determined based on depreciation rates of existing infrastructure. The
Moldovan government emphasizes accounting for public capital assets based on historical records of
investment, major repairs and upgrades, and depreciation rates, recognizing that such accounting infor-
mation will help guide capital resource allocation and project selection. The Vietnamese government
sets aside resources for public facilities in various sectors and separates maintenance allocation from
annual budgeting.
Germany, Ukraine, and Uzbekistan were rated fair for this component. Since inheriting its public
facilities from the former Soviet economy, the Ukrainian government has put some effort into asset
management although it does not have in place maintenance planning and funding. The case study
author notes that most of the public capital spending is to repair (rather than replace) aging facilities.
Uzbekistan has a maintenance funding system. For example, the country maintains the Republican Road
Fund in which earmarked revenue and surplus from natural resource exports are used to finance road
maintenance. Germany’s Basic Law requires the government to create and sustain a maintenance fund
containing earmarked revenue and surplus general revenue. However, the case study author notes that
in the last decade, Germany has faced problems in maintenance funding as public investment slowed
and the country experienced infrastructure aging and backlog.
Albania, Taiwan, Burkina Faso, Russia and U.S.A received poor ratings for infrastructure mainte-
nance. The Albanian government periodically assesses its capital stock, but the maintenance planning
system is not well established. The country sets aside some maintenance funding, but only for roads
and highways, and as noted in the country case study, even with maintenance funds being set aside,
Albanian roads remain inadequate. Furthermore, because of the focus on transportation, infrastructure
in other sectors are not maintained. The remaining governments rated as poor do not have any mainte-
nance planning and funding systems. The authors of the case studies specifically mention inadequate
maintenance performance in general, resulting in aging public infrastructure (subnational governments in
the USA), useless public buildings and so called “mosquito buildings” (Taiwan), and inadequate public
infrastructure (Burkina Faso and Russia).
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We are interested in the question of what drives differences in public capital management and budget-
ing practices across different countries. As a first step in answering this question we observe the case
study countries’ economic profile to identify patterns of relationships between economic performance
and public capital management and budgeting practices. Table 2 presents the total scores for the coun-
tries’ public capital management and budgeting processes, based on the evaluation rubric described in
the previous section, along with categorization according to the International Monetary Fund (IMF)
income group, total population in 2015, total GDP in 2015, per capita GDP in 2015 and per capita GDP
in 1990. Simple visual inspection does not suggest any patterns to the relationships between a country’s
capital management and budgeting total score and economic performance measured as income group,
GDP, and population size. We confirm our visual observation by performing correlation analysis. The
statistical results (shown in Table 3) indicate no relationship between economic performance and the
capital management and budgeting process.
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In the economic development literature, the convergence hypothesis asserts that a country starting
off its economy at a low-income level will grow faster than those starting off with higher income, and
eventually, the former’s economy will catch up with those of high-income economies (Barro & Lee,
1994; Baumol, 1986; Ben-David, 1996; Galor, 1996; Knack, 1996). This hypothesis is used to explain
why some countries develop faster than others. However, as shown in the last row of Table 3, the cor-
Table 2. Summary of capital management and budgeting total scores and economic performance data
for case study countries
Rank Country
Capital
Management &
Budgeting Total
Score
IMF Income
Group*
2015
Population
(million)**
2015 GDP
(billion)***
2015 Per
Capita
GDP***
1990 Per
Capita
GDP****
1st Korea 12 AE 50.7 1,740 34,314 8,276
1st Vietnam 12 LIDC 91.7 536 5,849 939
3rd Germany 11 AE 81.1 3,618 44,615 19,433
4th Taiwan 10 AE 23.5 977 41,569 8,178
4th Thailand 10 EM 65.1 1,020 15,662 4,298
4th United States 10 AE 321.2 16,940 52,740 23,955
5th Albania 9 EM 2.9 30 10,190 2,722
5th Moldova 9 LIDC 4.1 22 5,454 4,162
6th Uzbekistan 8 LIDC 31.3 284 9,078 1,985
7th Ukraine 6 EM 42.8 395 9,238 6,763
8th Burkina Faso 5 LIDC 18.5 27 1,444 546
8th Russia 5 EM 144.3 3,363 23,303 8,013
Source: Authors’ evaluation of capital management and budgeting practices; International Monetary Fund’s Economic Outlook Database
(2018); Population Reference Bureau (2015); and The World Bank (2018)
Notes:
* Income groups: Low income developing countries (LIDC), Emerging markets (EM), Advanced economies (AE); Retrieved from
International Monetary Fund (2018)
** For mid-year 2015; from Population Reference Bureau (2015)
*** Financial data are in real USD based year 2011; from IMF (2018)
**** 1990 Per Capita GDP is in current USD; from The World Bank (2018)
Table 3. Correlation coefficients for the relationship between capital management and budgeting prac-
tices and economic performance
Correlation
Coefficient
Capital Management and Budgeting Total Score 1.000
IMF Income Group 0.389
2015 Population (million) 0.109
2015 GDP (billion) 0.159
2015 Per Capita GDP 0.427
1990 Per Capita GDP 0.273
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relation between the 1990 GDP per capita and the total score for the capital management and budgeting
process (r = 0.273) is not in the negative direction and is weak. We note that this simple correlation
analysis is utilized to detect patterns and is not intended for statistical confirmation purposes due to the
small number of case study countries.
1
Next, we observe a country’s public administration institutions in order to find some clues about the
relationship between public administration functions and structures, and the public capital management
and budgeting process. To do this we obtained data from the Quality of Government (QoG) 2015 Expert
Survey II (Dahlström, Teorell, Dahlberg, Hartman, Lindberg & Nistotskaya, 2015), which provides an as-
sessment of the organizational design of public bureaucracies and bureaucratic behavior across countries.
2
Using our country case studies we examine the correlations between a country’s public administration
functions and structures (from the QoG 2015 Expert Survey II) and the capital management and bud-
geting total scores we assigned to that country. The goal of this exercise is to obtain some preliminary
insights into factors that may explain why the quality of capital management and budgeting varies across
countries. By looking at the sign, magnitude, and statistical significance of the correlation coefficients,
we hope to develop some ideas about (1) the direction of the relationship between institutional factors
and capital management and budgeting, (2) the strength of these relationships, and (3) unobservable
factors that may affect capital management and budgeting practices.
Among the 59 variables included in the 2015 Quality of Government Expert Survey II, five public
administration institutional variables were statistically significant (p<.05) and in the expected direc-
tion, exhibiting strong relationships between capital management and budgeting total scores and public
administration institutions (see Figure 1). The five public administration institutions are: merit-based
Figure 1. Spearman’s Rho exhibiting direction and magnitude of the relationship between capital man-
agement and budgeting total score and public administration institutional factors
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recruitment, due process in public human resource management, the extent to which minorities are
represented in the public employee workforce, the percent to which public spending for needy poor
recipients are received by needy poor groups, and the percent to which public spending for needy poor
recipients go into public employees’ own pockets.
3
Case study countries that have a merit-based system for hiring and retaining public sector employees
tend to have higher quality capital management and budgeting practices. Likewise, countries with due
process in hiring, firing, promoting, and paying public sector employees tend to have higher quality
practices. This is as expected given that capital management and budgeting require technical expertise
and skills to perform activities such as revenue forecasts, debt affordability analysis, cost-benefit analy-
sis, and ranking public projects based on a systematic scoring process. Merit-based recruitment and
due process in human resource management tend to ensure the public workforce has skilled labor with
technical expertise and, as a result, the management tools, procedures, and implementation processes
these employees undertake will result in systematic capital management and budgeting practices.
The relationships between capital management and budgeting and whether public spending for the
needy poor goes to the needy poor or into public employees’ own pockets are also not surprising. In
any objective resource allocation process, the allocation decision is focused on enhancing quality of life
and targeting the needy poor reflects such a priority. If, for some reason, there is corruption in diverting
public resource towards public employees themselves to be used for their own purposes, that tends to
reflect capital management and budgeting practices that are relatively poor quality. Combined, these
relationships suggest that capital management and budgeting practices may be better in countries where
public-sector corruption is relatively low.
The relationship between minority representation in the public sector workforce and capital manage-
ment and budgeting is negative with a relatively large magnitude, suggesting that diversity and pressure
from a pluralistic society may contribute to weakening of the capital management and budgeting process.
This is not surprising particularly in the context of capital management and budgeting practices that select
projects and allocate reasons based on economic analysis and reasoning, where the winners and losers
of such objective practices may not correspond to the diverse wants of society and public employees
seeking to meet these diverse interests.
We also examine the correlations between capital management and budgeting total scores and political,
economic, and public sector factors included in the QoG Standard Dataset Project (Teorell, Dahlberg,
Holmberg, Rothstein, Alvarado & Svensson, 2018). The QoG Standard Dataset consists of 2,100 variables
compiled from 100 publicly-available data sources (e.g., from the World Bank, International Monetary
Fund). We found several interesting relationships between the capital management and budgeting total
scores and QoG Standard Dataset variables (statistically significant at .05 level, exhibiting relatively
large magnitude and in the expected direction).
4
Four variables are worth mentioning. First, the variable representing the share of government con-
sumption to GDP has a large and significant correlation coefficient (-0.7929), suggesting that about 79%
of the capital management and budgeting total score is negatively related to the share of government
consumption to GDP. This negative relationship implies that countries whose governments consume
relatively less on non-durable goods and services tend to have stronger capital management and budget-
ing practices. Conversely, the QoG Standard Dataset does not contain public investment data; however,
since government spending includes public consumption and investment, we posit that it is therefore
quite likely that the size of public investment (i.e., public capital spending) is related to the capital
management and budgeting process.
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Second, the share of merchandise imports to GDP has a large and significant correlation coefficient
(-0.7005). This hints at issues related to a country’s openness to trade, but since the share of merchandise
exports to GDP is not statistically significant, we cannot conclude that the level of economic openness
is related to capital management and budgeting. However, this variable suggests general patterns where
a government that is saving-oriented (i.e., consumes less and imports less world merchandise) tends to
have a better capital management and budgeting process. Government savings orientation may be an
important clue for understanding factors underlying variations in the quality of capital management and
budgeting in different countries.
Third, the correlation coefficient for the variable representing the number of years since the last
amendment to the Constitution was adopted is positive (0.8023) and statistically significant suggesting
that countries with stable laws tend to have higher quality capital management and budgeting practices.
Finally, an additional public administration institutions variable, the Bayesian Corruption Index (a com-
posite index of the perceived overall level of corruption and defined as the “abuse of public power for
private gain” published by Transparency International and the World Bank), is negatively related to the
capital management and budgeting total score (correlation coefficient of -0.7825). This suggests that
public capital management and budgeting practices become weak in an environment where corruption
is widespread.
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We further examine the relationship between capital management and budgeting practices to the share
of government consumption. Specifically, Figure 2 shows the relationship between capital management
and budgeting total scores (on the Y-Axis) and the share of government consumption to GDP (on the
X-Axis), highlighting an emerging theme that comes out of this comparison of government consumption
and public capital management and budgeting practices. As shown in Figure 2, the Albanian government
is average in terms of its capital management and budgeting practices (total score of 9) and its share of
government consumption (21%) is at about the average across all case study countries. Countries with
shares of government consumption that are below the average tend to have above average capital manage-
ment and budgeting total scores. For example, Vietnam and Korea have high capital management and
budgeting total scores (total scores of 12) and below average government consumption to GDP (11%
for Vietnam and 15% for Korea). Shares of government consumption were similarly below average for
the USA, Thailand, and Taiwan, and correspondingly their capital management and budgeting practices
were above average.
The same pattern manifests when looking at countries with shares of government consumption to GDP
that are above the average. As Burkina Faso’s profile illustrates, the share of government consumption is
above average (23%) and the country’s capital management and budgeting total score is below average
(total score of 5). The former Soviet Union countries (with the exception of Moldova) and Burkina Faso
are consistent with the emerging theme; their capital management and budgeting performance scores
are all below average and their shares of government consumption are above average.
Given that transitioning economies are quite unique compared to the rest of the world in terms of
government regimes, management culture, and other factors, we look at the profiles of the countries in
this sub-group: Moldova, Russia, Ukraine, and Uzbekistan. As a whole these countries seem to conform
to the emerging theme, but when individual countries are compared, the patterns are not consistent with
the emerging theme. One likely explanation for this is the different levels and types of technical assistance
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that these countries receive given their status as transitioning economies. For example, at present the
Moldovan government is actively pursuing European Union membership. As presented in the case study,
the country is receiving technical assistance from the European Union in setting up its management and
budgeting processes. Significant parts of the capital management and budgeting total scores assigned to
Moldova are the result of the recently established public budgeting and financial management rules and
laws that resulted from this external technical assistance. Had the Moldovan government not received
technical assistance, its capital management and budgeting total score would be well below average.
Uzbekistan’s capital management and budgeting total score was 8, and we would expect its shares of
government consumption to be slightly above average. However, the country’s capital management and
budgeting process is unstable and depends on the levels of capital investment and the President’s deci-
sions that tend to be haphazard. Similarly, according to the emerging theme, Russia should have better
capital management and budgeting practices than those of Ukraine since its share of consumption is less
than those of Ukraine. However, data in Figure 3 shows the opposite. Based on this sub-group analysis,
we recognize that we do not clearly understand these former Soviet Union countries, except the explana-
tion that compared to the entire group they perform worse than the average and tend to have larger than
average shares of government consumption (except for Moldova). Our limited country case studies are
not enough to reveal significant themes in this subgroup. Furthermore, we believe that the countries in
this group deserve special analysis and additional research is needed.
Figure 2. Correlation between capital management and budgeting practices and share of government
consumption to GDP
Source: Analysis by the authors
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Based on the extant literature in international development and public finance, coupled with our initial
observations from comparing the case study countries, we develop a tentative theory for explaining
variations in public capital management and budgeting processes across countries. With this tentative
theory, which we call a tentative theory of public investment behavior, we also posit several propositions
regarding antecedents and outcomes of the public capital management and budgeting process.
The practices recommended by the public finance literature suggest that to have a high-quality
capital management and budgeting process, a government must have human capital with some degree
of technical competency and expertise to conduct such complex tasks as financial planning and fore-
casting, cost-benefit analysis, systematic project ranking, and capital inventory analyses. According to
the initial observations just discussed, we see a strong relationship between capital management and
budgeting total scores and merit-based practices and due process in public sector recruitment, hiring,
promotion and dismissal. Such processes are key for ensuring high levels of talent and expertise within
public sector organizations. Employees bring to their organization important skills and expertise which
in turn, set the management styles and work processes of the organization (Wright, 2004; Bloom, Gena-
kos, Sadun, & Reenen, 2012). Collectively, talented and expert labor apply their skills and professional
viewpoints to the work of the organization, resulting in more sophisticated working practices that are
conducive to systematic decision-making processes (Wright, 2004; Bloom, Genakos, Sadun, & Reenen,
2012; Kontoghiorghes, & Kalomyra, 2009). Thus, our first two propositions within this tentative capital
management and budgeting theory are stated as follows:
Proposition 1: The more extensive meritocratic recruitment and retention are practiced in a country’s
public sector human resource management, the better the country’s quality of capital management
and budgeting.
Proposition 2: The more due process is present in the country’s public sector human resource manage-
ment, the better the country’s quality of capital management and budgeting.
A strong capital management and budgeting process not only requires a merit-based employment
structure with an emphasis on due process, but also requires objective and ethical public sector employees.
Not surprisingly, then, we observe a strong relationship between the quality of the capital management and
budgeting process and levels of corruption. For example, our initial observations suggest that in a country
where the capital management and budgeting process is of relatively high quality, the implementation
of public programs and delivery of public services tend to successfully distribute resources to the needy
poor. In contrast, in a country where the capital management and budgeting process is of relatively low
quality, public program implementation and public service delivery tend to divert resources into public
employees’ pockets. Likewise, as mentioned above, a country with relatively poor capital management
and budgeting practices would have a relatively high Bayesian Corruption Index.
The international development literature is mixed regarding the effects of corruption, suggesting
that corruption may either ‘grease’ or ‘sand’ the wheels in terms of economic activities and economic
development (see for example Ahmed & Asmaa, 2016; Aidt, 2009; Blackburn & Forgues-Puccio, 2009;
DiRienzo & Das, 2015; Ibrahim, Kumi, & Yeboah, 2015; Méon & Sekkat, 2005; Saastamoinen & Kuos-
manen, 2014). The ‘greasing the wheels’ hypothesis suggests that corruption expedites public program
implementation while the ‘sanding the wheels’ hypothesis instead suggests that corruption impedes the
6XPPDU\,QLWLDO2EVHUYDWLRQVDQG*HWWLQJWRD7HQWDWLYH7KHRU\RI3XEOLF,QYHVWPHQW%HKDYLRU
public service process. At the international level, Lambsdorff (2003) finds that corruption, especially
with regards to capital spending, reduces efficiency in providing public infrastructure. Given that the
systematic capital management and budgeting process requires accountability, public disclosure, and
open-bidding processes in centralized execution and project management, it is not surprising that we
observe higher quality capital management and budgeting practices in environments where corruption
is generally not present. Thus, our third proposition is:
Proposition 3: The less corruption that exists in a country’s public sector, the better the country’s quality
of capital management and budgeting.
In the entrepreneurial finance literature, scholars have studied angel investors’ behavior and invest-
ment decision making (Maula, Autio, & Arenius, 2005; Maxwell, Jeffrey, & Lévesque, 2011; C. Mit-
teness, Sudek, & Cardon, 2012; C. R. Mitteness, Baucus, & Sudek, 2012; Smith, Harrison, & Mason,
2010; Wiltbank, Read, Dew, & Sarasvathy, 2009). Angel investors are wealthy individuals who act as
informal venture capitalists investing own capital directly into early stage ventures (Wiltbank et al.,
2009). Forrester (2014) finds that angel investors’ decisions cannot be explained by traditional finance
theories such as expectancy theory where cognitive processes are used in deliberation and decision
making. Instead, because of information asymmetry, especially in terms of predicting future returns on
investment, angel investors are influenced by cognitive biases formed through personal experiences,
including risk perception (Forrester, 2014).
To deal with uncertainty, angel investors rely on heuristics to determine the level of cognitive process
needed for instances of decision making. More specifically, angel investors must decide on the need for
due diligence (i.e., activities, time, effort and resources to gather information on the potential invest-
ment) which often involves technical and complicated tasks such as background checks, analysis of the
size of the target market, determination of growth potential, cash flow projection, and asset valuation
(Forrester, 2014). There is evidence in the entrepreneurial finance literature that angel investors reduce
information asymmetry by performing activities related to due diligence (Mason & Harrison, 2003; Stuart
& Abetti, 1990) and that time spent on due diligence reduces such asymmetry, thus improving angel
investment returns (Wiltbank & Boeker, 2007). More importantly, time spent on due diligence increases
with the percentage of wealth invested by the angel investor (DeGennaro & Dwyer, 2014; Mitteness et
al., 2012; Smith et al., 2010; Wiltbank & Boeker, 2007). Specifically, Wiltbank et al., (2009) find that
due diligence was significantly and positively related to investment size; where more due diligence is
performed, more money is being put into the new venture.
This connection between the practice of due diligence and investment behavior may be extended to
the situation of public investment at the country level. In the analysis of the twelve country case studies
presented in this book we see that countries with a meritocratic public workforce tend to have higher
quality capital management and budgeting practices (equivalent to practicing more due diligence), which,
in turn, relates to low consumption levels (equivalent to high investment levels). Wiltbank et al. (2009)
also find that angel investors who perform due diligence become confident and tend to invest more than
others. We would similarly reason that a country with a highly skilled workforce (recruited and retained
through a merit-based system) would have the expertise to conduct reasonable due diligence (i.e., hav-
ing systematic capital management and budgeting practices) that would result in high levels of public
investment.
6XPPDU\,QLWLDO2EVHUYDWLRQVDQG*HWWLQJWRD7HQWDWLYH7KHRU\RI3XEOLF,QYHVWPHQW%HKDYLRU
The entrepreneurial finance literature also notes differences in how novice angel investors and experi-
enced angel investors approach investment decision making. Specifically, novice angel investors perform
more due diligence (e.g., spend more time asking questions) than do experienced angel investors (Smith
et al., 2010). At the country level we can see parallels between novice angel investors and countries
with a saving orientation. Novice investors have less experience and therefore emphasize due diligence
as a way to overcome challenges arising from information asymmetry. Savings-oriented countries may
emphasize due diligence and a systematic decision-making process for public investment to overcome
challenges of information asymmetry that arise due to a strong focus on managing general consumption.
Based on applying findings from the entrepreneurial finance literature and our initial observations
from the country case studies, our final three propositions are as follows:
Proposition 4: The greater the country’s saving orientation, the better the country’s quality of capital
management and budgeting.
Proposition 5: The more extensive meritocratic recruitment and retention are practiced in a country’s
public sector human resource management, the higher the country’s public investment level.
Proposition 6: The better the country’s quality of capital management and budgeting, the higher the
country’s public investment level.
Figure 3 summarizes our tentative theory of public investment behavior that connects the extent to
which a country undertakes due diligence in its public investment decision making (i.e., having a sys-
tematic capital management and budgeting process) to possible antecedents and outcomes. The arrows
on the left side of Figure 3 show administrative factors that may influence the extent to which a country
adopts high quality capital management and budgeting practices. These factors correspond to Proposi-
tions 1, 2, 3, and 4. For example, consistent with Propositions 1 and 2, a country with a skilled public
workforce supported by a human resource management system that is merit-based and incorporates due
process will tend to put in place a systematic capital management and budgeting process. High levels
of corruption in a country can also result in strong opposition to putting in place a systematic capital
management and budgeting process, as such a process involves practices that remove both subjectivity
and opportunities for public sector officials and employees to personally benefit from public investment
decisions. As such, countries with public investment decision making that takes place in an environment
marked by corruption will have lower quality capital management and budgeting practices (Proposition 3).
Approaches to public investment may also be contingent on risk aversion, levels of emphasis or expe-
rience, and resources. Countries with a saving orientation are more likely to commit time and resources
to a systematic capital management and budgeting process, with an expectation of reducing risks, ad-
dressing uncertainty, and generating higher rates of return on its investment. In contrast, consumption-
maximizing countries focus on consumption rather than investment and are reluctant to implement a
systematic capital management and budgeting process when they are not expecting high rate of returns
on their limited public investments relative to high transaction costs. We expect the opposite to hold as
well, in that savings-oriented countries will, due to concerns about information asymmetry, put in place
better quality capital management and budgeting practices (Proposition 4).
Figure 3 also shows that skillful public workforce and public investment level (i.e., investment orienta-
tion) are interrelated. Specifically, Proposition 5 suggests that public sector human resource management
can result in relatively high level of public investment. Finally, Figure 3 suggests that when a country
6XPPDU\,QLWLDO2EVHUYDWLRQVDQG*HWWLQJWRD7HQWDWLYH7KHRU\RI3XEOLF,QYHVWPHQW%HKDYLRU
adopts and implements high quality capital management and budgeting process, its investment level tends
to be relatively high because the due diligence practices in public investment makes the government
become confidence in committing relatively high resources (Proposition 6). To summarize, Figure 3
suggests that the antecedents of the systematic capital management and budgeting process include saving
orientation, meritocratic recruitment and retention in public sectors, due process in public sectors, and
corruption environment while the outcome of the systematic capital management and budgeting process
is a high level of public investment.
&21&/86,21
This book began with the description of a systematic capital management and budgeting process that is
intended to be useful and responsive to the public’s capital needs and supports a public infrastructure
system that has reasonable cost compared to its useful life. This systematic process includes four com-
ponents: long-term capital planning, budgeting and financial management, centralized execution and
project management, and infrastructure maintenance. The book then provides twelve country case studies
that describe public capital management and budgeting practices in Albania, Burkina Faso, Germany,
Korea, Moldova, Russia, Taiwan, Thailand, Ukraine, Uzbekistan, USA, and Vietnam.
Analysis of these country case studies show that there are variations across the countries in terms
of their public capital management and budgeting practices. Beyond these differences we also find
that capital management and budgeting practices are related to various public sector factors. We use
these initial observations to propose a tentative theory along with several propositions that connect the
systematic capital management and budgeting process to possible antecedents. While we note that this
theory is tentative, it does suggest some venues for further study of factors affecting how countries ap-
proach capital management and budgeting. Furthermore, the tentative theory offers a starting point for
Figure 3. A tentative theory of public investment behavior
Source: Authors’ syntheses
6XPPDU\,QLWLDO2EVHUYDWLRQVDQG*HWWLQJWRD7HQWDWLYH7KHRU\RI3XEOLF,QYHVWPHQW%HKDYLRU
thinking about implications of the systematic approach to capital management and budgeting in terms
of key public investment outcomes (such as levels of public investment, quality and quantity of public
infrastructure, private sector investment, etc.) and governance factors such as openness and transparency,
corruption, and accountability.
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(1'127(6
1
We also want to determine the relationship between the 1960 per capita GDP and the Capital Man-
agement and Budgeting score (CMB). Unfortunately, the former Soviet Union member countries,
which include almost half of the case study countries, do not have GDP data prior to 1990.Thus,
we are unable to inspect the income convergence pattern using 1960 GDP data.
2
The 2015 Expert Survey II is part of the Quality of Government (QoG) project sponsored by the
Quality of Government Institute, University of Gothenburg, Sweden. The QoG Expert Survey is
a longitudinal project to collect data on the organizational design of public bureaucracies and bu-
reaucratic behavior in different countries. According to Dahlström et al. (2015), the purpose of the
QoG Expert Surveys is to provide quantitative assessment of the organizational design of public
bureaucracies and bureaucratic behavior across countries. Conceptually, the survey questionnaires
were written based on Evans and Rauch’s pioneering research on Weberian bureaucracies, New
Public Management, and administrative impartiality. The 2015 Expert Survey II’s respondents
include 1,294 public administrators across 159 countries (Dahlström et al., 2015). The Quality of
Government Institute compiled and updated the list of survey respondents, who are public admin-
istrators in each country (Dahlström et al., 2015). Each country has at least 3 public administrator
respondents.
6XPPDU\,QLWLDO2EVHUYDWLRQVDQG*HWWLQJWRD7HQWDWLYH7KHRU\RI3XEOLF,QYHVWPHQW%HKDYLRU
3
These public administration institutions are operationalized by the QoG Expert Survey as follows:
• Merit-based recruitment: Public sector employees are hired via a formal examination system.
• Due process in public human resource management: The practice of hiring, firing, promoting
and paying public sector employees follows the provisions of the laws and other legal documents
regulating these processes.
• Minorities are represented in the public employee workplace: Key ethnic and religious groups
in society are proportionally represented among public sector employees.
• Public spending reaches the needy poor: The percentage of funds that would reach the needy poor
in a hypothetical situation where a typical public sector employee is given the task to distribute an
amount equivalent to USD 1000 per capita to the needy poor in the country.
• Public spending goes into public employees’ pockets: The percentage of funds that would go
into the public employee’s own pocket in a hypothetical situation where a typical public sector
employee is given the task to distribute an amount equivalent to USD 1000 per capita to the needy
poor in the country.
4
The complete list of the correlation coefficients for these 80 variables can be obtained from the
editors.
