Auditing the three E's of infrastructure development projects: experience of the SAI Latvia
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Construction of new public infrastructure objects and renovation of existing ones requires significant amount of financial resources. Depending on country specifics, central and local governments finance various types of public infrastructure, for example, transport infrastructure, education facilities, health facilities, recreational infrastructure. However, large scale projects also pose a significant risk that public funds may be wasted – problems may arise with overdue deadlines, rapidly rising construction costs, poor quality, and expensive maintenance, to name just a few potential complications. Thus it is important that such projects are planned and executed in the most economic, effective and efficient way possible.
With this idea in mind, in 2019 the State Audit Office of Latvia (SAI Latvia) carried out an audit on planning, implementation and funding of municipal infrastructure projects – 'Compliance of Municipal Infrastructure Objects and Project Funding System, Process, and Criteria with Principles of Rational Use, Efficiency, and Sustainability of Finances'. In previous years municipalities had been actively borrowing state budget funding for construction of public infrastructure (for example, swimming pools, sports centres, concert halls), so we decided to audit how well municipalities had planned and executed these infrastructure development projects and how carefully the state had assessed feasibility of their funding applications. As a result, the Ministry of Finance and 15 of Latvia's 119 municipalities were included in the audit sample.
Since the audit was intended to provide a systemic view of the situation in municipalities, we chose to approach infrastructure development from a project management perspective. That is, we focused on the overall quality of the project management cycle in municipalities as well as selected more than 30 projects for an in-depth examination.
In order to develop criteria for evaluating municipal performance in infrastructure sphere, auditors examined international practice – project management standards, guidelines and best practice summaries of project management organisations (for instance, the Project Management Institute), guidelines on good governance developed by the Council of Europe. As a result, auditors produced a list of minimum steps that municipalities should carry out to ensure the feasibility of the project. Although these criteria have been developed for municipalities, they can be applied to other developers of public infrastructure as well.
· Infrastructure development planning
o In a situation of many needs and limited funding, the municipality has set priorities for infrastructure development and follows them
o Planning is based on the needs of residents and actual data (for example, population surveys, traffic intensity measurements)?
· Coherent development of infrastructure and cooperation of municipalities
o The municipality ensures coordinated development of infrastructure within its administrative borders. For example, the municipality ensures that residential areas are well connected by roads to schools, hospitals and other important infrastructure objects.
o The municipality coordinates timing of complementary projects. For example, when planning major road construction, the municipality also plans works on related underground infrastructure (pipes, cables, etc.)/
o The municipality evaluates infrastructure and opportunities for cooperation in neighbouring municipalities. For example, what is the experience of other municipalities in implementing similar projects?
· Research and calculations prior to the implementation of the project
o The municipality has identified the target audience and potential workload of the object, taking into account demographic trends in the municipality and its neighbouring territories.
o The municipality has identified the necessary size of the infrastructure object and the need for certain types of use (including types of rooms and their sizes). For example, what is the necessary size and parameters of school's sports facilities? Could the goal be reached also with infrastructure of a smaller size?
o The municipality has calculated and analysed potential revenues and expenses (including maintenance expenses) and assessed their impact on the municipality's budget in the long term.
o The municipality has cooperated with industry professionals (state institutions, industry associations) during the project planning and implementation phase. For example, the municipality has found out what are the specific requirements for concert hall acoustics or swimming pool parameters to host official competitions.
· Risk management measures to control and reduce potential risks
o The municipality systematically controls and, if necessary, limits the maximum amount of construction costs;
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After completing the construction of the object, the municipality has gathered and analysed data about operation of the object – revenues, maintenance costs, number of visitors, etc. For example, are there any improvements that could be made or lessons for future projects?
The audit revealed a number of weaknesses in the planning, financing, and management phases of projects, which require improvements. Municipalities often underestimate the importance of development planning and don't set specific infrastructure priorities based on the needs of population. Without setting specific infrastructure priorities arising from the needs of the population, municipalities find it hard to implement the projects necessary for the development of their territory and to plan the municipal budget purposefully.
Likewise, municipalities don't assess the economy and efficiency of the projects in full before they implement them. As a result, municipalities often face differences between actual project results and initial intentions, including the need for additional funding for unscheduled work, inconsistencies in revenue and expenditure with the initial forecasts, and a lower number of visitors than expected.
The practice of cooperating regarding the use or construction of infrastructure is also not widespread among local governments, and they even often compete unnecessarily with each other when building new infrastructure. The planned scope of infrastructure sites is not always proportionate with the actual situation and the necessity in the municipality. For instance, one of the municipalities planned reconstruction of a primary school stadium with parameters suitable to the organization of professional competitions and estimated costs of least 1.33 million euros. However, sports infrastructure of that scale is not necessarily required for the primary school curriculum.
Although municipalities have the opportunity to consult field experts upon their own incentive, such as sports federations on the specific requirements of sports facilities in a timely manner, only part of them do so. Thereby deficiencies are identified during construction and operation, resulting in additional costs due to changes in design and construction processes (for instance, swimming pools that are not suitable for organizing official competitions or equipment that is much more advanced and expensive than necessary).
Lastly, the state loan system does not provide the opportunity to reject projects whose priority, cost-effectiveness, efficiency, and sustainability a local government has not justified sufficiently in its loan application. The fact that 99% of loan applications are approved illustrates that statement. Even if the local government has not assessed the need for the project carefully, it can obtain a loan.
Based on the audit findings, the SAI Latvia made recommendations to 15 municipalities to improve their project planning, implementation, financing, and monitoring processes. Recommendations have also been made to the Ministry of Finance to improve the loan-granting system to local governments.
Overall, this audit allowed us to draw significant conclusions on best approaches to auditing infrastructure development. First of all, we realised that public sector projects can be audited according to project management standards that are used in the private sector. The main project management processes and issues that must be considered for a project to be successful in a public or private setting are very similar.
Moreover, sustainable infrastructure development requires coherent and coordinated policies at both regional and national level. To ensure that public finances are spent rationally, local and regional infrastructure development plans must be consistent with national plans and policies.
Summary of the above audit report is available on the SAI Latvia website: https://www.lrvk.gov.lv/en/audit-summaries/audit-summaries/compliance-of-municipal-infrastructure-objects-and-project-funding-system-process-and-criteria-with-principles-of-rational-use-efficiency-and-sustainability-of-finances
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