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United Arab Emirates: Selected Issues

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
July 2014
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The Efficiency of Public Spending in the United Arab Emirates1

1. In 2014, the federal and emirate governments will together spend about AED 350 billion, or about one quarter of the United Arab Emirates’ GDP. The spending will promote important goals such as “equal opportunity and access to first-rate education” and “long and healthy lives” for all Emiratis (United Arab Emirates’ Vision 2021). The efficiency with which this money is spent will help determine the extent to which these goals are met. Assessing and, where possible, improving the efficiency of the spending is thus of great importance.

2. This paper examines the efficiency of the United Arab Emirates’ public spending. It starts by looking at survey-based indicators of the effectiveness of government spending, and then compares outcomes such as life expectancy and school test scores with the amount that Emirati governments spend on health and education. Drawing on a regional study, it then looks in more depth at the efficiency of public investment, by (i) comparing the quality of infrastructure with spending on public works, (ii) examining scores on the Public Investment Management Index, and (iii) presenting data on the cost of constructing roads and metros. Because budgeting determines how public resources are used, the paper turns finally to an examination of the federal government’s new approach to budgeting, which aims to improve the efficiency of spending by establishing a three-year cycle, classifying spending into programs and services, and tracking performance indicators.

3. Budgeting and assessments of the efficiency of public spending confront important measurement problems. The objectives of government spending are often multidimensional and hard to specify precisely. In addition, the achievement of the government’s objectives depends on factors outside the government’s control. These problems mean that governments must allocate spending in the budget on the basis of highly imperfect information. They also make any assessment of the efficiency of public spending necessarily provisional.

A. Overall Perception of Effectiveness

4. Surveys show that governments in the United Arab Emirates are generally perceived as effective (Figure 1). Some of the World Bank’s Worldwide Governance Indicators, which are based mainly on surveys, are relevant to the effectiveness of government spending. The 2012 results ranked the United Arab Emirates 35th and 36th, respectively, out of 215 economies for government effectiveness and the control of corruption.2 Transparency International’s 2013 Corruption Perceptions Index also ranks the United Arab Emirates well (26th out of 177 economies). Several other, mainly survey-based results come from the World Economic Forum’s Global Competitiveness Report 2013–14 (World Economic Forum, 2013). This gives the United Arab Emirates high rankings for the absence of wastefulness of government spending (third best in a sample of 148 economies). The reliability of the police is rated 12th best, and quality of primary education 19th best. As detailed below, the United Arab Emirates’ infrastructure is rated fourth best in the world.

Figure 1.Selected Indicators Relevant to Efficiency of Public Spending

(Percentile, 2012)

Source: World Bank’s Governance indicators (WGI) and Global Competitiveness Report, 2013/14 (GCR).

5. Stronger evidence of efficiency requires comparisons of outcomes with spending. Survey participants may have a good idea of the quality of government services, but they generally do not know how much the services cost to produce. High-income countries can usually provide better services whether or not they are efficient. The United Arab Emirates’ score on government effectiveness, for instance, is high relative to those of most other countries, but not especially high given the country’s per capita income (Figure 2). To evaluate efficiency, it is necessary to compare indicators of quality with information on spending.

Figure 2.Perceived Government Effectiveness and GDP Per Capita, 2013

Sources: World Bank Worldwide Governance Indicators; IMF.

B. Efficiency of Spending on Health and Education

6. On the face of it, public spending on education is low but efficient. A common measure of the outcome of education spending comes from Program for International Student Assessment (PISA) tests of students’ ability in reading, science, and mathematics. In the United Arab Emirates, PISA scores are a little below average. But the United Arab Emirates appears to spend very little per capita on education compared to other countries of similar incomes, and no country that spends as little as the United Arab Emirates has higher PISA scores (Figure 3, panel (a)). In this sense, the data suggest prima facie (we consider some qualifications below) that Emirati governments are efficient in producing educational outcomes, but they also raise the question of whether the United Arab Emirates is spending too little on education.

Figure 3.United Arab Emirates: Public Spending and Selected Outcomes in Education and Health, 2012

Sources: OECD for PISA scores. Public spending on education in the UAE is for 2011 and is taken from the Government Finance Statistics Yearbook 2013 (IMF, 2014, p. 519). For the UAE, the purchasing-power-parity exchange rate is the same as the actual exchange rate, according to the World Bank (http://data.worldbank.org/indicator/PA.NUS.PPPC.RF). Note: The PISA scores are unweighted average of 2012 mean scores

7. Public spending on health, by contrast, is relative high, but seems less efficient. The data suggest that, relative to other countries, UAE governments’ spending on health is much higher than is their spending on education. Here, however, the data suggest that there is room for improved efficiency. Panel (b) of Figure 3 shows that, in several countries, people expect to live longer than in the United Arab Emirates even though their governments spend less.

8. These initial comparisons are, however, far from conclusive. First, the achievement of the governments’ objectives cannot be satisfactorily summarized by a single indicator such as test scores or life expectancy. Education, for instance, is about more than teaching students to read, understand science, and solve mathematical problems. Second, the extent to which the governments’ objectives are met depends on more than just the efficiency of public spending. Longevity, for instance, may depend on private as well as public spending on health care, and on diets, exercise, climate, and so on. For these reasons, the apparent room for improvement in the efficiency of health spending in the United Arab Emirates suggested by Figure 3(b) (above) could be an illusion. Likewise, public spending on education may be low in the United Arab Emirates per capita because many residents are immigrant workers without school-age children. Finally, there may be errors in the measurement of spending and outcomes and cross-country differences in definitions. The United Arab Emirates is only just beginning to measure consolidated government spending and classifying that spending by function, so its data need to be viewed with particular caution. In particular, some spending on education may not be classified as such.3

9. It is possible to mitigate some of the problems with simple comparisons. Health spending, for instance, can be compared not with life expectancy but with a measure developed by the World Health Organization of health-adjusted life expectancy (see Grigoli and Kapsoli, 2013). Substituting this measure for simple life expectancy in Figure 3(a) above also suggests that spending in the United Arab Emirates has room for improvement in efficiency. It is also possible to compare spending not with outcomes such as ability to read and solve mathematical problems, but with outputs, such as numbers of students taught. Outcomes are what ultimately matters, but outputs are what are under the government’s control. Grigoli (2014) considers spending on secondary education and secondary-school enrolments in emerging and developing economies. His data imply that public spending on secondary education per student (in contrast to total education spending per capita as shown in Figure 3(b) above) is relatively high. His results suggest that Emirati governments are more efficient in the production of schooling than most, but that more students could still be educated without increasing spending if the United Arab Emirates were fully efficient (Figures 4 and 5). As these issues suggest, a satisfactory assessment of the efficiency of spending requires an examination of the problem from many angles, including detailed public-expenditure reviews which are beyond the scope of this study.

Figure 4.Public Spending and Enrollment Rates in Secondary Schooling

Source: Grigoli (2014, figure 6).

Figure 5.Potential Efficiency Gains in School Enrolment

(Percentage)

Source: Grigoli (2014, figure 6).

C. A Closer Look at the Efficiency of Public Investment4

10. As noted above, the perceived quality of United Arab Emirates’ infrastructure is high. According to the World Economic Forum’s Global Competitiveness Indicator’s 2013/14, the United Arab Emirates’ ports are the fourth best in the world, its air transport the third best, and its roads the best. In terms of overall infrastructure quality, the United Arab Emirates compares favorably to advanced countries such as Finland, Germany, Singapore, and Switzerland, and its public capital stock is high (Figures 6, 7).

Figure 6.Global Competitiveness Indicators, 2013

(1=minimum, 7=maximum)

Figure 7.Public Capital Stocks and Quality of Overall Infrastructure, 2013

Sources: Global Competitiveness World Economic Forum; IMF staff

D. Efficiency Frontier Analysis

11. The efficiency of public investment can be assessed using two techniques that measure how well countries transform inputs (money) into outputs (infrastructure). Specifically, efficiency can be measured using a Data Envelopment Analysis (DEA) and a Partial Free Disposal Hull (PFDH). The main difference between these approaches is that the DEA compares each country against a fixed country sample, whereas the PFDH makes the comparison against repeated randomized subsamples, thus reducing sensitivity to outliers (See Appendix 1 for details). In the analysis reported here, output (the quality of infrastructure) was approximated using the infrastructure subcomponent of the Global Competitiveness Indicators, while inputs were measured as the real public capital stock per capita in PPP terms, taken from the Penn World Table. GDP per capita is included as a control variable. In addition, PFDH analysis was conducted to limit sensitivity to outliers. In both cases, a higher score implies greater efficiency.

12. The results of both methods suggest that the efficiency of UAE public investment spending compares favorably to peers in the Gulf and the wider MENA region (Figure 8). The United Arab Emirates has attained a relatively high degree of infrastructure quality, having spent an amount of resources comparable to amounts spent by other Gulf Cooperation Council countries. The DEA results suggest that the United Arab Emirates’ score is among the highest among the GCC and non-GCC oil exporters. That said, comparing the United Arab Emirates with some advanced economies with strong institutions such as Canada, Chile, and Singapore, suggests room for further improvement. The results derived from the PFDH assessment are broadly similar.

Figure 8.Measuring Efficiency: DEA and PFDH

Source: IMF staff estimates.

1/ Non-GCC oil exporters in MENA.

2/ Oil exporting countries with strong institutions as determined by high WGI indicators (90+).

E. Public Investment Management Index

13. The processes that are used to manage public investment can be examined using the Public Investment Management Index (PIMI). This index measures the quality of the institutions that influence the efficiency of public investment at the four main stages of the investment cycle: appraisal, selection, implementation, and evaluation. It was developed by Dabla-Norris and others (2011) for 71 countries using diagnostics of countries’ public investment management systems conducted by the World Bank, budget survey databases, donor assessments, and expert surveys.5 The United Arab Emirates’ scores are based on a self-assessment by the federal Ministry of Finance on the basis of the survey developed by Dabla-Norris et al (2011). Since the self-assessment covers only federal spending, its findings are limited to a relatively small share of overall public investment spending in the United Arab Emirates.

14. While the federal government of the United Arab Emirates performs significantly better than MENA countries on average in terms of PIMI scores, there are some opportunities for further improvement. The self-assessed PIMI components indicate that the federal government of the United Arab Emirates fares better than the MENA average in all stages (Figure 9). In relative terms, it performs better in the appraisal and implementation stages of the project cycle than in the selection and evaluation stages. The following could further strengthen project selection and evaluation: (i) more explicitly incorporating recurrent cost implications in the investment selection process; (ii) strengthening the process of ex-post evaluation of domestic projects, and (iv) further improving an asset register or inventory of public sector property. Norway’s recent experience shows that improvements in project selection may lead to significant cost savings (Box 1).

Figure 9.Public Investment Management Index Stages

Source: Dabla-Norris et al, IMF 2011; Country authorities.

1/ UAE federal government, based on self-assessment by the federal Ministry of Finance.

F. Project-Level Investment Analysis

15. The efficiency of public investment can also be assessed by examining the construction costs of large public infrastructure projects. The cost estimates are based on project-level data for MENA oil-exporting countries from the Zawya database. Given data limitations, the analysis considers only metro projects and large-scale road projects (i.e., roads longer than 20 kilometers).6 Unit costs are estimated on the basis of contracted prices and planned capacity (i.e., they are not necessarily the actual costs). The main caveat to this analysis is that other factors that could affect the unit cost (e.g., quality, technical complexities, etc) are omitted because of a lack of comparable information.

16. Contracted metro construction costs in the United Arab Emirates appear relatively low, but are subject to the risk of cost overruns (Figure 10). The per-kilometer cost of metro projects based on contract values is lower in the United Arab Emirates than in neighboring countries. Nevertheless, the substantial cross-country variation in these estimates, even within the GCC, could reflect uncertainty about the final costs of the metro projects and therefore suggest the risk of substantial cost escalation. Flyvbjerg and others (2002) finds an average cost overrun of 45 percent for rail-related projects, with a higher average overrun (65 percent) for projects outside Europe and North America. The experience of Dubai provides a cautionary tale, with final costs exceeding the contracted spending by 75 percent.7

Figure 10.Metro and Road Construction Cost Estimates

Sources: Zawya Projects; Flyvbjerg et al (2008); country authorities; and IMF staff calculations.

1/ Final cost estimates are in 2002 US$ per KM.

17. Metro projects seem more expensive in the United Arab Emirates when adjusting for its low labor costs, although the final costs estimates in UAE still appear reasonable compared to selected global benchmarks.8 The estimate of final cost for the United Arab Emirates is slightly higher than the average cost in Asia and Latin America, but is lower than the cost in the United States and Europe (Figure 10). Once low wage costs are taken into account, the United Arab Emirates still compares favorably to its MENA peers, although it appears more expensive than the United States. (Figure 10). However, an important qualifier to the comparison with the United States is that this calculation does not control for the different costs of raw materials that the United Arab Emirates must import from foreign countries at an additional expense.

18. The construction costs of large road projects in the UAE appear comparable to those of other countries in the region (Figure 10). The estimated per-kilometer per-lane cost of road projects in the UAE ranges from $0.5 million to $1 million. In contrast, the equivalent cost ranges from $0.7 million to $7.4 million in Qatar. Flyvbjerg (2007), Flyberg, Skamris, and Buhl (2002), and experience in the region suggest that cost escalation is less of a concern for road than metro projects. The Muscat Expressway in Oman, completed in 2012, for example, cost close to $350 million, compared to a contract value of $330 million, a 6 percent cost overrun.

Box 1.Norway Governance Framework for Public Project Implementation

The Ministry of Finance in Norway initiated a Quality Assurance Scheme (QAS) in 2000. Norway experienced a series of unsuccessful major projects and repeated overspending during the 1980s and 1990s. Following an investigation, the Ministry of Finance introduced a mandatory external assessment of state-financed projects over $500 million. The goal was to improve quality-at-entry by clearly demarcating political from administrative decisions.

The QAS has two stages that ensure that projects undergo comprehensive analysis before being approved. The first stage focuses on the rationale for the project, and consists of quality assurance of a series of strategic documents: a needs analysis, an overall strategy document, an overall requirements specification, and an analysis of alternatives. The second stage is undertaken by the end of the planning phase, before a formal submission is made to parliament. It is documented in a report containing the consultant’s advice on a cost frame for the project. Between the two stages, there are several coordination forums where the Ministry of Finance gathers interested people for discussions. As of 2013, the scheme has worked for 13 years and been applied in 160 projects.

Evidence indicates that the QAS has led to remarkable cost savings. A research paper shows that 32 of the 40 projects submitted to QAS in 2000–09 and implemented in 2000–12 were completed within the cost frame (Samset and others, 2003). The net saving was estimated at about 7 percent of total investment, which is notably better than in the 1990s (Text Figure). By comparison, a study of 11 public investment projects planned and implemented in the 1990s concluded that only three projects were delivered within the agreed cost frame, while the combined cost overrun was about 80 percent (Berg and others, 1999).

Norway: Deviation between final project cost and project budget, 2000–12

(40 projects in total, percent)

Source: Samset, et al (2013)

G. The Federal Government’s New Budget

19. Budgets are crucial to the efficiency of spending. They are where governments decide how to allocate spending between sectors and, within sectors, different programs (Figure 11 shows the allocation of federal spending by function in 2011). These choices can obviously have a major influence on the efficiency of public spending. In education, for instance, governments must choose how much to spend in total and how to divide that amount between preschool, primary, secondary, and tertiary education. Getting the balance right may have a major influence on lifetime learning. Within each program, the budget must also encourage productive efficiency, that is, maximizing results, given the allocation to the program.

Figure 11.Federal Spending by Function, 2011

(Dirham billions)

Source: Government Finance Statistics Yearbook 2012, pp. 466–67.

20. Until recently, the federal government had a traditional budget. As in many other countries, spending was allocated among ministries and autonomous agencies and within each organization among various input costs (wages, goods and services, capital, etc.). Budgeting was done on an annual basis, with limited analysis within the budget framework of the implications of decisions beyond the budget year. Costs were (and for the time being still are) measured exclusively on a cash basis. When enforced, such budgets not only control total cash disbursements but also ensure that money is spent on the intended inputs.

21. Traditional budgets have several drawbacks, however. First, they do not specify the services the government is producing, how much it spends to produce those services, or what the purpose of producing the services is. That makes it hard for the public, and the government itself, to judge whether the spending is justified. Second, cash accounting does not generally reflect the true costs of providing services—when employees have defined-benefit pensions, for instance, the full cost of employment in a given year may greatly exceed cash disbursements in that year. Third, the detailed controls that stop the misuse of funds can prevent managers from sensibly reallocating spending in response to new developments or to new information. Fourth, the annual nature of traditional budgets makes it easy to ignore future costs, such as the ongoing maintenance costs associated with this year’s capital spending and can encourage governments to meet this year’s budget target with fiscal gimmicks that delay the recognition of costs till future years. Finally, government agencies sometimes need long lead times to scale up or cut back large spending programs efficiently. So, purely annual budgets—with no credible estimates of spending ceilings for future years—can increase budgetary costs.

22. Influenced by such concerns, many governments around the world have redesigned their budgets. The reforms have differed from country to country, but most have aimed to redirect attention from inputs to results, to better measure costs, and to pay more attention to spending beyond the budget year. Nearly all OECD member governments measure the performance of spending programs in some way, and nearly three-quarters include such information in their budgets (OECD, 2007). Medium-term approaches to budgeting are also now routine (Harris and others, 2013). Accrual accounting is also widespread in advanced economies (Blondy and others, 2013), though cash budgeting remains common.

23. The federal government has recently overhauled its budget in a similar way. The new system has several parts:9

  • The development of three-year government strategies, designed to realize the United Arab Emirates’ “Vision 2021.” Individual ministries and autonomous government agencies also prepare their own strategies.

  • The budget now follows the same three-year cycle. The first was prepared for 2011–13 and accompanied the government’s strategy for the same period. The second has just been prepared for 2014–16.

  • Budgeting at the beginning of each three-year cycle is zero-based, in the sense that there is a more thorough than usual estimation of the costs and benefits of programs. This zero-based budgeting is intended to involve “bottom-up cost allocation without prior assumptions, the challenging of budget proposals by using benchmarks, and prioritizing budgets between activities.” Changes within each three-year period are incremental.

  • Budgeting is “top-down.” First, revenue is forecast, which yields a limit on total spending too, because the government must balance the budget.10 Following advice from the Financial and Economic Commission (FiCOM), the government then allocates total spending among sectors and among ministries and agencies within each sector. Ministries and agencies then propose budgets that should be consistent with the limits.

  • The budget is presented on the basis of programs, activities within programs, and now also services and with services subservices and supporting services. The Ministry of Finance’s guidelines suggest that each ministry or autonomous agency have 5–10 “strategic objectives,” each associated with 2–10 programs. Within the government, the Ministry of Cabinet Affairs works with line ministries to specify programs. Each ministry also has one or two administrative programs (described as the “administrative backbone”) that are not output of the ministry, but inputs into the delivery of the other programs.

  • Ministries and agencies have a set of financial performance indicators overseen by the Ministry of Finance and a set of nonfinancial performance indicators overseen by the Ministry of Cabinet Affairs.

24. Changes in accounting and fiscal coordination are also being made. The FiCOM’ Vision 2021 seeks to establish “active coordination among levels of government and integrated national planning and execution in all policy areas.” In the area of budgeting, there is a Fiscal Policy Coordination Council that includes the emirate departments of finance and the federal ministry of finance. The federal government has also begun to prepare consolidated fiscal information for general government. One of the goals of the sharing of information is to improve the efficiency of public spending by promoting complementary investments and avoiding undesirable duplication. Fiscal coordination—and the management of governments’ finances individually—is also being promoted by the gradual adoption, at the level of each emirate and the federal government, of accrual accounting and, for the FiCOM as a whole, the IMF’s accrual-based Government Finance Statistics Manual 2001.

25. The reorientation of the federal government’s budget is a welcome development. The top-down approach to setting budgets should facilitate both fiscal control and efficient spending by, among other things, limiting the time-consuming and sometimes dysfunctional negotiations that can occur when line ministries initiate the budget process by proposing a long list of proposals whose total cost far exceeds the government’s resources. Similarly, the three-year budget cycle should help give ministries and autonomous agencies more certainty about their future budgets and allow them to plan accordingly. Describing the budget in terms of programs and services based on the government’s objectives, tracking performance, and aligning the budget with the government’s strategy should all help focus attention on achieving the government’s objectives. Moreover, the planned move to accrual accounting should provide better estimates of costs.

26. International experience points to several possible issues to look out for. It is probably too early to evaluate the federal budgeting reforms in the United Arab Emirates, but experience with similar reforms in other countries may be relevant.11

27. A very general challenge reported in the literature is that reforms that emulate “international best practice” often fail to work as hoped. Schick (2013a) argues that the reality of budgets that have been reformed to conform to “best practice” frequently differs from their appearance. One reason is that line ministries and others may comply with the letter of the new law but not the spirit. Medium-term spending limits, for instance, may be carefully formulated but then ignored when the annual budget is prepared. Andrews (2013), who documents similar problems in developing countries, suggests addressing this kind of problem by ensuring that reforms respond to local problems and circumstances and are developed gradually by a process of trial and error.

28. Other problems arise because of the abovementioned difficulty of measuring the attainment of government’s objectivities. The first problem is that the intended results of spending are usually complex and multidimensional. A good police force prevents and successfully prosecutes crime, so good policing should lead to a low crime rate. But some crimes are more serious than others, so the crime rate is a crude measure of success. An index can be developed that gives different weights to different kinds of crimes, but even an index simplifies and the weights are inevitably subjective. The same problem arises in education and health, where PISA test scores and health-adjusted life-expectancy are at best incomplete measures of success.

29. This problem can lead to performance that “hits the target but misses the point” (Hood, 2006). In particular, international experience shows that line ministries may devote their efforts to improving those aspects of performance that are measured, while giving others short shrift. Teachers, for instance, may “teach to the test” rather than doing their best to help their students learn. The problem is summarized in Goodhart’s law: a measure that becomes a target may thereby cease to be a good measure. In addition, line ministries may choose to merely meet the target even if they could do more, because next year’s target may depend on this year achievement, and nothing is gained by overachieving. Or if they know they cannot meet the target, they may give up entirely instead of doing the best they can. At worst, they may simply misreport their performance.

30. A second problem is that factors beyond the government’s control always influence the achievement of outcomes. By definition, ministries can control outputs, but the outcomes that the government wants to achieve depend not only on those outputs but on factors outside the ministry’s control. Crime, for instance, may vary not only with the quantity and quality of police outputs but also with societal trends, demography, poverty, and drug epidemics. An increase in crime does not necessarily imply that the police are performing poorly; conversely a decline does not necessarily imply good performance.

31. Performance-based budgeting can worsen the asymmetry of information between line ministries and central ministries. Whatever powers they may have, finance ministries and other central agencies have less information than line ministries about the costs and benefits of spending programs. Present in traditional budgeting, the problem may become worse in performance budgeting because more information must be produced and evaluated (Schick, 2013a, p. 54). A line ministry can set itself easy targets and, if it fails to meet them, explain why the fault lies in events beyond the ministry’s control. In the United Arab Emirates, an additional complication arises because control is split. The Ministry of Finance supervises spending and financial performance indicators, while the Ministry of Cabinet Affairs is in charge of strategy, program design, and nonfinancial performance indicators. Yet assessing efficiency requires bringing together these two sets of issues.

32. Part of the solution to these problems is to improve performance measurement. Descriptions of the government’s objectives, the outputs of ministries (programs, services), and performance targets can all be refined over time in response to experience, as has happened in the United Arab Emirates. Performance audits can be introduced, to check, among other things, that performance is accurately reported.

33. Central ministries can also be given more resources to analyze performance and spending proposals. To reduce the asymmetry of information, ministries of finance and prime ministers’ offices need resources to review line ministries’ performance and to question specifications of the government’s objectives and descriptions of the ministries programs and services. This is a particular challenge in relatively small governments, such the United Arab Emirate’s federal government, where effective supervision may require very close cooperation between the Ministry of Finance and the Ministry of Cabinet Affairs.

34. In addition, the evaluation of performance should go beyond the monitoring of performance indicators. Performance indicators can help detect possible problems or successes, but especially for large spending programs there should also be periodic reviews informed by careful analysis that attempts to distinguish the effects of the spending from those of other influences. The traditional approach in economics, among other social sciences, is to see how variations in government programs (e.g., in numbers of police) affect outcomes (e.g., crime rates), while controlling for other variables that are believed to affect the outcomes (e.g., demography). Such studies are more informative than mere tracking of performance indicators, but may still fail to isolate the effect of government programs. As a result, randomized controlled trials are increasingly used (Banerjee and Duflo, 2012; Deaton, 2012). Modeled on tests of new medicines, the trials isolate the effect of a government service by providing it to a randomly selected set of people or communities and comparing their outcomes to those of a control group that does not receive the service. Because of randomization, the “treatment” and control groups should not significantly differ except in whether they receive the services. Though such trials can be done only when it is possible and appropriate to provide the service in question to some people but not others, they provide some of the most convincing evidence of the actual results of government spending.

35. Another part of the solution is not to rely solely or too heavily on performance measures to improve performance. Good performance comes in part from having well-trained nurses, doctors, managers, and other staff who want to do a good job for its own sake. Performance budgeting should thus complement rather than replace traditional concerns about hiring and motivating the right staff and creating organizational cultures that value high performance (Besley and Ghatak, 2003; Schick, 2013).

H. Conclusions

36. This paper has reviewed the efficiency of spending in the United Arab Emirates. It considered some survey-based indicators of the perceived effectiveness of Emirati governments and compared public spending on health and education with measures of health and education outcomes. It then offered a closer look at efficiency in public investment, first comparing cumulative investment with the quality of infrastructure, then analyzing the way public investment is managed, and finally assessing the comparative costs of road and metro projects. Because budgets are where many of the decisions critical to the efficiency of public spending are made, it also reviewed the federal government’s new budgeting techniques, including the use of a three-year cycle, top-down spending ceilings, program classification, and performance indicators.

37. On many dimensions, spending in the United Arab Emirates appears reasonably effective and efficient. For example, Emirati governments are perceived as relatively effective and relatively good in controlling corruption and avoiding wasteful spending. Prima facie evidence suggests that education spending is efficient in producing educational outcomes, but surprisingly low, whereas health spending is higher but less efficient than in some other countries. In the area of infrastructure, services are perceived as some of the best in the world and the quality appears to come at a reasonable cost: data envelopment and partial disposable hull analyses suggest that the United Arab Emirates is among the most efficient countries in the region in public investment. Nevertheless, the analysis suggests that there is still room for improvement, for example, in some aspects of the management of public investment.

38. The federal government’s new approach to budgeting offers the promise of improved spending efficiency. The federal government’s new top-down, performance-oriented three-year budget approach helps clarify the objectives of spending, measure performance, and set relatively firm spending limits over the medium term, all of which are likely to improve the efficiency of spending. Because public spending in the United Arab Emirates is concentrated in the larger emirates rather than in the federal government, greater efficiency gains might therefore be possible from further strengthening the emirates’ budget processes. Governments in the United Arab Emirates should also continue to improve the quality of fiscal data, so that basic questions—such as how much public money is spent on health, education, and infrastructure—can be answered with more confidence.

39. The pervasive problems of measurement performance suggest that governments should pursue several complementary strategies for improving the efficiency of spending. In addition to implementing the above reforms, governments should not lose sight of other factors that promote efficient spending including (i) well-staffed ministries of finance and other central agencies that can effectively analyze and, where appropriate, challenge line ministries’ spending proposals; (ii) talented and well-trained staff with a strong professional desire to do a good job independently of performance monitoring; and (iii) rigorous evaluation, using econometrics studies and randomized controlled trials, of major spending programs outside the budget process.

Appendix 1. DEA and PFDH

Efficiency is assessed using a cross-country approach that measures the effectiveness of spending in producing outcomes. The relative efficiency is assessed using a Data Envelopment Analysis (DEA) technique. Based on the assumption of a convex production possibilities set, an “efficiency frontier” is constructed as the linear combination of efficient input and output combinations in the cross-country sample. The term “envelopment” is used because the frontier envelops the set of observations. Figure 1 illustrates an efficiency frontier that connects points A through D as these input-output pairs dominate others such as E and F. An efficiency score is computed by measuring the distance between a country and the efficiency frontier, so defined.

Figure 1.Efficient Frontier under DEA Concept

Although DEA does not require an assumption about the empirical distribution of the efficiency term, the approach has some shortcomings. Thus, DEA is a powerful tool for assessing spending efficiency, but it is highly sensitive to sample selection and measurement error. As a result, outliers can exert a large effect on the efficiency scores and shape of the frontier. For this reason, proper sample selection is critical to ensure that cross-country input-output bundles are comparable.

To deal with sensitivity to measurement errors and outliers, the efficiency analysis can be supplemented by a partial frontier method. This method generalizes a Free Disposal Hull (FDH)—a nonconvex, “staircase” frontier—by adding a layer of randomness to the computation of the efficiency scores. Instead of benchmarking a country relative to the best-performing peer in the sample, the method compares each country against the best performer in a sample of peers that produce at least the same amount of output. The sample is randomly drawn with replacement.

Appendix 2. Components of the Public Investment Management Index (PIMI)1

The index captures quality and efficiency across four main stages of the cycle of public investment management: appraisal, selection, implementation, and evaluation. The processes and practices associated with the strongest score (4) in each stage are the following:

1. Strategic Guidance and Project Appraisal

  • Nature of strategic guidance and availability of sector strategies.

  • Transparency of appraisal standards.

  • Observed conduct of ex ante appraisals.

  • Independent review of appraisals conducted.

The maximum score requires a well-defined public investment plan and/or sector strategies for most sectors with full costing of recurrent expenditures and investment; a published document to detail appraisal standards; routinely undertaken economic appraisals for large projects; and independent checks by a regulator or office of appraisals.

2. Project Selection and Budgeting

  • Existence of medium-term planning framework and its integration into the budget.

  • Inclusion in budget (or similar) for donor-funded projects.

  • Integration of recurrent and investment expenditures in budget.

  • Nature of scrutiny and funding supplied by legislature, including its committees.

  • Public access to key fiscal information.

The maximum score requires multiyear forecasts and the subsequent setting of annual budget ceilings; detailed information for a large share of donor-funded projects; consistently selected investments; coverage of fiscal policies and the medium-term fiscal framework by the legislature’s review; and publicly available information on key fiscal aggregates, external audit reports, and contract awards.

3. Project Implementation

  • Degree of open competition for award of contracts.

  • Nature of any mechanism for complaints relating to procurement.

  • Funding flows during budget execution.

  • Existence and effectiveness of internal controls, such as commitment controls.

  • Effectiveness of system of internal audit.

The maximum score requires accurate data on the method used to award public contracts; an operative process for submission and timely resolution of procurement process complaints; the execution of more than 90 percent of the capital budget; broad expenditure commitment controls; and internal audits (that meet international standards) for all entities.

4. Project Evaluation and Audit

  • Degree to which ex-post evaluations are conducted.

  • Degree to which external audits are produced on a timely basis and scrutinized by the legislature.

  • The maintenance of asset registers and/or asset values.

The maximum score requires ex-post evaluations routinely performed by the auditor general or the executive; audited expenditures (should comply with auditing standards), including capital investments; and a complete and operational asset register.

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Prepared by Tim Irwin and Bahrom Shukurov under the guidance of Harald Finger and with assistance from Peter Gruskin.

The classification of the United Arab Emirates’spending by function assigns a very large share to “general public services” (IMF, 2014, pp. 518-19), a category that may include some spending on education.

This section is based on Albino-War and others (forthcoming).

Appendix 2 lists the practices assessed and the benchmarks covered by the index.

For metros, there are data on projects in Algeria (1 project), Iraq (1), Kuwait (1), Qatar (5), Saudi Arabia (4), and the United Arab Emirates (4). For roads, there are data on projects are in Iraq (1), Kuwait (1), Oman (1), Qatar (4), Saudi Arabia (3), and the United Arab Emirates (6).

Zawya database.

Where data on the final costs of metro projects were not available, we assumed a 65 percent cost overrun (from Flyvbjerg, 2008). This is mainly applied to MENA countries, while actual costs were available for the United States, Asia/Pacific, and European countries. Cost estimates and actual costs were converted to 2002 prices using the U.S. construction price index.

See the Ministry of Finance’s Federal Budget Planning Handbook and the 2011 law on law on budgeting and accounting.

The federal government controls only a small share of government spending, which is dominated by independent emirate governments, particularly Abu Dhabi, which receives most of the FiCOM’ oil revenue and runs a large surplus.

See Dabla-Norris and others (2011) for more detailed information on methodology.

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