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October 11, 2007

Public Investment: Good Project Management is an Issue of ...Capital Importance

"Unexpected changes to payment schedules related to capital projects can create significant difficulties for finance officers responsible for cash management" remarks Steven R. Kreklow (*) in his short article ("Capital Project Cash Flow Management") of the August 2007 issue of the Government Finance Review, the membership magazine of the US-based Government Finance Officers Association.

This adverse impact on cash management and more generally budget execution can be mitigated by good budget and project management techniques described in Steven R. Krelow's article.

The author lists five recommendations to better manage investment projects:

  • Start with a good project budget. This involves a good project analysis and the incorporation in the cost of all predictable costs, including inflation;
  • Develop good policies. These policies include:
    • Scope management: managing changes to the project's scope to make their impact on cash flows more predictable and controlled;
    • Project contingencies: establishing project financial contingencies to accommodate changes within the project's budget;
    • Budgetary transfers: providing the flexibility to make budgetary transfers between projects;
    • Capital fund reserves: creating capital reserve funds equivalent to a predetermined percentage of the capital budget.
  • Develop and use a formal project plan: a detailed project plan will help planning for cash flows and will serve as a baseline for project reporting;
  • Obtain regular progress reports: a robust capital reporting system will provide finance officers with information on changes in the the project budget and will track key issues that arise in project implementation;
  • Communication with projects managers: open communications line with project managers is an important tool in cash flow management.

PFM Blog assessment: Steven R. Kreklow's recommendations are fundamentally sound; their implementation should indeed facilitate oversight of capital projects and cash flow management. They are well adapted to US State and local governments--which are the backbone of GFOA's membership.

Some of his recommendations can easily be generalized and would constitute sound recommendations for middle- and low-income countries (e.g., starting with a good initial project analysis or establishing a robust capital reporting system). Others may be more difficult to implement in these countries.  For instance, budgetary transfers and capital fund reserves may be significantly more difficult to establish in low-income countries where most of the public investment is generally externally-financed.

Posted by Michel Lazare

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Steven R. KREKLOW is a senior manager in the GFOA's research and Consulting Center In Chicago, Illinois.

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