Joint Donor Staff Training Activity Tanzania, 17 - 19 June 2002

1. Joint Donor Staff Training ActivityTanzania, 17 - 19 June 2002 Partnership for Poverty Reduction Module 4 - Links between PRSP, Sector Programmes and Budgets Ken Robson

2. Links between PRSP, Sector Programmes and Budgets Scope of the module Part 1 new approaches reflecting the changing development agenda budget as a key development tool and governance issue fiduciary risk assessment - when is budget support appropriate? Part 2 Ghana case study

3. Links between PRSP, Sector Programmes and Budgets New aid approaches In low income, high aid dependent countries, the PRS is influencing how donors operate: their increased engagement in the policy dialogue and moving ‘upstream’ increased emphasis on partnering and ownership adoption of new lending and grant instruments such as Direct Budget Support (DBS)

4. Links between PRSP, Sector Programmes and Budgets Direct Budget Support (DBS), defined as: “Provision of development funds directly to recipient governments to be spent as part of their budget”. Provided in support of PRSP implementation and channelled through governments’ own financial management and accountability systems

5. Links between PRSP, Sector Programmes and Budgets Direct budget support - potential benefits facilitates a more programmatic approach encourages strategic dialogue and stronger partnerships strengthens in-country accountability avoids the pitfalls of project aid Requires comprehensive ex-ante assessment of fiduciary risk which requires partnerships within donor community between donor community and government

6. Links between PRSP, Sector Programmes and Budgets Budget as a key development tool and governance issue Why is budget process important? In formulation phase - determines overall resource envelope - apportions funds to priority policy areas In execution phase - releases funds to the service delivery agencies, predictably In reporting phase - accounts for how the funds have been used

7. Links between PRSP, Sector Programmes and Budgets • Typically, reality is far from the ideal: • Aggregate expenditure ceilings are unrealistic • because revenue forecasts are over ambitious • Sectoral allocations have little correlation with policy priorities • Spending levels within agencies are not linked explicitly to intended policy outputs • Funds release is not predictable • Expenditure reporting is late, inaccurate and incomplete • So what hope is there for PRSP implementation?

8. Links between PRSP, Sector Programmes and Budgets Medium Term Expenditure Frameworks (MTEF) Features include: realistic assessment of ‘resource envelope’ based on medium term macroeconomic projections medium term expenditure estimates for individual spending agencies based on clearly defined sector policies elements of activity and output budgeting Attempts to match available resources with the cost of policies

9. Links between PRSP, Sector Programmes and Budgets • Links between PRSP and budget need strengthening: • Ensure consistency of objectives, outputs and outcomes • Make explicit the sectoral (and geographical) aggregate budget allocations, in line with PRSP • Track expenditures, start to monitor impact • Initiate Policy Review Hearings • Start to report on performance, to all stakeholders

10. Links between PRSP, Sector Programmes and Budgets HIPC tracking Purpose is to assess whether funds intended to achieve poverty reduction outputs have been deployed as planned Easy to say but difficult to achieve deficiency in coding structures expenditure reporting is weak demands of data management

11. Links between PRSP, Sector Programmes and Budgets HIPC tracking Interim solutions ‘tagging’ of expenditures in the coding system separate release of funds and bank accounts expenditure tracking studies and beneficiary impact assessments Long term solution - IFMIS, but proceed with caution

12. Links between PRSP, Sector Programmes and Budgets Decentralisation - why important? Local government has a major role to play in PRS implementation, but individual countries are at different stages with implementation, which adds to the complexities around: capacity constraints access to budgets/revenue roles and behaviour of sector ministries and central management agencies (Finance, Planning, Local Govt)

13. Links between PRSP, Sector Programmes and Budgets Fiduciary risk assessment - when is budget support appropriate? What is fiduciary risk? From the donors’ perspective, it is the possibility that development aid expenditure will not be used for the intended purpose will not be accounted for accurately and on a timely basis fails to represent value for money

14. Links between PRSP, Sector Programmes and Budgets Why is FRA important for donors? Helps discharge domestic parliamentary accountability obligation Provides a mechanism to move towards DBS Provides the basis for a jointly agreed programme of PEM reform with recipient Government

15. Links between PRSP, Sector Programmes and Budgets How to complete FRA? Range of ‘tools’ in use: World Bank - PER, CFAA, CPAR, HIPC assessment and action plan IMF - Report on Standards and Codes (Fiscal Transparency), ‘Red Cover’ reports of Fiscal Affairs Department DFID - Fiduciary risk assessment Others?

16. Links between PRSP, Sector Programmes and Budgets • Coverage of FRA tools: • PEM in broadest sense, including revenue • Audit capacity • Procurement • Public accountability - parliamentarians, CSOs

17. Links between PRSP, Sector Programmes and Budgets Results of FRAs reveal major weaknesses However, they: provide a comprehensive assessment of the nature and scale of the risks enable fiduciary risk to be balanced against development benefit indicate ways to mitigate or manage the risks provide a benchmark against which to monitor progress

18. Links between PRSP, Sector Programmes and Budgets • If fiduciary risk is assessed as manageable - • move to DBS with parallel TA to support PEM reforms, if required • If fiduciary risk is too high - • agree the processes and steps to mitigate the risks over time, with TA support

19. Links between PRSP, Sector Programmes and Budgets • Continuing challenges: • Ensuring that budgets are aligned with PRSP objectives and targets - process becomes iterative and routine • Performance , especially impact, is measured and reported • Budget presentations become comprehensible • Ministries of Finance are transformed