Lessons In Pro-Poor Public Spending Reform

1. Lessons In Pro-Poor Public Spending Reform The Poverty Action Fund in Uganda

2. Policy Context • Public Expenditure instrumental in achievement of Poverty Reduction Goals. • Focus is on public spending on the poor, is it the same as public spending on pro-poor growth? • Upgrading Public Expenditure Management (PEM) Systems in developing Countries (HIPC Tracking Exercise) ongoing • Virtual Poverty Funds (VPFs) a means of: • Tagging poverty reducing expenditures within the budget and Monitoring specific expenditures in terms of outputs and outcomes • Ugandan Poverty Action Fund the first example of a Virtual Poverty Fund • What has PAF Achieved? • Does it represent good practice?

3. Ugandan PEM Reforms in the ‘90s • Long term macro stability & steady growth • Successful Reforms to budget systems • MTEF, aggregate fiscal discipline, OOB • Poverty Eradication Action Plan (1997) • Strong political commitment to poverty reduction • Development of SWAPs • Education, Roads, Health in the late 90’s • Decentralised governance and service delivery

4. What is meant by pro-poor public spending? • Public spending which aims to maximise benefits for the poor/achievement of poverty reduction goals: • in aggregate and over time • Involves public policy and expenditure decisions at different levels: • Aggregate spending, and financing • Spending between sectors and at LG level • Spending within sectors, and sector policies

5. Why was the PAF Formed? • No mechanism for reorienting budget towards PEAP in ‘97 • Concerns about fungibility • Where would HIPC debt relief be spent? • “Additionality” of donor budget support/HIPC to sectors • PAF created in 1998, as a means of: • Reorienting the budget towards PEAP priorities • Ensuring HIPC relief and donor budget support allocated to and spent in full on the poor • Retain/attract donor budget support

6. Key Features of the PAF • 3/4 of PAF funds channelled to Local Government as earmarked “conditional grants” • Protection of disbursements to PAF programmes from cuts • Specific requirements for reporting on the disbursement of PAF funds and progress in implementation of PAF programmes • 5% of PAF funds set aside for enhancing monitoring & accountability

7. Evolution of PAF • Focus moved from protection of inputs towards actual performance • Disbursements no longer guaranteed - linked system of performance reporting • Increase in institutional requirements • Formation of PAF Secretariat, with dedicated staff, and mainstreaming of reporting and accountability requirements

8. The Impact of PAF? • Increase in size of PAF from 18% of the GoU budget in 1998 to 36% in 2004 (large increase in on-budget HIPC and donor funding) • Observed Achievements…………….. • Huge increase in service delivery in Health, Education, Roads, Water and Agriculture Sectors • cannot be attributed to PAF alone Importance other initiatives: • Fiscal Discipline • MTEF, Output Oriented Budgeting • PEAP, SWAPs • Decentralisation • Reorientation of allocations within sectors towards expenditures on the poor

9. Increased Spending on the Poor • Huge increase in PAF • from US$100m in 1998 to $400 million 2004/5 in real terms • Mobilisation of Donor Funds • Donor budget support from $20m in 1998/9 to $130m in 2001/2 to $350 in 2004/5

10. Is the National Budget Biased/Sustainable? • Allocations within PAF biased towards social services • Health and Education make up over 80% of PAF, roads and agriculture 11%; Wage-intensive (PAF wage 32% of budget, relative to 21% of national GoU Budget) • Skewed MTEF allocations towards direct service provision to the poor • donor driven sector allocations • limited growth for Non-PAF Sector allocations • High Donor Dependency • Donor funds 50% of public expenditure • 15% appreciation of real exchange rate between 1997& 2002, • High commercial interest rates (20%+)

11. No substitute for Strong Foundation • Political Preference for Poverty Reduction • political leadership must want to reduce poverty • Clear, Balanced Poverty Reduction Goals • Most countries have done this within (I-)PRSPs • Process for integrating goals into MTEF • Systematic identification of strategies • Rationale for public sector: market failure or equity • Balance between sectors in the Budget • trade-offs, sustainability & affordability of goals

12. Why Form a Virtual Poverty Fund? • Countries where PEM systems are weak. • Possible candidates: • Cannot identify PRSP priorities within budget classification system. • Poor ability to track expenditures during budget implementation. • Poor orientation of budget allocations towards PRSP priorities. • High fiduciary risks associated with government budget system.

13. Principles • VPFs should be part of a long term strategy for Public Expenditure Management Reform • emphasis of development of budget wide systems for PEM • VPFs should avoid the creation of parallel mechanisms • VPFs are temporary, interim mechanisms • tracking pro-poor inputs and expenditures only whilst budget-wide systems are being built • Should have a clear exit strategy

14. Are the right mechanisms being promoted? • Importance of political and institutional commitment • only can be done if there is political preference • Importance of translating poverty reduction goals into balanced public sector startegies • Need more systematic-mechanisms for making effective spending choices • Budget-wide mechanisms to improve budget efficiency and accountability • VPFs, such as PAF are interim mechanisms only, and not the solution

15. Poverty Reducing Spending in Tanzania • Similar PEM reforms as Uganda in the 90’s • Same concerns on re-orienting budget towards PRS as Uganda • However, no Poverty Action Fund established, INSTEAD, holistic approach on increasing spending in PRS sectors adopted

16. Holistic Focus on General Budget in Tanzania - Modalities • Budget support resources and HIPC relief clearly reflected in budget • Poverty Reduction Budget Support (PRBS) Performance Assessment Framework developed – significant harmonization in policy actions and reporting • No 1-1 Mapping of budget support to priority sector allocations – only increase reqd.

17. Impact of Holistic Focus in Tanzania • Brought the entire budget discussions into PER domain – importance of non-priorities and expansion of ‘priority sectors’ • Improved alignment of PRSP with the MTEF and the Budget • Better disclosure of budget performance, and increased accountability at local government level • Strengthened the PFM environment