Vera A. Wilhelm The World Bank

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The Budget Process and External Assistance

Challenges and Opportunities for Domestic Accountability

Vera A. WilhelmThe World Bank

Budgeting and Public Financial Management WorkshopSeptember 11, 2007

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Two main questions

• How well do development policies get implemented through the budget process?

• What role does external assistance play in this respect?

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Outline

1) The budget process as a tool for policy implementation in LICs

2) The challenge of fragmented policy, budget and monitoring processes

3) Challenges and opportunities through external assistance

4) Lessons

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1)The budget process as a tool for policy implementation in LICs

• Linking national development policies with budgets: The role of PRSs (ANDS)

• The PRS as an instrument for mutual accountability

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Aim of the country-based development model (PRS)

Provide a working modality where:• governments are empowered to set their development priorities• donors are expected to align their assistance around a country’s

priorities rather than their own.

Provide Operational framework for countries to specify:• policies, programs and resources needed to accelerate

development results to reach medium term development goals

Functioning budget and medium-term expenditure allocation process is critical for achieving results

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2) The challenge of fragmented processes: LIC Country studies

• Minding the Gaps• Beyond the Numbers• AER 2007- Path to results based operational

development strategies

Identified important issues • Ownership• Incentives

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Planning and budgeting cycle

MTEF

PRS policies and plans

Sector strategies and plans

BudgetFormulation

BudgetExecution

Budget Reporting & Accountability

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Budget accountability: Multiple gaps and fractures

MTEF

PRS policies and plans

Sector strategies and plans

BudgetFormulation

BudgetExecution

Budget Reporting & Accountability

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PRS and budget: Ownership

I

Civil Society

Electorate

Executive

Cabinet

Parlia-ment

Planning

Sectors

Civil Society

Electorate

Parlia-mentFinance

Ministry

Line Ministries & ProvidersFinance

Executive

Cabinet

Planning

Sectors

Finance

The PRSP The Budget

Strong Ownership Moderate Weak

Societal Societal

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PRS and budget: Incentives and results orientation

PRSPoor prioritization and

selectivityWeak quality of dataWeak and fragmented

national monitoring systems

Parallel monitoring structures

Budgets

Incremental budgeting

Focus on inputs and lack of performance orientation

Weak enforcement of rules and poor budget execution

Dual budgeting

Poor predictability of funding

Weak use of monitoring/reporting information in decision making

Weak alignment of donor reporting requirements

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PRS stocktaking: Findings of the AER

•Overall only 13 % of the 62 countries have reached the Paris Target for operational development strategies. 5% have reached the target for results oriented frameworks

•Second generation PRS countries (18) have generally developed unified and well prioritized strategies, while first generation countries (22) have made incremental progress.

•Strengthening of domestic institutions (PFM systems and monitoring systems) remains a challenge.

•Five PRSII countries show an effective link between the PRS and the budget. At least two (UF, TZ) have shifted from a priority sector based approach to an outcome-oriented approach to budget allocations relying on their country level M&E systems. The PRS in these countries has been costed and is linked to the budget through three year rolling global and sectoral MTFFs.

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Poverty Analysis

Sector Diagnostics

PRSP Policies and programs

Link to the budget

COUNTRY

DONORS

Support for analysis and consultations

Consultations

Mon

itorin

g

3) External assistance: It’s role for PRS implementation

Assistance StrategiesDonor programs:Projects, including budget supportAdvisory and Analytical Work

Feedback mechanisms

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Challenges through external assistance

• Poor predictability of aid undermines expenditure planning and budget authority-OECD reports that on average governments expect only 88% of the aid that was disbursed by donors in 2005; for Afghanistan reverse situation as only half the aid that was expected was disbursed

• High transaction cost of aid delivery due to multiple aid instruments and large number of donors

• Significant amount of tied aid can lead to inefficient public spending

• Bias towards capital investment, leading to imbalance between capital/current spending and sustainability problems

• Reliance on off-budget parallel systems undermining the effectiveness of government systems

• Large “external budgets”, not always aligned with national priorities

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Aid channeled through country systems?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Budget execution (% of totaldisbursed)

Financial reporting (% of totaldisbursed)

Auditing (% of total disbursed)

Afghanistan Average 34 Countries

Source: OECD-DAC

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Aid delivery modalities

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Percent of untied aid Percent of program based aid

Afghanistan Average 34 Countries

Source: OECD-DAC

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Opportunities through external assistance

• Aid modalities: Move to program based approaches (GBS, SBS and SWAps)

Promote ownership of national development policies; use and strengthening of country systems, predictable funding, donor alignment and harmonization of processes

• Monitoring and accountability: Annual progress reports (APR) on PRS implementation Increasingly participatory monitoring (parliaments, media) and influence on domestic policies and budgets. (SPA survey)

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Donor harmonization processes

• Ghana’s resource and results process– Joint assistance strategy covering most external funding

– Results matrix tracks actions and progress in achieving PRS results

– Resource matrix charts donor support over PRS implementation period

http://siteresources.worldbank.org/INTGHANA/Resources/Partnership_Results_Matrix.pdf

• Tanzania’s Joint Assistance Strategy (JAST) with development partners– DPs have committed to align support to government PRS priorities

– Make increasing use of government systems

– Untie TA and reduce number of PIUs

– Increase aid predictability through reporting of 3 year donor financing commitments

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4. Lessons: Strengthening policy implementation externally and from within

1. Focus on strengthening and harmonization of existing processes

2. Support from within: High level ownership of policies, a strategic review of the budget and clear sector roles.

3. Foster incentives for integration

4. Keep it simple and move gradually

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Lesson 1: Strengthen and Harmonise Existing Processes

Strengthening and Harmonising Existing Processes

• Promote aid instruments that help to strengthen domestic systems and minimize transaction cost.

• Tailor interventions to local context and realities and build in incentives for implementation

• Provide timely and reliable information on external assistance – consult and coordinate.

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Lesson 2: Build Support from Within

Strategic phase and sector processes• Introducing a strategic phase in the budget process

– A phase, before the preparation of operational budgets, in which sectors and cabinet review high-level policy priorities and their impact on inter-sectoral resource allocation.

• Developing sector-level policy processes.– The PRS should be a tool for high level policy

priorities – Sectors should be charged with establishing

processes to elaborate sector policies and budgets and review policy implementation

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Lesson 3: Foster Incentives for Integration

• To better link policy making with implementation and monitoring, reporting instruments need to be linked to decision making processes involving actors who may demand and use the information

• Better targeting of reports, both financial and performance-related, to users’ differing needs could facilitate and improve decision making.

• Donor requirements need to be aligned with domestic systems– APRs are generally produced due to external demands and often lack a

direct link to domestic decision making. They would be more useful if consistent with the goals articulated in the budget.

– Avoid parallel monitoring processes to satisfy discrete and uncoordinated donor demands.

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Lesson 4: Keep it Simple and move gradually

• Strengthening the results orientation of budgets does not necessarily require sophisticated technical solutions.

• Don’t necessarily need early on– Formal programme or performance budgeting– A comprehensive up-front costing of the PRS

• Move gradually as capacity building takes time– More successful budget reforms often link PFM with broader civil

service reforms.

• Focus on making the budget more policy oriented and PRS more budget friendly (e.g. structured along sectors and administrative units not pillars & objectives)

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THANK YOU