PUBLIC EXPENDITURE MANAGEMENT AND ......72 PUBLIC EXPENDITURE MANAGEMENT AND DEVELOPING COUNTRIES PART I: PUBLIC EXPENDITURE MANAGEMENT AND DEVELOPMENT ASSISTANCE Kaoru Hayashi* JBIC

72

PUBLIC EXPENDITURE MANAGEMENT AND DEVELOPING COUNTRIESPART I: PUBLIC EXPENDITURE MANAGEMENT AND

DEVELOPMENT ASSISTANCE

Kaoru Hayashi*

JBIC Review No. 4 May 2001 pp 72~84©2001 by Japan Bank for International Cooperation. All rights reserved.

* Deputy Director General, Research Institute for Development and Finance.

Public Expenditure Management and Developing CountriesPart I: Public Expenditure Management and Development Assistance

1 Arrangement of the concepts of public expenditure management is taken from the 1999 interim report entitled “Public ExpenditureManagement in Developing Countries and the Response of Aid Agencies” for the “Survey of Development Policy and Project Assistance”by JBIC (Consulting House Ltd. Minerva’s Owl and Shinko OMC Inc). (Abbreviated below to “Interim Report”) (in Japanese) .

CHAPTER 1 TREND TOWARDS THEINTRODUCTION OF PUBLIC

EXPENDITURE MANAGEMENT INDEVELOPMENT ASSISTANCE

For several years moves have been apparent towardsthe introduction of the public expenditure manage-ment in development assistance. International finan-cial institutions such as the World Bank and the AsianDevelopment Bank (ADB) have made it one of thepoints of their policy dialogs with developing coun-tries, and they have started to implement some tech-nical assistance and other measures which more nar-rowly target public expenditure management. TheADB, which is enthusiastically pursuing public ex-penditure management, incorporates the followingmeasures within the concept of public expendituremanagement:Revision of Public Investment Programs (PIP).Setting three year Medium Term Expenditure Frame-works (MTEF).Building contingent debt monitoring systems.Drafting fiscal and finance-related laws.Improving internal audit systems.Introducing computerized data systems into wholegovernment accounting system.Introducing and enhancing computerized financial re-porting within governments.

The World Bank takes a public expenditure man-agement viewpoint in the preparation and formationof Public Expenditure Reform Loans (PERL) and

Governance, Institutional Reform Loans (GIRL).1

The characteristic point here is that governancereform and other initiatives and operations for publicsector reform are coming to be understood as inte-grated elements with public expenditure management.The process leading to that position begins with in-creased concern over the outcomes of aid, followedby consideration of “governance and institutionalcapability in the governments of developing coun-tries” as a precondition for successful outcomes, andfollows through to the positioning of “public expen-diture management” as a means of building that ca-pability.

The public expenditure management approachoriginated in reforms of the public sectors of devel-oped countries. From the point of view of making themanagement of public sector funds more efficient andrealizing its effects, the fiscal and budgetary targetsare:(1) Fiscal discipline.(2) Allocation of resources based on strategic priori-

ties (allocative efficiency).(3) Effective and efficient use of resources (opera-

tional efficiency).Public expenditure management is valued as a

specific, basic approach for achieving those roles andtargets. Its concepts and characteristics are definedby the following:(a) System building through the introduction of sound

management methods, and the use of those meth-ods to allocate resources and improve efficiency.

JBIC Review No.4 73

(b) Shifting the emphasis from the idea of due pro-cess, which holds that strict observance of rulesand procedures guarantees results, to a new em-phasis on output and outcomes.

(c) Information disclosure and accountability for theattainment of targets.

(d) Systematic reforms, including the introduction ofbudgets for each type of activity and of accrualbased accounting, and the strengthening of auditdepartments.These ideas are summarized in Table 1. 2

The elements, targets and methods listed aboveare certainly not new inventions as individual points,and most of them have already been developed in tra-ditional public finance or public corporation theory,but there are the following two important features:(a) The roles and objectives of the public sector are

incorporated from the point of view of new insti-tutional economics, the above elements are col-lated into three groups, and fund management inthe public sector as a whole is considered.

(b) The “public expenditure cycle” of planning,implementation and evaluation is emphasized.The idea of the “project cycle”3 has been estab-

lished in the world of development assistance sincethe 1970s, thus the “plan - do - see” cycle is certainlynothing new, but it is notable that its application hasnow been extended to the entire public sectors of de-veloping countries.

CHAPTER 2 WILL PUBLICEXPENDITURE MANAGEMENTBECOME THE MAINSTREAM INDEVELOPMENT ASSISTANCE?

As we saw in the preceding chapter, public expendi-ture management was in the forefront of the majormovements in development assistance in the 1990s.There have still not been many actual records of pub-lic expenditure-type loans (GIRL, PERL etc.), butthere is a strong possibility that direct support forpublic expenditure management could become themajor trend in development assistance in the future.That is the case because public expenditure manage-ment is, by definition, a comprehensive approach, andbecause in recent years the World Bank and otheragencies have started a succession of initiatives cen-tering on comprehensive assistance.

The Comprehensive Development Framework(CDF) is one comprehensive approach which pro-poses that the World Bank should aim to encouragestronger linkages between aid agencies and countries,while respecting the ownership of aid recipient coun-tries. It is a framework for coordination betweenmultiple stakeholders. In the same way as the DACInternational Development Strategy, it works on thebasis of ownership and partnership to reduce poverty.Rather than relying solely on macroeconomics, as thestructural adjustment approach did in the past, CDFconducts it in parallel with analysis of social, struc-tural and humanistic aspects. The actions of each of

2 Interim Report p.2-53 Warren C. Baum, “The Project Cycle,” World Bank/IMF FINANCE AND DEVELOPMENT, Vol.7, No.2, June 1970.

Table 1 Elements, Targets and Specific Methods for Public Expenditure Management

Element

Fiscal discipline

Allocative efficiency

Operational efficiency

Targets

• Strong budgetary control• Control of off-budget funds

• Budget allocation in line with priorities

• Setting of objective criteria to serve as the bases of fiscal decisions

• More efficient budget disbursement• Independence and reinforcement

for the management of budget disbursement departments

Measures

• Securing accountability through information disclosure• Adoption of Medium-Term Expenditure Framework (MTEF)• Clarification and evaluation of policy objectives (project

evaluation, policy evaluation) = grasp of results (outcomes)• Feedback of evaluation results (fading out of incrementalism

in budgeting and introduction of merit-based personnel systems)

• Introduction of budgets for each area of activity and of accrual based accounting

• Empowerment of audit departments

Source: Interim Report p.2-5

74

the domestic and foreign stakeholders contributingto development, and the actions needed to tackle eachtask, are arranged in a matrix, with a time frame of10~15 years in mind, to build a comprehensive de-velopment framework4.

Chronologically, the concept of public expendi-ture management predates the start of the CDF initia-tive. It is natural that public expenditure managementwill be taken up as an effective tool for implement-ing CDF, because they are both comprehensive ap-proaches. As mentioned above, CDF is not the kindof approach that adheres to macroeconomics andmarket mechanisms. Instead it aims to bring the in-stitutional and social elements, which are essentialfor the proper function of a modern market economy,into the framework. The public sector bears the cen-tral role in laying the social and economic founda-tions, and its work is achieved through public expen-diture. Therefore it is reasonable to say that improvedinstitutional capability, supported by public expendi-ture management, is the key to the development whichCDF is intended to achieve. The process begins withevaluation of public expenditure management capac-ity and identification of shortcomings in each devel-oping country. The next step is to provide supportmeasures to improve on the identified shortcomings,thus raising the state’s overall development capacityand enhancing the effectiveness of aid5.

Alongside CDF, the relationship between publicexpenditure management and the Poverty ReductionStrategy Paper (PRSP) also attracted attention.ThePRSP is also based on concepts of ownership andpartnership and makes the judgement that develop-ing countries should make their own economic policydecisions. On that basis they are responsible for policymaking, which they carry out with support and con-sultation from the World Bank and the IMF, in a part-nership which includes the UN, regional developmentbanks, bilateral aid agencies, NGOs, academia, re-search agencies, companies and other parties. ThePRSP approach is comprehensive and results-ori-

ented. It emphasizes the setting of achievement tar-gets, the selection of policy methods to attain thosetargets, and a comprehensive approach to action onpoverty.

Public policy is of central importance to the re-duction of poverty. As the public policy concerned isimplemented through public expenditure, it is exactlythe same as the CDF case. The “Source Book”6, whichis the key reference work on PRSP, includes one chap-ter on public expenditure. It emphasizes the estab-lishment of public finance rules as a critical pathwithin the budget cycle. Furthermore, the SourceBook identifies certain common weaknesses sufferedby developing countries in implementing policies forthe reduction of poverty:- Poor prioritization of investments.- Unclear compartmentalization between invest-

ment (development) budgets and budgets for re-current expenditures.

- Shortage of budget for recurrent expendituresbecause their budget allocations are not clearlystated in PIP.

- Inconsistency in the macroeconomic forecastingwhich is a precondition for the above.

The Source Book emphasizes the establishmentof public expenditure management cycles, and of pri-ority for the direction of public expenditure to pov-erty reduction. Thus PRSP already incorporates in-herent elements of public expenditure management.

From the above one can easily infer that publicexpenditure management will become an importantitem on the agenda in development assistance in thefuture, as CDF and PRSP converge. There are fourlevels for putting it into operation:(1) Public expenditure management is employed in

policy dialogs with the developing country sidealongside previous country policy (strategy) asan element in country economic sector surveys.Alternatively, it can be a added as a perspectiveon the preparation and formation of individualprojects.

4 James D. Wolfenson (1999) “A Proposal for a Comprehensive Development Framework”5 Interim Report pp.3-6.6 World Bank (2000).


JBIC Review No.4 75

(2) Addition to the project appraisal items, or reflec-tion in the implementation methods of the loans.

(3) Provision of T/A and loan, taking into accountpolicy dialogs accompanied by country-specificaid policies and country-specific economic sec-tor surveys, in which public expenditure manage-ment is treated as one sector.

(4) Based on the policy conditionalities on publicexpenditure management, aid can be providedcomprehensively in the form of fiscal support inline with, or as an element of, structural adjust-ment facilities.The first level is actually being carried out in

Public Expenditure Reviews by the World Bank. Infuture, in developing countries where CDF and PRSPare used, they are expected to be merged into one.However, it is quite likely that individual bilateraldonors will carry on policy dialogs from their ownindependent points of view, based on country-spe-cific aid strategies. That is a valid way of applyingchecks and balances as well. In this survey by JBIC,multiple donors were competing to set performanceindicators and displaying keen interest in providingaid, but these indicators are the basis for judging“value for money” and should be regarded as startingpoints. There were apparent cases of unbalance inwhich not enough attention was paid to raising theaccuracy of costing.7

The World Bank is currently preparing projectsbased on (3) and (4) above. In these areas, Japan ishandicapped in all aspects, such as skill and experi-ence, due to the paucity of its own accumulated ex-perience of public expenditure management, and istherefore unable to take the lead in project formation.As described below, there may be some potential forthe future, but the best way for Japan to proceed forthe time being would be to accumulate experience inthis area by providing co-finance with other donors.

In the formation and appraisal of individualprojects, in stage (2), “public expenditure manage-

ment considerations” could be developed into a nec-essary aspect considered alongside “environmentalconsiderations” and “social considerations”. Thereneed not be a mutually exclusive choice between theindividual project approach and the fiscal supportapproach. Even when projects are carried out indi-vidually, public expenditure management is an ex-tremely important element of the policy environmentin which the projects are implemented. If there areelements in the public expenditure cycle which im-pede the implementation of a project, the remedy ofsuch problems should be taken as a benchmark forthe progress made in improving procedures. (2) is themost familiar field for Japanese ODA. Therefore wewill go on to examine the key points of public expen-diture management considerations in the implemen-tation of individual projects.

CHAPTER 3 PUBLICEXPENDITURE MANAGEMENT AND

THE IMPLEMENTATION OFPROJECTS

According to a survey8 carried out in 1997 by JBIC(then OECF), which examined the specific lessonslearned from project implementation at each stage ofthe project cycle, the most common experience at allstages of the cycle concerned “improvement in insti-tutional capability”. The stages of the cycle were“project formation and appraisal”, “management ofprocurement and implementation”, “operation andmaintenance”. Of these, the most lessons were learnedfrom “project formation and appraisal”. Institutionalcapability could be called the ability to manage anduse limited resources such as funds, personnel andinformation in order to carry out the project. Consid-ering the fact that most development projects areimplemented through the public sector, the issues of

7 For details, please refer to the JBIC Research Paper on this survey JBIC Research Paper (No.10 Public Expenditure Managementin Developing Countries).

8 Shinya Ejima and Katsuhiko Nakadate (1998) “Lessons Learned From OECF Post-Evaluation”, Journal of DevelopmentAssistance Vol.5, No.2.

76

organizational ability and public expenditure manage-ment are two sides of the same coin.

The problems listed below are among those gen-erally recognized as affecting appropriate resourceallocation and efficient project implementation:(1) Weak planning capability.(2) Weakness in the links between policy decision,

plan drafting and budget making.(3) Weak expenditure management.(4) Inappropriate budget allocations for maintenance

management (inappropriate recurrent budget al-locations).

(5) Inappropriate accounting systems.(6) Inappropriate flows of funds through governmen-

tal structures to lower-tier agencies.(7) Inappropriate management of foreign aid.(8) Inappropriate management of cash funds.(9) Inadequate reporting of fiscal performance.(10)Inadequate motivation of staff involved in public

expenditure.The World Bank recognizes from its analysis that

these shortcomings have their roots in structural prob-lems in budget systems. The structural problems areas follows:9

(1) Achievement of the goals of budget expenditureis evaluated solely by the input side, namely howmuch money was spent.

(2) The above input targets only consider the short-term view, with no proper consideration for ap-parent or latent long-term costs. Furthermore,when choices arise between capital (development)investment and recurrent expenditure, or betweenfinancial measures and non-financial measures(regulatory improvements etc.), there is a strongbias towards short-term measures.

(3) Budget determination works on a “bottom-up”basis, which makes it difficult to coordinate be-tween central government agencies and line-inagencies in line with policy priorities under anappropriate fiscal policy. (The costs of dealingsfor coordination become extremely high).

(4) Government budget setting tends to allocate anyincrease in revenue to new projects.

(5) Budget setting by the government, ministries andagencies tends to concentrate exclusively on finetuning of budgets for existing projects (Reviewsdo not extend to comprehensive reviews of thenecessity of existing projects).

(6) When expenditure is adjusted up or down part-way through a financial year, there is a tendencyto make sweeping, uniform cuts from all budgetitems.

(7) The application of uniform cuts across all bud-gets in mid-financial year heightens the uncer-tainty of policies and budgets in progress, withthe result that ministries and agencies tend tochase after contingency backup sources of fund-ing.

(8) The prospect of uniform cuts across all budgetsin mid-financial year gives ministries and agen-cies a strong incentive to use up their budgets asearly as possible.

(9) There are very few opportunities to make closeinspections of existing projects and projects un-der way.

(10) Incrementalism in budgets results in very weaklinkages (between central government ministriesand agencies and between the center and the re-gions) between policies and resources.

(11) Policy implementation and targets lack clarity andthere is a shortage of information on the perfor-mance of policies, programs and services. Thereis also little linkage to their costs, thus informa-tion on cost - performance is lacking.

(12) As a result of all these problems, there is verylittle incentive to improve performance (to usethe budget to attain the objectives of the policyconcerned).To recap, the problems are concentrated in areas

such as single-year budgets, line-item budgets, “In-put based” budget appraisal, and incrementalism.10

Among the available tools of public expenditure man-agement, the single-year budget bias could be coun-tered by the introduction of Medium-Term Expendi-ture Frameworks (MTEF). “Input based” budget ap-praisal could be countered by the introduction of per-

9 World Bank (1986)10 Of course, these problems are not confined to developing countries. They are apparent in developed countries, including Japan.


JBIC Review No.4 77

formance budgets (necessitating performance audit-ing). The line-item budgets, which make it difficultto introduce performance criteria, can be tackled withthe introduction of activity-based budgets. Perfor-mance budgets, zero-based budgets and other mea-sures can be used against incrementalism.

These problems can be arranged in relation tothe implementation of projects, as described below.11

1. GENERAL BUDGETS AND DEVELOPMENTBUDGETS

In many cases the budget provided for maintenancemanagement is not enough to do the job properly. TheWorld Bank’s PER etc. reports that this shortage is asymptom of the common tendency in developingcountries to put development (investment) budgetsahead of budgets for recurrent expenditure. Lookingmore deeply into the cause, they indicate problemssuch as the following:- There are no policy-based comprehensive frame-

works for whole sector units (such as cases whereno MTEF has been drawn up).

- Cases where allocations for recurrent expendituresin the medium and long term have been consid-ered within a Public Investment Program (PIP),but the fiscal authorities only estimate the alloca-tions on a yearly basis (Laos PER).

- Cases where recurrent budgets are being squeezedby subsidies and interest payments on externalborrowing (Indonesia PER).

- Cases where, even in traditional aid projects, theestimate made of recurrent expenditures at the fi-nancing stage was inadequate.The PRSP Source Book emphasizes the poor

linkage between individual project budgets and PIP.At the beginning, how we can deal with the sepa-

ration of the budgets for development and for recur-rent expenditures? There have been arguments for andagainst this divided (two tier) budget method sincethe 1980s or even before. The argument in favor ofthe divided budget method is that the ways develop-

ment expenditures are incoming and used are clear,and it is possible to set targets for economic policieswithin a balanced budget. The counterargument is thatunder the divided budget method, the budget putsneedless emphasis on the construction of physicalfacilities.12

Where the objective of each individual project isits physical completion and the prime concern is tosecure the funding for that purpose, the divided bud-get method would be advantageous. The upper limiton the development budget can be simply ascertainedby adding the current account surplus to the amountof borrowing, thus showing the affordability ofprojects. However, this is only an appropriate ap-proach where the aim is “input” in the form of con-struction of facilities. From a point of view whichgives greater weight to output and outcomes, or fromthe point of view of public expenditure management,integration to PIP or MTEF is a more desirable stance.Also, the divided budget method does not easily con-form to reconstruction of activity-based budgets. Evenif the divided budget method is used, it is importantto incorporate some kind of public expenditure man-agement framework to secure a recurrent cost financ-ing for operation and maintenance after the project iscomplete.

On the subject of recurrent expenses for projects,the PRSP Source Book supports the practice of do-nors incorporating recurrent cost for operation andmaintenance expenses into their aid. In contrast, thetraditional approach to aid, which is followed by Ja-pan among others, holds that support for recurrentexpenses, once begun, is endless and places a heavyburden on the donor in later years, as well as harmingthe recipient country’s self-help efforts. Even suppos-ing such assistance is provided, the traditional ap-proach holds that the increased recurrent expenditurescaused by the implementation of the project shouldbe supported in a limited and diminishing manner (in-cremental cost on a declining basis, according to theWorld Bank ). However, from a public expenditure

11 The World Bank PER summary below was a survey commissioned by Research Institute for Development and Finance, JBIC:From “Problems with Public Expenditure Management in Five Asian Countries as Seen in World Bank Public Expenditure Reviews”,by Takayuki Urade, February 2000. (in Japanese)

12 W.C. Baum & S.M. Tolbert (1985) “Investing in Development: Lessons of World Bank Experience”, Oxford.

78

management point of view, the total activity in eachsector as a whole, including the kinds of activitiesmentioned above, including all investment expendi-ture and recurrent expenditure, is important and thedivision between investment and recurrent expendi-ture has no significance. The activity in a sector couldbe, in the example of the irrigation sector, all aspectsof the building, maintenance and operation of irriga-tion facilities.

Under the traditional approach, finance for op-eration and maintenance and other recurrent expen-ditures is impossible, while capital (development)expenditures for rehabilitation and renewal of facili-ties can be the subject of aid. However, if there is anadequate budget for maintenance, there is likely tobe less demand for rehabilitation work. Moreover, thepublic expenditure management point of view pointsout that if aid is specialized into capital expenditure,it becomes biased towards the construction of physi-cal facilities.

Thus it is possible that systems that would beadvantageous for individual projects and would bepreferable for “input” target of aid would not be sup-ported under public expenditure management.

2. THE POSITIONS OF SINGLE-YEARBUDGETING AND INDIVIDUALPROJECTS WITHIN MEDIUM ANDLONG-TERM PLANS

In general, even in cases where a developing countryis drawing up its medium and long-term plans, it isvery common for such plans to be only weakly linkedto plans for single year.

The increase in BOT, BOO and other projectsinvolving private sector activity must also be consid-ered, In Pakistan, the Public Sector Development Pro-gram (PSDP) is prepared at the central governmentlevel within its five-year plans, while Annual Devel-opment Program (ADP) is prepared at the state level.However, the linkages between the Five Year Plans,the PSDP and the ADP is weak. Many infrastructureprojects, particularly those on BOT or BOO schemes,are carried out outside the PSDP, necessitating care

with the management of contingent liabilities.13

In addition, there are cases such as the followingwhich are regarded as problems under PER:- Where the PIP is merely a list of projects (Laos

PER)- Where the project selection process becomes po-

liticized (with budget battles between ministriesand agencies).

- Where the projects of some parts of the govern-ment do not require approval from the PlanningCommittee and lead to the risk of distortions (Pa-kistan PER).14

The last case had the advantages of simplifiedadministrative procedures and greater speed, but wouldprobably not be supported by public expenditure man-agement. In cases where there is a high level of depen-dence on the donor side, coordination between donorsin the drafting of medium and long-term plans and insetting orders of priority for investments can have astrong impact on the effectiveness of aid.

3. OFF-BUDGET FUNDSThe approach of aiding individual projects wouldsupport securing of off-budget earmarked funding.However, as a result, off-budget funds end up squeez-ing financial resources which should really be taxrevenues. Public expenditure management, whichaims to look at the public sector as a whole, wouldgive that practice a negative evaluation for its effectson establishing fiscal norms and allocating resourcesefficiently. If system is transparent and accountabil-ity is guaranteed, the problems can be avoided to someextent. However, all the PERs take a negative viewon off-budget funds.

In China, debt-related incomes and expendituresare accounted separately from general account bud-gets. As a result, the fiscal deficit figures publishedby the State Bureau of Statistics do not include gov-ernment bond expenses and repayment of externalborrowing. The figures for fiscal deficit are thereforemuch lower than the real situation. Debts must behandled with great care in cases where projects arecarried out using off-budget funds. Furthermore, care-

13 See the above-mentioned survey by Urade.14 ibid.


JBIC Review No.4 79

ful attention must also be paid to “tacit governmentguarantees” as a form of contingent liability in theimplementation of BOO and BOT-type projects.

4. MANAGEMENT OF AID FUND FLOWAn on-budget/off-budget system is selected for themanagement of aid fund related to the previouslymentioned off-budget funds. When using the on-bud-get method, the assistance received is calculated asrevenue and its use is calculated as expenditure, andit is handled as part of the total budget (general ac-count). On the other hand, when in the off-budgetmethod, income and expenditure of aid fund ishandled as off-budget fund. When using the off-bud-get method, there are general problems with the off-budget system, but there is the advantage that “fungi-bility” can be avoided to some extent in order to re-move this from the general account. For example,China is a typical example of a country using off-budget management. Here the primary effort for re-ceiving the aid fund (project formation, response todonor appraisal) is the responsibility of the executingagency of the project, and the central government(Ministry of Finance) has sole control over manag-ing the debts. The central government’s State Plan-ning Commission is in charge of maintaining consis-tency in the nation’s long-term plans. The executingagency of the project is an entity at the provincial orcity level, and it is common for the relevant projectto be the largest and most important project for theentity. This means that there is only a very smallchance that the provided funds would be appropri-ated for some other purpose. The executing agencyhas the large “additionality” of “the project can nowbe executed because assistance was received”. Thisalso supports project ownership by the executingagency.

In this manner there are many advantages in us-ing the off-budget method from the standpoint of in-

dividual project assistance. There will likely be cleardifferences of opinion among donors in whether anindividual project aid approach should be taken orshould budgetary support approach be adopted. Thekey points to consider for adopting either the off-bud-get or on-budget method are the transfer of the aidfunds (how are concessions transferred and who arethe beneficiaries) and, particularly in the case of loanaid (ODA loan), how will foreign exchange risks beshouldered. These and other points will be studied insection 6. Case Study.

5. CENTRAL AND LOCAL FINANCIALRELATIONSHIPS

The central and regional financial relationships varywidely among countries, but generally speaking lo-cal governments tend to rely heavily on the centralgovernment for financial assistance. Currently, thedecentralization is being promoted, but local govern-ments have had trouble securing their own sources ofrevenues and there are many cases in which they havemet with financial difficulties15. There are also limi-tations as the local governments lack fiscal restraint.For example, India has a systematic mechanism fortransferring development expenditures from the cen-tral government to the states. Still, losses at the StateElectricity Board have weighed on state finances andhave had a negative impact on the capacity to secureinternal funding for development projects for powerand other sectors. The financial relationship betweenthe central and local governments will be examinedin the following case study.

6. CASE OF AID FUND MANAGEMENT:INDIA16

In India development funds are allotted between thecentral and local governments with the aim of cor-recting disparities between the regions. Funds aretransferred to the states from the central government

15 Based on the PER (public expenditure review) for each country.16 The following is from Kaoru Hayashi “Development Assistance Problems in India”, Global Industrial and Social Progress

Research Institute, “21st Century India and International Society”, 1997 (in Japanese). Information on the financial relationships betweenIndia’s central and local governments were referenced from Hiroshi Sato, “Financial Relationships between Central and ProvincialGovernments in India”, Institute of Developing Economies, Ajia Keizai (Asian Economy), Vol. 29, No. 5, No. 6 (1988) (in Japanese),Hiroshi Sato “Financial Relationships between Central and Provincial Governments in India Involving Electric Power Divisions”,Institute of Developing Economics, Ajia Keizai (Asian Economy), Vol. 32, No. 3 (1991) (in Japanese)

80

using the method and based on a fixed formula. Aidfunds are also processed through this system withmoney being borrowed (received) by the central gov-ernment and then allotted to the local governments inaccordance with the planned fund transfer system. Thefollowing is a general overview of this aid fund man-agement in the 1980s.(1) The aid fund (both loan and grant aid) is received

by the central government and then transferred tothe state governments and other project execut-ing organizations.

(2) The transfer from the central government to thestate government is conducted within the “Trans-fer of Planned Expenditures”. The conditions arethat 70% of the funds are a loan and 30% are agrant, regardless of the conditions placed on theoriginal fund (for backward regions only 10% isa loan and 90% is a grant).

(3) The transfer of funds is in accordance with thesystem mentioned in (2) and therefore the fundsare temporarily placed within the general accountto combine it with other “fund allotments” andthen the funds are distributed.

(4) For the target project the state government mustalso calculate the receipt and use of aid fundwithin the state and central governments’ plannedexpenditure budget.

(5) The aid fund is converted into rupees by the cen-tral government. Therefore, there are no exchangerisks for the state governments.The following summarizes the rationale behind

this system and shows the general merits for this typeof on-budget management.(1) Aid fund and development strategies can be eas-

ily aligned because aid projects are included inthe general planned budget allotments. This is es-pecially true for budget allotments with the aimof correcting disparities between regions. It is alsopossible to have the central government monitor-ing the progress of the project as part of the bud-get process.

(2) Unfairness resulting from the different conditionsof the original aid fund can be avoided. For ex-ample, within the same sector, say irrigation orafforestation, differences in the levels for execut-

ing agencies and the beneficiaries, as well as un-fair burdens, can be avoided by providing grantaid in some area and loan aid in other area.

(3) Support can be given to development projectscarried out by the local governments and theirpublic corporations under local governments,which tend to be weaker financially, as the for-eign exchange risks associated with the loan as-sistance are shouldered by the central government.Taking another look at this on-budget manage-

ment from the point of view of public spending man-agement from the 1990s, it can be highly praised forhelping to plan effective allotment of developmentfunds. From the point of view of implementing indi-vidual projects, especially in the case of loan assis-tance, this system was quite effective in handling for-eign exchange risks. In other words, the yen loansare transferred into rupees at the central bank. Theyen is then managed within the central bank’s portfo-lio. China had adopted an off-budget managementsystem in which foreign exchange risks were shoul-dered by the executing agency and eventually thebeneficiaries, and this resulted in the big problem forthem having to repay much larger amounts due toappreciation of yen since 1993. This is why Indiachose a different method.

However, this on-budget management systemused by India has resulted in some problems on thedonor side. It goes without saying that the main prob-lem has been “fungibility”. The following describessome of the criticisms that have arisen.(1) When aid fund is lumped in with the funds being

allotted from the central government to the localgovernment, there are cases in which funds origi-nally intended to be grant aid are provided to thelocal government and executing agencies in theform of loans. In other words, the grant aid isturned into loans (cross subsidization). Some ofthe donors providing mostly grant aid are findingthis hard to accept.

(2) Because the aid fund is transferred to generalaccount, it is difficult to track the flow of theaid, even if the accounts all balance (fungible inpractice). Furthermore, there is low level ofawareness among the executing agency and the


JBIC Review No.4 81

beneficiaries that “projects are using aid funds”= “additionality”, and this can hamper incentivesto effectively use the aid funds.

(3) Foreign exchange risks handled by the centralgovernment can result in a type of “hidden sub-sidy” for the local governments and executingagencies.These arguments summarize the problems with

on-budget management of aid funds from the view-point of assisting individual projects. From the pub-lic expenditure management approach, these maybe used as a means for discussing and supportingmid-term public spending plans and other publicspending cycles targeting the overall developmentbudget. However, India covers such a large area andhas such a large population, and considering the scaleof its economy, it may be difficult to introduce publicexpenditure management at the national level. TheIndian government has hammered out a form of“disintermediation” in which off-budget system isused for a portion of the aid fund management in re-sponse to the problems caused on the donor side17.

The main points of this disintermediation are:(1) Public corporations under the central government

are seen as direct borrowers of the loan aid (guar-anteed by the central government).

(2) In other cases the central government receives theaid fund and then transfers it with the same termsand conditions. This includes transfer of foreignexchange risks.Soon after this partial off-budget system was pro-

posed, there were debates both for and against it. Itgoes without saying that donors that provide mostlygrant aid were in full support of this proposal. How-ever, Japan, Germany and other donors that offer ahigh percentage of loan aid were quick to point outproblems such as foreign exchange risks. Some ofthese points are summarized in the following.(1) This would effectively close the path to borrow-

ing loan assistance for local executing agencies

that do not have the capabilities to handle foreignexchange risks.

(2) This would result in larger disparities betweenstates with strong financial bases and those withweaker financial bases.

(3) It would be difficult to apply financial aid in ar-eas such as major infrastructure projects with longgestation periods for the capital and in environ-ments where there is invested poor capacity togenerate direct cash flows. This would all likelyhave a negative impact on India’s economic de-velopment.

(4) Narrowing of the scope of the responsibility ofthe central government could undermined moni-toring functions of the aided project.In addition to these problems, there are also is-

sues that were initially overlooked (not seen as mainissues). These are related to debt management. Bymaking many public corporations direct borrowersthrough the off-budget method, government debts onthe balance sheet are changed to contingent debts. Thisall makes the management of debts even more diffi-cult. When there are guarantees from the government,and even when there aren’t, many public corporationswill operate public utilities that can not easily bank-rupt as this results in a type of “tacit guarantee”. Powersector is a typical example where many of the PublicSector Units (State Electricity Boards) are in deficitdue to the politically constrained tariff structure. Thesepublic sector units are “too big to fail” cycle, andtherefore state governments have to continue hugeamount of subsidies to these units.

Clearly there are various practical problems withbudget systems, management of aid fund, off-budgetfunds and the financial relationships between the cen-tral government and local governments. There are nosimple solutions, but it will be necessary to in thefuture address these problems within the frameworkof the public expenditure cycle and analysis.

17 “Proposals for Promoting Aid Project Implementation” presented by the Indian Finance Ministry for the June 1993 at IndiaDevelopment Forum

82

CHAPTER 4 CHALLENGES FORINTRODUCING PUBLIC

EXPENDITURE MANAGEMENTINTO DEVELOPMENT ASSISTANCE

Until now the argument has been along the lines that“public expenditure management will become themainstream for future development assistance”, butthe problems and risks involved in introducing pub-lic expenditure management into development assis-tance, as well as mitigation strategies, must also beaddressed.

1. FROM OUTPUT EVALUATIONS TOOVERCOME EVALUATIONS

Each donor is focusing on the problem of outcomeevaluations and the making of these indexes, whichare directly linked to policy evaluations. However,the relationship between output and outcome is not asimple problem. The relationship is shown by theADB divisions in Table 2. Outcomes should begrasped quantitatively, however, it is difficult to makeconcrete indexes. One example is poverty reductionthrough the DAC new “International DevelopmentStrategy”. In order to achieve this outcome, povertybeing limited to “income poverty”, it is indispens-able to obtain data. However in almost cases it is verydifficult. Where is the poverty line to be drawn andhow is the poverty of particular social groups to behandled18? It is also difficult to evaluate the results ofthe assistance segregated from total outcome of mac-roeconomic policies. As a result, even if we try tograsp the actual outcome of poverty reduction, it isassumed that we will only be able to make an ap-proximation with the accumulated output. There hasbeen a great deal of effort in trying to make outcomeindicators, however, many feel that they are still aproxy for the true outcome.19

It is important to grasp outcomes and create in-dexes, but this will all be meaningless unless impor-tance is also placed on grasping the outputs as well.

Even if the output is not necessarily always linked tothe outcome, there will be no outcome if there is nooutput. Emphasis must be placed on outcomes thatare formed by accumulating outputs through thesteady execution of individual projects. We are nowwaiting for actual research to uncover the missing linkbetween output and outcome.

2. INSTITUTIONAL CAPABILITIES OFDEVELOPING COUNTRIES

Public expenditure management has the aim of im-proving the institutional capabilities of developingcountries, but its introduction also limits the country’sinstitutional capabilities. When introducing publicexpenditure management into a developing country,the country’s stage of development and other condi-tions, especially its institutional capabilities, must betaken into consideration and the advisability and pro-cedures for such an introduction must also be stud-ied. This study includes case studies and seminars inthe Punjab Province of Pakistan and in the Philip-pines as per Part II, two developing countries that havemade considerable progress in introducing publicexpenditure management. Through this study manyproblems where uncovered in both cases.

Even in these two cases, which have made com-parative advances for developing nations, it is difficultto say that public expenditure management has beenfully developed. In particular, the cycle based on thepremise of a performance budget is still far from beingfully developed. If the advanced systems of the devel-oped nations are simply introduced, it will be difficultfor these systems to become firmly established.

The most important point for the introduction ofpublic expenditure management in both countries isthat they both had the strong leadership needed forintroducing such a system.

The following are general points of considerationfor introducing public expenditure management intodeveloping countries, based on the case studies andseminars.

18 For difficulties with poverty project formation, see; Hideki Esho, “Development and Poverty”, Journal of Development Assistance,Vol. 5 No. 4, pp. 46-48, Institute of Development Assistance

19 Interim Report, pp. 2-9


JBIC Review No.4 83

(1) Government leaders who have strong will to im-prove the public expenditure management needto be supported in the developing countries.

(2) The introduction of an “Activity Based Budget”is very useful for identifying the costs of the rel-evant projects and policies.

(3) Consideration must be given to the tradeoff be-tween the transfer of authority and accountabil-ity. Monitoring must be improved.

(4) Policy changes based on feedback from the re-sults and the accompanying changes in the bud-get allotment are very difficult areas.

CHAPTER 5 JAPAN’SDEVELOPMENT ASSISTANCE AND

TACKLING WITH PUBLICEXPENDITURE MANAGEMENT

This final section will address public expendituremanagement in Japan’s development assistance, fo-cusing mainly on ODA loans. Public expendituremanagement is basically part of the trend towardsbudget support, and has been made apparent by look-ing at this background. However, as mentioned ear-lier, this is not simply the problem of choosing be-

tween supporting individual projects or providingbudget support. Even when executing an individualproject, public expenditure management is importantin the total process to implement the project and real-ize effectiveness. Even from the point of view of se-curing the domestic currency budget, there must be astrong link between the Medium Term ExpenditureFramework (MTEF) based on the macro-sector com-prehensive framework, annual budget and individualproject. Emphasis should be given to public expendi-ture management in the management of financial as-sistance, and efforts should be made to avoid off-bud-get financing or use of earmarking.

Support for public expenditure management ispossible, but Japan does not have advanced experi-ence in this field and thus may have difficulty in lead-ing such projects at this stage. However, local gov-ernments in Japan have very strong interest in publicexpenditure management and new public manage-ment20. In the future, the expertise now being gainedby these local government will be mobilized.

There is also the possibility of projects that takeinto consideration public expenditure managementreforms in the assistance for individual projects. Forexample, there are methods for promoting assistanceand for drafting, integrating capital expenditures and

Table 2 Examples of Performance Indicators

Administration

Education

Judicial system

Police

Corrections

Health

Social welfare

InputNo. of staff

Student/teacher ratio

Budget

No. of police cars

Cost per prisoner

Nurses perpopulation

Social workers

OutputNo. of policy papers

Retention rates

Cases heard

No. of arrests

No. of prisoners

No. of vaccinations

Persons assisted

OutcomeBetter decisions

Higher literacy

Low appeal rate

Decline in crime rate

Recidivism rate

Lower morbidity

Exits from system

ProcessOpenness of debate

Encouragement of studentexpression

Assistance for indigentdefendants

Respect for rights

Prevention of abuse

“Bedside manners”

Dignified treatment

Sector Type of Indicator

20 Ohsumi (1999)

Source: ADB 1999 p.334

84

current expenditures, mid-term action plans and fi-nancing plans based on budgets for each action itemin the sector loan. Proto-type of these loans are al-ready being implemented21. Monitoring function indeveloping countries should be strengthened throughproject execution. The World Bank is providing LACI(Loan Administrative Change Initiative)-type coop-eration and similar methods are used with its yen loans(checks expenditure-related documents provided bythe developing country’s auditing organization). Thereis room for further expansion in this area, includingtraining and other components in the future.

It is important to offer active cooperation in cre-ating performance standards for developing countries.Specifically, there must be a shared understanding ofoperational and effectiveness standards. Dialog andimprovements are possible in coordination with otherdonors.

In this manner, support for individual projectsare consistent with public expenditure management.It is possible to provide support for public expendi-ture management as an extension of existing assis-tance tools.

REFERENCES

[Japanese References]Ohsumi S., (1999) “New Public Management - Doc-

trine, Vision and Stragety” Nihon HyoronshaJICA (1998), “DAC New Development Strategic

Assistance Research Reports 1-4”.

[English References]DfID. 1997. “Eliminating World Poverty: A Challenge

for the 21st Century”.World Bank. 1991. “World Development Report

1991” (Japanese translation: World Bank “WorldDevelopment Report 1991 - Problems of Devel-opment 1991)

World Bank. 1993. “The East Asian Miracle; Eco-nomic Growth and Public Policy” Oxford

World Bank. 1998a. “Assessing Aid - What Works,What Doesn’t and Why”.

World Bank. 1998b. “Public Expenditure Manage-ment Hand Book”.

World Bank. 1997. “World Development Report 1997- The State in a Changing World” (Japanese trans-lation: OECF Development Problem ResearchGroup “World Bank World Development Report1997, Nation’s Role in the Government” ToyoKeizai Shinposha, 1998.

Asian Development Bank 1999 “Managing Govern-ment Expenditure”

21 One example from Pakistan “On Farm Water Management Project” (1992)

aaaaaaaaaaaaa


JBIC Review No.4 85

PUBLIC EXPENDITURE MANAGEMENT AND DEVELOPING COUNTRIESPART II: CASE STUDIES22

Taichi Sakano*Masashi Aoki**

JBIC Review No. 4 May 2001 pp 85~92©2001 by Japan Bank for International Cooperation. All rights reserved.

CHAPTER I THE PHILIPPINES

1. BUDGET FORMULATION PROCESS

(1) An OverviewThe actual system at present is closer to compliancebudgeting and input-oriented budgeting because ofthe disconnect in program structure and administra-tive structure and difficulties in estimating unit costsand some loss of expenditure control. On the posi-tive side, the experiment in performance budgetinghas improved the presentation of the budget and hasincreased the performance orientation of budget offi-cials.

(2) Key Institutions and OrganizationsIn the Philippines, a number of administrative bodiesare individually and interchangeably play key rolesin the preparation and implementation of the budget.These are (i) Development Budget CoordinatingCommittee (DBCC), (ii) Department of Budget andManagement (DBM)23, (iii) National Economic andDevelopment Authority (NEDA), (iv) Departmentof Finance (DOF), (v) Bangko Sentral ng Pilipinas(BSP), (vi) Congress and Commission on Audit(COA), (vii) LEDAC and (viii) Regional level Insti-tutions.

At the national level, the President steers the fis-cal policy formulation process through DBCC thatcomprises the Secretary of DBM as chairman, with

the Secretaries of NEDA and DOF) and the Gover-nor of BSP as members. DBM is mandated to assistthe President in the preparation of a national resourcesand expenditures budget with the goal of attainingnational socio-economic plans and objectives. DBMhas four main program areas, covering:

1) budget operations , 2) accounting and finan-cial services, 3) management services, 4) supportservices - involving support to DOF’s units in area ofinternal management and logistics. NEDA is the eco-nomic planning agency, with the responsibility offormulating the medium-term development plan. Italso coordinates the preparation of development plansin line agencies. The Department of Finance is theinstitution charged with ensuring sound and efficientgeneration and management of the fiscal and finan-cial resources of Government. An important link be-tween the legislative and executive branches of gov-ernment is provided by the Legislative-ExecutiveDevelopment Advisory Council (LEDAC) with amajor objective of achieving consistency betweendevelopment plans deemed at the executive branchesand law making priorities at the legislative branch.

2. AGGREGATE FISCAL DISCIPLINE

(1) Legal Framework for BudgetingThe legal and institutional framework for budgetingin the Philippines is well articulated in the Constitu-tion. The Constitution stipulates that no public money

22 This part is written mainly on case studies consigned to the study team consisting of Consulting House the Minerva’s Oul andSHINKO Overseas Management Consulting, Inc.

23 NEDA-ISP (1997), pp.16-19.

* Research Institute for Development and Finance** Research Institute for Development and Finance

86

is to be spent without legislative authorization (i.e.,appropriation), thus by making the Constitution func-tion as an effective mechanism of budget control. Italso delineates the relative power of the legislativeand the executive branches of government in publicfinance. In the Philippines, the power of the pursethat is granted to the legislative branch is counterbal-anced by the possibility of presidential veto. At thesame time, the Constitution defines the financial re-lationship between the central government and localgovernment units (LGUs).

(2) Coordination among Central MinistriesIn the first instance, the purpose of the framework isto ensure that the budget is consistent with the mac-roeconomic policies and resource constraints. In thisregard, DBCC sets the overall budget obligation ceil-ing (i.e., maximum expenditures for current and capi-tal expenditures) based on projections of central gov-ernment revenues, including ODA, the fiscal deficittarget and upper limit for new borrowings for the year.In practice, the responsibility for the macroeconomicprojections is fragmented. DOF is responsible forprojections of government revenue, whereas NEDAfor projections of the real sector and prices as well asODA flows. BSP for projections of monetary aggre-gates and balance-of-payment variables. DBCC, withDBM performing secretariat function, acts as theclearinghouse that evaluates the different projections.Nonetheless, this arrangement has oftentimes resultedin the lack of consistency of the projections.

(3) Fiscal ControlThe government, or DMB has two instruments of fis-cal control, (i) limited issuance of obligation authori-ties and other measures to keep on the track of fiscaldiscipline, and (ii) cash programming. One measureof the fiscal discipline is for DBM to apply reserveson agencies’ appropriations by issuing obligation au-thorities that are less than the appropriation cover asthey appear in the GAA. Another instrument DBMuses to achieve fiscal control is cash programming.

In this regard, DBM in close coordination with DOFprepares the annual program of cash expenditures,including an Annual Program of Monthly NCA (theNotice of Cash Allocations) Releases.

(4) WYSIWYG Policy and Notice of CashAllocations (NCA)

Starting 1999, DBM initiated a number of reforms inbudgeting with the ultimate goal of establishing lineagencies to speed up the delivery of essential publicservices with less paper works. WYSIWYG (WhatYou See Is What You Get) policy was on a top ofbudgetary reform agenda for the current administra-tion. Under this, the General Appropriation Act (GAA)serves as the authority of agencies to expend, therebyhaving allotment to national/local government agen-cies released comprehensively every quarter withoutthe needs for the issuance of the General AllotmentRelease Order (GARO). Further, the Notice of CashAllocations (NCA) to facilitate payment of due anddemandable Accounts Payables (A/Ps) has since 1999Budget been released quarterly in lieu of monthlyrations imposed by DBM.

(5) From SPPBS to Medium-Term ExpenditureFramework (MTEF)

(a) SPPBSThe Synchronized Planning-Programming-BudgetingSystem (SPPBS) in 1990 was intended to improvethe coordination among the budget, planning and rev-enue agencies so as to ensure the consistency of bud-get plans with development goals and available fi-nance. The concept dates back to the late 1980s. Af-ter a decade, the general assessment has to be that, inits own terms, it failed24. Its started objectives arelaudable, but the chosen approach of synchronizationacross agencies and regions (with regions in turn syn-chronizing with LGUs) proved over elaborate.

(b) MTEF (1) Fiscal level and ceilingThese problems was expected to be addressed in thecontext of a Medium Term Expenditure Framework

24 NEDA-ISP (1997), p.45.

Public Expenditure Management and Developing CountriesPart II: Case Studies

JBIC Review No.4 87

(MTEF). It is regarded as a more appropriate way oftrying to achieve the objectives of the PPBS. TheGovernment of the Philippines (GOP) embarked onthe budgetary reform in the Budget Call for theFY2000 that signaled the implementation of MTEF.The overall objective of MTEF is perceived in thecountry to include (i) enhancing planning and bud-geting linkages, (ii) strengthening fiscal discipline,(iii) improving allocation of budgetary resources, and(iv) enhancing agency in program implementation.

In the administrative arena in the country, MTEFcalls for greater integration of the planning and bud-geting systems involving NEDA, the DBM, and theDOF. The framework has two salient features, vis-a-vis, a consistent set of macroeconomic and revenueforecasts, and forward estimates (FEs) of costsaccruable to the ongoing programs/projects for thefollowing two years.

MTEF also divides agency’s budget into twoparts, that is, (i) the baseline (or operating) budget,and (ii) other claims over and above the baseline bud-get for funding of new programs and projects. Thebaseline budget refers to the minimum level of ex-penditure at which the agency will continue to oper-ate at the current year’s level and be able to performits basic mandate and functions.

3. ALLOCATIVE EFFICIENCY

(1) Prioritalization ProcedureDuring the preparation of the 1993 budget, theprioritization strategy was developed by DBCC’s Sub-committee on Prioritization that was headed byNEDA, with representatives from DOF, DBM andthe Coordinating Council for the Philippine Aid Plan(CCPAP) as members. After making provisions forgovernment-wide baseline budget, the PriorityProjects Fund (PPF) was created and all other agencyactivities are lined up against the PPF.

Prioritization for the PPF then followed a two-stage process. Projects/activities with the followingcharacteristics were given first priority and are in-cluded in the agency budget. They are (i) On-goingforeign-assisted projects with an expenditure ratio(1991 expenditure obligation over budgetary release)of 60 percent or above; (ii) Projects for completion

in 1993; (iii) Projects/activities tied to program loanswith budget support implications; and (iv) Positivenet revenue generating activities in 1993. In the sec-ond stage, all other projects/activities not includedunder first stage were prioritized based on a pointsystem with the following criteria: development goal,regional distribution, source of finance, and imple-mentation capability.

(2) Limitations on LegislatureThe 1987 Constitution provides that “no money shallbe paid out of the Treasury except in pursuance of anappropriation made by law.” However, it should beemphasized that there are statutory limitations on theextent to which the legislature may influence budgetallocation. On the one hand, Congress is not autho-rized to increase the proposed outlays for each ex-penditure item included in the President’s budget. Itcan only reduce them.

(3) MTEF and Forward Estimates (FE)(a) MTEF (2) Allocation levelMTEF comprises the following official documents.It is important to know that MTEF is not only docu-ments but also is a process.1) The Medium-Term Philippine Development Plan

(MTPDP) 1999-2004,2) The Medium-Term Public Investment Plan

(MTPIP),3) The Medium-Term Macroeconomic Framework

(MTMF),4) The Medium-Term Fiscal Plan (MTFP), and5) The Medium-Term Expenditure Plan (MTEP)

The full MTEF implementation mechanism com-prises the four components, vis-a-vis, (i) budget prepa-ration, (ii) budget release for major capital expendi-tures and auxiliaries chargeable against special pur-pose funds, (iii) contingent liabilities, and (iv) Con-gressional bills with fund requirements. As notedabove, the transitional MTEF mechanism for theCY2001 budget requires that (i) the above-the-baseline proposals include augmentations for exist-ing programs/projects, and (ii) no saving proposalsbeing embodied in the light of underestimation ofbaseline expenditure.

88

(b) Forward Estimates (FE)The purpose of forward estimates is rather the deter-mination of the block allocation for increased mana-gerial flexibility. In the Philippines, experience ofbaseline budget is a good basis for Forward Estimate.

(4) Performance IndicatorsAll National Agencies and Government Owned andControlled Corporations (GOCCs) are requested byDBM to provide their performance targets and theindicators applied to measure said targets, normallyby the end of the first month of calendar year for theensuing budget. Subsequently, a mid-year review ofthe financial and physical performance of those pub-lic undertakings and entities are carried out by DBM,while taking into account the Agency’s actual physi-cal accomplishment and the cost involved in the at-tainment thereof against the targets committed by eachof the Agencies and NOCCs at the beginning of theyear. The Agency’s performance as gauged duringthe mid-year review is to serve as a basis for eitherproviding for additional allotment from Special Pur-pose Funds or withdrawal of the allotment alreadyissued to the Agency.25

4. OPERATIONAL EFFICIENCY

(1) Reengineering BureaucracyAs dignified in the Budget Call 2000, the governmentstressed to improve productivity through the propermanagement of the bureaucracy, while recognizingthe urgent need for responsive, streamlined and effi-cient public service undertaking26. To this end, theproposed measure gave the President authority to re-organize all departments, agencies and offices of theExecutive Branch, including government-owned-or-controlled corporations (GOCCs). The bill also ad-vocated the adoption of a “scrap-and-build” policythat is aimed at limiting the creation of agencies.

(2) Performance Evaluation and Costing(a) Performance EvaluationPerformance Evaluation has to look at both the “Per-

formance” and the “Cost” sides like a Profit and LossStatement of an income earning entity in private andpublic sectors. In the Philippines, the “Performance”side involving also the argument which to take “Out-put” or “Outcome” is now discussed with foreigntechnical assistance. To cope with the enforcementof new budget regulation to impose each agency tosubmit performance targets at the time of their bud-get request and quarterly reporting of the targetachievements.

(b) CostingIn the Philippines, appropriate costing practice isrequired in the Executive Order, but the “CostingSystem” has not been established. The process ofbudget formulation was changed from the Budgetof 2000. Under the new process, an agency is re-quested to prepare its expenditure program for afiscal year without prior knowledge of its budget-ary ceiling. The indicative ceiling is usually issuedafter the agency expenditure program is formulated.Thus, with no guide on its monetary ceiling, everyagency has to prepare more accurate budget esti-mation based on rational and justifiable method.This inevitably requires each agency to improvetheir prevailing budget or cost estimation proce-dures.

(3) AuditCOA is one of the three Constitutional Commissions,together with the Civil Service Commission and theCommission on Elections, appointed in the Constitu-tion of the Republic of the Philippines 1987. Its ma-jor functions are below.

(i) Auditorial FunctionIts function is to examine, audit and settle all

accounts pertaining to the revenue and receipts of,and expenditures of uses of funds and property owedor held in trust by, or pertaining to, of all politicalsubdivisions of the government, such as the provinces,cities, municipalities, including government-ownedor-controlled corporations. Types of audit that COA

25 DBM (1999a)26 DBM (1999), p.16


JBIC Review No.4 89

performs are as follows27:1) Compliance Audit2) Financial Audit3) Performance or Value-for-Money (VFM) AuditOther functions are:(ii) Rule-making Function; (iii) Reporting Function;(iv) Recommendatory Function; (v) Limited Account-ing Function; and (vi) Custodial or Archival Func-tion

(4) Public Accounting PracticesThe public accounting system of the Philippineswould be relatively advanced compared to those be-ing currently practiced in the rest of the world in termsof their application of a complete double entry book-keeping procedure and, even partially, the adoptionof accrual accounting. The accrual accounting beingadopted is what they call “Obligation AccountingSystem” in which expenditures are recorded whenincurred regardless the accompanied cash payment,and the “incurrence” is recognized when “Obligation”arises.

However, the accrual accounting is not appliedto the Revenue side28. The constitution stipulates thatCOA shall have the power, authority, and duty to settlethe government account. Practically for the execu-tion, all the government agencies must submit theirtrial balances and supporting statements, which aresubject to the COA’s audit, and the trial balances areconsolidate by COA into the Government Consoli-dated Financial Statements, which are submitted tothe President and the National Congress.

Thanks to this accounting system, the govern-ment is able to prepare a set of financial statementsconsisting of the following three statements29.(i) Balance Sheet (Statements of Financial Position)(ii) Statement of Operations (Statement of Financial

Position)(iii) Cumulative Results of Operation

(5) Strength of the Philippine System inFeedback Function

The important function in the PEM Cycle that is tobe performed is the “Feedback”. Normally the “Feed-back” is the weakest function, but, in “Feedback Func-tion”, the Philippine PEM system has a strong ad-vantage from two aspects listed below.1) The first strength is the “Resident Auditor Sys-

tem” stated above functioning as day-to-daymonitoring and fostering corrective actions.

2) The second advantage is the disclosure system ofthe government performance accompanied by itsevaluation. All the financial and operational re-sults of every government agency are disclosedto the public after the approval of the Presidentand the Congress.

CHAPTER 2 THE PROVINCE OFPUNJAB, PAKISTAN

1. BUDGET FORMULATION PROCESS

(1) An OverviewThe Province of Punjab has started introducing the“Performance Budget”, which is an ambitious attemptto apply “Activity-Based Budget”, getting rid of theirconventional “incrementalism” under the “Line-ItemBudget” system. The Province is also leading rest ofthe country in the field of Performance Auditing whichplays one of the key roles in Public ManagementReform. This effort has just been introduced and thusfar tried to mainly improve Operational Efficiency,How Allocative Efficiency will be tackled on provin-cial level and Fiscal Efficiency can be achieved is thenext step for the reform.

(2) Key Institutions and Organizations(a) Finance DepartmentOn the introduction of Performance budget, Punjab

27 COA, “What you need to know about COA”28 “Accounts Receivables of taxes and other government revenue” do not appear in the Current Assets of the Balance Sheet.29 This is based on the Financial Statements of FY 1997.

90

provincial financial department played an importantrole. Punjab provincial financial department advisedall provincial departments to prepare their 1999/2000budgets as per the revised format, outputs, and in-puts. Moreover, the financial department planned toremove from the budget books and process all un-filled sanctioned posts.

(b)Office of Director General Performance AuditWing, Lahore

The Office of Director General Performance AuditWing is the development center of Performance Au-dit and conducts comprehensive training for internalstaff as well as for key officials of whole governmen-tal sector throughout the country to be involved inperformance evaluation.

(c) Office of Director General Audit, PunjabWhile the D.G. Performance Audit Wing is the de-veloper and trainer of Performance Audit, the execu-tor is the Office of Director General Audit.

2. AGGREGATE FISCAL DISCIPLINE ANDALLOCATIVE EFFICIENCY

The principle of the Punjabi budgeting which keepsthe category-wise balance is perfectly sound to em-phasize proper linkages between the receipts and ex-penditures based on their respective nature. How-ever, the distinction between the Current and Devel-opment budget putting them under different controlprevents the Government of Punjab from efficientimplementation of the new attempt toward New Pub-lic Management. This issue will be discussed in thefollowing sections.

3. OPERATIONAL EFFICIENCY

(1) Retrenching Redundant WorkforceOn the front of public expenditure, the biggest struc-tural problem faced by the provisional governance isthe excessive size of their civil service to the resourcesavailable.

(2) Introduction of Public Expenditure ReformThe efforts were materialized as the “Performance

Audit Guidelines” in 1986, which comprises 12 vol-umes covering auditing procedures for 9 economicsectors, and the practice commenced. Until last year(1999), Directorate General Audit, Punjab had per-formed more than five hundred cases of performanceaudit with a wide range. The Directorate General Per-formance Audit Wing is conducting the training in-viting not only auditors and other key officialsthroughout the country. Along this advanced stepstoward Public Expenditure Management in the au-diting aspect, a new initiative in the budgeting side,“Performance Budgeting”, was launched in 1999.

Thus the move toward Public Expenditure Man-agement, even it is still at an infant stage except forthe area of Performance Auditing, has been proceed-ing actively leading rest of the country. The Provincehas been positively taking in the initiatives and man-agement techniques for public management providedby bilateral and multilateral aid agencies like BMB,the World Bank and ADB during the course of itsprogress. However, those momenta seem spontane-ous rather than imposed and has been led by internalinitiatives as mentioned above.

(3) Performance Budgeting(a) Outline of Punjab Performance Budgeting

A departure from incremental “Line-Item Bud-geting” to “Activity-Based Budgeting” is the prereq-uisite for a “Budget” to carry out its mandated func-tions: planning and control. The Province of Punjabintroduced in FY 1999 (July to June) the “PerformanceBudgeting”, which is a drastic change from their con-ventional “Line-Item Budgeting”. The “PerformanceBudgeting” was applied to the following six depart-ments to pilot the rest of the Provincial Government.

The underlined phrases clearly depicts that (1)every department shall specify and propose quanti-fied performance targets for each activity, and (2) thebudgets are estimated and allocated for these activi-ties to achieve the targets proposed.

(b)Weaknesses in Punjab Performance Budgetingi) Imperfect integration of costs under an objective

of an activity.None of the cost for these activities is included in

the performance budget statement. On the contrary,


JBIC Review No.4 91

performance measures and performance standardscorresponding to the performance budget, that is theNDF or current costs, do not appear on the statementexcept for the minor activities; Reconciliation of ex-penditure/receipt, Collection of receipts and Moni-toring of audit paras. According to the Director Gen-eral Agriculture (Water Management), the perfor-mance of the NDF is embodied in the physical tar-gets stated. However, it makes the comparison be-tween the cost and performance ambiguous. Further,ensuing operation and maintenance costs accrued tothe completed projects under the non-developmentbudget (recurrent revenue budget) should be incor-porated beforehand in development budget, therebyleading to the medium-long-term fund commitmentto development projects in construction and contin-ued operation.

ii) Budget estimation with lack of accurate costingprocedures.The budget estimation is merely based on a rough

percentage allocation of the manpower cost. To im-prove this situation, the introduction of accurate cost-ing system is needed.

iii) Lack of cooperation with the Department of Au-ditor GeneralThe public auditing by Directors General of Au-

dit, Punjab is very strong among the functions of PEM.They are the professional source of performanceevaluation and accounting. The new attempt of thePerformance Budgeting would not be successfullyestablished and operated without the Punjabi audi-tors’ expertise and cooperation. However, there is nosign or intention in the Finance Department who hasbeen leading the Performance Budgeting to involvethe Department of Auditor General in the region.

(4) Performance Auditing(a) Framework of Performance AuditingThe Performance Audit Guidelines issued in 1986 wasfurther enriched into the new Performance AuditGuidelines in 1993 absorbing the results and lessonsof the practical performances in this field.

The new Guidelines have been enriched in termsof its comprehensive coverage, principle and practi-

cal auditing procedures, expanding its old scope cov-ering nine economic sectors to accommodate moredetailed conceptual framework with extended sectoralcoverage including social and environmental aspects.The new Guidelines consist of two separate catego-ries. The contents of each are as follows.

(b)Practice of Performance AuditThe auditors of the Office, together with consultantshired to evaluate technical issues and project evalua-tion. Conducting a) review of project documentscompletion and evaluation reports by various agen-cies, b) interviews with the beneficiaries and c) sitevisits and physical inspection of the project facilities,the team performed the audit from comprehensiveviewpoints including technical, financial, economic,managerial and social aspects. Accordingly their find-ings and recommendations cover quite a wide rangeof important issues.

The Performance Auditing is judged consider-ably strong among the elements of PEM in the Prov-ince of Punjab in terms of not only its institutionalframework but also the practices conducted especiallyin the fields of project and programme auditing. How-ever, it is supposed that the auditing could not exer-cise their full capacity due to the lack of PerformanceStatement in the Pakistani public accounting system.The issue of the Performance Statement will be re-viewed in the context of Punjab PEM from the ac-counting viewpoint in the later section.

(c) Project Evaluation by the Provincial GovernmentPerformance Evaluation is carried out by recommen-dation of the Finance Department and at the requestof the department in concern for the completedprojects. Largely due to a paucity of staff, budget,and time, project evaluation take place selectively,not all of the completed projects. In the Forestry sec-tor, ten projects have been evaluated thus far in thisfiscal year, of which three projects have been recom-mended to terminate, or alternatively saying, disquali-fied for ensuing allocation of operation and mainte-nance non-development budget.

In due course of evaluation, the criteria are usu-ally applied which include, among others, (i) compli-ance with PC-1utilization of funds allocated, (ii)

92

physical achievements, (iii) compliance with thepolicy objectives of the project, and (iv) meeting thepolicy target of the Provincial Government that in-cludes the increase of income level of the beneficiarypeople. Duration of project evaluation is somewherearound a couple of weeks at minimum and a coupleof months at maximum.

(5) Multi-Layered Evaluation SystemA well organized multi-layered control system wasobserved for its performance evaluation. The fol-lowing is the system from internal control withinthe Office of Director General Agriculture (WaterManagement) Punjab, to the Office of DirectorGeneral Audit.

(6) Public Accounting SystemAn Accounting System is a major provider of mon-etary information to every stage (except Feedback)of a PEM Cycle, and double-entry bookkeeping pro-cedures and accrual-basis accounting are importantand effective functioning. Additionally, a Perfor-mance Statement must be one of the main compo-nents of Public Accounting together with financialstatements for the Evaluation stage as well as to carryout the public accountability.

In Pakistan, the Department of Auditor General

is preparing a new public accounting system underthe World Bank technical assistance entitled “Paki-stan Improvement to Financial Reporting and Audit-ing Project (PIFRA)” to be adopted throughout thecountry. The system itself is sophisticated based onthe double-entry and accrual accounting, however ithas a weakness as public accounting in a sense that itonly covers financial statements and omits prepara-tion of a Performance Statement.

REFERENCES

Commission on Audit (COA). (no published year).What you need to know about COA. COA, Ma-nila.

Department of Budget and Management (DBM).1999a. 1999 Performance Accomplishment Re-port, 1 January to 30 November. DBM, Manila.

Department of Budget and Management (DBM).1999b. FY2000 Budget Program Executive Sum-mary. DBM, Manila.

National Economic and Development Authority –Institutional Strengthening Project (NEDA –ISP). 1997. Philippines – Systems and GapAnalysis. NEDA, Manila.

aaaaaaaaaaaaa


Documents

PUBLIC EXPENDITURE MANAGEMENT AND ......72 PUBLIC EXPENDITURE MANAGEMENT AND DEVELOPING COUNTRIES PART I: PUBLIC EXPENDITURE MANAGEMENT AND DEVELOPMENT ASSISTANCE Kaoru Hayashi* JBIC