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Lessons In Pro-Poor Public Spending Reform. The Poverty Action Fund in Uganda Sudharshan Canagarajah, World Bank Tim Williamson, Overseas Development Institute. Key Questions. What do we mean by pro-poor public spending?

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Lessons in pro poor public spending reform

Lessons In Pro-Poor Public Spending Reform

The Poverty Action Fund in Uganda

Sudharshan Canagarajah, World Bank

Tim Williamson, Overseas Development Institute

Key questions
Key Questions

  • What do we mean by pro-poor public spending?

  • Are the right mechanisms being promoted to make public spending more pro-poor?

  • Increasing spending on the poor and pro-poor growth - are they compatible?

Part 1 pro poor public spending in context

PART 1Pro-Poor Public Spending in Context

Policy context
Policy Context

  • Public Expenditure instrumental in achievement of Poverty Reduction Goals.

    • Developing Countries are encouraged to:

      • Set clear poverty reduction goals and strategies to achieve them through PRSPs and SWAPs,

      • reorient national budget allocations towards pro-poor expenditure priorities, and

      • reform public expenditure management systems towards pro-poor service delivery.

  • Focus is on public spending on the poor, is it the same as public spending on pro-poor growth?

Policy context cont
Policy Context (cont.)

  • Upgrading Public Expenditure Management (PEM) Systems in developing Countries (HIPC Tracking Exercise)

    • Need to be able to track pro-poor expenditures within national budgets as a whole.

    • Importance of strong PEM systems to do so.

  • Virtual Poverty Funds (VPFs) a means of:

    • Tagging poverty reducing expenditures within the budget, using existing budget classification system

    • Monitoring of the performance of specific expenditures in terms of outputs and outcomes

Policy context cont1
Policy Context (cont.)

  • VPFs are being encouraged by IMF/World Bank as interim mechanisms,

    • whilst strong PEM systems are being built by countries.

  • Ugandan Poverty Action Fund the first example of a Virtual Poverty Fund

    • What has PAF Achieved?

    • Does it represent good practice?

Part 2 the poverty action fund and pro poor public spending in uganda

PART 2 The Poverty Action Fund and Pro-Poor Public Spending in Uganda

Ugandan pem reforms in the 90s
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

Why was the paf formed
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

Key features of the paf
Key Features of the PAF

  • Identification and special treatment of specific “pro-poor” programmes within the budget/MTEF

    • Primary Healthcare, Rural Roads, Agriculture Extension, Primary Education, Water & Sanitation

  • Matching of resources (HIPC, donor and GoU) to pro-poor programmes within the budget

  • PAF resources shown as additional to GoU allocations to same programmes in 1997 (pre PAF)

Key features of the paf1
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

Evolution of paf
Evolution of PAF

  • PAF was Expanded to Cover More of the Budget

    • Increase in size of PAF from 18% of the GoU budget in 1998 to 35% in 2002 (large increase in on-budget HIPC and donor funding)

    • More programmes included, and explicit “pro-poor” criteria developed for accessing PAF

    • Commitment that PAF would not decline as a proportion of the MTEF

Evolution of paf1
Evolution of PAF

  • Focus moved from protection of inputs towards actual performance

    • Focus moved towards the actual results being achieved from expenditures.

    • Disbursements no longer guaranteed - linked system of performance reporting

  • Increase in institutional requirements

    • Formation of PAF Secretariat, with dedicated staff

    • Streamlining and mainstreaming of reporting and accountability requirements

The impact of paf
The Impact of PAF?

  • Observed Achievements……………..

    • Huge increase in service delivery in Health, Education, Roads, Water and Agriculture Sectors

    • Concurrently a reduction in poverty (consumption) from 44% in 1997 to 35% in 2000

      …..……. cannot be attributed to PAF alone

  • Importance other initiatives:

    • Fiscal Discipline

    • MTEF, Output Oriented Budgeting

    • PEAP, SWAPs

    • Decentralisation

Increased spending on the poor
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

Shifting budget allocations
Shifting Budget Allocations

  • Reorientation of budget allocations between sectors towards pro-poor service delivery

    • 18% to 36% of a rapidly expanding GoU budget

  • Reorientation of allocations within sectors towards expenditures on the poor

    • PAF Criteria ensure expenditures/services targeted towards the poor

    • Increase from 47% to 66% of sector budgets going to PAF programmes

Is paf spending pro poor
Is PAF Spending Pro-Poor?

  • Have the right spending options in PAF been taken?

    • Was the rationale for public intervention identified?

    • Do actions address market failures & equity?

    • Were strategies chosen on their efficiency and effectiveness?

  • Questions not asked/answered systematically

    • Sector policies and plans all based on public financed provision of services

    • Inappropriate strategies in the productive sector - no rationale for public service provision??

Is the national budget biased
Is the National Budget Biased?

  • 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

A high risk strategy
A High Risk Strategy?

  • Questionable Sustainability of Expenditures

    • Budget deficit 12% of GDP (excl grants)

    • Economic growth driven by government expenditure, not private investment

  • High Donor Dependency

    • Donor funds 50% of public expenditure

    • Crowding out of private sector growth

    • 15% appreciation of real exchange rate between 1997& 2002,

    • High commercial interest rates (20%+)

Spending on the poor vs pro poor growth
Spending on the Poor Vs Pro-Poor Growth?

  • Imbalance between types of expenditures

    • Directly Poverty Reducing Expenditures - provide goods (services) to the poor themselves.

    • Indirectly Poverty Reducing Expenditures - increase the demand of goods and services from the poor.

  • Long term commitments, short term funding

    • Returns from investments in education take long

    • Increasingly donor budget support funding committed on short term annual basis.

    • Returns from other investment such as roads are quick, and lower recurrent implications

Improving budget efficiency
Improving Budget Efficiency

  • Successful protection of disbursements

    • Disbursements protected to good-performing programmes

    • Programmes able to achieve planned outputs

  • Initiatives to improve Budget Efficiency

    • Requirements for results based workplans

    • Linking of budgets to results

    • Reporting on outputs and expenditures

    • Monitoring activities by central & local government

Parallel mechanisms
Parallel Mechanisms

  • Non PAF sectors suffer large in-year budget cuts

    • Worsened by persistent over-spending by powerful public administration votes

    • Under-performance in the achievement of non-PAF outcomes and outputs with indirect impact on the poor (e.g. rural electrification, justice law and order)

    • Inflexibility in budget management.

  • Not enough focus on Non-PAF areas

    • can only monitor budget efficiency of PAF

    • non-PAF sectors are not scrutinised as thoroughly

    • parallel reporting systems stretch capacity

Part 3 getting the balance of pro poor spending right

PART 3:Getting the Balance of Pro-Poor Spending Right

Strong foundation
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 building of Political and Institutional Commitment to poverty reduction

    • Why? Need political and institutional ownership of identified goals

Process for selecting balanced public sector strategies
Process for Selecting Balanced Public Sector Strategies

  • Systematic identification of strategies

    • Rationale for public sector: market failure or equity

  • Balance between sectors in the Budget

    • trade-offs, sustainability & affordability of goals

  • Aggregate expenditure decisions

    • size of public sector, deficit, financing, vs growth and future revenues

  • Ex-ante assessment of impact

    • overall mix of public expenditures & strategies

    • trade-offs, efficiency and effectivenes

Expenditure programmes must produce results
Expenditure Programmes must produce results

  • There needs to be a systematic use of results

    • all public expenditures, policies, and process produce outputs should contribute towards the achievement of poverty reduction outcomes.

  • Public sector strategies and actions should be selected on the basis of:

    • Effectiveness - the extent to which a set of programme outputs contribute towards the achievement of outcomes; and

    • Efficiency - the quantity of inputs (including money) required to achieve a given outputs.

Public sector policies which promote growth
Public Sector Policies which Promote Growth

IMF & World Bank (2002) on PRSPs:

“the analysis of the likely sources of growth……and the contribution of planned policies has often been limited”

  • Growth always a PRSP goal, but often backed up by inadequate policies/investments.

  • What public sector policies and actions to promote growth (beyond macroeconomic stability)?

  • Developing countries need better policy advice.

Part 4 virtual poverty funds pro poor pem reform

PART 4: Virtual Poverty Funds & Pro-poor PEM Reform

Why form a virtual poverty fund
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.


  • 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

Vpfs supporting not distorting prsp implementation
VPFs Supporting not Distorting PRSP Implementation

  • Highlights/tags PRSP priory programmes in the exiting budget classification

  • Programmes reflect an inclusive, balanced definition of pro-poor, reviewed regularly.

  • Expenditure performance tracked within budget wide reporting and review systems

  • Protection of disbursements against budget linked to a system of limiting overspending elsewhere in the budget

  • Clear exit strategy

Issues for wider pem reform
Issues for wider PEM Reform

  • Budget formulation supports balanced PRSP implementation

    • sustained achievement of poverty reduction goals

  • Supportive Budget Wide PEM Systems

    • results oriented planning and budgeting

    • budget wide reporting, expenditure against budget and outputs against targets

    • open budget wide reviews

    • comprehensive financial management reforms

  • Consistent Donor Conditions

    • link to budget-wide PEM reforms, not just VPF.

Part 5 conclusions

PART 5: Conclusions

What is meant by pro poor public spending
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

    • 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

  • Sustainability of expenditure choices (timing)

Are the right mechanisms being promoted
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

Compatibility of spending on the poor and pro poor growth
Compatibility of Spending on the Poor and Pro-poor growth?

  • Acknowledge there can be trade off between spending decisions and growth in the budget process.

  • Need more emphasis on improving the efficiency and effectiveness of spending on the poor

  • Support countries develop effective policies to promote growth

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