Lessons In Pro-Poor Public Spending Reform

1. Lessons In Pro-Poor Public Spending Reform The Poverty Action Fund in Uganda Sudharshan Canagarajah, World Bank Tim Williamson, Overseas Development Institute

2. 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?

3. PART 1Pro-Poor Public Spending in Context

4. 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?

5. 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

6. 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?

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

8. 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

9. 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

10. 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)

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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??

18. 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

19. 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%+)

20. 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

21. 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

22. 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

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

24. 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

25. 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

26. 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.

27. 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.

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

29. 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.

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

31. 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

32. 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.

33. PART 5: Conclusions

34. 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)

35. 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

36. 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

37. http://www-wbweb.worldbank.org/prem/premcompass/know_learn/psgo.htmhttp://www-wbweb.worldbank.org/prem/premcompass/know_learn/psgo.htm