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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?
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?
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
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.
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.
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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