BHUTAN - WORKSHOP ON PEM II

1. BHUTAN - WORKSHOP ON PEM II APPROACHES TO PRIORITIZATION OF EXPENDITURES Mike Stevens Thursday, 19 August 2004

2. Introduction • Presentation will look at expenditure prioritization under different PEM paradigms, chiefly: national planning, PRSPs, ZBB, MTEFs • It will emphasize practices rather than “principles” (are there any?) • It will not cover “benefit incidence” (another topic) • It will conclude with some comments on the Ninth Plan’s approach to expenditure prioritization, a warning, and how Bhutan might strengthen its existing machinery.

3. Documents examined • The following Bhutan Govt documents were reviewed in preparation for this presentation: • Budget Manual (but how far has this been implemented – eg: program structure?) • Ninth Plan (is there an accompanying PIP – list of projects?) • PRSP (this presents itself as a MTEF accompaniment to the Plan, together with sections analyzing poverty)

4. Different approaches to prioritization • Economist’s approach to prioritization: priorities can be determined by economic analysis – eg: cost benefit analysis of projects. National or sector plan comprises projects with the highest rate of return, above a minimum threshold, that can be financed with available resources • Poverty specialist’s approach: Plan and budgets should be focussed on public spending which has greatest impact on reducing poverty • Public Management approach: little scope for prioritization anyway, since spending patterns are largely predetermined by past policy decisions and unavoidable commitments

5. Approaches to prioritization, cont. • Political scientists: politics will always determine spending choices, and the task of technicians is to inform those choices • Donors: ask for the government’s highest priorities to fund, but if they really wanted to influence the composition of spending, they would seek the marginal projects (Governments, if they have a current budget surplus, should keep high priority projects to themselves, to avoid delay, and give donors second order projects while pretending they are first order!)

6. Prioritization under different paradigms • National Planning paradigm • Centralized approach to expenditure prioritization: planners articulate development strategy based on goals (4 in Bhutan), and call for sector plans to achieve these goals. Planners effectively set priorities by determining relative sector outlays (does Bhutan have a mechanism whereby planners present ministers with options and proposed outlays, ahead of instructing agencies to prepare plans?) • Annual budgets take lead from plan outlays and content • Budget Manual 4.3.1: “Based on sectoral plans, priorities and implementation capacity, the Agencies shall prepare budgets for different programs and projects” • Agency PUs to keep the direction of the budget in line with the 5YP

7. Paradigms cont. - PRSPs • PRSPs inherently take a different approach, in most countries • Prior assumption that spending should be pro-poor (ie. Having greatest impact) • Priorities should be arrived at in participatory way involving all stakeholders (in contrast to central planning, which may be consultative, but seldom truly participatory) • Unclear where pro-poor spending begins and ends – eg: spending on roads and power which promote economic growth, or on security and justice (absence of which affects poor most) • Problem of recurrent costs – high cost drivers of pro-poor spending • Biasing budgets to poor may conflict with political realities • Are PRSPs true spending plans or advocacy documents?

8. Paradigms cont. - ZBB • Zero-based Budgeting (ZBB) • In vogue 20-30 years ago in US states and LGs • Clean sheet each budget year, ranking programs in descending order of importance (politically or otherwise), with cut off through available funds, yields priority budget • Unworkable in developing countries for many reasons • Budget needs to be in program format • Programs need to be essentially outsourced (so that they can be easily terminated) • Govts cannot turn their backs on past policy decisions each year • Administratively burdensome • But as antidote to incrementalism, the concept is attractive

9. Paradigms cont. - MTEFs • MTEF - at the opposite end of the scale to the 5YP, at least as practiced in OECD countries (originators of the concept) • Budget ministry has no formal view on spending priorities – its concern is fiscal aggregates: TR, TE, debt and deficit • Line ministries given resources for existing policy, and have flexibility to reallocate to achieve agreed outputs or outcomes • How “headroom” (gap between existing policy allocations and TE) is allocated is politically decided through collective cabinet decision • In practice developing country MTEFs will be more top-down

10. How does Bhutan match these paradigms? • Ninth Plan – clear goals and strategy, and five year current and capital planned outlays by sector • PRSP – cover paper to Ninth Plan, combines “MTEF” and poverty analysis. Breaks down sector spending by year, by current/capital, and by centre/district/village. • Not really a MTEF for two main reasons: • Organized by sector, not ministerial/agency portfolio (essential to locate managerial responsibility) • Based, like Plan, on “needs” not “availabilities”

11. Conclusions – what direction should Bhutan take? • Could stay with existingplanning paradigm which is well understood, driven by local revenues and aid, and by plan priorities. Will maximize aid flows, but risks fiscal crisis given large capital spending and likely high recurrent costs of MDGs • Current PSRP doesn’t greatly change this – still a planning model, not a true MTEF • Complement Plan with a better articulated MTEF • MTFF dealing with budget aggregates, based on projected availabilities and fiscal strategy

12. Conclusions cont. • MTEF cont • Divide MTFF into portfolio envelopes, initially top down, (i) provide sufficient finance to cover existing commitments, (ii) shape MTEF portfolio frame to reflect political priorities, (iii)seek to program aid flows in dialog with donors • Regard Plan as articulation of sector policies and strategies, which feed into MTEF, as ‘clearing house” for annual budget • Pay more attention to current side of budget by estimating how total costs of policies/programs will evolve over Plan period – and adjust as needed. • Within MTEF, MF should hold back a planning contingency, say 5-10%