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Strengthening provincial planning and budgeting capacity (laos 2010)

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  • 1.Public Finance Management Strengthening ProgrammeStrengthening ProvincialPlanning and Budgeting CapacityJean-Marc Lepain Intergovernmental Fiscal AdvisorManilay TipsilantyResearch Assistant

2. Part IObjective and Issues Related to theImplementation of the New BudgetLaw 3. Objectives of This Visit Share with provinces progress made with budget lawimplementation and further plans; Map existing planning and budgeting process toidentity improvement areas; Identify requirements for budget norms, includingneeds assessment, and identification of cost drivers,especially for the education and health sectors; Evaluate capacity building needs and prepare acapacity building plan. 4. Issues Identified (1) Different budget formulation and budget execution processes in differentprovinces Lack of predictability and large year-to-year variations in allocations No multi-year budgeting and no medium term commitment from MoF Budget driven by resources and not by needs Important disparity in fun allocation between provinces (horizontalimbalance) Lack of integration between planning and budgeting, Unrealistic planning and unrealistic budget submissions in a context ofbargaining Imbalance between recurrent and investment budget leading to a lack ofcapacity to maintain existing infrastructures Insufficient funding of non-wage recurrent expenditures 5. Issues Identified (2) Confusion between recurrent budget and investment budget and lack ofintegration Lack of alignment of expenditures on national strategies Lack of pro-poor orientation Lack of clarity of decision-making procedures Insufficient discussion with MoF and line-ministries Lack of financing at the national level of already adopted policy initiatives No break-down of budget by programmes and by projects Sector Ministry not involved at the central level in budget discussions andnot informed of budget execution No performance indicators Budget execution essentially cash based Large arrears in many provinces 6. Horizontal ImbalanceDefinition:Horizontal imbalance measures the disparity inrevenue assignment and resource allocationbetween provinces based on their respectiveexpenditure needs. 7. GENERAL IMBALANCE IN 2008/09 BUDGET(in millions kips)Poverty Population Total Total Exp. RecurrentCapital B.ProvincesIndex%Expendituresper capita per capita per capitaVientiane Capital1.1711.42% 11.96% 0.532 0.2730.258Savannakhet1.4313.50% 8.93%0.336 0.2790.057Champasak1.18 9.93% 8.12%0.415 0.3330.082Khammouane 1.34 5.52% 6.46%0.594 0.4250.169Luangphrabang1.23 6.66% 6.64%0.507 0.4330.074Bolikhamxay1.29 3.68% 4.52%0.623 0.4700.153Houaphan 1.52 4.59% 5.39%0.595 0.4100.185Oudomxai 1.45 4.34% 4.77%0.558 0.3900.168Xayabury 1.25 5.54% 7.04%0.645 0.3830.262Xiengkhuang1.42 4.07% 4.96%0.618 0.5200.099Vientiane Pro. 1.19 6.68% 7.62%0.579 0.3800.199Bokeo1.21 2.38% 3.48%0.744 0.4940.250Phongsaly1.51 2.71% 3.12%0.583 0.4380.146Luangnamtha1.23 2.38% 4.09%0.874 0.6450.228Saravanh 1.54 5.30% 3.96%0.379 0.3050.075Attapeur 1.44 6.43% 4.18%0.330 0.1910.138Xekong 1.42 4.88% 4.75%0.494 0.2120.281TOTAL 100% 100%0.5080.3530.155 8. Provincial Spending per Capita (2007/08) Education HealthAgriculture Rec. Budget Cap. Exp. Total Exp Rec. Budget Cap. Exp. Total Exp Rec. Budget Cap. Exp. Total Expper capita per capita per capita per capita per capita per capita per capita per capita per capitaLower Province 41,000300 41,300 11,000 1,000 12,0004,0004,0008,000National average 79,000 16,000 95,000 18,000 9,000 27,0009,000 25,000 34,000Highest Province129,000 58,000187,000 36,00057,000 93,000 23,000 57,000 80,000 9. Objectives of the new Budget Law Improve revenue assignment and revenue management through a newrevenue sharing model; Modernize treasury functions through computerization, single treasuryaccount, and centralization of treasury operations ; Improve accounting procedures(new chart of account, new budgetnomenclature and new computerized system); Improve linkage between planning and budgeting Improve budget arrangements through (a) expenditure need assessment,(b) multi-year budgeting, (c) budget norms, (d) new budget preparationforms and new procedures; Develop a revenue transfer system based on revenue sharing and budgetnorms; Improve accountability. 10. Part IIBudget FinancingandIntergovernmental Transfers 11. Three Types of Funding Local Revenues or Province Own Revenue Result from a new revenue assignment Province Own Revenues vary from province to province from 3.3%(Houaphan) to 63% (Savannakhet) of domestic expenditures. Average Local revenue is 20% of local budget 11 provinces are below the average of 20% and will need to relyheavily on government transfers Shared Revenue(can provide only 25% of funds needed for local budget financing)Status: Decree drafted, awaiting Prime Ministers signature Central Revenue Transfers 12. Average Structure of Provincial BudgetsProvince Own Revenue 20%Transfers from SharedOperatingRevenuesExpenditures 25%73%Conditional andUnconditional Grants 55%DomesticInvestments23% 13. Central Revenue Transfers Unconditional Grants -based on budget norms, need assessment and costdrivers such as population, life expectancy, number ofstudents, literacy rate, number of civil servants, kilometres ofroads, accessibility, poverty indicators, land area, etc. -predictable and transparent Conditional Grants -depend on negotiation-based on specific situations such as temporary revenueshort fall, natural disasters, special projects, large investments 14. Intergovernmental Transfers + Shared revenue + Unconditional Grant + Conditional Grants ______________________ = Intergovernmental Transfers 15. Objective of IntergovernmentalTransfers Introduce transparency and predictability in budgetpreparation based on quantitative and objective criteria Transfers should be based on needs with a pro-poororientation Horizontal imbalance should be reduced gradually The system should provide incentives for improving deliveryof Governments services The system should provide incentive for improving collectionof local revenues The system should be compatible with fiscal sustainability 16. Intergovernmental Transfer System Provincial Fiscal EnvelopeProvincial Education Health Agriculture CTPC G.A.Administration Expenditure Assignment based on Budget Norms Revenue AssignmentLocal Shared Ad hoc Equalization Transfer Rev.Revenue Grants Unconditional Grants ConditionalGrants 17. Equalization Model(Based on FY 2007/08)Education Sector Recurrent Budget:85,000 kips per capita Investment Budget: 7% of recurrent budget asminimum investment envelope Maintenance cost:5% of investmentsHealth Sector Recurrent Budget:21,000 kips per capita Investment Budget: 12% of recurrent budget asminimum investment envelope Maintenance cost:10% of investment 18. Part IIIBudget Financingand Budget Norms 19. DefinitionA budget norm system is methodology for allocatingbudgetary funds based on expenditure needs in a fairand transparent manner with the objective ofavoiding political bargaining and correctinghorizontal imbalance. Budget norms are usuallyintegrated in the design of grant transfer formulae. 20. Objectives correcting vertical and horizontal budgetaryimbalance; Ensuring that all provincial basic need are covered; Reducing user fees and out-of-pocket expenditures; Balancing operational cost and investment; Ensuring maintenance of all infrastructures; Ensuring a linkage between national and provincialbudgeting and the national development strategy; Ensuring budget predictability Multi-year budget programming 21. Constrains Two budgets: recurrent and capital Three sources of funding: local, central andshared Fiscal capacity of the Lao Government Unclear regulatory framework forresponsibility assignment between central andlocal administration 22. Two Types of Norms Grant transfer norms Budget formulation normsMoF is considering the possibility to have intermediary aggregated budget norms by economic categories (wage, non-wage, investment) 23. General Principles Sector budget norms integrated in the system of unconditional transfers; Introduction of budget norm will be progressive to avoid any drastic changes in the local budget structure; Transition period might last several years and might include the introduction of non-wage aggregated norm for recurrent expenditures Salaries will not be directly affected by budget norms but will be included in the total amount of the unconditional transfer; Investment norms will be prepared by the Ministry of Planning and Investment but will integrate macro-fiscal constrains established by MoF. 24. Example of Budget Norms Factors forthe Education BudgetObjective: Raising education budget from 2.15% to 4.5% of GDP andmeeting Millennium Development GoalsSize of the local Education Budget could be determined by the following factors: Total population Number of Enrolled Students Number of teachers Number of classrooms Literacy rateCost drivers to be taken into consideration: Salary incentive policy Poverty Proportion of urban/rural population Accessibility of schools Ethnic minorities 25. Education Non-wage Recurrent Expenditure Norm Objective: non-wage expenditures equal to27%-32% of recurrent education budget Introduction of a block grant system Manuals free of charge for primary schoolswithin three yearsMore detailed analysis is required 26. Example of Budget Norm Factorsfor the Health BudgetFactors to be taken into consideration: Population Life expectancy and maternal mortality Number of health facilities and beds Number of patients Number of doctors and other medical staff Scope of the minimum health packageCost drivers Prevalence rate of infectious diseases Poverty and vulnerability Accessibility of rural areas 27. Part IVImproving Planning and Budgeting 28. Issues Allocated budgets are the result of politicalbargaining without consideration for needsand priorities; Planning and budgeting are not integratedtogether No allignement of provincial budget withnational strategies and