Strengthening Provincial Planning and Budgeting Capacity

Jean-Marc Lepain Intergovernmental Fiscal Advisor

Manilay Tipsilanty Research Assistant

Public Finance Management Strengthening Programme

Part I

Objective and Issues Related to the Implementation of the New Budget

Law

Objectives of This Visit

• Share with provinces progress made with budget law implementation and further plans;

• Map existing planning and budgeting process to identity improvement areas;

• Identify requirements for budget norms, including needs assessment, and identification of cost drivers, especially for the education and health sectors;

• Evaluate capacity building needs and prepare a capacity building plan.

Issues Identified (1)

• Different budget formulation and budget execution processes in different provinces

• 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 (horizontal imbalance)

• Lack of integration between planning and budgeting,

• Unrealistic planning and unrealistic budget submissions in a context of bargaining

• Imbalance between recurrent and investment budget leading to a lack of capacity to maintain existing infrastructures

• Insufficient funding of non-wage recurrent expenditures

Issues Identified (2)

• Confusion between recurrent budget and investment budget and lack of integration

• 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 and not informed of budget execution

• No performance indicators

• Budget execution essentially cash based

• Large arrears in many provinces

Horizontal Imbalance

Definition:

“Horizontal imbalance measures the disparity in revenue assignment and resource allocation between provinces based on their respective expenditure needs.”

Poverty Population Total Total Exp. Recurrent Capital B.

Provinces Index % Expenditures per capita per capita per capita

Vientiane Capital 1.17 11.42% 11.96% 0.532 0.273 0.258

Savannakhet 1.43 13.50% 8.93% 0.336 0.279 0.057

Champasak 1.18 9.93% 8.12% 0.415 0.333 0.082

Khammouane 1.34 5.52% 6.46% 0.594 0.425 0.169

Luangphrabang 1.23 6.66% 6.64% 0.507 0.433 0.074

Bolikhamxay 1.29 3.68% 4.52% 0.623 0.470 0.153

Houaphan 1.52 4.59% 5.39% 0.595 0.410 0.185

Oudomxai 1.45 4.34% 4.77% 0.558 0.390 0.168

Xayabury 1.25 5.54% 7.04% 0.645 0.383 0.262

Xiengkhuang 1.42 4.07% 4.96% 0.618 0.520 0.099

Vientiane Pro. 1.19 6.68% 7.62% 0.579 0.380 0.199

Bokeo 1.21 2.38% 3.48% 0.744 0.494 0.250

Phongsaly 1.51 2.71% 3.12% 0.583 0.438 0.146

Luangnamtha 1.23 2.38% 4.09% 0.874 0.645 0.228

Saravanh 1.54 5.30% 3.96% 0.379 0.305 0.075

Attapeur 1.44 6.43% 4.18% 0.330 0.191 0.138

Xekong 1.42 4.88% 4.75% 0.494 0.212 0.281

TOTAL 100% 100% 0.508 0.353 0.155

GENERAL IMBALANCE IN 2008/09 BUDGET(in millions kips)

Rec. Budget Cap. Exp. Total Exp Rec. Budget Cap. Exp. Total Exp Rec. Budget Cap. Exp. Total Exp

per capita per capita per capita per capita per capita per capita per capita per capita per capita

Lower Province 41,000 300 41,300 11,000 1,000 12,000 4,000 4,000 8,000

National average 79,000 16,000 95,000 18,000 9,000 27,000 9,000 25,000 34,000

Highest Province 129,000 58,000 187,000 36,000 57,000 93,000 23,000 57,000 80,000

Education Health Agriculture

Provincial Spending per Capita (2007/08)

Objectives of the new Budget Law

• Improve revenue assignment and revenue management through a new revenue sharing model;

• Modernize treasury functions through computerization, single treasury account, and centralization of treasury operations ;

• Improve accounting procedures(new chart of account, new budget nomenclature 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 preparation forms and new procedures;

• Develop a revenue transfer system based on revenue sharing and budget norms;

• Improve accountability.

Part II

Budget Financing

and

Intergovernmental Transfers

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 rely heavily on government transfers

• Shared Revenue

(can provide only 25% of funds needed for local budget financing)

Status: Decree drafted, awaiting Prime Minister’s signature

• Central Revenue Transfers

Average Structure of Provincial Budgets

Province Own Revenue 20%

Transfers from Shared Revenues

25%

Conditional and Unconditional Grants

55%

Operating Expenditures

73%

Domestic Investments

23%

Central Revenue Transfers

• Unconditional Grants

-based on budget norms, need assessment and cost

drivers such as population, life expectancy, number of students, literacy rate, number of civil servants, kilometres of roads, accessibility, poverty indicators, land area, etc.

-predictable and transparent

• Conditional Grants

-depend on negotiation

-based on specific situations such as temporary revenue short fall, natural disasters, special projects, large investments

Intergovernmental Transfers

+ Shared revenue

+ Unconditional Grant

+ Conditional Grants

______________________

= Intergovernmental Transfers

Objective of Intergovernmental Transfers

• Introduce transparency and predictability in budget preparation based on quantitative and objective criteria

• Transfers should be based on needs with a pro-poor orientation

• Horizontal imbalance should be reduced gradually

• The system should provide incentives for improving delivery of Government’s services

• The system should provide incentive for improving collection of local revenues

• The system should be compatible with fiscal sustainability

Health Agriculture CTPC G.A. Provincial

Administration

Provincial Fiscal Envelope

Intergovernmental Transfer System

Expenditure Assignment based on Budget Norms

Revenue Assignment

Local Rev.

Shared Revenue

Equalization Transfer Ad hoc Grants

Education

Unconditional Grants Conditional Grants

Equalization Model (Based on FY 2007/08)

Education Sector • Recurrent Budget: 85,000 kips per capita • Investment Budget: 7% of recurrent budget as

minimum investment envelope • Maintenance cost: 5% of investments Health Sector • Recurrent Budget: 21,000 kips per capita • Investment Budget: 12% of recurrent budget as

minimum investment envelope • Maintenance cost: 10% of investment

Part III

Budget Financing

and

Budget Norms

Definition

“A budget norm system is methodology for allocating budgetary funds based on expenditure needs in a fair and transparent manner with the objective of avoiding political bargaining and correcting horizontal imbalance. Budget norms are usually integrated in the design of grant transfer formulae.”

Objectives

• correcting vertical and horizontal budgetary imbalance;

• 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 provincial budgeting and the national development strategy;

• Ensuring budget predictability

• Multi-year budget programming

Constrains

• Two budgets: recurrent and capital

• Three sources of funding: local, central and shared

• Fiscal capacity of the Lao Government

• Unclear regulatory framework for responsibility assignment between central and local administration

Two Types of Norms

• Grant transfer norms

• Budget formulation norms

MoF is considering the possibility to have intermediary aggregated budget norms by economic categories (wage, non-wage, investment)

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.

Example of Budget Norms Factors for the Education Budget

Objective: Raising education budget from 2.15% to 4.5% of GDP and

meeting Millennium Development Goals

Size 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 rate

Cost drivers to be taken into consideration: • Salary incentive policy

• Poverty

• Proportion of urban/rural population

• Accessibility of schools

• Ethnic minorities

Education Non-wage Recurrent Expenditure Norm

• Objective: non-wage expenditures equal to 27%-32% of recurrent education budget

• Introduction of a block grant system

• Manuals free of charge for primary schools within three years

More detailed analysis is required

Example of Budget Norm Factors for the Health Budget

Factors 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 package

Cost drivers • Prevalence rate of infectious diseases

• Poverty and vulnerability

• Accessibility of rural areas

Part IV

Improving Planning and Budgeting

Issues

• Allocated budgets are the result of political bargaining without consideration for needs and priorities;

• Planning and budgeting are not integrated together

• No allignement of provincial budget with national strategies and poverty reduction policies

• Achievement reporting remains weeks

The New Approach

• During the transition period budget norms will only define an expenditure ceiling.

• Budget Norms might increase significantly the size of budget in some provinces and the volume of funds available for non-wage expenditures. However, the money should not be made available to the provinces unless there is a plan to spend it.

• Spending plan must but be backed by demonstrated implementation capacity (ex: text books, schools meals, specific health programmes);

• Spending programmes must be in line with national priorities;

• User fees and out of pocket expenditures will be included as resources in budget preparation

• Strict budget execution rules and accounting rules should be enforced.

• Communication and reporting between provincial offices and ministries at the central level should be improved.

What Is Required

• Better consultation and reporting between provinces and ministries

• Better guidelines for integrating planning and budgeting sector by sector

• Multi-year expenditure plans

• Better prioritization of expenditures

• More detailed budgeting

• New budget execution procedures

• New reporting procedures

Thanks