Lessons In Pro-Poor Public Spending Reform

The Poverty Action Fund in Uganda

Sudharshan Canagarajah, World Bank

Tim Williamson, Overseas Development Institute

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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?

PART 1 Pro-Poor Public

Spending in Context

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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?

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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

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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?

PART 2

The Poverty Action Fund

and Pro-Poor Public Spending in Uganda

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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

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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

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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)

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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

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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

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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

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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

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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

0

50

100

150

200

250

300

350

400

450

500

550

600

650

1997/8 (Pre PAF)

1998/9 1999/00 2000/01 2001/2 2002/3

Other (Land Reform, Adult Literacy, Restocking etc)

Accountability

Rural Roads

Agriculture Extension

Safe Water & Sanitation

PHC

Universal Primary Education

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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

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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??

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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

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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%+)

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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

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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

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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

PART 3:

Getting the Balance of Pro-Poor Spending Right

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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

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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

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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.

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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.

PART 4:

Virtual Poverty Funds & Pro-poor PEM Reform

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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.

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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

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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

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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.

PART 5:

Conclusions

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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)

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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

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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

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