LGA Public Expenditure Tracking Survey in TanzaniaA Stocktaking of Recent Experiences with PETS and Recommendations for Future Surveys

By Per Tidemand for DFID and PETS Task Force

List of Abbreviations

ABP Area-Based ProgrammeALAT Association of Local Authorities TanzaniaACB-RALG Assistant Commissioner Budget, Regional Administration and Local

Governments (MOF)ADLG(F) Assistant Director Local Government Finance – PMO-RALGBOT Bank of TanzaniaCBG Capacity Building GrantCDB Council Development GrantDCA Development Credit AgreementD by D Decentralization by DevolutionDLG Director / Department for Local GovernmentDSC Director / Department for Sector CoordinationDP Development PartnersFY Fiscal YearHSBF Health Sector Basket FundICR Implementation Completion ReportIDA International Development AssociationIPF Indicative Planning FigureLGCDG Local Government Capital Development GrantLGDG Local Government Development GrantLGRP Local Government Reform ProgrammeLGSP Local Government Support ProjectMC Minimum Condition or Municipal Council (as per context)MOF Ministry of FinanceMOFEA Ministry of Finance and Economic AffairsNBC National Bank of CommerceOC Other ChargesPE Personal EmolumentsPM Performance MeasurePFM Public financial managementPMO-RALG Prime Minister’s Office – Regional Administration and Local

GovernmentPO-RALG President’s Office – Regional Administration and Local GovernmentSSA Sub Saharan Africa

Table of Contents

Executive Summary.....................................................................................................................iv

1. Introduction..........................................................................................................................11.1 Background.............................................................................................................................................................................11.2 Objective of this assignment............................................................................................................................................11.3 Approach and Methodology.............................................................................................................................................21.3 Structure of report................................................................................................................................................................2

2. The PETS Concept and International Experiences..................................................................32.1 What are PETS?.....................................................................................................................................................................32.2 General International Lessons........................................................................................................................................4

3. Recent and Planned LGA PFM Analyses in Tanzania..............................................................53.1 Key Experiences with PETS in Tanzania.....................................................................................................................53.2 Recent Analyses of the LGDG System...........................................................................................................................73.3 Planned or Ongoing Studies.............................................................................................................................................8

4. Key conclusions and Recommendations.............................................................................114.1 What Constitutes LGA “Development Grant Transfers”?..................................................................................114.2 What are the key challenges related to LGA PFM?..............................................................................................134.3 Options for Possible LGA PETS.....................................................................................................................................154.4 Recommended Option and Implications for Study Design..............................................................................16

References.................................................................................................................................19

Annex........................................................................................................................................20Annex 1: Past Experiences of PETS in Tanzania...............................................................................................................20

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EXECUTIVE SUMMARY

The Government of Tanzania and Development Partners have contemplated launching Public Expenditure Tracking Study (PETS) in order to inform ongoing reforms at local and central government level, with a view of ultimately contributing to improving the quality and impact of expenditure programmes.

This report briefly reviews the concept of PETS and international and Tanzanian experiences with PETS. In summary it concludes that a “classical” PETS with emphasis on identification of “leakages” would be of limited value at this stage of LGA PFM work. However, a broader study of LGA PFM challenges would be beneficial if properly designed.

This report presents various options for a local PFM/PETS study (table below).

Option Main objective of study Type of PETS/LG Study

A

To identify possible leakages in LG development grant transfers from central government to the point of service delivery

Classical Public Expenditure Tracking Study (PETS)(Not recommended)

BTo assess broader aspects of “value for money” related to the system of LG development funding

A Value for Money Study combined with analysis of wider LG Fiscal arrangements

C

To assess obstacles for (and identify strategies) more equitable resource allocation among LGAs through the development grant system

A broad technical review of the development grant transfers to LGAs that intend to target “hard to reach areas”

D

To analyse key factors for low levels of budget execution

Assessment of budget execution procurement and contract management practices in LGAs.

It is concluded that options B, C and D may be combined into a single broader study of the LGA development grant system. The report provides preliminary observations on required sample size.

It is recommended to convene a meeting of the Task Force to discuss in details the specific objectives of the study before detailed design of the proposed study is embarked upon.

1. INTRODUCTION

1.1 Background

The Government of Tanzania and Development Partners are considering launching one or more Public Expenditure Tracking Studies focusing on development expenditures at LGA levels.

The overall aim of the PETS would be to provide detailed evidence of PFM challenges in LGAs to inform ongoing reforms at local and central government level, and ultimately contribute to improving the quality and impact of expenditure programmes.

Since the last tracking survey was done in 2010 (focusing on education sector) levels of responsibility devolved from central government to LGAs have increased while capacity remains weak. Difficulties consistently arise with the execution of the development budget (more than half of which was under-executed at local level in 2010/11), handling of carry-overs, and complexities of multiple funding channels, imbalances between capital and recurrent expenditure and with reporting fund utilisation at local level.

1.2 Objective of this assignment The purpose of this assignment is to facilitate an informed discussion of the design of possible future LGA Public Expenditure Tracking Surveys (PETS) Tanzania. The overall objective of the assignment is to produce full Terms of Reference for the PETS.

Two steps are envisaged:

Step 1: stocktakeThe first step is to carry out a stocktake of recent documentation and analysis to consolidate current understanding of financial blockages and inefficiencies at LGA level, and determine where key unknowns lie to inform design of the PETS. Consideration will be given (though not confined) to the significance of low rates of execution of the development budget and broader budget execution delays.

The stocktake will be used to inform details of the survey design and appropriate level of effort. It will take the form of a short briefing paper summarising key issues and proposing a limited range of design options for the PETS.

Step 2: completion of Terms of ReferenceThe second step is to produce full terms of reference for the survey, based on discussions emerging from the stocktake, for approval by the PETS Task Force (to include representatives of PMO-RALG, MoF and DPs (DFID, CIDA and Belgian Co-operation)). The Terms of Reference will provide a sufficient basis for DFID to tender services and reflect generic DFID procurement guidance.

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1.3 Approach and Methodology

The assignment is undertaken by Per Tidemand (DEGE Consult) with an input of 10 working days.The consultant will, according to the Terms of Reference:

Work with the Task Force to facilitate agreement on specific objectives and deliverables of the survey based on the stocktake, identify stakeholders and built up commitment.

Advise on selection of specific development funds for analysis and LGA sample. Use his/her knowledge and expertise of expenditure tracking surveys and local government

financing in Tanzania/SSA to advise on aspects of methodology, data collection strategy and design and pretesting of survey instruments.

Develop methodology for sampling of delivery points. Advise on workshops, debriefing events and strategy for dissemination of survey findings. Recommend appropriate inputs, expertise, time frame and key milestones for the survey.

The first step of the assignment is to produce a stocktake of current studies and challenges regarding LG fiscal arrangements with particular emphasis on development expenditure budget execution.

This report presents the initial findings and recommendations arising from the stocktaking exercise.

1.3 Structure of reportThis report initially, in section 2, provides a general overview of the PETS concept and international experiences. This is followed by a discussion (section 3) of experiences from recent PETS and related studies of LGA PFM issues in Tanzania. Section 4 presents the general conclusions and recommendations.

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2. THE PETS CONCEPT AND INTERNATIONAL EXPERIENCES

2.1 What are PETS?

The concept of Public Expenditure Tracking Surveys (PETS) emerged in the late 1990s. The first systematic Public Expenditure Tracking Survey was conducted in Uganda in 1996. A team of World Bank researchers undertook the study to determine whether the funding disbursed for Ugandan primary schools actually reached the schools. The researchers decided to track disbursals and receipts of the so-called capitation grant, a sum of money intended for school supplies that was calculated as a set amount per student.

The strength of the PETS methodology lies in its simplicity. “It is basically a survey that measures the amount of funds received at each link of the public service delivery chain from a nation’s treasury down to the service delivery unit, where it is supposed to be spent. By comparing how much was sent from the treasury with how much was actually received at the service delivery units surveyed, one can calculate how much was lost or diverted on the way, commonly referred to as ‘leakage’. The difference from a more conventional audit is its use of statistics and averages. Rather than, for example, going to every single school in a country to determine how much has been received, a PETS selects a statistically representative sample of schools and uses the findings from these schools to calculate an estimate of total receipts in all schools in the country. It can therefore be an excellent diagnostic tool to assess the strengths of existing controls, by demonstrating how the systems are functioning in terms of ensuring that funds reach the intended recipients”1.

The “classical PETS” is foremost suitable for identifying and quantifying possible leakages in the system. The PETS may in itself tell little about wider quality aspects of service delivery and may therefore be combined with other survey instruments such as e.g. Quantitative Service Delivery Surveys (QSDS).

There are a number of international guidelines available for how to best design a PETS. The design of a PETS will typically include the following key stages, i) Identification of Scope, Purpose and Actors, ii) Design of Questionnaires, iii) Sampling, iv) Execution of Survey, v) Data Analysis, vi) Dissemination and vii) Institutionalization2.

1 Source: Sundet, G., 2008, 'Following the Money: Do Public Expenditure Tracking Surveys Matter?', U4 Issue 2008:8, U4 Anti-Corruption Resource Centre, Chr. Michelsen Institute, Bergen, Norway 2 See e.g. http://go.worldbank.org/84C1RUHTD0 and Public Expenditure Tracking and Facility Surveys – A General Note on Methodology prepared by Swarnim Waglé and Parmesh Shah of the Social Development Department at The World Bank Group.

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2.2 General International Lessons

PETS have been undertaken in at least 24 countries since the first PETS in Uganda. In 2009, the World Bank summarised its experiences with work in support of PETS with the following key lessons3:

PETS have proven to be useful as part of a broader policy strategy aimed at improving service delivery results;

PETS have become a brand name for very different instruments, but at its core there is a survey methodology that requires skilled technical expertise and a solid knowledge of budget execution processes;

Policy impact in a variety of PETS experiences could be further strengthened by stronger country ownership and effective follow-up; and

The Bank could enhance PETS results through strategic partnering, and greater emphasis on dissemination and communication strategies

Policy impact is a key challenge. Many PETS are undertaken without pointing to clear policy reforms.

A 2003 World Bank review examined the conduct and impact of World Bank sponsored PETS in eight countries. With the exception of Uganda, no claims are made that the PETS have had a direct impact on the flow of resources or on any other aspect of service delivery4.

The early PETS experience from Uganda appears in many ways unique. The PETS led to various reform initiatives. In the literature most emphasis was paid to various measures for increasing transparency in budget allocation: posting of LG transfers in newspapers, etc. Subsequent PETS indicated that leakages had been significantly minimised. However, later analysis (Hubbard, 2007) indicated that other reforms possibly had more significant impact: such as the introduction of earmarked conditional grants for capitation transfers that had previously been bundled into many other grants manifest as one single block grant5.

3 Gurkan, Asli; Kaiser, Kai; Voorbraak, Doris. 2009. Implementing Public Expenditure Tracking Surveys for Results: Lessons from a Decade of Global Experience. © World Bank, Washington, DC4 Dehn, J, Reinikka, R and Svensson, J (2003), “Survey Tools for Assessing Performance in ServiceDelivery,” in Bourguignon, F and da Silva, L. A. P (eds.) The Impact of Economic Policies onPoverty and Income Distribution: Evaluation Techniques and Tools World Bank and OxfordUniversity Press, Washington DC. http://www1.worldbank.org/publicsector/pe/PETS1.pdfS - quoted in Sundet op.cit. 5 See Sundet op.cit p.12 for further details.

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3. RECENT AND PLANNED LGA PFM ANALYSES IN TANZANIA

A number of PETS as well as related studies have been undertaken in Tanzania to explore various aspects of PFM challenges at LGA level. This section provides a brief, but not exhaustive, overview of key experiences with PETS as well as relevant technical reviews and value for Money Audits at LGA level. The purpose of the review is to distil key lessons to inform possible future studies.

3.1 Key Experiences with PETS in Tanzania

In recent years, four donor-supported PETS have been carried out in Tanzania. Others have been carried out by civil society organisations for which there are little publicly available information. The first PETS (1999) explored financial flows in education and health in a small sample of three districts. A subsequent study (2001) analysed financial flows in several sectors (primary education, primary health, water and rural roads) in five districts. A pilot study in 2003 focussed on the Education Development Programme (EDP) in six districts; this was extended to 21 districts in a full scale PETS of EDP in 20046.

In practice, these studies had limited impact reflecting methodological difficulties (e.g. lack of representative sample) and weak government ownership. A more elaborate survey, completed in 2010, made efforts to take on board previous lessons: A comprehensive analysis of funding flows, including private contributions, for primary and secondary education (in FY 2007/8) was carried out in 26 districts based on a sample of 338 schools.

The 2010 PETS had very broad TOR – and only marginally touched upon the core classical PETS objectives (leakages), but sought to analyse the following wider issues:

Flow of public funds responding to questions such as; Who spends the public funds allocated through the central and regional budgets? What are they spent on i.e. how much spending benefits school level service delivery

directly and indirectly? How much of funds allocated reach the 'school' and how do they spend the funds? Private contributions to schools; i.e. what is the level of parent/community/other

contributions to schools? Equity in distribution; i.e. is there a correlation between allocation per student and other

school and district level characteristics? Link between school performance and allocation; i.e. is there correlation between

allocation per student and school level performance indicators?

The 2010 PETS highlighted a maze of formula-based and discretionary funding channels involving multiple ministries and disbursement channels, and found significant disparities in allocations 6 For details on these studies see Annex 1.

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between urban and rural councils and to primary education. A complementary pilot service delivery survey in 2010 provided a set of metrics for benchmarking the performance of schools and health clinics.

The findings were not entirely new, but had been identified in previous Education PER, Education annual reviews as well as in wider LGA fiscal reviews. The report includes several recommendations, of which many are very general in nature. From the documentary review it is not possible to ascertain exactly which recommendations – if any – have been implemented as a result of the study.

In addition to the various national PETS, several smaller CSO implemented PETS have been undertaken as part of broader social accountability assessments. It is beyond the scope of this paper to summarise lessons, but generally these exercises have been relatively challenging for CSOs to undertake in a constructive manner (see box below).

Box 1: Some common features of CSO facilitated PETSAlthough one hesitates to generalize, it might be useful to describe a typical Tanzanian CSO PETS. This description draws from the author’s close co-operation with CSOs that work with PETS in Tanzania. From the dozens of PETS performed by CSOs in Tanzania in the last six years or so, the following characteristics emerge:

1) The motivation for doing a PETS was that there was funding available and that it fit within the stated objectives of the organisation to address accountability issues at the local level.It was difficult to get accurate financial information from the local authorities, and it was therefore often not possible to check what percentage of the funding had reached the service delivery centre (usually primary schools) and to see whether there were any leakages.2) Information on how much money had been received was collected at the frontline service delivery centres, but the information was often not shared with people at this level.3) The final reports were presented to the aid agencies that provided funding for the PETS and at national workshops. There was generally no follow up and no attempt to make the reports available to officials and other stakeholders at district and village level.4) Basically, many of these studies almost appear as studies for their own sake. They may be fed into national processes, such as national consultations among CSOs, but they do not connect with similar studies of other CSOs to fit into a larger context. And, perhaps most crucially, they do not feed back into processes at the level where the information was collected in order to improve local awareness of entitlements and to build stronger demand for accountability from the bottom.Source: Sundet 2008 op. cit.

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3.2 Recent Analyses of the LGDG System

The LGDG system is commonly viewed in Tanzania as constituting the main modality for development fund transfers to LGAs (however, see discussion of wider definition of the “LGA development budget” in section 4.2).

Within recent years at least four major studies have been undertaken of the LGDG operations:

A Mid Term Review of the LGSP (which is the IDA funding for the LGDG) in 2008, (undertaken by DEGE Consult in association with Urban Institute in Washington)

A Mid Term Review of the LGDG in 2011 funded by LGRP and undertaken by MDF Training and Consultancy,

An Evaluation of the LGSP support to LGDG in 2012 (undertaken by DEGE Consult in association with Urban Institute in Washington),

Independent Procurement Review & Value for Money Audit of Contracts Implemented by LGAs (FY 07/08, 08/09, 09/10 & 10/11) under the LGDG System, 2012 (undertaken by UPIMAC).

In addition there have been analyses, reviews and value for money audits of some of the “sector windows” of the LGDG including the Health Sector Development Grant.

Key findings from the various studies include:

The LGDG system intends to provide funds to LGAs in a formula based manner and provide incentives to those LGAs that perform well. The system in itself is a significant move towards greater budget transparency, equity and promotion of good governance. However, these features are only partially implemented in practice.

There are difficulties in reconciling figures on funds transfers with expenditure data as significant funds are rolled over from one year to the next (and as systems for reporting of roll over of funds are not fully in place).

The above problem of “roll over of funds” is mainly due to late transfer of funds – significant funds are released to LGAs within the last month of the fiscal years that makes it impossible for LGAs to spend the funds the same year. The late release also complicates reflection of the releases in the subsequent years budget (as the funds are released after the budget for the next fiscal year is completed).

The LGDG system includes a core discretionary CDG as well as sector specific windows for health, agriculture, etc. All funds are channeled to the same account at LGA level, but the LGAs are expected to utilize the funds on specific priorities and also to present separate reporting for each of the windows.

There have not been any reported “leakages” in the LGDG system. However, the question of potential “leakages” has been difficult to address because of problems of how to report the substantial amount of funds that have been “rolled over”.

The procurement reviews and Value For Money Studies generally note that procurement processes often deviate from rules and regulations but that “Value for Money” is generically satisfactory.

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The technical quality of development planning at LGA levels is often compromised by political prioritization that leads to significant fragmentation of funds among many small projects (in each ward) and with relative emphasis on new capital projects rather than rehabilitation and without simultaneous investments in staff and recurrent costs.

3.3 Planned or Ongoing Studies

Several studies on LGA public financial management are currently planned for 2013 – or recently launched. This includes at least the following three general studies:

1. A Sub-national PEFA This study is planned but the TOR for the assignment is not yet completed. The PEFA methodology follows a standard procedure and it is expected that the PEFA will cover the below mentioned key issues7.

A. PFM OUT-TURNS: Credibility of the budget

PI-1 Aggregate expenditure out-turn to original approved budgetPI-2 Composition of expenditure out-turn to original budgetPI-3 Aggregate revenue out-turn to original approved budgetPI-4 Stock and monitoring of expenditure payment arrears

B. KEY CROSS-CUTTING ISSUES: Comprehensiveness & Transparency

PI-5 Classification of the budgetPI-6 Comprehensiveness of information in budget documentationPI-7 Extent of unreported government operationsPI-8 Transparency of Inter-Governmental Fiscal RelationsPI-9 Oversight aggregate fiscal risk from other entitiesPI-10 Public Access to key fiscal information

C. BUDGET CYCLE

C (i) Policy-Based BudgetingPI-11 Orderliness and participation in the annual budget processPI-12 Multi-year perspective in fiscal planning, policy & budgeting

C (ii) Predictability & Control in Budget ExecutionPI-13 Transparency of taxpayer obligations and liabilitiesPI-14 Effectiveness of measures for taxpayer registrationPI-15 Effectiveness in collection of tax paymentsPI-16 Availability of funds for committing expendituresPI-17 Recording/management of cash balances, debt/guaranteesPI-18 Effectiveness of payroll controlsPI-19 Competition, value for money and controls in procurementPI-20 Effectiveness of internal controls for non-salary expendituresPI-21 Effectiveness of internal audit

C (iii) Accounting, Recording and ReportingPI-22 Timeliness and regularity of accounts reconciliationPI-23 Availability of data on resources received by service delivery unitsPI-24 Quality and timeliness of in-year budget reportsPI-25 Quality and timeliness of annual financial statements

C (iv) External Scrutiny and AuditPI-26 Scope, nature and follow-up of external auditPI-27 Legislative scrutiny of the annual budget lawPI-28 Legislative scrutiny of external audit reports

D. DONOR PRACTICES

D-1 Predictability of Direct Budget SupportD-2 Financial information provided by donors for budgeting and reporting on project and

program aidD-3 Proportion of aid managed by use of national proceduresHLG-1 Predictability of transfers from Higher Level of Government

7 Format is derived from the recent 2012 LG PEFA in Uganda.

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2. Mapping Exercise on Transfer of Funds to LGAs (for MOF)

The Inception Report (February 2013) states the objective of the assignment as:

“The main objective of the assignment is to carry out a critical review of the existing methodology and processes that are currently being used to allocate, release and transfer funds from all Government external sources to LGAs. The mapping exercise will shed light on the cause of fund transfer delays to LGAs and propose mitigation measures required for an improved, efficient and effective process and systems for the fund transfers to LGAs.

It is envisaged that with improved processes and systems the downtime required for the transfer of funds should be reduced from the current estimated time of execution of seven (7) days to a much lower number”.

From the Inception Study it appears that fieldwork will be undertaken, however the exact scope of fieldwork (sample size, etc) as well as the type of grant transfers to include is not yet clear although the perspective is broad. It is yet to be seen what the fieldwork will contribute, compared to a thorough review of central government level modalities for budget allocations and transfers.

3. Consultancy Assignment to ascertain the level of Unspent Funds at Local Government Authorities originating from the receipt of the Local Government Development Grant (Carry over of funds) (Draft TOR to be commissioned under LGRP/PMO-RALG)

The draft TOR received by the consultant indicates that, “the assignment should clarify the amount of unspent balances at LGA level”. It should determine what amount of local and foreign funds LGAs received through the LGDG System, how much they spent and how much unspent funds remains at LGA level. The draft TOR states the objectives of the assignment as:

To determine from the original financial statements of LGAs the actual position in relation to LGDG financed expenditures and unspent balances carried forward at individual LGA level for each of the years ended 30 June 2010, 30 June 2011 and 30 June 2012 and to prepare a financial report in spreadsheet format showing for each LGA separately:

Opening balances of LGDG funds at July 1 LGDG funds received during the year Expenditures from the LGDG funds Closing balances of LGDG funds at June 30 of each year

To confirm the expenditures and balances shown above with information available from other independent sources and to report any exceptions or variances

To reconcile amounts held on 30 June 2012 with amounts transferred to the Development (bank) account managed by each LGA under the new Epicor system

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To visit a sample of LGAs and inspect the accounting records relating to works and activities funded from the unspent LGDG funds carried over to the new financial year and verify that they have been captured in LGDG expenditures in the normal way.

To compare and contrast the actual unspent balances with those contained in the NAO verification report for the year to June 2011.

To review the financial reporting system and information sources used by PMO-RALG in preparing the annual LGDG report and make recommendations on a more accurate and reliable reporting financial system.

Summary observations on the planned/ongoing studies:

Several rather broad LGA fiscal studies are being launched. Some are looking at the entire LG fiscal system (the PEFA study and possibly the mapping study). The study on “unspent funds” focuses on the LGDG system (unclear if sector windows will be included).

The objective of the mapping study seems to focus on the processes for how to “allocate, release and transfer funds”. It will therefore aim to focus on national government procedures for fund allocations and transfers, and elements of detailed fund tracking at LGA levels.

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4. KEY CONCLUSIONS AND RECOMMENDATIONS

The Government of Tanzania and Development Partners are considering launching one or more Public Expenditure Tracking Studies focusing at development expenditures at LGA levels.

The overall aim of the PETS would be to provide detailed evidence of PFM challenges in LGAs to inform ongoing reforms at local and central government level, and ultimately contribute to improving the quality and impact of expenditure programmes

In this concluding section we first explore two key issues:

1) What really constitutes the LGA development budget (i.e., what should a PETS focus on if it is to inform wider PFM work related to LGA development budget)?

2) What are the key PFM challenges for management of LGA development budgets at present that a study should explore?

The subsequent section presents the overall options and recommendations for a “PETS”.

4.1 What Constitutes LGA “Development Grant Transfers”?

Since FY 2008/09, MOFEA has made an effort to restructure the manner in which local development grants have been included in the national budget by consolidating all local government grant programs in the regional votes under Program 80: Local Governments (Sub vote 8091, 271100 - Current Grants to Other Levels of Government).8 Under this sub vote, each grant scheme is listed as a ‘project’, thereby providing a comprehensive overall view of grant resources flowing to the local government level within each region. This shift was driven by the LGDG system, as LGSP grants were moved out of PMO-RALG’s vote (Vote 56) into the regional votes under sub vote 8091 in the budget of 2007/08 to reflect that LGDG is not a “project” but rather, a harmonized grant modality.

The Table below provides a summary of the Local Government Program, by aggregating up program expenditures across the 21 regional sub votes for 2009/10. The four main windows of the LGDG system are immediately visible.9 In addition, two project codes (6401 and 6402) capture discretionary development grants provided by the GoT to local (urban and district) governments, which includes the so-called grants for disadvantaged councils.10 An additional 19 projects are 8 Since the preponderance that local development grants (although not necessarily all) are expected to be spent on capital infrastructure, it is unclear why development grants are classified as “current” (rather than capital) grants. 9 Even though the Health Sector Basket Fund is a recurrent funding source for LGAs, it is counted as development spending at the national level.10 Project codes 6401/6402 capture a variety of earmarked grants, including council buildings, bridges and other public works, staff housing, and other local infrastructure projects. During the budget formulation process, ACB/RALG permits each LGA to identify one or two specific capital projects in a discretionary manner. See Annex 6 of “An Assessment of the D-By-D Compliance of the Planning and Budget Guidelines for FY 2009/10”, PMO-RALG, October

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included in the budget document reflecting TSh. 57 billion in specific development projects, including small donor-driven development projects such as the Local Government Transport Programme; miscellaneous Primary Education Development funding; and other small development projects.

Table 1: LG Development Grants

Actual (realized) expenditures, 2009/10(Program 80 /Sub vote 8091/271100, TSh. million)

Project Code Project Name Actual expenditures3280 Rural Water Supply and Sanitation 51,442.14486 Agricultural Sector Development Programme 48,346.55418 MMAM/Primary Health Service Dev Programme 1,141.55421 Health Sector Basket Fund 63,784.16277 Local Govt Capital Development Grant 91,785.06401 District council 91,283.76402 Town/Municipal/City Council (urban councils) 18,522.6

All other Local Gov Development Grants / Funds 56,107.1Total Program 422,412.7

Source: Actual/realized grants released for 2009/10 as National Development Budget (Regional Votes), 2011/12.

The analysis of the national budget figures in the Table shows that the “LGDG system” (as more narrowly defined above as being LGDG Core plus sector windows) accounts for approximately half of all local development funding in Tanzania.11 Because the other grants are not performance based and non-formula based they, by definition, fall outside the narrower definition of the LGDG system.

There are two main elements of LG development funds allocated outside the LGDG system:

A large share of the government’s own development expenditures, which are allocated outside the LGDG system on a discretionary basis – in the table above captured as “project codes 6401 and 6402”. While these grants appear to be allocated in a discretionary, non-formula-based manner12, they end up funding council buildings, bridges and other local infrastructure that are identified by council officials as local priorities. Although there are governance and equity benefits to allocation grant resources in a formula-based manner, it cannot be argued that there is no role for discretionary local development grants within Tanzania’s development grant system, or that these grants fail to contribute value to local

2009, for a more detailed analysis and discussion. For an analysis of intergovernmental fiscal transfers and a more detailed discussion on such earmarked grants, see DEGE Consult: “Fiscal Assessment of Local Government Authorities and the Design of an Urban Infrastructure Grant (UIG)”, November 2011 (Section 2.2.2).11 The exact percentage is either 46 or 54 percent, depending on whether “total development spending” is considered to include (recurrent) Health Sector Basket Fund spending. 12 It should be noted that most of these funds are allocated as equal shares to LGAs (with some exceptions) and therefore in a way strictly speaking has some features of “formula” based allocations – however not a formula that attempts to capture location specific investment needs.

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public sector infrastructure. Parts of these grants are allocated specifically to address “hard to reach areas”. These grants are therefore critical parts of the LG development budget.

Second, there are still a large number of (generally relatively small) donor-driven or donor-

supported development grants that fall outside the LGDG system.13 In many cases, the decision for these grants to remain outside the LGDG system is either driven or fully supported by the DPs providing funding for these programs, which allows the sectoral line ministry and its DPs greater flexibility and control. The most significant local “development” scheme to the local level outside of the LGDG system proper is the Health Sector Basket Fund, which is allocated on a transparent formula-basis, but which is intended to fund operation and maintenance expenditures at the local level (rather than development activities).14 There are other reasons why donors or line ministries may choose to opt out of the LGDG system for practical reasons. For instance, providing a grant to only a sub-set of LGAs violates the ground rules for the LGDG system, thereby placing smaller grant programs, that wish to strategically support a more limited number of LGAs, outside the confines of the LGDG system. Although the five common principles set forth in the LGDG MOU (2008) were well intended, they resulted in a rather narrow –perhaps idealistic- definition of the LGDG system.

Although different grant schemes grouped under sub vote 80 may be managed under different institutional mechanisms, they all have in common that the ACB/RALG is responsible for triggering their release from the Treasury. As such, the national budget presents the most comprehensive list of grant funding that LGAs should expect to receive and, combining all local development grants under a specific for Local Governments, has considerably enhanced the transparency of the budgeted grant flows to the local government level. As a result, to the extent that the GoT and its DPs want to consider “what is next” for the local government development grant system in Tanzania, a plausible starting point for an assessment of the effectiveness, transparency and equity of the local government development grant system would be a more systematic consideration of all grant flows captured by program 80.

4.2 What are the key challenges related to LGA PFM?

The current key issues related to LGA financing of services are numerous and relate to budget allocation procedures, transfer procedures, wider systemic aspects of LGA reporting and accounting (e.g the IFMIS, procedures for roll over of funds, etc) as well as specific local challenges with regards to budget execution, quality of planning, design, procurement, contract management, reporting, etc. These key challenges are partly related to issues that may benefit from some form of local level analysis of LG PFM (a form of “PETS”) – whereas other issues can best be further understood from analysis of central government management procedures:

13 It should be noted that some of the development programs that were included in the 2009/10 budget include a number of small development programs that pre-dated the LGDG sector windows.14 Because the HSBF is funded by DPs, the fund is classified as a development project despite the fact that it funds recurrent (operational) expenditures.

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Problems related to inequities in fund allocations – for recurrent funds this is foremost related to the distribution of PE/OC and related to wider challenges of local staff management and staff distribution. The Government has sought to address these challenges partly through giving these “hard to reach areas” preference when new staff is deployed and with additional development funding (in particular within project code 6401 and 6402). The extent to which these development grants transfers make a significant contribution to address the wider inequities may be explored in a wider PET study. The problems related to inequities in LGA allocations have to date primarily been addressed from a “macro” national management perspective.

For development fund transfers at LGA level, the critical issues include the need for greater transparency in budget allocations by clearly and comprehensively recording LGA budget allocation in GoT budgets. This is partly a fundamental policy question of possibly introducing “LGA votes” in the national budget and partly a more operational question of proper MOF communication (e.g. through website), etc. These problems are foremost related to national (rather than local) management procedures and a local PETS will not contribute to further understanding of these problems.

Lack of reliability and timeliness of LGA development grant transfers. Also lack of Information on these issues (e.g. displayed on website) and effective transmission of information to LGAs. Delayed and incomplete transfers of funds are entirely related to management problems at central government level: it would be worthwhile to explore how fund transfer could be made more timely and reliable as well as explore how information on fiscal transfers could be made more transparent and better communicated to LGAs. A local type “PETS” will not contribute to better understanding of these challenges.

Low levels of budget execution has occasionally been mentioned as a problem at LGA levels – however, there is also significant consensus on the fact that incomplete transfers and delays in fund transfers (as discussed above) are probably the primary reasons behind poor budget execution in LGAs15. Some elements of local budget execution – most notably procurement management practices – do contribute to problems with budget execution – and may be better understood if analyzed through some form of local PFM study.

Challenges related to “rolling over” of development funds from one fiscal year to another at LGA level. Several reports have indicated that “rolling over of funds” has become more prevalent and it has also been noted that these funds are poorly recorded in current systems of accounts and reports. The problems may be further explored through local level PFM studies – but may also be better understood with more emphasis on the basic systems (rather than practices) applied (centrally and at LGA levels) for properly capturing and reporting of “rolled over funds”. A more general analysis of the basic systems for LGA fund reporting may be beneficial.

Quality of LGA planning, procurement and technical supervision that contribute to low-level quality of implemented local projects. These issues are relevant to study through some form of local level PFM or PETS study.

15 See e.g. URT Public Expenditure Review 2011 (draft report June 2012) – the same report noted that LGAs generally have better levels of budget execution than MDAs (see para. 44).

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4.3 Options for Possible LGA PETS

Section 4.2 summarised a wide array of LGA PFM challenges. Some of these challenges can be further analysed through a form of local level PFM or PETS study – while other of the challenges may be better analysed through a study with focus on national level management procedures.

A LGA PETS may be designed in order to gain insight into the wider LG Development Funding system for more detailed insights on a sub-set of issues. Below, we present in table form some broad options for study design with emphasis on the specific objectives and broad scope of the study. Once agreement has been reached on this it will be possible to proceed with more detailed design of the study (sample size, etc).

Option Main objective of study Type of PETS/LG Study

Comments

A

To identify possible leakages in LG development Grant transfers from central government to the point of service delivery

Classical Public Expenditure Tracking Study (PETS)

The study will have to have a distinct focus on specific points of service delivery: probably health clinics or schools. A normal PETS will require statistical sampling of both LGAs and service delivery points. Previous studies do not indicate such “leakages” to be a major issue. Such a study is unlikely to assist work on LG PFM.

BTo assess broader aspects of “value for money” related to the wider system of LG development funding.

A Value for Money Study combined with analysis of wider LG Fiscal arrangements

The study should be broad in nature and include most or all of the LG development funding streams: both the various LGDG grants and “project codes 6401/2”. The study may generate interesting insights of the LG Fiscal framework and broadly inform LG PFM work – however some overlap is likely with recent and ongoing studies.

C

To assess obstacles for (and identify strategies) more equitable resource allocation among LGAs through the development grant system.(How best to develop “hard to reach areas”.)

A broad technical review of the development grants transfers to LGAs that intend to target “hard to reach areas”.

The study will assess the extent to which the various grants and “project codes 6401/2” assist LGAs to escape the status as “hard to reach areas” and more successfully retain staff.The grant system (in particular project codes 6401/2) has not been analysed from this perspective and findings may lead more to operational recommendations.

D

To analyse key factors for low levels of budget execution

Assessment of budget execution procurement and contract management practices in LGAs.

The study will focus on a sample of LGAs (and grant types) that have significant problems with budget execution and compare with LGA (and grant types) that have less problems in order to identity potential actions for approved budget execution. From the literature review it is

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Option Main objective of study Type of PETS/LG Study

Comments

unclear to what extent low levels of budget execution is determined by locality specific conditions. There is consensus on the fact that the most important causes of low levels of budget execution in LGAs derive from delays in release of funds.

It is clear from our analysis that, in the current situation, a “classical PETS” study (Option A in Table above) that normally has emphasis on identification of “leakages” is unlikely to provide significant information of use for wider LGA PFM reforms. The key issues related to e.g. education sector funding appear not to be leakages from central government to facility level, but broader issues related to budget allocations, local planning and management as well as reporting systems (as also identified in the 2010 Education PETS).

The other three types of studies outlined above (B, C and D) may be combined in various forms or one of the three options may be chosen.

In order for a PETS (or another type of LGA PFM study) to successfully influence policymaking and LGA PFM work it would be desirable to focus on a few specific challenges in a manner that would generate new insights. The TOR for a PET study could include elements from option B, C and D but should be clear on what the most important of these objectives are.

4.4 Recommended Option and Implications for Study Design

Government priorities for PFM work should guide the selection of appropriate types of studies. It is recommended that the above options are presented to the PETS Task Force for discussion and agreement.

From the consultant’s review of literature and knowledge of LGA PFM challenges it can be concluded that the preferred option would probably be option B with elements of options C and possibly D.

The objectives of the study could therefore be defined as:

To assess broader aspects of “value for money” related to the wider system of LG development funding through an analysis of how different funding streams and institutional arrangements impact on the quality of local government planning, budgeting and value for money of funded projects.

To assess obstacles for (and identify strategies) more equitable resource allocation among LGAs through the development grant system: to what extent are the so-called “hard to reach areas” favoured by the existing LGA development grant system. This will include a

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broad review of all the existing LGA grants but also a more in-depth analysis of how grants targeted to these LGAs have any significant effect on these LGAs in terms of their ability to attract and retain staff.

To identify and analyse local key factors for low levels of budget execution – firstly be identifying local variation in local budget execution and secondly to identify key explanatory variables.

The design implications for such a relative broad study would be:

Type of grants: All the important elements of the current LGA development grant system should be included in the study. This would probably include all the grants presented in table 1 – except the health basket fund (as that fund primarily finance recurrent expenses).

Sample of LGAs : The main objective of the recommended study is related to broader qualitative aspects of the LGA development grant system, thus there is no need for having a very large sample as long as the most significant types of LGA variation of importance to the study are captured. The LGAs that are included will be included as “case studies” rather than “statistically representative sample”. Based on the above discussion of study objectives It will be relevant to include the following examples of LGAs:

o Urban-rural,o Relative “disadvantaged” and o With relative high and low levels of budget execution.

This type of variation could be achieved by a sample of 6-10 LGAs16.

Sample of Service Delivery Units/Projects: A significant part of the study should be undertaken at the LGA level rather than at service delivery /project level. The specific questions related to project/service delivery level may require a relative significant sample of approximate 30% of the value for the investments in the particular LGA.

16 Note this is a lower figure than many of the recent VFM studies – e.g. the recent VFM audit of the health sector development grants (PMO-RALG 2012) where 16 LGAs were analysed. However, an experience from this and other recent VFM studies is that an expansion of the number of LGAs that are included in a survey always happens at the expense of in-depth analysis of individual LGAs. A larger sample is relevant f it is attempted to quantify e.g. leakages or the scope of a problems – however if the objective is to understand the nature of the problems it is more relevant to focus on smaller sample.

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REFERENCES

Amanda Glassman, Loren Becker and Chinyere Bun 2009: Monitoring the quality of public spending in the social sectors in developing countries: Lessons from public expenditure tracking surveys and other sources, Transparency and Accountability Project (TAP) The Brookings Institution

Clausen, Jens and Mussa J Assad 2010. Public Expenditure Tracking Survey for Primary and Secondary Education in Mainland Tanzania

Dehn, Jan, Ritva Reinikka, and Jakob Svensson. "Survey tools for assessing performance in service delivery." The impact of economic policies on poverty and income distribution: evaluation techniques and tools (2003): 191-212

DEGE Consult 2012: Evaluation of LGSP Implementation (Component 1 and 3) to Inform the Preparation of the Project Implementation Completion Report (ICR)

Hubbard, P (2007) “Putting the Power of Transparency in Context: Information’s Role in ReducingCorruption in Uganda’s Education Sector,” Working Paper No 136, Center for GlobalDevelopment, http://www.cgdev.org/files/15050_file_Uganda.pdf

PMO-RALG 2008: Mid Term Review of LGSP (by DEGE Consult)

PMO-RALG 2012a: Technical Review and Value for Money Audit of Contracts implemented by Local Government Authorities (LGA) under the Health Sector Window of the Local Government Development Grant (LGDG) System (DEGE Consult).

PMO-RALG 2012b: Consultancy Services for the Fiscal Assessment of Local Government Authorities and the Design of an Urban Infrastructure Grant (UIG) in Support of Preparation of the Proposed LGSP 2 Analytical Report (Final), DEGE Consult and Urban Institute February 2012

Tanscott Associates Ltd., 2013: Inception Report for the Assignment: Mapping Exercise on Transfer of Funds to LGAs – A Report submitted to MOF.

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ANNEX

Annex 1: Past Experiences of PETS in Tanzania

Review of various past experiences in Tanzania (as reviewed by Clausen and Assad 2010)

There have been several attempts to analyse the link between education sector spending and outcomes most notably in the Public Expenditure Reviews (PER) and Public Expenditure and Financial Accountability Assessments (PEFA). Furthermore, several efforts have been made to track public expenditure in education and assess the extent to which earmarked transfers for specific education sector expenditures are managed as intended and resulting in intended outcomes (Price Waterhouse Coopers, 1999; REPOA and ESRF, 2001; Björkman and Madestam, 2003; REPOA, 2004).The 1999 PETS covered two sectors (education and health) and employed a limited sample of only three districts in three regions. These were Kondoa (Dodoma), Kiteto (Arusha) and Hai (Kilimanjaro).The sample was not representative and therefore findings had little scope for aggregation. The study sought to track funds and resources in kind from the Central Government as well as resources collected at the district and frontline facility level. The financial years tracked were 1996/97, 1997/98 and 1998/99.The study provided useful insights – it reported that only 43 percent of transfers reached the schools. However, perhaps the size of the sample limited its relevance at the national level. This study features very little in discussions, subsequent studies as well as in the literature suggesting that it was not well publicised and provided limited input to decision making.The second PETS in Tanzania was jointly executed in 2001 by two Tanzanian foundations; Research on Poverty Alleviation (REPOA) and the Economic and Social Research Foundation (ESRF) – two well established research organizations with reputation on policy research. The study is referred to as a ‘pro-poor’ PETS because it paid close attention to the pro-poor policy priorities of the Government of Tanzania (GoT) that commissioned the survey. The study covered five districts (Regions in brackets) – Babati (Arusha), Kisarawe (Pwani), Mtwara Urban (Mtwara), Dodoma Rural (Dodoma) and Kigoma Urban (Kigoma). Its sector coverage was more extensive and included primary education, primary health care, water and rural roads. It covered the financial years 1999/2000 up to and first half of the financial year 2000/2001.Resembling the earlier study this attempt was also short on analysis although it made interesting observations on so called 'leakages' (less than 50% of transfers reaching schools) and excessive expenditure on district level discretionary expense items. Again, like its predecessor this study was not made widely available and referenced in analytical work in sector level Public ExpenditureReviews (PER). Consequently, subsequent works do not build on this effort.

Two consultants (Björkman and Madestam) conducted, on behalf of the World Bank a PETS ‘pilot’ in June 2003 covering the fiscal year 2002/03. It was a very narrow study in coverage but also in scope as it focused only on the Primary Education Development Programme (PEDP) covering the capitation grant, textbooks and the development grant. The study covered 15 primary schools in

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six districts in only two regions – Kibaha and Bagamoyo (Pwani Region) and Masasi, Mtwara Urban, Mtwara Rural, and Tandahimba (Mtwara Region). This study attempted to relate resource flows to enrolment and test score data, which previous studies never did. Some findings of this pilot study contrasted with those of the previous two PETS, especially on 'leakages' – it reported only a 5% leakage with 95% of transfers reaching schools.

REPOA was commissioned by the PER Working Group to undertake what was a fairly extensive PETS in 2004 whose main objective was stated as “to establish more exact knowledge on the actual amount of resources disbursed from central level that reaches the schools in PEDP.” It was based on a sample of 210 schools across 21 districts, in 7 regions. The regions were sampled according to their ranking on the Human Development Index while the councils were sampled according to their proximity to the regional headquarter, and schools within districts were sampled according to proximity to council headquarter.The 2004 PETS found that the disbursement system from the central level to councils was complex and consequently, tracking financial flows from the Accountant General down to frontline facility levels was a complex task.The study reported that for the fiscal years 2002 and 2003, inflows of overall capitation grant reaching school level was in the range of 54% to 64% of the central level disbursement. For development grants the recorded inflow of development grant at the school level was 84% of the central level disbursement for 2002 and 2003. This survey also reported significant variations in the inflow of capitation grant at the school level – varying from TSh. 1,600 to TSh. 8,700 per pupil per year. In contrast to the previous studies the 2004 PETS makes reference to the previous two studies (Björkman and Madestam, 2003 and REPOA and ESRF, 2001).

Like other previous studies the 2004 PETS was limited to some specific grants and covered only primary education. It also focussed entirely on to what extent a grant intended for a specific use actually reached the school while it was beyond the scope of the study to assess if the funds not reaching the schools were actually also spent on primary education activities indirectly benefiting the schools (training, supervision, investments in new schools, etc.) even if this would not be in accordance with the intended use of the grant (earmarking not being effective). Unfortunately, the amount assessed as not reaching schools was interpreted by some decision makers as 'leakage' i.e. as if the resources not reaching schools were not used for expenditure benefitting schools and/or other public expenditure.

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