Sector Planning and Budgeting within the MTEF: Key Concepts Richard Allen Fiscal Affairs Department (IMF) & METAC Workshop on MTEFs December 16th–19th, 2014, Beirut, Lebanon

I. Outline of Presentation Relationship between MTBFs and National Development Plans (NDPs) Preparation of Sector Strategy Plans (SSPs) Formulation of a Sector MTBF Key challenges Conclusions (How has this conceptual framework been applied in METAC countries?)

II. Relationship between the NDP and MTBF Prepared every 5 years with mid-term review NDP Sets high level government policy vision. Not usually costed or prioritized. Sector Planning Prepared every 3-5 years Translates NDP into sector specific strategies. Not usually costed or prioritized. Sometimes phased. Identifies strategic priorities for one year and medium term. Costed and prioritized. Includes forward estimates of existing activities as well as new policy initiatives. Ministry Planning Prepared annually Allocates aggregate resources to existing activities and approved new policy initiatives over a 3-5 year period. MTBF Annual Budget and Out-year Projections Authorizes annual spending and indicative use of resources over the out-years.

II. MTBFs and National Development Plans In advanced countries, MTBFs have largely replaced NDPs which no longer exist as separate policy instrument, except for special purposes (e.g., EU structural funds) The functions of planning and economic development ministries / commissions have also disappeared, or changed radically The issue for EMs and developing countries is how to manage the coexistence of these two institutions and strengthen their relationship

II. No perfect solution has emerged to this issue … II. No perfect solution has emerged to this issue …. partial solutions include Greater cooperation between ministry of finance and ministry of development planning Merger of planning and finance officers into a single cadre within one ministry Integration of budgeting and planning into a single calendar and parallel processes Establishment of multi-constituency sector working groups (SWGs) that cover both the planning and budgeting process What approaches have been taken in the METAC region?

Preparing a Sector Strategic Plan

III. Purpose of the Plan Relevant ministries work together to develop a shared strategy and costed plan aimed at achieving the sector-specific objectives and goals of the NDP; Guides sub-sectors in their regular medium-term and annual planning and budgeting exercises; and Provides a framework for the lead ministry to: Coordinate the policy and expenditure prioritization and budgeting processes within a sector Promote strategic resource allocation to agreed priority areas over the medium term Ensure coordinated mobilization of resources from external funding agencies and efficiency in the use of resources by the sector.

III. Major Tasks/Stages in Preparation of an SSP Task 1: Undertaking a Situation Analysis Task 2: Establishment of the Sector Vision and Mission Task 3: Development of Sector Goals, Objectives and Strategy Task 4: Assessment of Medium-term Sector Resource Envelope Task 5: Costing and Prioritizing of Sector Objectives and Outputs Task 6: Approval by Cabinet - buy-in, ownership commitment and consistency over the medium-term

III. Task 1: Conducting a Situation Analysis Assessment of the sector’s achievements, and challenges that constrain delivery of its NDP-driven mandate Examples from Education: Net enrollment and pass rates in “strategic” subjects (mathematics, science) Gender/income/geographic disparities % of students advancing to the next stage (secondary, tertiary) Teachers’ performance; availability of science teachers Is the curriculum aligned with strategic objectives (e.g. promoting the private sector, SMEs, environment)? A description of the current status of the sector highlighting: Coverage and quality of services Opportunities and constraints High priority issues that merit special attention

III. Task 2 : Developing the Sector’s Vision and Mission - A statement of the sector’s expectations of service delivery and desired medium-term development goals Mission: The sector’s rationale for existence The public services to be provided, and clients’ needs and expectations The relationship between the sector and other stakeholders in addressing the needs of clients

III. Task 3: Developing Sector Goals, Objectives and Strategy To set realistic goals for sector service delivery, outputs or outcomes over the medium term. These goals should:  be informed by a well-defined assessment of current economic and social conditions, and the challenges facing the sector provide a framework for more detailed planning at lower levels within the sector and its component ministries and agencies Sector Objectives: To identify specific, quantifiable and time-bound sector objectives that seek to ensure that the strategic goals specified above are attained. Economic analysis of cost-effective mechanisms to deliver sector goals and objectives, collaboration with NGOs involved in the sector In Education: policy choices to deal with gender disparities; school building; private sector partnerships and financing; access to remote areas, etc.

III. Task 4: Developing the Sector Resource Envelope Demand-side: Estimation of the total resource requirements for achieving these desired goals or target Supply-side: Assessment of the resources likely to be available to the sector from both domestic and foreign sources over the MTBF period

III. Task 5: Costing and Prioritizing of Sector Objectives and Outputs Purpose: Align policy objectives with a resource-constrained framework Estimate the costs of attaining the sector objectives and outputs to be produced over the MTBF period How many schools should be built? Number of teachers to be recruited and wage bill implications? Inclusion of recurrent costs of school building program? Are the priorities too costly or overambitious? Is there a methodology and expertise to carry out feasibility studies and cost-benefit analysis of planned projects? Are absorptive capacities sufficient for planned expenditures? Outputs: Prioritization of new programs and investment projects that can be accommodated within the estimated resources available to the sector in the MTBF, linking with country’s public investment plan (PIP) if available

III. Task 6: Cabinet Approval of the SSP The SSP must be approved by Cabinet and Parliament (buy-in, ownership and commitment important). It then becomes the basis for forward estimates within the indicated spending ceilings SSP and sector MTBF facilitates progressive achievement of sector objectives within available resources Regular monitoring and evaluation must be carried out and the SSP updated accordingly

Preparation of the Sector MTBF (Strategic Phase of the Budget/MTBF process)

III. Preparing Sector Strategic Plans

IV. Strategic Phase at Sector Level (Bottom-up process) Stage 1: Expenditure Review Review of past expenditure and identification of inefficiencies and low absorptive capacities that need to be addressed Review progress on attaining sector objectives and identify bottlenecks that need to be addressed Stage 2: Development of Sector Forward Estimates Sector/Ministry Forward Estimates aligned with affordable sector priorities within the medium-term resource envelope Separation of costs for current policies and new policy proposals Resource allocations should be estimated by subsectors, administrative units, major programs within a sector and NOT by economic classification Stage 3: Reconciliation of Sector MTBF proposals with overall MTBF Budget hearings with MoF Discussion and approval by cabinet to initiate preparation of detailed budget estimates  

IV. Stage 1: Sector Expenditure Reviews Review of previous spending Do the expenditure choices support the achievement of sector objectives and priorities? Identify policy implementation issues and propose strategies to address them. Develop sector resource allocation proposals (forward estimates) for the MTBF Reconcile policy, laws, resource limits Sector Policies and Objectives Program priorities relative to objectives Assess modalities and strategies Evaluate service delivery performance Sector Programs Under ceiling Above ceiling Potential savings Sector Budget Request

IV. Stage 2: Preparation of Forward Estimates Understand the existing budget (baselines) Identify current level of service delivery (no policy changes) Separate sector into sub-sectors / spending units / major spending areas Identify one-off expenditures to estimate potential savings 2. Understand and apply medium-term cost drivers Identify and apply price and volume cost drivers, e.g., inflation, exchange rate changes, changes in the school-age population Link price and volume parameters to macro-economic and demographic variables Increase baseline spending by price and volume parameters 3. Aggregate spending for the ministry / sector Aggregate for the spending units in the sector / sub-sector / ministry Calculate sensitivity of estimates to changes in price / volume parameters

IV. Stage 3: Reconciliation of Requests and MTBF Ceilings within MoF Sector requests must be reconciled with the resource ceilings Competing policy priorities must be sequenced with budgetary implications Final policy priorities and funding decisions reached The stage can be contentious or productive depending on: effectiveness of decision-making process; reliability of budget and forward estimates; and policy consistency. Vetting assumptions, policies, estimates Challenging strategies, modalities, activities Evaluating performance, absorptive capacities Sector Ceilings Technical Assessment and Reconciliation Sector Requests Revised requests and/or decision papers

IV. Lessons Learned: Deviations between Forward Estimates and Budget Estimates Example: Spending on Primary Education

V. Challenges of implementing SSPs and sector MTBFs in developing countries Extensive consultation with stakeholders, including donors can lead to bureaucratic overload Lack of capacity in line ministries – economists, financial analysts, project managers, etc. Institutional fragmentation of the budget and SSP processes Poor links with macroeconomic framework and fiscal targets/objectives – one aspect of institutional fragmentation Lack of realism of SSPs and PIPs In countries that are aid dependent, inadequate mechanisms for coordinating aid financed projects

V. To what extent do METAC countries comply with these models/approaches? In Egypt, education and health sectors prepare SSPs up to 2030, and are working on 5-year programs In Afghanistan, government has taken measures to align national priority programs (NPPs) with overall development strategy (ANDS), and to set priorities for internal and external funding However, challenges remain, e.g., available funding for specific NPPs is driven by donor priorities and earmarking in some sectors What about other METAC countries’ experience?

VI. Conclusion 1. The institutional relationship between MTBFs and NDPs in most developing countries is challenging 2. There is no one method of preparing SSPs, but guidelines on good practice have been developed over the past 25 years 3. Preparing baselines and forward estimates of future spending are the key steps in preparing sector MTBFs 4. Preparing forward estimates is technically challenging for many countries and requires intensive and sustained capacity building 5. PIPs should be upgraded and costed as an entry point for preparing sector MTBFs