1 Tanzania: Public Expenditure and Financial Accountability Review Mission Brief for the DPG March 15, 2006

2 CONTEXT PEFAR 2006: 2 nd integrated external (to Govt) review of PE + PFM + PP (“One process, One assessment”). Joint exercise => WB, IMF/East AFRITAC, DFID, KfW, EU, Finland, Ireland, Canada, NGOs – Haki Elimu, Water Aid, NPF, REPOA + consultancy support (NB: synergy; resources – manpower + financial; minimized overlap & duplication of effort; lower transaction costs to Govt) FY06 is year 1 of MKUKUTA implementation => Support to strengthen MKUKUTA-Budget links General elections & New Government »Election-related expenditure pressures »Budget implications of new structure of ministries »Budget response to the priorities of the new Govt Emergency: Drought-related expenditure pressures

3 COMPONENTS OF PEFAR 2006 (1)Evaluation of spending (FY05 & ½ FY06) (Overall; economic & functional composition; some recent events) (2)Fiscal Space for Infrastructure (I: Key bottlenecks; prioritization; institutional framework; additional fiscal space II: Funding needs for scaling-up & macro implications) (3)MKUKUTA – Budget Links (Lessons from Sector expenditure analysis; bdgt process & stakeholder consultations; cross-country study; NGO views) (4)PFM (+PP) (Update of PEFA indicators; FM practices & risks at LG level; cash/fund flow arrangements; accountability system; progress on procurement reforms) (5)Allowances and W-bill Allocation (use of allowances; W allocation process & strategies) (6)Zanzibar

4 SOME KEY ISSUES COMING OUT OF THE PEFAR MISSION PRELIMINARY !!

5 (1) EVALUATION OF PUBLIC SPENDING Aggregate fiscals are on track (FD =4.4% of GDP) Domestic revenue effort has improved (from 13% in FY04 to 13.6% of GDP in FY05 ) but remains low (Total expenditure = 25% of GDP; Others in the region doing better). There is potential for more revenue. Revenue foregone through exemptions (VAT, donor- funded projects) on the increase More tax expenditures envisaged under EPZs and SEZs draft legislation

6 (1) EVALUATION OF PUBLIC SPENDING (cont.) Donor-dependency remains high (42% of total expenditure in FY05) Unpredictability of donor support & timing of disbursements. Development Budget: Foreign resources account for 75% of the devt budget but only 67% of actual devt expenditure Drought-related increase in spending (Estim. 1.2% of GDP) Budget deviations: One-off Vs systemic over/under-spending Large under-spending for foreign financed devt expenditure (Works -Tshs.56; Labor & Youth Devt – Tshs.40bn; President’s Office – Tshs.23 bn; Education – Tshs.21 bn; Health – Tshs.19bn)

7 (2) INFRASTRUCTURE »Lack of an objective project selection process »Coordination of investments between infrastructure sectors is weak or lacking »Major bottlenecks: (i) Run down state of TRC causing serious take-off problems at Dar port (ii) Energy crisis/load shedding

8 (2 ) INFRASTRUCTURE (cont) »Potential areas for additional fiscal space: curbing tax evasion; better cost recovery in water & electricity; improving technical and operational performance of PEs; Data quality. »Financing of infrastructure has increased recently but less compared to social sectors »Experience with private sector participation is mixed

9 (3) PUBLIC FINANCIAL MANAGEMENT - LG Value of Multi-year dialogue: Data on LG revenue & expenditure is now available. Moving forward with analysis of the data, checking quality + Visits to select LGAs to assess actual FM practices. PFM systems are weak across LGAs (=> Need to improve bank reconciliation, documentation - asset & imprest registers, procurement contracts; frequency of internal audit etc.) Very erratic funds flow to LGAs (CDG, OC) + Funds transferred without instructions on what they are for + Large sums sitting in LG accounts earning interest but no instructions on how the interest should be spent. Transfers for school construction biased against remote LGAs/schools Too many uncoordinated donor funding sources (24 to 28 different bank accounts for each LGA!!)

10 (4) Public Procurement LG has yet to implement the new PP law (Regulations still under preparation) Capacity is weak across all levels of govt Dissemination of the PP law not adequate No established procurement cadre Zanzibar: (i) No regulations & the law needs to be amended (ii) No independent regulatory authority (DPG push under PFMRP, PRBS/PRSC ?)

11 (5) Allowances and W-bill Allocation »Work still going on (Questionnaire on PIUs) (6) Zanzibar »Work on fiscals, PFM planned for next week

12 7.MKUKUTA – BUDGET LINKAGES Multi-country case study : a comparative framework on PRS/budget linkages Preliminary views : Tz one of the most comprehensive effort to redesign instruments of PRS as well as policy content (cf draft JSAN) Positive assessment of innovations (SBAS year 2, harmonisation group agenda, Strategic Planning and Budget Manual,..) Need for consolidation and simplification of existing instruments, tailoring highly ambitious agenda to capacity constraints

13 EXTERNAL FINANCING Key gap in budget process : effective review of external financing projections Previously, MTEF projections used as base for checking only aggregate finance and level of budget support, not composition Need to look at (1) adequacy as MTEF projections (2) fit with Mkukuta requirements (3) consistency with JAS principles Next steps :Preliminary PEFAR team analysis > GoT dialogue with DPs > consultation on financing strategy in May consultations

14 SECTOR REVIEWS PEFAR: looking at sector reviews through the lens of institutional assessment of public resource management Realistic assessment of multiple objectives: instrument of sector planning, enhancing domestic accountability, integrating external financing (PRBS + sector) Clarifying principles developed in outline in the PRBS/PAF redesign

15 ‘ONE PROCESS, ONE ASSESSMENT’ GoT challenge to carry out budget analysis/ fiduciary assessment within one process for combined Budget, PFM review PEFA indicators as internationally agreed minimum base for comparative assessment Complementarity with PEFAR process: (1) broader analytic frame as context and evidence base for indicators summary indicators, (2) PEFAR provides frame for TZ specific analysis beyond minimum PEFA (3) PER/PEFAR process provides for dialogue (Wg, May consultations) Current PEFAR cycle : technical team to complete 05/6 indicators, review by full PEFAR team, dialogue with GoT in PEFAR WG, May consultations…..