1. Vera A. Wilhelm The World Bank
The Budget Process and External Assistance Challenges and Opportunities for Domestic Accountability
Vera A. Wilhelm
The World Bank
Budgeting and Public Financial Management Workshop
September 11, 2007

2. Two main questions
How well do development policies get implemented through the budget process?
What role does external assistance play in this respect?
Focus on role of the budget to translate poverty reduction priorities into resource allocations, actins and ultimately service delivery, and obstacles along the way.

3. Outline
1) The budget process as a tool for policy implementation in LICs
2) The challenge of fragmented policy, budget and monitoring processes
3) Challenges and opportunities through external assistance
4) Lessons

4. 1)The budget process as a tool for policy implementation in LICs
Linking national development policies with budgets: The role of PRSs (ANDS)
The PRS as an instrument for mutual accountability
Under first point, talk about role of PRS for budget process and it’s importance for mutual accountability, i.e. domestic accountability of government for the implementation of policies and accountability of external partners for the delivery of more and better aid to facilitate implementation

5. Aim of the country-based development model (PRS)
Provide a working modality where:
governments are empowered to set their development priorities
donors are expected to align their assistance around a country’s priorities rather than their own.
Provide Operational framework for countries to specify:
policies, programs and resources needed to accelerate development results to reach medium term development goals
Functioning budget and medium-term expenditure
allocation process is critical for achieving results

6. 2) The challenge of fragmented processes: LIC Country studies
Minding the Gaps
Beyond the Numbers
AER Path to results based operational development strategies
Identified important issues
Ownership
Incentives
I’ll be drawing on three main studies to present some findings and lessons drawn from country experience on how to improve the policy/budget link and what role external assistance can play.
Minding the Gaps: Nine case study countries (Albania, Burkina Faso, Madagascar, Malawi, Mali, Mozambique, Rwanda, Uganda, Tanzania)
Four successful MIC reformers (Australia, Chile, South Korea, South Africa); Focus on ownership and incentive structures that help to link (PRS) policies with national budgets
Beyond the numbers: 12 country studies on building institutions for monitoring poverty reduction strategies, providing lessons on the design and functioning of poverty monitoring systems
AER 2007: Stocktaking of progress in PRS countries

7. Planning and budgeting cycle
PRS policies
and plans
Budget
Formulation
Budget
Execution
MTEF
As you know in theory policy planning and budgeting are closely linked in a cycle where PRS and sector plans inform medium term expenditure frameworks which in turn find their way into the annual budget, which is then executed and reported on and informs policy making in the upcoming cycle.
Sector strategies
and plans
Budget Reporting & Accountability

8. Budget accountability: Multiple gaps and fractures
MTEF
PRS policies
and plans
Sector strategies
Budget
Formulation
Execution
Budget Reporting & Accountability
In reality, the Minding the Gaps study based on the experience in 9 LICs found that these ideal linkages between development strategies and the budget are complicated by multiple fractures that exist in the planning and budgeting system. Medium term budget planning is not in sink with the national strategy document or sector plans; and fragmentation exists within the budget cycle: : weak prioritization of plans and weak coordination between planning and budgeting units; poor incentives to formulate realistic budgets or execute them as planned; lower ownership of the PRSP at the sector level; a limited role for Medium Term Expenditure Frameworks (MTEFs) so far in strategic resource allocation; and inadequately integrated reporting mechanisms.

9. PRS and budget: Ownership
Civil Society
Electorate
Executive
Cabinet
Parlia-ment
Planning
Sectors
Finance
Ministry
Line
Ministries & Providers
The PRSP
The Budget
Strong Ownership
Moderate
Weak I
In theory PRS was to strengthen ownership through participation, budget owned by the executive and parliament approval. In practice, levels of ownership in PRS and budget processes have varied across groups of stakeholders. For instance, while the executive and parliament tend to be more involved in the formulation of the budget than in the PRS, civil society and the public often have less opportunity for meaningful engagement in the former than the latter.
Societal
Societal

10. PRS and budget: Incentives and results orientation
Poor prioritization and selectivity
Weak quality of data
Weak and fragmented national monitoring systems
Parallel monitoring structures
Budgets
Incremental budgeting
Focus on inputs and lack of performance orientation
Weak enforcement of rules and poor budget execution
Dual budgeting
Poor predictability of funding
To effectively implement policy priorities through the budget it is important to have clear objectives and monitor results. But it is not easy to monitor results through the budget and PRS often have flawed designs that makes it difficult to translate them into budgets and monitor their implementation. Also incentives to plan for and show results tend to be weak with the exception of a few countries described in the studies I mentioned earlier.
Although the PRS was intended to provide a results-orientation to strategic planning and policy making, it has often suffered from a lack of prioritization and operational detail. In some case APRs have stimulated a proliferation of products without improving performance incentives. In budget processes, poor budget formulation, weak enforcement of rules (or stretching of rules- supplementary budget allocations as in UG) and, in some cases, continued informality, have limited the extent to which budget rules and transparency mechanisms have raised the incentives to execute the budget effectively. Also the lack of a medium term perspective and a program structure often makes it difficult to bring together investment and current spending in a way that allows to plan for results and takes into account the medium term effect of capital investment on the recurrent budget.
Findings point to critical importance of political ownership to build incentives for good performance and strengthen budget processes. South Africa, UG good processes but receding political commitment; In terms of how to strengthen budget processes, the
importance of building on existing systems and allow flexibility in the institutional design to allow them to adapt to changing political and institutional context was seen as important. A good link of performance information with decision making processes helps to build incentives to use information. Finally, donor behavior is critical in terms of avoiding parallel structure, using domestic systems, and more predictability of funding also over a medium term horizon. Talk in more detail later
Weak use of monitoring/reporting
information in decision making
Weak alignment of donor reporting requirements

11. PRS stocktaking: Findings of the AER
Overall only 13 % of the 62 countries have reached the Paris Target for operational development strategies. 5% have reached the target for results oriented frameworks
Second generation PRS countries (18) have generally developed unified and well prioritized strategies, while first generation countries (22) have made incremental progress.
Strengthening of domestic institutions (PFM systems and monitoring systems) remains a challenge.
Five PRSII countries show an effective link between the PRS and the budget. At least two (UF, TZ) have shifted from a priority sector based approach to an outcome-oriented approach to budget allocations relying on their country level M&E systems. The PRS in these countries has been costed and is linked to the budget through three year rolling global and sectoral MTFFs.
This years AER monitors Paris declaration on aid effectiveness in particular indicator one and eleven i.e. operational development strategies and results oriented frameworks and basically confirms the above findings.
Challenges: (for the remaining countries)
1. links between strategy and the budget remain weak.
2. costs may be based on estimates made by central ministries with marginal involvement of line ministries. This in turn may affect the level of detail and accuracy of the cost estimates and ultimately make costing less useful for the preparation of the MTFF and the budget.
3. the relationship between the global MTFFs, sectoral MTFFs, where they exist, and the budget is not always clear because of insufficient clarity on the strategic framework.
Tanzania example: the central government is supporting the formulation of local MTFFs and budgets linked to the PRS to better monitor local expenditure and implementation.
Uganda example: (of how significant challenges remain even with the substantial progress) supplementary appropriations undermine the budget process.

12. 3) External assistance: It’s role for PRS implementation
C O U N T R Y
Consultations
Link to the budget
Poverty Analysis
PRSP
Monitoring
Policies and programs
Sector Diagnostics
D O N O R S
Assistance Strategies
Donor programs:
Projects, including budget support
Advisory and Analytical Work
Ideally external assistance aligns with and supports country priorities in a number of ways.
Support for analysis and consultations
Feedback mechanisms

13. Challenges through external assistance
Poor predictability of aid undermines expenditure planning and budget authority
-OECD reports that on average governments expect only 88% of the aid that was disbursed by donors in 2005; for Afghanistan reverse situation as only half the aid that was expected was disbursed
High transaction cost of aid delivery due to multiple aid instruments and large number of donors
Significant amount of tied aid can lead to inefficient public spending
Bias towards capital investment, leading to imbalance between capital/current spending and sustainability problems
Reliance on off-budget parallel systems undermining the effectiveness of government systems
Large “external budgets”, not always aligned with national priorities
Emerging donors-the average number of donors per country rose from about 12 in the 1960s to about 33 in
According to OECD/DAC data LICs receive 200 donor missions per year
25% of ODA is still tied, meaning that part of its objective is financial gain of a donor country see slide

14. Aid channeled through country systems?
OECD finds that less than half of aid is channeled through domestic budget process and even less is channeled through domestic financial accountability systems and audits. This illustrated the importance of off budget support which makes it really very difficult for countries to be accountable for the implementation of their development plans. On the other had donors often feel reluctant to use country systems for fear of corruption and misuse of funds and prefer to have parallel processes in place.

15. Aid delivery modalities
Tied aid provided by donors is usually linked to a commercial gain for the donor country. The OECD DAC survey on monitoring the Paris declaration finds that 25% of aid is still tied in participating countries. Tied aid undermines institution building and capacity building efforts as it relies on foreign experts and companies.
Although program based aid may seem low there has been a significant increase over recent years. An increasing amount of aid is provided through budget support (43% of aid was provided through program-based approaches such as direct budget support and sector-wide approaches in 2006 compared to 20% in 2004)

16. Opportunities through external assistance
Aid modalities: Move to program based approaches (GBS, SBS and SWAps)
Promote ownership of national development policies; use and strengthening of country systems, predictable funding, donor alignment and harmonization of processes
Monitoring and accountability: Annual progress reports (APR) on PRS implementation
Increasingly participatory monitoring (parliaments, media) and influence on domestic policies and budgets. (SPA survey)
To support PRS implementation there has been a significant shift towards general budget support (PRSCs, PRGF, EC-MDG contract). GBS is directly provided to partner governments, channeled through domestic systems and not earmarked. Often combined with TA and capacity building efforts and donor harmonization efforts. SPA survey on budget support for Africa (16 countries) reveals that commitments have been continuously increasing since 2004.
SBS is a financial transfer to the national budget of a partner government in support of a sector program and usually targeted to specific budget lines and implies verification of spending, auditing, and disbursement procedures. SPA survey included SBS for the first time in 2005 and found that GBS amounts to about 10% of GBS in those countries. Disbursement rates are reasonably good at 85 %.
SWAps not aid modality but way to organize projects and SBS and sector pooling funding arrangements. Have supported sector MTEFs and strengthened donor coordination
APRs are required on an annual basis and report on progress in PRS implementation and major changes in strategy. They are supposed to involve and be shared with domestic stakeholders and partners to build support for the development strategy. A review of APR in the Africa regions in 2005/2006 finds that APRs have increasingly relied on existing documents and almost all of them use budget execution information in addition to other monitoring data. An increasing number of countries has involved domestic stakeholders in their preparation and they have had more influence on domestic policies and budget allocations.

17. Donor harmonization processes
Ghana’s resource and results process
Joint assistance strategy covering most external funding
Results matrix tracks actions and progress in achieving PRS results
Resource matrix charts donor support over PRS implementation period
Tanzania’s Joint Assistance Strategy (JAST) with development partners
DPs have committed to align support to government PRS priorities
Make increasing use of government systems
Untie TA and reduce number of PIUs
Increase aid predictability through reporting of 3 year donor financing commitments
GH: Has developed Ghana harmonization action plan to implement Paris agenda
A results partnership matrix identifying development results, a monitoring baseline and donor contributions
A resource partnership matrix, identifying government and donor resources and financing mode for each PRS pillar and sector. Also identifies financing gaps
TZ: Development partner group coordinating 35 development partners,meets monthly and is chaired by Un and bilaterals on an alternating basis

18. 1. Focus on strengthening and harmonization of existing processes
4. Lessons: Strengthening policy implementation externally and from within
1. Focus on strengthening and harmonization of existing processes
2. Support from within: High level ownership of policies, a strategic review of the budget and clear sector roles.
3. Foster incentives for integration
4. Keep it simple and move gradually
Foster incentives for integration: Linking information on performance to decision making processes- for example need to use information from sector performance review processes and link to the budget; coordinate PRS with budget and budget support cycle; clearly define roles and responsibilities I central and line ministries and planning units

19. Lesson 1: Strengthen and Harmonise Existing Processes
Strengthening and Harmonising Existing Processes
Promote aid instruments that help to strengthen domestic systems and minimize transaction cost.
Tailor interventions to local context and realities and build in incentives for implementation
Provide timely and reliable information on external assistance – consult and coordinate.
Strengthen and harmonize: When existing systems are fragmented introducing a number of new approaches together may make things worse; Budget comprehensiveness, including aid financed expenses, is important for credibility and predictability of resources.
Coordinated missions, coordinated analytical work, pooled funding for capacity building
A Gradual Approach

20. Lesson 2: Build Support from Within
Strategic phase and sector processes
Introducing a strategic phase in the budget process
A phase, before the preparation of operational budgets, in which sectors and cabinet review high-level policy priorities and their impact on inter-sectoral resource allocation.
Developing sector-level policy processes.
The PRS should be a tool for high level policy priorities
Sectors should be charged with establishing processes to elaborate sector policies and budgets and review policy implementation
Build support from within: High level leadership is needed for reforms; A strong role for cabinet in the strategic phase of the budget process; Develop sector level policy processes; Strengthen parliamentary committees;

21. Lesson 3: Foster Incentives for Integration
To better link policy making with implementation and monitoring, reporting instruments need to be linked to decision making processes involving actors who may demand and use the information
Better targeting of reports, both financial and performance-related, to users’ differing needs could facilitate and improve decision making.
Donor requirements need to be aligned with domestic systems
APRs are generally produced due to external demands and often lack a direct link to domestic decision making. They would be more useful if consistent with the goals articulated in the budget.
Avoid parallel monitoring processes to satisfy discrete and uncoordinated donor demands.
Foster incentives for integration: Linking information on performance to decision making processes- for example need to use information from sector performance review processes and link to the budget; coordinate PRS with budget and budget support cycle; clearly define roles and responsibilities I central and line ministries and planning units.
APR examples: Mali program budgets inform APR and are attached to the budget sent to parliament. Mozambique uses it’s report on National strategy implementation

22. Lesson 4: Keep it Simple and move gradually
Strengthening the results orientation of budgets does not necessarily require sophisticated technical solutions.
Don’t necessarily need early on
Formal programme or performance budgeting
A comprehensive up-front costing of the PRS
Move gradually as capacity building takes time
More successful budget reforms often link PFM with broader civil service reforms.
Focus on making the budget more policy oriented and PRS more budget friendly (e.g. structured along sectors and administrative units not pillars & objectives)
Keep it simple: Start with the budget and MTEF process and design PRS from the bottom up, in a way that it is easier to link with a budget/sector structure; pillars are good for cross-cutting issues but difficult for accountability. Avoid an overload of overly complex technical reforms

23. THANK YOU