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The World Bank Budget Formulation: good practices Rob Taliercio, World Bank With material from Bill Dorotinsky, IMF Washington, DC April 24, 2007.

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Presentation on theme: "The World Bank Budget Formulation: good practices Rob Taliercio, World Bank With material from Bill Dorotinsky, IMF Washington, DC April 24, 2007."— Presentation transcript:

1 The World Bank Budget Formulation: good practices Rob Taliercio, World Bank With material from Bill Dorotinsky, IMF Washington, DC April 24, 2007

2 The World Bank 2 Outline Three PEM System Objectives Three PEM System Objectives Process Issues Process Issues Quality Issues: Classification, MTEFs, etc. Quality Issues: Classification, MTEFs, etc. Capital Budgeting Capital Budgeting Budget office roles Budget office roles References References

3 The World Bank 3 Three Objectives of Public Expenditure Management Systems Macrofiscal discipline and stability Macrofiscal discipline and stability Avoid public finance crises Avoid public finance crises Support economic growth and stability Support economic growth and stability Strategic allocation of resources Strategic allocation of resources Match government policy with programs, objectives Match government policy with programs, objectives Technical efficiency Technical efficiency Getting the most from each dollar spent Getting the most from each dollar spent

4 The World Bank 4 Planning system Medium term plans, e.g. three year rolling plans Annual budgets Development, recurrent and revenue Fund release procedure, e.g... warranting Accounting for revenue and expenditure Public expenditure review Institutions Reports and financial statements Audit system Project monitoring Project appraisal Resource allocation Liquidity management Expenditure control Monitoring & controlling Post event review Accountability Expenditure review Financial management system boundaries Source: Adapted from Integrated Financial Management. Michael Parry, International Management Consultants Limited. Training Workshop on Government Budgeting in Developing Countries. THE UNITED NATIONS. December 1997. Expenditure Management Cycle

5 The World Bank 5 Process Issues “ Due process ” “ Due process ” Fair hearing for proposals, requests within government Fair hearing for proposals, requests within government Coherence Coherence Budget process is planning process Budget process is planning process Planning within resource constraints Planning within resource constraints –Indicative ceilings for budget offered early in the process –‘ hard budget constraint ’ Changing incentives (special ‘ rights ’ ) Changing incentives (special ‘ rights ’ ) Comprehensiveness Comprehensiveness Capital, all revenues and expenses Capital, all revenues and expenses Civil society participation (transparency) Civil society participation (transparency) ‘ decentralized ’ impact analysis ‘ decentralized ’ impact analysis Legislative stage Legislative stage In executive via white papers In executive via white papers

6 The World Bank 6 Process (continued) Proper decision sequence for coherent process Proper decision sequence for coherent process Macrofiscal, revenues, expenditures Macrofiscal, revenues, expenditures Sectoral Sectoral Administrative/program/project Administrative/program/project –Accountability: Link resources with management responsibility Schedule Schedule Budget calendar issued Budget calendar issued Sufficient time for sound proposals Sufficient time for sound proposals –Ministries –Budget office analysis –Legislative review

7 The World Bank 7 Classification 1 Function — purpose of spending (general public services, social, economic, etc.) Function — purpose of spending (general public services, social, economic, etc.) Classification of the Functions of Gov ’ t (COFOG) Classification of the Functions of Gov ’ t (COFOG) Economic — goods and services, subsidies, interest, capital, etc. Economic — goods and services, subsidies, interest, capital, etc. Government Finance Statistics (GFS) Government Finance Statistics (GFS)

8 The World Bank 8 Classification 2 Object/line item — disaggregated categories for control and monitoring (travel, utilities, etc.) Object/line item — disaggregated categories for control and monitoring (travel, utilities, etc.) Appropriate usage for management Appropriate usage for management Compatible with GFS Compatible with GFS Administrative — hierarchical by governmental unit (ministry, department, province, district, etc.) Administrative — hierarchical by governmental unit (ministry, department, province, district, etc.) Program — disaggregated by function Program — disaggregated by function Disconnect with administrative structure? Disconnect with administrative structure?

9 The World Bank 9 Medium Term Perspective Medium Term Expenditure Framework (MTEF) The MTEF provides the “ linking framework ” that allows expenditures to be driven by policy priorities and disciplined by budget realities. ” Gives a medium-term perspective to budgeting. The heart of the MT perspective is constraining choices to support LT development.

10 The World Bank 10 MTEF Concept 1 An MTEF rests on three pillars: the top-down multi-year projections of resource envelope targets (what is affordable) the bottom-up multi-year cost estimates of sector programs (what has to be financed, with a focus on performance) the institutional (politico-administrative) decision- making process to integrate the above two pillars (making the necessary trade-offs)

11 The World Bank 11 MTEF Concept 2 STAGECHARACTERISTICS I. Development of Macroeconomic Framework Macroeconomic model that projects revenues and expenditure in medium term Macroeconomic model that projects revenues and expenditure in medium term II. Development of Sectoral Programs Agreement on sector objectives, outputs, and activities Agreement on sector objectives, outputs, and activities Review and development of programs and sub-programs Review and development of programs and sub-programs Program cost estimation Program cost estimation III. Development of Strategic Expenditure Framework Analysis of inter- and intra-sectoral trade-offs Analysis of inter- and intra-sectoral trade-offs Consensus-building on strategic resource allocation Consensus-building on strategic resource allocation IV. Definition of Sector Resource Allocations Setting medium term sector budget ceilings Setting medium term sector budget ceilings V. Preparation of Sectoral Budgets Medium term sectoral programs based on budget ceilings Medium term sectoral programs based on budget ceilings VI. Political Approval Presentation of budget estimates to cabinet and parliament for approval Presentation of budget estimates to cabinet and parliament for approval

12 The World Bank 12 Some Technical Issues DESIGN FEATURE KEY ELEMENTS Macro/Fiscal Framework (MFF) -Basis for framework (type of quantitative model) -Content of framework (projections, targets, aggregate and sectoral ceilings, etc.) Sector Expenditure Framework (SEF) -Inclusion of policy framework and strategy -Type of costings of existing and proposed programs (level of detail)

13 The World Bank 13 Some Organizational Issues DESIGN FEATURE KEY ELEMENTS Status in Budget Process -Fit in budget process (form and date of inclusion in annual process) -Approval/authorization process Management Structure -Central and sectoral agencies ’ roles -Organizational locale of MTEF management -Civil society input into process Dissemination -Method and form of dissemination internally and externally (formality) Oversight and Support -Oversight of sectors by central ministries -Oversight of central ministries by sectors -Training support

14 The World Bank 14 Some Lessons from Experience MTEF should be a complement to — not a substitute for — basic PE management reform (esp. execution) MTEF should be a complement to — not a substitute for — basic PE management reform (esp. execution) Sequencing and phasing of the MTEF reform itself. In practice, most MTEFs have been implemented in a phased and piloted manner: Phased vertically (macro, sector, service delivery) Piloted horizontally (across sectors) Tailor to capacity and time with respect to overall PEM reform (e.g., in a country with weak PEM focus on MFF first, then “ phase-in ” the SEFs, starting with sectoral strategies, objectives, and performance indicators before moving to costed programs) MTEFs should be part of the annual budget process MTEFs should be part of the annual budget process

15 The World Bank 15 Quality 1 Budget ownership Budget ownership Early, frequent engagement of policy officials on structured decisions Early, frequent engagement of policy officials on structured decisions Fiscal policy paper to kick-off process Fiscal policy paper to kick-off process Communication (transparency) Communication (transparency) Clear signals of direction, markets and agencies Clear signals of direction, markets and agencies Prepare public for change – sustainable adjustment Prepare public for change – sustainable adjustment

16 The World Bank 16 Quality 2 Budget Information Budget Information –Prior year actual, current year estimate, budget year +2, Staffing, Outputs –Classification: economic, administrative, functional, program –Requests distinguish between on-going, new spending; mandatory, discretionary Decision papers Decision papers –Basis for Minister of Finance, Gov ’ t decision –Pulls together academic, audit, performance, evaluation of prior years financial performance, other information

17 The World Bank 17 Information to Factor in to Budget Papers Prior Year Spending – –Did the agency stay within its budget? Why/why not? – –Did the agency spend all of its funds? – –Was there one-time funding included in last year’s budget that should not be included again this year? Current Year Spending – –Is the agency staying within its allotments? – –Is the agency spending at a rate which will lead to over-spending, and what measures must be taken now to correct? Policy Performance – –Did the agency fulfill the policy directives for the prior year? Are they doing so for the current year? Audit Results – –Were there internal or external audits of the agency or its programs and activities last year or this year? What are the implications for funding? Did the agency make any corrections recommended in the audits?

18 The World Bank 18 Information (continued) Program Evaluations – –Were there any program evaluations of the agency or ministry completed since the last budget cycle? What were the results, and what are the implications for funding? Other studies – –Were there any academic or private researcher papers or NGO studies published that have implications for funding, program structure, etc.? Performance Assessment – –Did productivity (cost-effectiveness, e.g.) increase or decrease from the last budget cycle? – –Did the activity or program attain planned outputs for the prior year? – –Did average costs per output increase or decrease? – –What did the agency accomplish over the past year? Is it achieving its objectives or fulfilling its mission? What is the outcome of the activity?

19 The World Bank 19 Capital budgeting: good practice Investment office Investment office Central appraisal, process management Central appraisal, process management –Cost-Benefit Analysis (CBA): financial, economic, and risk –Clear assumptions (e.g. life-span and maintenance) Avoid ‘ dual budgeting ’ problems Avoid ‘ dual budgeting ’ problems Recurrent costs – captured in budget Recurrent costs – captured in budget Quality control, managed database of approved projects Quality control, managed database of approved projects Monitoring physical, financial progress Monitoring physical, financial progress Ex post evaluation of actual costs Ex post evaluation of actual costs Line ministry Line ministry Project proposal preparation Project proposal preparation –Supporting sector strategy Identify project manager Identify project manager Project preparation, management training Project preparation, management training

20 The World Bank 20 Budget office roles Budget offices (center, ministry) Budget offices (center, ministry) Manage process – vertical and horizontal Manage process – vertical and horizontal Vet assumptions in requests Vet assumptions in requests Probe for efficiencies, alternative means Probe for efficiencies, alternative means Independent source of advice on sector strategies, policy (advanced) Independent source of advice on sector strategies, policy (advanced)

21 The World Bank 21 Handbooks Public Expenditure Handbook, World Bank, 1998 Public Expenditure Handbook, World Bank, 1998 Managing Government Expenditure, S. Schiavo- Campo and D. Tommasi, Asian Development Bank, 1999 (on-line) Managing Government Expenditure, S. Schiavo- Campo and D. Tommasi, Asian Development Bank, 1999 (on-line)


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