MTEF and performance budgeting INTRODUCTION TO PUBLIC FINANCE MANAGEMENT Module 2.2 MTEF and performance budgeting

Module map Planning and budgeting 2.4 Budget Execution 1.1 Introduction 2.1 Macroeconomics of the Budget 4.1 Revenue Administration 3.1 Payroll, Procurement & IT 1.4 Budget Classification 4.3 Accounting & Reporting 4.2 Treasury Management 5.3 Assessing & Recapitulation 3.2 Internal Control & Audit 5.1 External Scrutiny & Oversight 2.2 MTEF and performance budgeting 1.3 The Budget and budget preparation 1.2 Budget Cycle

Course outline 1. What is an MTEF? 2. Main features of an MTEF 3. Achievements and pitfalls 4. Performance budgeting

$ 1. What is MTEF? $ The camel's nose is a metaphor for a situation where permitting some small undesirable situation will allow gradual and unavoidable worsening. A typical usage is this, from U.S. Senator Barry Goldwater in 1958: This bill and the foregoing remarks of the majority remind me of an old Arabian proverb: "If the camel once gets his nose in the tent, his body will soon follow." If adopted, the legislation will mark the inception of aid, supervision, and ultimately control of education in this country by the federal authorities.

1. What is MTEF? “ It is said that the Inuit people (Eskimo)have 15 different words for snow. The opposite is true of MTEF, where the same term is used to refer to very different ways of stretching the time perspective of annual budgeting. Conflating a variety of different approaches into a single rubric has caused a host of problems” Schiavo-Campo, “Potemkin Villages: 'The' MTEF in Developing Countries” Public Budgeting and Finance, Summer 2009.

1. What is MTEF? Variant 1: The MTEF is an instrument for fiscal discipline for prioritisation in confor-mity with the strategies for providing funding predictability OECD countries Some developing countries Variant 2: The MTEF(s) cost sector strategies. It is used for negotiating budget increases with the Ministry of Finance and additional financial support with the donors Other developing countries

1. What is MTEF? 1. MTEF for fiscal discipline and prioritisation 2. Strategy costing Ministerial (MoF) Sectoral Consistent with the MTFF Should be realistic, but may include financial gap and scenarios Rolling horizon Regularly updated, but may have a fixed horizon Projection period: 3 to 4 years A long term period is required in several sectors Unified budget-MTEF preparation processes Prepared outside the pressure of the budget preparation process Next slides deal with the MTEF variant 1

MTEF Instrument + Process Government strategic framework (This is a picture of “The Erasmus” bridge in Rotterdam, the Netherlands) MTEF is a concept addressing the link between the annual budget process (with a 1 year focus) and the multi year focus you normally see in the government strategies and policies. a MTEF (a multi year budgeting framework) tries to “BRIDGE” the annual budgeting process and the strategic framework and its sector strategies and annual activities In that respect MTEF is both an instrument and a process. Please note: The word MTEF means different things for different people. Even among experts in PFM. Every expert will stress different aspects of MTEF. But what they all have in common is that MTEF is focussing on multi year budgeting and bringing policy and strategy closer to the budgting process. Plans and strategies are implemented through the budget Recent economic development and actual implementation of planned activities must be taken into account Annual budget law appropriations & forward estimates Government strategic framework sector strategies & policies framework, laws

1. What is MTEF? The MTEF defines a strategy implementation path that takes into account the financial constraints We can distinguish: The MTFF, which defines the totals The Medium Term Budget Framework (MTBF) –or “global” MTEF- which allocates MTFF overall expenditure envelopes to ministries or sectors/functions The MTEF; detailing MTBF projections by programme Named also “global MTEF” May be structured by ministry and/or by function/sector Structured by ministry, it is prepared during the strategic phase of budget preparation and used to frame the preparation of the budget and ministerial MTEFs Structured by function, it is used for policy dialogue and transparency In several countries an MTBF is included in a budget policy paper tabled in Parliament 3 to 4 months before the budget bill (e.g. South Africa)

Development towards MTEF MTFF MTBF MTEF

1. What is MTEF? MTFF: Fiscal discipline MTBF: Inter-sectoral resource allocation MTEF: Intra-ministerial resource allocation

1. What is MTEF?

Course outline 1. What is an MTEF? 2. Main features of MTEF 3. Achievements and pitfalls 4. Other special issues

MTEF in Tajikistan MTEF in Tajikistan

2. Main features of MTEF Exercise Exercise: Identify key MTEF concepts Explain content of key concepts

What is top-down / bottom-up in an MTEF? 2. Main features of MTEF What is top-down / bottom-up in an MTEF? Top-down budget preparation Multi-year projections of resource envelope targets (what is affordable) Bottom-up budget preparation Multi-year cost estimates of sector programmes (what has to be financed, with a focus on programme performance) Integrating these two pillars Institutional (political-administrative) decision-making process to make the necessary trade-offs

2. Main features of MTEF Costing MTEF expenditure projections Expenditure ceiling New programs and policy changes Baseline However, in the first implementation steps, the projection baseline may consist of: For personnel and goods and services: the current level of activities (The actual budget plus the impact of the inflation and decisions already made) Transfers related to the existing legally binding commitments Ongoing investment projects, including their recurrent costs Savings on existing programs Year 0 Year 1 Year 2 Year 3

2. Main Features of MTEF ? Rolling Budget Forward Estimates Budget T 18

MTEF process MTEF process

Course outline 1. What is an MTEF? 2. Main features of MTEF 3. Achievements and pitfalls 3. Other special issues

1. Achievements and pitfalls The results are uneven….. “Developing comprehensive MTEF can be effective when circumstances and capacities permit…. Otherwise, … it might distract attention from the immediate needs for improving the annual budget and budget execution processes… in a number of African countries, the MTEF was introduced prematurely, and is turning out to be merely a paper exercise”. World Bank-IMF Global Economic Report 2006, page 146

2. Achievements and pitfalls Why uneven results? Too complex/sophisticated approaches Poor annual budget discipline No impact on the annual budget: the MTEF prepared the previous year is ignored Administrative and/or political instability. Every year MTEF preparation starts from scratch Complexity. Some countries prepared very complex MTEFs, attempting to link costed activities closely to objectives. Appeared complex and too arbitrary in estimating linkages (e.g. failed Ghana experience). Poor budget discipline. Why an MTEF, when the budget is in practice revised every 3 months? No impact on the annual budget, the MTEF prepared the previous year is ignored. E.g. the 2010 budget may be quite different from the 2010 tranche of the 2009-2011 MTEF prepared in 2008) Administrative and/or political instability. Every year MTEF preparation starts from scratch. No link with the budget process Isolated sector MTEF prepared by external consultants to comply with a donor request. The MTEF remain a pure technical exercise, the decision-makers are not involved in the MTEF processes Economic difficulties that make obsolete the previous MTEF forecasts Lack of predictability of resources

2. Achievements and Pittfalls Why uneven results? Isolated sector MTEF prepared by external consultants to comply with a donor request The MTEF remain a pure technical exercise; no political interference Economic instability Lack of predictability of resources

2. Achievements and pitfalls Supporting donor practice?? However, it does not make sense to demand a "sector MTEF" prematurely…. Taking stock from experience, it is recommended to adopt a process and systemic perspective on the development of a sector MTEF, rather than making it a pre-requisite for supporting a sector programme. EC. Support to sector programmes. Guidelines no2. July. 2007. Page 22.

2. Achievements and pitfalls How to avoid the pittfalls? Before considering implementing MTEF: Make sure annual budget processes are disciplined Avoid complexity Prepare an MTBF Ensure there are capacities to prepare an MTFF Prepare costed sector strategies first Estimate the forward costs of existing activities Make sure decision makers are involved BASICS FIRST MTBF +MTFF COSTING POLITICS

Course outline 1. What is an MTEF? 2. Main Features of MTEF 3. Achievements and pitfalls 4. Performance budgeting

4. Performance budgeting Performance indicators (PI): Activities Output indicator Outcome indicators

4. Performance budgeting Inputs Money Activities Buying books, building schools, hiring teachers Outputs Enrollment ratio outcome Literacy rate Impact Competitiveness, engaged citizens

4. Performance budgeting Q-1 MONITORING Q-2 MONITORING Q-3 MONITORING ANNUAL REPORT Financial information Performance information

Main principles in selecting Performance indicators Indicators should be prioritised on the strategic and operational objectives There should not be more indicators than are necessary to capture the objectives (limited number) Performance indicators can be developed by asking ‘How will the objectives be achieved?

Criteria for Useful Performance Indicators CREAM-criteria Clear: Precise, understandable, unambiguous Relevant: Appropriate, useful to the objective at hand Economic: Data available at reasonable costs Adequate: Attributable, provide reliable and timely basis for the assessment of performance Monitorable: Availability of information, consistent over time and open to independent scrutiny

Key messages Sound MTEF processes may help in reinforcing the policy-budget link, but only if several preconditions are met Strategy costing should be carried out, but planning documents with a financial gap should not be considered as financial commitment of the government Programming documents and working plans should not be over-sophisticated