Lessons Learned on Costing, Prioritization and Operationalisation : PRSPs and MDGs Raj Nallari, World Bank Institute, PREM Antoine Heuty, UNDP New York Vientiane, October 20 th, 2004

Outline I/ Rationale for costing and Prioritization II/Approaches to Costing III/ The PRSP Experience IV/ Costing the MDGs

I/ Rationale for costing and Prioritization

Rationale for cost estimates Strategic choice for achieving NGPES-MDG goals may be helpful in answering two kinds of questions: Should an end be pursued ? The feasibility of achieving NGPES-MDG goals, given a sufficient application of resources and adequate policy and institutional reform, is not generally in doubt. However, the discussion implicitly supposes that the commitment to achieving the objectives is not unconditional. An implicit rationale: In the MDGs context, convincing developing countries and donors that the goals can be achieved without undue sacrifice of other objectives. How should an end best be pursued? Budgetary Planning: needs, gaps, “stickiness” (irreversibilities, cost of planning). What is the most cost efficient approach to achieving the development objectives?

Objectives of NGPES Costing To estimate the needed financial resources to implement the planned interventions of NGPES. To inform budget preparation and lay out tradeoffs for policy-makers. To present alternative scenarios to Laos Government in order to identify policy and financing options to identify the appropriate strategy to reach NGPES-MDG goals

Why costing & prioritization matters? Lack of prioritization= wish list Wish lists are not credible, not likely to be implemented, and are likely to disappoint domestic stakeholders Wish lists are also less likely to attract external financing in the form of budget support Uncosted programs will not receive adequate or predictable budgetary allocations, overall or appropriate capital/ recurrent mix. And if no costing, prioritization is impossible. Prioritization depends on: Comprehensive analysis of policy options Good costing Knowledge of aggregate resource envelope Feedback from participatory processes While costing is technical in nature, prioritization is a political process which needs to be owned and driven by government and decision-makers

II/Approaches to Costing

Which approach for costing NGPES? Costing of NGPES should be done on short and medium term but consistent with Laos PDR long term development vision This approach needs to balance the focus on ambitious development goals and the constraints imposed by the macroeconomic framework OBJECTIVE: An iterative approach reconciling resource requirements assessments based on sector or program analysis and resource availability based on econometric estimation of growth and resource envelope (2) PRIORITIZATION (3) OPERATIONALIZATION (1) COSTING - Resource requirement - Resource availability

What does prioritization mean? Prioritization is needed in both the choices of policy measures and budget allocations consistent with the achievement of NGPES goals. Prioritization implies: Analyzing all available policy options in order to achieve NGPES goals Limiting—and sequencing—the set of policy measures to those which can most likely be achieved, given human resource and political constraints, over the time horizon of the strategy. Prioritization leads to: Identifying resource gap and assessing of potential adaptation of macroeconomic framework (foreign assistance, tax reform, borrowing) Recognizing budget constraints, understanding of costs and a willingness to reallocate budgets from lower priority to higher priority sectors and sub ‑ sectors.

Prioritization in practice Compare resource needs with resource availability to identify resource gap Assess budget constraints based on the aggregate resource envelope, including both domestic and external funds Information from donors by sector Scope for increasing resource mobilization (ODA, taxation, borrowing) Base case should be that considered most likely Alternative scenarios needed in cases of higher or lower than expected growth, external flows, etc.

III/ The PRSP Experience

PRSP-Sector Programs-Budget Budget as a key development tool and governance issue Why is budget process important? In formulation phase - determines resource envelope - allocates to priority policy areas In execution phase - releases funds to the service delivery agencies, predictably In reporting phase - accounts for how the funds have been used

Short-term measures to improve public financial management In selected Ministries that are ready to move ahead: adoption of an integrated Financial Management System, or improved manual procedures for recording spending, and/or Public Expenditure Tracking Surveys Improved budget classification systems Several PRSPs have proposed revising the budget classification system in order to allow more meaningful targeting and monitoring of public expenditure Strengthening Treasury operations to ensure more timely release of funds and better reporting of expenditure Publication of quarterly or semi-annual budget execution reports Placing programming and execution of foreign-financed capital expenditure on budget ensuring full recording of externally financed project expenditures in the government’s accounts Strengthening control institutions such as Comptroller General

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

A good country case 1. Consensus on priorities built through the participatory process, built on ongoing programs. Lower priority activities dropped/scaled down 2. Comprehensive“ Critical to the success of the PRSP is the need to implement only the PRSP” 3. PRSP-budget link is central: Budget preparation & scrutiny by MOF to ensure that line agency budget submissions are consistent with the PRSP 4. Transition phase for donor activities: Existing projects “grand fathered” All new projects must fit within PRSP priorities 5. Annual review vehicles, envisaged as country’s central policy review process PER – expenditures & impacts PRSP review (annual progress report) complemented by a comprehensive review every three years

Need for patience and perseverance: Prioritisation and costing will likely need continuing improvement in the context of implementation and monitoring of the first PRSP Prioritization and costing will only be possible if the PRSP is linked to the budget process MTEF can be valuable: The MTEF should not be a parallel exercise, but integrated with existing budget processes the institutional arrangements for the MTEF & PRSP should be consistent in both exercises, and recognize the central role of Ministry of Finance Phasing-in of MTEF, by sector and functions, needed

IV/ Costing the MDGs

Global estimates Zedillo Report: “The cost of achieving the 2015 goals would probably be on the order of an extra $50 billion a year”. The Bank’s initial estimates of the cost (to donors) of achieving Goal 1 range between US $ 54 billion and $ 62 billion a year. Its estimates of the cost of achieving the goal depend on ad hoc assumptions concerning, ‘poverty elasticities of income’, capital- output ratios, national savings rates, and ‘absorption constraints’. The Bank estimates the total cost of achieving the other goals (by adding existing sectoral estimates, as does the Zedillo commission) as ranging between US $ 35 and $ 76 billion per year.

MDG needs assessment at the country level UNDP country offices have participated in a pilot project which has attempted to estimate the cost of attaining the MDGs in six countries. The reports focused on six MDG targets: income poverty, primary education, child mortality, maternal health, HIV/AIDS and water. The Millennium Project is also preparing a number of country case studies to map out the major policies and investments required to achieve the MDGs in the countries concerned. The World Bank approach gives priority to the Poverty Reduction Strategy (PRS) previously defined by each country, and asks how, giving priority to the objectives and strategy of the PRS, the MDGs can best be achieved. PRSPs often prominently feature macroeconomic policy objectives that are not directly referred to among the MDGs.

NEPAL MDG COSTING Projection of resource requirement Relevant population forecast (e.g. 6 to 10 year old in he education sector) Identification of required inputs and norms based on National plan (NGPES in the case of Laos) Calculation of per unit norms of different activities Projection of resource availability Revenue Projection based on revenue/GDP ratio Projection of internal borrowing and foreign assistance Resource availability at the sub-sectoral level is done independently from domestic and external sources Different growth scenarios are taken into consideration Projection of resource gap Resource gap = resource requirement - Resource availability Resource gap is presented at two levels: Resource gap from internal resource availability (revenue + borrowing) Total resource gap includes foreign assistance

Millennium Project: MDG Based Poverty reduction Strategies (PRS) Pilot countries: Cambodia, Ethiopia, Kenya, Ghana, Dominican Republic, Yemen, Tajikistan Developing MDG-based Poverty Reduction Strategies requires to: Set tailored targets for 2015 and beyond (MDGR) Express them in intermediate targets and actionable propositions for the short- and medium-term (NGPES) Estimate the cost of the intermediate targets so they can drive the macro-economic and sectoral policy frameworks as well as the national budget.

The limits of existing MDG Needs Assessments Models Costing the MDGs is undermined by five main weaknesses: The impossibility to define the optimal policy framework ex ante (what is a good policy, a good institution?) Fixed absorptive capacity constraints The limits of the “unit cost” approach The interconnectedness between the goals Unpredictable future shocks

Making sense of MDG Costing… Domestic vs. external funding Financing vs. costing Short- and medium-term vs. long-term costing Ownership vs. donorship