Rapport No. 34937-DRC DEMOCRATIC REPUBLIC OF CONGO Public Expenditure Review (2002) Executive Summary June30, 2004 (corrected as of June 2006) Poverty Reduction and Economic Management 3 Africa Region Document of the World Bank Executive Summary I. Introduction 1. This report is based on the work carried out during the second half of 2002 in close collaboration with the DRC government. It is part of a full range of efforts undertaken since July 2001 by the World Bank and the International Monetary Fund, the goal of which is to help the DRC set in place a modern and viable public expenditure management system, specifically capable of tracking the destination of resources and assessing the quality of the work and services produced with their assistance, particularly as regards expenditures of potential benefit to the poorer segments of the population. Also, the World Bank’s Transitional Support Strategy for the DRC, dated June 2001, had proposed that a public expenditure review (the Review) be performed in order to make the departments more effective and improve the transparency of public resource management (Paragraph 35). 2. The first IMF report, delivered to the government in November 2001, emphasized critical analysis and reform of public finance management in general and public expenditure management in particular. It led to technical assistance from IMF and World Bank experts, including two resident experts in the area of public expenditure management. The emphasis of the assistance in the area of expenditures was placed most particularly on (i) modernization and implementation of an expenditure channel circuit, capable of computerized tracking of specific expenditures from commitment through payment, and (ii) implementation of a new public expenditure nomenclature, including a functional, economic and administrative classification, capable of tracking expenditures in general and those related to poverty reduction in particular. 3. A variety of missions have been carried out to date, as follows: Institution Mission Date IMF • Critical analysis and recommendations for • July 2001 reforming public expenditure management • November 2003 • Upgrading of public finance management (budget preparation and execution, cash and public finance management at the provincial level) World • Public expenditure review: analysis of the • July-November Bank structure of public expenditure, and sector 2002 assessment (health, education, • April-May 2003 transportation) • May-June and • Decentralization October- • Common expenditures November 2003 • Procurement, CPAR • May 2004 1 4. Within this context, the present report places an emphasis on (a) an overview of the structure of public expenditure (Chapter 1), (b) an analysis of the problems related to public expenditure management and public service delivery in the health (Chapter 2), education (Chapter 3) and transportation (Chapter 4) sectors, and (c) public expenditure management, particularly as regards the capacity to monitor and track expenditures in general, and poverty reduction expenditures, as well as expenditures financed by budget savings generated by the HIPC Initiative, in particular. An initial version of the report was given to the government in November 2002 and was used to help prepare the appropriation law for 2003. 5. In this regard, it should be noted that the Chapter 1 analysis led to the World Bank’s decision to undertake more in-depth work on the following subjects: (i) management of so-called common expenditures, (ii) management of public finances at the local level, and (iii) governance in general, in relation to public service delivery. The management and financing of common expenditures are supported by the Post Reunification Economic Recovery Credit, approved by the Board of Directors in February 2004, and governance issues are the subject of an Institutional and Governance Review (IGR) now in progress. 6. Chapters 2 and 3 were widely used in preparing the Country Status Reports on the health and education sectors, which are now being completed, while Chapter 4 served as a background paper for the transportation sector. 7. Similarly, the Chapter 5 analysis was used (i) as the first HIPC AAP1 report concerning the tracking of poverty reducing public spending, (ii) to assist the government in developing an action plan to improve the capacity to track the execution of public expenditures in general and pro-poor expenditures in particular, and (iii) in developing both the preliminary and final documents within the context of the DRC’s joining the HIPC Initiative in July 2003. 8. The IMF report of November 2003 delved more deeply into the issues jointly tackled by the World Bank and the IMF over the two preceding years. This report places an emphasis on (i) budget preparation and presentation, (ii) budget execution and public accounting, (iii) cash management, and (iv) public finances at the provincial level. 9. Upcoming efforts would involve (i) joint development, by World Bank and IMF departments, of the second HIPC AAP in August-September 2004, and (ii) the preparation of specialized reports on public expenditure management at the provincial level during the year 2005. 10. With respect to institutional support on budget matters, in 2001 the World Bank began to regularly assist in the work of monitoring the portfolio of external aid. The goal of this work is to update the data base on inventories and annual flows of external aid by collecting data from donors on actual and projected disbursements stemming from external official assistance. Such updating gives a fairly complete overview of financial and humanitarian external aid and serves to identify difficulties either in raising the aid or 1 AAP – Assessment and Action Plan, Tracking Poverty Reducing Spending in HIPC. 2 in launching and executing the projects. It should be noted that the data on the portfolio of external aid are fully integrated into the IMF macroeconomic framework for the DRC. 11. In the area of procurement, in 2003 the World Bank and the government undertook an in-depth review of the government procurement and contract execution system, culminating in the Country Procurement Assessment Report (CPAR). The final report and the action plan have just been submitted for discussion and validation. During preparation of the CPAR, the government benefited from resident expertise financed by the World Bank, which is thinking of continuing to assist the authorities in their reform activities through an emergency project to support the process of economic and social reunification. 12. In collaboration with other donors, assistance could also be considered in connection with reforming the government payroll management system. The analytic report on the current system will soon be discussed and validated by the government. This reform of the system of managing and paying government employees will require technical and financial assistance from the donors involved in budget reform. 13. Assistance could also be considered in connection with building the administrative and financial capacities of provinces. The government intends to request technical and financial assistance from donors to improve management of the provinces’ public finances pursuant to the identification of needs and priorities derived from the analyses and road map to be developed for each province. II. 2002 report and recommendations 14. This section of the executive summary excerpts the main elements of the report and the main recommendations of the Volume I capsule report. For greater detail, it may prove useful to consult the corresponding chapters of Volume I (summary report) and Volume II (main report and annexes). 15. Chapter 1 provides an analysis of the structure and allocation of public expenditure in the DRC, within the context of objectives established by the country under its program of reform during the period 2002-2005. Next, the Review has identified five specific problems that could seriously compromise the budget’s balance, transparency and consistency: (i) wages, (ii) provincial offices and decentralized administrative units (EADs), (iii) common expenditures, (iv) capital expenditures from the government’s own resources, and (v) the country’s access to the HIPC Initiative and implementation of specific mechanisms for budgetary tracking of expenditures so financed. A. Structure and allocation of public expenditure 16. It was very difficult to obtain reliable figures because of the total disarray of information systems. It is however certain that resources have strongly declined in real terms over the last decade due to hyperinflation and the collapse of the economy. In this context: 3 • Current expenditures have been favored over capital expenditures. • The province of Kinshasa was the main beneficiary of spending, while the other provinces were effectively deprived of budget resources from the central government. This is a frequently recurring observation. • Treasury Directorate information on spending by each administrative unit demonstrates that the social sectors are at a disadvantage (see Table 1.6 and Graph 1.1). Spending in the social sectors accounts for roughly 7 percent of total expenditure,2 while 17.5 percent is earmarked for defense, 14.3 percent for the presidency and 4.4 percent for security services. • The budget is extremely difficult to review. The budget nomenclature and the nomenclature used by the Treasury are different. Several line items included in the cash plan do not appear in the appropriation law. • Oversight of budget execution appears to be very weak. The structure of the executed budget does not match the budget adopted by vote. There is no “prioritization� of expenditures, with the result that the rate of execution is highly variable, depending on the type of expenditure and the availability of revenues. In addition, there are major off-budget expenditures, i.e. expenditures in non-budgeted line items. B. The five main challenges 1. Wages 17. Wages make up approximately 35 percent of the budget (excluding supplementary budgets). At an average of roughly US $13.75 per month, civil service wages are among the lowest in the world, due to hyperinflation which has resulted in a reduction of 90 percent in real terms over the last decade and an increase in the already high number of civil servants (estimated at 4 to 500,000 persons).3 Geographically, the distribution of wages favors the capital, with 80 to 85 percent of the allocation in this category (see Annex 1.16 for details). 18. Wages are often the only substantial resource that the central government manages to transfer regularly to its departments. Furthermore, it is far from certain that wages are received in full and on time by those entitled to them. Wage payments ran into problems of execution during the first quarter of 2002, but the related arrears have been recouped. In addition, as indicated in Chapter 3, the 30 percent raises for teachers, initially planned for the entire country, have only been given to Kinshasa teachers. 2 Including 2.25 percent for the Ministry of Primary, Secondary and Professional Education, 1.27 percent for higher and university-level education and 1.52 percent for the Ministry of Health. The Ministries of Education and Health are included in this Table only because of the size of the wage bill. 3 However, average wages cannot be calculated for institutions and the army because their numbers are not published. 4 19. Analysis of wage expenditure execution is complicated by the fact that wages are managed by two centers: the Payroll Directorate, which falls under the Ministry of Finance and Budget, and the Cabinet of the Minister of Finance and Budget. Each manages roughly 50 percent of the total wage bill. The payroll circuit is complex and lacks transparency, so it is not certain that all scheduled wages arrive at their destination.4 20. With respect to wage increases (in 2002), the rates applied by the Payroll Directorate did not significantly change during the first quarter of 2002, although the rates applied by the Cabinet went up by 12 percent. However, this is an average figure that masks the major increases given to the Presidency (32 percent), the National Assembly (177 percent) and the police (33 percent). 21. Recommendations. As government institutions return to normal functioning, the pressure on the government to settle arrears and re-evaluate civil service wages is growing. The Review examined a few options in this area and argues that, over the next three years, the government should concentrate increases on employees situated at the lowest levels of the wage scale, by using a fixed rate to increase the average wage. In addition to having an impact on the poorest civil servants, this would serve to improve the expenditure balance between the capital and the provinces. 2. Provincial offices and decentralized administrative units 22. In addition to its central departments, the Congolese government serves the population through two types of administrative structures: the deconcentrated provincial offices (Services Provinciaux: SPs), which are representations of the central ministries in the provinces, and the decentralized administrative units (Entités Administratives Décentralisées: EADs), i.e. the local governments, including provinces, territories, communes, villages, etc. The Review attempts to assess the levels and methods of funding for these two categories of administrative structures. 23. In principle, the deconcentrated provincial offices (SPs) are funded by the national budget, and the decentralized administrative units (EADs) by (i) retrocessions (budget transfers) from the central government, as well as by (ii) specific taxes which they themselves levy. Retrocessions account in principle for 20 percent of the revenues received by financial authorities in the regions and are paid in two installments. The additional budget resources at the provincial level are obtained through the provincial and communal governments’ efforts to raise revenues. 24. However, the central government has scarcely been in a position to release budget allocations for the deconcentrated provincial offices for several years. As a result, the provincial offices have had to be funded through resources earmarked for, or collected by, the EADs and/or local governments at various levels, which has required the 4 An audit of the procedures for managing expenditures associated with non-military government personnel was undertaken during the period of January-February 2004; a reform of the expenditure management system is planned for 2004-2005. A full census will also be undertaken in 2004-2005. 5 intervention of governors.5 In particular, transfer of the second installment of retrocessions has encountered greater and greater delays and, in some cases, these transfers have not taken place at all.6 25. In other words, a system has gradually evolved in which the center deprives the outlying areas of the resources to which they are legally entitled. This has created a strong incentive to impose levies and informal or special taxes, often with no legal justification. This in turn has created a strong incentive to engage in corruption. 26. Total revenues for the provinces and lower administrative levels reportedly came to some CF 6 billion in 2002, which is equivalent to 3.5 percent of national revenues (national revenues totaled CF 167.6 billion). This imposes an effective ceiling for spending at the local level since neither the provinces nor the EADs can finance their spending by taking out loans. But local budget resources for fiscal year 2002 totaled CF 34.8 billion (or rather CF 20 billion when the double counting inherent in the formula for presenting the provincial budgets is deducted), i.e. at least CF 14 billion more than the effective revenues. 27. In addition, the recording of revenues and expenditures for provinces and EADs lacks transparency at both the budgeting and execution levels. This de facto situation needs to be quickly remedied because, at the present time, (i) the lack of a real budget for the provincial offices has gone unnoticed, (ii) execution of retrocessions to EADs is hard to track, and (iii) there is little awareness of the inadequacies of the retrocession mechanisms. 28. With respect to local spending, the recommendations of the Review are as follows: • With respect to accounting, ensure proper recording of budget transfers to the deconcentrated offices of ministries and of retrocessions and transfers to the EADs. • With respect to policy and management, efforts should focus on the following goals: • Put an end to the situation in which the center deprives EADs in all their forms of the resources that are legally theirs; • Adhere to the schedule for executing the two installments of retrocessions to EADs; 5 The governors themselves fall under the supervision of the Presidency of the Republic, through the Ministry of the Interior. Thus, this is a matter of relative decentralization. 6 When it was instituted in 1997, the retrocession was automatic and accounted for 30 percent of the revenues of the three financial authorities. But in July 2000, the amount that was automatically reconveyed was reduced to 15 percent, with the remainder covered by a discretionary transfer from the Ministry of Finance. It was later necessary to increase the retrocession rate to 20 percent (two installments of 10 percent). Later still, in 2003, enterprises were asked to pay their taxes directly to Kinshasa, which effectively eliminated the automatic portion of the retrocession. 6 • Execute all budget allocations for the operations of provincial offices, which have the greatest potential for improvement, execution and reduction of impact on household expenditures (see Chapters 2 and 3); • Develop public finance management capacity at the provincial level. 3. Common expenditures 29. The budget line item labeled common expenditures7 encompasses a number of expenditure items that share the particular characteristic of being covered by common and centralized management by the Ministry of Budget, and the most important of which relate to the consumption of fuel, water, electric power and telephone services. 30. Yet, according to the Review, real consumption by government departments could in all probability exceed – according to estimates from suppliers – a total of CF 40 billion per year, i.e. five times the budgeted amount and 12 times the executed amount.8 If this is true, real consumption under the category of common expenditures would come to more than 20 percent of the total budget, representing roughly the same financial weight as total remuneration. 31. Quite obviously, if this amount of consumption had to be paid in toto, the expenditure would instantly create a budgetary imbalance; in the opposite scenario, arrears will threaten the suppliers’ viability. Common expenditures thus require immediate attention, and a series of measures should be taken to: • validate the estimate of annual consumption; • evaluate the amount of outstanding arrears; • impose oversight of consumption in the future; • develop a short-term action plan for the oversight of consumption and a medium-term action plan for settling arrears (taking into account the contributions due by suppliers to the government). 4. Capital expenditures 32. The Review examined capital expenditures for fiscal years 2001 and 2002, while trying to differentiate between expenditures financed with the government’s own resources and those financed with external resources. The main observations are as follows: • Expenditures from the government’s own resources are low (CF 8 billion, i.e. less than $25 million in 2002) and the rates of execution are close to zero. This result is due to the lack of cash flow at the time. In addition, the logic of capital expenditures from the government’s own resources is unclear, with such resources spread much too thinly. 7 Also known as centralized payment expenditures. 8 According to 2002 projections. 7 • It is very difficult to know the implementation status of projects financed with external resources. Most financial movements are not recorded in the tables that track budget execution, nor in the cash plan. Such information must instead be collected from the donors involved. 33. The basic recommendations are that: • Large projects should be financed with external funding and managed by the donors. However, the corresponding financial flows should be tracked in the budget and in public accounting. • Capital expenditures financed with the government’s own resources should focus on simple and easily achievable objectives and on small and/or urgent projects that are coherent and visible but for which it may be difficult to raise targeted external funding, as in the case of the general rehabilitation of public buildings. 5. HIPC Initiative 34. The preparatory work for the DRC’s admission to the Enhanced HIPC Initiative is already under way. The country’s final admission could potentially occur during the second quarter of 2003, and would substantially increase the availability of its own budget resources (to the extent of the debt service relief resulting from the Initiative). To be admitted, the DRC must, among other requirements, be able to demonstrate that these additional budget resources would actually be used to increase pro-poor spending, i.e. spending that has a direct and positive impact on poverty reduction. As a result, the government’s priorities should be to: • define and identify poverty reducing spending in the annual budget; • demonstrate that the expenditures financed with HIPC resources would lead to an increase in pro-poor spending and have a positive impact on poverty reduction. 35. There are five key ideas: the fivefold need to (i) identify and effectively track through their final destination all poverty-related expenditures by implementing a specific budget classification within the functional classification already being developed, (ii) assess so-called poverty reducing spending and its impact, (iii) demonstrate that the spending financed by the Initiative is additional rather than substitute spending, (iv) hold the budget savings resulting from the Initiative in a special Central Bank of Congo account until the moment of actual use of the resources, and (v) earmark a portion of these additional resources for local governmental or nongovernmental organizations located in the provinces. In addition, these resources could be transferred directly to such organizations, in the form of budget support or comprehensive support, inasmuch as they have demonstrated a capacity for financial and accounting management acceptable to the Treasury and to donors. All these matters are discussed in greater detail in Chapter 5. 8 36. General recommendations. The chapter concludes with general and specific recommendations concerning budget preparation and execution, including, in particular, the following: • With respect to budget preparation, presentation and management, the key recommendations are to: • Restore the role of the appropriation law (budget) as the central document of fiscal policy. • Implement a real accounting and budget framework to describe all budget operations. At the present time, government accounting is inadequate to describe, in a coherent framework, all government financial operations. • As part of the reforms of the budget nomenclature and the chart of accounts, ensure that all allocations to each ministry, institution or administrative unit of the government are grouped together in transparent fashion in the budget or other expenditure tracking documents. • With respect to the financing and tracking of poverty reducing spending, it would be important to: • Define what is meant by poverty reducing spending. • Propose specific mechanisms for regularly tracking this component of the budget. C. Health sector 37. Chapter 2 provides an overview of spending in the public health sector within the context of the I-PRSP and the strategy proposed in the National Health Development Policy. 38. The Review suggests that (i) the sector has suffered from the effects of the decrease in public spending in recent decades, (ii) apart from the visible problems of the budget breakdown, preparation of this budget is unclear and complex, while execution is very weak and includes irregularities, and (iii) the impact of public spending is weakened by the allocation and execution problems. 39. In addition, the analysis confirms a number of the observations of Chapter 1. It should be noted that 97 percent of the spending benefited the Ministry Cabinet, whereas the corresponding budget allocation was 8 percent. The Secretary General had 2 percent of the spending and the remaining offices less than 1 percent. The functional offices have no resources, especially at the provincial level, and they attempt to finance their operations with some resources from the EADs. As a result, these offices have no interest in the budget process and concentrate instead on foreign aid, which is, moreover, substantial. The total amount is approximately US $100-125 million per year, either 9 through specific projects or through a system of comprehensive support where direct financial support is provided to certain health zones. This could be an example to follow in using HIPC resources. 40. However, external aid is largely uncoordinated, particularly by the country’s authorities. As a result, each donor agency intervenes as it sees fit. A major proportion of the aid is concentrated in Kinshasa. 41. More generally, from a geographic perspective, the budget analysis indicates that the level of spending is on the order of $1 per person in Kinshasa versus 10-20 cents in the provinces. The cause of this imbalance is the line item allocation for wages, which directs 62 percent of the resources to the city of Kinshasa. Excluding wages, the provinces benefit solely from the portion of transfers (supplementary budgets) and the few interventions that are executed. The distribution of human resources confirms this concentration favoring Kinshasa and, to a certain extent, the southwestern provinces. 42. From a socioeconomic perspective, this analysis shows that the distribution of public health allocations among different socioeconomic groups clearly favors the wealthiest groups of the population because it is concentrated on urban areas versus provinces and on administrative structures versus health centers. 43. Recommendations. The Review recommends the following measures: (i) round out the DRC’s strategy with a clear definition of the roles of the public and private sectors; (ii) reorganize the Ministry in such a way as to streamline the administrative structures and thus expenses, while refraining from creating new bureaucratic structures; (iii) prepare a detailed budget that is better allocated, rigorous and understandable in order to recapture the interest of the departments; (iv) reorganize the breakdown of allocations and test the transfer of the government’s own resources based on the existing model of comprehensive support for health zones; (v) increase wages based on a fixed rate; and (vi) use the funds derived from the HIPC Initiative in a “virtual poverty fund� system that permits tracking of the allocation of these additional funds. 44. More specifically, with respect to the budget: • At the central level, the objectives should be to ensure a minimum level of funding for key departments and to streamline bureaucratic structures. • At the intermediate level, there is an urgent need to reinstate operating allocations for provincial offices and to ensure that this is accompanied by less “draining� of the income of local structures (health zones) by provincial structures. This would put an end to negative transfers from the outlying structures to the provincial offices, which increases the financial pressure on those who are ill (and their households) and leads to a general decline in the demand for care. • In terms of local services, the objective should be to strengthen the comprehensive support mechanism, already used by donors with positive results. This approach has 10 been able to meet donors’ needs with respect to management and effectiveness and could also meet the government’s needs in providing support at the local level. • With respect to labor costs, the government should continue to pay its contribution to wages, which can be considered a partial, but almost universal, subsidy of health care services. • In addition, it will be necessary to develop a strategy of human resource development and management to ensure the availability of skilled staff who are much more evenly distributed throughout the country than at the present time. • As for resources derived from the HIPC Initiative, a portion of the funds should be transferred to health facilities in return for performance contracts. D. Education sector 45. Chapter 3 provides an overview of spending in the education sector. The main conclusions are as follows: (i) the education sector is in crisis; (ii) at the present time, households finance 97 percent of primary school expenses; (iii) the government’s contribution to this sector is low; (iv) current government spending is almost exclusively concentrated on wages; (v) however, unlike the health sector, donor contributions to this sector are low. 46. In addition, as in the case of the health sector, the analysis confirms a number of the observations of Chapter 1 regarding public expenditure. The following points are of particular interest: • In 1960, the DRC’s educational system received very satisfactory public funding, with roughly 30 percent of the government’s budget earmarked for education. In 2001, the most recent year for which the Review was able to obtain figures, the public commitment to education resumed and the government allocated approximately 5.8 percent of its budget to this sector. • Public spending on education consists primarily of wages, which represent 86 percent of recurrent costs. Non-wage expenditures serve almost exclusively to support the operations of the central departments, particularly the Cabinet of the Ministry of National Education. • Expenditures to improve the quality of learning (instruction) are nonexistent. Teaching inputs are no longer supplied, and facilities such as bathrooms are in deplorable condition. Nothing has been spent on infrastructure maintenance and/or rehabilitation. • The drastic decline in public spending on education, beginning more than ten years ago, has forced families to take over from the government and organize themselves around churches which have assumed responsibility for managing the schools. 11 Households contribute 97 percent of total spending. They fund the bulk of the teachers’ compensation and all of the system’s other current expenditures. • Thus, in summary, since the 1990s, except for the basic wages paid by the civil service, the Congolese educational system has operated as a deconcentrated public system financed by households (approximately $80 per person per year). • The allocation of government resources clearly favors the province of Kinshasa and Bandundu. Excluding current operations, the per capita public resources received in Kinshasa during the year 2001 came to CF 12, versus CF 10 in Bandundu, CF 2 in the two provinces of the Kasai and just CF 1 in the Equator province. • With respect to wages, it should be noted that, since 2002, teachers in Kinshasa have been paid according to a new wage scale, while the other provinces continue to pay their teachers according to the old scale (equivalent to 70 percent of the official wage). As for non-wage expenditures, all the resources are absorbed by the central level, especially the departments of the Ministry of Education. • The Congolese system of educational expenditures is highly centralized. Apart from wages, there are no mechanisms for directly transferring resources to the schools (which are situated at the bottom of the existing pyramid, particularly schools located in disadvantaged and often remote areas of the country). • There is no reliable system of planning, which would make it possible to assess the efforts made, and those still to be made, by incorporating all relevant indicators for good sector development. • There is an annual funding gap on the order of $130 million in terms of meeting the needs of schoolchildren who are already enrolled, and the gap is much greater when the needs of unenrolled children are taken into account. • The lack of external funding does not reflect a lack of interest on the part of donors, quite to the contrary. But their commitment would be subject to (i) detailed assessment of the status of the education sector (cost estimates and a command of key indicators); (ii) a clear indication of the government’s objectives; (iii) the existence of reliable and transparent funding channels to deliver resources, with no risk of embezzlement, to the departments and schools; and (iv) a commitment on the part of the authorities not only to implement a program but also to monitor and evaluate its impact. 47. Recommendations. The Review recommends that a sector strategy statement be prepared so as to clearly define the government’s role in relation to other bodies involved in education, and that this statement should emphasize responsibilities in four key areas: (i) define and improve the environment in which educational services are provided in the DRC; (ii) manage and finance targeted interventions to address the failures of the marketplace; (iii) collect data and monitor performance; and (iv) raise external financial 12 resources (and monitor their use and their impact). More specifically, measures need to be taken in terms of both supply and demand. 48. On the supply side, the following measures are necessary: • Double the recurrent spending on education from approximately 4-5 percent in 2002 to 8-10 percent of the government’s total budget in 2005. • Consider the partial payment of wages to be an educational subsidy that should therefore be allocated on a priority basis to the schools with the greatest needs. • Restore budget funding for regional educational departments at the intermediate level so as to eliminate negative transfers of parents’ contributions to provincial government structures. • Develop a financial protocol for donors that would permit them to make direct transfers to schools and other educational institutions (see Chapter 1). The specific procedures for this window of financing should be developed in collaboration with the Ministries of Finance, Planning and the Interior. This plan should present detailed agreements for transparent expenditure management and tracking and could, in principle, follow the example of the protocol already in place at the Ministry of Health. 49. On the demand side, the following measures are necessary: • Reduce the cost of education borne by households in order to increase the enrollment rate and reduce the number of drop-outs and repeaters. In the short term, this could be accomplished through simple policy initiatives such as (a) temporarily doing away with compulsory school uniforms, and (b) eliminating the use of enrollment fees to pay for central and regional services (such as inspections and examinations). • Eliminate negative transfers from outlying structures to the center. The Ministry of Education should apply strong pressure to return to a budget system in which financial and budget transfers from the center to the provincial offices of the Ministry of Education actually take place, rather than the negative transfers from the outlying areas currently observed. • Institute measures to improve quality and, more specifically: (a) mobilize funding or investment sources for teacher training, education equipment and facility rehabilitation; and (b) define standards at the national and provincial levels, including the development and publication of the curriculum and standardized national tests. E. Transportation and infrastructure 50. This chapter provides an overview of spending on transportation and transportation infrastructure, with an emphasis on reconstruction and maintenance of the national road 13 system. The planning and execution of public expenditures take place within the context of a complicated institutional structure and a seriously deteriorated sector. 51. The institutional structure is complicated by the fact that transportation services are provided by public enterprises, while infrastructure maintenance is handled primarily by government departments. Supervisory authority is spread among the Ministry of Transportation (transportation enterprises), the Ministry of Public Works and National and Regional Development (road and rail maintenance) and the Ministry of Agriculture (feeder roads). This results in legal and organizational gaps. 52. The condition of transportation sector infrastructure (roads, rails, rivers, ports, airports) has greatly deteriorated over the last decade, which hinders trade and thus the functioning of the entire economy. The deteriorated condition of the infrastructure is the result of inadequate investment and maintenance and the ineffective use of resources, attributable to the war and the economic mismanagement of the last decade. 53. The very substantial involvement of public enterprises in running transportation services weighs on the sector’s efficiency due to their weak performance and the fact that the government and certain key public enterprises (for example, the General Quarrying and Mining Company, known as GECAMINES) do not pay for the services provided. In addition, economic policy management in the transportation sector generates requests for budget support on the part of public enterprises, which cannot, however, be satisfied. This has resulted in decapitalization of these enterprises. 54. Within the transportation infrastructure sector, funding of public works is primarily earmarked for road management and maintenance through the Department of Roads, which has the largest budget in the sector. However, the allocated budget and the intervention potential are far from being able to meet the needs associated with maintaining and operating the road system. There is a wide disparity between the resources made available over the last decade (including foreign investments) and the requirements of road system maintenance (US $145 million annually). 55. The bulk of road maintenance work is done under government control. However, the quality of the work is unsatisfactory because of a number of impediments, including three main factors: (i) the poor condition of the equipment fleet (with an availability rate of 26 percent); (ii) the lack of qualified managerial and technical personnel due to the suspension, since the 1990s, of recruitment and basic training (the most recent training plan dates back to the period of 1985-1990); and (iii) the lack of operating resources for organizing, overseeing and managing the programming, execution and oversight activities. 56. Furthermore, the present structure of the Department of Roads, set up during a period of very great activity and based on a total separation of tasks and responsibilities, is not in line with the requirements of efficiency and rational use of limited resources that it must now face on a day-to-day basis. The existing structure is designed to operate with substantial resources and in a highly centralized manner. A comprehensive reform 14 should be prepared with the goal of (i) setting in place a safe funding mechanism; and (ii) modernizing the structures and methods of management and operation. 57. Recommendations. In the transportation sector, steps should be taken to: • Prepare and adopt a new strategy to govern and oversee public enterprises in the transportation sector. • Accurately assess liabilities due for payment by the government and its subsidiaries, including GECAMINES, in exchange for services provided by transportation enterprises, and prepare a strategy to settle them. • Assess the current tax system and its impact on each of the transportation subsectors. 58. In the area of road maintenance, the main recommendations are to: • Restructure the Department of Roads, including an early retirement plan. The restructured department should be responsible for road planning and maintenance, studies, inspection and monitoring of current projects. • Develop a Road Maintenance Fund that could be established by 2006. The design of the Fund should take into account the heterogeneous nature of the road system and the difficulties of communication, in terms of both persons and information. Decentralization of management is thus necessary in order to bring decision-making bodies as close as possible to centers of execution. • Establish funding sources for the Road Maintenance Fund. To succeed, the Fund will need dependable funding sources, as well as regular and reliable fundraising methods. 59. As in other countries that have created similar institutions, in the DRC the Road Maintenance Fund’s own resources should mainly come from a user fee. Inasmuch as the resources given to the Road Maintenance Fund remain public monies, it would also be very important to define in precise terms the methods for collecting and transferring such funds to the Road Maintenance Fund in a way that makes it possible to track these movements in public accounting. In addition, their use should be independently and meticulously monitored and evaluated to ensure that the resources are used advisedly. F. Public finance management and action plan 60. The international community has stressed the importance, in order for the HIPC Initiative to succeed, of building the capacity to track poverty reducing expenditures. To that end, each country admitted to the HIPC Initiative must prepare (i) an evaluation of the public finance management system based on 15 benchmark criteria, and (ii) a three- year action plan to rectify the problems identified. Chapter 5 deals with this evaluation 15 and the action plan in the DRC context. The action plan deals with the following topics: (a) involvement of the different levels of government; (b) budget preparation; (c) budget execution; (d) budget execution reports and audits; and (e) specific recommendations for the HIPC Initiative. 1. Involvement of the different levels of government 61. At least 80 percent of the general population and probably an even higher percentage of the poor population live in the provinces outside the capital. Under these conditions, it is clear that the decentralized administrative units (EADs) and the provincial offices (SPs) of the ministries will need to play a major and central role in poverty reduction. Yet financial management procedures at the provincial level remain less developed than those of the central government. This situation needs to be remedied as soon as possible. 62. Indeed, in the near future, it will be impossible to properly track the expenditures made by the EADs, although the alternative of heavily centralizing the HIPC expenditure process would be undesirable as well. In the short term, financial procedures need to be identified that would permit spending under HIPC financing at the provincial and local levels, with specific monitoring of the use of such funds. It will thus be a priority to set in place monitoring and reporting mechanisms at the regional level, so as to permit a gradual increase in transfers to the provinces in the medium term. 2. Budget preparation 63. Improvements are needed in three areas: (i) thoroughness; (ii) classification; and (iii) multiyear projections. 64. Thoroughness. The scope of the budget, which covers the central government and its regional offices, does not perfectly match the international definition of the public administration sector. There are still some off-budget operations, but the number of such operations declined sharply in 2002 compared to 2001. The areas requiring special attention are non-fiscal revenue (for example, enrollment fees), certain Central Bank operations and external aid. 65. Classification. There is an urgent need to finalize the new budget nomenclature, the preparation of which is now under way with technical assistance from the IMF and the World Bank, so as to classify budget operations according to their administrative, economic and functional nature. The new nomenclature also needs to be used in monitoring execution. Classification by program is also planned, but not yet defined. 66. Multiyear projections. The Budget Preparation and Monitoring Directorate has no multiyear projections available at the present time, except for those provided by the IMF. This gap should be filled if possible during preparation of the full PRSP. 16 3. Budget execution 67. Substantial improvements are needed in the areas of (i) internal oversight and (ii) the recording of expenditures. 68. With respect to a priori oversight, in late 2001 the Ministry of Finance undertook an in-depth reform of the procedures and mechanisms of expenditure execution and oversight. With IMF support, the Ministry is now implementing a new public expenditure circuit that will make it possible to track a specific expenditure from commitment through payment. It is anticipated that the system will become operational in time for the 2003 budget. The a posteriori oversight function, in the form of an internal audit, is placed under the authority of the Ministry of Finance, but is not operational. The terms of reference and working methods of the General Inspectorate of Finance need to be reviewed in order to fill this gap. 69. There is no regular or ad hoc mechanism to survey users about the reality and quality of services provided. This is a major gap. 70. Recording of expenditures. The government’s Central Bank operations are currently reconciled on a weekly basis, jointly by the departments of the Treasury and the Central Bank. But it sometimes happens, as in May 2002, that the parties disagree about the final figures for the accounts. Efforts are under way to smooth the difficulties underlying this situation. 4. Budget execution reports and audits 71. Substantial improvements are necessary concerning (i) the regularity and accuracy of reports and (ii) audits. 72. Regularity and accuracy of reports. There are no published reports that monitor budget execution – not in the technical ministries and not in the departments responsible for budget monitoring and oversight. This situation should be rectified as soon as possible. In addition, the budget execution reports should use the new budget nomenclature. 73. Audit of accounts. The last budget settlement law presented to Parliament dates back to 1996 and pertains to fiscal year 1994. There is an immediate need to consider all necessary measures to ensure that government receipts and expenditures for each fiscal year, beginning with 2002, are prepared and published. 5. Specific recommendations for the HIPC Initiative 74. The recommendations of this chapter apply to the entire budget and not just the monitoring of HIPC Initiative expenditures. However, a number of specific measures will need to be taken to guarantee that all will be ready for the HIPC decision point. 17 75. The principal objective should be to ensure that all pro-poor spending is prepared, executed and monitored in accordance with standard budget procedures. In general, the “virtual poverty fund� approach is recommended in order to ensure monitoring of all pro- poor expenditures and guarantee the additional impact of the HIPC Initiative. Establishing such a fund requires that a number of steps be taken as soon as possible: • With respect to HIPC expenditures, a classification system should be set in place in the form of a specific classification of government budget expenditures within the functional classification. This approach could be used to incorporate HIPC expenditure monitoring into general budget monitoring, in the form of a “virtual poverty fund.� The definition of pro-poor spending should reflect the priorities set forth in the I-PRSP. • The projected trend of poverty reducing spending should be prepared, clearly showing the increase associated with the country’s admission to the decision point phase. • A committee to monitor execution of poverty reducing expenditures should be created by the end of the year. This committee could include representatives of government (outside the Ministry of Finance) and civil society. It could meet on a regular basis during the year to be informed about the quarterly publication of the poverty reducing expenditure monitoring statement. 76. However, in the short term, additional “transitional� measures will be required in view of the existing weaknesses in the area of public finance management. It is proposed that the “virtual poverty fund� mechanism be strengthened with specific monitoring and oversight measures for resources released by the HIPC Initiative. In particular: • A special account should be established at the Central Bank of Congo for resources released by the HIPC Initiative, at least for the first year. The resources in this account will be used only to finance authorized poverty reducing expenditures. • Independent audits of the special account at the Central Bank of Congo should be performed, and the results published. • Regular monitoring of HIPC resources should be incorporated into the general monitoring of pro-poor expenditures (including those financed by the general Treasury account) to be performed by a participatory committee composed of civil service representatives. 77. These measures will provide reassurance regarding the transparency of operations to creditors who have participated in the Initiative. 18 G. Retrospective overview and next steps 78. The goal of Chapter 6 is to provide a brief retrospective and prospective overview in order to propose a provisional agenda for the pursuit of public expenditure reform, by posing the three following questions. • Does the report of two years ago still match current reality, and what are the main gaps? • In addition, what progress has been made in implementing the recommendations formulated earlier? • What are the main problems that need to be addressed right now? With this goal in mind, a series of discussions were held with Congolese officials and Bank experts. 1. Accuracy of the 2002 report 79. In general, all parties agree that the present report satisfactorily reports the work done two years ago. The observations are correct and the recommendations are appropriate. However, although the observations remain intact overall, there are additional comments and information of considerable importance that require attention. 80. The report ignored the key question of the broad institutional reforms that are essential in order to implement a reformed public expenditure management system that is both credible and sustainable. In this regard, the report states that the work helped instead to identify a number of key questions that need to be addressed in the institutional reform and the capacity building that is also necessary. 81. The report should have addressed more specifically the problems in the procedures for managing labor costs and should have offered recommendations for improving wage management. In this regard, it should be noted that a reform of payroll management procedures has now begun with an audit of payroll procedures. 82. Special emphasis could have been placed on the level of off-budget spending; this constitutes an indicator that the process of making and preparing a budget meets the requirement of streamlining, and if off-budget spending reaches a certain threshold, this means that serious economic policy is either weak or nonexistent. However, the information system was inadequate in this respect at the time of the Review. 83. As regards the analysis of provincial offices, the emphasis is placed on resource mobilization methods rather than on expenditures. This is partly correct, but additional work has been undertaken on the subject of expenditures since the Review and could be continued in a future Public Expenditure Review focusing on this specific subject. 19 84. With respect to health, special emphasis should have been placed on the level of budget funding and the extent of deviation from generally recommended standards. 85. With respect to education, the recommendations reflect the actual situation quite accurately, but hinge nevertheless on an incomplete data base, so some recommendations could appear either excessive or inadequate. The Review examined neither the university education sector nor scientific research. In addition, the Review did not closely study the following issues: (i) how to ensure regular salary payments in all the provinces; (ii) how to increase compensation for key personnel; and (iii) how to develop a formula for settling arrears and placing eligible personnel in retirement. This is true, but such issues should be addressed in a sectoral Public Expenditure Review. 86. As regards transportation, it is important to note that, in the case of the road maintenance budget, there has been a change of objectives since the Review in the definition of the priority road system. The ministry has now defined a priority system of 23,170 kilometers (a subset of the 58,000 kilometers of national and provincial roads) and the cost of maintaining this priority system is now estimated at $60 million (versus the estimate of $145.7 million cited in the report). 2. Progress made in implementing the recommendations formulated earlier 2.1 Recent developments in the area of general spending and the capacity to monitor expenditure execution 87. The government has undertaken sustained efforts to make improvements and has placed an emphasis on strengthening budget management, improving the transparency of the budget process and upgrading the capacity to monitor the execution of public expenditures, with a special emphasis on poverty reducing expenditures. Special note should be made of: (i) preparation of the new budget nomenclature; and (ii) effective implementation of the new expenditure circuit which makes it possible to track a specific public expenditure from commitment through payment. 88. The improvement stems in large part from: (i) implementation of the new expenditure circuit and preparation of budget monitoring statements, including poverty reducing expenditures and expenditures from HIPC resources; (ii) implementation of the new budget nomenclature (classification of expenditures by nature, department and government function) and computerized data entry of public expenditures with the assistance of the new computer system; (iii) specific tagging of poverty reducing expenditures,9 including expenditures from HIPC resources, to make it possible to identify them at every step of the expenditure channel through final destination; and (iv) efforts to ensure effective integration of expenditures stemming from the payroll, public debt and external resources and to harmonize the nomenclature of the Table of Government Financial Operations (Treasury) with the budget monitoring statements. 9 The definition and identification of poverty reducing expenditures were based on the classification of expenditures by major government function (i.e. the functional classification of expenditures). 20 89. A variety of efforts to build transparency are now under way, including: (i) implementation of protocols for payroll, public debt and external resources which will make it possible to properly integrate these expenditures in the channel; (ii) development of the government’s simplified double entry accounting framework, the adoption of which is planned for this year; and (iii) preparation of efforts to build the public finance management capacities of the city province of Kinshasa. 2.2 Recent developments and work in progress in the area of health 90. Major projects are either under way or under consideration in the health sector, and they are likely to raise questions related to public finance. It should be noted in particular that the Congolese government is attempting to strengthen the collaboration between the government and donors (Round Table of March 2004). The ministry has asked its partners to consider a Sector Wide Approach (SWAP) because of the very fact that the operational departments are facing enormous operational difficulties and are expected to produce results with no substantial budgetary and financial resources. Also, with the assistance of IDA, efforts are being made to set up performance contracts between the government and certain health facilities, with the idea that these facilities receive direct financial transfers based on services actually provided in accordance with performance contracts. In addition, work is now proceeding in the following areas: (i) preparation, with IDA assistance, of the Country Status Report (CSR) on Health and Poverty, which contains a public finance component and which will provide the basis for developing the sector strategy that constitutes a reference point within the context of the HIPC Initiative; and (ii) preparation of health-related national accounts which will permit systematic analysis of sector funding. 2.3 Recent developments and work in progress in the area of education 91. As in the health sector, a Country Status Report (CSR) on the National Educational System is being prepared with IDA assistance, and the preliminary version has just been finalized and discussed. This report will serve as the basis for developing the general framework for sector development, which is a benchmark for the HIPC completion point. In addition, the Ministry of Primary, Secondary and Professional Education has prepared a Program to Safeguard Primary, Secondary and Professional Education. Also, the Ministry of Higher and University Education has prepared a strategy for subsector reform called the Higher and University Education Modernization Pact. The government is also trying to strengthen cooperation with national nongovernmental actors involved in the sector, particularly churches and associations of parents of students, in order to update the system of sharing the costs of service delivery. The government is undertaking major efforts to strengthen collaboration with donors who contribute to sector financing. 2.4 Recent developments in the area of transportation 92. In the road sector, there has been a change of objectives since the Review in the definition of the priority road system. The ministry has now defined a priority system of 23,170 kilometers (a subset of the 58,000 kilometers of national and provincial roads) 21 and the cost of maintaining this priority system is now estimated at $60 million (instead of $145.7 million). The ministry has begun to discuss the institutions and mechanisms that need to be set in place in order to achieve sustainable road maintenance, particularly: (i) rehabilitation of the Department of Roads; and (ii) establishment of a Road Maintenance Fund. 3. Future agenda 93. At the end of this Review, a number of key themes emerge quite clearly: • Continue the reforms under way relating to expenditure management and monitoring in general, and pro-poor expenditure management and monitoring in particular, at the central level. • Expand these reforms to the provincial level, a monumental task which will require institutional reform and long-term capacity building efforts. • Address the issue of employee wages, as the current levels provide a clear incentive for corruption. • Prepare reforms at the sector level (health, education, public works) to ensure, in particular, that the central and provincial technical departments of ministries are properly funded, so as to effectively halt the implicit “taxation� of outlying structures. • Set in place mechanisms for direct transfers to decentralized administrative units (EADs) and possibly to nongovernmental suppliers, consistent with the principles of good public finance management and acceptable to donors, to permit an increased volume of transfers and improve the quality of services provided in the provinces, where the majority of the population, and the majority of the poor, reside. Sector experts (including public finance managers) have also identified a number of key themes, discussed below. 3.1 General spending and the capacity to monitor expenditure execution 94. As regards general spending and the capacity to monitor expenditure execution, the priorities will be to focus on continuing the reforms related to streamlining and automating the public expenditure circuit, as well as building the capacity to monitor expenditures. Building the monitoring capacity means setting in place measures that will provide information on budget expenditure management, either in relation to the objectives of economic or sector policy, or in relation to resources and government departments. These measures will aim to consolidate and support the reforms under way in connection with public finance rehabilitation, the transparency of the budget execution process and monitoring of the government’s financial operations. 22 95. In the area of budget preparation, special attention needs to be given to compliance with the budget preparation timetable and the direct use of the single data base to estimate the budget allocations. 96. With respect to execution, special attention needs to be given to: (i) systematic production of budget monitoring reports, including effective integration of expenditures stemming from the payroll, public debt and external resources; (ii) production of specific budget monitoring statements for poverty reducing expenditures; (iii) definitive harmonization between the Table of Government Financial Operations (ToFE) and the budget monitoring reports; (iv) validation of the budget monitoring statements and the Table of Government Financial Operations by the Public Expenditure Management Committee; and (v) making the Committee for Monitoring Poverty Reducing Expenditure operational and producing analyses of poverty reducing expenditure execution. 97. In the area of government accounting, the double entry government accounting plan needs to be finalized. 3.2 Health sector 98. The priorities of the Ministry of Health propose to focus on mobilizing the necessary financial resources to achieve the MDGs. In particular, efforts will center on: (i) increasing the budget allocation to the sector, if only by 1 percent per year over five years; (ii) streamlining the administrative structures so that they are genuinely responsible for execution of the resources allocated to them and justification of their use; and (iii) preparation of a Medium-Term Expenditure Framework (MTEF). 3.3 Education sector 99. The education sector ministries propose to focus on: (i) improving the allocations to the sector as a whole, and adherence to the expenditure breakdown and expenditure execution; (ii) effective implementation of measures to ensure regular salary payment for education personnel; (iii) definition of a regulatory and financial administrative framework at all levels to promote a partnership with nongovernmental actors in the sector; and (iv) preparation of an administrative reform of the sector, including a policy of gradual retirement of eligible personnel. Other priorities include: (i) finalization of the State Report on the National Educational System, which will be a major element in (a) developing the education component of the PRSP and (b) preparing the sector development strategy; (ii) strengthening the collaboration among donors active in the sector, under the government’s leadership, in order to optimize the resources to be deployed to meet education sector development needs; (iii) capacity building and human resources development; and (iv) infrastructure rehabilitation. Finally, the government intends to initiate discussions on higher education sector reform. In all cases, it will be necessary to take into account the government’s limited financial capacity. 23 3.4 Transportation and infrastructure sector 100. The main problems that the Ministry of Transportation and the Ministry of Public Works intend to address in the near future are the following: (i) reform of public enterprises in the transportation sector (National Transportation Office [ONATRA], Congolese National Railway Company [SNCC], etc.); (ii) reform of the Department of Roads; and (iii) preparation of a Road Maintenance Fund. 24 BH C:\Documents and Settings\wb19009\My Documents\DRC_FY06\PER final\PER- posted\DRC_PER_2002_Ex-Sum_Final (posted Dec 22, 06)_BH.doc 12/22/2006 5:05:00 PM 25