Report No. 29377-UG The Republic of Uganda Country Integrated Fiduciary Assessment 2004 (In Five Volumes) Volume I: Main Report (CIFA) August 2004 Poverty Reduction and Economic Management 2 Country Department of Uganda Africa Region Document of the World Bank VICE PRESIDENT: CALLISTO MADAVO COUNTRYDIRECTOR: JUDYM.O'CONNOR COUNTRYMANAGER: GRACEM.YABRUDY SECTOR MANAGER:KATHIEL.KRUMM TASKTEAMLEADER: SUDHARSHANCANAGARAJAH TABLE OF CONTENTS PREFACE ................................................................................................................................................... V EXECUTIVESUMMARY ...............................................................................................................................vi111 ................................................................................................................... 1 INTRODUCTION . A. B. OBJECTIVES...................................................................................................................................... 1 SCOPE OF THE REPORT ..................................................................................................................... 2 2 2.c STATUSOF . STRUCTURE OF THE REPORT ............................................................................................................ ONGOINGAND PLANNEDGOVERNMENTREFORMS ................................... 3 A. ECONOMICAND LEGISLATIVE 3 B. THEPUBLIC SECTOR AND PAYREF0RM.......................................................................................... REFORMS......................................................................................... 5 6 3.C HIGH-LEVELFISCALRISKSAND . DECENTRALIZATION ........................................................................................................................ FIDUCIARYCONCERNS .............................................. 18 A BUDGET 18 B. DEFICIT............................................................................................................................ BUDGET REALISM .......................................................................................................................... 19 c. ............................................................................... 24 D. CORRUPTION AND POORVALUE FORMONEY HUMAN RESOURCE ISSUES ............................................................................................................ 26 E. KEYCHALLENGES.......................................................................................................................... 27 4. LINKINGPOLICIESAND PLANSTO THE BUDGET ............................................................. 29 A. MEDIUM-TERMRESOURCE ENVELOPE .......................................................................................... 29 B C.. RESOURCE ALLOCATION................................................................................................................ 29 BUDGET D. FORMULATION ................................................................................................................. 32 KEYCHALLENGES .......................................................................................................................... 35 5. RAISINGREVENUES, DEPLOYINGRESOURCES,AND UNDERTAKINGACTIVITIES ............................................................................................................................................................. ... 36 A. 36 B. RAISING REVENUE......................................................................................................................... DEPLOYING RESOURCES ACTIVITIES ............................................................................................................ ................................................................................................................ 38 C UNDERTAKING 44 6.DREPORTINGONTHE .. KEYCHALLENGES.......................................................................................................................... 44 USE OFRESOURCESAND ACHIEVEMENT OFRESULTS .........46 . ACCOUNTING KEEPING ............................................................................................ 46 B. A AND RECORD ........................ C. SYSTEMSFORACCOUNTING. FINANCIAL REPORTING. AND INTERNAL CONTROL 47 REPORTING ..................................................................................................................................... 50 D. INTERNAL AUDIT AND OTHERMONITORING MECHANISMS .......................................................... 52 55 7.E HOLDINGGOVERNMENTTO . KEYCHALLENGES .......................................................................................................................... ACCOUNT FORITSPERFORMANCE .............................. 56 A. B. ACCOUNTABILITY .......................................................................................................................... 56 OVERSIGHTBODIES ....................................................................................................................... 57 ACCESS AND AVAILABILITY TO OF FINANCIAL MANAGEMENT INFORMATION ............................ 63 64 8.DLESSONS c.. KEYCHALLENGES.......................................................................................................................... LEARNEDAND PROPOSEDACTION PLAN ......................................................... 65 A. THECIFA PROCESS ....................................................................................................................... 65 B. . BENEFITS ........................................................................................................................................ 65 D. C LESSONSTHE FUTURE............................................................................................................. FOR 66 E. KEYCONCLUSIONSAND CHALLENGES.......................................................................................... 66 F. THEPROPOSED ACTIONPLAN........................................................................................................ 67 IMPLEMENTATION ARRANGEMENTS .............................................................................................. 68 H. G. MONITORING EVALUATIONMECHANISMS AND ............................................................................ 69 NEXT STEPS.................................................................................................................................... 69 ANNEXES .................................................................................................................................................. 71 ANNEXA. FIDUCIARYRISKANALYSIS................................................................................................... . ......................................... 71 ANNEXc.PROPOSEDACTIONPLAN....................................................................................................... ANNEX B STATUS MATRIX OF THE 2001 CFAA AND CPAR ACTIONPLAN 76 85 BIBLIOGRAPHY ..................................................................................................................................... 99 LIST OF TABLES TABLE1. ONGOINGAND PLANNED INITIATIVES INLOCAL ....6 TABLE2.AVERAGE GOVERNMENTFINANCIALMANAGEMENT., ................................................................................................. TABLE3.REVENUEPERFORMANCE41-43, FISCAL2003/04 (USHBILLIONS) ......................................... BUDGET DEVIATIONS 19 TABLE4.EXPENDITURE .......................................................................... 21 21 TABLE5.KEYFISCALPERFORMANCEINDICATORS FOR2002/03FOR SAMPLE LGS................................. PERFORMANCE (USHBILLIONS) TABLE6.NUMBERDAYS 22 OF INVOLVED INTRANSFERS FROM THE CONSOLIDATED FUNDTO SPENDING TABLE7. BUDGET AGENCIES............................................................................................................................................ 23 ............................................................................................................................................ PROVISION FORTHE CLEARANCE OF DOMESTIC ARREARS AND OUTTURN (USH TABLE8. STOCK OFNONWAGE BILLIONS) 24 TABLE9.UGANDA'S RANKINGINTHE TI CORRUPTION PERCEPTIONINDEX ............................................ RECURRENT AND DEVELOPMENT SPENDINGARREARS (USHBILLIONS) 24 TABLE10. SECTORAL SHARESOF EXPENDITURE ........................... 25 TABLE11.PLANNED SCHEDULEFORTHE ROLLOUT THE IFMS............................................................ OVER THE MEDIUM TERM(PERCENT) 31 TABLE12. STATUS OF REPORTSONCENTRAL GOVERNMENT C C O ~ T S OF 48 A ................................................. 60 LIST OF FIGURES FIGURE1. FOREIGNASSISTANCE ................................................................................................ FIGURE2. PROPOSEDIMPLEMENTATIONARRANGEMENTS LGCOMPONENTS................................... INFLOWS 37 FOR 70 .iv. PREFACE The Country IntegratedFiduciaryAssessment (CIFA) process The effective management of a government's financial resources consists of a number of separate but related processes, involving a variety of different stakeholders and levels of government. The CIFA in Ugandais one ofthe first exercisesby developmentpartners (DPs) and governmentto adopt an integrated and holistic approach to the assessment of public financial management(PFM). A detailed review of the lessons learnt and challenges for future CIFA assignments is provided in Section 9. In Uganda, it has involved coordinating and consolidating four separate Bank diagnostic processes: the Country ProcurementAssessment Report (CPAR); the Country FinancialAccountability Assessment (CFAA); the Local GovernmentIntegratedFiduciaryAssessment(LGIFA); andthe Public ExpenditureReview(PER). These diagnostic exercises were supplemented by two additional assessments, the annual Tracking PovertyReducingSpendingAssessment, conductedby the World Bank andInternationalMonetaryFund (IMF); and the Fiduciary Risk Assessment, recently conducted by the Department for International Development (DFID) o f the United Kingdom. The overall CIFA process has spanned a nine-month period, with each of the individual assessments being conducted over a two- to three-month period and the PERprocesscarriedout over the entire financial year. We launchedthe CIFA process in October 2003 with an identificatiodpreparation mission.The mission helddiscussions on each ofthe components ofthe assessmentwith the mainstakeholders: the Ministry o f Finance, Planning and Economic Development (MoFPED) Budget Department, Accountant General's Office (AGO), the Public Procurement and Disposal of Assets Authority (PPDA), and the Ministry of Local Government (MoLG). During the wrap-up meeting with the permanent secretaryhecretary to the treasury (PSIST) of MoFPED, the programfor the CIFA work was defined and agreed. Financialsupport to the LGIFA and the CIFA report and action plan was provided by the European Union's Public Expenditure and Financial Accountability (PEFA) Trust Fund and World Bank (WB) budgetary resources.The Bank funded the PER exercise fully, while the RoyalNetherlands Government supported the release study, which was carried out in fiscal 2003/04. The CPAR was funded by the Bank, the Danish InternationalDevelopment Agency (DANIDA), and the Royal Netherlands Government. The CFAA was funded by the Bank with additionalsupport from the DFID, the African Development Bank, andthe SwedishInternationalDevelopmentCooperationAgency. Buildingonthis experience, we proposethat future exercisesshouldconsider the following: - v - 0 moving the exercise to an earlier point in the government's budget process (ideally between October and February), so that its recommendations can be more readily incorporated into the budgetprocess; committing more time to an in-depthanalysisat the local government(LG) level; 0 carrying out a detailed assessment of PFM issues affecting statutory authorities, state enterprises, and other semi-autonomousagencies; and 0 the feasibility of focusingonparticularareas of concern, such as pay andpayrollmanagement. Next steps As it seeks to develop its own action plan and to clarify the coordination and monitoring arrangements, the GovernmentofUganda(GoU) hasproposedthat it carry out the following actions: 0 review the proposed action plan in detail, set out tasks, prioritize and sequence the necessary activities, and assign responsibilitiesas appropriate; 0 review the mandate and composition of the Public Expenditure Management Committee (PEMCOM); 0 review and define PEMCOM's relationshipwith the coordinating and integratedmonitoring and evaluation mechanisms approvedby cabinet for oversight of the Poverty EradicationAction Plan (PEAP); and 0 determine what, if any, financial or technical assistance is necessary to carry out or oversee the action plan. PEMCOM will complete this initial work on the action plan before October 2004, to ensure that its financial repercussionscan be incorporated into the budget process.The plan will be discussed with DPs and other stakeholdersbeforethe national budget workshop. We propose that the PFM reform be monitored annually using the PFM Performance Measurement Framework. This framework, which is based on 25 indicators of GoU performance and two DP indicators, is being developed by the PEFA program and is being tested on the basis of the CIFA report. Over time, we anticipate that the framework will replace the need for separate assessments such as the Tracking Poverty, ReducingSpendingAssessment and the FiscalTransparencyReporton the Observancy of Standards and Codes. This will reduce transaction costs by reducing the number of separate action plans andspecific monitoring arrangements. Acknowledgements The authors would like to express their sincere gratitude for the assistance and courtesiesextendedby all partiesthat participatedinthis analysis.We are grateful to PEMCOM, through which various government departments, participating LGs, state enterprises, private companies, and nongovernmental and professional organizations, assisted us with documents, data, and field visits. Without their support this report could not have been produced.Inparticular we would like to thank Mr.C.M. Kassami(Permanent Secretary, Ministry o f Finance, Planning, and Economic Development (MoFPED)), Mrs. M.C. Muduuli - vi - (Deputy Secretary to the Treasury), Ms. Florence Kuteesa (Director, Budget), Mr. G.O.L. Bwoch (Accountant General), Mr. Robert Muwanga (PEMCOM coordinator), Mr E. Agaba (Acting Executive Director, PPDA), Mr.V. Ssekono (Permanent Secretary, Ministry of Local Government (MoLG), and Mr T. Nkayarwa(Commissioner, LocalGovernmentInspectorate Department,MoLG). We would also like to thank all DPs for their contributions and for the various peer reviewers for their invaluablecomments. The CIFA report and actionplanwas produced with the able leadership of Carole Pretorius, who tirelessly worked to ensure that the report was consistent with not only the PER, CFAA, and CPAR carried out this year, but with all other work that has been carried out in the recent past by government and donors. UgandaCIFA Team UgandaCountryDirector:.JudyM.O'Connor UgandaCountryManager: GraceM.Yabrudy PREM Sector Manager:KathieKrumm FinancialManagementManager: Anthony M.Hegarty ProcurementAdviser: BernardAbeille CIFAPEWLGIFA Task Manager:SudharshanCanagarajah CFAA Task Manager:Marius Koen CPARTask Manager:RogatiKayani CIFA LeadConsultant: Carole Pretorius LGIFA LeadConsultant: Tim Williamson CPARLeadConsultants: RambollManagement, Denmark CIFA Peer Reviewers:Nicola Smithers (WB), Allister Moon(WB), Tim Williams (DFID) - vii - EXECUTIVESUMMARY Objectives The Uganda Country Integrated Fiduciary Assessment (CIFA) consolidates the results and recommendations of various diagnostic processes, including the Public ExpenditureReview (PER), the Country Financial Accountability Assessment (CFAA), the Country Procurement Assessment report (CPAR), the Tracking Poverty, Reducing Spending Assessment, and the Local Government Integrated Fiduciary Assessment (LGIFA). This integrated approach is designed to address comprehensively the budgetary, financialaccountability,andtransparency challenges that Ugandais facing.CIFA marksa first step toward adopting a single standard assessment o f Uganda's public financial management (PFM) systems for all levelsof government. The report provides the Government of Uganda (GoU), its development partners (DPs), and other stakeholderswith a candid review of the public sector challenges and an assessment of the key fiduciary risks and opportunitiesfor corrupt practices. Fiduciaryrisk is defined as the risk that expenditure is not properlyaccountedfor, that it is not usedfor its intendedpurposes, andthat it does notrepresentvalue for money (VFM). Past assessments o f fiduciary risk have been linked with the provisionof budget support by DPs, but it is now widely recognized that sound PFM is of critical importance to all stakeholders, includingtaxpayers, members of parliament, councillors, the private sector, and beneficiaries of services. It is critical additionally to central government itself, in relationto the transfers that it makes to local government. Overallassessment A brief overview of the various diagnostic processes is set out in the following four paragraphs. This is followed by a more detailed descriptiono f specific findings and challenges, Assessment of the fiduciary risk for central government operations, basedon 18 assessment benchmarks that follow agreedguidelines set out by the Development Assistance Committee of the Organisationfor Economic Co-operationand Development (OECD-DAC), is providedin Annex A. Insummary, the assessment shows that in the last four years the GoUhas made significant progress instrengthening andupdatingthe legal framework and regulatory environment for PFM, thus reducing the risk associated with a lack of clear rules and regulations.Inaddition, the GoUhas reduced the fiduciary risks associatedwith poor budget formulation andpreparationthroughthe PERprocess.The quality of informationprovidedinthe annual accounts also has improved. Implementing new rules and ways of working takes time, however, as it requires a combination o f attitudinal changes, improved capacity, political willingness, and widespread demand for greater - viii - -accountability. There remains high fiduciary risk, associated with: the enforcement o f procurement and payroll rules and procedures; the incompleteness o f data on debt and contingent liabilities; weak independent oversight; and the timeliness and effectiveness o f legislative and public scrutiny. While the progress made in raising public awareness o f anticorruption activities is commendable, the cost o f corruption to the economy remains significant. The legislative framework for integrity is still being developed and there are significant legal, institutional, and capacity constraints on the ability o f the integrity bodies-the Inspectorate o f Government, the Directorate o f Ethics and Integrity, the police, and the Director o f Public Prosecutions-to carry out their functions, both in public education and in investigating, detecting, and prosecuting offenders. More than 70 percent of total budgeted expenditure is channeled through the procurement process at the central or local government level. Though the CPAR now assesses the legal and regulatory environment to be essentially sound, the GoU readily acknowledges that its public procurement system remains weak. In particular, the enforcement of rules and regulations must be strengthened, and the procurement institutions must be given sufficient ability and authority to become effective tools in managing public funds efficiently andtransparently. The decentralization o f activities to the LG level over the last 10 years means that 40 percent o f the total budgeted expenditure for spending agencies i s now spent at the LG level. Seventy-five percent o f Poverty Action Fundmonies also is channeled through LGs. Sound PFMat the LG level is therefore o f paramount importance inensuring that public funds are spent and accounted for correctly and efficiently. The LGIFA benchmarking exercise used a sample o f four districts and one municipality (Apac, Tororo, Jinja, and Kabale districts and Masaka municipality), together with the results o f a financial management study commissioned in 2003, to make an assessment o f the state o f P F M at the LG level. The LGIFA highlights the considerable progress made over the last decade in providing services at the local level; from this base, however, it notes with concern that the budgeting and planning processes at LGs are poor at articulating specific local needs within overall national objectives and policies. The assessment also raises concerns over the ability, desire, and willingness o f local residents and politicians to hold their administrations to account for their performance. High-level fiscal risks and fiduciary concerns Duringthe 1990s Uganda experienced high rates o f growth. Poverty levels dropped from 56 percent in 1992 to 34 percent in 2000. However, the 2003 data show inequality increasing, and poverty rising to 38 percent. The situation is exacerbated by high levels o f population growth. The budget deficit has for the last five years exceeded 10 percent, excluding grants, and large external aid inflows have presented the GoU with a number of management challenges, as it seeks to ensure macroeconomic stability and to sustain an environment that is conducive to private sector investment. In particular, the government has had to mop up excess liquidity through a combination o f Treasury Bill sales and foreign exchange sales, adversely effecting interest rates and exchange rates, respectively. Higher interest payments have also reduced the availability o f resources for service provision, and have crowded out the private sector. - ix - Falling international coffee prices additionally have exposed the vulnerability o f the Ugandan economy to exogenous price shocks and have underscored the need for continued diversification. On the basis o f current predictions, Uganda is likely to achieve some but not all o f the Millennium Development Goals (MDGs). The goals for completion o f primary education, for gender equality in secondary education, and for child and maternal mortality, are unlikely to be met. To ensure that the goals set out in the Poverty Eradication Action Plan (PEAP) are attainable and sustainable and that the benefits o f growth are more evenly distributed, the GoU must overcome a number o f important macroeconomic, political, and institutional challenges. Specifically, Uganda must: maintain macroeconomic stability and keep inflation below 5 percent; progressively raise the tax:GDP ratio; improve the efficiency of resource allocation; reverse the deteriorating trend in Uganda's net present value (NPV) o f debt:exports ratio (the support o f the international community will be required if Uganda is to achieve a more sustainable position); make more effective use o f existing aid resources; restore and improve the integrity o f the budget process; improve the predictability o f the flow o f funds; and improve information on stocks o f arrears and contingent liabilities (this would help the Ministry o f Justice defend claims about contingent liabilities, and thus could help reduce the compensation amounts provided in court awards). To meet the PEAP and MDG goals, and the anticipated increase in demand for social services, the GoU additionally must make a concerted effort to improve efficiency in providing public services. There is a critical needto review the public sector comprehensively, to identify core activities, eliminate duplication, and focus on work that specifically targets promoting growth or reducing poverty. The current pension obligation exceeds USh276 billion and is unsustainable, and implementation o f the proposed pension reform i s urgentlyrequired. Corruption also is a severe problem. To improve the efficiency o f resource allocation and obtain more value for money, corruption needs to be tackled from all angles: the government must reduce the acceptability o f bribery and corruption, and must work to achieve more effective detection, investigation, and prosecution o f offenders. Corruption i s evident in many areas, including procurement, the financing o f politics, revenue collection, and generally inthe financial sector. It manifests itself inmany forms, such as in the proliferation o f "ghost" employees. The cost of corruption to the economy is not known (the proposed procurement indicators are intended to establish some initial figures), but with 70 percent o f expenditure channeled through procurement and 23 percent o f funds paid through the payroll, significant sums are likely to be lost. The Transparency International Index places Uganda in the top 15 percent of most corrupt countries. - x - Good progress has been made in developing the accounting and auditingprofession, and in developing skills and staffing levelsinthe accountingand auditingcadre o f the public sector. The government needs more capacity, both technical and managerial, at all levels in finance and procurement. Attracting and retaining appropriately qualified personnel will require greater flexibility in the pay structure. However, the BudgetCommitteeandsome stakeholdershave expressedconcern over the value ofexistingcapacity- building initiatives, so the question of how best to improve the capability and effectiveness of the public sector needs to be closely examined. The GoU and its DPs also must take into account the range of capacity and needs of the individualLGs and procurement entities when determiningthe most effective form oftrainingandassistance. Budget realism at the LG level is also a concern. As shown by the Release Tracking Study and Public ExpenditureTracking Studies, the predictability of fund flows to all levels of government remains an impedimentto the effective useof funds, particularlygiventhe current cashbudgetingsystem. Linking policiesand plans to budgets Ugandahas made significantsteps in improvingthe transparency and adequacy o f its budget formulation process, but the GoU still needs to improve the integrity of the budget process, minimize overruns, and ensure that agreed allocations are supported. Failure to adhere to this regime could result in some DPs applyingpressure for a returnto project funding. Fromthe DP perspective, it is importantto ensure that the predictabilityof DP funds is improved; that optimal aid effectiveness is achieved; that project funds are effectively incorporatedinto projections; and that disbursements are recorded. Budget Framework Papers (BFP) needto be made more realistic, and estimates o f planned activitiesmust be achievable and more closely aligned to the PEAP and sector plans. The implementationby some ministries of output- oriented budgetinghas faltered; its success depends on the successful implementationof results-oriented management, which is stalled. It also requires the full incorporationof salaries and wages into the budget framework. Althoughthe LGs oftenhavethe appropriate technicalexpertise inplanningandbudgeting, weak political engagement and a poorly sequenced process undermine their efforts in this area. District development plans will be unrealistic so longas they fail to take into account the availability of resources, and are not sufficiently linkedto the BFP andbudget.Ifthe plans are not implementedinfull, localcommunitieswill become cynical about the process, and the objectives of the LG are unlikely to be achieved. Without greater local political participation,aided by user-friendly budgets and work plans, activities at the local levelfurthermore will continue to be drivenby nationaldemandsratherthan local needs. - xi - Raisingrevenues,deploying resources,and undertakingactivities Expandingthe revenue base and improvingtax administrationare essentialto improvingUganda's fiscal position (but it should be noted that new tax measures will be difficult to introduce in the run-upto the 2006 elections). The situation is being aggravated by continuingdiscussions about the possible removal of the graduated tax, the main source of revenue at LG level. Also, joining the East African Community Customs Union is expected to incur significant revenue losses. The 1971 Customs Act additionally is outdated and inadequately supports sanctions against corrupt or fraudulent practices. Given this narrow, unpredictable local revenue base and an environment in which politicians are able to undermine tax revenues with impunity, all stakeholders view the accountability of LGs to their citizens as a serious cause for concern. In the government's pursuit of improvedvalue for money (VFM) from public expenditures, the major challenge is to ensure that procurement processes are transparent, efficient, and effective in providing high-qualitygoods and services at the'righttime and in the right place. They also must represent good VFM. Certain provisions in the regulations, such as access to local preference, undermine the procurementprocess and needto be addressed, as does the lack of a clear policy directionon the part of the Ministry of Finance, Planning, and Economic Development (MoFPED). Lack of capacity and of a general understanding o f procurement processes is a serious cause of concern, and capacity-building strategies have been proposed to address this issue (the development of clear, straightforward LG procurement regulations is an action within Poverty Reduction Support Credit [PRSC] 4, for example). Improving the integrity of the payroll, which accounts for approximately 23 percent of total budgeted expenditure, is urgent. Finally, cash managementat the central and local levels must be improvedso that implementingmanagers can execute their work plans more effectively. This is a complex task and one that cannot be easily achieved. Information on debt obligationsand contingent liabilities is incomplete, andthis needsto be addressedto assist the budget formulationprocess andto helpthe Ministry of Justice defend questionable claims. The Budget Committee also has expressed concern at the level of arrears and the pace at which arrears are beingsettled. This situationplaces a significantburdenon suppliers, many of whom are likely to be small or medium-sizedenterprises.The inabilityo fthe existingcommitment controlsystemto recordaccurately or to check the growthof arrears also is a problem.To some extent this will be eased by introducingthe integrated financial management system (IFMS), but inmany instancesthe growthof arrears will require better budget disciplineon the part of the accounting officers (AOs), andthe sanctioning of those officers who contravenethe regulations. - xii - Reportingonthe use of resourcesand achievement of results The procurement ofthe IFMShas beenconcluded, but its management,roll out, further development, and funding pose significant challenges to the GoU. From an accounting and financial reportingperspective, the key challenges relate to the sustainability, functionality, and extension o f the system, including the following: 0 ensuringthe availabilityof sustainable staffcapacity andnecessarymaintenancebudgets; 0 progressively extendingand deepeningthe functionalityandutilizationofthe system; 0 completingthe rolloutandensuringthat the systemprovides the necessary coveragefor the whole of government; and 0 securingthe additionalfundingnecessaryto complete implementation. A great deal of time, money, and effort has been spent on introducingnew legislationand regulations to support the IFMS. There are concerns that this will be wasted if the proposed restructuring of the Accountant General's Office (AGO) is not implemented. It has therefore been proposed that this be an actionfor PRSC4. The quality of in-yearreportingmust be improvedso that it reflects outputs or results rather than merely fund releases; however, this will require implementing results-orientedmanagement, which as noted above has stalled. In terms o f internal audit and monitoring, the challenge at the central and local government levels will be to implement the new (or proposed) institutionalarrangements and to mitigate any resistance to changes in working methods that may come from the auditors themselves and from accounting officers and accounting personnel at the line ministries and LGs.This may requirechanges in the methodsof remuneration. Froman LGperspective, the biggest accountingchallenge is to reversethe emphasisonupwardreporting, andto insteademphasizehorizontaland downward functions ofreportingandmonitoring,ina formatthat is understood by and that stimulates interest from all parties. This in particular should reinforce local accountability. The budget implementation guidelines, included in the fiscal decentralizationstrategy, state that reports requiredby centralgovernment shouldalso be presentedto the executive andto councils for decision-making purposes. While central government reporting facilitates the release of funds, however, at this level the reports should primarily be for information purposes rather than decision- making. Holdinggovernment to account The major challenges for all oversight bodies are to improve their credibility as government watchdogs andto ensure that rules are enforced. This requires a willingness at all levels of governmentto enforce the rules. Unless the rules are enforced, the government and the Ugandanpeople will continue to obtainpoor value for money from public funds. - X...l - l l Ifthe Office of the Auditor General is to operate as a Supreme Audit Institution, it must have greater independence. It must be clearly separated from the finance and public service ministries. The Public Procurement and Disposal of Assets Authority (PPDA) must improve its ability to act as a credible regulatory and monitoring body, and parliamentary and council committees need a better understanding of the key rolesthat they play inensuringfinancial accountabilityand high levels of service delivery. The greatest challenge that faces government, however, is to uphold the public interest by ensuring that the authority and capacity of the anticorruption authorities to pursue their mandate is not compromised. The government also must develop a culture that is less accepting of poor service, nontransparent practices, and lack of information. Next steps The proposedaction plan is set out inAnnex C. The plan captures ongoing or already identified activities (60 percent of the total) and new activities that require clarification or initiation by the government (40 percent). The 60 percent ongoing and identified activities break down into 29 percent ongoing, of which 10 percent are activities that require refinement or expansion, and 31 percent on which the GoU has merely indicated an intention to act. These activities are all included in the action plan, to ensure that stakeholders have a comprehensive picture of the issues that need to be addressed. Their inclusion furthermore highlights issues, such as public service, pay, and anticorruption,that may not be traditionally found inPFMplans, but for which improvementis fundamentalto the success of PFMreforms. The Public ExpenditureManagement Committee (PEMCOM) has proposedthat by October 2004 it will review with government stakeholders and seek agreement on its relationship with the coordinating and integrated monitoring and evaluation mechanisms approved by cabinet for oversight of the PEAP. The committee also intends to review its own mandate and composition, to ensure that it is able to take the action plan forward. The GoU has indicatedthat it intends,through PEMCOM, to review the action plan in detail, set out tasks, prioritize and sequence activities (taking relevant note of dependencies and capacity), and assign responsibilities. In those cases where financial assistance may be required, PEMCOM will also estimatecosts. This initial work on the action plan will be done intime to ensure that any financial repercussionscan be incorporatedinto the annualbudget process. - xiv - 1. INTRODUCTION A. OBJECTIVES 1.1 The Country IntegratedFiduciaryAssessment (CIFA) for Ugandarepresents a major opportunity for government, donors, and stakeholders to address the fiduciary risk issues facing the country. For government, the CIFA addresses the challenges o f budgetary and financial accountability and transparency, and is a first step towardestablishing, for all levels of government, a standard for assessing public financial management(PFM) systems. The CIFA also sets benchmarks by which government can seek to ensure that the fiduciary arrangements are in place to meet the requirements of prospective and existingdonors. These benchmarks are established by consolidatingthe results and recommendationsof various diagnostic processes, including the Public Expenditure Review (PER); the Country Financial Accountability Assessment (CFAA); the Country Procurement Assessment Review (CPAR); the Tracking Poverty Reducing Spending Assessment; and the Local Government Integrated Fiduciary Assessment(LGIFA). 1.2 Previousevaluations of PFMand accountabilitysystems inUganda' have helpedfocus the efforts to improve these systems. In particular, a new legislative framework for budget, procurement, and financial management has been developed that is expected to strengthen progressively the standards, systems, and institutionalarrangements of the PFMframework. Underpinningthis progress has beenthe implementationby the Ministry of Finance, Planning, andEconomic Development, with World Bank and bilateral support, of a second Economic and Financial Management Program (EFMP-11), and a complementary FinancialAccountability Program(FAP) funded by the UK Department for International Development(DFID). A number of development partners(DPs) are also supporting PFMprograms inthe health, education, and localgovernment sectors, and are assistingorganizations such as the Office of the Auditor General, the Public Accounts Committee, the Inspector General of Government, the Directorate of Ethics and Integrity, and the Ministry of Public Service, in payroll and personnel management. A PublicExpenditureManagementCommittee is seekingto coordinatethese development activities. 1.3 This report assesses current practices and institutionaland legal arrangements, highlights recent progress, and sets out the agreed key PFM priorities for the Government of Uganda (GoU). It seeks to providethe GoU, its development partners, and other interestedstakeholders with a candidreview of the challenges facing the public sector and an assessment of the main fiduciary risks and opportunitiesfor corrupt practices. Fiduciaryrisk is defined as the risk that expenditure (a) is not properly accountedfor; (b) is not usedfor its intendedpurposes; and (c) does notrepresentvalue for money. While assessmentof fiduciary risk has been linked in the past with the provision of budget support by DPs, it is now widely recognizedthat soundPFM is of critical importanceto all stakeholders, includingtaxpayers, membersof parliament, councillors, the private sector, beneficiariesof public services, and central government itself (in relation to the transfers made to local government). The assessment of fiduciary risk for central government operations, based on 18 assessment benchmarks that follow agreed guidelinesdrawn up by the Development Assistance Committee of the Organisation for Economic Co-operation and Development(OECD-DAC), is providedinAnnex A. 1.4 The first two pillars o f the PovertyEradicationActionPlan(PEAP) emphasizethe importance of strong PFM and good governance to any effort to improvepublic service delivery. A key component of ' EFMPIIdesignstudies (1998/99),CFANCPAR (2001), HIPC TrackingStudy (2001/2), Review o f Local Govt. PFM (2003) and annualPERs. - 1 - this report, therefore, is the roadmap that it provides o f short- and medium-term actions on which the GoU should focus as it seeks to achieve its goal of improvedpublic services. The consolidated actionplan presented here must above all be realistic and achievable, however, and as such takes fully into account the constraints of limited human resource capacity in Uganda, particularly in key disciplines such as procurement, the need to minimize the negative consequences of political interference, and the need to change attitudes. The report also underlines the importance of closer DP collaboration. 1.5 The CIFA is beingundertakenat a time when the GoU is finalizing the thirdPEAP and DPs are revising their Country Assistance Strategies (CASs). Unlike the second PEAP, the third PEAP has sections on the public expenditure that will be includedby the PEAP and on monitoring and evaluation. 1.6 We anticipate that the CIFA and its more detailed subcomponent processes will help the GoU and its DPs in preparing, revising, and implementingthe PEAP and CASs. CIFA should be an important input to ongoing reform programs, including the preparation o f DP budget support and Poverty Reduction Support Credit. On 22 June 2004, a workshop brought together a wide range of stakeholders to discuss the report, and in particular to discuss the action plan and the modalities for its implementation, monitoring, and evaluation. The GoU has proposed that it direct the Public Expenditure Management Committee to review and prioritize the action plan and to set out the modalities for working within its agreedcoordination, monitoring, and evaluation mechanisms. B. SCOPE OF THE REPORT 1.7 The CIFA report addresses national and subnational government and, to a lesser degree, state enterprises. Interms o f local government (LG) coverage, a sample o f four districts and one municipality was agreed, to comprise Apac, Tororo, Jinja, and Kabale Districts and Masaka Municipality. These LGs represent a spectrum of capacities, geographical locations, and involvement in new PFM initiatives. The report also refers to the role o f nongovernmental organizations in providing services, and to the roles o f the accountancy and procurement professions in raising standards of professionalism within the public sector and inenhancing financial accountability. c. STRUCTURE OF THE REPORT 1.8 The report is set out as follows. Section 3 provides a brief overview of the status of ongoing and planned government reforms, highlighting the changes that have taken place since the previous procurement and financial accountability reviews in 2001. Section 4 addresses some broad fiscal and cross-cutting issues and service delivery constraints, including the fiscal deficit, the realism o f the budget, the predictability of fundflows, the value for money achieved from government expenditure, and human resource capacity constraints. Sections 5 through 8 assess the budget cycle o f the various levels of government, examining the linkages between policy, plans, and the budget; the raising o f revenue, use o f resources, and reporting and monitoring of results; and the accountability of government for its performance. Section 9 sets out the lessons from this CIFA exercise and goes on to presentthe proposed short-term and medium-termaction plans and monitoring and evaluation mechanisms. - 2 - 2. STATUS OFONGOINGAND PLANNEDGOVERNMENT REFORMS A. ECONOMICANDLEGISLATIVE REFORMS Economic reforms 2.1 Uganda has since the early 1990s been pursuing economic reforms aimed at maintaining macroeconomic stability and highrates of economic growth. Above all, however, these reforms are aimed at reducingpoverty, as set out inthe country's Poverty Eradication Action Plan (PEAP). The country also i s committed to meeting the Millennium Development Goals (MDGs) by 2015. At the center of the reforms i s the liberalization of markets in all sectors o f the economy and the decision that the private sector should lead the economic growth process. 2.2 Uganda registered high rates of economic growth during the 1990s, reducing poverty from 56 percent in 1992 to 34 percent in 2000. Household survey data for 2003 indicates a reversal o f this progress, however, with headcount poverty rising to 38 percent and inequality increasing to 0.43 from the 2000 level of 0.40. Real gross domestic product (GDP) growth has averaged 6.5 percent each year since fiscal 1990191, although it fell back slightly from an average of 6.8 percent in 1990/91 through 1997/98, when it was boosted by economic reforms and a coffee price boom, to an average of 6.1 percent in the period 1998/99-2002103. Growth in 2003104 is estimated to be 6 percent, a slight improvement on the 2002103 figure o f 5.4 percent. Population growth is high, however, at 3.4 percent annually, with the result that GDP per capita has risen only by an average 2.7 percent over each of the last five years. 2.3 A critical challenge ofthe reforms is to ensure a more even distribution ofthe benefits of growth. Agricultural growth and greater productivity are key components of a pro-poor growth strategy. Falling international coffee prices have exposed the vulnerability of the Ugandan economy to exogenous price shocks and have underscored the needfor diversification o f the export base. Efforts to boost the export o f fishand cut flowers andto increasetourism inparticular needstrengthening. Legislativereforms 2.4 The Government of Uganda (GoU) has since the most recent assessment enacted a number of significant pieces of legislationto improve the public financial management (PFM) framework. 2.5 The 2001 Budget Act has provided a legal platform for the budget formulation process. The act stipulates first and foremost the content and timing of the budget process, requiringthat the government present to Parliament a macroeconomic plan, fiscal and monetary programs for economic and social development for a three-year period, and estimates of revenue and expenditure for a one-year period (the new financial year) and for a three-year horizon(themedium-termplanningperiod). 2.6 The 2003 Public Finance and Accountability Act (PFAA) and related Public Finance and Accountability Regulations (PFAR) came into force on 1 July 2003. This legislation makes significant improvements in the framework for accounting and financial reporting, addressing a number o f the recommendations made in the 2001 Country FinancialAccountability Assessment (CFAA), including that: 0 supplementary appropriations require prior parliamentary approval before any commitment is made; 0 accountingofficers be requiredto reportfailureto achievevalue for money; 0 the Auditor General(AudGen) is entitledto full access to informationon classifiedexpenditures; 0 accounts must includeflow of funds statementsandbroadercoverage of governmentexpenditure; and 0 specificoffences are identifiedandpenalties or proceduresfor recovery of losses put inplace. 2.7 A cabinet memorandumwas preparedin 1999to enable the preparationo f legislationto enhance the independence of the Office of the Auditor General (OAG). The Ministry of Finance, Planning, and Economic Development incorporatedthe recommendations into an Audit Bill; however, the AudGen expressed his concerns about the adequacy of the draft legislation, and in response to perceived constitutionalcontradictions concerning, for example, the release o f humanresource management(HRM) authorityto the AudGen, it was agreedthat new legislationshouldawait the findingsofthe Constitutional Review Commission (CRC). It is understood that cabinet recommendations to the CRC do not include these provisions. (The status of the 2001 CFAA and Country Procurement Assessment Report [CPAR] recommendationsis includedinAnnex B.). 2.8 Since the 2001 CPAR, the GoU has taken several important steps to improve public sector procurement practices. These include the introductionof the 2003 Public Procurement and Disposalof Public Assets (PPDAA) Act and the establishment of the Public Procurement and Disposal of Assets Authority (PPDA). The PPDAA Act applies to all public procurement and disposal activities undertaken by public institutions, including SEs and defense establishments, and provides a legal framework of public procurement which embodies the principles of efficiency, accountability, and value for money. Procurement regulations have been developed for central government, but the Local Government Procurement Regulations developed in 2001 were put on hold because they were not in line with either the PFAA or the PPDAAAct. 2.9 In July 2000 the President launched the "Government Strategy and Plan of Action to Fight Corruption and Rebuild Ethics and Integrity in Public Office: Fiscal Years 2000/01-2002/03." Stakeholders are now reviewinga draft version of the secondthree-year plan. Inthe interveningperioda number of acts havebeenupdatedandchanges inlegislationproposed.The two most significantpieces of legislationwere the 2002 Inspectorate of Government (IG) Act and the 2002 Leadership Code Act. The IGAct grants to the inspectoratethe powers and proceduresthat it requires to fight corruption, including the mandateto (a) supervise enforcement of the Leadership Code; (b) promote and foster strict adherence to the rule of law; and (c) direct public awareness programs and investigations. The Leadership Code additionallycalls for full disclosure ofthe assetsheldby public leaders. 2.10 A draft Preventionof Corruption Bill has been prepared but not yet submitted to cabinet. The purpose of the bill is to provide a more effective legal framework for combating corruption and the misappropriationof public resources. It seeks to consolidate the existing legislationbut also to identify and fill gaps inthat legislation.Inparticular, the revisedact is intendedto strengthenenforcement and to provide for the confiscation, freezing, and seizure of assets. It also will address other issues such as conflictof interest. - 4 - 2.11 Public consultations are planned on proposed Whistleblower ProtectiodQui Tam legislation. There are practical difficulties to implementingsuch legislation in Uganda, but providing protection is considered necessary to encourage members of the public to come forward with information. The principles o f the whistleblower legislationare to be presentedto cabinet in2004. Anti-money laundering legislation has also reached draft form and is due to go to cabinet in 2004. InDecember 2003 the GoU furthermore signed the United Nations Convention against Corruption, and a memorandum for the ratification of this convention and of the African Union Convention on Combating Corruption has been submittedto cabinet for decision. 2.12 An Access to Information Bill, sponsored by the Ministry of Information, was presented to parliament in April 2004. On 2 March 2004 the heads o f state of the East African Community (EAC, comprising Kenya, Tanzania, and Uganda) signed a Customs Union Protocol to transform the present preferential trade area into a customs union (CU). The target date for the inauguration of the union is the second half of 2004, but this date may slip unless the three countries and the EAC Secretariat speedily conclude their preparatory efforts, includingratification o f the protocol by all three parliaments. 2.13 The legal and regulatory framework governing the operation of NGOs (nongovernmental organizations) is beingreformed, but there are serious concerns that the 2001 NGOs Amendment Bill, if passed in its present form, will severely restrict NGO operations. Despite the liberalization o f the Ugandan economy, laws pertaining to the private sector, including the 1964 Companies Act and the 1971 Customs Act, have not yet been revised.The 2002 Competition Bill, for example, which would establish the Competition Commission of Uganda and make illegal the current widespread use of cartels, has not yet been enacted by parliament. Some regulatory institutions, such as the commercial court, the Center for Dispute Resolution, and the Tax Appeal Tribunal, are operating, but others, such as the Registrar of Companies, are in urgent need of improvement. The modernization of the Uganda Revenue Authority (URA), includingits restructuringandproposals for the procurement and implementationofan integrated tax administration system, is ongoing. B. THEPUBLICSECTORAND PAYREFORM 2.14 In 2001 the GoU launched a 10-year public sector and pay reform initiative. Some notable achievements have already been made, including the reduction of pay differentials between higher-level and middle-level civil servants. In addition, parliament recently has been presented with a new Public Service Bill that is consistent with changes put forward by the Constitutional Review Commission. The bill includes a number of other proposed changes inthe field of human resource management, including its devolvement to local government. Many significant challenges nonethelessremain, and the progress o f reform has for a variety o f reasons slowed down. There i s growing concern specifically about the size and inefficiency of the public sector and the obstacle that this presents to the achievement of the goals set out inthe Poverty Eradication Action Plan. Inresponseto these concerns, Poverty Reduction Support Credit (PRSC) 4 will require the Ministry of Public Service, together with other ministries, to establish service delivery standards based on the national service delivery survey results, and conduct beneficiary assessments. 2.15 The size ofthe Public Administration (PA) and the true costzof labor inthe provision of services are areas o f concern to all stakeholders. The Ministry o f Public Service and the Ministry o f Finance, Planning, and Economic Development have, as requiredunder PRSC 3, prepared a draft policy paper on issues, measures, and modalities to control the size of PA, but neither this paper nor the recommendations o f various other studies on reducing PA costs have yet beendebatedby the cabinet. ' True cost o f labor includes salary, benefits, and access to preferential loans and advances. - 5 - C. DECENTRALIZATION 2.16 The decentralization o f public service delivery in Uganda, as in many countries, was implemented on the premise that it would increase the efficiency and effectiveness o f public expenditure and the responsiveness o f services to the needs o f local populations. The 1995 constitution established a system by which local government (LG) would assume responsibility for the delivery o f key basic public services. New structures for LG accordingly have been proposed, but they have not yet been implemented. A review o f the decentralization policy is due to start in October 2004. The review will examine (a) the relationship between LG administration and deconcentrated central government technical support units; (b) the legal framework for LG; and (c) institutional reforms, such as that which set up a water supply board in Kampala, to ensure that they are compatible with the policy and principles o f decentralization. 2.17 The primary laws governing the financial management of LG are the Local Government Act (LGA), Cap 243,3 and the 1998 Local Government Financial and Accounting Regulations (LGFAR). These set out an elaborate and comprehensive legal framework for development planning, budgeting, revenue collection, expenditure management, and accounting and audit. In response to growing concerns over the limited autonomy o f LGs and the need to streamline the systems o f government transfer to LGs, a Fiscal Decentralization Strategy (FDS) also was developed and finalized in 2002. Under the FDS the number o f central grants is being reduced significantly, and LGs have been given the flexibility to reallocate recurrent conditional grants within and between sectors. The LGFAR are due to be revised this year to bring them into line with the 2003 Public Finance and Accountability Act, the FDS provisions, and other initiatives. A summary of the various initiatives is set out in Table 1. Ongoing Initiatives PlannedInitiatives FDS budget formulation guidelines Harmonizing central and local government Local Government Information and Communications procurementregulations System (LOGICS) Rollout of harmonizedparticipatory Local GovernmentCompliance Inspection System planning guidelines IntegratedFinancial Management System (IFMS) Revision of district developmentplanning Local GovernmentFinancial Information and Analysis guidelines System (LoGFIAS) Revision o fthe LGFAR LocalGovernmentFinancial ManagementTraining FDS budget implementation guidelines Materials Review and revision of L G revenue Harmonized participatory planning guidelines legislation EFMP-I1activities, including training of accounts 2.18 This upgrading o f capacity has been underpinned by the first and second Local Government Development Programs (LGDPs) and the World Bank's Second Economic and Financial Management Project (EFMP-11), but the multiplicity o f initiatives designed to improve financial management capacity at the LG level presents a major challenge to all stakeholders. There is a clear need for effective and efficient coordinationand communication mechanisms to ensure that these initiatives reinforce rather than undermine each other. Inthis reportall acts promulgatedprior to 2000 are referencedaccordingto the chapterofthe LawsofUganda, Revised Edition, 2000. The volume number is shown inthe bibliography list ofAppendix 2 o fthe CFAA. - 6 - 3. HIGH-LEVELFISCAL RISKSAND FIDUCIARY CONCERNS A BUDGETDEFICIT 3.1 For the last five years the GoU has been running a budget deficit, excluding grants, in excess o f 10 percent. The deficit in fiscal year 2002/03 was 11.2 percent (in fact marking a decline), a figure that was establishedas a target and that was expected to be achievedagain in2003/04. The deficit after grants is much lower. Grants doubled from slightly more than 6 percent of GDP in 1997/98 to more than 12 percent in 2001/02, primarily through Highly Indebted Poor Countries (HIPC) debt relief and higher aid inflows, with the result that the budget deficit after grants for 2003/04 is expectedto be below the target of 3.2 percent o f GDP. While government expenditure rose from 16.1 percent of GDP in 1997/98to 25.3 percent o f GDP in2002/03, inthe last five years governmentrevenue has only risento about 12.9 percent of GDP (the average for Sub-Saharancountries is 18percent). Since 2001, budgetsupport has become the preferredform of externalassistance. 3.2 The large external aid inflows of the last five years have created the need to mop up excess liquidity, through a combination of Treasury Bill sales and foreign exchange sales. Both measures have had the adverse effects of driving up interest rates and causing exchange rate appreciation. The trend of large inflows has not been easy to manage, and has posed a number of macroeconomic management challenges, including: High cost of private sector borrowing. Bank of Uganda (BoU) sales o f Treasury Bills for sterilization purposes have pushed up interest rates (the stock of government securities has increased fivefold in five years). The proportion of commercial bank lending going to the private sector has fallen from 55 percent in 1999to 40 percent in2003. High domestic interest costs. Interest payments have risen from USh21 billion in 1998/99 to a projected UShl90 billion (8 percent of GoU expenditure) in 2003/04. Interest payments now exceed the budgets for the health sector, the justice, law, and order sector, and roads (excluding projects). Overvalued exchange rate. BoU sales of foreign exchange, executed for sterilization purposes, have risentenfold inthe last five years, causingan overvaluationofthe exchange rate. Vulnerability of the budget to possible cuts in donor aid. The amount of GoU expenditures and external debt repayments that could be funded from domestic resources improved from 60 percent in 2001/02 to 66 percent in 2002/03; any temporary loss in donor aid additionally could be absorbed through a limited rundown in the BoU's foreign exchange reserves. The GoU nonetheless remains concerned that a sustained cutback would force it to make severe budget cuts. Rising external debt burden. Ugandahas borrowedUS$1.5 billion from multilateral donors since the HIPC completion point. Combined with lower export growth projections and lower world interest rates, this has seen the net present value of debt to exports ratio more than double, to 325 percent. - 7 - 0 Rising domestic debt burden. The stock of domestic debt has risenfrom less than 1percent inthe mid-1990sto 10 percent in 2003/04. Ninety-five percent of domestic debt has maturities of one year or less. 0 Political economy concerns. Uganda's excessive dependency on aid has given rise to concerns that the GoU's sovereignty is beingundermined, particularly interms of the constraints that are beingplacedon its economic andbudgetarychoices. 3.3 There is a consensus among stakeholders that the fiscal deficit should be reduced, but there is concern also that a strategy focusedexcessively on deficit reduction could deter the offer or use of aid resources, This inturn couldresult in productivepublic expenditures not beingpursued, even where they could enhance Uganda's growth potential. Given the imperatives also to ensure that the Millennium Development Goals are pursued and that the growth prospects of the private sector are not undermined, the question of how to reducethe fiscal deficit, therefore, is still under debate. The fiscal deficit couldbe reducedby cuttinggovernment spendingand/or by mobilizingmore domestic revenues.Improvementsin tax administrationand the introduction of new tax policy measures to widen the tax base and reduce inefficiencies, such as those due to corruption,couldincrease domestic revenues, for example.The report on corruption in the Uganda Revenue Authority recommended changes that, if effected, could significantly improve tax administration. However, legal complications have delayed their implementation. 3.4 Reducedgovernment spending cannot be allowedtojeopardize the economic growth andpoverty reductionobjectives set out in the Poverty EradicationAction Plan(PEAP). Public administration(PA), which in2002/03 accounted for about 17.6percentoftotal government expenditure, clearly is one area in which reductions couldsafely be made, but there are also a number of other areas inwhichthe efficiency of resource use could be improved. The importance to the achievement of the government's fiscal objectives of a comprehensivereformof public serviceandpay cannot be overstated. 3.5 A thorough analysis of contingent liabilities-for example, of pension liabilities for state enterprise employees and of loans that are guaranteed by government, through the Bank of Uganda, for private enterprises-would enable the GoU to plan more effectively for future demands on government resources. Providingmore comprehensive data could further assist the Ministry of Justice in defending claims against the government. B. BUDGETREALISM 3.6 The budget discrepancy has declined from double figures inthe early 1990sto less than 6 percent in fiscal 2002/03. The discrepancy index, a weighted average across budget sectors of the absolute percentagedeviationbetweenbudget and outturns, demonstratesthis progress (see Table 2). (It should be noted,however,that this achievement of low deviationmay not be reflectedat the sub-vote level.) Table 2. Average BudgetDeviations I1998199 1999/00 I 2000/01 I2001/02 I 2002/03 Discrepancy index I9.8% 1I4.9% I 7.6% I5.8% I 5.5% 3.7 The central government continues to face pressureto approve supplementary allocations. During the previous three fiscal years (2001/02 through 2003/04) the authorities released supplementary expenditures o f about 5 percent of the total budgetedexpenditure (excludingdonor project^).^ This was in The BudgetAct requires supplementaryspendingto be below 3 percent oftotal expenditure, inclusive ofbudgeteddonor projects. - 8 - addition to technical supplementaries used to reassign spending across votes and sub-votes. The supplementaries reflected budget overruns in some votes, especially PA; and the underbudgeting of spending in areas such as domestic interest payments, subsidies for state enterprises, and pensions. Supplementaryappropriations requireprior parliamentary approvalbefore any commitment is made. 3.8 Supplementary allocations during the first half of fiscal 2003/04 amounted to USh86 billion. A further supplement for USh41 billion was presentedlate in the third quarter and approved, raisingtotal supplementaries to UShl27 billion. The approval of these supplementaries has resulted in differences in the compositionofthe executedbudget relativeto its appropriation.When calculated at the vote level for aggregate primary expenditure, the discrepancy between budget outturns and appropriation (excluding donor projects) reached an average of 13 percent between 2000/01 and 2002/03. The variability of vote shares to total expenditure relativeto the approvedbudget shares duringthe same periodaveraged about 14 percent.These dataclearly indicatethat the problemo f budgetvariability is still out there. 3.9 Nontax revenues continue to underperform, returningonly 74 percent outturn for the first three quarters o f 2003/04, but overall revenue projections have improved. The overperformance of budget support grants specifically has offset the shortfall in domestic resources. During the period the total budget resources were 2.6 percent higher than projected; adjusted for resource outflows, the total resources available for financing the budget were 18 percent above projection. Domestic resources amountedto USh1,248.5 billion, or 99.8 percent ofthe total. Incontrast to 2002/03, when budget support on a pro rata basis underperformedby 10 percent because of differences arising from additionaldefense spending, budget support during the period under review overperformed by 11.7 percent. The overperformanceof budget support is attributablein mainto money carriedover from the previous fiscal year and to unprogrammed releases from DPs. Revenue performance for the first three quarters of 2003/04 is showninTable 3. \ - 9 - Table 3. Revenue Performance Ql-Q3, Fiscal 2003/04 (USh billions) Annual First-halfperformance Performance for the 1st 3 budget quarters program YOpro rata program YOpro rata Inflows A. Domestic resources 1,719.4 828.2 98.5% 1,25 1.O 99.8% UgandaRevenue Authority (URA) 1,655.2 805.4 98.7% 1,203.0 98.3% Non-URA 35.7 14.8 77.7% 24.8 73.6% Loan repayments 28.5 8.0 114.4% 23.3 206.9% B.Budgetsupport 696.3 295.0 117.5% 391.1 111.7% Grants 496.4 291.9 118.7% 387.9 111.9% Loans 199.9 3.2 0.0% 3.2 84.5% C. Total resource inflows 2,457.1 1,123.2 103.5% 1,642.1 102.6% D.Externaldebt repayment 135.6 66.5 78.8 97.0 98.9% E. Domestic financing 62.1 142.7 234.9 199.7 7.2% F. Arrears repayments 45.0 16.6 67.5 26.9 68.9% G.Total resourcesavailable 2,173.0 897.4 130.8Yo 1,381.5 118.0 for the medium-term expenditure framework 3.10 Expenditure performance in the first three quarters of fiscal 2003/04 is shown in Table 4. Local government (LG) development expenditure performance was 73.8 percent, compared to 84.5 percent for central government votes. With the inclusion of wage expenditure, LG performance rises to 100.1 percent, compared to the central government performance o f 90.5 percent. Nonwage expenditure was below programmed levels at both central government and LG levels. Table 4. ExpenditurePerformance (USh billions) ApprovedBt get Pro rata Annual H1+43 Performance release Wage 673.37 504.92 99.98% Nonwage 843.77 641 101.29% Statutory 130.55 96.42 103-76% PAF 177.29 113.44 85.29% Other 535.93 431.14 105.96% Development* 586.55 312.15 73.2% PAF 337.77 197.23 78.08% Other 232.41 114.92 66.12% Total (excludinginterest) 2,085.69 1,458.07 93.21% ~ Interestpayments 227.80 188.80 110.51% TOTAL 2,313.49 1,646.87 94.91% 3.11 The Poverty Action Fund (PAF) consistently underperforms, while the security and PA sectors tend to overperform. Absorption capacity is often cited to explain PAF underperformance, but the overperformance of security and PA points to a pattern o f priority setting that is not fully in line with PEAP objectives. Lower-than-programmedPAF spending means that services such as health, education, water, roads, and extension cannot be deliveredon time and that quality is likely to be compromised. - 1 0 - 3.12 The pensionvote is the fastest-growing expenditure within the PA sector, risingfrom 5 percent of PA expenditure in 1997/98 to 14 percent in 2002/03. Containing growth in pensions is essential to containing the PA sector as a whole. The public service and armed forces have accumulated pension obligations in excess o f USh276 billion-an unsustainable budgetary commitment. The management, administrative costs, and investment choices and returns o f the National Social Security Fund (NSSF) demand close scrutiny. The Social Security Transition Group has produced a report entitled "The Challenges and Financing o f Social Security and Pension Reform in Uganda: The Tripartite Consultative Process, Policy Recommendations, and the Way Forward"; progress toward pension reform however has been delayed by the decision to hold wider stakeholder consultations. 3.13 Overall, local government budgets appear unrealistic, with outturns deviating significantly from budgeted amounts. On the basis o f the benchmarked LG average, aggregate expenditures, at 87 percent, are well below projections (see Table 5). Aggregate revenues, at 91 percent, are slightly better, but local revenue collection is well below budget, averagingjust 76 percent of the projected amount. Table 5. KeyFiscalPerformance Indicatorsfor 2002/03 for Sample LGs Average Poorest percentage Best outturn outturn outturn .performance performance Total expenditure, as a percentage ofbudgetedexpenditure Masaka 87% 97% Jinja 67% MC Masaka Total revenuereceived, as apercentageof budgetedrevenue 91% 99% Jinja 83% M C Local revenuereceived, as apercentageof budgetedlocal revenue 76% 88% Masaka 68% Kabale Local revenuereceived, as apercentageoftotal revenue collected5 2.5%6 3.3% Jinja 2.0% Tororo Departmentexpendituredeviation from budget (average percentage) 25% 10% Kabale 50% Apac Average level of arrears, as a percentageoftotal Masaka exoenditure 7% 1% ADac 13% M C 3.14 On the basis o f the sample, deviations between the budgeted and actual amounts are most significant at the departmental level. While most sector departments underspend against budget, the situation is chronic for those departments that rely on locally generated revenues. It is important to note, however, that budget reliability differs across LGs: Jinja and Kabale districts appear to be in control o f their aggregate revenues and expenditures, and most sectors spend generally in accordance with their budgets. Due to their reliance on central transfers, districts such as Kabale are able to deliver services as planned, even if they are unable to collect local revenues. Masaka municipality, in contrast, is more reliant on local revenues and appears unable either to collect local revenues as planned or to control expenditures. Despite severe underspending against sector budgets, it has accumulated significant arrears in areas that are not supported by conditional grants. Where there is a lack o f realism in LG budgets, it typically results from a combination o f factors that vary from one LGto the next. There nonetheless tends to be a common, largely political incentive to overinflate local revenue projections. Excludessubcountyand divisional revenues.These LGsretain65 percent and 50 percentrespectively o fthe revenues collected intheirjurisdictions. ExcludingMasakamunicipality, which hadlocal revenuesof 24 percent of total revenues.Urbanauthorities ingeneralhave higher tax collectionsthan do districts. - 11 - Predictability 3.15 While budget releases have been improving,there continues to be an irregularflow of funds. This lack of predictability impacts negatively on procurement practices, and the delayed arrival of funds at sectoral or LG levelcan distort project implementation. In2003/04 the irregular flow of funds appearsto have beenaggravatedby the frontloadingof sectors such as defense andPA at the expense of other areas, such as PAF (although some ministries attribute delays to the nonavailability o f cash). Administrative delays, includingthe failure by LGs to open bank accounts at the start o f the year, the failure to adhere to reporting requirements, and delays in processing the vote of account at the start of the year, have also contributed to the problem. A recent Ministry of Finance, Planning, and Economic Development (MoFPED)~study showedthat on the basis of a simple average the time taken for funds to be transferred from the Consolidated Fund to spending agencies was less than a month, but the transfer of some development funds took more than four months (see Table 6). Disbursement from LGs to spending agencies is particularly problematic. In the water sector, for example, releases from the chief administrativeofficer took as muchas 84 days to reach the district andurbanwater authorities.One ofthe reasons providedfor this delay is that informationonthe purposeof release is not issuedon a timely basis by the treasury to the LGauthority. To LG To ministries Min Max Average Min Max Average Wage 7 50 18 6 23 12 Nonwage 6 84 32 5 72 23 Development 7 103 27 5 135 43 3.16 Provided that they adhere to reporting requirements, LGs typically receive their full grant allocation from central government. For most LGs, the funds arrive late in the fiscal year, however. Because a cash budgeting system is used, at the beginningof the year agencies tend to have time but no money, and at the end of the year they have money but no time-and compliance with the law obliges them to returnunspent funds to the treasury. Arrears 3.17 Realism inbudgetingis improving,butthe existence of a large and growingstock of arrears-the result of underbudgeting, irregular cash flows, and noncompliance with commitment controls-is a serious problem. Since fiscal 2000/01 annual budgets have allocated resources to reduce the stock of expenditure arrears, but there has been no assessment o f the type or age profile o f arrears settled (see Table 7). Anecdotal evidence suggests that accounting officers are permittedto use their own discretion when selecting arrears to be cleared, and do not systematically clear old arrears first. In 2003/04 little progress was madeintacklingthis problem. 'ReleaseTrackingStudy, May 2004 - 12- Table 7. Budget Provisionfor the Clearanceof DomesticArrears and Outturn (USh billions) Outturn 2000101 108.3 130.2 2001102 131.7 115.2 2002/03 2003104 45.0 45.0 Source:MoFPED, July 2004. 3.18 Information from the Accountant General (AccGen) indicates that the stock o f nonwage recurrent and development spending arrears now amounts to nearly UShlSO billion (Table 8). While the AccGen maintains a record o f the individual items o f arrears cleared, his office does not record when each item is cleared. This makes it difficult to monitor the progressive clearance o f arrears. Internally audited accounts as Incurred in of 30 June 1997/98 or Incurred in Incurred in Incurred in Incurred in Incurred in 2003 before 1998199 1999/2000 2000/01 2001102 2002103 Total 19.74 41.07 24.56 22.73 21.26 20.21 149.56 3.19 The available data on the magnitude and age profile o f wage, pension, and utility arrears are neither consistent nor reliable.* Tentative estimates indicate that at end-June 2003 these arrears amounted to USh8.9 billion (wages), USh276 billion (pensions), and USh2O billion (utilities). The addition o f these estimates to the arrears compiled by the AccGen produces a total stock o f identified expenditure arrears in excess o f 5 percent o fthe budgeted outlay for each year. 3.20 Most, if not all, LGs have stocks o f arrears and few, if any, have plans to clear them. Many believe that central government will help them clear their arrears, particularly o f salaries and pensions. However, the Local Government Act and Local Government Financial and Accounting,Regulations are silent on the subject; there is a need for a clear policy statement on the treatment o f arrears and a requirement for budget priority in their clearance, ifand when they are incurred. c. CORRUPTION AND POORVALUE FOR MONEY 3.21 The level o f corruption in Uganda is a cause for serious concern for all stakeholders. The Inspector General o f Government (IGG), the World Bank, the media, NGOs, and others have identified corrupt or fraudulent practices ina wide range o f areas, including: 0 the financing o f politics; 0 personnel management (the prevalence on personnel lists o f nonexistent `ghost' workers, soldiers, teachers, and students/pupils is a particular problem); 0 the justice, law, and order sector (inparticular, in the making o f court awards); 0 revenue collection; 0 the financial sector; and The AudGen ofUgandadoes not audit or reportexpenditurearrears. - 13 - 0 the procurement and disposal o fpublic goods, services, and assets. 3.22 Public procurement accounts for about 70 percent o f annual expenditure, and 70-90 percent o f the complaints received annually by the IGG relate to corruption in public procurement. The Auditor General (AudGen) has estimated that some 20 percent o f the value o f public procurement i s lost through corrupt practices, with a concomitant effect on the cost, quantity, and quality o f public services and thus on the attainment o f national poverty reduction and other policy objectives. Transparency International (TI) reports that corruption in Uganda is perceived as high (see Table 9); although the country's rating improved slightly between 2002 and 2003, Uganda is still rated among the 15 percent o f countries most badly affected by corruption. The International Country Risk Guide also gives Uganda a low rating (2 out o f a possible 6) with respect to corruption. Table 9. Uganda's Rankingin the T I CorruptionPerceptionIndex Rankingfro Year Position bottom' 1998 73 85 8th 1999 87 99 12th 2000 80 90 loth 2001 88 91 3rd 2002 93 102 9th 2003 113 133 17th Source:Transparency International, Global Corruption Report, 2004. aThe ranking from the bottom shows the actual position from the bottom in terms o f scores, and ignores the fact that there i s sometimes more thanone country with the same score 3.23 According to the IGG's Second National Integrity Survey, conducted in 2003, Uganda has made some progress in combating corruption. The report (which it should be noted uses a small sample size), found that the reported percentage level of bribery has declined since the initial survey in 1998. It also notes that corruption remains a significant problem, however, adversely affecting the poor in a number o f ways. A large proportion o f users o f what purportedly are free health and education services continue to be forced to pay for these services, for example; there also have been several allegations o f corruption in relation to the construction o f new classrooms and health centers, and o f embezzlement o f universal primary education funds by head teacher^.^ 3-24 A number o f high-profile corruption cases within public procurement additionally remain unaddressed, and key legislative improvements, such as the draft Prevention o f Corruption Bill, the Access to Information Bill, and the Whistleblower Protection and Qui Tam legislation remain to be enacted and/or implemented. Along with the legislative improvement, the monitoring and controlling o f corruption in public procurement needs to be improved through annual surveys and the use o f procurement indicators. 3.25 All stakeholders recognize that over the last 14 years there have been considerable improvements in providing core services in the education, health, and water and sanitation sectors. Tracking studies describe numerous success stories, indicating, for example, that primary school enrolment has increased from about 2.2 million pupils in 1986 to more than 7 million in2003. The number o f primary schools also is shown to have increased, from 7,351 to 13,332. These figures do not necessarily tell the whole story, however. A value-for-money study o f universal primary education, carried out by the Office o f the Auditor General (OAG) in 2002/03 in conjunction with an African Organisation o f Supreme Audit Uganda Debt Network study o fKatakwi district. - 14 - Institutions initiative, showed that significant losses had been incurred in the sector.'OThe report was presented to the Speaker o f the House in mid-2003, but as yet has not been reviewed by the Public Accounts Committee. The enactment o f the Public Procurement and Disposal o f Public Assets (PPDPA) Act legislation gives government a much stronger mandate to deal with corruption in the areas o f public procurement and the disposal o f public assets. Again, however, the political willingness to enforce the regulations remains an unknown factor. D. HUMAN RESOURCE ISSUES Political environment 3.26 Lack of technical capacity is frequently cited as the main reason behind poor standards o f public financial management (PFM). The Local Government Integrated Fiduciary Assessment (LGIFA) benchmarking exercise makes clear that, despite LG authorities having similar technical capacities, there is a wide variation inthe quality o f PFM. 3.27 It is extremely difficult to measure PFM quantitatively. From a qualitative perspective, however, the key distinguishing feature between Tororo and Kabale districts, the worst- and best-performing districts in the sample, is the political and managerial environment. In Tororo there was found to be constant tension between politicians and technocrats, with the council showing little or no interest in the administration's performance. In Kabale, the most transparent and accountable o f the benchmarked LGs, there is a constructive and trusting relationship between the administration and politicians. The chief administrative officer and chief finance officer (CFO) in particular exhibit strong leadership, the CFO delegating responsibility to his staff, holding them responsible for their performance, and sanctioning those who do not adhere to guidelines. Staffing levels and training needs 3.28 At the central government level, the staffing situation at the Accountant General's Office (AGO) and the OAG has improved since the 2001 Country Financial Accountability Assessment (CFAA). The number o f vacancies i s lower and there are more qualified staff at both offices. This situation is due to reform initiatives such as the Second Economic and Financial Management Project (EFMP-11), which has supported the training o f almost 2,000 accounting and auditing staff in local and central government, and to wider economic conditions. However, the large number o f unqualified senior staff, especially at the OAG, continues to constitute a fiduciary risk. The lack o f independence o f the AudGen with respect to human resource (HR) issues increases this risk further. 3.29 Similar HR constraints may be found inthe ethics and integrity bodies. The Directorate o f Ethics and Integrity has a professional staff o fjust three people, and the position o f permanent secretary has been vacant for more than a year. The Inspectorate o f Government also has serious staffing problems, and a lack o f experience across the directorate, meaning that it reportedly is unable to deal effectively with some o f the more complicated issues and higher-level cases. The ability o f both institutions to retain qualified and experienced staff is limited by pay and by terms and conditions o f service, which, contrary to the practice o f other countries, are comparable with those o f other public sector employees. loA second VFM studyon UPE was conductedby private sector auditors.This report showedeven greater losses as adifferent valuation methodologywas used. - 15 - 3.30 Throughout the GoU there is a general lack of understanding o f public procurement principles, and at the LG levelthere is a significantlack of capacity and skilledpersonnel. This is a key impediment to sound public procurement. With decentralization and the creation of Procurement and Disposal Units in each Procuring and Disposing Entity (PDE), the demand for skilled procurement staff has risen sharply. A recent capacity building strategy preparedby the Public Procurement and Disposalof Assets Authority (PPDA) estimates the minimum number of staff required to deal with procurement issues at morethan 5,400." 3.3 1 The Public Procurement and Disposalof Public Assets Act called for the establishment of a new procurement cadre to undertake procurement for both central and local government. This cadre has not yet been introducedat the LG level, and at the central level recruits to procurement have been drawn primarily from the private sector, necessitatingadditionaltraining inpublic sector finance. Compounding the problem, the new recruits face considerable resistance from within government and from the now- redundantsupply officers. 3.32 Since the introduction of the procurement reform agenda, a number of capacity building initiatives, supported through the Poverty Reduction Support Credit program and the second Local Government Development Program(LGDP-11), have taken place. These have involvedbothinternational and national organizations. Between May and November 2003, 2,135 people received workshop-based training, focusing mainly on the legal framework for procurement rather than procurement principles. A more demand-driven approach is being adopted that will be better aligned to the specific needs of each PDE. The lack o f procurement professionals is a problem not only for the PDEs, but also for the universities and private training institutes that must recruit qualified lecturers and trainers. The Netherlands Embassy has since October 2003 sought to ease this problem by working with Kyambogo UniversityandMakerereUniversityBusiness School to develop a capacity-buildingproject.The embassy planwill includeatwinningelement with one or more universitiesfromthe Netherlands. 3.33 A problem identified in the LGIFA (but which is equally relevant to central government) is the lack of understanding among vote controllers and senior management of financial management issues. Recent training provided to the parliamentary Public Accounts Committee members has improvedtheir ability to carry out their roles andresponsibilities.The LGIFA also highlightedthe inappropriate natureo f workshop training programs, preferring on-the-job assistance provided through the integrated financial management system (IFMS). Again, while the LGIFA finding refers specifically to the LG situationit is likely to be equally relevant at line ministries.The Budget Committee also has questionedthe value of current capacity building initiatives, and its concerns will need to be reflected in the action plan, particularlywith respectto the initiativesthat are ongoingunderEFMP-I1andLGDP-11. E. KEYCHALLENGES 3.34 The GoUfaces a number of importantmacroeconomic, political, and institutionalchallenges as it seeksto ensure that the goals set out inthe PovertyEradicationActionPlanare attainable and sustainable. These includeinparticularthe needsto: 0 improverevenuecollection; 0 maintainmacroeconomic stabilityandkeep inflationbelow 5 percent; 0 progressively raisethe tax: GDP ratio; " "Capacity Building Strategy for the Public ProcurementSector for the Period 1July 2003 to 30 June 2006," issuedAugust 2003. - 16- 0 improvethe efficiencyo fresourceallocation; 0 reversethe deterioratingtrend inUganda's net presentvalue of debt: exportsratio; 0 make moreeffectiveuse o fexistingaid resources; 0 restore and improvethe integrityofthe budgetprocess; 0 improvepredictabilityofthe flow of funds; 0 resolve the tension between macroeconomic targets and the availability of additionalresources, includingglobalfunds, to meetthe MillenniumDevelopmentGoals; and 0 improveinformationonthe stocks of arrears andcontingent liabilities. 3.35 The need to eliminate low-priority, unproductive elements of government expenditure to make space for higher-priority,more productiveexpenditure is a major politicalandadministrativechallenge. It must be achievedincombinationwith pensionreform, as pensionobligationsare runningat unsustainable levels. To improve the efficiency of resource allocation and obtain better value for money, the government also must win its fight against corruption; it must address all issues that help create an environment that tolerates and enables corruption; it must reduce the acceptability of bribery and corruption; and it must achieve more effective detection, investigation,andprosecutionof corruption. 3.36 There is a needat all levels of governmentto develop capacity infinancialand procurement.The pay structure must be amended to attract and retaintechnical and managerial staff qualifiedto meet the needs of government operations. The value of existingcapacity building initiatives has been questioned by the Budget Committee and stakeholders, and a more appropriate way forward must be identified. Giventhe introductionof new budget guidelines and new informationtechnology (IT) system, the GoU and its development partners must determine what is the most effective form of training and assistance. The capacity required by different LG authorities and procurement entities varies, and the assistance givento these entities mustbebasedmore onneeds. 3.37 There have been considerable improvements at the LG level, and basic goods and services are now beingprovided,but the needfor more effective political participation(and less political interference) remainsto be addressed. Local governmentbudgetsmust be made more realistic ifthey are to effectively translate LGprioritiesandobjectives into appropriate resourceallocations. -17- 4. LINKINGPOLICIESAND PLANSTO THE BUDGET A. MEDIUM-TERM RESOURCE ENVELOPE 4.1 The introductionof the medium-termexpenditure framework (MTEF) has made it possible for the Government of Uganda (GoU) to formulate a resource envelope for medium-termplanning that is consistent with projectedmacroeconomicdevelopment.Most important, the MTEF also makesit possible for the Ministry of Finance, Planning, and Economic Development (MoFPED) to project the size of different budget components (for example, wage, nonwage, or development) in different scenarios on an aggregate level.Inthis respectthe MTEF is an importantstabilizingfiscal factor. 4.2 Budget coveragegenerally is consideredto be improving.Those resources not explicitly included in government budgetingprimarily are linked either to the diminishing number of development partner (DP) projectsthat are directly fundedoutside the budget framework (estimatedto be around25 percent of total budgeted central government expenditure) or to non-tax-revenue-financedexpenditure exempt from transfer to the Consolidated Fund (estimated to be about 2.25 percent of total budgeted expenditure). (Concerns over defense spending, however, are increasing the pressure on some DPs to returnto project funding.) The quality of informationon DP project financingis poor; better forecasts of revenue and DP financing, as shown in the 2002/03 Annual Budget Performance Report, would stabilize medium-term forecasts and improvethe credibility ofthe MTEFprocess. 4.3 A mandatory requirement that government ministries include all projects in their budget submissions is being introducedfor fiscal 2004/05. This new system of budget formulation will require the inclusion o f mechanisms for incorporatingcross-cuttingreforms, will require greater clarity of the financing of technical assistance, and will require the introduction of mechanisms to manage project resource shortfall.It also will require line ministriesand local government (LG) entities to state expected donor project disbursements, maintain close interactionwith donors, and report to the center on donor projects duringthe fiscal year. (The authoritieshave not yet establishedmechanismsto ensurethe ex post integration of donor projects into expenditure reports.) The proposal entails the amendment of Public Finance andAccountabilityAct regulationsto invest the Accountant Generalwith the authorityto require reporting on expenditure on all projects executed by line ministries.There are no plans as yet to seek reports from LGs on project implementation.Finally, incorporationinto the budget of in-kindproject aid would requiredonors to reportthe monetary value of such aid as it is disbursed-information that is not readily available. B. RESOURCE ALLOCATION 4.4 On the basis of current predictions, Uganda is likely to achieve some but not all of the Millennium Development Goals (MDGs). Specifically, the goals for primary education completion, secondary gender equality, and child and maternal mortality rates are unlikely to be met.Ifthe country is to meet the Poverty EradicationAction Plan (PEAP) and MDG goals and the anticipated increase in demand for social services, the GoU must make a concerted effort to improve efficiency and resource saving. Publicexpendituresmust be bothbetter targeted, to ensure that the available resources are usedto benefitthose most inneed, andbetter used, to ensure the best possibleresults per unit o f expenditure. - 1 8 - 4.5 The key to the efficient and effective allocation of resources is a strong link between policies, plans, andbudget.'* Intheory, the PEAP and long-termsector development plans are linkedto the budget through the MTEF, with sector budget strategies set out in Budget Framework Papers (BFPs). The process of determining MTEF ceilings is a consultative process initiated by MoFPED, and involves stakeholders from central government, the donor ~ommunity,'~parliament, local government, and civil society. The extent to which the MTEFaddressesPEAPprioritiesis weak, however.Althoughthe GoUis committedto linking the MTEF and PEAP, it is doingso through the PEAP revisionprocessrather than through any systematic means. The need for a consensus on priorities and for all parties to respect this consensus throughout the budget process cannot be overemphasized. In addition, appropriate analysis of payrollcosts andofthe implicationsofpay reformstrategies needto be incorporatedat an early stage into the MTEFprocess.The link betweenlocal andnationalprioritiesalso is not well formulated, althoughthe introduction for the 2005/06 budget process o f a joint annual review of decentralizationis intended to ensure that local priorities are incorporated more effectively into the national budget process. The intentionis that this reviewwill be heldinOctober, priorto the nationalbudgetworkshop. 4.6 The budget in Uganda is dividedbetweenareas protectedunder the PovertyAction Fund(PAF), andnon-PAF areas. Poverty-reducingexpenditureswithinthe existingclassificationsare identifiedduring budget preparation, and the priority poverty-reducingexpenditure is ring-fencedfor tracking purposes under the PAF.PAF activitiesare routinely reportedto parliament and are includedinthe documentation submitted for the annual budget. The PAF has been particularly successful in attracting budget support fromdonors, since it provides a degree of assurancethat funds will reachtargetedpoverty-reducingareas. 4.7 However the PAF does not comprehensively cover all poverty-reducingexpenditures envisaged under the PEAP. Whether the PEAP prioritization of social sector spending as a vehicle for poverty reductionis the most sustainablesolutionto the problem is under debate. There are also concerns that the distorting effects of the PAF might cause efficiency losses in the government's budget formulation process, because budget cuts impact disproportionatelyon non-PAF areas that support the performance and effectiveness of PAF resources. The planned shift toward a more integrated and dynamic resource allocationsystem would better support plans for a performance-basedbudget process and reduce the risk o f distortion and efficiency but until overruns on public administration (PA) and security are curtailed, a move away fromPAFmechanismsis unlikely to occur. 4.8 Proposed allocations over the mediumterm are shown in Table 10. Budgetary allocations to the different sectors show little change. The share allocated to security is programmed to decline from 10.9 percent in 2004/05 to 10.5 percent in 2006/07. The share for PA is set to rise from 12.5 percent in 2004/05 to 13.2 percent in 2005/06, before returning to 12.5 percent in 2006/07. Agriculture is programmedto increase from 3.4 percent in 2004/05 to 4.0 percent in 2006/07. The shares for education and health are programmed to remain almost constant, at approximately 18 percent and 21 percent respectively.Educationwill continue to take the largest share of budgetaryresources inthe mediumterm. (It should be emphasized that, based on past experience, the reliability of forward projections- particularlywith respectto PA and security-is not good.). The role of the NPA inthe overall planningprocessis still evolving andtherefore is unclear, giventhe participatory developmentof PEAP and sector plans. l3 The GoUhas indicatedthat the PER processis the only channelby which DPs may commenton allocations. l4This issue is discussed indetail inWilliamson and Canagarajah, July 2003, DevelopmentPolicy Reviewpaper. - 19- Table 10. Sectoral Shares of Expenditure over the Medium Term (percent) 2000101 001102 2002103 2003104 200415 2005106 2006107 Outturn Outturn Outturn Approved Projected Projected Projected Security 13.94 12.55 14.08 11.09 10.9 10.9 10.5 Roadsand works 8.54 8.27 7.35 10.91 12.3 13.2 13.2 Agriculture 1.46 2.24 2.33 3.32 3.4 3.6 4.0 Education 24.94 24.05 23.031 19.85 18.1 17.9 18.1 Health 7.36 8.60 9.00 12.08 11.2 11.4 11.1 Water 2.43 2.59 2.62 3.14 3.3 2.6 2.6 Justice, law, and order 6.53 6.72 6.91 5.42 5.0 4.7 4.7 Accountability 1.09 1.13 1.24 5.70 5.8 3.5 3.6 EF and SS" 5-02 6.46 7.20 8.42 9.4 9.7 9.9 Public administration 20.17 19.30 17.40 12.44 12.5 13.2 12.5 Interestpayments 8.53 8.09 8.57 7.63 7.6 8.9 9.2 Total 100 100 100 100 100 100 100 Source: MoFPED, July 2004 aEconomic functions and social services 4.9 The overall budget is scheduled to increase by USh405 billion for 2004/05. The roads sector is programmed to receive the highest increase, o f USh91 billion, primarily due to DP project funding. Accountability i s the only sector programmed to receive less funds (this due to the reduction in MoFPED projects), although over the medium-term planning period the allocations to ethics and integrity and external audit are also due to decrease. The increase for the security sector and P A appears to contradict the government commitment to reduce expenditure on security and reform the PA vote. 4.10 At the local government level, the weakest element o fthe budget cycle appears to be the effort to link policies and plans to the budget. In particular, the linkage between District Development Plans (DDPs) and Budget Framework Papers (BFPs) is weak. The development plans are in some cases thorough, present coherent objectives and strategies, and are backed up by sound analysis, but unless they are properly costed and resource-constrained (as was the case in the sample only o f Apac and Kabale) they are likely to prove unrealistic. The sequence o f the budget cycle furthermore obstructs the effective linkage o f policies and budget, as it requires that DDPs be prepared and approved at the same time as are the BFPs. The need for two separate medium-term planning and budgetingtools also is questionable, and the fact that two are used would seem to suggestthat the role o f the BFP, in linkingplans to the budget, is poorly understood. 4.1 1 A secondary problem, but one that compounds the poor sequencing o f events inthe process, is the lack o f contestability of resource allocations by LGs. For resources to be allocated efficiently, different policy proposals must be evaluated against each other so that choices can be made on how best to spend the money, both within and across sectors. This means that LGs must have the autonomy to allocate their funds based on the merit o fthe budget proposals put forward by different activities. 4.12 The current lack of autonomy is due to sector ministries increasingly using conditional grants to ensure that central policies and plans are implemented at the local level. The allocation formulae for grants have evolved arbitrarily, and have not necessarily been equitable. The situation has been confused further by a lack o f coordination between LG budget formulation processes and the provision o f funding allocations and guidelines. This has culminated in the center setting conflicting and confusing budget ceilings and formats and disseminating inconsistent information regardingplans and budgets. - 20 - 4.13 Furthermore, allocation choices are not clearly presented to councilors in the budget process. This, combined with their low level o f autonomy, undermines the ability o f councilors to make choices beyond the location o f different services. Ensuring that local prioritization is recognized in the consultative process could mitigate the apparent tension between the achievement o f national targets and local priorities. Budgets otherwise are unlikely to reflect adequately a local council's true priorities; lack o f political ownership o f those budgets additionally means they are less likely to be realistic and implemented as planned. 4.14 The GoU has acknowledged the need to move away from the control o f inputs and toward agreement on common policies and objectives. It also has agreed that LGs must be given greater autonomy. Efforts, led by the Local Government Budget Committee (LGBC), established under the Fiscal Decentralization Strategy (FDS), are underway to redress the situation. The LGBC, which is chaired by the Local Government Finance Commission (LGFC), has overseen major negotiations between LGs and sector ministries that, if followed through, should result in significant improvements. The negotiations have seen agreement on the need to reduce the number o f conditional grants to one recurrent and development grant per sector, on the development o f allocation formulae for these grants, and on agreement o f sector policies, conditions, budget lines, and output indicators for budgeting and reporting purposes. 4.15 The new allocation formulae represent significant progress toward the equitable distribution o f resources across the country, and toward grant allocations that are more transparent and comprehensible. The new formulae would create winners and losers, however; to ensure that no LG will lose out it has been agreed that the formulae should be introduced gradually over a three- to five-year period. 4.16 Inaddition, the FDS mandates that LGs be given 10percent flexibility, risingto 20 percent from fiscal 2004/05, to reallocate recurrent grant allocations within and across sectors. This means that spending departments in future will be required to justify their budget allocations. Councilors will have the opportunity at the budget conference to decide how to use this extra flexibility. Although it was available to all LGs this fiscal year, there was little evidence o f this debate having taken place in the sample LGs. While some districts, such as Mubende and Bushenyi, have made innovative use o f the new flexibility, it appears that the unpredictability o f grant ceilings set by central government continues to undermine the local process. 4.17 Concerns also remain that the extra flexibility in the allocation o f recurrent grants will not be applied to development grants, and that the issue o f the proliferation o f sector planning guidelines and formats will not be addressed fully. Integration of sector planning modalities with lower-level development planning, and complete flexibility in the allocation o f sector development grants, are key to ensuring the adequate contestability o f resources. The revision of the LG development planning guides represents an important opportunity to introduce real contestability o f development resources. C. BUDGETFORMULATION 4.18 In general, the Ugandan budget formulation process works well, and has improved in the last decade. Legislation and supporting circulars are comprehensive and relevant (although it would be difficult for the government to comply with all stated requirements), and recent changes in legislation have strengthened the budget planning process. However, although there are many regulations supporting the primary legislation, confusion persists in the area o f roles and responsibilities regarding the enforcement o f compliance (for example, in budgeting for the payment o f arrears). The regulations furthermore place a heavy workload on MoFPED, which is required to intervene or act on many o f the instructions, guidelines, and other regulations. This situation could constitute a fiduciary risk if the volume o f detailed requirements makes it difficult for MoFPED to follow up on key financial control - 2 1 - mechanisms, such as the comprehensiveness of registered commitments or the submission o f nontax revenue (NTR) by sector ministries,andto imposethe necessary sanctions on noncompliance. 4.19 According to MoFPED, BFPs are gradually improving and becoming less of an academic exercise. In many cases they still lack realism, however; that is, they do not realistically reflectwhat can be achieved given the available capacity in a sector. BFPs are primarily concerned with nonwage and development issues; additional staffing and pay increases are the concern of the Ministry of Public Service and are not incorporated and analyzed at an early stage of the budget process. Sector working groups also are not realistic in their budget formulation process and typically include planned undertakings that are inconsistent bothwith budget ceilings and with the capacity of the sector to utilize funds. Underbudgetingfor certain items also is commonplace, and lack of counterpart fundingthreatens the successful implementationof numerousprojects. 4.20 Budget FrameworkPapersshouldbe basedon a set of costed activitiesthat supportthe objectives of the sector programs. This presupposesaccess to accurateandappropriately classifiedfinancialdata, but would support a more balancedbudget dialogue, and ifpracticed, shouldresult inthe formulationo fmore realisticsector ceilings. These wouldthen enable sector ministriesto expanduse of the MTEFbeyondits applicationmerely to the annual budgetprocess. 4.21 Underthe new FDS modalities,LGs were supposedto usethe new structure ofthe BFP as set out in the 2003 Budget Guidelines. This was not done adequately, so the Local Government Finance Commission is reviewingthe BFPs submitted and providingfeedback. This review is finding that many LGs are not taking advantage of the flexibility available to them. It confirms also the benchmarking findings that there is almost universallyno link between DDPs and BFPs and that there is a general lack of understandingof the cross-sectoral nature of LG activities. 4.22 There is a similar lack of a clear link betweenBFPs and annual budget estimates at the LG level. Local government budget estimates vary in quality, and many comprise simply a set of tables of calculations that are unexplained and that lack clear justifications. Many LGs prepare their work plans accordingto fundingsource, with the objectiveof fulfilling central requirementssuch as those for Poverty Action Fund conditionalgrants, or for departmental administrativepurposes for the chief administrative officer. The work plans are seldom used as a means of presenting to council the intended activities and results frombudgetedexpenditure, andtypically are not discussedby council. 4.23 The use of output-orientedbudgetingis being introducedas a legal requirement of the Public Finance and Accountability Act (PFAA), with effect from July 2004, to improvethe link betweenpolicy objectives and resource allocation.To date, the different sectors have used the BFP process to identify appropriate performance indicators. Some progress has been made in moving away from purely quantitativetargets, such as the number of exercise books, to contextualtargets such as the ratio of text books to pupils, but even these new targets ultimately are input-oriented. Defined outputs are a more appropriate monitoringbenchmarkof budget implementation, but the Ministry of Defense (MOD)andthe public administration have had difficulty in determining appropriate outputs. The indicators used tend also to focus on service delivery and LGs, and not on central agencies. For example, health sector indicatorsare dominatedby LG service delivery levels and outcomes, despite the fact that more than 50 percentofthe budget is spent by the Ministry of Health. 4.24 Meaningful implementation of output-oriented budgeting is also being delayed by the slow implementationof results-orientedmanagement(ROM). Underthe PFAA, all votes are requiredto ensure that their budgets are output- and outcome-oriented. This provides an opportunity to legally require agencies to prepare ROM annual performance plans, and to requirethat these be linked to the resource allocation process. To effectively prepare and implement such plans, managers must be able to manage - 22 - their own resources. However, under the existing public service regulations, departmental heads cannot hire and fire based on staff performance. Consequently,no government line ministry or department has made noticeable progress in implementing ROM. Wages also are not integrated into the manager's budget, which in a service-oriented environment puts a severe constraint on the methods available by which to achieve specifiedoutputsor outcomes. Procurementplanning 4.25 The procurement regulation^'^ require every procuring entity (user department) to prepare "a multi-annual rolling work plan for procurement,based on the approved budget." The regulations provide extensive guidance on the process. The team witnessedvery few work plans actually being prepared, and most of these were in the ministries and in state enterprises that have large procurement budgets. The general impression at central and local government level is that procurements are launched either when funds are available or on an annual basis, regardless of how this corresponds with current needs. 4.26 The consequences o f this practice are that procurementis failing to meet the actual needs of user departments; opportunities to realize advantages of scale and bulk purchasing are lost; and the possibilities o f improving value for moneythroughthe use of different packagingand timing are missed. Participation 4.27 Civil society participation in the budget process has increased, as demonstrated by the participation of civil society organizations in the national and regional budget workshops of October through December 2003. Members of Parliament (MPs) participate in the budget process at almost all levels, either as members of specific finance-relatedcommittees or as individuals. They have participated in various sector working group workshops, the national workshop, and inthe regional workshops for LGs. Development partners also participated in the October workshop, the May Public Expenditure Review (PER), and at regular PERworking group meetings.Cabinet approves the MTEF ceilings andthe draft national BFP and submits it to parliament for comments. After parliament has commented on the preliminary indicative budget and macro and social plan, the cabinet makes required revisions. The president presents the budgetto parliament inJune. Budget classification 4.28 The GoU recently adopted the Government Financial Statistics system and the Classification of the Functions of Government (COFOG). The latter will be adjusted to match the structure of the new PEAP. The new classifications include fund and funding source, administrative (vote and cost centers), project, Medium Term Budget Framework (sector), MTEF (objective, output, and activity), and account (class, item, and sub-item) codes. Spare segments within the COFOG provide flexibility for future requirements. 4.29 The budget for 2004105 is being prepared using a new chart of accounts, and the COFOG functional classification is being defined by use of the reporting capability of the integrated financial management system. The chart of accounts provides a framework for better budget management and the progressive adoption of the elements of accrual accounting, including the eventual recognition of nonfinancial assets and liabilities such as depreciation. It also should facilitate multiple forms o f budget and accounts reporting and expenditure, and revenue tracking at all levels of government. As a result it should produce information, such as data on the use of resources, that is better able to support decision- making, and should enable moretransparentfinancial reporting. " DivisionI1o fthe ProcurementRegulations; specificallySection96. - 23 - 4.30 At the LG level, there are concerns that the new chart o f accounts includes prescribed codes only for directorates, and not for departments. As reporting inthe future is to be based on performance against budget rather than by conditional grant, it is imperative that the GoU come to an agreement on a standardized budget structure that incorporates the new establishment structures (not yet implemented) for different types o f LGs. D. KEYCHALLENGES 4.31 As indicated in Section 5.3, much work must be done to restore and improve the integrity o f the budget process, to minimize overruns, and to ensure that agreed allocations are supported. Failure to adhere to this regime may result inadditional pressure from some development partners (DPs) for a return to project funding, and could threaten the relationships that have been built up over the last few years. From the DP perspective, there is a need also to improve the predictability o f funding and to ensure that DP project disbursements are incorporated into projections. Budget Framework Papers need to be made more realistic, and achievable estimates o f planned activities and the implications o f staffing and pay increases need to be incorporated into the budget process at an earlier stage. The effective implementation o f output-oriented budgeting hinges on successfully implementing ROM, and effectively incorporating salaries and wages (including contestability) into the budget framework. 4.32 The success o f the new classification framework will depend on the integrity o f accounting systems and on the availability o f critical skills and data. Personnel at all levels must be trained to understand the potential o f the system, in conjunction with the integrated financial management system, to support monitoring, decision-making, and reporting requirements. 4.33 There exists within local government the technical expertise to accomplishthe necessary planning and budgeting changes, but this expertise is undermined by weak political engagement and a poorly sequenced process. If they fail to take into account the availability o f resources, and if they are insufficiently linkedto the BFP and budget, District Development Plans will continue to be unrealistic. In consequence, they will not be fully implemented, local communities will become cynical about the process, and local government objectives are unlikely to be achieved. Absent greater local political participation, aided by user-friendly budgets and work plans, activities at the local level will continue to be drivenby nationaldemands rather than by localneeds. - 24 - 5. RAISINGREVENUES,DEPLOYINGRESOURCES,AND UNDERTAKINGACTIVITIES A. RAISING REVENUE Domestic revenue 5.1 Uganda faces the challenge of increasing domestic revenue, which has stagnated at about 12 percent of GDP for the last five years. Trade taxes inthe first half o ffiscal 2003/04 provided53.5 percent of this domestic revenue, but entry into the East African Community CustomsUnion is expectedto result in a tax loss of USh86billion. Furthermore,the options for wideningthe tax base inthe mediumterm are limited: although some increase in domestic revenue could be registered through improvements in tax administration,particularly in the areas of excise duties and VAT (value-addedtax) on local goods, the increases inrevenue inthe short term wouldbe marginal. 5.2 Changes in tax policy therefore are necessary if Uganda is to increase the contributionmade to GDP by domestic revenue. The GoU needs to quickly identify the most efficient, equitable, and administratively simple ways of increasing tax revenue (and should review the issue of tax holidaysthat are erodingthe tax base). It needs also to begin to implement the findings of the Ssebutinde report into corruption at the Uganda Revenue Authority (URA) and to modernize and enhance administrative efficiency. Computerizingcustoms procedures, in particular fully implementingthe new ASYCUDA++ system, couldpotentiallycontributesignificantlyto efficiency. 5.3 Customs practices have improvedand efficiencyis rising, but the valuationof goods continues to be unsophisticated, and there are plenty of opportunities for corruption. A 2003 survey of administrative barriers to investment in Uganda identified customs as one of the five biggest obstructions: the 1971 Customs Act is outdated; flaws are numerous, and provisions that hinder sanctions against fraud and corruptionneed urgently to be removed. Forwardingand clearing agents also have limited professional skills, resultingin delays, under- andoverinvoicing, andproceduralirregularitiesandcorruption. 5.4 Nontax revenue (NTR) includes revenue from ministries and departments; URA collections on behalfof the ministries; and property income, in the form of interest on project accounts, dividends, and the rent of institutionalhouses.As inpreviousyears, NTRunderperformedinthe first half of 2003/04 due to the nonpayment of dividends by enterprises and agencies in which government has an interest. In addition, nontax receipts from central government ministriesand agencies were below the targeted level (in 2002/03, collectionswere about 80 percent of total projections).Appropriation inAid was abolished two years ago, but evaluations by the Accountant General (AccGen) suggest that this underperformance may be due to the unreportedretentionofNTR. External aid 5.5 Accordingto informationfrom the Aid LiaisonDepartment (ALD), foreign,assistance finance in fiscal 2002/03 accounted for 13.9 percent of GDP. This figure is expectedto increase marginallyto 14.0 percent in 2003/04. These figures are slightly higher than those based on the aggregates presented in the budget, of 13.1 percent and 11.2 percent respectively.The Government's aid policy is that all foreign - 25 - developmental assistance to Uganda, including loans, grants, and technical assistance (TA), should be made within the framework of the Poverty Eradication Action Plan (PEAP). The government is committed to taking a lead role in Uganda's developmentalprocess, and through consultations with its development partners (DPs), has agreed a set of partnership principles. These principles are intendedto enhance the management of external aid resources through the budget framework, with emphasis moving from projects toward programs under a sector-wide approach (SWAP). Formal coordination mechanisms linking aid policies and programs to the PEAP have been clearly established, with the aim of achieving the optimal use offoreign assistance inpovertyalleviation initiatives. 5.6 A major concernofthe GoU is the high proportion of foreign assistance funds channeledthrough investmentprojects, ratherthanthrough budget support or programsunder SWAps. This is contrary to the agreed partnership principles. The foreign assistance inflow to Uganda in fiscal 2002/03 amounted to US$789 million, of which US$330 million (42 percent) was received through investment projects (see Figure 1). (Equally, there is a trend that budget is greater than project support.) The projections for 2003/04 and 2004/05 suggest that this trend will change, with investment project financing exceeding budget support/SWAps financing in2004/05, but these projectionsshouldbe regardedwith caution. Figure 1.Foreign Assistance Inflows FORBGNASSISTANCEINFLOWS 900 aoo 3 700 YI 5 600 v) 500 400 ZC 300 a 200 uE 100 o FinancialYear Source: Macroeconomic Policy Department, MoFPED, July 2004 5.7 The level of budget support financing has steadily increasedinthe past five years, however, and there is strong support from DPs for a move toward SWAps in key sectors. Such a move would be expectedto promote commonmanagement and implementationarrangements and significantly reduce the transaction costs incurredby government incoordinating and managingforeign assistance. 5.8 The bypassingof MoFPED inthe process of recordingthe actual disbursementofproject hnds- and in a few cases the channeling of grants directly to line ministries-means that MoFPED is unable to keep its aid database up to date. As a result the development budget estimates and debt records are incomplete. Projects executedby nongovernmental organizations (NGOs)also are not recorded, so these activities cannot be taken into account in assessing the optimal allocation of the government's own resources, both within and across sectors. Direct payments by DPs to the providers of goods and services are also difficult to capture. Together, these factors undermine the ability of MoFPED to plan the budget based on a comprehensive understandingof all resources available; they also jeopardize the efficacy of - 26 - public expenditures. MoFPED has advised all government units that from fiscal 2004/05 all DP-funded projects (loans and grants) will be part o fthe total budgetary resource envelope. Local government revenue 5.9 Local government revenues in recent years have been undermined by political interference from both the central and local government levels. Duringthe presidential and parliamentary election campaign in2001, payment o f graduated tax (GTax) was discouraged. Council elections in2001 further reducedthe payment and collection o f GTax. This year there has again been high-level talk that GTax may be abolished, effective 2005/06, a fact that is likely to further undermine collection (whether or not abolition goes through). Since 1998 there additionally have been large increases in the size of the grants flowing from the center to LGs, with the result that LGs have found that they can deliver key services without being too rigorous about collecting taxes. The lack o f a social contract (in the form o f local taxes) between residents and their local councils severely undermines the accountability process, reducing local interest inensuringthat funds are used appropriately. 5.10 The LGs have been overoptimistic when projecting local revenue collections, with the resultthat those spending departments that rely on local revenues have not received their full budget allocation. Local revenues nonetheless comprise a significant proportion o f LG income, especially for the lower- level LGsthat benefit least from conditional grants from the center. 5.11 Both local and central governments are beginningto understand the importance o f local revenue, however, and on the administrative side the situation is improving. The Local Government Finance Commission (LGFC) has carried out studies o f revenue generation and has produced best practice guidelines, and the Ministryo f Local Government (MoLG) has supported this move by developing a local revenue module for the new capacity-building curriculum. The second LG Development Program (LGDP2) also has a component devoted to enhancing revenue collection, making improvements in revenue a more prominent criterion inthe annual assessment process. 5.12 The LGFC and LG Budget Commission (LGBC) have agreed that GTax deductions for salaried employees should be made in 12 equal installments, from the next fiscal year. This should make it easier for LGs to manage cash flows relating to local revenue. The M o L G and MoFPED are commissioning a study to identify and analyze sources o f revenue that potentially might replace GTax, and the M o L G has tabled a Local Government (Rating) Bill that would enable LGs to collect property tax from commercial and industrial properties in rural areas. If GTax were to be abolished, however, property tax may provide the only viable revenue alternative for LGs. The impact on private sector investment o f`a new property tax naturally would need to be closely assessed. 5.13 With the exception o f Tororo, all the LGs studied in the benchmarking exercise had made significant efforts to improve tax administration (although many o f these initiatives were recent and had not always proven successful). Absent the identification o f a viable alternative, however, the continued discussion o f the abolition o f GTax i s likely to undermine any progress made. B. DEPLOYING RESOURCES Procurement and contract management 5.14 The Procurement Act, which broadly describes the methods for public procurement, has greatly helped to clarify the legal framework and eliminate exemptions. The act applies to "all public procurement and disposal activities" undertaken by public institutions, including state enterprises (SEs), - 27 - statutory authorities, and the military. In addition, the act covers procurement carried out by any nonpublicentities that benefitfrom publicfunds. 5.15 The inclusion of non-security-relatedprocurement constitutes a significant change from the previousregulations, which exemptedall Ministryof Defense (MOD)procurement from the general rules for public procurement. Section 42 of the new act requires that the MODseparate its procurement into an "openyyanda "restricted" list.Procurementof items onthe restrictedlist must follow specific rules as laid out inthe act, but procurement of items onthe open list must comply fully with the act. 5.16 At the time of the Country ProcurementAssessment Report (CPAR) inFebruary 2004, the MOD had not formed a contracts committee. This was a requirement even in the old regulations, and was reiteratedby the new Procurement Act. (A committee finally was established in June 2004.) The MOD itself defines which items are open and which are restricted.The Public Procurement and Disposal of Assets Authority (PPDA) is not involvedin this process, and as a result the PPDA has not been able to carry out its mandate with respect to the monitoring and enforcement o f MODprocurement. It is reasonable to assume that the MODsuffers to at least some extent from malpractice.The MODand the Uganda People's Defense Force (UPDF) are estimated to account for up to 25 percent of the total procurement volume inUganda, and are amongthe largest buyers of foodstuffs, clothes, and many other ordinary items. The lack of monitoringand enforcement of procurement regulations as a consequence is a serious concern. Regulations on the financial audit of classifiedexpenditure only became effective from 2003/04, and procurement audits of the restrictedlist can only take place once agreement on the list itself i s reachedby the PPDA andthe MOD. 5.17 The new procurement regulations are characterized by several weaknesses. Most important,the regulations seem too bulky and complex to be practically adaptable to the Ugandan procurement environment. At atotal of 958 pages, includingscores o f forms and appendixes, the regulations are poorly adaptedto an audience in a decentralized procurement system. Their size and complexitymay in fact be the greatest obstacle to their proper disseminationand implementation. 5.18 A number of weaknessesalso are observable inthe implementationof the legalframework. Even at the central level, this study found that most entities were unaware of specific regulations, and gross violations of the stipulated procedures were widespread. While the procurement cycle may follow the accepted path, actual practice is characterized by a number o f malpractices. The budgeting of procurement is weak, andthe procurement selection methods described inguidelines issuedby the PPDA are often circumvented, by the splitting of tenders, for example, the use of micro procurement, and, in particular,throughuse ofthe restrictedbiddingmethod. The study also found several instances ofmissing or incomplete files and of otherwise faulty filing systems. This makes enforcement extremely difficult andallows corruptionto spread. 5.19 Section 126 o f the regulations provides for the use of prequalification (or registration) lists. Registration lists are widely used, are often based on generic criteria, and are rarely verified. The preferredprocurementmethodis restrictedbiddingbasedon shortlistsdevelopedfromthese lists,with the result that it is a general rule that, to do business with the public, a supplier must be on the list.16This naturally creates a situation that is susceptible to corruption, but it is the next step, selection of the supplier from the list, that appears most uneven and prone to corruption. The regulations require the biddersto berotated onthe shortlists,butthis study foundno evidenceof suchrotation.The perceptionof the privatesector is that decentralizationhas increasedthe use ofthese lists; that the lists are administered l6 The teammetwith privatecompaniesforcedto maintainandresubmitrequestsfor inclusiononregistrationlistsat morethan 40 differententities. - 28 - unevenly and in contradictionwith the principlesof transparency andequality; andthat their use is costly, as substantial fees are requiredto maintaina positionon the lists. 5.20 Sections 219 and 220 of the regulations permit the use in certain circumstances of precontract negotiations. It was observed by the CPAR team that negotiations in the award process are in fact common, to the extent that they tendto be the ruleratherthanthe exception, even incompetitivebidding. This situationis considerednaturalby the procuringentities. 5.21 The perceptionof the private sector (a perception confirmed by the CPAR and LG Integrated FiduciaryAssessment (LGIFA) teams andby the Auditor Generalreports) is that contract managementis poor, leading to poor value for money (VFM). The main reasons for this are threefold: (1) poor specificationsleadingto excessive need for variations; (2) lack of knowledge of simple contract law and standardterms of contract; and(3) lack of qualifiedprofessionalsto performquality assurance. 5.22 The institutional framework stipulated by the Procurement Act has produced a number of improvementssince the 2001 CPAR, includingthe full decentralizationof procurement to procuringand disposingentities (PDEs) in central and local government. According to Article 24 of the Procurement Act, the PDEs shall be composed of an accounting officer, a contracts committee (for LGs, a tender board), a procurement and disposalunit (PDU), a user department, and an evaluationcommittee. The act also requires the replacement of the Central Tender Board as regulatory and monitoring body by the PPDA. The GoU should be congratulatedfor its achievements so far, but some unresolved areas remain. MoFPED, for example, seemingly has not actively pursued the policymakingrole that the Procurement Act mandates for it.And while the PPDA oversees the regulatoryandmonitoringfunctions, it is still ina constitutingphase and will needto be further strengthened if it is to serve as a center of excellence and expertise inthe areaof publicprocurement. 5.23 The Procurement Act also covers public procurement at the LG level. While a few LGs use the draft Local Government Tender Regulations of 2001, most continue to apply the 1998 LG Financialand Accounting Regulations (LGFAR). The MoLG, aided by the PPDA, has taken action in this area by initiatingthe draftingof a set of LG procurement regulations," but the CPAR team is concernedthat the adaptation of local regulations to the specific needs of LGs"-and specifically, ensuring that they are simple and easy to apply-may be inadequate.That said, successfully implementingsimilar regulationsat bothlevels coulddeliver huge gains in capacity buildingand complaints handling. 5.24 Inpractice, the ProcurementAct appearsto not yet have made any impact at the locallevel.The general impression of the CPAR study is that procurement at the LG level is nontransparent and not econ~mic'~(it should be noted, however, that there have been significantimprovements over the last two or three years, includingthe formationof tender boards in all districtsandthe publicationof tenders). One reason for the current weaknesses is the way in which tender board members are nominated and appointed.The LGA requires the chairman ofthe districtcouncil to nominatetender boardmembers, who are then appointedby the district councilexecutive. The appointment o f these members is done mainly on the basis of politicalpatronage, and procurement decisions are consequentlytaintedby political and local interests.A tangible result is the widespreaduse o f localpreference inthe awarding of contracts: inmany " The tender for aconsultant to draft the local regulationswas underway inMarch2004, but ground to ahalt as the PPDA investigatedallegationso fmisprocurement.It is understoodthat these problems have now been settled. The terms of reference for this consultancywere made availableto the team. Unfortunately,the terms do not mentionthe simplification andadaptationto the localprocurementenvironment, but appear to focusontransformingthe existingcentral regulations.The set time periodoftwo months appearstoo short. This is corroboratedby arecentstudy (Assessment of procurement capacitiesand systems in LGs inUganda, 2003) undertakenunder USAID financing. - 29 - cases, the CPARteam found that local tender boards appearedmore interestedinkeepingbusiness within their owndistrictthan inachievingVFM. 5.25 The LGIFA notedthat LGprocurement is unlikelyever to be completelyfree from politickingor from conflict of interest. The wealthier, better-educated community within most districts (including councilors,civil society, and the business elite) tends to be small. Everyone knows each other, and many are relatedto each other. Councilors and administrativestafftendtherefore be close to or part of the local business community.Whether appointedby councilor not, conflicts o f interest inprocurement are bound to arise between tender boards, LG officials, and the local business community. Therefore, technical procedures must be carefully enforced, to ensure that they meet the requirements for transparency, and contracts must be carefullymonitoredandexecuted.All are weak at the LGlevel. 5.26 Another major weakness of the LG Financial and Accounting Regulations is a provision that denies suppliers and contractors from outside the council areathe right to participate inprovidinggoods and services. The CPAR team'was informedthat this provision is intended to build local capacity; in practice, however, it reduces competition, encourages the formation o f cartels, and does not build capacity. Commitmentcontrolsystems 5.27 A commitment control system(CCS) has beeninoperationsince 1998 to track paymentarrearsin nonwage recurrent and development spending.The CCS does not cover arrears of wages, pensions, court awards, or utilities; nor does it deal with the stock of arrears, which in a cash-based accounting framework escape recording. Fiscalreports compiled by the AccGen do not report stocks and flows of expenditure arrears-this information is separately and unsystematically compiled, data for wage and pension arrears being collated from line ministries by the Ministry of Public Service (MOPS), and for utility arrears by the ParastatalMonitoringUnit (PMU). 5.28 Implementationo f the CCS suffers from weaknesses that undermine the reliability of data on payment arrears. The Budget Committee has expressed its concern over arrears and the pace at which stock levels are being reduced and additional arrears are being incurred. Reports by the Treasury Inspectorate Department (TID) o f the Accountant General's Office (AGO) note that "AOs [accounting officers] have continued to conceal information by withholding invoices after exhausting quarterly commitment limits until such time when funds are available. This has led to overcommitments towards the end of the fiscal year and eventually arrears [unfunded outstanding commitments] at the end of the fiscal year."20Reports of the Internal Audit Department (IAD) of the AGO additionally identify types of noncomplianceby the AOs, includingpurchases made without a local purchase order (LPO), post-dating of LPOs, the absence of an invoice register, the use of duplicate vouchers, and the nonrecordingof commitments until they are paid. Service providers should be concerned that the CCS adversely affects service delivery. 5.29 At the local level, there also is no consolidated information on the stocks and flows o f arrears. Evidence from selected districts suggests that expenditure arrears, especially in the areas of salaries and pensions, are widespread. Recent World Bank reports indicate that some districts may be holding stocks o f arrears of up to 20 percent of their budgeted expenditures." In the LGIFA benchmarking exercise it was discovered that Tororo district had accumulated significant utility bills arrears and that, due to poor debt management, Masakamunicipality had been unable to meet its salary bills. Jinja district authorities '' Annual ConsolidatedReportonPerformanceofCCS preparedbythe TID ofthe AGO (August 2003). See the Public Expenditure Review, November2003. - 30 - estimated payment arrears (mostly pensions and gratuity) in excess o f USh400 million. And in Kayunga district, which was created only in 2001, the stock o f nonwage arrears was already reported to be USh60 million. Cash Management 5.30 Cash is a valuable resource. It needs to be managed effectively and efficiently to ensure that money does not lie idle or have to be raised through costly loans. The government payment system and banking arrangements use multiple bank accounts operated by a variety o f budget entities. This arrangement runs counter to the need for an effective cash management system centralized at the treasury, and can result ina suboptimal use o f government cash. 5.3 1 The government is trying to resolve this situation by rationalizing the number o f bank accounts. Ministries, departments, and agencies (MDAs) are now required to submit quarterly action plans and monthly commitment monitoring reports as a basis for MoFPED quarterly expenditure approvals and monthly cash releases. Releases in the form o f warrants are issued by the AccGen to MDA and LG bank accounts at the Bank o f Uganda or direct to operational project accounts at commercial banks. Commitments are not permitted unless there is sufficient cash cover in MDA bank accounts, and failure to make CCS returns results inthe delay or cancellation o f releases by MoFPED. The capacity within line ministries to monitor and approve action plans for the release o f conditional transfers to LGs, however, is weak. 5.32 This system has improved cash control and has helped to reduce arrears to government suppliers. However, the system also has caused delays in procurement due to the nonavailability o f cash, has left balances lying idle in MDA accounts, and has caused significant operational inefficiencies. Additionally, depending on the aggregate government cash position, MDAs report that monthly cash releases may fall short o f quarterly approvals and that non-Poverty Action Fund-related expenditure may be subject to severe cuts. (In contrast, PAF expenditure is protected under various aid arrangements.) MDAs also report that the system has a tendency to increase the incentive to generate arrears, particularly in relation to noncontrollable expenditure items such as utilities, and to undermine both PAF and non-PAF activities, which often are mutually interdependent. 5.33 Proper cash planning involves projecting the timing o f the collection o f revenues duringthe fiscal year, and planning the timing o f expenditures accordingly. The majorityof LGs do not plan their disbursements, but merely wait for cash to arrive, and then choose how to spend it. Conditional grants usually are transferred promptly to the appropriate sectoral account; unconditional grants are used to pay salaries. Any cash received from local revenue collection is disbursed as soon as it is received, typically in an ad hoc manner. (In Apac district this cash was disbursed in proportion to departmental budget allocations for local revenues. In Jinja, in contrast, the chief financial officer had a pile o f approved payments in a drawer from which he selected a recipient for the cash as and when it arrived.) Most districts hold regular meetingsto discuss priorities for payment; the budget, however, seldom provides the basis o f these discussions. 5.34 Kabale has developed its own system o f cash management, on its own initiative. The district has a cash flow budget that sets out the expected timing o f inflows from different revenue sources and the department expenditure ceilings, over a two-month period. These statements are endorsed by the executive. The district also keeps quarterly cash projections and schedules for disbursement to the spending departments. Kabale is the exception rather than the rule, however. Within the vast majority of LGsthere is an absence o fproper cash management. - 3 1 - Debtmanagement 5.35 Transaction processing, accounting, and debt reporting are undertaken centrally by the Accountant General, in cooperation with the Aid Liaison Department (ALD) and the Bank of Uganda (BoU). A debt management and financial analysis system (DMFAS) is installed with the AccGen and BoU, and the AccGen's system has recently been upgraded with the assistance o f United Nations Cpnference on Trade and Development-staff have beentrained, procedures developed, and reports and manuals designed. Data have been captured from the BoU system, and a comprehensive data validation and cleaning exercise, including a review o f domestic debt obligations and contingent liabilities, is underway. Monthly debt reporting is available from the system and a coordinationcommittee involving stakeholdershas beenestablished. 5.36 Intheory, the law allowing LGs to take out loans appears fair, limiting the size of the loan to 25 percent of local revenues, and requiringthe prior approval of the minister.It also states that the executive should provide "a guarantee to the effect that repayment of the loan shall not adversely affect the operations ofthe LGcouncil; and in particularmeetingthe statutory obligationsincludingsalaries" (LGA Schedule 5, para. 20). In practice, without the development and presentation of an annual cash flow budget, incorporatingloan repayments, for the forthcoming fiscal year, the irregularity of local revenue inflows andthe obligationto make loan repayments has meant that Masaka municipalityhas beenunable to meet its salary bill. Generally, information is incomplete on outstanding debt obligations at both the localandcentralgovernmentlevels, andmay leadto unknowncontingent liabilities. Payrollmanagement 5.37 There are serious doubts over the integrityofthe payrollsystem, which is maintained centrally by the Ministry of Public Service (MoPS). A recent consultancy reportz2undertaken by crown agents identifiedmultiplerisks at eachstage ofthe payroll/pensionsandHRprocessingsystem, includinginvalid or unauthorized payments, delays in making payments, errors in payments, incomplete data, and unauthorized access to the system. The reintroduction of various benefits and allowances is further obstructing the effective management of payroll costs-and compounding these problems is the well- publicizedissue ofthe existence onthe publicpayrollofthousands of nonexistent"ghost" workers. 5.38 All health, education, and most other service delivery staff are on the centrally administered payroll. However, through their District Service Commissions, LGs have control over the appointment, promotion, and discipliningof staff. It is knownthat some LGs do not updatetheir establishment registers or maintainsalary arrears registers, and reports from the Inspector General of Government indicate that corruption exists in the payment o f arrears to teachers. All of these factors compromise the integrity of payroll information. The MoPS additionally has been the source of delays in processing LG appointments, although this particular situationhas improved. 5.39 Studies for a new integrated personnel and payroll system (IPPS) and human resource management system have been undertaken, but there is as yet no funding available to implementthese systems. Uganda Computer Services (UCS) provides information system support for payroll and pensions, the general ledger, and check production, but has access only to obsolete applicationsoftware that is difficult to maintainand upgrade. A lack o f funding has in the past beencited as the mainreason for a lack of progress in payrollmanagement, but a number o f improvements could be readily made by institutinggreater compliance with rules and procedures, auditingthe system, and developinga clear pay reformstrategy. 22 Review of BusinessProcesses of the Payroll andPensions Systemo fCentral Government of UgandaDecember 2003 - Crown Agents - 32 - C. UNDERTAKING ACTIVITIES 5.40 Central government agencies have failed to systematically link work plans to budgets. Results- orientedmanagement (ROM) annual performance plans that are not linkedto resource allocations carry little meaningful weight and lack legal standing in budget implementation.Central agencies therefore have beenrequiredonly to adhere to their budgets, andnotto activitiesidentifiedinthe work plan.Article 17 of the Public Finance and Accountability Act (PFAA), requires agencies to make a statement of objectives alongside their budget, and redefines overexpenditure as occurring where money is expended "for a purpose for which no monies have been voted and appropriated." This potentially provides the legal basis for ensuringthat annual performance plans are adheredto and that activities are implemented as planned. 5.41 For local government, the focus has been primarily on service delivery indicators.Annual work plans have become more common within LGs, because of the requirements of PAF conditional grants, and revisions of work plans are required to be approved. Nevertheless, it appears that LG administrations/executivemembersmay be able to alter work plans without redress.The credibility of the planning and budgeting process as a means of identifying local council objectives and priorities is underminedwhen the planned locationof a water point, classroom, or road can be changed without the approval o f the council. Until work plans are approved by the full council, alongside the budget, there is little prospectof local councils ensuringthat they are implementedas planned. D. KEYCHALLENGES 5.42 Expanding the revenue base and improving tax administration are acknowledged by most stakeholders to be essential steps toward improvingthe country's fiscal position. It will be difficult to introduce any new tax measures in the run-up to 2006 elections, however, and the situation could be further complicatedby continuingdiscussions about the possibleremovalofthe GTax, the mainsource of revenue at LG level. Revenue losses incurred through Uganda's membership of the East African Community Customs Union will further exacerbate this problem, and the outdated 1971 Customs Act elsewhere makes difficult the sanctioning of corrupt or fraudulent practices. Giventhat the local revenue base is narrow and unpredictable, and that politicians are able to undermine tax revenues with impunity, stakeholdersnaturallyregard it essentialto improvethe accountabilityo fLGsto their citizens. 5.43 The major challenge for government is to ensure that public procurement processes are transparent, efficient, and effective in providinghigh-quality, high VFM goods and services at the right time and in the right place. Certain provisions in the regulations, such as access to local preference, are underminingthe procurement process and needto be addressed. The lack o f clear policy directionfrom MoFPEDneedsto betackled.The lack of capacity andof understandingofprocurementprocessesalso is a serious cause of concern. Proposed capacity-buildingstrategies are intended to address this issue: the development of clear, straightforwardLG procurement regulationsis an action within the fourth Poverty ReductionSupport Credit(PRSC 4), for example. 5.44 Another key task is to improvethe integrityof public payrolls,which account for approximately 23 percent of total budgetedexpenditure. There also is a needto improve cash management at both the centralleveland the local level, to enable implementingmanagers to more effectively execute their work plans. 5.45 Complete information on debt obligations and contingent liabilities is not available. This is a problemthat must be resolved, to both assist the budget formulation process and to support the Ministry o f Justice when defendingquestionable claims. Inaddition, the Budget Committee has notedwith concern the levelo f arrears and the pace at which arrears are beingsettled. This is placinga significant burdenon - 33 - suppliers, many o f which are small or medium-size enterprises. The inability o f the commitment control system to record accurately or check the growth of arrears finally also is a concern. This issue to some extent will be addressed by the introduction o f the integrated financial management system, but in many instances it will require also better budget discipline on the part o f accounting officers and the sanctioning o f those officers who contravene regulations. - 34 - 6. REPORTINGONTHE USEOFRESOURCESAND ACHIEVEMENT OFRESULTS A. ACCOUNTING AND RECORD KEEPING Accountingframework 6.1 Since the previous Country Financial Accountability Assessment, the Public Finance and Accountability Act (PFAA) and corresponding regulations have been enacted. However, although new Treasury Accounting Instructions were drafted in June 2003, the 1991 instructions remain operational. These do not reflect the contents either o f the new legislation or o f other public financial management (PFM) improvements implemented inthe intervening years. The 2003 instructions unfortunately also are based on manual systems that are in the process o f being superseded by the new integrated financial management system (IFMS). The Accountant General accordingly proposes to incorporate the new internal control and accounting requirements o f the IFMS into the latest Treasury Accounting Instructions; this is expected to be completed duringthe pilot operation of the IFMS that was scheduled to end in June 2004. 6.2 Three sections within the Accountant General's Office (AGO)-the Treasury Office Accounts, the Treasury Inspectorate Department (TID), and the Internal Audit Department (IAD)-are responsible for the overall management and supervision o f the accounting framework; the consolidated fund; internal audit and inspection; statutory reporting; and central processing for public debt, payroll and pensions, and foreign aid transactions. Ministry, department, and agency (MDA) accounting and internal audit units are primarily responsible for internal control, pre-audit, the payment o f creditors, receipting, accounting, bank reconciliation, and financial/budgetary control reporting. 6.3 The Ministry o f Finance, Planning, and Economic Development (MoFPED) has finalized a study on the restructuring o f the AGO.23Based on previous experience, the progress o f the proposed restructuring through the necessary approvals procedure with MoFPED, the Ministry o f Public Service (MOPS), and the Public Accounts Committee (PAC), is expected to be slow. It is clear, however, that if the benefits o f the investments made in the PFAA, in training, and in the IFMS are to be realized, the restructuring proposals must be expedited through finalization, approval, and implementation. The rapid transition o f the proposals into reality would also serve to ensure sustainability and to maximize the opportunity for skills transfer while consultants to the World Bank's Economic and Financial Management Project (EFMP) and to the UK-sponsored Financial Accountability Program (FAP) are still present. A similar review o f staffing requirements also needs to be implemented for the accounting units at MDAsthat will progressively be affected by the IFMS and the new requirements of the PFAA. 23MinistryofFinance, Planning and Economic Development FAP /01/02 OrganisationalReview ofthe - Directorate o fAccounts Draft Final Report- October 2003 - 35 - B. SYSTEMSFORACCOUNTING,FINANCIAL REPORTING, AND INTERNAL CONTROL Currentsystems 6.4 Uganda's basic transaction, processing, internal control, and accounting systems are either manual (receipting, payment vouchers, cash books, vote control registers, reconciliation processes) or standalone, partially computerized systems. Nontax revenue (NTR) and Uganda Revenue Authority (URA) tax is transferred from ministry, department, and agency (MDA)/URA collection accounts monthly to the consolidated fund. The Auditor General's 2001/02 report cites numerous cases of fraud, waste, and poor documentation in relation to revenue collection and recurrent and development expenditure and revenue. 6.5 The Accountant General is of the view that the trend is significantly downward, however, and that the materiality of such leakages is decreasing. The Education, Health, and Agriculture and Works Ministries also claim that the basic framework of accounting (record keeping, maintenance and reconciliation of ledgers, production of monthly and annual accounts, and bank reconciliation) is operating more efficiently, and that their accounts are consequently beingproducedwith greater levels of accuracy, timeliness, and reconciliation. There are no objective indicators to verify these claims, but as internal auditing becomes more system-oriented it should become easier to compile and maintain the relevant data. 6.6 The GoU attributes its claimed improvements to a number o f factors, including stricter implementationo f the commitment control system (CCS), which now requires submission o f expenditure and NTR reports to secure the release of further funds; closer monitoring of contingent liabilities; increasing levels of computerization; data conversion preparations for the implementation of the IFMS; and improved skills on the part o f accounting personnel, as a result o f the EFMP-IIiFAP training programs. However, a review o f the status o f CCS and monthly and quarterly reporting suggests that gaps continue to exist in the regularity and quality of accounting and financial reporting. While some improvements clearly have been made, the ability of internal control and financial reporting systems to support proper documentation, and the completeness, accuracy, and timeliness of reporting and reconciliation, remains weak.. Integratedfinancial managementsystem 6.7 The GoU recognizes that its existing systems do not provide a sound basis for accounting and financial reporting. In consequence, GoU is implementinga major reform program through the EFMP-I1 and FAP projects. An important element of this program is implementingthe IFMS, which is intendedto provide the framework to redress many of the system weaknesses identified earlier. The new IFMS system is operating on a pilot basis in MoFPED, five sector ministries, and four LGs, but will also facilitate the capture of transactions and balances from other nonpilot MDAs and LGs through the use of journals. As a result it will generate the consolidated year-end financial statementsfor these entities. 6.8 The IFMS is based on the core modules of Oracle Financials (budget management, purchase order, accountspayable, accounts receivable, cash management, general ledger, and financial reporting), a product of Oracle Consulting, and is fundamentally an accrual-based package. It therefore enables as a standard feature the capture on an accrual basis of revenue/expenditure transactions and, where available, balances of accounts payable, accounts receivable, and financial assets and liabilities. Hewlett Packard and their subcontractor, Oracle, have additionally provided a facility to allow the generation of cash-based year-end financial statements to meet the cash-based accounting requirement. The IFMS also provides for - 3 6 - the capture and consolidation o f MDA budgets, the release o f budgets and warrants to MDAs, commitment control and reporting, in-year cash flow management, and extensive reporting. An interfacing capacity additionally permits the capture o f payroll, public debt, check and URA tax revenue data. 6.9 Duringearly system mapping it emerged that the budget formulation and cash flow forecasting modules did not fully meet the requirements o fthe original specification. Significant customization o f the system was found necessary; the contractor Hewlett Packard has agreed to facilitate this customization but these functions will not become operational until the commencement o f the 2005/06 budget cycle in October 2004. The full IFMS is timetabled to roll out according to the schedule shown inTable 11. Table 11.PlannedSchedulefor the Rolloutof the IFMS February2004 (exists) 2 12 sector ministries and six districts 1July 2004 to EFMP-I1 30 June 2005 (exists) 3 37 districts, 13 municipalities, 28 agencies, and 1July2005 to does not exist 26 embassies 30 June 2007 14 Fixed-assetsmodule (all entities) 1 July2005 to does not exist 30June2007 6.11 In this context the most important actors are MoFPED (specifically the Budget, Aid Coordination, and Macroeconomic Policy Departments) and other ministry planning and budget units. The Ministry o f Local Government (MoLG) has an important role to play in facilitating LG implementation, and a specialist revenue module for LGs i s being piloted by Kampala City Council. This implementation has been held back, however, by the limited availability and capability o f counterpart staff, reliance on the AGO to provide transitional/project management capacity, and the weak participation o fthe MoLG. 6.12 The IFMS is highly complex, sophisticated, and expensive. Having chosen this route, the GoU must overcome a number o f major challenges to fully realize the benefits o f the system, while ensuring that security is not compromised. From an accounting and financial reporting perspective, failure to address specific issues relating to the sustainability, functionality, and extension o f the system are liable to result in higher rather than lower levels o f fiduciary risk. Inparticular there i s a needto ensure that: 0 either internally or externally there is sufficient capacity to manage the ongoing implementation process; 0 funds are available for the maintenance o fthe system; 0 government can retain staff at all levels who have the capacity to utilize the system effectively; 0 the coverage o fthe system is comprehensive; and - 37 - 0 funding is available to facilitate any future rollout. 6.13 The introduction o f the IFMS also poses significant challenges for the OAG, whose staff must acquire the specialized skills required for conducting audits in a complex IT environment. Because information technology systems are vulnerable to technical failure, unauthorized access, and computer fraud, the OAG will need to develop the capacity to review the integrity, security, and availability o f the IFMS. The OAG, supported by a specialist advisor funded under EFMP-11, has secured an online audit facility to the IFMS that provides access to all GoU transactions and enables it to activate an audit trail. The OAG has also participated in user acceptance testing, and has recommended developing a number o f user controls. Recordsmanagement 6.14 The legal framework for records management is provided by the 2001 National Records and Archives Act. The act also has provided for the transformation o f the Records Management Department o f the MOPSinto the Records Management and Information Technology Agency. Draft regulations have been prepared. In addition, the procurement regulations include detailed instructions on the contents o f a proper procurement file. The CPAR team identified two serious problems: missing or incomplete files, the result o f carelessness or malpractice; and faulty filing systems, in which documents have been grouped with similar documentsz4instead o f in a single complete file. Improper filing o f this nature has been recorded in every audit report on procurement inUganda.25 6.15 Assistance has been provided in the past by the UK Department for International Development (DFID) and the DanishInternationalDevelopment Agency (DANIDA), but records management remains severely underresourced-the temporary arrangements for the central storage o f records are inadequate and the facilities available within MDAs limited. Most record keeping is done manually, and there is significant duplication o f data across the GoU. Records management staff have been appointed to most MDAs and LGs and some training has been provided, but ingeneral staff lack the training, storage space, and equipment to deliver anything other than a low level o f service to their respective institutions. The perceptionamong staff is that records management becomes a priority only when a specific issue needs to be addressed and the relevant records are found to be missing. 6.16 This situation presents a number o f fiduciary risks in terms o f the potential loss o f important documentation through inadequate storage, natural causes (fire, water penetration, and so forth), theft, or poor records management. The lack o f policy and procedural advice on how to handle documentation i s a major contributing factor to this risk. In addition, the efficiency o f record keeping i s poor due to the manual nature o f the system, as evidenced in the duplication o f records and the difficulties o f finding, tracking, or cross-referencing documents-a situation furthermore that creates an environment that is conducive to fraud and corruption. The AudGen refers in many o f his audit queries to the inability to produce supportingdocumentation. 24 For example, it is common for all advertisementsor all bidsreceived inayear to be filed together without reference to the *'Inthe rest o fthe procurementfile. latest draft audit reports seen by the team, missingor incompletefiles were an issue inmore than 80 percento f cases audited. - 38 - C. REPORTING Internal reporting 6.17 Concerns have beenexpressedabout the integrity,timeliness, and usefulness for budgetreporting and decision-making of the monthly and quarterly financial reports. Only at year-end, when comprehensive informationis requiredfor the productionof the consolidated annual financial statement, do most MDAs make any significant effort to generate useful accounting data. Preparation of the MoFPEDbudgetperformance reports must rely on multiple data sources (the GoU, for example, presents a semiannual and an Annual Budget PerformanceReview to parliament to report cash releases made in relationto the budget). 6.18 As the medium-term expenditure framework (MTEF) objective, output, and activity coding has not yet been implemented at the transaction level, the Accountant General's Office (AGO) does not produce accounting reports in terms of the MTEF format. Instead, it submits accounts to the Budget Directorate, which then prepares in-year MTEF reports. This raises concerns about the accuracy and reliability of the in-yearMTEF reports and about awarenessof these formats at the line ministry and LG levels. 6.19 All central ministries, self-financing agencies, and district-level LGs are required to provide monthly fiscal reports to MoFPED within 20 days of the end of the month (it should be noted that reportingon defense activitiesis almost nonexistent). Inpractice, the status ofreportingis as follows: a Line ministriessubmit monthlyreports within four weeks of the end ofthe month.These reports are not accompaniedby bankreconciliationstatements, but (with the exception of donor-financed projects) the fiscal informationprovidedis complete. a Self-financingbudget agencies suchas hospitals anduniversitiessubmit a detailed monthlyreturn of revenues collected and retained. This report does not provide information on spending from these receipts.A comprehensivefiscal reportonallrevenuesandspending is made annually. a District-levelLGs render a monthly report on expenditures out of conditional and other central transfers, and a separate monthly report on local revenues that they themselves collect. Expendituresfromthese localrevenuesare not includedinthe report. a Subcounties render monthly accounts directly to the Auditor General, who furnishes one copy to the district administration. Fiscal operations of the subcounties are not made available to MoFPED. a N o reports are preparedon fiscal operations at the parishandvillage levels. 6.20 The Bank of Ugandaremits a monthly statement of accounts on inflows into and outflows out of the bank account holdingthe consolidated fund (CF). This informationis usedto cross-check changes in the bank accounts maintained by line ministriesand other reportingentities. Line ministriesand districts are not required to (and do not) report on funding and expenditure linked to project aid (which i s not remitted to the CF, but usually is kept in commercial bank accounts); furthermore, reconciliation statements on these resources are not submitted. Reportingon projects is purely financial in nature and does not makereferenceto outputs or results. 6.21 In-year reporting by LGs is improving, and in most districts is becoming a relatively routine exercise. However, this reporting has been largely realizedthrough centrally mandated requirements on - 39 - funding, rather than as result of management or political demands from within the LG. For example, it took a 2001 presidentialdirective-a responseto concerns about accountabilitythat hadbeen expressed by education donors-to force LGs to start submittingmonthly accountability statements. The reporting requirements introduced by the Poverty Action Fund (PAF) have placed a substantial administrative burden on LGs, which, in additionto monthly accountabilitystatements, are requiredto submit quarterly reports for every PAF grant they receive. While the LGs may comply with these requirements, however, the reports submittedrarely serve a managementor local accountabilityfunction. 6.22 In accordance with the fiscal decentralization strategy (FDS), from fiscal 2004/05 the existing requirement for a multiplicity of reports will be replaced by the requirement to submit a single, consolidated monthly report. This will comprise a financial statement; reporting on revenues, commitments, and expenditure againstthe budget in aggregate; andperformanceagainst key performance indicatorsineach sector.The FDS emphasizes also that this reportshouldbe moreuser-friendly,for local consumption, andthat it shouldcontainnarrative as well as quantitativedata. 6.23 Differentsectors operate different systems of internalreporting.The best system is that used by the health sector, for which all health units prepare a monthly return using the health management informationsystem. Incontrast, the education sector has no regular system of financial reporting.(Given the widespread reportingof the misuse of funds allocated to universal primary education, resolutionof this situation requires priority action: head teachers should be required to present simple monthly or quarterly financial returns, verifiable by internalauditors or schools inspectors, to the district education officer and to the subcounty and school management committee.) In many LGs there is regular, usually monthly, reporting from subcounties to the chief administrative officer (CAO) on local revenue collections and expenditures. In some LGs there also is regular reportingfrom sector departments to the CAO or town clerk. External reporting 6.24 The GoU has presented an annual report, including audited financial statements, to parliament within the statutory periodfor each of the last six fiscal years. Local government audits are increasingly also being delivered on schedule. The late submission o f accounts for audit has in the past caused all audits to be deliveredlate, but 46 percent of districtand urban authority accounts for fiscal 2001/02 were audited within the statutory period and it is anticipated that all 2002/03 audits would be completed on schedule, by June 2004. This is an indication of much improvedcapacity and bookkeeping at the local level, and is a notableachievement giventhe lacko f computerizedsystems. 6.25 Comprehensiveannualperformancereports are notyet beingprepared, however, either by sectors or by LGs as a whole. The lack of comprehensive annual work plans is a probleminthis regard, with the only real analysis of performancebeingcarried out within the context o f the Budget Framework Papers (BFPs). The new FDS guidelines require LGs to prepare annual performancereports, thus bringingthem into linewith the requirements ofthe PublicFinanceandAccountability Act. 6.26 The ParastatalMonitoringUnit (PMU) of MoFPED, in liaison with the relevant line ministry, is responsiblefor the strategic economic monitoringof state enterprises (SEs). This role involvesreviewing operational plans before implementation, and monitoringperformance against those plans. To guide and facilitatethe unit's operations, the governmentcategorized SEs into five different classes. The PMUhas a goodworkingrelationship-ranging from representationonthe boardto participationinkey management decisions, especially with regardto impendingprivatization-with most enterprises inClasses 11, IV, and V. There are no longer any Class I11enterprises. However, the unit has not beenacceptedby most Class I - 40 - enterprises,26which maintainthat legallythey havereportingresponsibilityonly to their line ministry.The PMUtherefore has beenunable to fully exercise its monitoringrole on behalfof MoFPED, and most of these enterprises submit their annual audited financial statements to the PMU late. This is of particular concern as several ofthese enterprises are not self-financing,but draw upon government for most of their funding. 6.27 It is understoodthat the accounts for a number of statutory authorities and SEs, ofwhichthere are approximately 71, are not up to date. The responsible ministers and the PMU need to follow up and ensure compliance with the relevant legislation. From 1 July 2005 the PFAA will require that the government reportonthe net worthof SEs, by whichtime all accounts clearlymustbeupto date. 6.28 There are about 4,800 registered nongovernmental organizations (NGOs) in Uganda. Most are small, and most are almost entirely dependent on public funding for their activities. The NGO RegistrationAct and Regulationsmakesno requirementthat NGOs prepare annual audited accounts, nor does it require that they submit accounts or associated management letters to the National Board of NGOs. The National Board of NGOs in fact receives no data on the annual monetary value of NGO revenue (grant receipts). This absence of informationon income and expenditure represents a potentially high fiduciary risk that public funds are not being used for their intended purposes. From a macroeconomic perspective, the informationavailable to the BoUon the value of money flowing through these channels is insufficientto permitthe BoUto managethe economy,However, NGOs are requiredto provide information on estimated income and expenditure to district development committees, and are required to submit proposed work plans to the ministry responsible for planning and economic development. Intheory this meansthat it shouldbe feasible to assess the overallcontributionof the NGO sector, but inpractice this is likely to be difficult. D. INTERNALAUDIT AND OTHERMONITORING MECHANISMS Internalaudit 6.29 The internal audit function has undergone significant development since the 2001 Country Financial Accountability Assessment. The enactment of the Public Finance and Accountability Act (PFAA) in particular has given the Accountant General the power to "ensure that the internal audit function within each government ministry, department, fund, agency, or other reporting unit is appropriate to the needs of the organizationconcerned." The act also brings the AccGen into line with internationallyrecognizedstandards inrespect of his status andprocedures. 6.30 The recently completed study on the reorganizationof the Accountant General's Office sets out the need to devolve the internal audit function to ministries, departments, and agencies (MDAs). In support of this process, a number of key documents have been drafted. These include Government Internal Auditing Guidelines, Ethical Guidelines for Internal Auditors in Government, and a detailed internalaudit manual.The PFAA also provides for the introductionof audit committees (from July 2004) to enhance the independence of the function. Internalauditors for each ministry will now be responsible to the accounting officer (AO) for the ministry as well as to the audit committee for that ministry, established to assist the AO. The duties and responsibilities of the audit committees are specified in the 26 Class Icomprises SEs inwhich the state is required to retaina 100percent shareholding. Includedinthis class are the UgandaWildlife Authority, Civil Aviation Authority, Cotton Development Organization, National Social Security Fund, UgandaTea Authority, UgandaTourism Board, Uganda Coffee Development Authority, and all regulatory agencies formed as a result of sectoral reform. -41 - publicfinance and accountabilityregulations, as well as inthe draft Charter for Audit Committees andthe additionalCharter for InternalAudit in Government. 6.31 The legalframework is therefore inplace, butthe necessary changes in institutionalarrangements and working methods are not yet complete. The internal audit function within government is not sufficiently independent, headedas it is by a MoFPED commissioner and staffedby personnel who are seconded to ministries. Within the ministries themselves, internal audit staff report to the A 0 of their particularministry, copyingtheir reports also to the MoFPED commissioner. The support available from the MoFPED commissioner is limited, as he is too low in the government hierarchy to be able to effectively advise somebody at permanent secretary level. The importance of havingan effective Internal Audit Department (IAD), capable of ensuring sound public financial management throughout government, cannot be overemphasized. 6.32 Althoughthere has beensome movementtowarda review ofthe internalcontrolsystemandother advisory services, the IAD's duties still contain a large pre-audit component. The department does not performany technicalor value-for-money(VFM) audits as it does not have the necessary skills to do so. Inthe longer term, strategies must be put in place to coordinate the system's audit work with the work carriedout by the PublicProcurementandDisposalofAssets Authority (PPDA). 6.33 At the LG level, most of the IAD's time is spent on pre-audit work, although the department is also requiredto serve the executive with quarterlyaudit reports on district, municipality,and lower levels of local government. The independence of the internal audit function i s compromised by the IAD's involvement in pre-audit,by the proximity of internalaudit personnel to their colleagues at the district level, by a lack o f transport facilities, and by the IAD's reliance on local revenues. Its potential effectiveness has been demonstratedby its work at the lower levels of local government, however; for example, inenforcingproper accountingfor localrevenue inthe subcountiesofJinjadistrict. 6.34 The effectiveness of statutory authority and state enterprise IADshas beenlimitedby capacity (in most instances these departments are manned by three people or fewer), competence (insufficient professionallytrained auditors), and lack of independence (most audit departments report to the head of finance). Since the advent of the PFAA the situation at a number of enterprises appears to have been placed under review, with efforts being made to upgrade the post of head of internal audit to full managerial grade, reportingdirectly to the chief executive. Audit committees may also be introduced, as requiredby the PFAA.Finally,the role ofthe internalaudit is also beingdevelopedfrom a predominantly pre-auditlevelto an approach that is focused more on the financial management system itself and on the achievement ofvalue for money (VFM). Publicexpendituretracking studies 6.35 Since 1999, public expenditure tracking studies (PETS) have been carried out in the education, health, andwater and sanitationsectors. The assessmentshave addressed: the status o fthe universalprimaryeducation(UPE) system(two studies); teacher recruitment,deployment, andpayrollmanagement; the VFM realizedfor the schoolfacilities grant; funds underthe primaryhealthcare conditionalgrant (2001); drugs (2002); a conditionalgrant for sharedservices (2003); and - 42 - the cost-effectiveness and efficiency o f education spending (for which the terms o f reference are being prepared). 6.36 An action plan is formulated at the conclusion o f each PETS. In theory, its implementation is ensured by integrating it into the relevant sector policy agenda. However, a number o f stakeholders have voiced their concerns that there is no effective follow-up o fthe recommendations made. 6.37 From a local perspective, PETS are useful exercises for assessing issues o f central concern to LGs with respect to the achievement of national objectives. The fact that they are carried out on a sample basis, and therefore cannot be seen as a mechanism for identifying individual LG problems, unfortunately means that they can do no more than complement the system o f monitoring and assessing individual LG performance. 6.38 The tracking o f PAF expenditure at the LGlevel is facilitated by the fact that a large share o f it is financed through tied grants transferred to LGs. However, the fiscal decentralization strategy (FDS) envisages a move toward making a higher proportion o f block grants to LGs. This would make the monitoring o f specific PAF expenditures more difficult, but it should enable the evolution o f more comprehensive monitoring systems o f sector performance. Other inspections and monitoring exercises 6.39 Throughout government, there is little use o f contract monitoring to improve the procurement process. At the LG level, a common concern that has emerged over the years i s the proliferation o f institutions monitoring and inspecting LGs in a disjointed, uncoordinated manner. The Treasury Inspectorate Department, Inspectorate o f Government, sector ministries, and LG inspectors all carry out separate monitoring activities, and there is serious doubt about the value o f these exercises, particularly where there is little or no analysis o fthe information collected. 6.40 The monitoring by LGs o f service provision is also weak and unsystematic, and there is little use o f grassroots accountability systems. With the exception o f Kabale, the sample group study found little use o f user committees such as school and health management committees, although the Uganda Debt Network has tried to set up some district and community-based monitoring committees. The potential o f the subcounty to monitor and supervise the finances of service providershas not beenexploited. 6.41 The preponderance o f monitoring and evaluation systems is a recognized problem for the GoU, which has recently developed a National Integrated Monitoring and Evaluation Strategy (NIMES) to address this issue. A new compliance inspection system, developed by the Inspectorate Department o f the Ministry o f Local Government, is another important innovation. LG inspectors are now using an inspection manual to guide the collection of data on all aspects o f the administrative performance o f LGs. These data may be analyzed and used as the basis for targeting support and follow-up. Over time the compliance inspection system is intended to replace the LG Development Program(LGDP) assessment. 6.42 Some commentators argue that routine sector monitoring should be replaced by a more structured system o f annual sector performance measurement or benchmarking, along the lines o f the current assessments used under the LGDP.This system could then be followed up with technical support targeted specifically at those LGs that are performing poorly. This would reduce the transaction costs between central and local government, and improve the mentoring value o f monitoring by central government. As an additional measure, publishing league tables o f performance is a proven way o f encouraging better performance by public authorities and o f ignitinglocal demands for accountability. - 43 - 6.43 Cross-sector monitoring is particularly weak. Discussions at technical planning committee meetings tend to focus on administrative issues, and not on the analysis o f financial or performance reports. The Local Government Information and Communications System (LOGICS) and Financial Information and Analysis System (LoGFIAS) have been designed, like the Health Management Information System, to enable LGs to analyze and use financial and performance data to make better decisions within and across the various sectors. E. KEYCHALLENGES 6.44 From an accounting and financial reporting perspective, the key challenges relate to the sustainability, functionality, and extension o fthe integrated financial management They include: 0 ensuringthe availability o fa sustainable staffcapacity and necessary maintenance budgets; 0 progressively extending and deepening the functionality and utilization o f the system; 0 completion o f the rollout to ensure the system provides the necessary coverage for the whole o f government; and 0 securing the additional funding necessary to complete implementation. 6.45 The quality o f in-year reporting needs to be improved, so that it reflects outputs or results rather than merely fund releases; however, this will require the implementation o f results-oriented management, which has stalled. In terms o f internal audit and monitoring, the challenge at the central and local government level will be to implement the new (or proposed) institutional arrangements and to mitigate any resistance to changes in working methods on the part o f the auditors, accounting officers, and accounting personnel at line ministries or LGs. Resistance to change in the monitoring arrangements at LGswill also be difficult to overcome without an associated change inremuneration. 6.46 From an LG perspective, the biggest challenge in terms o f accounting and reporting i s to change the emphasis on upward reporting to one that focuses on the horizontal and downward functions o f reporting and monitoring. The format that i s ultimately chosen for this must be understood by and stimulate the interest o f all parties, and must in particular reinforce local accountability. The budget implementation guidelines o f the fiscal decentralization strategy emphasize that all reports required by central government should also be presented to the executive and council, for decision-making purposes. While central government reporting facilitates the release o f funds, it should use the reports primarily for information purposes, rather than for decision-making. 27 Should the IFMS fail, there is no backup at the moment other than the continued use of existing systems in parallel. The implementation methodology requires that transfer to the new system occur in stages. Fulltransfer to the new system will not occur until the new system has become fully operational, at which time parallel arrangements will be discontinued. Backup/disasterrecovery arrangements exist inthe event of partial/catastrophic hardwarehetworkfailure. - 44 - 7. HOLDINGGOVERNMENT TOACCOUNT FOR ITS PERFORMANCE A. ACCOUNTABILITY Overview 7.1 A number of organizations, includingthe Office of the Auditor General(OAG), the Inspectorate o f Government (IG), the Public Procurementand Disposal of Assets Authority (PPDA), and parliament, councils, and their committees, have legal and institutional responsibilityfor ensuring the financial and performance accountability of government officials. The public has a critical role to play also in overseeing the activities of these government bodies, and in the private sector, professionalaccounting andprocurementbodiesmust ensurethe integrity oftheir members. 7.2 The ability of oversight bodiesto carry out their functions clearly depends on the ability of their staff to carry out their duties in a professionaland independent manner. The government-commissioned Skills Gap Study inPublic Service that was completed inAugust 2003 documentsthe extent to whichthe GoU has proven unable to recruit and retain adequate numbers of personnel with the appropriate technical, professional, and managerial skills. Skills gaps undermine the capacity and performance of the public sector, andare particularlydamagingto the oversightbodies. 7.3 In part to address this skills gap, the fifth Poverty Reduction and Support Credit (PRSC 5) includes as a trigger a commitment to a medium-term pay reform strategy. Equally important to the effectiveness of oversight bodies is the reinvigoration of the public service agenda. An integrated approach will be necessaryto establisheffectiveinstitutionaland humanresources practices andto avoid the overlapandduplicationof efforts. 7.4 At the local level, the existingmechanismsfor holdinggovernment to account for its performance are nearly as weak as the planning and budgetingsystem. The strongest accountability mechanisms are vertical: between sector departments, sector committees, and central sector ministries.The public rarely demands accountabilityfrom its LGs, and councils are inactive and therefore ineffective at holdingtheir administrations to account for performance. Enforcementand follow-upmechanisms 7.5 The credibility of the various oversight bodies will ultimately be determined by their ability to enforce compliance with regulationsand by their readiness to impose sanctions (or refer to the relevant prosecuting body) on those institutions and individuals that do not comply. Some Uganda Revenue Authority (URA) personnel have been sanctioned on corruptioncharges, but the approachusedhas been unsystematic. The prosecutionof grand corruption cases can be both difficult and dangerous, and the achievement of compliance will depend largely on the political will at the central and local government levelsto tackle corruptionandensure that rules are enforced. 7.6 The follow-up and enforcement o f audit and inspectionfindings varies from one organizationto the next, but it is widely acknowledged that for the follow-up to succeed the organizations concerned - 45 - must work together. For example, the Auditor Generalmay in the course of his work uncover financial mismanagement, misprocurement, or other kinds of wrongdoing. In instances where public funds have beenwasted or lost, it is the Public Accounts Committee (PAC) that decides on the appropriate course of action. The imposition of sanctions, however, would be the responsibility o f the Ministry of Finance, Planning, andEconomicDevelopment(MoFPED). 7.7 Recent legal challenges with respect to the leadership code have diminishedthe powers of the Inspector General of Government (IGG). Cabinet proposals to the ConstitutionalReview Commission (CRC)-including removal o f the power to prosecute and to dismiss personnel, and suspension of the possibilityo f receivingcomplaints inthe tendering process-are consideredby some stakeholdersalso to dilute the powers of the Inspectorate of Government (IG). There are legitimate concerns about the overlapping o f duties, but rather than suspending or removing this authority it would seem more appropriate to first clarify the respective roles and responsibilities of the parties involved, thereby ensuring that the appropriate checks and balances remain in force. The IG has also had difficulty in enforcing the implementation of decisions at the local level, as a result of the autonomy that the constitution has granted to local government. There is a danger of reversing the gains made if the proposedamendmentto the constitutionregardingthe power of the IGGwere to be approved. 7.8 There are some encouraging signs at the lower level, nonetheless. The district service commissions, for example, are becoming more active in disciplining staff there have been many instances of head teachers being disciplined for misappropriating universal primary education (UPE) funds, andof subcounty staffbeingdisciplinedfor embezzlingtax revenues. 7.9 Enforcement of procurement rules is difficult. The PPDA has carriedout only two audits, rarely acts on complaints, and makes few unannouncedinspections. Enforcement is even more rudimentaryat the LG level: the CPAR team witnessed the use of ad hoc procedures, a lack of advertisements, the nonpublicationof awards criteria, andmore. 7.10 The inabilityof the PPDA to enforcethe rules is further illustratedby the followingexamples: 0 The Uganda Wildlife Authority publicly denounced the PPDA, and declared that it would not comply with the provisions of the Procurement Act unless it were assured that its board could participateinthe procurement process 0 At the time ofthe CPAR, the Ministryof Defense (MOD)andthe UgandaPeople's Defense Force hadyet to form the contracts committees requiredby the Procurement Act. In addition, the MOD has assumed full responsibility for deciding the division between classified and other procurements. Legally, it must share this responsibilitywith the PPDA. 7.11 Costly commissions of inquiry, such as one into the purchaseof unreconditionedhelicopters, are becoming commonplace. The findings of these inquiries are rarely acted upon, raising serious concerns about boththe value for money that they represent andtheir usefulness. B. OVERSIGHTBODIES Officeof the Auditor General 7.12 Under the constitution, the Public Finance and Accountability Act (PFAA), and other enabling legislation, the Auditor General has the statutory responsibility to report to parliament on the propriety and regularity of the way in which government monies have been spent. In accordance with the constitution, the AudGen is requiredto conduct both financial and value-for-money(VFM) audits. New - 46 - Public Finance and Accountability(ClassifiedExpenditure) Regulations came into force on 1 July 2003. These regulations require the Office o f the Auditor General (OAG) to examine and inquire into all classifiedexpenditure, and give the OAGfull access to all relevant records.The OAG is a member of the International Organization of Supreme Audit Institutions (INTOSAI) and its African counterpart, AFROSAI. As a member of INTOSAI,the OAG is expectedto apply all auditingstandards promulgated by that body. 7.13 The lack o f independence, and limited control over its own financial and human resources, are seriously compromisingthe ability of the OAG to fulfill its mandate. Consequently there are significant concerns about the accountabilityo f public funds, fiduciary risk is high, and the ability o f the AudGento carry out his role as publicwatchdog is severely restricted.These facts diminishthe ability o fthe AudGen to performan active and effective role inthe fight against corruptionand thereby threaten the long-term sustainabilityof current support initiatives. 7.14 As noted in the report of the INTOSAI task force on the independence of Supreme Audit Institutions (SAIs), "in these days of privatization, decentralization, public sector reforms, and the fight against corruption,ensuringthat SAIs have the independence,competence, andresourcesneededto fulfill their mandatesis more importantthan ever." PRSC 5 accordinglyincludesthe trigger that MoFPEDmust draft a revised audit bill to ensure adequate operational independenceof the AudGen. The revised bill must also mandate that the OAG have its budget approved by parliament, in accordance with the recommendations o f a professionaland independent audit board, and that the OAG have management autonomy over humanresources. 7.15 Despite these operational constraints, the central government has for the last six fiscal years produced its annual reports to parliament within the specified nine-monthperiod (by 31 March). It is anticipatedthat all 2002/03 district and urban authority audits also would be completedon time (by June 2004). The AudGen has set out his strategy for carryingout subcounty audits and is to receive funding through the World Bank. The effective audit of LG accounts at all levels remains a significant problem, however, due to the inadequacy o f manpower, physical infrastructure,communications, and facilities of the regionalaudit offices. The materiality o f local expenditure cannot be ignored, as 40 percent of the national budget (excluding projects) assigned to spending agencies is sent directly to LGs, and approximately75 percent of Poverty Action Fund(PAF) expenditure is made at the local level. Risk is highand is exacerbatedby the fact that there is also weak localoversight. 7.16 The GoU, through voted expenditures by parliament, funds the OAG. The OAG's budget is approvedby parliament via an annual appropriationact, andMoFPEDcontrols the release of funds. Most of the OAG's budget is part of the PAF program andthus is largelyprotectedfrom cuts to releasedfunds, but the OAG must seek the permission of MoFPED to reallocate funds according to its identified priorities. Despite a significant increase in workload and an increased emphasis on accountability, funding for the OAG in real terms has not increased significantly over the last seven years, with its percentageshare ofthe nationalbudgetremainingfairly constant at 0.18 percent. The cost per audit report has fallen, but not as a resultof the better use o f auditresources. Audit riskcontinues to rise. 7.17 The implementationof many of the initiativesto improve the work of the OAG and to enhance the effectiveness o f training furthermore is constrained by the inability of the AudGen to motivate staff through pay, promotion, or other incentives.Incontraventionof SA1principles,he also has no authority to discipline or remove staff. A lack of accommodation and outdated auditing techniques additionally meanthat external auditors are placedwith the line ministrieson a permanentbasis for two to three years, a practicethat has inthe past compromisedthe independenceo fthe auditor. - 47 - 7,18 The AudGenrecognizes that the qualityof audits is low, thanks to poor file documentation, a lack of standard audit programs, and inadequate supervision, A technical advisor, funded under the Bank's second Economic and Financial Management Project (EFMP-11), is working with the OAG to update audit methodologiesand to implement new financial audit manuals, and a second advisor is assisting the OAG in the area o f informationtechnology (IT). Contracting processes also have been reviewed, raising the standardof work done by private sector audit firms on behalfofthe OAG. (There nonethelessremain some concerns about the quality of subcontracted work, and strict quality control measures needto be applied.) 7.19 The AudGen and the IGG have a good working relationship, but there is still a lack of clarity concerning the roles and reporting mechanisms between the AudGen and the PPDA on the issue of procurement audits. There seems to be room for mutual cooperation, without compromising the constitutionalmandate of the AudGen. Adopting a collaborativestrategic approach to the monitoring, audit, and oversight actions associated with the procurement and disposal function at central and local government levelshouldimprove accountability. Parliamentaryand councilcommittees 7.20 There are 12standingparliamentary andcouncil committees, of which five are directly concerned with financial matters. Theseare: 0 the Committeeon Budget; 0 the PublicAccounts Committee (PAC); 0 the CommitteeonCommissions, StatutoryAuthorities, and StateEnterprises(COSASE); 0 the LocalGovernmentAccounts Committee(LGAC); and 0 the Committeeonthe National Economy, whichdeals, amongother issues, withthe approvalof loanagreements. 7.21 There are also 10 sessional committees, including one for finance, planning, and economic development. The Sessional Committee on Legal and Parliamentary Affairs reviews the report of the Inspectorateof Government, among others. These committees are open to the media and members of the public (although the public generally are unaware of this provision).A strategic investment planhas been drawn up to improve the ability of parliament and its supporting committees and technical personnel to understandandcarry out their generalfunctions. 7.22 The PAC has eliminated a considerable amount of the backlog o f reports (see Table 12). However, the Business Committee has not givenparliament sufficient time to debate the outcomes of the reports. The failure to allocate sufficient time to study of the reports undermines the scrutiny process and the whole cycle of accountability. - 48 - Table 12. Status of Reportson CentralGovernment Accounts a. Refers to the year o f the accounts b. Work in progress 7.23 Followingsubmission of the PAC findings to parliament, a treasury memorandum(TM) is issued by MoFPED to inform parliament of the action taken on each recommendation. Only when the PAC reports have been tabled to parliament do they become publicly available. As presentation of the PAC reports is behind schedule, the TMs also are behind schedule, and the effectiveness of the processthus is severely constrained. 7.24 COSASE has two major problems: the informationon the status of the entities within its remit is incomplete, and it has a significant backlog of work. According to the AudGen's records, which are reasonably comprehensive, COSASE oversees 71 entities, each of which must submit a report to the committee. The obligation to review these reports and to undertake special reviews as requested by parliament represents a large workload. Unlike PAC members, COSASE members have received no specialtraining, and few membershave expertise infinancial management. 7.25 LGAC members have been active in reviewing the reports of the Local Government Public Accounts Committees (LGPACs) and associated audited accounts, and LGAC investigations have resulted in some prosecutions, demotions, and recommendations for withdrawal of the status of accounting officers (AOs). There is some debate, however, as to the relevant authorityof the LGAC with respectto the LocalGovernmentPubic Accounts Committees(LGPACs). 7.26 Members of LGPACs are appointees of council, rather than councilors, and within their limited remit function relatively well. They are mandated to examine internal and external audit reports and recommend follow-up actions. Audit reports are of variable quality, however, and LGPAC reports as a result tend to focus on the recommendation of disciplinary action against individuals rather than on underlyingsystems improvement. LGPACs have limitedability or powerto make effective decisions, and their recommendations are rarely acted upon. There is an almost total absence of council scrutiny of accounts, PAC reports, or LGperformance, thus underminingthe localaccountabilityprocess. Public Procurementand Disposalof PublicAssets Authority 7.27 The Public Procurement and Disposalof Public Assets Authority (PPDA) consists o f four main departments: 0 Trainingand Capacity BuildingDepartment; 0 Legaland ComplianceDepartment; 0 ProcurementAudit, Inspection,andInvestigationsDepartment; 0 FinanceandAdministration. - 49 - 7.28 The mainfunctions ofthe PPDA include: 0 advisinggovernmenton publicprocurementmatters; 0 monitoringprocurementperformance; 0 developingtrainingandcertificationstandards for the procurement cadre, andmaintaininglinks with professionalassociations; 0 issuingstandardbiddingdocumentsand guidelines; and 0 conductingperiodicinspections andprocurement audits. 7.29 The PPDA, in the exercise of its regulatory functions, may commission or undertake investigations,andconduct audits, o f any publicprocurement or disposaltransactions. Since its formation it has carriedoutjust two audits, neither of which has been releasedto the public, and only a handfulof randominspections. Personsor entities that have committeda corruptact underthe ProcurementAct may be fined or imprisoned. The responsibility for prosecution rests with either the Inspector General of Government (IGG) or the DirectorofPublicProsecutions (DPP). 7.30 Boththe ProcurementAct andthe regulations stipulate procedures for handlingcomplaintsat the procuring entity, and as a second level of complaint, at the PPDA. The CPAR team found that the procuring entities were largely unaware of their responsibilities in this respect. Most entities are unsystematicintheir handlingof complaints, andthe PPDA is yet to assert itselfas a crediblechannel for complaint.The vast majority of complaints inwhichthe complainer is not satisfiedby the official finding are pursuedat the IGG, by the Auditor General, or handledthrough informalcontacts with the procuring entity. 7.3 1 The few cases that have beenhandledby the PPDA appear to havereceiveda comprehensiveand qualifiedtreatment, but the perception of the bidders clearly is that the PPDA will not providethem with justice. The team suspects that this problem is relatedto the lack of ability of the PPDA to enforce the regulationsin situations where political influence is strong. The same lack of authority also hinders the PPDA in performing its role as a complaints authority. The PPDA, by virtue of its mandate, is independent o f procurement operations, but has been approached for advice in a number of cases, a fact that undermines the perception of the authority as an unbiased entity. Complaints in cases where the PPDA has given advice should be handled by the IGG, and to handle such complaints the IGG should, where he deems appropriate, appoint a specialist procurement agency with the necessary expertise. This would, however, conflict with the Constitutional Review Commission proposals that recommend the removalo fthe IGGfromtendering issues. Directorate of Ethics and Integrity and Inspectorate of Government 7.32 Observers generally recognize that core government functions-particularly in the areas o f remuneration, humanresource management, procurement,and financial management-must work well if the government is to be capable of curbing corruption. They also acknowledge that detection, investigation,andprosecutionofcorruptioncases mustbe improved. 7.33 The Directorate of Ethics and Integrity (DEI) falls under the Office of the President, and is headed by the Minister of State for Ethics and Integrity.It representsthe politicalvoice of anticorruption actioninUganda, and is chargedwith: 0 responsibilityfor developing policiesand legislationto fight corruption; - 50 - 0 coordinatingthe activities o f the anticorruption agencies; 0 monitoring and reporting on the implementation o f anticorruptionprograms; and establishing ethical codes o f conduct for public sector employees. 7.34 Despite staffing constraints, the DEI has advanced the approval process for new legislation, including anticorruption legislationandwhistleblower protection. 7.35 The DEI also arranges an interagency forum" on a monthly basis. This is designed to help improve working relationships, but there is some debate both within and outside the forum on the respective roles o f some o f the agencies involved and on the lack o f clarity on some issues, including mandates. A key concern relates to the extent to which forum members can work together without compromising their constitutional independence. There also is considerable concern as to how effective MoFPED can be incarrying out both oversight and implementation activities. 7.36 The functions o fthe Inspectorate o f Government (IG) include: 0 supervision o fthe enforcement o f the leadership code; 0 promotion and fostering o f strict adherence to the rule o f law; 0 public awareness programs; and 0 investigations. 7.37 Supported by the Danish International Development Agency (DANIDA), the IG's leadership directorate has completed analysis o f the 65 asset declarations received from government ministers and has commenced the verification process for this group. 7.38 The twice-yearly IGreports outline the type o f work that the inspectorate perform and detail the volume o f complaints and investigations. Between 1996 and 2001, the inspectorate has obtained 10 convictions and 189 prosecutions. The number o f new cases opened in this period exceeded 16,000, but many o f the IG's investigations are carried out in conjunction with the police and the DPP and are not included incalculations o fthe IG's own results. 7.39 The IG also runs a public awareness program that has been effective in raising the profile o f the organization and inadvising the public on how to complain about corrupt practices. However, as noted by the National Integrity Survey, there is growing public acceptance o f bribery and corruption. This suggests that the actual and opportunity cost o f corrupt activities needs to be conveyed more effectively to the public. Professional bodies 7.40 The main functions o f the Institute o f Certified Public Accountants o f Uganda (ICPAU) are regulating and maintaining the standards o f accountancy and prescribing and regulating the conduct o f professional accountants. In 1997 the institute also developed a code o f ethics for its members. 7.41 The accountancy profession inUganda plays an important role inenhancing accountability inthe management o f public funds, not only through its members who are employed in the public sector,but also through those who provide audit services to institutions entrusted with public funds. However, there i s no quality control or peer assessment program to monitor local auditing firms to ensure that they Membershipofthis forum includesrepresentatives from the DEI, OAG, IG, police (criminalinvestigationdepartment), DPP, PAC, andMoFPED. - 5 1 - comply with minimumstandardsandmaintainthe hightechnicalstandards prescribedby the ICPAU; nor does the institute itself have the capacity and resources to monitor and enforce compliance. There therefore is an obvious fiduciary risk relatedto the inadequateregulationand compliancemechanisms of the profession. The Eastern, Central, and Southern Africa Federation of Accountants is working to addressthis issue, but is limitedby financialresources. 7.42 There are two associations for procurement and purchasing professionals in Uganda: the Chartered Institute of Purchasing and Supplies (CIPS) and the Procurement and Logistic Management Association(PALMA). CIPS is a locally registeredgroup of individuals who have passedthe UK CIPS course, and PALMA is a Uganda-based organization that for some years was supported by the International Trade Center of the United Nations. Both organizations are weak, and neither focuses explicitly on public procurement. There is a clear needto establish a strong professionalassociation for procurement specialists; this, together with the PPDA, could promote the profession, provide a professional code o f conduct, and assist with capacity-building measures. The ethical dimension is particularly important because the existing ethical framework is weak and self-regulation is virtually nonexistent. Neither of the two existingorganizations could provide examples of members having been excludedon ethicalgrounds, despite numerousexamples ofmisconduct. c. ACCESSTO AND AVAILABILITY OF FINANCIALMANAGEMENT INFORMATION 7.43 In internationalhumanrights legislation,freedom of information is part of the fundamental right of freedom of expression. Uganda, in line with other democratic societies, has made some progress toward ensuring that the public has access to financial information.The constitutionguaranteesthat the budget estimates and audited annual accounts of government come to the public domain through parliament, which sits inpublic.The deliberations o fthe PublicAccounts Committee (PAC) also are open to the public, although this right is not widely used. The approved budget reports, the government's annual accounts and the Auditor General's report on those accounts, and the reports of the PAC are available in public libraries. Civil society is engaged in the public sector budget preparation process through workshops that are conducted at all levels of government (althoughthe budget documentationis perhapsinsufficientlytransparentto facilitatemeaningfuldialogue). 7.44 The Access to Information Bill, No. 7 of 2004, is currently before parliament, but there are provisionsin law (such as the Official Secrets Act, Cap. 302; the Public Service Act, Cap. 288; the Penal Code, Cap. 120; and the 2002 AntiterrorismAct) that could, if appliedinappropriately,restrict access to public information.Subsidiary laws regulatingthe operations of the press and other media (the Press and Journalist Act, Cap. 105, and the ElectronicMedia Act) similarly set limits on the informationthat may bepublished. For example, Section4 ofthe PressandJournalist Act allows"access to official information subject to any law inforce relatingto nationalsecurity, secrecy, or confidentialityof information." 7.45 The procurement regulations call for all tenders to be made available to the public through postingon a noticeboard and throughadvertisement in"at least one newspaper" of wide circulation,and this provision is generally followed. The PPDA does not maintain a current list of all bidding opportunitieson its website, however.Sucha listingwould solve the problemo f highadvertisement costs that the team found in some instances had been the only reason that an open tender method was not applied. However, real progress in improvingthe overall transparency of the public procurement process in Uganda lies not in systems o f publication, but in increasing the volume o f procurement carried out throughopentender. - 52 - 7.46 Section 126 o f the procurement regulations provides for the use o f prequalification lists, or "registration lists." Perhaps the most worrisome practice surrounding the registration lists is the way potential bidders are selected. The regulations require the bidders to be rotated on the shortlists, but the CPAR team found evidence that the rotation was flawed and in no circumstances did the team find the necessary and required public disclosure o f a rotation system. Public awareness o f the activities o f the PPDA generally is limited, but there are plans to conduct a publicity campaign to address this issue. 7.47 Information maintained at the Registrar o f Companies is unreliable, incomplete, and often difficult to find, as the filing system is paper-based and incorrectly maintained. This unreliability o f the registrar is unfortunate, as investors and joint-venture partners need independent verification o f the soundness o f companies with which they propose doing business; the public also should have access to the names o f directors o f companies that are awarded public contracts. Significantly, a 2003 survey o f private enterprises in Uganda identified the Registrar o f Companies as one o f the five greatest administrative barriers to investment inthe country. 7.48 While most LGs are not open, transparent, or accountable, they are also not closed nor secretive. In cases where there is corruption at a high level, there logically will also be a lack o f enthusiasm for openness and transparency, but the main reasons for lack o f transparency are inpractice a combination o f not knowing how to be transparent and a lack o f priority given to becoming transparent. The information that is displayed typically is not user-friendly and is often out o f date, and information officers have little expertise in public relations and communication. The one notable exception in the sample group was again Kabale, where the LG publishes newspapers and local councilors regularly appear on a local radio station. 7.49 Effective mechanisms for local transparency and accountability are key to ensuring the efficient use o f resources at the level of the service unit. The effect o f publishing universal primary education (UPE) receipts on school notice boards, ensuring that the vast majority o fUPEfunds reached schools, has been widely quoted outside Uganda.29However, there is little accountability regarding the actual use o f those funds and the resultingoutputs, and this is a serious cause o f concern for many stakeholders. D. KEYCHALLENGES 7.50 The major challenge for all oversight bodies is to improve their capacity and credibility as watchdogs o f government activities. They must ensure that the rules are enforced. In order for them to fulfill their functions, there must be willingness at all levels o f government to comply with the rules: unless rules are enforced, the government and the Ugandan people will continue to obtain poor value for money from the expenditure o f public funds. 7.51 For the Office o f the Auditor General to operate as a Supreme Audit Institution, it must have greater independence, and clear separation from the finance and public service ministries. The Public Procurement and Disposal o f Assets Authority must improve its credibility as a regulatory and monitoring body, and parliamentary and council committees must have a better understanding o f the roles that they play in ensuring financial accountability and high levels o f service delivery. 7.52 The most difficult challenge that faces government, however, is to ensure that the public interest is upheld and that the authority and capacity o f the anticorruption authorities i s not compromised. The government must at the same time seek to develop a culture that is less accepting o f poor service, nontransparent practices, and lack o f information. 29 MacKinnonandReinikka - 53 - LESSONSLEARNERAND PROPOSEDACTION PLAN A. THECIFA PROCESS 8.1 This chapter outlines the lessons learned from the Country Integrated Fiduciary Assessment (CIFA) exercise andoutlines the way forward. 8.2 The effective managementof a government's financialresourcesconsists of a number of separate but relatedprocesses, involvinga variety of different stakeholders and levels of government. The CIFA aims to provide a means by which the government can comprehensively address the fiduciary risk issues relatingto budgetary and financial accountability at all levels of government. The assessment will help government to meet the demands of its citizens and development partners for an integrated and holistic approachto assessingpublic financial management(PFM) and associatedrisk. 8.3 InUganda, preparingthe CIFA has involvedthe coordinationand consolidationof four separate Bank diagnostic processes: the Country Procurement Assessment report (CPAR), the Country Financial Accountability Assessment (CFAA), the Local Government IntegratedFiduciary Assessment (LGIFA), and the Public Expenditure Review (PER). These exercises were supplemented by two additional assessments: the Tracking Poverty, Reducing Spending Assessment, conducted by the Bank and the International Monetary Fund (IMF); and the Fiduciary Risk Assessment, conducted by the UK Department for InternationalDevelopment (DFID). It is importantto ensure that the maximumbenefits are derivedfrom these exercises and that the lessons learned are used to shape future reforms.It is also important that the CIFA itself provides tangible additional value-specifically, that it helps the GoU to prioritize its actions and to recognize the interdependencies within the PFM framework and between different reforminitiatives. 8.4 The overall CIFA process has spanned a nine-month period, with each of the individual assessments being conducted over a two- to three-month period and the PER process being carried out over the entire nine months. The CIFA has benefitedfrom strong coordinationof the various components and from lengthy and continuous consultationwith key stakeholders. A good working relationship with the GoU and other major non-governmental stakeholders and the excellent coordinationof development partners playedan importantpart inthe process. B. BENEFITS 8.5 The integration of the different components of the study highlighted the links between the diagnostic processes and enabled a greater degree of harmonizationof these processes.It also helpedto improvethe GoU's and other stakeholders' comprehensionof PFM issues, by providinga comprehensive overview of the situation. The CIFA similarly highlightedthe dependencies within the PFM framework, andthe clear linksto other reformprograms. 8.6 The integrated proposed action plan and assessment of fiduciary risk is designedto provide the GoUwith a sound basis from which to improvePFM inUganda. The planand assessment also provide a means to ensure that the various diagnostic assessments relay a consistent message on prioritizationto mitigaterisk. - 54 - 8.7 Includinga specific local government component should be effectiveinthe decentralizedservice deliveryenvironment that prevails inUganda.Uganda's CIFA at the LG levelis the first of its kind inthe new generation of public expenditure and financial accountability (PEFA) LGIFA's use of a quantitative benchmarking exercise has proved beneficial in enabling a comparative assessment of different LGs, and should also prove a usefulmethodof comparingtrends over time. The use o f "yes-no" benchmarks also mitigatesthe subjectivityo f the assessment. Clearly, giventhe large number of LGs, the size of the sample and the degree to which the LGs chosen are representative i s an important issue. Althoughthe sample usedis small, it is consideredto be representative. c. LESSONS FORTHE FUTURE 8.8 The CIFA takes the CFAA and PER a step further, by including an executive summary and developingan actionplanthat incorporates the two diagnostics. The CIFA exercise emphasizedboththe commonalityof problems betweenthe different levels of government and the differences. Inretrospect, a more probinganalysis at the LG level might have produced a clearer understandingof the causes of the problems, rather than merely the symptoms. Includinga procurement specialist in the LGIFA (or better coordination with the CPAR) also could have helped produce a closer understanding o f the problems surrounding procurement at the local level. 8.9 Future exercises will try to improve the consistency o f the PER and CIFA reports and reduce overlaps betweenthem. The next PER and CIFA also will aim to provide a more dynamic analysis of the budget process and allocations while reducing the normative expectations. We propose that budget formulationissues infuture beremovedfromthe CFAA and leftto the PER. 8.10 The experience o f this exercise will also help to better coordinate future financial management analysis of the central and local government finance functions, enabling it more effectively to address pertinent issues at the sector level, both in the finance and service departments. Future exercises also should address the wide variety and diversity of statutory authorities, state enterprises, and other semi- autonomousorganizations, and shouldmoreclosely address any specific PFMconcernsthat may not have beenadequatelytackledhere. 8.11 Finally, future diagnostic exercises (should be more closely aligned with the GoU's budget process, so that any recommendations made can be more rapidly incorporatedinto the process. Shorter, periodic reviews of progress that can be aligned with the budget process are needed; the more comprehensive analyses should be conducted less frequently. Annual exercises should use as their basis the public expenditure and financial accountability (PEFA) PFM performance measurement framework. This uses 25 government indicatorsand two development partner indicatorsto assess the state of PFM in Uganda, andthus to monitorthe progress ofthe GoU's actionplan. D. KEYCONCLUSIONSAND CHALLENGES 8.12 The GoU and stakeholders have gained considerable knowledge and experience through performing this exercise. The CIFA provides significant tangible benefits to the GoU, including an integrated action plan, the potential for reducingtransaction costs, a robust platform on which to build sustainable budget support, and a broad assessment of fiduciary risk. A number of issues and challenges remain, however, regardingthe future format of such exercises and how the DP technical groups should 30 The PEFA programisjointly financed by the World Bank's DevelopmentGrantFacility (DGF), the EuropeanCommission (EC), the UK'sDepartmentfor InternationalDevelopment (DFID), the Swiss State Secretariat for EconomicAffairs (SECO), the RoyalNorwegianMinistry o f ForeignAffairs, andthe FrenchMinistry of ForeignAffairs. The InternationalMonetary Fund(IMF) andthe Strategic Partnershipwith Africa (SPA) are also partners. - 55 - evolve their traditional ways of working. Key issues to be agreed both intemally and with the GoU and other stakeholdersinclude: e the frequency and content of such comprehensive exercises - every three years has been proposed; e the relationship between the CPAR, PER, CFAA, CIFA, and the emerging PFM performance measurementframework beingdevelopedthroughthe PEFA program; e the relationship of the CIFA action plan to other reform initiatives, in particular the Poverty ReductionSupport Credit(PRSC), the Economic andFinancialManagementProject(EFMP), the Financial Accountability Program (FAP), and the Capacity and Performance Enhancement Project(CAPEP); e the extent to which the Public Expenditure Management Committee (PEMCOM) can or should take the leadintakingthe processforward; e the role of other stakeholders, including line ministries, nongovernmental organizations, and development partners; e the changes to make to the process and to the substance of the process when repeating the exercise; and e the balance between ensuring that the action plan addresses comprehensively the key issues facingthe government, andensuringthat its scope doesnot render it self-defeating. 8.13 PEMCOMhas been entrustedwith the responsibilityof discussingand makingrecommendations onthese issues. E. THEPROPOSED ACTIONPLAN 8.14 It is clear from the assessment that the GoU has made considerable progress in pursuing an improved legislative framework, greater technical capacity, and more appropriate institutional arrangements. However, ifthe time, money, and effort invested inthese activitiesare to be rewarded, two recurringthemes of this assessment must be urgently addressed. First, ifthe government's fiduciary risk is to be reduced, and in particular poor value for money mitigated, it i s essential that technical improvements be combined with a comprehensivereview of the public sector, to identify core activities and eliminate duplication. Second, there must be willingness at all levels of government to enforce the rules. Unless the rules are enforced, the government andthe Ugandanpeople will continue to obtainpoor VFM from public funds. 8.15 Annex C sets out the proposed action plan.This plancaptures both ongoing or already identified activities (60 percent of the total) and new activities that require clarification or initiation by the government (40 percent). The 60 percent ongoing and identified activities break down into 29 percent ongoing, o fwhich 10percent are activitiesthat requirerefinementor expansion, and 31percent on which the GoU has merely indicated an intentionto act. These activities are all includedin the action plan to ensure that stakeholders have a comprehensive picture of the issues that need to be addressed. Their inclusionfurthermore highlights issues, such as public service, pay, and anticorruption, that may not be traditionally found in PFM plans, but for which improvement is fundamental to the success of PFM reforms. 8.16 The plan identifies short-termand medium-term actions, identifyingthe responsible person or institution and the desired outcome. As noted in Section 8.4, the GoU has indicated that it intends, - 56 - through PEMCOM, to review the proposals in detail and to rationalize and phase in the implementation accordingto sector capacity and recognized need. F, IMPLEMENTATION ARRANGEMENTS Coordinationand management 8.17 The effective coordination and management o f the reforms is critical to ensure that expenditure represents good VFM; to improve public service delivery; and to recognize the linkages and dependencies between different government activities and institutions. Uganda has been running a plethora o f reform initiatives, associated action plans, and internal and external monitoring and evaluation systems. In the last 12 months, all stakeholders have made a concerted effort to rationalize the situation. 8.18 The cabinet recently has approved an institutional framework to coordinate and streamline the implementation o f government policies and programs. This framework is a four-tier coordination mechanism, including: 0 a cabinet subcommittee on policy coordination, comprising the ministers o f the coordinating ministriesand chaired by the prime minister; 0 the Implementation Coordination Steering Committee (ICSC), comprising all permanent secretaries and chaired by the head o f public servicehecretary to the cabinet; 0 a technical implementation coordination committee-a multisectoral technical committee that will be chaired by the permanent secretary of the Office o fthe Prime Minister (OPM); and 0 sector working groups (SWGs), representing all sectoral stakeholders. 8.19 This mechanism is designed to facilitate intrasectoral coordination, to help realizesector targets and goals. 8.20 The ICSC reviews the progress made inthe area o f the Poverty Reduction Support Credit (PRSC) reforms and processes, and is supported by a secretariat in the OPM. It is required to ensure the consistency and harmony o f all government policies and programs. To fulfill this mandate the ICSC must ensure that programs such as public service reform and anticorruption plans follow agreed timetables; it also must ensure that there is due recognition o f inter- and intra-program linkages and sequencing implications. For instance, local governments need to liaise closely with the National Capacity Building Policy program, which is coordinated by the Ministry o f Local Government (MoLG). Specific donor projects in the LG environment historically have been targeted to specific geographical areas, but again there is a need for liaison with any countrywide policy initiatives, to ensure their consistency and compliance with the national agenda. 8.21 PEMCOM is mandated to provide a framework for improved awareness, coordination, harmonization, and resourcing and monitoring o f central and local government activities, pertaining to public financial management within the context o f the PEAP and the PRSC. Membership o f the committee includes the permanent secretaries from the health, education, public service, local government, and agriculture and works ministries; the Public Procurement and Disposal o f Assets Authority (PPDA); the Office o f the Auditor General (OAG); the Accountant General's Office (AGO); the Director, Budget; and three development partners. The committee is chaired by the permanent secretaryhecretary to the treasury. PEMCOM's central role in coordinating, monitoring, and reporting on the progress o f the CIFA action plan needs to be clearly articulated. The support provided through EFMP2 and FAP should be viewed as a resource for achieving the desired improvements in PFM. - 57 - 8.22 Responsibilityfor managingthe various activities is assignedeither to the responsible department or, as highlightedin Figure2 inthe LG context, to one of the three maincommittees workingon different aspects of LG financial management. These are the Local Government Budget Committee, the Local Government Releases and Operations Committee, and the Local Revenue Enhancement Committee. These are all governmentcommittees, but it is nonetheless importantthat donor initiativesbe coordinated with these efforts. We therefore recommend that a representative o f the donor subgroup on decentralizationbe co-optedonto the relevant committee. G. MONITORING EVALUATION AND MECHANISMS 8.23 There is a multiplicity of monitoringandevaluation (M&E) mechanismsinplace inUganda.This results in the creation o f poor quality information, duplicationof effort, and diversiono f resources from service delivery. The NationalIntegratedMonitoringand EvaluationStrategy (NIMES) accordinglyhas beenset up as a first step towardrationalizingM&E. The agreedPoverty EradicationActionPlan(PEAP) results and monitoring mechanism provide a high-level basis on which to assess performance in the various PEAP initiatives. The proposedaction plan supports the weaknesses, highlightedby NIMES, on information collection. The GoU has indicatedthat it will decide the exact modalities for coordination, monitoring,andevaluationby October 2004, inconsultation with stakeholders. 8.24 The progress of PFM reforms additionally will be assessed on an annual basis using the PFM PerformanceMeasurementFramework, which is beingdevelopedandpilotedas a test case onthe basis of the CIFA report. Over time, we anticipate that the need for separate assessments such as the Tracking Poverty, Reducing Spending Assessment and the IMF's Fiscal Transparency Report on Observance of Standardsand Codeswill be graduallyeliminated. H. NEXTSTEPS 8.25 PEMCOM has proposed that before October 2004 it will review and agree with the relevant government stakeholders its relationshipwith the coordinatingand integratedmonitoringand evaluation mechanisms approved by Cabinet for the oversight of the PEAP. It also intends to review its own mandateandcompositionto ensurethat it is able to take the actionplanforward. 8.26 To take the CIFA forward, and in particular to take forward the action plan, the GoU has indicated that it intends, through PEMCOM, to review the action plan in detail, set out tasks, and prioritize and sequence the necessary activities. It also will assign responsibilities, to take account of specific dependencies and capacities. In those cases where financial assistance may be required, PEMCOMwill also estimate costs. This initial work on the actionplanwill be done beforeOctober 2004 to ensure that any financialrepercussionscan be incorporated intothe budgetprocess. 8.27 From the perspective o f the development partners, the intention is to monitor progress on an annual basis usingthe PFM Performance Monitoring Framework. Once any revisions have been made, the assessment will form the basis for future work. Over time, the need for other assessments should be gradually eliminated.PEMCOMmay also requestthat more detailed work on high-riskareas such as pay andprocurementbe carriedout. - 58 - Figure2. ProposedImplementationArrangements for LGComponents - f - Joint Annual ' .I Decentralization Review I e EM e \ 1 .I z1 s5: t 1 .I PEMCOM .I da 7 0 e .I c) LGReleases LGRevenue iz Committee & Operations Committee Committee - 59 - ,z b E II 8 n .- c L aM 8 e! E, E d e p e p u e p u I 3 \o I U U n a n n a a U U n a n n L, a .-B A r e, a W a n I 3 I 3 I I I v) \o I I vi 3 .-%& 0 fe, U 0 e, m e, E, i E I W d W 8 I e e I e, c) 9 50 a x Y 2 =E!m se B a cd U 0 88 Y 3 e, I cc W I cj v; N m N N I 0 F I a 3 3 4i L ii m -d $E * 0 3 3 eOD eU E e, 9 g- 5 'Z2 E2 V 'B 5 i-) Y 8 E Y 33 C 2 5n n V 3 3 $1 I 3 U c 3 I m t- I 4 '2: 2 3 G G W v v 3 3 4 0 4 s e h h h v 3 7 I I 4 h h h d 3 e s e n A A n n h v e & E- . W e W .s 5 s U e, 00 3 3 i3 r2 .-.- v e h n h n h n0 v s Wd e W I I .e e 4 I 3 3. v 4 L Q. ;2 3 h h m h h v W v v h 4 h h e h 4 v v W N m -0 N0 N =' d I 3 ? ? h h h v v v I I h v N 00 c u 3 3 s c1 s, n W I 0 ec I N E N C > 4 3 o a , 3 4 n h h W c e A h c e I 3 00 I - n h n W e 4 e m V b Y 4 = v 3 O a, h n v Q v h v Q e n n 0 v e, Lc m n 00 cm I m OQ h n T h v e d I I % e I Y m eq 3 4 3 W W 3 v 4 4 ; t ? 2.4, 4 z e h h z e h h z e h h h v . - A s I rl 00 I h h v e h h v e h h v e h v d m 0 $ 4 h td h h v z e eL oe h h I h h `4 h v e h 4 e W 0 2 d de, d00 3 0 2 % h h h v 3 e -a -e h h h h W W v e '3 * Y BIBLIOGRAPHY Ablo, E. and R. Reinikka. 1998. "Do Budgets Really Matter? Evidence from Public Spending on Education and Health in Uganda." World Bank Research Paper No. 1926. Washington, D.C.: World Bank. Appleton, S. and S. Ssewanyana, 2003. "Poverty Estimates from the UgandaNational Household Survey 11, 2002/03." Background paper to the Report of the Uganda National Household Survey 11, 2002/03. Uganda Bureau of Statistics, Entebbe. Deininger, K., and P. Mpuga. 2004. "Economic andWelfare Impact of the Abolition of Health User Fees: Evidencefrom Uganda." World Bank Working Paper, No. 3276. Washington, D.C.: World Bank. Knapp, M., 1984. The economics of social care. Basingstoke: McMillan. McPake, B., 1993. "User charges for health services indeveloping countries: A review of the economic literature." Social Science and Medicine, 36:11, pp. 1397-1405. MillenniumProject, 2004. "Millennium DevelopmentGoalsNeeds Assessment:Country Case Studies of Bangladesh, Cambodia, Ghana, Tanzania and Uganda", Working Paper (draft 17 Jan 2004). Mpuga, P., and S. Canagarajah. 2004. "Government Budgets, Gender, and the Poor: Analysis of the Social Service Sectors inUganda." World Bank, Kampala, processed. Okidi, J.A, P.O. Okwi, and J. Ddumba-Ssentamu. 2003. "Welfare Distribution and Poverty in Uganda." African Economic ResearchConsortium, Nairobi, Unprocessed ResearchReport. Reinikka, R. 2001. "Recovery in Service Delivery: Evidence from Schools and Health Centers." In Ritva Renikka and Paul Collier, eds., Uganda's Recovery: The Role of Farms, Firms, and Government. Regional and Sectoral Studies. Washington, D.C.: World Bank. Reinikka, R., and P. Collier. 2001, Uganda's Recovery: The Role of Farms, Firms and Government. Regional and Sectoral Studies. Washington, D.C.: World Bank. Reinikka, R., and J. Svensson. 2003. "The Power of Information: Evidence from a Newspaper Campaign to Reduce Capture." World Bank discussion papers. Washington, D.C.: World Bank. -. 2004. "Local Capture: Evidence from a Central Government Transfer Program in Uganda." Quarterly Journal of Economics, 119(2). Republic of Uganda, 2004a. Indicative Preliminary Revenue and ExpenditureFramework, 2004/05-2006- 07. Ministry of Finance, Planning and Economic Development. - 88 - , 2004b. Background to the Budget 2004/05. Ministry of Finance, Planning and Economic Development. , 2004c. Semi-AnnualBudgetPerformance FY 2003/04. Ministry of Finance, Planningand Economic Development ,2004d. "Uganda Local Government IntegratedFiduciary AssessmentReport, 2004." Ministryof Local Government. A study sponsored by the World Bank and conducted by Consultants from the Overseas Development Institute (ODI). ,2004e, ReleaseTrackingStudy,KebuConsultantsandEPRCReportfor MOFPED, May2004. ,2004f, "The PovertyEradicationAction Plan, 2004." Draft revisedversion. MinistryofFinance, Planningand Economic Development ,http://www.finance.go.ug/peap-revision, July 2004. 2004g, "Affording Uganda's Public Administration sector." Background paper to the Fourth Poverty Reduction Support Credit (PRSC4) negotiations prepared by Ranjana Mukherjee for March2004. , 2004h, "Long Term Expenditure Framework." Ministry of Finance, Planning and Economic Development, Kampala. ,2004i. "Expenditure ReleaseTrackingStudy," MinistryofFinance, PlanningandEconomic Development, May 2004. Kampala ,2003a. "Uganda's progressinattainingthePEAPtargets-inthecontextoftheMillennium Development Goals," background paper prepared for the Consultative Group Meeting, Kampala, 14-16 May 2003, Ministry o f Finance, Planning and Economic Development, Kampala. , 2003b. Background to the Budget 2003/04. Ministry of Finance, Planning and Economic Development. ,2003c.ThePublicFinanceandAccountability Act, 2003.TheUgandaGazetteNo.3, Vol. XCV. ,2003d. Review of Local Government Public Financial Management 2003. Ministry of Local Government, Kampala. -- -3 2003e. "Review of Business Processes of the Payroll and Pensions System o f Central Government of Uganda," Ministry o f Finance, Planning and Economic Development. A study conducted by Crown Agents Ltd. -, 2002a. Uganda Participatory Poverty Assessment Process: Deepening the Understanding of Poverty. Second Participatory Poverty Assessment Report. Ministry of Finance, Planning and Economic Development. -, 2002b. Health Sector StrategicPlan, 2000/01- 2004/05. Ministryof Health, Kampala. ,2002~.Baseline study offinancial management systems. A study conducted for the Justice Law and Order Sector, Ministry of Justice and ConstitutionalAffairs, Kampala. - 89 - ,2002d.LawsofUganda,RevisedEdition,2000.Ministry ofJusticeandConstitutionalAffairs, Kampala. -Y 2002e. Baseline Study of Financial Management Systems. Study conductedfor the JusticeLaw and Order Sector. Kampala:Ministry of Justice and ConstitutionalAffairs, Republic of Uganda. , 1999. "The National Assessment of Progress in Education, 1999." Ministry of Educationand Sports, unpublishedreport. ,1998."Second EconomicandFinancialManagementProjectEFMPIIdesignstudies," Ministry of Financial, Planningand EconomicDevelopment, Kampala. Ssewanyana, S.N., J.O. Nabyonga, I.Kasirye, and D. Lawson. 2004. "Demand for Health Care Services in Uganda: Implications for Poverty Reduction." Economic Policy Research Center discussion paper, unpublished. Ssewanyana, S.N., J.A. Okidi, D. Angemi, and V. Barungi. 2004. "Understanding the Determinants of IncomeInequality inUganda." Economic Policy Research Center discussionpaper, unpublished. TransparencyInternational,2004. Global CorruptionReport, 2004. London: Pluto Press. UDN, 2003. Monitoring the Use of the School Facilities Grant (SFG) for Primary Schools. The Uganda Debt Network. Kampala, ISBN:9970 838 133. UNDP, 2004. Human Development Report, 2004: Cultural Liberty in Today's Diverse World. United Nations Development Programme,New York. Williamson, Tim and Canagarajah, Sudharshan (2003) "Is there a placefor Virtual Poverty Funds inPro- Poor Public SpendingReform? Lessons from Uganda's PAF. Development Policy Review, Volume 21: " 4, July. World Bank andInternationalMonetary Fund, 2004. "The Republicof Uganda:Tracking Poverty- ReducingSpending: SecondAssessment and Action Plan(AAP)," Report Preparedby the IMF /WB, June 2004. World Bank, 2004. Fourth Poverty Reduction Support Credit Program document. Unprocessed, the World Bank, Washington D.C. -, 2003a. Third Poverty Reduction Support Credit Programdocument. Unprocessed, the World Bank, WashingtonD.C. -, 2003b. The Republic of Uganda Public Expenditure Review: Supporting Budget Reforms at the Central and Local Government Levels. Poverty Reduction and Economic Management 2, Africa Region. The World Bank, Washington D.C. -, 2004. Fourth Poverty Reduction Support Credit Program, Negotiation Aide Memoire . Unprocessed, the World Bank, Washington D.C. -, 2001a.World Development Report, 2001/02. The World Bank, WashingtonD.C. - 90 - -9 2001b. The Republic ofUgandaCountry FinancialAccountability Assessment Report, 2001. OperationalQuality and Knowledge Services Unit,Africa Region, the World Bank, Washington. D.C. -3 2001c. The Republic of UgandaCountry ProcurementAssessment Report, 2001, Operational Quality and Knowledge ServicesUnit, Africa Region,the World Bank, Washington. D.C. -3 2001d. HIPC Tracking Study 2001/2, The World Bank, Washington D.C. -3 1993. WorldDevelopment Report 1993.The World Bank, Washington D.C. -91 -