Report No 42167-ZR Democratic Republic of Congo Public Expenditure Review (PER) March 2008 Poverty Reduction and Economic Management 3 Africa Region Document of the World Bank Co-produced with the Government of the Democratic Republic of Congo Department for International Development MICS2 Multiple Indicator Cluster Survey, 2nd Series MinBud Ministry of Budget MinEPSP Ministry of Primary, Secondary, and Professional Education MinFin Ministry of Finance MinSect Line Ministries MinWA Ministry of Women's Affaires MSF Médecins sans Frontières MTEF Medium-Term Expenditure Framework NGO Non-governmental organization NPV Net present value ODA Official Development Aid OECD Organization for Economic Cooperation and Development OFIDA Customs Agency (Office des Douanes et Accises) OGEDEP Debt management agency (Office de Gestion de la Dette Publique) PER Public Expenditure Review PETS Public Expenditure Tracking Survey PFM Public Financial Management PHC Primary health care PPG Public and publicly guaranteed PRSP Poverty Reduction Strategy Paper PSF Pharmaciens sans Frontières SANRU Santé Rural Project SP Deconcentrated provincial offices (Services Provinciaux) SWAP Sector Wide Approach TENAFEP The exam required to pass 6th grade/primary level TOFE Treasury Operations Report (Tableau des Operations Financières et Économiques) UN United Nations UNAIDS United Nations Programme on HIV/AIDS UNICEF United Nations Children's Fund UNCTAD United Nations Conference for Trade and Development USAID United States Agency for International Development US$ United States Dollar WHO World Health Organization Vice President: Obiageli K. Ezekwesili Country Director: Marie-Francoise Marie-Nelly Sector Director: Sudhir Shetty Sector Manager: Jan Walliser Lead Economist: Hinh T. Dinh Task Team Leader: Keiko Kubota iii TABLE OF CONTENTS Executive Summary....................................................................................................................................1 Introduction ..............................................................................................................................................1 Chapter 2: Analyses of public expenditure trends and fiscal sustainability .............................................3 Chapter 3: Public financial management..................................................................................................5 Chapter 4: Education sector......................................................................................................................7 Chapter 5: Health sector ...........................................................................................................................9 Chapter 6: Gender...................................................................................................................................11 Chapter 1. Introduction And Country Overview............................................................................19 Chapter 2. Analyses Of Public Expenditure Trends And Fiscal Sustainability...........................26 2.1. Trends in public expenditure and revenues...........................................................................26 2.2. Fiscal Sustainability Analysis ...............................................................................................39 2.3. Conclusion and recommendations ........................................................................................45 Chapter 3. Current Situation Of Public financial management....................................................47 3.1. Main findings of the 2002 public expenditure review ..........................................................47 3.2. The basic principles of the Congolese budget management system .....................................48 3.3. Budgeting and accounting practices ­ Main weaknesses......................................................55 3.4. Traceability of public spending at the central and provincial levels. Roles of line ministries and governors.....................................................................................................................................62 3.5. Deviations between executed and voted budgets..................................................................63 3.6. Main recommendations for public financial management....................................................64 Chapter 4. Education Sector.............................................................................................................71 4.1. Introduction...........................................................................................................................71 4.2. Education sector baseline review ..........................................................................................72 4.3. Institutional and contractual structure...................................................................................74 4.4. Budget Process......................................................................................................................77 4.5. Observations on expenditure execution ................................................................................83 4.6. Decentralization ....................................................................................................................92 4.7. Recommendations.................................................................................................................93 Chapter 5. Health Sector...................................................................................................................97 5.1. Health Situation and System .................................................................................................97 5.2. Sector Strategy and Decentralization ..................................................................................100 5.3. Domestic Public Sector Health Spending ...........................................................................101 5.4. Government Budget and Disbursement Process .................................................................106 5.5. Health Financing in Selected Provinces..............................................................................107 5.3. International Public Sector Health Spending ......................................................................112 5.4 Health Sector Financing Requirements...............................................................................120 5.6. Conclusions and recommendations.....................................................................................124 Chapter 6. Gender ...........................................................................................................................128 6.1. Introduction.........................................................................................................................128 6.2. Institutional Framework......................................................................................................130 6.3. Budgetary Framework.........................................................................................................131 6.4. Sectoral Issues-Education, Health, and Security.................................................................132 6.5 Recommendations...............................................................................................................138 iv LIST OF TABLES Table 1.1: Incidents of poverty ...................................................................................................................19 Table 1.2: DRC Selected economic indicators (% GDP unless otherwise indicated) ................................21 Table 2.1 : Executed Programmed Expenditures........................................................................................35 Table 2.2: Budget Execution Reports versus Treasury Operations Report.................................................37 Table 2.3: Definitions of Scenario..............................................................................................................42 Table 3.1: Rates of execution by category of expenditure..........................................................................63 Table 3.2:Rates of execution by function ...................................................................................................64 Table 4.1: Summary of education indicators for primary education ..........................................................74 Table 4.2: Regularized and non-regularized personnel (2007)...................................................................77 Table 4.3: MEPSP and total budget execution ...........................................................................................77 Table 4.4: Analysis of teacher payroll leakage...........................................................................................85 Table 4.5: School block grant program.......................................................................................................88 Table 5.1: Government health budget and expenditures, 2001-07 ...........................................................102 Table 5.2: Government health budget and expenditures by category, 2006.............................................103 Table 5.3: Government health expenditures by category and type, 2006.................................................104 Table 5.4: Monthly revenues of selected health facilities in Equateur and Katanga, 2007 (US$)............110 Table 5.5: Monthly revenues of selected hospitals in Nord-Kivu, 2004 (US$)........................................111 Table 5.6: Monthly expenditures of selected health facilities in Equateur and Katanga, 2007 (US$) .....111 Table 5.7: Monthly expenditures of selected hospitals in Nord-Kivu, 2004 (US$)..................................112 Table 5.8: Estimated and projected international donor financing of health and HIV/AIDS programs in DRC, 2003-10...........................................................................................................................................115 Table 5.9: Budget categories of selected health sector projects................................................................117 Table 5.10: Draft health sector Medium-Term Expenditure Framework (MTEF), 2007-10 (US$ million unless otherwise indicated).......................................................................................................................122 Table 6.1: Parity in Education, 2003.........................................................................................................129 Table 6.2: Actual Budgetary Expenditures for 2003-2006 .......................................................................131 LIST OF FIGURES Figure 1.1: Real GDP growth Figure 1.2: Inflation (annual average ................................................20 Figure 2.1: Expenditure and Revenues in 2004 ..........................................................................................27 Figure 2.2: Revenues and Grants (% GDP) ................................................................................................27 Figure 2.3: Break down of grants (% GDP)................................................................................................28 Figure 2.4: Official Net Transfers*.............................................................................................................29 Figure 2.5: DRC: Expenditure Breakdown 2000-2006...............................................................................30 Figure 2.6: Capital Expenditure (% GDP)..................................................................................................33 Figure 2.7: Programmed versus Executed Salaries.....................................................................................36 Figure 2.8: Executed Expenditure by Functional Classification.................................................................36 Figure 2.9: Poverty Reducing Expenditure.................................................................................................38 Figure 2.10: Executed as a share of budgeted expenditure.........................................................................39 Figure 2.11: Executed Poverty-Reducing Expenditure...............................................................................39 Figure 2.12:Evolution of Copper Prices .....................................................................................................43 Figure 3.1: Control mechanisms.................................................................................................................54 Figure 4.1: percentage of government budget earmarked for education (2002).........................................73 Figure 4.2: Payment of teachers' wages in the DRC, along and complex chain ........................................79 Figure 4.3: Frequency of observations........................................................................................................85 Figure 4.4: Distribution and Allocation of school fees: Bas-Congo case 2006-2007 (non-church-run network .......................................................................................................................................................91 v Figure 5.1: Annual Per Capita Curative Service Utilization Rate as a Function of Average Fee per Episode, DRC, 2005 (n = 26 Health Zones) ...............................................................................................98 Figure 5.2. Civil Service Physicians and Nurses .......................................................................................99 Figure 5.3. Per capita government health budget and expenditures (US$), 2001-07 ...............................101 Figure 5.4: Per capita government health spending vs. per capita GDP,..................................................103 Figure 5.5: Government health expenditures by category, 2005-06 (US$ million)..................................104 Figure 5.6: Per capita government spending on health worker base salaries by province, 2005-06 ........105 Figure 5.7: Estimated and projected international donor support to health and HIV/AIDS programs, 2003- 10 ..............................................................................................................................................................114 Figure 5.8: Estimated annual per capita international support to Health Zones by province, 2007-08....116 LIST OF BOXES Box 2.1: Funding provincial offices and decentralized administrative units..............................................31 Box 2.2 : Debt Management in DRC..........................................................................................................34 Box 2.3: Problems with DRC's expenditure data.......................................................................................37 Box 2.4: DRC's debt...................................................................................................................................41 Box 3.1: Public financial management according to the 2006 Constitution...............................................48 Box 3.2: Institutions and departments responsible for budget management...............................................49 Box 4.1: National Schools Management Covenant ....................................................................................75 Box 4.2: Example........................................................................................................................................89 Box 6.1: Gender Survey within Primary Schools.....................................................................................134 LIST OF ANNEXES Annex 1: Public Expenditure Management ..............................................................................................140 Annex 2: Status of the 2002 Public Expenditure Review Recommendations ..........................................149 Annex 3: Democratic Republic of the Congo: Progress Status of Triggers for Reaching the Floating Completion Point ......................................................................................................................................157 Annex 4: Education Step-by-step survey questionnaires..........................................................................159 Annex 5: Health........................................................................................................................................173 Annex 6: Decentralization ........................................................................................................................197 Annex 7: Bibliography..............................................................................................................................223 vi Acknowledgments This PER is a joint work of the authorities of the DRC, Belgian Cooperation, Swedish International Development Agency (Sida), UK Department For International Development (DFID), French Cooperation, and the World Bank. Financial support from Belgian Poverty Reduction Partnership (BPRP) and Bank Netherlands Partnership Program (BNPP) is gratefully acknowledged. The fiscal chapter was produced by a partnership involving the DRC Ministries of Budget and Finance, the debt management agency (OGEDEP), and the World Bank. The main authors were Doerte Doemeland (Economist, World Bank) and François Painchaud (Consultant, World Bank). The IMF country team and Helena Grandão Ramos (Public Finance Specialist, World Bank) provided relevant data. Support was provided by Hans Loefgren (Senior Economist, World Bank), Carolina Diaz-Bonilla (Economist, World Bank), and Keiko Kubota (Senior Economist, World Bank). The public financial management chapter was produced by a partnership involving the DRC Ministries of Budget and Finance, Planning, Interior, Primary, Secondary, and Professional Education (EPSP), Health, Social Affaires, Women's Affaires, Rural Development, Transport and Infrastructure, Agriculture, Comité Technique de Suivi des Réformes Économiques, the Central Bank, the General Finance Inspectorate, the Audit Office, the Economic and Financial Commission of the National Assembly, the Governorate of Kinshasa, and the World Bank. The main authors were Helena Grandão Ramos and Alain Catalan (Public Finance Specialists, World Bank), with inputs from the teams led by Mr. Ephrem Ghonda (Ministry of Budget), Mr. Essimbo Manu and Mr. Blaise Kiangala-ne-Tulete (Ministry of Finance), Mr. Eugene Bola (Inter-ministerial Commission of IT service) as well as Mr. Bruno Bamanga (Ministry of EPSP) and Mrs. Annie Mikanda (Ministry of Health). Comments to earlier drafts were provided by the French Cooperation, DFID, and UNCTAD. The education chapter was produced by a partnership involving the DRC Ministries of Primary, Secondary, and Professional Education (EPSP), Budget, and Finance, Governorate of South Kivu, and the World Bank. The main authors were Johan Verhaghe (Education Specialist, World Bank) and Keiko Kubota (Senior Economist, World Bank), under the guidance of Susan Opper (Senior Education Specialist, World Bank) and technical input from Helena Grandão Ramos (World Bank). The main government counterparts were Mr. Mbaka Boniface and his team (SECOPE, Ministry of EPSP), Mrs. Kau-Kau Muledili Marie Josée (Ministry of Budget), Messrs Emile Osomba Wediko and Kibaya Mwashamia (Ministry of Finance). The survey was developed and overseen by Mr. Verhaghe, and carried out by Messrs. Guillaume Lofele, François Mukadi, and Jean-Pierre Kimbuya. Juan Diego Alonso (Education Economist, World Bank) provided comments on earlier drafts. Support was provided by the Swedish International Development Agency. The health sector chapter was produced by a partnership involving the DRC Ministries of Health, Budget and Finance, the World Bank, and the Embassy of Belgium. The text was written by Patrick D. Mullen (Health Specialist, World Bank), based on background papers by Mr. Raf Nunga Matadi (Ministry of Health), Mr. Tshendela Kalomba (Ministry of Budget), Mr. Kibaya Mwashamia (Ministry of Finance), Mr. Godefroid Misenga (Consultant, World Bank), and by Ms. Catherine Delain (Embassy of Belgium) and Mr. Mano Ntayingi (USAID Project Axxes). Support was provided by Jean-Pierre Manshande (Senior Health Specialist, World Bank), Dr. Martinus Desmet (Embassy of Belgium), Dr. Jacques Wangata (Ministry of Health), and Petra Righetti (Consultant, World Bank). The gender chapter was produced by a partnership involving the DRC Ministries of Women's Affaires and Finance and the World Bank. The main author was Heather Milkiewicz (Junior Professional Associate, World Bank), with the input from Ministry of Women's Affaires. Support was provided by Mr. Noel Ihebuzor (UNICEF), Cecilia Valdivieso, Mireille Linjouom (Consultants, World Bank), and Emilie Mushobekwa (Economist, World Bank). The task team was led by Keiko Kubota (Senior Economist, World Bank), under the overall guidance of Hinh Dinh (Lead Economist, World Bank), Yvonne Tsikata and Jan Walliser (former and current Sector Managers, World Bank), Pedro Alba, Judy O'Connor, and Marie-Francoise Marie-Nelly (former and current Country Directors, World Bank). Mariama Daifour Ba (ACS World Bank) processed the document. The team was also assisted by Yvette Shungu and Jeanine Nkakala (ACS, World Bank). Peer reviewers were Mr. Oliver Blake (DIFD) and William Byrd (Advisor, World Bank). vii Executive Summary INTRODUCTION E1. The Democratic Republic of the Congo (DRC) is an immense country about the size of Western Europe, with an estimated population of 60 million. It is emerging from decades of economic mismanagement, and a series of unrest, riots, and armed conflict supported by foreign governments. A cease-fire agreement was signed in 1999, a transitional government took office in 2001, a peace accord was signed in 2003, and in 2006, historic elections brought in a coalition government headed by President Joseph Kabila. E2. A full Poverty Reduction Strategy Paper (PRSP) was adopted in July 2006, in which reunification, peace, and stability are named the top priorities. The surveys conducted during the preparation of the PRSP revealed that poverty is overwhelming, affecting more than 70% of the population, and over 90% in the province of Equateur. The dimensions of poverty varied substantially across regions. In areas affected severely by the armed conflicts, the lack of security was considered to be the most important cause of poverty, whereas in the isolated provinces, people were mostly concerned about scarce food and means of transportation. Shared across regions was the sentiment that institutional weaknesses, including poor governance and the lack of transparency and accountability, were contributors to poverty. E3. Since 2001, the government has implemented a solid program of macroeconomic and structural reforms to stabilize the economy and revive productive activities: hyperinflation was broken, fiscal and monetary policies have largely been prudent, and foreign exchange rate started to float. Between 2002 and 2006, the compounded economic growth was 30%, reversing more than a decade of decline until 2001. The macroeconomic framework deteriorated as fiscal discipline weakened with the elections approaching, although it remained far better than the hyperinflationary years of the late 1990s. The new government is making efforts to restore fiscal discipline with some positive results. E4. DRC has made significant headway in restoring sound public financial management since 2001. However, in order to address its vast development needs, the country will have to make much more progress in increasing the fiscal space, as well as in improving the efficiency of public expenditure. The challenges the DRC faces are not uncommon in post-conflict countries. For example, the standard four-phase public expenditure circuit has been restored and computerized, but it is not always used appropriately. Weakness of Treasury management, combined with often severe liquidity constraints, causes delays in processing expenditures, creating a situation where those who are politically well-connected receive payments first. The expenditure tracking after the funds leave the Treasury is almost never done. The lack of monitoring and follow-up is caused as much by the communication challenges that this vast country with very limited infrastructure faces, as the decades of economic mismanagement. Even when proper framework exists and rules are defined clearly, underpaid and demoralized civil servants often tempted by opportunities to circumvent them. The leaders of the new government are not opposing the reforms, but neither are they taking initiatives in improving 1 public financial management, as the politics of a fragile coalition government consume their energy and time. E5. An immediate consequence of these challenges is that systematic data on which to base detailed analyses are scarce. This Public Expenditure Review (PER), therefore, relies on educated guesses and small sample surveys. Based on the available information, the bulk of the public expenditure is used for paying the public sector employees, covering the central administration's operating costs, and servicing debt. The funding to these items cannot be reduced quickly (the analyses of the civil service and how to improve its efficiency are a subject of a forthcoming civil service note) although it would be desirable to allocate a higher share of available resources to public service provision. It follows that the government is unlikely to play a large redistributive role or undertake massive public investments in the near future. Therefore, the PER advocates policies to increase the fiscal space, rather than tries to analyze the allocative efficiencies beyond calling for a gradual increase in priority sectors as resources become available, and belt-tightening in the "sovereign and institutional expenditures" category. As too little resources were allocated for public service delivery, and very few data were available on what little was allocated, it was also not possible to conduct a systematic incidence analyses to examine the efficiency and quality of the spending. E6. Given these constraints, the PER concentrates essentially on two questions. First, how is the public expenditure circuit performing, and what could be improved to faithfully carry out the intended expenditure policies? Second, what can be done through fiscal policies to improve service provision in priority sectors? Through consultations with the authorities, the PER chose to address two social sectors, education and health, and one cross-cutting issue, gender equality. Other priority areas such as infrastructure, water, and sanitation were not included, partly due to resource constraints, and also due to the fact that expenditures in these sectors are even more reliant on foreign resources than the ones addressed in this PER, and are expected to remain so for the near future. E7. The PER focuses on reviewing public expenditure management originating at the central government. However, in view of the ongoing decentralization process, capacity development at sub-national level will become important in the coming years. Following an ardent debate during most of 2007 over the interpretation and application of constitutional provisions on revenue sharing, a compromise solution was agreed upon in October 2007. The solution entails the transfer of some 36% of domestic revenue to sub-national levels under the 2008 budget, but with significant control and safeguard mechanisms to ensure salary payments to key social sector staff. The Bank has conducted a set of analytical studies on the decentralization process, a summary of which is in the annex. E8. This PER is an important exercise for DRC, because the new government is under a tremendous pressure from the population to show that it could provide a better life. The perception and anecdotal evidence that the wealth in DRC is not shared equitably among the population were a leading cause of the recent war on the DRC territory. A lack of action by the government to demonstrate its commitment to move in the right direction could translate into a renewed armed conflict. Without such a demonstration of commitment, international development partners are wary of granting aid to the country, which implies stagnating investment activities, and possible debt crises. 2 E9. Less dramatically, the fact that the PER is unable to conduct the most basic analyses due to lack of data is an important message in itself: good statistics is an essential basis for good policy- making. The PER strongly advocates to break the cycle of apathy among line ministries of presenting an unrealistic wish-list of a budget proposal, receiving a budget allocation that has little to do with the proposal, enduring an erratic execution of even the diminished allocation, and not reporting back to the financial ministries of how exactly the public funds were used. Their experience of passing decades not receiving meaningful allocations of resources is an understandable reason for such apathy, but it is not an excuse. It is each line ministry's responsibility to present a credible budget based on its sector strategy, and report how the funds were used, so that the intended recipients of public goods and services are served. Development partners can assist where skills were lost during the long neglect. E10. Finally, it is useful to take stock of the progress in the area of public financial management made under the transitional government, and for all the stakeholders to agree on (or at least discuss) the way forward. A functional public financial management system is a fundamental and important asset for any government, and particularly those hoping to attract foreign resources. Indeed, it is recommended that this exercise be undertaken periodically, every two years or so. E11. The rest of the Executive Summary is organized by chapters, which are designed to read as stand-alone pieces. Chapter 2 presents the analyses of the past public financial trends and fiscal sustainability. Chapter 3 examines the current public financial management system. Chapters 4 and 5 are case studies of public financial systems in education and health sectors. Finally, chapter 6 presents the role of public expenditure management in promoting gender equality, a cross-cutting issue. The last section summarizes the recommendations with a summary matrix at the end. CHAPTER 2: ANALYSES OF PUBLIC EXPENDITURE TRENDS AND FISCAL SUSTAINABILITY E12. DRC's revenues as a share of GDP are among the lowest in the world. As a sign of an underdeveloped tax regime, customs and excise revenues are the largest contributor, constituting over a third of revenues excluding grants, although their share has been declining. The direct and indirect taxes are dominated by a few large corporate tax payers. Grants were the largest contributor to the overall government revenues, but at a little over US$10 per capita (total of US$700 million in 2006), DRC is not among the largest aid-receivers of the world. Revenues are increasing, however, in absolute terms and also as a share of GDP. Further increase is desirable and possible through improved transparency and efficiency of tax administration, particularly in the mining sector, and through enhanced oversight over revenue authorities at provincial level. Lower level governments are likely to become more interested in exerting oversight as the decentralization process makes their interest more aligned with the performance of the tax authorities. E13. DRC's expenditure to GDP ratio is also increasing but remains among the lowest in Sub- Saharan Africa. Its capital expenditure as a share of GDP is particularly low (15% of total expenditures, or 3.4% of GDP in 2006). The largest items on the current expenditures are, in order of size, wages, "other current expenditures" ­ including such items as central 3 administration operating costs, transfers to lower level governments, and utility bills ­, and debt service, of which 80% was for external debt service. E14. Even though the wage bill was the largest expenditure item in 2006, wage levels in DRC are among the lowest in the world. Responding to pressures from striking teachers and the need to improve living conditions, the government has increased civil service wages significantly over the last years. However, wage increases have come mainly in the form of increased bonuses and allowances, while base wages (on which retirement benefits are calculated) were kept low. In addition, wage increases were significantly higher in Kinshasa than in the rest of the country. The method used to manage social pressure has led to an effective collapse of the public sector wage system, as documented in two analytical notes on public sector wages produced by the Bank during 2007. The wage system has become highly opaque and inequitable as a result, and considering the lack of progress on organizational restructuring, the wage bill remains at risk of being unsustainable. E15. Some steps in reforming the wage system were initiated during 2007 and their overall direction is encouraging, as the measures aimed to restore some degree of transparence and predictability in the system. However, beyond technical changes to the wages system, it is urgent for the government to finally determine the accurate number of personnel on the payroll (a census is ongoing), then introduce comprehensive civil service reforms based on a decision on what type of public service that the country wants to provide and can afford. It also needs to determine the nature and scale of security threat to decide the type of armed forces the country wishes to keep and can afford. This last issue is a subject of the concurrent security sector PER. E16. "Other current expenditures" is the line item where the scope of belt-tightening is the largest, but one of its components, transfers to lower level government, is scheduled to increase dramatically (up to 50% of total revenues, of which up to 40% to transfers and 10% through an "equalization fund," which will mostly finance investments in infrastructure), consistent with the new Constitution (2006). While the movement away from disproportionate resource allocation to Kinshasa is a step in the welcome direction, the process of transferring resources and responsibilities to lower level governments must be managed carefully, so as not to overwhelm the local governments whose capacity may not be adequately developed, and to avoid exacerbating the existing inequalities among provinces. The compromise solution reached on the fiscal transfer mechanism reflects the above considerations in that while increasing transfers in line with constitutional provisions. E17. A recent Debt Sustainability Analysis (2007) found that DRC is in debt distress unless debt relief is provided through the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Reduction (MDR) initiatives. After reaching the Decision Point in 2003, DRC has benefited from interim debt relief, but still struggles to meet its debt service obligations; its effective expenditure on debt service increased following the Decision Point because it was not servicing its debt before. DRC has stopped honoring its debt service obligations to the Paris Club members since July 2006, during the acute budget shortage in the election year. Debt service paid represented 14% of revenues (5.8% of exports) in 2006. Domestic debt, estimated to be over US$1.2 billion (17% of GDP in 2005) as of end-2004, is almost entirely in arrears. The government negotiated a settlement with a majority of creditors, and is scheduled to settle its obligations in 2007-08 with financial assistance from the World Bank. 4 E18. The definition of "pro-poor spending" in DRC was established in 2004 based on general functional classifications. Pro-poor spending has increased substantially from 1.5% of GDP in 2003 to 5.7% in 2006 (or US$1.5 per capita in 2003 to US$7.7 per capita in 2006), reaching 33% of total executed expenditure. Despite these increases, DRC's pro-poor spending remains well below the Sub-Saharan average of 10.2% of GDP in 2006 (although the definitions of pro-poor spending vary from country to country, so the figures are not necessarily directly comparable). In terms of sectoral breakdown, the government is allocating more funds to infrastructure and education, two of the priority sectors identified in the PRSP. However, expenditures on health and social protection, also identified as priorities in the PRSP, remain low. E19. For the purpose of assessing fiscal sustainability, the PER tested a baseline scenario and five alternative scenarios using a computer general equilibrium model MAMS developed by the World Bank. The baseline scenario (scenario i) assumes that prudent macroeconomic policies and structural reforms result in average GDP growth of 6% between 2006 and 2026, and that DRC reaches the HIPC Completion Point in 2008. The baseline scenario is feasible although optimistic: it assumes robust economic performance as a result of solid reforms. The first outcome of the baseline scenario is that even with this optimistic rate of growth, the economy will not quite regain the level of per capita income attained in 1990 (it will take until 2029 to do so). However, the government will gain significant fiscal space to finance pro-poor programs (for example, reduced school fees and health clinic fees) or to make more public investments, and at the same time increase its recurrent spending (which will permit, for example, an increase of civil service wages) from 16% of GDP in 2006 to 20% in 2026. The debt will be sustainable thanks to the debt relief initiatives and prudent borrowing policies. E20. Alternative scenarios are (ii) no reform; (iii) lower export prices; (iv) higher government consumption; (v) more non-concessional borrowing; and (vi) China financing scenario. The alternative scenarios (ii) through (v) run into crises, and hence are not sustainable unless mitigating measures are taken. The China scenario assumes a US$3 billion concessional loan (accompanied by an additional US$2 billion in FDI) for investment in priority projects, consistent with the available information at the time of writing. Under these assumptions, public investment is higher, debt is higher but still under the threshold level (the HIPC Completion Point is still assumed to be reached in 2008), and DRC will achieve higher GDP at the end of the projection period. The analyses show that not reforming is not a viable option, and that there is no place for complacency as the country remains vulnerable to exogenous shocks even with good economic policies. A large scale loans could be useful for the country's development, but it must be contracted on concessional terms, used wisely, and not overwhelm the absorptive capacity. CHAPTER 3: PUBLIC FINANCIAL MANAGEMENT E21. Since the last PER was conducted in 2002, the authorities have made great strides in strengthening public financial management. Of the three major recommendations of the 2002 PER, strengthening the State Budget formulation process ­ improved exhaustiveness, reconciliation of different sources of data, reduction in off-budget items, and modernization of budget classifications ­ have been achieved. A second recommendation, improved execution of budget ­ rationalization and computerization of budget execution circuit, minimizing the expenditure executed outside of the circuit, reducing arrears, controlling the utility bills, and 5 strengthening the a posteriori controls ­ is also met, although some deterioration was observed during the election period. A third recommendation, publish reliable budget execution reports and implementing a double-entry accounting system is progressing, and is expected to be completed by mid-2008. E22. Three instruments that constitute the legal framework of DRC's public finance system are the Constitution (2006), the Finance Law (1983/1987), and the General Regulations of Public Accounting (GRPA). The State Budget formulation follows (in theory) an annual cycle consisting of (i) formulation of macroeconomic framework; (ii) definition of budget framework; (iii) holding budget conference; and (iv) vote by the Parliament. E23. The Macroeconomic Framework Commission kicks off the budget cycle with its projections. Revenue projections are produced by three tax agencies. Once the global budget envelope is determined, the Ministry of Budget issues guidelines on budget formulation so that each ministry can prepare its budget proposal. A budget conference is held to discuss the merits of the proposals, and to arrive at an agreement on trade-offs. The link between the PRSP and the budget is assured by the Ministries of Planning and Budget. Once an agreement is reached, draft budget law is submitted to the Council of Ministers, then to the Parliament. It becomes the budget law when the President of the Republic signs and promulgates it. E24. Budget execution follows (in theory) the standard four-phase public expenditure procedure, which consists of commitment, verification, authorization, and payment. The procedure is computerized since 2003, and has (the potential of) all the properties of a modern public expenditure system. In addition to the standard procedure, there are several exceptional procedures for specific types of expenditure: emergency operations, salary payments, debt service, utility bills, and advance funds mechanism for small amounts (MAD). In the case of expenditures involving procurement, terms of reference are prepared by the line ministry requesting the procurement, and submitted to the Conseil des Adjudications. Once the purchase is approved by the Conseil, the expenditure is executed following the standard procedure. E25. Monitoring and control is to be conducted internally by the units within the administration (Division of Budget Control in Ministry of Budget and Division of Treasury in Ministry of Finance) and by General Finance Inspectorate. External control is carried out by the Audit Office and the Parliament. E26. In practice, the Finance law and the GRPA are outdated, and their updating is one of the more urgent tasks. The institutional framework is awkward with the function of the financial administration split between the Ministries of Budget and Finance. The roles of the two ministries often overlap and create redundancies. The collaboration and coordination between the two ministries, and other line ministries are not optimal. E27. Line ministries do not participate effectively in the budget formulation process. They are informed of the overall budget envelope, but not the indicative envelope allocated to them. They do not make an effort to produce a realistic and credible budget proposal based on a sectoral strategy because past experience tells them that most of the spending proposals will not be approved, and even when they are, the funds fail to materialize (due to liquidity constraints, shifting priorities, and so on). 6 E28. Budget execution has improved considerably compared to the situation in 2003. However, large discrepancies between the budget allocation and execution results remain due to the quality of budget itself as well as control issues. In addition, execution practice deteriorated during the election period. Line ministries used the emergency procedure for normal expenditure items, claiming, justifiably, that the standard procedure took too much time. The delay is particularly acute for spending involving procurement, which takes on average 4 to 5 months between commitment and payment. Modernizing reforms recommended in the Country Procurement Assessment Report (CPAR 2003) have not yet been fully carried out. The Treasury does not have the means to manage cash adequately: partly due to the delay in implementing an adequate accounting system, the central bank is unable to share the necessary revenue and payments information with the Treasury in real time; the Treasury is not empowered to manage liquidity according to established priorities and urgency of the spending. The lack of effective Treasury management is another of the main causes of the large discrepancies between the budget allocation and execution results. E29. Reporting has improved considerably compared to the situation in 2003 with regular production and publication of Budget Execution Reports and Treasury Operations Reports. However, mistakes and discrepancies remain in both reports, again, partly due to the delay in implementing the adequate accounting system. Moreover, the expenditures are not tracked after the funds leave the Treasury, and there is little reporting back from the line ministries and lower level governments on how the funds were actually used. Monitoring and control are lagging behind, because the entities in charge are under-funded and/or lack technical capacity. CHAPTER 4: EDUCATION SECTOR E30. According to the Constitution (2006), PRSP (2006), and Governance contract (2007), education is a national priority. However, the public resources available for the education sector from all sources combined are not nearly enough to assure affordable basic education for all. DRC's allocation to education is lowest of all Sub-Saharan African countries. What little resources designated to the sector are not necessarily allocated optimally based on a coherent strategy and policies. Moreover, allocated resources are not always executed, because of cash constraints, leakages, and other problems. As a result, parents of the students shoulder the bulk of costs associated with public education. This system discriminates against the poor, and often disproportionately girls. E31. In DRC, the Framework Law (1986) and Convention (1977) constitute the legal framework for education system, which are both in urgent need of updating. Many non State actors provide primary education (both public and private schools) in the country. More than 70% of the schools are managed by churches, a little under 20% are managed by the State directly, and the rest are private schools. Private schools are mostly in urban areas, and often function without any agreement with or oversight by the State. Public schools run by churches belong to a religious network. E32. In theory, the State provides salaries for teachers, and operating and maintenance budget for schools. Constructing non-church public school buildings is also the State's responsibility. In practice, the State pays only the salaries and a small fraction of operating costs, with NGOs, 7 churches, international development partners, and school fees paid by parents covering the balance. The salary level is abysmally low, hyperinflation having devoured most of its value. E33. All teachers working for accredited schools must (theoretically) be registered officially in the database of SECOPE, a public entity responsible for managing the teachers. However, there are a large number of unregistered teachers who were hired during the long years of conflicts and confusion or whom SECOPE had not had the time or the means to register properly. These are not "ghost workers" as they do exist and work. Their salaries are paid either from those intended for departed or diseased teachers, or from school fees. E34. In theory, the Ministry of Education participates in the budget formulation process through its proposal. In reality, its budget proposal is too large compared to the envelope available for the sector that the Ministry of Budget ends up using the last year's allocation, adjusted for the slightly higher overall budget envelope. The result is that the priorities of the sector are not necessarily reflected in the budget allocation. E35. The expenditure procedure for teacher salaries is long and cash-based for the most of the trajectory. The salary statements are prepared by SECOPE; names of the teachers and the amount of their salaries stay at provincial level, so the Ministry of Budget in the capital only knows the global salary envelope for each province. The funds are transferred from the Treasury to provincial branches of the central bank or to designated commercial banks. Principal public accountants of Ministry of Education (Comptable Public Principal de l'EPSP) representing groups of schools withdraw the money from the banks. Several persons/entities (including some that are no longer officially authorized, such as the "pay commission") intervene in physically transporting the cash from these principal public accountants to headmasters. Headmasters are responsible for paying the teachers. E36. The expenditure procedure for non salary items exists, but has not been used for many years. One exception is the school block grant program that was initiated in 2005, designated to partially finance schools' operating costs. A special procedure delivering the grants directly to schools via SECOPE was used for this program. This program appeared successful and popular, but was suspended after a year when the central government ran into severe budget constraints. E37. This PER developed and conducted a small sample expenditure tracking survey to follow every step of the expenditure circuit for teacher salaries. Although the sample size was too small (36 schools in 3 provinces, covering 2 months) to extrapolate the results to the rest of the country, the survey found interesting results. On average, over 90% of the funds that left the Treasury to pay the teacher salaries reached its destination. The rate of arrival varied across provinces, and also across different months for the same school. Many teachers received 100% of their salaries, while some received less than 60%. Even small deductions are a blow to already low teacher pay, and the unpredictability of such deductions also adds to the hardship of teachers. These deductions, however small, are illegal, and points to a lax control mechanism. The public expenditure tracking survey needs to be conducted with a larger sample size for accurate evaluation and diagnosis (it is also a HIPC CP trigger). E38. Reporting mechanisms are also weak. Headmasters are required to return the signed receipts for salary payments to SECOPE but rarely did so. For the block grant program, 8 headmasters were required to keep the books, and report the use of funds to the Principal public accountants of Ministry of Education. At the time of writing, no reports from the provinces had been filed to the central administration. E39. The new Constitution (2006) stipulates a substantial transfer of responsibilities and resources to provinces and lower level governments. At the time of writing, teachers were discussed as one of the groups of civil servants to be transferred to local governments. While this policy would seem reasonable in the long run, it is not clear that the local governments will have the necessary capacity to manage such responsibilities and resources in the near future. Careful planning and progressive approach is needed to avoid disruption of service in this important sector. CHAPTER 5: HEALTH SECTOR E40. Health, nutrition, and population outcomes, including the main health sector-related Millennium Development Goal (MDG) indicators, are poor in DRC. The crisis and conflicts of the past decades severely affected the health status of the population and degraded the health system. In 2001, date of the last population-representative household survey, child and maternal mortality rates were among the highest in the world. The total fertility rate was very high. The health situation is likely to have improved since 2002 with the much improved security in most of the country, although insecurity continues to affect some areas of eastern DRC severely. E41. Coverage of basic health services has improved in recent years but remains very low. In 2001, only half of one-year-olds were vaccinated against measles; less than 1% of under-five children slept under an insecticide-treated net; only a third of children with respiratory infections and half of children with fever received treatment by a health provider. Roughly a half of children with respiratory infections do not receive treatment, and about 25% seek medication from drug sellers or others. E42. There are significant disparities between the poor and the better-off. Barriers to health service utilization include lack of geographic access, poor functionality and quality of services, and the cost to households. There are also disparities in health facility infrastructure coverage and health worker availability between Kinshasa (and to a lesser extent Bas-Congo) and the rest of the country. The information on the availability of health workers is obscured by a large number of non-regularized health staff who works in government facilities across the country. E43. The health service development has focused on creating a Health Zone system, which integrates a network of primary health services with a referral facility, covering an average catchment population of about 110,000. Based on a history of public-private partnership with church-based providers, non-governmental organizations play a significant role in sector development, largely through donor-financed programs. E44. Public spending on the health sector collapsed in the 1990s. Since 2003, the budget allocation to the sector has increased but remains among the lowest in the world, totaling around US$ 50 million, or US $0.80 per capita in 2006. Government health spending was 3.3% of total government expenditures and 0.6% of GDP. About half of total spending was for health staff 9 remuneration. Expenditures on operations, supplies, and investment were relatively important, mostly financed from HIPC resources. E45. Although the government's budgeting and reporting system has improved significantly, there are a number of issues that require urgent attention in the health sector. The health budget has little credibility as the budget proposed by the Ministry of Health does not reflect any prioritization or a realistic envelope, budget development does not involve the provinces, and only about half of the budget is executed. The allocation of available funds is not transparent, and non emergency use of the emergency procedure bypassing usual controls raises the risk of poor governance. There is no system of monitoring and reporting on the use of public funds by the Ministry of Health. It is recommended that these issues, which are largely within the control of the Ministry of Health, be addressed in the short-term. E46. International public financing has also risen significantly, to an estimated level of up to US$ 300 million in 2006, including humanitarian and HIV/AIDS programs. Health sector development spending, excluding HIV/AIDS programs, is expected to be around US$ 200 million annually over the next few years, or US$ 4 per capita. Donor support to the Health Zone system is coordinated geographically, currently reaching about 85% of the zones with varying levels of financing. Although coordination has improved in recent years, particularly at the strategic level, donor-funded programs are numerous, often with little predictability, particularly with regard to actual expenditures. About half of estimated international financing is devoted to specific diseases or issues. It is recommended that donors support government to strengthen harmonization on technical issues such as monitoring and evaluation, and improve data collection on donor budgets and expenditures in order to inform the government planning and budget allocation process. E47. Information on financing at the health facility level shows that health services without external donor support depend on revenues from patients, raising barriers to utilization and with impoverishing effects. The largest share of health facility expenditure is for staff remuneration, including salaries and incentives for civil servant health workers, as well as remuneration of the large numbers of "unregularized" health workers. E48. Total domestic and international public spending is currently estimated at around US$ 250 million annually, or about US$ 4 per capita. Minimum additional annual required resources in the next few years may be estimated at US$ 2.50 per capita, or a total of US$ 150 million, although implementation of the DRC health sector development strategy of expanding coverage of a comprehensive package of services will cost substantially more. The newly elected government has made health service development one of its major priorities, announcing a commitment to increased health spending. Given this, it is reasonable to suggest that US$ 50 million of the annual gap will be filled from domestic resources, while the remaining US$ 100 million could come from additional international financing. It should be noted that the resulting public spending on health services (excluding HIV/AIDS programs) of around US$ 7 per capita would still leave DRC among the lowest ranked countries on this measure. The cost of implementing a comprehensive package of services needs to be estimated, along with realistic scenarios for geographic expansion of coverage, in order to inform further work on a draft medium-term expenditure framework (MTEF). 10 CHAPTER 6: GENDER E49. The treatment of women in DRC is dismal, even for a country in extreme poverty with almost nonexistent social services. DRC is rated among the lowest by the United Nations Human Development Index; it is also ranked 130th out of 136 countries in the Gender Related Development Index. Girls have lower school enrollment; the maternal mortality ratio and fertility rate are among the highest in the world; women are more susceptible to HIV/AIDS; women are subject to gender-based and sexual violence, both as a result of the conflict and lack of economic independence. E50. Sexual violence against women is a major issue in DRC, especially in the eastern part of the country most affected by the conflict. A 2005 Human Rights Watch report estimated that tens of thousands of women and girls were victims of sexual violence during the five years of conflict. A WHO study concluded that around forty thousand people had been raped in the provinces of South Kivu and Maniema and in two cities of Goma and Kalémie. Unfortunately, violence still continues in eastern Congo despite the end of conflict, primarily by combatants of armies and armed groups in the area. E51. Domestic violence against women is also prevalent. However, as in many other countries, the social and political culture of the DRC makes it very difficult to address the issue. Women suffer from a very patriarchal system; in many rural areas in particular women are purchased through a dowry. E52. The State budget does not allocate any resources to programs clearly directed at addressing the problem. The United Nations Peacekeeping Force (MONUC) has training programs on gender sensitization in place both for their own force and also for the police and military. This training aim to make the police and military more aware of how to deal with cases of sexual violence appropriately and also how it should be treated in the event that someone within the force is a perpetrator. The serious issue of violence against women, and possible way to address it will be discussed in more detail in the concurrent security sector PER. E53. Laws and protocols do exist to address the equality and protection of women and girls because the gender inequality in the political, economic and social landscape is acknowledged as detrimental to the livelihood of the society as a whole. The PRSP recognizes gender as an important issue, and advocates measures to be taken to ensure equality and proper treatment for all. However, the implementation of such laws and protocols is inadequate, and the political and socio-economic situation for women does not appear to have improved significantly over the last two decades. An improvement in the execution and effectiveness of programs and initiatives directed towards addressing gender inequalities, as well as better quality statistics to measure the progress are essential in order to achieve the objectives outlined in the PRSP and move in the direction of attaining the Millennium Development Goals. The gender analysis of current policies and spending is particularly important in order to achieve these goals. E54. In terms of institutions, there is a Ministry of Women's Affairs (MinWA) tasked with ensuring that proper attention is given to the needs of women and girls. The main role of this ministry is to identify the main problems which women face within all sectors and the subsequent mechanisms to be employed at the sector level for solving such problems. In 11 addition to the MinWA, the Ministry for Social Affairs also has initiatives which specifically target women, such as women's resources centers and a program to address the needs of handicapped women. Ministry of Education advocates for increased girls' enrollment (via "education for all" program), and Ministry of Health has programs for women's health. Programs at different ministries are poorly coordinated, and the fragmentation reduces the effectiveness of what little resources are allocated to promote gender equality. E55. The MinWA received a budget allocation of US$1 million in 2006, of which 67% was executed, amounting to only 0.05% of the total budget executed. The percentage of total funds and amount executed in 2006 was similar to that in 2005, although it was an improvement compared to 2003 and 2004. Like other line ministries, the MinWA's budget proposal does not use a realistic envelope or reflect priorities based on a clear strategy: it has prepared an ambitious set of programs, aimed at addressing issues facing women in various areas, whose total cost is estimated at US$ 219 million, 325 times the budget allocation to the MinWA in 2006, or a little more than that to the Ministry of Defense. The MinWA used the available resources primarily for personnel and construction, with a little over half of these funds allocated to the Cabinet and the Secretary General. E56. Budget allocations to items directly and indirectly related to gender issues within other ministries also receive a very small amount of funds. The total amount of funds allocated to all gender programming, both gender specific and those with a gender incidence, within the budget is less than 0.1%. Only two of the five programs listed on-budget in the Ministry of Social Affairs received funds in 2006. The Ministry of Health was the only other ministry with budgeted programs to address gender-related issues, which accounted for a total of 0.34% of the ministry's executed budget. CONCLUSIONS AND RECOMMENDATIONS E57. The DRC is at a critical juncture. For the newly elected government to move the country beyond the post-conflict recovery phase to a sustainable development phase, a concerted effort requiring a firm commitment to difficult reforms is needed. Currently, the government has very little scope for effective fiscal policy, as the bulk of the available resources are used up to finance public employee salaries, central administration operating costs, and debt service. The government must gain fiscal space through better revenue mobilization and prudent debt management. In parallel, efforts are needed to improve the efficiency of public spending, even though (or perhaps particularly because) the available resources are insufficient to address the enormous needs of the country adequately. E58. The authorities wished the PER to act as a joint action plan between themselves and development partners to address the preponderant fiduciary concerns. Hence, the recommendations included in this PER represent a shared understanding between the authorities and the participating partners of where DRC's public finances could and should be in 18 months, and the commitment on both sides to invest the necessary efforts and resources to achieve them. They are summarized in the matrix at the end of this executive summary. In collaboration with the authorities, the task team has worked to limit the number of recommendations so as not to overwhelm the country's capacity to implement reforms. Wherever possible, the emphasis is on improving transparency and delivering basic public service to the poor, while the importance of 12 longer term, systemic reforms is acknowledged and preparations for them are recommended to start immediately. E59. For macroeconomic stability and fiscal sustainability, the PER recommends, in the short run, to: (i) improve governance and tax administration so that tax revenues, particularly from mining, would increase; (ii) allocate progressively more resources to priority sectors, and improve the execution rate of the allocation, (iii) strengthen debt management and implement prudent borrowing policies and (iv) start consultations in order to develop sector-specific strategy on decentralization. Questions relating to financing, capacity, division of responsibilities, and the risk of exacerbating inequalities need to be discussed. E60. In the medium term, the PER recommends that the authorities: (i) improve the quality and coverage of data to rationalize the structure of expenditures (with the aim of increasing resources allocated to pro-poor spending); (ii) improve macroeconomic projections; (iii) develop a medium term framework aligned with the PRSP so that multi-year programs can be planned and funded adequately; and (iv) strengthen the framework ­ de jure and de facto ­ for contracting and managing public and public guaranteed debt, including contingent liabilities. E61. To rebuild a reliable public financial management system with requisite checks and balances, the following reforms are recommended. In the next 18 months, (i) update the legal and institutional framework; (ii) strengthen the budget formulation process with effective participation of priority line ministries; (iii) use standard procedure (reserve the emergency procedure for true emergencies) and remove unnecessary steps inserted during the electoral period that are weighing down the circuit; (iv) improve Treasury management by establishing prioritization rules, empowering the appropriate personnel, and implementing the double-entry accounting as soon as possible (HIPC Completion Point trigger); and (v) improve coverage and quality of data through enforcing the requirements for the line ministries to report the use of funds, and disseminating information effectively. E62. In the medium term, it is recommended that (i) Treasury balance is produced in real time; (ii) public expenditures are tracked after the funds leave the Treasury by obliging the line ministries to report on public expenditure execution; and (iii) the minimum capacity to manage public finance at provincial and local governments are assured before State resources are transferred on massive scale, as stipulated in the new Constitution. E63. For moving closer to attaining the MDG goal and realizing the government's commitment to provide quality education for all, it is necessary to increase resources allocated to the sector, ensure that human resources are managed properly, decrease fraud in public expenditure execution, evaluate the capacity of local governments to prepare for decentralization, and improve governance. In the short run, the concrete actions recommended are to (i) establish a realistic costed priority action plan for the 2009 budget; (ii) declare moratorium on regularization of personnel and creation of new schools until the teacher census and school mapping exercise are complete; and (iii) improve the arrival rate of salaries through enforcing the abolition of pay commissions and other unauthorized entities intervening in the circuit and reiterating the interdiction of unauthorized deductions from teacher salaries (and any other public funds). 13 E64. In the medium term, in order to decrease the school fees paid by the parents, resource allocation to education sector should be increased through more active participation of Ministry of Education in budget formulation and execution processes. Transaction costs associated with salary payments must be reduced using creative methods adapted to logistical challenges of the country; the remaining costs should be adequately funded, so as to prohibit any unauthorized deductions. Control and evaluation mechanisms should be strengthened by expanding the roles of parents, teacher unions, and NGOs. The government must put an end to the culture of impunity by enforcing laws and regulations. Effective enforcement will be possible only if adequate funds are available to pay civil servants and cover operating costs. The capacity of SECOPE, weakened during the long decades of neglect, must be rehabilitated. Finally, but not the least, it is important to start the consultation process in order to develop a sector-specific strategy on decentralization. E65. To provide better access to quality health care for all, it is necessary to (i) allocate progressively more public funds to the health sector; (ii) build government capacity for leadership and overall management of the sector; and (iii) provide credible mechanisms for the absorption of additional funds. It will also be vital to consider various options for public-private partnership, particularly in service delivery. It is recommended that Ministry of Health participate more actively in all phases of public expenditure: budget formulation, execution, reporting, and evaluation. Civil servants working in the health sector must be managed better. As in education sector, the issue of non-regularized workers must be resolved so that clinics and hospitals can be adequately staffed based on a strategic plan, and that "unauthorized taxes," collected in part to pay the salaries of these workers, can be eliminated gradually. E66. The pending creation of new provinces and decentralization of responsibility for basic health services raise substantial uncertainties and challenges in all areas of health financing and policy. In particular there is a major risk that the poorer provinces will not be able to maintain the regular health worker salary payments that the central government has been able to achieve in recent years. Inequalities will be exacerbated if sufficient capacity and funds are not available to the poorest provinces for the exercise of this new responsibility. It is recommended that the Ministry of Health lead a consultation and strategy development process in order to address the multiple issues raised by decentralization. E67. As for gender issues, it is clear that the amount of budgetary funds allocated does not match the gravity of the problems, proclamations by the government, or necessity to achieve various human development benchmarks, such as the MDGs. The priorities declared in the Constitution, PRSP, and other policy statements should be better reflected in the government's program, and hence in the State budget. The ministries tasked with promoting gender equality need to participate more actively in the budget preparation and execution process, starting with preparing their own credible budget proposals, reflecting the priorities based on a clear strategy. It is also important that external financing is incorporated into the government's planning (and hence the State budget) so that various programs are well coordinated and targets the overall objectives. E68. The DRC also needs better coordinated institutions to address gender issues. In order to achieve this, the breakdown of the responsibilities between the Ministry of Women's Affaires, 14 Ministry of Social Affaires and others needs to be specified. It is necessary to clarify the modalities of collaboration, coordination, and accountability with line ministries. E69. These recommendations are feasible, but by no means easy. It will take a firm commitment from the government, and a steadfast support from development partners to implement them successfully. However, the option of not reforming is not acceptable, as is amply demonstrated in the "no reform scenario" of the fiscal sustainability analysis. The time to start acting is now. 15 in reflects for clinics to and space Priority delivered. schools. health women. expenditure fiscal access understanding framework allocation are and and information situation predictable Outcome/results priorities. girls the Modern place Increased Budget the services Better reorganizing Improved schools by Improved of More transparent execution a to of on CP of and purpose finalized in education reduced and is 16% the sectors in based reflect proposal this is (HIPC respectively. school developed. clarified. of and improve care. removed. milestone are law impact for eliminated. reach to health 4% and planning budget are use to executed health the girls levels in budget health proposals sectors on need MinWA ESO procedure months and and 2009 undertaken envelope, census completed. study family of 18 fees sector the to allocation in framework 10% priorities. to and exercise revenues budget health role commissions made pre-election Draft Tax GDP Expenditures education reach '09 and realistic sector Teacher mapping Plans school Health reflects access reproductive The Budget is ELDP Non-emergency emergency to Pay PETS education trigger) 2008-2009 for the on care to sectors process a plan and 16 (ii) framework mining schools and and that calendar emergencies accounting within priority new so coordination, enforcing action draft of violence to to workers, moratorium of time allocations reproductive the preparation a girls salaries public one particularly credibility provinces process on and expenditure reforms health as through Commissions; from Priority preparation the prioritizing eliminate the procedure finalize resources budget declare fees ents general (i) role to budget and taken in processing Pay non-salary measures d e sustainability an in by involving accreditation of th revenues, budget the be planning paym the more improve ii) in and school WA's steps efforts and for fiscal can reduce deductions teachers Reform administration with of of emergency and family for validate proposal on Meanwhile, and should advocacy the salaries execution to tax to eliminate ministries its impact of finances the of measures extraneous (i) Ministry and governance progressively census movements circuit, jeopardizing line departments use to complying envelope; the access resources the teacher budget mapping. the women unauthorized Zones public ministries the workshops on Improve Implement Allocate without Involve through Line usefulness realistic technical Complete school personnel Examine appropriate Improve Clarify monitoring, Allocate against Remove execution Limit Improve decisions prohibit Improve Health Hold law regulations · · · · · · · · · · · · · · not of and legal in Issues revenue priorities deviation execution budget Outdated institutional framework Weak mobilization Sector reflected expenditure allocation Large budget from allocation and and of debt process. in debt, tracking Outcome/results transparency managed Better expenditures Sustainable more predictability management Better decentralization up loans public local education education unique trigger) at by Follow in A CP milestone prove sectoral center filed im projections to and sectors. sectors. 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INTRODUCTION AND COUNTRY OVERVIEW 1.1 The Democratic Republic of the Congo (DRC) is an immense country about the size of Western Europe, with an estimated population of 60 million. Formerly the Belgian Congo, DRC won its independence in 1960. In 1965, Mobutu Sese Seko seized power and ruled the country for 32 years. While President Mobutu created a solid sense of national unity, his regime mismanaged the economy and corruption became rampant. In the early 1990s, the country's economy collapsed under hyperinflation, and a series of unrest, riots, and armed conflict supported by foreign governments ensued. Over 3 million people reportedly died during the conflict since 1998, mostly due to starvation and diseases. In 1999, a cease-fire agreement was signed, and in 2001, a transitional government took office with Joseph Kabila as its president, and the military and political situation began to stabilize. A peace accord was signed in 2003. In 2006, the first elections in four decades were held, and a coalition government took office in February 2007 with Mr. Kabila as its president. 1.2 A full Poverty Reduction Strategy Paper (PRSP) was adopted in July 2006, in which reunification, peace, and stability are named the top priorities. The surveys conducted during the preparation of the PRSP revealed that poverty is overwhelming, affecting more than 70% of the population, and over 90% in the province of Equateur. The dimensions of poverty varied substantially across regions. In areas severely affected by the armed conflicts, the lack of security was considered to be the most important cause of poverty, whereas in the isolated provinces, people were mostly concerned about scarce food and means of transportation. The sentiment was shared across regions that institutional weaknesses including poor governance and the lack of transparency and accountability were contributors to poverty. Table 1.1: Incidents of poverty Population Share of population below (share of total) poverty threshold Overall 100 71.3 Provinces Equateur 10.4 93.6 Bandundu 11.5 89.1 Sud Kivu 7.0 84.7 Province Orientale 12.1 75.5 Nord Kivu 8.0 72.9 Bas-Congo 5.9 69.8 Katanga 15.5 69.1 Kasaï Oriental 8.5 62.3 Maniena 2.9 58.5 Kasaï Occidental 7.6 55.8 Kinshasa 10.7 41.6 Source: 1-2-3 survey 2004-2005 (analysis by the authorities, AFRISTAT and World Bank) 19 1.3 Since 2001, the government has implemented a program of macroeconomic and structural reforms to stabilize the economy and revive productive activities: hyperinflation was broken, fiscal and monetary policies have largely been prudent, and foreign exchange rate is now floating. As a result, the economy rebounded. Between 2002 and 2006, the compounded economic growth was 30%, reversing more than a decade of decline until 2001. Mining, construction and public works, and telecommunications led the recovery. GDP in 2006 was estimated to be roughly US$8.4 billion. Foreign direct investments increased consistently since 2001, to an estimated US$1.3 billion in 2005, in mining and other sectors such as telecommunications. Figure 1.1: Real GDP growth Figure 1.2: Inflation (annual average 0.09 200% 0.06 175% 150% 0.03 125% 100% 0 75% 1996 1998 2000 2002 2004 2006* -0.03 50% 25% -0.06 0% 1996 1998 2000 2002 2004 2006* -0.09 Source: Live database, IMF 2006 preliminary Source: SIMA and IMF 1.4 Macroeconomic balances deteriorated beginning in late 2005, as the country entered the pre-electoral period, with inflation creeping back up to 18% towards end- 2005, after a sharp decline from over 500% in 2000 to 9.2% in 2004. The cause of this reversal was the weakening of fiscal discipline, as the tensions rose during this period. The government was unable to manage the temporary expenditure spike, such as unplanned security spending and bonus to civil servants in response to social pressures. Dollarization of the economy limited the scope for using the traditional monetary instruments, translating any domestic borrowing immediately to inflation and exchange rate depreciation. Precariously low official reserves (equivalent of only 3 weeks of non aid-related imports at end-2006) also meant that the authorities had little margin of maneuver. In addition, foreign investments and disbursement of official aid slowed down during this period. 1.5 The new government, which took office in February 2007, strengthened fiscal discipline aimed at restoring macroeconomic stability, and its efforts are beginning to show at the time of this writing. Restored confidence in the stability of the country has allowed economic activities to resume. 1.6 During the last five years, the transitional government concentrated on political and socio-economic stabilization and clearance of various types of arrears inherited from the previous regime. Looking forward over the medium term, the new government's 20 objectives are to ensure high and shared growth and create fiscal space1 for carrying out poverty-fighting programs. The government must create an environment conducive to economic activities through improved governance, better physical and financial infrastructure, and effective enforcement of law and order. Resource mobilization must improve, as does efficiency and effectiveness of expenditures both in terms of allocation and execution. There are many ingredients to achieve these objectives: improved fiduciary control over revenue collection and public expenditures, decentralization, reforms to create professional and accountable civil service, transparent natural resource management, and so forth. Ensuring security is sine qua non for all economic activities. Table 1.2: DRC Selected economic indicators (% GDP unless otherwise indicated) 2003 2004 2005 2006 Real GDP growth rate 5.8 6.6 6.5 4.9 Inflation (% change of CPI end of period) 4.4 9.2 21.3 18.2 Total revenue and grants 9.7 11.5 16.8 21.4 Total revenue 7.7 9.5 11.6 13.2 Total grants 2.0 2.0 5.2 8.2 Total expenditure 13.9 15.6 19.9 22.1 Current expenditure 11.1 12.8 13.7 14.5 of which wages 2.5 3.6 4.4 5.5 interest due 3.8 3.6 3.7 3.5 of which on external debt 3.6 3.3 3.2 2.9 Capital expenditure 2.7 2.8 3.4 3.4 of which foreign-financed 2.1 2.2 2.4 2.3 domestic-financed 0.6 0.6 1.0 1.0 Exceptional expenditure1 n/a 0.0 2.9 4.3 Overall fiscal balance (payment order basis) -4.2 -4.1 -3.1 -0.7 GDP (billions of Congo francs) 2298.7 2601.3 3366.4 4000.7 Exchange rate period average 373.0 397.8 474.4 468.3 Source: IMF (2007) 1Includes DDR, elections, and payments for civil service retirement program. 1"Fiscal space exists when a government can increase expenditures without impairing its fiscal solvency" (World Bank 2006 Fiscal Policy for Growth and Development). 21 1.7 While public financial management has improved tremendously since the transition government started the reform process after decades of mismanagement and the devastating war, it still has a long way to go. The standard four-phase public expenditure circuit is now restored and computerized, but it is not always used appropriately. The proper procedure of verification-before-payment is not always followed, which is partly a reflection of the understandable reluctance by the suppliers to deliver goods and services to the government before being paid. Weakness of Treasury management, combined with often severe liquidity constraints, causes delays in processing expenditures, creating the situation where those who are politically well-connected receiving payments first. The expenditure tracking after the funds leave the Treasury is almost never done. The lack of monitoring and follow-up is caused as much by the communication challenges that this vast country with very limited infrastructure faces as the decades of economic mismanagement. Even when proper framework exists and rules are defined clearly, the underpaid civil servants are not motivated to learn the proper procedure and are often tempted by opportunities to circumvent them. The leaders of the new government are not opposing the reforms, but neither are they taking initiatives in improving public financial management, as the fragile coalition government politics consume their energy and time. These challenges are not uncommon in post-conflict countries. To improve public financial management (and hence the quality of life for the population through better public service), the commitment of the leaders is an indispensable precondition. At the same time, the international development partners must have realistic expectations and patience, and also to deliver on their promise expressed in the Paris declaration. 1.8 The immediate consequence of the challenges described above is that the information on which to base detailed public expenditure analyses is scarce. In fact, systematic and reliable data are scare all around. This Public Expenditure Review (PER), therefore, relies on educated guesses of the authorities, who know the system the best, and development partners, who bring international expertise to the exercise. It seeks to identify a small set of reforms that could be implemented in the next 18 months. The set of priority reforms is by no means exhaustive, and may not necessarily be the most important, as it was chosen with feasibility in mind. The PER also proposes a broader and longer-term (3-5 years) reform agenda. Through consultations with the authorities, the PER chose to address two social sectors, education and health, and one cross-cutting issue, gender. Other priority areas such as infrastructure, water, and sanitation were not included, partly due to constraints on resources, and also due to the fact that expenditures in these sectors are even more reliant on foreign resources than the ones addressed in this PER, and are expected to remain so for the near future. The authorities wished to have a document which acts as a joint action plan between themselves and development partners to address the preponderant fiduciary concerns directly linked to their own expenditure management system and procedures. Hence, the recommendations included in this PER represent a shared understanding between the authorities and the participating partners of where DRC's public finances should be in 18 months, and the commitment on both sides to invest the necessary efforts and resources to achieve them. It is hoped that better public financial management will result not only in more effective fiscal policies but also in access to more external financing. 22 1.9 This PER is one of the core analytical pieces being planned in the framework of the Country Assistance Strategy for DRC. Other analytical work include a decentralization note, a civil service reform note, a security sector public expenditure review, a country economic memorandum probing for the sources of growth, and a mining sector review. The purpose of this PER is to analyze the (civilian) public expenditure performance of the past few years, identify salient problems, and prioritize the necessary reforms to help the government make the transition from stabilization to medium term development goals, as described in their recently completed Poverty Reduction Strategy Paper (PRSP). In parallel, a Public Expenditure and Financial Accountability (PEFA) exercise is being undertaken by the authorities in partnership with the European Commission. Although the final report was not yet available at the time of writing, the findings included in the preliminary draft appeared in line with the findings and recommendations of the PER. 1.10 The government is unlikely to play a large redistributive role or undertake massive public investments in the near future due to severe resource constraints. Its role in the next few years would be limited to maintenance of peace and macroeconomic stability, and an improved provision of basic public services. The topic of maintaining peace is addressed in the security sector PER, mentioned above. 1.11 The macroeconomic framework has proved reasonably stable in the last few years when the government refrains from resorting to money-financed expenditures. Hence the first order of business is to avoid domestic borrowing in the near future. Foreign borrowing should also be contracted judiciously, since the country is still in debt distress if a debt relief is not granted under Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief (MDR) initiatives. The analyses on the past trends in public expenditure and revenues, as well as fiscal sustainability looking forward are discussed in chapter 2. 1.12 Although the government's ability to conduct large scale investments will be limited, DRC is a country with an enormous potential for private sector investments. Even with the problems that made the country ranked the last in doing business survey, investors are flocking back into the country. While systematic data are not available (the economy is still predominantly informal), urban centers such as Kinshasa and Lubumbashi are bustling with activities, and showing signs of a boom. The challenge for the government is to keep the momentum for the economic activities going beyond the reconstruction phase through improved administration. The mining sector is likely to attract the most investment and be the source of growth in the near future, but long term sustainable growth would depend on the government's ability to improve the business climate to allow diverse industries to blossom, as well as to ameliorate the conditions for rural sector activities, on which a majority of the population still depend. Which policies are suitable for sustaining equitable and high growth will be addressed in the above- mentioned country economic memorandum. 1.13 This PER presents the progress made in the area of public expenditure (a summary of the progress status of the reforms recommended in the PER (2002) is in the annex), and an analysis of the current expenditure structure. As is discussed in the 23 subsequent chapters, the bulk of the public expenditure is used for paying the employees of the public sector, maintaining the institutions of the central administration, and servicing debt, with very little resources reaching the end-service providers even in the priority sectors (such as schools and clinics). Very little resources allocated for outcome producing items, combined with the very poor availability of data meant that it was not possible to conduct a systematic incidence analyses to examine efficiency and quality of the spending. By the same token, the PER has little to say about the allocative efficiencies beyond calling for a gradual increase in priority sectors as resources become available, and reducing "sovereign and institutional expenditures" (for example, decrease the overall allowance allocation to ministerial cabinets by rationalizing the number of ministries). Therefore, the PER concentrates essentially on two questions (the analyses of the civil service and how to improve its efficiency are a subject of the above- mentioned civil service note). First concerns the mechanics of the public expenditure system: how is the public expenditure circuit performing, and what could be improved to faithfully carry out the intended expenditure policies (discussed in chapter 3)? Second concerns the efficiencies of expenditures in priority sectors/areas: within the limit of the government's resources, what can be done through fiscal policies in health and education sectors and for promoting gender equality so that better services are provided to the population, especially to the disadvantaged (discussed in chapters 4 through 6)? 1.14 This PER is an important exercise for DRC to have undertaken now, because the new government is under a tremendous pressure from the population to show that it could provide a better life. The perception and anecdotal evidence that the wealth in DRC is not shared equitably among the population was a leading cause of the recent war on the DRC territory. A lack of action by the government to demonstrate its commitment to move in the right direction could translate into a renewed armed conflict. Without such a demonstration of commitment, international development partners are wary of granting aid to the country, which implies stagnating investment activities, and possible debt crises and worse. The PER identifies incremental reforms which will be a stepping stone to larger reforms, and which could lead to improved service provision relatively rapidly. 1.15 Less dramatically, the fact that the PER is unable to conduct the most basic analyses due to lack of data is an important message in itself: statistics collection is an essential component of good economic policy-making. The PER strongly advocates to break the cycle of apathy by the line ministries of presenting unrealistic wish-list of a budget proposal, receiving a budget allocation that has nothing to do with the proposal, having an erratic execution of even the diminished allocation, and not bothering to report back to the financial ministries of how exactly the public funds were used. Their experience of passing decades not receiving meaningful allocations of resources is an understandable reason for such apathy, but it is not an excuse. It is each line ministry's responsibility to present a credible budget based on its sector strategy, and report how the funds were used, so that the intended recipients of public goods and services are served. Development partners can assist where skills were lost during the long neglect. 1.16 Finally, it is useful to take stock of the progress in the area of public financial management made under the transitional government, and for all the stakeholders to agree on (or at least discuss) the way forward. A functional public financial management 24 system is a fundamental and important asset for any government, and particularly those hoping to attract foreign resources. Indeed, it is recommended that this exercise be undertaken periodically, every two years or so. 1.17 Each chapter of this PER is designed to read as a stand-alone piece, although care was taken to minimize the repetition for the benefit of the readers of the whole document. 25 Chapter 2. ANALYSES OF PUBLIC EXPENDITURE TRENDS AND FISCAL SUSTAINABILITY Priority recommendations Improve revenue · Improve governance to improve the tax revenues Start mobilization particularly from mining sector immediately · Implement the tax administration reforms Expenditure Allocate progressively more resources to priority Starting with management sectors, and improve the execution rate of the 2009 budget allocations cycle Manage debt · Contract all new loans on concessional terms, and Immediately prudently only for high return projects Designate a unique debt information center to improve By third quarter the collaboration and coordination among entities 2008 handling debt and publish monthly debt service projections on a quarterly basis.(HIPC completion point trigger) Decentralization Start consultation process in order to develop sector- Start specific strategies on decentralization immediately 2.1 This chapter analyzes past trends of DRC's public expenditure and revenues, and presents a fiscal sustainability analysis. The first section covers the period 2000 to 2006, i.e. from the end of President Laurent Kabila's government and to the elections in 2006 which ended the period of the transitional government (2002 - 2006). The second section presents a fiscal sustainability analysis covering the twenty year period starting in 2006. It presents six alternative scenarios, analyzing the impact of different expenditure patterns on DRC's fiscal sustainability outlook and growth. 2.1. Trends in public expenditure and revenues Revenues 2.2 DRC's revenues as a share of GDP are among the lowest in the world (see figure 2.1). However, the revenues have been growing steadily to reach approximately 13% or US$1.1 billion in 2006. This performance was helped in recent years by high petroleum prices: the revenues from the petroleum sector (royalties and taxes) constituted roughly a quarter of non grant revenues in 2006. As a sign of an underdeveloped tax regime, customs and excise revenues are the largest contributor, constituting over a third of revenues excluding grant, although their shares have been declining (see figure 2.2). The share of direct and indirect taxes2 is increasing, although it is dominated by a few large corporate tax payers. The grants have grown in recent years, and at roughly US$ 370 million and US$ 700 million respectively in 2005 and 2006, were also the largest contributor to the overall government revenues. The high disbursement of grants 2DRC still reports its revenues by collecting agencies, DGI, OFIDA, and DGRAD, rather than by GFS classifications. 26 includes temporary funding for elections as well as transitional financing for Demobilization, Disarmament, and Reinsertion program (see figure 2.3). Figure 2.1: Expenditure and Revenues in 2004 45.0 40.0 )P 35.0 D Gfo 30.0 25.0 e arhs 20.0 a 15.0 sa(10.0 5.0 0.0 C R a bia p. a ian) DR CA anda and m gol undi ed Ug o,Re Rw Za An ng Bur (m Co SSA Current expenditure Capital expenditure Revenues Source: World Bank Live Database Figure 2.2: Revenues and Grants (% GDP) % 20 18 16 14 12 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 Customs and excise Direct and indirect taxes Petroleum (royalties and taxes) Other Grants HIPC Initiative assistance Source: DRC authorities, IMF 27 Figure 2.3: Break down of grants (% GDP) 9 6 3 0 2003 2004 2005 2006 Budget Project HIPC Initiative assistance grants grants Source: DRC authorities 2.3 Fiscal revenues from the mining sector are low compared to their potential. The country has Africa's largest deposits of copper, cobalt, and coltan and significant reserves of diamonds and oil, many of which remain still untapped. However, the abundance of natural resources has yet to be converted to improved living standards for the population, but rather been at the heart of the many violent conflicts in DRC. Hostile environment and mismanagement have led to a collapse of the mining sector in general, and of the large state-owned mining companies such as GECAMINES (copper and cobalt) and MIBA (diamond) in particular. The mining sector accounted for about 25% of GDP in mid-1980s but barely contributed 7% to GDP in 2001.3 The revenues from mining plummeted from 25% of GDP in the mid 1980s to 0.18% in 2002, before climbing back to 0.24% in 2004.4 With stability restored in most parts of the country, the sector's activities resumed and its contribution to GDP climbed back to 11% in 2006. However, it is unlikely that mining revenues would reach their full potential without reforms to address the weak institutional and administrative capacities and the lack of control over its boarders. The authorities are aware that mining could be a crucial driver of growth, and have started its reforms by promulgating a state-of-the-art Mining code in 2002, which improves incentives for private investment in mining. Foreign direct investments have flowed, lured by the high commodity prices and richness of DRC's mines. Restructuring of GECAMINES and other mining companies is in various stages of progress; fiscal revenues from the mining sector are projected to increase in the next 5-10 years.5 3The decline in the formal sector was partially offset by an increase in informal mining, notably artisanal diamond mining. 4IMF, "Democratic Republic of the Congo: Selected Issues and Statistical Appendix", October 2005, IMF Country Report No. 05/373. 5See Mining Sector Review (World Bank 2007) for more details. 28 2.4 Official net transfers to DRC have been positive in recent years (figure 2.4). The external official net transfers to DRC declined in 2006 as the execution of foreign- financed projects slowed down during the elections. Figure 2.4: Official Net Transfers* 14 )P 12 D Gfo 10 8 era 6 sh a 4 sa( 2 0 2000 2001 2002 2003 2004 2005 2006 Net transfers IDA Official net transfers * Does not include grants for election. Source: IMF Expenditures 2.5 DRC's expenditure to GDP ratio is among the lowest in Sub-Saharan Africa. It was 9 percentage points below the Sub-Saharan African median, and exceeded only the ratio of four Sub-Saharan countries (Liberia, the Central African Republic, Togo, and Chad) in 2004 (see figure 2.1). The low level of expenditure can be explained by weak revenue mobilization and low foreign aid, amounting to 12% of GDP, far below the Sub- Saharan median of 20%. DRC's current expenditure constitutes 73% of expenditures, making capital expenditure as a share of GDP particularly low, corresponding to only 39% of the Sub-Saharan African median. 2.6 Since 2000, however, expenditure as a share of GDP in DRC has increased continuously (see figure 2.5). The wage bill was the largest expenditure item in 2006. Its share in total expenditure has been stable at about 25% since 2000. Wage levels in DRC are among the lowest in the world, since their values plummeted by 90% at the beginning of the millennium due to hyperinflation. In contrast to its share in total expenditure, the composition of the wage bill has evolved. Civil service wages constituted about 60% of the wage bill in 2003, but grew to more than 80% in 2006. It seems to reflect the efforts by the government to contain the military wage bill, but there is very little information available on this matter. The authorities are trying to grapple with the conflicting needs of paying a living wage and containing the wage bill growth through civil service and 29 military reforms, assisted by development partners. Military and civil service censuses are ongoing, and the payroll system is being overhauled. However, the wage issue is likely to remain one of the leading causes of inflationary pressure in the near future. Figure 2.5: DRC: Expenditure Breakdown 2000-2006 25.0 20.0 GDP) 15.0 of share a 10.0 (as 5.0 0.0 2000 2001 2002 2003 2004 2005 2006 Wages Interest (due) Transfers and Subsidies Other current expenditure Capital expenditure Exceptional expenditure Off Budget expenditure Source: DRC authorities, IMF 2.7 The largest expenditure category in 2006 was "other current expenditure." It covers such items as the operating costs of central administration and other public institutions, "centralized payments (charges communes),6" and transfers to deconcentrated provincial offices and to decentralized administrative units.7 This category of expenditures declined steadily from 54% in 2001 to 28% in 2006 as a share of total expenditure. The share of centralized payments in other current expenditure has slowly declined from 28.5% in 2001 to 20% in 2006 as the government made efforts to control it (see chapter 3). See Box 2.1 for a discussion of the evolution of transfers to local governments. 6 "Centralized payments" encompass several expenditure items that share the characteristic of being centrally managed by the Ministry of Budget, such as water and electricity bills. 7Deconcentrated provincial offices (Services Provinciaux, SPs) represent the central ministries in provinces while decentralized administrative units (Entités Administratives Décentralisées, EADs) are local administrations. See Box 2.1 for more discussion. 30 Box 2.1: Funding provincial offices and decentralized administrative units Approximately 90% of DRC's population lives in the provinces outside the capital. The central government serves this through two types of administrative structures: the deconcentrated provincial offices (Services Provinciaux, SPs) representing the central ministries in the provinces, and the decentralized administrative units (Entités Administratives Décentralisées, EADs), which constitute the local governments, i.e. provinces, territories, communes, and villages. While the SPs are funded by the state budget, the EADs are financed through transfers (retrocessions) from the central government, as well as local taxes which the local governments levy. In the past, transfers were stipulated to be 20% of the revenues collected by the tax agencies in the provinces, 10% withheld at the source and 10% transferred from the Treasury. However, the central government has not transferred the stipulated amounts to the regional administration: transfers to SPs and EADs combined constituted only 10% of current expenditure in 2004, 4% in 2005 and 20% in 2006. The lack of funding from the central government induces the regional offices to impose levies and informal taxes without legal justification, opening the door for corruption. Moreover, the recording of revenues and expenditures for SPs and EADs still lacks transparency during both the budgeting and the execution process. The new Constitution (2006) calls for more fiscal decentralization. It stipulates that 40% of revenues are to be transferred to the provinces of origin, an additional 10% to be distributed to the provinces for investment purposes in a way that would allow addressing infrastructure imbalances across provinces. The remaining 50% stays with the central government. Major challenges have to be overcome for implementing the fiscal decentralization stipulated in the Constitution: i) appropriate legal framework needs to be set up, ii) revenue transfers must be managed so that poor provinces are not deprived of minimum funds necessary to operate; iii) expenditure responsibilities commensurate with revenues must be transferred to local governments ; and iv) civil service must be overhauled to introduce an administrative system to manage public service in a decentralized environment.8 2.8 The third largest current expenditure item in 2006 was the interest payments, of which 80% was payments on external debt. It is decreasing as a share of GDP, revenues, and exports: debt service represented 23% of revenues (8.3% of exports) in 2004, and declined to 14% of revenues (5.8% of exports) in 2006. 2.9 DRC reached the decision point under the enhanced Heavily Indebted Poor Countries (HIPC) initiative in 2003, after having rescheduled the arrears accumulated during the Mobutu era, amounting to US$10.6 billion at end-of 2001. At the decision point, HIPC debt relief to DRC was estimated to be US$6.3 billion (in end-2002 net present value terms). Recent Debt Sustainability Analysis (2007) found that external debt indicators would remain above the relevant policy-based thresholds9 for many years 8For more information on decentralization in DRC, see "République Démocratique du Congo: Note de Synthèse: Reforme de la Fonction Publique: Les Quatre Grands Axes: Décentralisation, Système des Salaire, Rationalisation, Base Juridique." 9The World Bank's Country Policy and Institutional Assessment (CPIA) rates the DRC as a low performer. Under the joint World Bank/IMF debt sustainability framework, the thresholds for low performers are 30% for the NPV of external public and publicly guaranteed (PPG) debt to GDP ratio, 100% for the NPV of external PPG debt to exports ratio, 200% for the NPV of external PPG debt to revenue ratio, 15% of external PPG debt service to export ratio, and 25% for the external PPG debt service to revenue 31 to come unless debt relief is provided through the HIPC and Multilateral Debt Reduction (MDR) initiatives. If the new duly-elected government manages to carry out sound economic policies to restore macroeconomic stability and meet the triggers (complete list of triggers and their implementation status are in annex 3.3), DRC could reach the Enhanced HIPC Completion Point as early as mid-2008, and also benefit from the MDRI. 2.10 In 2006, interest payment due on external debt was roughly US$300 million, representing about 3.5% of GDP. The interest payment that DRC intended to pay was much lower, thanks to interim debt relief. The interest on external debt actually paid in 2006 was roughly US$100 million, falling short of what was planned because cash- constrained DRC stopped honoring its debt service obligations to all bilateral creditors in the second half of 2006. DRC has struggled to meet the debt service obligations since the HIPC decision point, as the rescheduling of arrears increased scheduled debt service from 2003 onward, even after interim debt relief. At the decision point, it was expected that new external resources would more than offset the increased debt service obligations, but it has not quite worked out as expected. Although official net inflows have indeed been positive since 2003 (see figure 2.4), it has been erratic and often in kind (such as consultants). Moreover, the types of project have not provided the liquidity-constrained government with enough margins of maneuver: the external funds designated to an infrastructure project, for example, cannot be used to pay the debt service, and these funds are not quite fungible, as the government would not have undertaken (would not have had the cash to undertake) the project in the absence of foreign aid. 2.11 The government is working to obtain HIPC debt relief from external commercial creditors (London Club debt) with the support of the World Bank. 2.12 Domestic debt, almost entirely in arrears, was estimated to be over US$1.2 billion (17% of GDP in 2005) as of end-2004. In 2005, with the support of the World Bank, the government negotiated a settlement with a majority of creditors. However, due to severe budget constraints, it has missed the payments for 2006, and fallen back into arrears. The government has reached new agreements with creditors, and is scheduled to settle the remaining obligations in 2007-08 with financial assistance from the World Bank. 2.13 Capital expenditure in DRC continues to be low, constituting only 15% of total expenditures in 2006, only a half of the Sub-Saharan median of 30%. However, the share of capital expenditure has increased steeply from 0.4% of GDP in 2001 to 3.4% in 2006 (see figure 2.6). This increase decelerated in the last two years, as the execution of foreign-financed projects slowed. As a consequence, the share of foreign-financed capital expenditure remained constant as a share of GDP, but dropped as a share of total capital expenditures from 79.1 in 2004% to 68.7% in 2006. Capital expenditure from the government's own resources increased nearly fourfold between 2002 and 2006, but the level of domestically-financed capital expenditure remains low at approximately 40 billion Congolese francs (US$ 90 million), or 1% of GDP. ratio ("Operational Framework for Debt Sustainability for Low-Income Countries ­ Further Considerations," IDA/R2005-0056). 32 Figure 2.6: Capital Expenditure (% GDP) 4.0 3.5 3.0 GDP) 2.5 of 2.0 share a 1.5 (as 1.0 0.5 0.0 2000 2001 2002 2003 2004 2005 2006 Foreign-financed Domestic-financed Source: DRC authorities, IMF 2.14 Non-budgeted expenditures were sizeable between 2000 and 2003. The coverage of the budget increased since 2004 as previously non-budgeted expenditure items were included in the budget. Exceptional spending, covering mainly foreign financed outlays for the elections and demobilization, disarmament, and reinsertion program (DDR),10 increased substantially in 2005 and 2006. Execution 2.15 Current expenditure execution exceeded the budget allocation during the last few years (see Table 2.1). Several line-items, such as "transfers and subsidies," and "other current expenditures," exceeded budgeted amounts significantly. Moreover, the execution-to-allocation ratios of these two items have increased persistently during the last few years. The wage bill execution also exceeded the budget allocation, which reflects the pressure from teacher unions and other civil servants. There are also large deviations between executed and budgeted interest payments, pointing to a weak debt management capacity (see Box 2.2). For discussions on the reasons for these discrepancies, particularly problems with the current budget preparation process, see chapter 3. 10It also includes spending for retirement indemnities, settlements of domestic arrears, and payment for bank restructuring. 33 Box 2.2 : Debt Management in DRC DRC's framework for debt management is weak and fragmented. In principle, Office de la Gestion de la Dette Publique (OGEDEP), which was once a caisse autonome d'amortissement and now a public enterprise, is tasked with recording, managing, servicing and analyzing the debt, keeping and publishing debt-related statistics, and issuing government guarantees. The Ministry of Finance has the sole authority to contract public external debt with the technical advice from OGEDEP. However, the legislation is not always respected. Since OGEDEP's assets were expropriated to finance the government's deficit during the Mobutu era, OGEDEP has not had assets to be independent. The revenues from issuing guarantees have also dried up as the government itself lost credibility. OGEDEP now receives subsidies from the Treasury to cover the operating costs. The agency is over-staffed with personnel who have become under- qualified due to decades of neglect. As OGEDEP lost its efficiency and competence, other institutions started to bypass it or substitute for its functions, further undermining its capacity to fulfill its mandates. For example, the Ministry of Finance does not inform OGEDEP systematically of the debt it contracts, let alone solicits advice from OGEDEP. The Central Bank services debt with instructions from the Ministry of Finance, which receives information from OGEDEP. However, the Central Bank manages the repayment obligations to the IMF on its own, and does not ask advice from or even share information with OGEDEP. The project implementing agencies, established in recent years, have the responsibility for processing disbursement applications to creditors, and do not share information with OGEDEP. Exchange of information among the Central Bank, Treasury, Ministries of Budget and Finance, and OGEDEP does not take place regularly, with the exception of information regarding debt service payments made. The formal mechanism that ensures regular diffusion of information regarding critical debt indicators does not function properly. OGEDEP is informed only on an ad-hoc basis about the signing of a new loan after the fact. Information regarding new disbursements and external public and publicly-guaranteed debt managed by the Central Bank is not shared with OGEDEP. The quality of debt management needs to be strengthened all around. Under a debt capacity reinforcement program co-financed by the World Bank and African Development Bank and executed by United Nations Conference for Trade and Development (UNCTAD), the debt recording system DMFAS 5.3 was introduced recently, and the OGEDEP staff received training on debt data recording, reporting, management, and analysis. The responsibilities of OGEDEP staff were clearly redefined under this program. Turnover of trained staff has been relatively low, ensuring institutional memory and continuity in work. As a result of this program, the quality of the recorded data has improved and forecasts became reasonably reliable. However, external debt data are reconciled only in the context of debt relief negotiations and checks are not undertaken on a regular basis. These functions should be strengthened in order to maintain the quality of the data base. Finally, information regarding certain debt categories, such as direct debt contracted by public enterprises or non-guaranteed private debt, is likely to be incomplete in OGEDEP's data base. Moreover, OGEDEP does not have any information regarding external grants. Debt data are still not published, although the authorities have committed to do so regularly (a HIPC completion point trigger; see Annex 3). As a country that has enormous rehabilitation and reconstruction needs and a huge potential for receiving investments, it is important to have a comprehensive public debt management strategy in place. The authorities also need to have a firm understanding of their contingent liabilities. The recent announcement for a US$5 billion capital inflow deal with China is, in principle, very good news for a country starved for capital, but the authorities need to ensure that such a deal is compatible with debt sustainability and with the existing agreements with other development partners who are extending debt relief. 2.16 Contrary to current expenditure, the execution of capital expenditure has been below budget allocation between 2004 and 2006, largely due to slow disbursements of foreign-financed projects. Donors' concern about the security situation and fiduciary control appear to have led to the sluggish pace. It is difficult for the government to 34 predict foreign-financed capital expenditure because information on its disbursement projections and execution results is not readily available (see chapter 5 for a detailed discussion of this problem in the case of health sector).11 This is an area where development partners can help improve public financial management concretely and immediately. Table 2.1 : Executed Programmed Expenditures 2004 2005 2006 Programmed Expenditures (million CF) Total Expenditure 461,511 747,188 879,136 Current Expenditure 205,880 308,534 413,414 Wages and Salaries 88,674 123,963 180,147 Interests 20,401 69,681 92,392 Subsidies 14,225 15,895 28,221 Other Current Expenditures 82,580 98,995 112,655 Capital Expenditure 179,152 233,607 240,652 Foreign Financed 171,451 217,267 221,041 Domestically Financed 7,701 16,340 19,611 Executed Expenditures (million CF) Total Expenditure 330,471 528,946 726,012 Current Expenditure 254,041 330,011 517,131 Wages and Salaries 92,662 142,003 188,995 Interests 38,988 33,206 104,918 Subsidies 15,071 22,158 46,260 Other Current Expenditures 108,267 132,645 176,100 Capital Expenditure 59,848 111,972 118,645 Foreign Financed 48,081 79,659 84,312 Domestically Financed 11,767 32,313 34,333 Programmed as a Share of Executed Expenditures (in %) Total Expenditure 72 71 83 Current Expenditure 123 107 125 Wages and Salaries 104 115 105 Interests 191 48 114 Subsidies 106 139 164 Other Current Expenditures 131 134 156 Capital Expenditure 33 48 49 Foreign Financed 28 37 38 Domestically Financed 153 198 175 Source: DRC Authorities (TOFE) and WB Staff estimates. 2.17 The rates of execution are highly variable, depending on the type of expenditure and the availability of resources. Figure 2.7 shows that in 2004 and 2005, the executed salaries fell short of budget allocation frequently. It shows a pattern of arrears accumulation and their subsequent clearance. In 2005, the overall execution of salary expenditure was close to the budget allocation, which seems to indicate that liquidity problems rather than an unrealistic budget allocation were the cause for the arrears accumulation. In 2006 (the election year), however, salary execution continuously exceeded the budget allocation. 11At the time of this writing, the Ministry of Planning was taking the lead in centralizing this information. 35 Figure 2.7: Programmed versus Executed Salaries Billions of CF 25,000 20,000 15,000 10,000 5,000 0 Jan-04 Jun-04 Jan-05 Jun-05 Jan-06 Jun-06 Programmed Executed Source: DRC authorities 2.18 The central administration consumes the bulk of executed expenditure, although declining from nearly 10% of GDP in 2004 to 7% in 2006 (see figure 2.8). Included in the central administration budget are expenditure of the executive, the legislative, and the foreign service as well as operations related to public debt. Figure 2.8: Executed Expenditure by Functional Classification 20 18 16 P) 14 D G 12 of 10 er 8 has( 6 4 2 0 2003 2004 2005 2006 Central Administration Defense Public Security Economic Services (incl. Agriculture) Environmental Protection Housing and Public Goods Health Religions, Culture, Sport Education Social Protection Source: DRC authorities 36 Box 2.3: Problems with DRC's expenditure data The expenditure data in DRC present a major challenge for analysts. Their availability and coverage improved dramatically compared to 5 years ago, and in some aspects (such as a regular reconciliation between the authorization and actual payment statistics), are ahead of other countries at similar development stage. The authorities continue to work closely with development partners to make further improvements to supply data for good policy-making. Coverage: Information on expenditures in DRC is readily available only for the central government. Data on expenditures and revenues at local levels are weak to nonexistent. Several public enterprises, such as the water and electricity companies are probably running deficits, but their accounts are not kept in a transparent fashion, and data on them cannot be obtained from the authorities. Hence, it is difficult even to guess the rough magnitude of contingent liabilities. Foreign-financed projects: Projections on the foreign-financed capital expenditure are not available systematically, making it difficult for the government to budget for foreign-financed capital expenditure. Information regarding the execution of foreign-financed projects is provided late and is often incomplete. Inconsistent execution reports: There exist large discrepancies between the Treasury Operations report (TOFE) and the State budget execution reports (ESB) (see table 2.2). The two are reconciled manually, which accounts for part of the errors (see also chapter 3). Table 2.2: Budget Execution Reports versus Treasury Operations Report In billion CF 2004 2005 2006 Budget Execution Reports (ESBs) Budget allocation 528333 806171 1039561 Executed budget 399426 602622 693334 Execution rate 76% 75% 67% Treasury Operations Reports (TOFEs) Budget allocation 461511 747188 879136 Executed budget 330471 528946 726012 Execution rate 72% 71% 83% Source: DRC authorities and WB staff estimates Pro-poor spending 2.19 The government is commendably allocating more funds to infrastructure and education, two of the priority sectors identified in the PRSP, within the limited resources (see figure 2.9). Investments in infrastructure and electricity sectors increased, driving up the expenditure on economic services. Both the budget allocation and its execution increased for education, the latter rising from 0.4% of GDP in 2003 to 2.1% in 2006 (see chapter 4 for more discussions). On the other hand, expenditure on health and social protection, also identified as priorities in the PRSP, remains low (see chapters 5 and 6). 37 Figure 2.9: Poverty Reducing Expenditure US$ % of expenditure 9.00 35 8.00 30 7.00 25 6.00 5.00 20 4.00 15 3.00 10 2.00 5 1.00 - 0 2003 2004 2005 2006 Per Capita Poverty Reducing Expenditures (left axis) As a share of executed expenditures (right axis) As a share of GDP (right axis) 2.20 The definition of pro-poor spending in DRC was established in 2004 based on general functional classifications, and has been modified only slightly since. For each general function, certain sub-functions qualify as pro-poor spending, such as reintegration of demobilized soldiers in the functional classification "defense." The definition of pro- poor spending in DRC is consistent with the priority sectors identified in the PRSP. However, appropriateness of the definition has not prevented instances of questionable use of funds, as reported by the recent audit of HIPC accounts. The HIPC committee, which oversees the use of HIPC resources needs to strengthen its vigilance to ensure appropriate use of funds without over-burdening the approval process for using the funds. 2.21 Pro-poor spending has increased substantially from US$1.5 per capita in 2003 to US$7.7 per capita in 2006, reaching 33% of total executed expenditure (see figure 2.9). Pro-poor spending as a share of GDP increased from 1.5% to 5.7% in 2006. Despite these increases, DRC's pro-poor spending remains well below the Sub-Saharan average of 10.2% of GDP in 2006. According to the authorities, the pro-poor spending in 2006 was financed roughly equally through the HIPC savings, domestic resources, and donor projects. 2.22 Execution rate of pro-poor spending has improved since 2003 (see figure 2.10). It is particularly high in the education sector (where the teacher salaries account for the bulk of the budget allocation). It has been low for the DDR program and health sector. For these two functions, the execution ratio amounted to 45% and 39%, respectively, in 2006. The DDR program has been plagued with implementation problems while the health sector suffers from coordination problems among various actors, governmental and external (see chapter 5). 38 Figure 2.10: Executed as a share of budgeted expenditure 90.0 80.0 70.0 60.0 )tne 50.0 rcep n(i 40.0 30.0 20.0 10.0 0.0 2003 2004 2005 2006 Poverty Reducing Expenditure Total Expenditure 2.23 A substantial share of pro-poor spending has been in infrastructure (classified as "economic affairs") and education, partly as a result of strong donor involvement in these sectors (see figure 2.11). Allocations in education and health are to a large extent used to cover salary top-ups. In 2005, a block grant program for primary and secondary schools was disbursed to finance operational costs (see chapter 4). Figure 2.11: Executed Poverty-Reducing Expenditure 3.5% 2003 2004 2005 3.0% )P 2.5% D Gfo 2.0% era sh 1.5% a sa( 1.0% 0.5% 0.0% esnef yti )s ci la rtuo rsi nte noi cilb gnisu htla n erafl De ecurS (C onomc ffa Pu He A We E onmr nvi ecttorP Ho tioacud E E 2.2. Fiscal Sustainability Analysis 2.24 The fiscal space available to the government in the near future is extremely limited, because of low fiscal revenues, low aid inflow, especially in per capita terms, 39 and high share of non-discretionary spending, such as salaries and debt service, in its budget structure. The situation could improve progressively on the revenue side through reviving private sector, especially mining, improved tax administration, and debt relief. Improving fiduciary control and other governance reforms could also lead to higher inflows of official development aid (ODA). On the expenditure side, the limited resources could be made to work harder by increasing efficiency through civil service reforms, military census and DDR, better tracking of expenditure, and more adequate prioritization of expenditures throughout the entire budget process. 2.25 Fiscal sustainability is assured if the growth in expenditures does not outpace the growth in revenues, all sources combined. In the immediate future, the government has no choice but to follow prudent fiscal policy in order to maintain the still fragile macroeconomic stability. It entails working towards reaching HIPC completion point as soon as possible, borrowing only on concessional terms and only for investments with high returns justifying the costs of borrowing, and working together with development partners so that the committed ODA is disbursed and put to productive uses. On the expenditure side, the government must reserve the emergency procedure to true emergencies only, exercise discipline to respect the budget allocations, follow established rules to prioritize spending when it runs into liquidity constraints, and make corresponding expenditure cuts when unplanned expenditure is authorized. 2.26 In the medium term, there are several angles that government can pursue to increase the fiscal space. First is to follow the reform path to maintain or outperform the solid growth performance of the recent years. Improving security is a major contributor to an environment conducive to growth. The government should strive to contain inflation and avoid exchange rate depreciation, which will encourage economic activities in the private sector. Reforms improving the business and investment environment are expected to facilitate realizing a solid performance. 2.27 Second is to improve revenue mobilization through tax policy and administration reforms. How the mineral and petroleum prices evolve over the next decade will have a large impact on DRC's macroeconomic performance and revenue mobilization, although the country has little control over it. 2.28 Third is to manage debt responsibly to avoid debt crises and aid dependency. The country's large rehabilitation and reconstruction needs necessitate considerable foreign capital inflow. It is important to contract any new public and publicly-guaranteed debt on terms that are compatible with existing obligations, notably, under the HIPC initiative, to avoid burdening the future generations unduly. Any such inflow should be managed appropriately, either through market forces or transparent and participative public decision making process, so that it is allocated to the most productive purposes whose returns (financial, economic, and social, as applicable) justify the cost of capital. This implies the debt management capacity in DRC should be strengthened. 40 Box 2.4: DRC's debt At end-2001, DRC's public and publicly guaranteed (PPG) external debt, estimated to be US$10.6 billion, was largely in arrears. The HIPC decision point was reached in 2003 after clearance of arrears to multilateral institutions and progress towards macroeconomic stability. At end-2002 , HIPC debt relief to the DRC12 was estimated at US$6.3 billion in NPV terms. At end-2006, DRC's PPG external debt is estimated at US$11.4 billion, including US$4.5 billion to multilateral institutions and more than US$6.0 billion to Paris Club creditors.13 Since the decision point, the country has benefited from substantial interim debt relief provided by major multilateral creditors. The DRC has signed debt relief agreements with a number of commercial creditors. It has also benefited from a flow rescheduling on Cologne terms and debt relief beyond HIPC assistance by Paris Club creditors. Even with the relief, however, the DRC has been unable to meet its debt service obligations to Paris Club creditors since July 2006. Public domestic debt in DRC, almost entirely in arrears, was estimated to be below 0.5% of GDP at end- 2006. In 2005, with the support of the World Bank, the government negotiated a restructuring of the debt with a majority of creditors. However, due to severe budget constraints, it has missed the payments for 2006, and has fallen back into arrears. The government has reached new agreements with creditors, and is scheduled to settle the remaining obligations in 2007 with financial assistance from the World Bank. DRC is in risk of debt distress according to a recent joint Bank-Fund debt sustainability analysis.14 At end- 2006, debt service on PPG external debt amounted to 26% of exports while the NPV of PPG external debt exceeded 300% of exports and 700% of government revenue, exceeding the policy-dependent thresholds.15 The DSA reported that even if macroeconomic policies improve substantially, as assumed under the baseline scenario, external debt indicators would remain above the relevant policy thresholds for many years to come and could worsen dramatically in the event of adverse exogenous shocks. 2.29 The government's fiscal policy and commitment to reform will determine debt sustainability as well as growth patterns. The fiscal sustainability analysis presented here uses a dynamic general equilibrium model (MAMS)16 to explore the effects of different scenarios on debt burden and other macroeconomic indicators. In particular, it analyses the macroeconomic impact of the following scenarios: i) baseline scenario -- growth and reforms of last few years to continue; ii) a historical average ­ no reform scenario; iii) lower than projected export prices; iv) higher growth of government consumption; v) foreign borrowing on less concessional terms; and vi) borrowing US$ 3 billion from China on concessional terms. The decentralization scenario is not explored here, as it is a subject of detailed discussion in the forthcoming ESW on decentralization. 12"Democratic Republic of the Congo ­ Enhanced Initiative for Heavily Indebted Poor Countries ­ Decision Point Document", IDA/R2003-0059. 13These estimates exclude amounts of penalties and late interest due to London Club creditors. The DRC is working on a World Bank financed buy-back operation for its debt to London Club creditors. 14The debt sustainability analysis was conducted using the Debt Sustainability Framework for Low-Income Countries. Report # 39748. 15The World Bank's Country Policy and Institutional Assessment (CPIA) rates the DRC as a low performer. Under the joint World Bank/ IMF debt sustainability framework the corresponding thresholds are 30% for the NPV of external PPG debt to GDP ratio, 100% for the NPV of external PPG debt to exports ratio, 200% for the NPV of external PPG debt to revenue ratio, 15% for the external PPG debt service to exports ratio, and 25% for the external PPG debt service to revenue ratio. ("Operational Framework for Debt Sustainability Assessments in Low-Income Countries ­ Further Considerations", IDA/R2005-0056, April 2005). 16The MAMS (Maquette for MDG Simulations) is a dynamic CGE developed at the World Bank. The model, whose results are presented here, does not differentiate among different functions of the government. The private sector is divided into mining and non-mining sectors. The factors of production include only one type of labor, one public and one private capital stock. 41 2.30 The baseline scenario assumes that prudent macroeconomic policies and structural reforms attract strong foreign-direct investment and financial support from the international community.17 The baseline growth is assumed to average 6% between 2006 and 2026. This growth rate exceeds DRC's average growth of 0.7% over the last ten years, but is only 0.5 percentage points above the average real GDP growth rate since 2002. It is not overly ambitious for this country: at an average growth rate of 6% over the next 20 years, the DRC will still not have reached the per capita GDP level that it had in 1990 (it will take until 2029 to do so). Table 2.3: Definitions of Scenario Name Description (i) Baseline scenario Average growth rate of 6%, HIPC Completion point in 2008, continued prudent macroeconomic policies, and strong growth in FDI mainly to mining sector (ii) No reform scenario Economy wide growth of 1%, no debt relief, lower growth in FDI and net foreign borrowing. (iii) Lower export prices Export prices are half of projections under the baseline scenario. (iv) Higher government Growth of real government consumption of 7% instead of consumption 5%. (v) Less concessional borrowing Increase of interest rate on foreign loans by 2 percentage points. (vi) New China loan scenario New loan of US$3 billion on concessional terms, additional US$2 billion in FDI. 2.31 Under the baseline scenario, real GDP growth is expected to be high in the immediate future, around 7.7% over the 2008-2012 period as a result of strong private investment driven by FDI. High FDI growth of 25%, mostly to the mining sector, is expected to be sustained until 2012, declining to 6% by 2026. These high FDI growth projections are based on available information, and are plausible. DRC has Africa's largest deposits of copper, cobalt, and coltan, as well as significant reserves of diamonds and petroleum. The long years of mismanagement and insecurity caused mining sector activities to grind to a halt, reducing the share of the mining sector in GDP from 25% of GDP in the mid-1980s to less than 10% in the early 2000s. However, with the stabilization of the security and macroeconomic conditions, the recent successful transition to democracy, and high commodity prices, investors have already began to flock back to DRC. The authorities estimate that total investments in copper and cobalt 17The model was closed by assuming that: a) tax rates and domestic borrowing are fixed and government saving is flexible (government closure); b) foreign grants and the exchange rate are flexible and foreign borrowing is fixed (rest of the world closure); and c) fixed marginal propensity to save, savings-driven investment and a flexible absorption share of investment demand (savings-investment closure). Under scenarios (iii) to (vi), it is assumed that any additional financing need is closed through foreign borrowing instead of grants consistent with the assumptions underlying the Debt Sustainability Framework in Low- Income Countries. 42 projects could reach US$3 billion through 2012, allowing output to return to levels not recorded since the 1980s. 2.32 The baseline assumes that, throughout the projection period, import prices increase by 1.5%, consistent with inflation in developed economies, while export prices are projected to decline by 1.5% annually. Strong global demand, numerous supply disruptions, lower-than-projected production growth, and small inventories have kept prices at high levels in 2006. While demand is still expected to stay strong, prices are expected to decline as new mines start operating. In particular, copper prices are expected to decline from their currently high levels as supply increases (see figure 2.12). Similarly, high demand from Asia and the lack of new major projects lead to an increase in Cobalt prices, which are expected to decline slightly after 2009. Figure 2.12: Evolution of Copper Prices 2.33 The current account deficit is expected to increase over the projection period, reflecting DRC's need for external capital. Especially, imports related to the mining sector are expected to grow rapidly over the medium term. The assumption of falling export prices and increasing import prices is projected to lead to real exchange rate depreciation throughout 2007-2026, except in 2008 when HIPC and MDRI debt relief are expected to lead to a real appreciation. 2.34 DRC is expected to reach completion point under the HIPC Initiative in 2008. Accordingly, it is assumed to benefit from debt relief under the HIPC and MDR initiatives, leading to a significant decline in its debt-to-GDP ratio from 110% in 2007 to 28% in 2008. Similarly, debt service is expected to decline as a result of these initiatives. 43 2.35 Under the baseline scenario, it is assumed that the government will use the fiscal space gained through debt relief and improvement in revenues for pro-poor programs (modeled as transfers to households). Such programs could take the form of a reduction in school fees and basic health care service fees. Even with these transfers, the fiscal balance is projected to improve, reaching 1% of GDP in 2012, before starting to decline. Government's recurrent spending is projected to increase from 16% in 2006 to 20% in 2026 as public consumption18 increases, while capital spending is expected to remain at a constant share of GDP. Alternative scenario projections using MAMS 2.36 No reform scenario. If the government does not continue the reforms, average real GDP growth is assumed to be its historic average (1%), FDI inflow to be much lower (growing at about 10%), and debt relief will not be attained. Under this scenario, the government will not gain any fiscal space, and the scope for implementing poverty- reducing programs is severely compromised. DRC will run into a debt crisis, as its public access to external financing is severely limited, debt-to-GDP ratio reaches unsustainably high 141% (see figure 2.11). Moreover, under this scenario, private consumption in real terms will be about half of the corresponding amounts under the baseline at the end of the projection period; even if the government manages to pay its employees, there will be discontent among the population at large. 2.37 Lower than projected export prices scenario. If the country is hit by an adverse terms of trade shock, the country will experience an acute worsening of fiscal and debt indicators immediately in 2007, but if this crisis is averted, other reforms continue, the HIPC completion point is reached in 2008, and foreign grants per capita in US dollar terms are the same as under the baseline, so the medium term projections are not dire. The decline in export prices leads to an exchange rate depreciation which is expected to mitigate the adverse shock and the need for foreign financing (for the given financing gap in Congolese franc, fewer dollars are needed to fill it). However, these are big "ifs," and working through the immediate crisis will require concerted and disciplined efforts by the government and development partners. 2.38 Higher government consumption scenario. This scenario assumes that the government intends to increase its consumption further. Higher government consumption may take a form of higher wage bill, higher security-related spending, or higher allocation to central government administrations. There are legitimate reasons why the government may pursue these policies, such as intensifying social pressure from labor unions, and regrettable escalation of violence in certain parts of the country. What is important is to be clear about the trade-offs and that the decisions are made in a transparent and participative manner. Under this scenario, the need for foreign financing is higher and the fiscal balance would worsen. 2.39 Borrowing on less concessional terms scenario. This scenario obviously leads to a substantial deterioration in DRC's public debt indicators. Debt service payments to the 18Public consumption includes such items as wages and operating costs for administration. 44 rest would increase, leading to an increase in recurrent spending, which would need to be financed by additional new borrowing. Unless the return on the investments financed with less concessional foreign loans is high, this strategy risks that the government will allocate more resources to servicing its debt rather than on its priority programs. 2.40 Large new borrowing on concessional terms ("China scenario"). Under this scenario, a US$3 billion borrowing on concessional terms accompanied by a US$2 billion FDI (joint venture) is assumed, in line with the recent announcement by the authorities of their intension to enter into such an arrangement. As long as the borrowing is on highly concessional terms, the funds are used for productive purposes in line with the government's priorities, and disbursements are in line with the country's absorptive capacity, this arrangement could be beneficial to the country, triggering a higher growth rate, accelerating export growth, and larger fiscal space, at least initially. In the medium term, the government saving would decline substantially as the increase in net interest payments on foreign debt outpaces the increase in recurrent receipts. It should also be noted that DRC's debt stock would increase substantially reaching 94% of GDP by 2026 even if the loan is concessional. 2.3. Conclusion and recommendations 2.41 Since the end of the open hostilities, the authorities have made significant progress in restoring the macroeconomic stability. However, there is still a long way to go before the government has the fiscal space and the capacity to use it efficiently to address the country's immense needs. There are reforms that need to be undertaken immediately, and there are others that will take longer time to implement, but nevertheless, the authorities need to start planning for. 2.42 In the short run, it is recommended to: · Work on governance and tax administration reforms so that tax revenues, particularly from mining, would increase; · Allocate progressively more resources to priority sectors, and improve execution rates of the allocations; · Ensure that new borrowing is contracted on concessional terms and is used for productive purposes that are in line with the government's priorities, and whose returns are high enough to justify the costs; · Designate a unique debt information center to improve coordination and collaboration among entities handling debt, and publish monthly debt service projections on a quarterly basis; and · Start consultation process in order to develop sector-specific strategies on decentralization. Questions relating to financing, capacity, division of responsibilities, and the risk of exacerbating inequalities need to be discussed. 45 2.43 In the medium run, it is necessary to: · Improve the quality and coverage of data to rationalize the structure of expenditure so that allocations to priority sectors can be increased; · Improve macroeconomic projections, including better data collection and generation; · Have a longer strategy aligned with the PRSP so that multi-year programs can be planned and funded adequately; and · Strengthen the framework ­ de jure and de facto ­ for contracting and managing public and public guaranteed debt, including contingent liabilities. 46 Chapter 3. CURRENT SITUATION OF PUBLIC FINANCIAL MANAGEMENT Priority recommendations Legal and Workshops to validate and finalize the draft Framework law on public End of regulatory finances and the general public accounting regulations. September framework 2008 Budget Compliance with budget preparation calendar so that line ministries have Starting preparation enough time to prepare realistic budget reflecting the sector priorities immediately (based on the previous year's exercise) for the 2009 budget cycle Budget · Removal of the extraneous manual steps introduced (ELDPs et ESOs) Immediately execution to the expenditure execution circuit (chaîne de la dépense) and respect the standard procedures to reduce the processing time for normal expenditure procedure · Limiting the use of public expenditure execution by exceptional procedures of budget execution to true emergencies Expenditure Improve coverage and quality of data by Starting monitoring · collecting the sectoral budget execution reports systematically immediately increasing the use of ministerial websites for posting information 3.1. Main findings of the 2002 public expenditure review 3.1 Two main conclusions emerged from an assessment of the RDC financial management system in the context of a previous Public Expenditure Review: the existing system is weak; but an ambitious reform program is under way. The first conclusion reflected the impact of years of mismanagement. By July 2002, virtually none of the 15 benchmarks identified in the context of the HIPC road map had been met. The second conclusion reflected efforts made by the Congolese authorities to restore normal public sector management procedures, which yielded significant benefits in 2003 and the following years. Summary of main recommendations of the 2002 Public Expenditure Review [Annex 2 presents a complete assessment on public financial management reforms since 2002]. Recommendations Progress Budget preparation · Prepare a comprehensive budget and reconcile data from different Done sources. Reduce the number of "Budgets Annexes".19 Modernize the budget nomenclature. Implement the budget preparation schedule. Prepare realistic estimates. Budget execution · Rationalize, simplify and computerize the expenditure circuit. Progress was made, but Minimize the use of exceptional budget execution and control performance weakened in procedures. Reduce arrears. Better control centralized payments. some areas in 2006. Strengthen ex-post controls. · Introduce a reliable budget monitoring system (Budget monitoring The quality of budget reports or ESBs) covering also pro-poor spending. Develop a execution reports improved comprehensive accounting system for government operations. but more progress is needed. 19Budgets annexes are sections of the government budget reflecting the financial operations of autonomous government agencies. 47 3.2 Since 2002, DRC made significant efforts to restore a more functional public financial management system. The government launched multi-year capacity-building programs to improve technical tools and institutional structures and to train the staff. These human resource development programs need to be intensified and permanent internal training systems need to be developed. 3.3 The financial management system of the DRC was evaluated not only during the PER of 2002, but also in the context of other assessment exercises (HIPC-AAA in 2003 and CFAA in 2005). These reviews provide the basis for the present evaluation, which proposes a number of measures to strengthen the country's public finance performance. 3.2. The basic principles of the Congolese budget management system 3.4 Budget management in the DRC is based on a system that in theory establishes the foundations of a rational, transparent and efficient public spending process. Existing laws and regulations clearly identify the main actors and their respective functions and provide for a flexible budget execution mechanism that can be monitored at all times (during and after execution). Finally, all budgeting and accounting operations must be reported shortly after execution and reports must be accurate. The legal and regulatory framework 3.5 The public financial management system is based on three main legal instruments: the 2006 Constitution, the 1983/1987 Public Finance Framework Law (loi organique) and the 1952 General Public Accounting Regulations.20 The Constitution establishes a number of basic rules concerning public financial management, namely the relations between the executive and the legislative concerning the budget (lois des finances). The Public Finance Law defines, according to the Constitution, the rules for budget elaboration, presentation and execution and the competencies and processes (modalités) describes the relationship between the government and the legislator in budget management, for budget management, and organizes internal and external controls. The General Public Accounting Regulations define the technical rules applicable to the financial operations of the government, in accordance with the Public Finance Framework Law. The legal framework is supplemented by a number of regulations, including two annual directives concerning: (i) budget preparation, and (ii) budget execution. Box 3.1: Public financial management according to the 2006 Constitution A new Constitution, published in 2006, defines some of the basic principles of public financial management. Public finance regulations (article 122), the structure of the budget, the budget preparation and approval process (article 126) must be defined by law; article 127 specifies that prepared and approved budgets must be balanced. A full section of the Constitution (articles 170-181) is about public finance issues; it provides for the separation of central and local government budgets, which however must be presented in the same annual budget document (articles 171 and 175); 40% of tax revenues must be transferred to local governments (article 175). The fiscal year starts on January 1 and ends on December 31 (article 172). Article 173 establishes the principle of Budget Review Laws (loi de règlement). Only the legislator can create taxes (article 174). Two articles (articles 176 and 177) deal with the operations of the Central Bank and articles 178 to 180 are about the Audit Office. Article 181 defines the modus operandi of the National Equalization Fund. 20The CFAA (2005) provides a detailed analysis of the Framework Law and the General Public Accounting Regulations. 48 The institutional framework 3.6 The institutional framework as defined in the Framework Law describes the respective roles of the government, the Parliament and the Audit Office. The government prepares the budget and executes the budget law following its approval by the Parliament. Budget execution is controlled ex post by the Audit Office. 3.7 The government relies on a number of departments and institutions to perform its budget functions. Since 2003, two ministries ­ the Ministry of Budget and the Ministry of Finance (MoF) are the main institutions responsible for public financial management.21 Box 3.2: Institutions and departments responsible for budget management The Ministry of Budget is responsible for commitments (engagements) and verifications (liquidations) while the Ministry of Finance (MoF) is tasked with authorization (ordonnancement) and payment (payments). The line ministries are responsible for executing public expenditure program in their sectors. They help prepare the government budget in cooperation with the Budget and Finance ministries. The "Services gestionnaires de crédits" (officers responsible for budget management in their ministries) handle commitments and validation of expenditures (under the supervision of the ministry's Secretary General). However, "sous-gestionnaires" and budget controllers have been posted by the Budget Ministry in line ministries. The Budget Control Department (Budget Ministry) reviews commitment requests and handles the commitment accounting process and the validation phase of public spending. The Payroll Department (Budget Ministry) is responsible for the validation of personnel expenditures (salaries of civil servants and other government employees). The Treasury and Payment Authorization Department (MoF) authorizes payments (contrôleur de l'ordonnancement and ordonnateur délégué). The Public Accounting Department (Ministry of Finance) is responsible for keeping government accounts and supervising public accountants. The Central Bank of Congo is the government cashier and executes payments. Government accounts are managed by the Current Account Department. Financial management agencies are responsible for managing and executing foreign aid-financed operations. They act as ordonnateurs délégués and paymasters for project accounts and cash advances funded by some development partners (BCECO, BCMI, UCOP, etc.). The Bid Evaluation Council prepares and approves commitments related to government contracts. The Budget Preparation and Monitoring Department (Ministry of Budget) is responsible for preparing budgets and reports on execution of public expenditure execution. The Revenue Agencies collect taxes, customs duties and non fiscal revenue through the Departments of Taxes (DGI), Administrative, Judicial and Property Revenue and Investment Income (DGRAD) and the Customs Office (OFIDA). Budget preparation 3.8 The budget preparation process must comply with the established annual budget cycle, which includes: (i) preparation of the macroeconomic framework; (ii) preparation of the budget framework; (iii) organization of budget conferences; and (iv) budget approval by the Parliament. 21The institutional set-up described in the Sun City agreement of 2002 established a Presidency and four Vice Presidencies; one of the Vice Presidents was responsible for economic and public financial management. Since the 2006 elections, the new institutional set up includes a President and a Prime Minister. 49 3.9 The budget cycle starts with the analysis of the main macroeconomic indicators which will help determine budget projections and government priorities. This macroeconomic forecasting role is performed by the Macroeconomic Framework Committee.22 3.10 The Budget Ministry's directives concerning the preparation of the next budget are widely disseminated among government departments. They analyze the government economic policies and the macroeconomic framework that will serve as a basis for budget projections. They include broad and specific instructions concerning revenue estimates, public spending programs and the budget preparation timetable.23 3.11 Revenue estimates must be based on results obtained during the past three fiscal years and during the first semester of the current year, taking into account changes in tax rates, macroeconomic indicators and measures taken to broaden the tax base. Revenue forecasts are based on estimates prepared by agencies responsible for collecting taxes and customs duties (DGI, DGRAD and OFIDA) under the supervision of the Budget Preparation and Monitoring Department (DPSB). 3.12 Projections of public expenditures are presented by category of expenditure, department (section and chapter) and function, in accordance with the 2004 budget nomenclature. The Budget and Planning ministries verify that the government budget is in line with the priorities of the Growth and Poverty Reduction Strategy Paper, which should guide government programs and projects. 3.13 Requests for including investment projects in the capital expenditure budget must go through the Programming and Budgeting Department of the Planning Ministry and the Budget Preparation and Monitoring Department of the Budget Ministry. The requests must provide a detailed analysis of the proposed projects. 22The Committee includes the Budget, Finance and Planning Ministers and the Central Bank. 23The directives stipulate that: (i) public agencies funded by "Budgets Annexes" must indicate all their sources of revenue before calculating and submitting requests for government subsidies, and (ii) local governments (services provinciaux, see Box 2.1) must prepare their budget forecasts at the same time as central administration (to be submitted to Ministry of Budget to be included in the state budget as "subsidies"). 50 3.14 In theory, the budget preparation timetable is as follows: Period Tasks to be performed Responsible institutions May Budget Preparation Directives. Budget Ministry (Minister's Office & Budget preparation and Monitoring Department). Validating the macroeconomic framework Macroeconomic Framework Committee. June Distribution of Budget Directives to line ministries. Budget Ministry July (i) Workshops on budget preparation, Line ministries. (ii) Preparing indicative budget ceilings, Budget Ministry (Minister's Office and DPSB). (iii) Disseminating indicative budget ceilings to Budget Ministry ministries. July/August (i) Preparation of spending programs in line with ceilings; Line ministries and Institutions. (ii) Missions to explain instructions and collect data; Budget Ministry (DPSB) (iii) Submission of budget proposals to Budget Ministry Line ministries and institutions. (DPSB). August Budget conferences. Budget Ministry and relevant departments. Distribution of budget allocations. Budget Ministry (DPSB) September (i) Breakdown of budget allocations. Submission to Line ministries and institutions. Budget Ministry. (ii) Finalization of Government budget. Budget Ministry (DPSB). Adoption by the government. Government October Draft Budget Law submitted to Parliament. Government October/ Review and approval of budget Parliament November December Budget law is promulgated President 3.15 Budget conferences are organized when line ministries have completed the preparation of their budget proposals. Each ministry presents its budget. The Budget Minister coordinates the process and makes adjustments taking into account both the needs of the ministries and the resource constraints. Then the Budget Minister prepares a draft budget law, which is submitted to the Council of Ministers. 3.16 The last two phases of the budget preparation process are the approval of the budget by the Parliament and its promulgation by the President of the Republic. When the budget has been published, it becomes the Budget Law for the fiscal year. The government is allowed to revise the annual budget through a Supplementary Budget Law also approved by the Parliament. Budget execution 3.17 Budget execution begins as soon as the budget law has been published and the Budget Ministry has disclosed budget allocations for the fiscal year and issued directives concerning budget execution and specific allocations. 3.18 Public expenditures are executed through a computerized management information system. Since 2003, the expenditure circuit has been rationalized and computerized through budget execution software. Normalizing the chain of expenditure, 51 restoring the commitment phase and introducing a simple computerized management system was a major achievement and a step forward towards a transparent financial management system. 3.19 Public expenditures can be executed through standard or exceptional procedures. The standard procedure includes four phases: commitment, verification of expenditure (verifying that the service has been provided), authorization, and payment. Most of the public expenditures must go through the normal procedures. Exceptional procedures are for specific categories of expenditures or sources of financing. They are also used for types of activity which require simultaneous execution of the commitment, verification and authorization phases (for emergencies, payment of salaries, centralized payments, debt service and cash advances. 3.20 Borrowing agreements are signed by the MoF, which represents the government in dealing with international institutions and development partners. The Public Debt Management Office (OGEDEP)24 manages domestic and foreign debt, executes debt service operations and helps formulate the government debt policy. Currently, OGEDEP submits projections of debt service payments for the following quarter to MoF. The agreement specifies that 15 days before the beginning of each quarter OGEDEP should inform the MoF in case of disagreements between OGEDEP projections and payments claimed by creditors during the quarter. OGEDEP monitors execution from the commitment phase to payment by the Central Bank. The government has established a foreign debt service reconciliation committee, which should meet twice each month, prepares a payment reconciliation based on data originating from all the departments concerned, including the MoF, OGEDEP, the Central Bank, Project executing agencies and the Treasury. 3.21 With respect to expenditures based on public contracts, documents describing the obligations of the contractor including project specifications must be prepared by the line ministries and submitted to the Bid Evaluation Council.25 The Council is involved in the contract preparation and approval process before the commitment phase but does not participate in execution. 3.22 In contrast with the situation in 2002, the introduction of a computerized public expenditure management system should make it possible: (i) to monitor in real time public spending at the four phases of budget execution; (ii) to improve the decision- making process, including accelerating or slowing down commitments and better managing arrears, (iii) to better control the eligibility of public expenditures (if a budget allocation is not in the system since the beginning of the fiscal year, no purchase can be made on that basis through the budget), (iv) to verify that pro-poor expenditures 24OGEDEP has been established by the law No. 76-021 of September 16, 1976 as a public agency with legal and financial autonomy under the supervision of the MoF. 25The Bid Evaluation Council approves the bidding documents, including technical and other specifications, opens bids in a public session, checks the eligibility of the bids and makes its recommendation before the award. A Bid Evaluation Council operates at the central government level, in the capital of each Province, in each city and in each traditional district (Law-Ordinance No. 69-054 of December 5, 1969). 52 (including HIPC-financed expenditures) have been carried out in accordance with normal execution procedures and are identified on the basis of the agreed nomenclature, (v) to ensure that suppliers meet their tax obligations, and (vi) to publish budget data in the web sites of the Finance and Budget ministries. 3.23 Capital expenditures, notably foreign-financed investments, should be better integrated into the financial management information system. The number of debt-related operations handled manually should decline. The volume of centralized payments should be better controlled through a rationalization plan. 3.24 Appropriate accounting and payment at the payment phase should be based on a functional cash management plan (Plan de Trésorerie). Cash management plans are prepared by a cash management committee.26 Their objective is to ensure that payment authorizations will be executed and will not generate additional arrears. It is at the same time a strategic document and a procedure for the management of short-term financial flows in an effective and transparent manner. The cash management plan is an important instrument in case of short-term liquidity problems. It helps the government make the most appropriate decisions in terms of: (i) adjusting the pace of commitments, and (ii) prioritizing disbursements in favor of mandatory expenditures, including staff salaries and social expenditures. 3.25 The two departments, the Treasury (Direction du Trésor et de l'Ordonnancement) and the Public Accounting (Direction de la Comptabilité Publique) are responsible for proper accounting of government financial operations. In 2003, the government decided to introduce a double-entry accounting system at the level of the Treasury.27 In 2005, the government adopted a simplified accounting system and created, within the Treasury, a division responsible for centralizing all the accounting operations of the Treasury. The preparation of monthly Treasury balances (balances du Trésor) should make it possible to record all the accounting operations of the month and produce final balances. Budget reporting 3.26 The public financial management system of the DRC includes a fairly comprehensive reporting system. Budget execution reports for each sector must be submitted to the Budget Ministry through the sous-gestionnaires de crédits. At the end of each month, a comprehensive budget execution report (État de Suivi Budgétaire, or ESBs) can be produced automatically through the single database common to Budget and the Treasury. A monthly Treasury balance reports the financial flows of the month and produces the overall balance of government accounts. A Table of the Financial Operations of the government (TOFE), prepared on the basis of the Treasury balance, makes it possible to monitor all the government financial operations. All these reporting 26The cash management committee includes representatives of the Finance and Budget Ministers, the Treasury and the Central Bank. 27Since then, the government prepared a simplified double-entry accounting system, including a list of all accounts, manuals of accounting procedures (for revenue, expenditures, accounts of revenue collecting agencies: DGI, DGRAD and OFIDA) and model reconciliation statements. 53 instruments strengthen the analytical capacity of the government and should help improve the decision-making process. Controls 3.27 Public expenditures must be controlled ex-ante and ex-post through internal and external control mechanisms. Internal controls (administrative controls) are organized within government services before and after payment execution. External controls are performed by the Audit Office (judicial control) and the Parliament (political control). Since 2001, the government has improved internal control procedures by restoring the commitment phase and rationalizing the four phases of the expenditure circuit. In essence, internal controls verify the eligibility of the expenditure, i.e. the availability of an appropriate budget allocation, the legality of the expenditure and the provision of supporting documents.28 Figure 3.1: Control mechanisms Ministry of Budget Ministry of Finance Audit Office - Department of budget - Treasury Department Control - Cabinet of Finance Parliament - Cabinet of Budget General Finance Inspectorate 3.28 The Minister of Budget is the principal controller of public expenditure. Internal administrative controls are performed before the payment phase by the Department of Budget Control (Direction du Contrôle Budgétaire - DCB) within the Budget Ministry, by the Treasury within the MoF and by the Offices of the Budget and Finance Ministers. DCB controls the commitment procedure and verifies that the service has been provided. The Treasury controls the payment authorization phase (ordonnancement). The Cabinet Office of the Budget Minister monitors global commitments while the Cabinet Office of the Finance Minister monitors the flows of payment authorizations and actual payments. Another type of internal control is performed by a high-level internal audit institution, i.e. the General Finance Inspectorate (Inspection Générale des Finances), which reports to the Finance Minister. Ex-post reviews of foreign-financed expenditures are performed by private audit firms which audit all the agencies implementing projects financed by development partners. 28The quality of internal controls is affected by the shortage of human resources and the lack of adequate training programs. Appropriate remedial measures should be taken. 54 3.29 The role of the Audit Office is to perform a comprehensive and permanent judicial control29 of public finance operations, to ensure transparent use of public funds and to provide the Parliament, the government and the citizens with adequate information on public sector management. The role of the Parliament is to use the budget approval and budget review law to control the financial management performance of the government. The Economic and Finance Committee of the National Assembly (ECOFIN) reviews draft public finance laws and questions the performance of government officials and administrative units. Since 2005, efforts are made to invite the Committee to participate in budget conferences and involve it in the discussion of the overall budget and its main components. This facilitates the dialogue between the government and the National Assembly. 3.3. Budgeting and accounting practices ­ Main weaknesses The legal and regulatory framework 3.30 A variety of diagnostic studies carried out since 2002 have shown that the legal and institutional framework was no longer adequate to support a modern public financial management system, which requires more sophisticated financial instruments. The provisions of the 83/87 Public Finance Law, which is de facto a framework law, do not meet the criteria of a transparent, fluid and efficient budget management system ensuring the traceability of public expenditures. Few people are familiar with the provisions of the General Public Accounting Regulations, which are obsolete and inapplicable in their present form. The regulatory framework is inconsistent and confusing and does not facilitate a good understanding of public financial management procedures. A public expenditure manual has been introduced in the regulatory framework (ministerial directive of 2003) to help implement the 2003 reform of the expenditure circuit. Another ministerial directive introduced a new budget nomenclature and defined pro-poor expenditures. The institutional framework 3.31 Budget management is divided between two ministries (Budget and Finance) along the following lines: (i) the Budget Ministry prepares the budget, is responsible for the commitment and verification phases of the expenditure circuit, and produces a report on budget execution; (ii) the MoF performs the authorization and payment phases of the circuit, and produces government accounts. The division of responsibilities between the two ministries is not supported by an efficient data sharing process. They use a single budget and accounting database but experience of the past few years shows that the data recording process is generally not followed, which affects the quality of budget execution reports (ESBs of the Budget Ministry) and accounts (the Treasury balance produced by the MoF) -- both in terms of comprehensiveness and reliability. 3.32 An inter-ministerial unit (the Cellule Informatique Inter-ministérielle or CII) is responsible for managing the computerized financial management information system. 29The Audit Office issues conclusions but has no sanctioning authorities. 55 The CII assists the Budget Ministry and the MoF during budget preparation, budget execution and accounting operations. However, there is a risk that the computerized information system could no longer be unified if the government views the expenditure circuit, the revenue circuit, and the accounting operations as three different systems. They are three components of the same budget execution and accounting system, and must use the same computerized information system and be managed by the same technicians. The Offices of the Budget and Finance Ministers do not seem to provide adequate guidance to CII. The ongoing reform should include a reform of CII activities. Simpler procedures introduced by the CII should be of considerable assistance to the government if it supports the CII and provides adequate guidance to its management. Budget preparation 3.33 The budget preparation process does not provide for an effective dialogue between the Budget Ministry and the line ministries. Despite the integration of macroeconomic and revenue projections, budget preparation is based on mechanical forecasts and does not encourage the review of alternative scenarios based on alternative sector policies and programs. Periodic updating of macroeconomic projections is not systematic. Budget planning is not based on a realistic vision of available resources that could have an influence on public expenditure programs. Budget forecasts often exceed the absorptive capacity of implementing departments. They also tend to underestimate (sometimes systematically) specific types of expenditures (e.g. travel costs and per diems) or the costs of specific institutions (notably: sovereign institutions). 3.34 The macroeconomic framework prepared at the beginning of the budget preparation process does not lead to the determination of indicative spending ceilings for each line ministry. Line ministries do not use data on execution of previous year to prepare realistic budget proposals. In effect, they put together a long list of future needs that go much beyond what an annual budget can realistically accommodate. The line ministries and also the Budget Ministry still find it difficult to organize the structure of their annual budgets along the sector priorities described in the PRSP. DPSB does not have the capacity to evaluate the technical proposals prepared by the line ministries. Finally, since Budget and Finance discuss investment programs without adequate participation of line ministries, the latter feel that they do not "own" these programs, which have been imposed on them. 3.35 Over the past two years less time was allocated to budget conferences and this affected discussions on budget priorities between Budget and line ministries (no budget conference was even held in 2006). In addition the Budget Ministry does not do enough to develop the budget preparation capacity of line ministries either through direct training or with the help of Budget staff posted in line ministries. In fact, the presence of Budget staff in line ministries,30 which was meant to improve the budget preparation and execution performance of line ministries and accelerate the spending process, did not prove to be a useful instrument. 30Sous-gestionnaires de crédits (for budget preparation) and financial controllers (for budget execution). 56 3.36 The Budget Ministry has begun to develop an interest in results-based management. A Steering Committee has been created within the Budget Ministry to help develop Medium-Term Expenditure Frameworks (MTEFs).31 Five sectors (education, health, social activities, rural development and agriculture) have been selected to initiate the process. Representatives of these ministries have received special training on results- based management. Budget execution 3.37 Several government departments ­ within and outside the Budget and Finance Ministries ­ feel that since 2005 the expenditure circuit does not function properly. Inadequate practices, including excessive use of exceptional procedures, weaken budget execution. Administrative controls slowed down the execution process. 3.38 The expenditure circuit has also been modified: (i) the expenditure verification phase was transferred from the Treasury to the DCB; (ii) two new documents have been introduced ­ the Budget Ministry prepares public expenditure verification statements (États de Liquidation or ELDPs) and the MoF prepares statements of outstanding payment authorizations (États des Sommes à Ordonnancer or ESOs).32 The transfer of the expenditure verification responsibility was not included in a government regulation but referred to in guidelines concerning the execution of the 2006 budget. The transfer is in fact a duplication of the same function, as the Treasury has not stopped verifying the expenditures. ELDPs and ESOs are manually prepared documents, which only duplicate data produced by the computerized financial management system (which the Offices of the Budget and Finance Ministers do not use). The unnecessary steps slowed down the expenditure circuit, prompting line ministries to resort to emergency procedures for normal spending, and reduced the transparency of public financial operations. 3.39 Other types of deviations also affect the efficiency of the expenditure circuit: (i) in 2005 and 2006, the Office of the Budget Minister decided to use exceptional procedures (letters to the Minister's Office) rather than the regular commitment process for a large number of expenditures; (ii) the list of provisory rejections of payment requests provides the basis for obtaining the review and approval of rejected expenditures and this often leads to overspending in excess of budget allocations;33 and finally (iii) often expenditures on the list of provisory rejections remain pending for a long time. In other words, with the introduction of ELDPs commitment vouchers are no longer the main budget execution document. ELDPs now play that role; sometimes they are even used to modify the nature of the initial commitments. 3.40 The frequent use of the emergency procedure (i.e. letters to the Office of the Budget Minister) weakens budget controls and makes it very difficult to monitor public 31The Steering Committee includes the "sous-gestionnaires de crédits" who in cooperation with DPSB will guide the MTEF process within each line ministry. 32ELDPs are prepared by the Office of the Budget Minister to validate approval of commitments. ESOs are prepared by the MoF. Used for emergency expenditures and for the payment of salaries, they are equivalent to a final payment authorization. 33Notably in 2006. 57 spending by category of expenditure. The use of cash advance mechanism (MAD) is also problematic but to a lesser extent. In 2005, the government announced its intention to minimize the practice of letters to the Office of the Budget Minister. However, the procedure continued to be used in 2005 and 2006, either to expedite the spending process or because a Minister wanted to impose an expenditure which normally should have been rejected for lack of appropriate budget allocation. The Budget Ministry is expected to promote an efficient handling of the expenditure circuit throughout the administrative phase of public expenditure, while the Finance Ministry plays the same role during the payment phase. While the Cabinet Offices of the two ministers are responsible for approving the introduction of new documents and steps, they also complain that these additions have increased the complexity of the spending process. Since 2007, new ministerial guidelines (No. 1/2007, April 17, Ministry of Budget) recommended a return to the orthodox budget execution methods and prohibit commitments based on letters to the Budget Minister's Office. The impact of these guidelines will be evaluated when the new budget is voted and the new budget allocations are made available to spending departments. Procurement 3.41 Line ministries complain that procurement procedures for public contracts are cumbersome. The Bid Evaluation Council does not meet regularly and this delays the processing of public contracts. Spending on public contracts takes on average 4-5 months from commitment to payment authorization and/or actual payment. Ministries argue that these delays justify the use of emergency procedures. In 2003 the procurement system was reviewed in a CPAR. The final report and recommendations were adopted in September 2004. According to the report, (i) the legal and institutional framework is obsolete and does not encourage transparency, competition and efficiency; (ii) only a few government departments have some (limited) capacity to handle procurement issues; (iii) current procedures are out of date and do not conform to generally accepted procurement management principles; and (iv) control mechanisms are inefficient. Public investment 3.42 The Planning Ministry coordinates the selection of domestically-financed projects on the basis of budget allocations determined by the Budget Ministry. Project descriptions and cost estimates are expected to reflect sector policies when available. Externally-financed projects are managed by specialized units (implementing agencies) which act as ordonnateurs délégués handling payment authorizations and actual payments for projects funded by cash advances from development partners. The Planning Ministry receives data on externally-financed expenditures from development partners and submits them to DPSB (Budget Ministry). The government does not work on the basis of Public Investment Programs (PIP), but draft guidelines on PIP preparation, execution and monitoring have been prepared and discussed with Budget and Finance. The Planning Ministry does not monitor execution of investment spending; line ministries are in charge. However, DCB (Budget) and the Treasury (Finance) keep Planning informed of actual disbursements. 58 Management of centralized payments ("charges communes") 3.43 An Action Plan should help rationalize the management and improve the control of centralized payments. The regulatory framework as revised in 2006 provides a definition of entities eligible for publicly funded utility service ("centralized payments"); a database on users has been prepared following an inventory of departments eligible for 5 categories of centralized payments.34 Implementation of the Action Plan has been delayed, notably the preparation of water and electricity bills based on actual use. Beneficiaries and supply locations have been identified, but the water and electricity companies have not yet installed the meters. Consequently, the Treasury continues to make monthly lump sum payments to the companies until the new system becomes operational. Public debt management 3.44 OGEDEP submits to the Finance Ministry monthly debt service payment projections and actual payments are almost on time. The Committee responsible for the reconciliation of external debt service payments does not meet regularly and does not prepare a Reconciliation Table based on data originating from different sources. OGEDEP, however, uses SYGADE to maintain the debt database, but: (i) does not publish its monthly projections of public debt service payments; and (ii) does not play its role as the single information center on public debt. Cash management 3.45 Both cash flow projections and daily cash management practices are inadequate. Currently, cash management plans are based on: (i) broad projections of major current expenditures; and (ii) data on Central Bank operations, notably revenue data. As the transfer to Kinshasa of data concerning expected and collected revenue is particularly difficult, cash management plans do not help project but only describe the cash position of the government in a given month. As a result these plans are not transparent, do not provide the elements of a strategy for the management of short-term cash flows and do not guarantee that planned payments will be made. On a daily basis, data on revenue flows come late (not before the last day of the previous month) but forecasts of expenditures are generally accurate.35 Cash management is not based on the discussion of the relative priority of expenditures and the Treasury does not have access to contingency funds or other financial instruments for the management of emergencies. Cash management plans do not help decision-makers as data on outstanding payments do not reach the Minister of Budget systematically and cannot be used to regulate new commitments. 34The 2007 budget decentralized the management of a number of centralized payments: fuel, rental of satellite (PTT), health care (Health), maintenance (Public Works) and funeral expenses (Social Affairs). The other centralized payments, notably water and electricity, need to be broken down by services and continue to be managed by the General Services Department (Intendance Générale). 35Since June 2007, the Kinshasa and provincial offices of the Central Bank is linked and the accounting system is online. The delays in information flow on credits and debits should no longer occur. 59 3.46 Weak institutional systems are partly responsible for the inadequacies of current cash management instruments. The Committee responsible for preparing cash management plans includes representatives of the Treasury, the Central Bank, the MoF and the Budget Ministry. It is chaired by an Adviser from the Office of the Finance Minister, assisted by a representative of the Central Bank. The Committee does not have the tools necessary to compare forecasts and actual transactions. It does not analyze the quality of initial forecasts and why actual spending on specific types of expenditures differs from projections. In fact, the MoF does not show a great deal of interest in the work of the Committee, which lacks authority. A manual on methodology should help improve cash flow estimates. No instrument is available to the Treasury to handle short- term cash shortages, except Central Bank advances which are costly. Accounting 3.47 Implementation of an accounting plan progressed during the 2004-07 period. A simplified accounting plan in line with international standards was prepared in 2004 and has been gradually put in place during the following three years. The Treasury has been reorganized and the computerized information system captures in real time accounting operations. The accounting software is based on the structure of the chain of expenditure and is managed by the team responsible for handling budget execution. An accounting manual has been prepared to supplement the manual on the expenditure circuit. The budget nomenclature progresses; the classification of expenditures has been completed, the revenue classification will soon be available, and the two classifications will be harmonized to produce a final nomenclature in 2007. The length of the supplementary period ­ normally three months ­ varies from year to year. It was officially reduced in 2006 (commitments were expected to end on October 31), but in fact commitments continued until the end of the year. 3.48 The objective of a public accounting system is to provide detailed, comprehensive and reliable computerized data on government operations. The government expects a fully computerized financial management system to be in place in January 2008. The system will be comprehensive and reliable under certain conditions: (i) the structure of the Treasury must provide for a clear distribution of accounting responsibilities within the agency, which is well understood by the staff of the agency; (ii) validation of accounting entries36 must proceed on a timely basis and the staff of the Treasury should feel accountable for achieving this result; (iii) technical anomalies in the revenue accounting software should be eliminated rapidly, to avoid duplicate entries of the same transactions,37 and (iv) classifications of revenue and expenditures must be harmonized. Reporting 3.49 Budget execution reports of line ministries are not produced systematically and are of poor quality. Consequently, the DPSB does not make much use of these reports. Recently, however, the Ministry of Primary and Secondary Education and Vocational 36Recording the credits and debits entries in the Treasury balance. 37Today Treasury accountants who enter accounting operations do not have access to supporting documents during the validation process. 60 Training (EPSP) and the Health Ministry made an effort to submit their budget execution reports submit to the Budget Ministry. The production of overall ESBs is irregular and quality needs to improve. This is largely due to delays in the transmission of data from the Central Bank (debits), the Treasury (payments) and implementing agencies: BCECO, UCOP, BCMI, PNMLS etc. (data on execution). 3.50 The Treasury prepares Treasury balances, which however are neither exhaustive nor reliable. The current software (May 2007) provides only a "static balance" and computer technicians must review the data repeatedly, notably for retained earnings. The most recent balance dates back to August 2006. 3.51 A TOFE should be prepared on a monthly basis when monthly accounts have been closed and reconciled with the BCC and, more importantly, with revenue agencies. In practice, validation of the December 2006 TOFE was still underway in May 2007. In the future TOFEs will be prepared automatically on the basis of Treasury balances. Controls 3.52 Since the "transfer" of the expenditure verification function from the Treasury to the DCB, every expenditure is reviewed by both offices. The Budget Minister's Office complains: (i) that control operations tend to take longer; and (ii) the quality of controls over expenditures has not improved.38 3.53 Ex post administrative controls are performed by the General Inspectorate of Finances (IGF). In practice, IGF prepared only two reports on public expenditures in 2006 (at the beginning of the year) and most of its activities were about revenue and revenue collecting agencies. IGF reports do not lead to corrective measures aimed at improving public financial management. 3.54 Government accounts are submitted to the Audit Office after long delays (2005 accounts were submitted only in December 2006). The political context at the beginning of 2007 (and arguments with the Supreme Court on the management of equipment and supplies) will make it impossible for the Audit Office to audit the 2005 accounts before the middle of this year. Recommendations in earlier reports have not been published and are not implemented. Yet, comments from the Court on the draft Budget Review Law for 2004 have been published in the Official Gazette in December 2005. The Audit Office depends on the MoF for its operational budget, which is available irregularly. The Parliament elected in 2007 has not yet decided to act on the recommendations of the Office. 3.55 Budget execution and public accounts are controlled ex-post by the Parliament, through the ECOFIN Committees of the two Chambers, and with the help of the Court of Account. The new Committees must become fully familiar with current budget execution and accounting systems and the public financial management reforms started in 2002. 38The Budget Ministry is considering the possibility of seeking technical assistance for the management of the budget control function. 61 3.4. Traceability of public spending at the central and provincial levels -- Roles of line ministries and governors 3.56 The Treasury and the Central Bank channel funds to beneficiary services or suppliers through two different circuits depending on whether the funds are paid in cash or through transfers. 3.57 Cash payments to beneficiary services (for instance for payment of salaries and allowances) are generally made by Treasury accountants. However, part of the money may be taken by various intermediaries. These unofficial payments are not recorded or reimbursed. 3.58 Supplies of goods and services on public contracts are paid through transfers from the Treasury to the banking accounts of the suppliers. Proof of delivery of goods and services should be systematically validated by ad hoc committees in each ministry. These documents must be provided in support of payment requests. The relevant sector agency should verify that the goods and services provided are those requested in the purchase order. For public spending in the capital city, ex ante controls mobilize DCB investigators who monitor the expenditure until its final destination. These controls are made on an ad hoc basis but could become an instrument to verify the delivery of services. The IGF is entitled to perform ex-post controls, upon request from the Finance Minister; it could therefore also review the final destination of public expenditures. 3.59 The expenditure circuit is weak and cumbersome, but provides a global view of funds disbursed by the Treasury. However, it is virtually impossible to monitor the final destination of specific public expenditures (and their beneficiaries). The traceability of public spending in the Provinces is even more hazardous. 3.60 The role of DCB investigators is limited, if only because their ministry does not give them the necessary authority on a permanent basis. Payments are authorized without any significant effort to verify that the service has been delivered, a responsibility that has been transferred to DCB at the expenditure verification stage. IGF does not systematically review ex-post that goods and services have been delivered. Administrative units do not keep inventories of goods and materials. Initiation of a stock accounting system is not envisaged for the time being. In essence all the control mechanisms are inefficient. No procedure makes it possible to verify ­ after delivery ­ that the goods purchased have remained in a given service for the benefit of the intended beneficiary. 3.61 For goods purchased and paid in Kinshasa for delivery to one of the provinces, line ministries are responsible for deciding how the goods will be delivered and verifying the delivery. Local delegates should certify that the goods or services have reached their destination. Committees representing the parents of school children, associations operating in the neighborhood of hospital facilities, committees representing the users of specific infrastructures or NGOs should be able to verify that funds allocated to specific categories of expenditures have been spent and well used. 62 3.62 In the case of cash payments, notably to public sector staff, beneficiaries may have to make unofficial payments to intermediaries, which do not appear in supporting documents.39 3.63 Provincial authorities cannot monitor public expenditures executed for them in Kinshasa (all the documents regarding public contracts are in Kinshasa and are not available to local authorities and beneficiary services). Information on contracts and specifications is not communicated to provincial beneficiary services. The financial teams working in governors' offices are powerless. 3.64 With respect to operations for the benefit of the City of Kinshasa, the government believes that central bank transfers to the City's bank accounts are executed on a timely basis and are not subject to illegal deductions. Since 2007, the Governor's office transfers funds to municipalities upon receipt of relevant monthly lump sums.40 However these funds must be used on the basis of spending priorities imposed on municipal authorities. The latter must report on the use of these funds and an audit unit in the office of the governor verifies these reports. The Kinshasa Governor has created a special information network for other governors, which operates through the web site of the Kinshasa province. Governors and their financial management teams should take advantage of this service. 3.5. Deviations between executed and voted budgets 3.65 Government budgets are not based on realistic estimates. Overoptimistic forecasts lead either to overspending on budget lines or under-provision of services. Table 3.1: Rates of execution by category of expenditure Nature 2003 2004 2005 2006 Goods and materials 205% 102% 210% 189% Personnel 102% 111% 105% 102% Services 77% 118% 125% 77% Transfers 122% 62% 44% 64% Construction & 30% 59% 44% 60% Rehabilitation Public Debt 83% 54% 84% 53% Equipment 27% 33% 65% 39% Financial Charges 29% 206% 58% 27% Source: DRC government États de suivi budgétaire (various issues) 3.66 Over the past four years, standard deviations between voted and executed budgets varied between 0.24 and 0.38.41 As budget allocations to goods and materials tend to be underestimated, actual spending over the past four years always exceeded estimates. Budget allocations for construction and rehabilitation, equipment and public debt are 39A May 2007 report provides a detailed description of public sector payments for the education sector. It shows how frequently beneficiaries are victims of these practices. 40Since 2007, the Treasury transfers a lump sum to the provinces every two weeks. 41Taking into account the relative weight of each category of expenditure. 63 never used entirely.42 Low rates of budget execution for the first two categories of expenditures are probably due to the difficulty of making reliable forecasts of foreign aid disbursements ­ the main source of financing for investment expenditures. The most important budget allocations are for personnel expenditures (18-20%) for which rates of execution are comparatively stable. Table 3.2:Rates of execution by function Nature 2003 2004 2005 2006 Order and security 107% 111% 108% 127% Religious affairs, culture & sports 105% 101% 102% 124% Defense 115% 112% 103% 112% Education 36% 24% 84% 86% Economic affairs 49% 40% 55% 71% Central administrative services 103% 97% 79% 55% Environment protection 448% 23% 70% 49% Housing and urban equipment 26% 37% 93% 45% Health 59% 39% 58% 45% Social protection 29% 23% 23% 24% Average rate 85% 75% 75% 67% Source: DRC government État de suivi budgétaire (various issues) 3.67 Standard deviations between voted and executed budgets ­ based on a functional classification ­ varied between 0.15 and 0.3343 over the past four years. Rates of execution always exceeded 100% for order/security and defense. For central administrative services, which account for 40-62% of total public expenditures, rates of execution declined over the past four years. Budget allocations for health and education are modest (health accounts for 4.5-5.6% of total budget allocations and education for 7- 9.4%) and rates of execution are alarmingly low. 3.6. Main recommendations for public financial management 3.68 To improve the legal and regulatory framework, the government ­ following adequate consultations with institutions involved in public expenditure management ­ should draft a new Framework Law on public financial management44 and new General Public Accounting Regulations. However, communication problems may block the process. In 2006, the Budget Ministry (DPSB) and a deputy45 prepared separately two draft Organic Laws. A group of peer-reviewers will discuss the drafts, and will also be responsible for preparing draft General Public Accounting Regulations.46 Based on a 42Payable debt service, i.e. debt service forecasts minus debt relief. 43Taking into account the relative weight of expenditures on specific functions. 44Projet de Loi Organique portant sur les Lois de Finances. 45The honorable Dean of the Faculty of Law. 46For the first time since 1952 draft General Public Accounting Regulations are likely to be prepared shortly. As soon as the Finance and Budget ministries ­ with help from French advisers or the IMF ­ have produced a draft Framework Law and draft General Public Accounting Regulations, a donor should finance a workshop to discuss and popularize the two documents. 64 timetable to be proposed by this group in March 2008, the two drafts should be discussed in a validation workshop in September 2008 and finalized for implementation in 2009. 3.69 To help improve the institutional framework and the budget preparation process, the Budget Ministry should strengthen its representation in line ministries. Guidelines for its representatives (Sous-gestionnaires) and a timetable for their implementation should be prepared by the Budget Ministry before mid-2008. The Budget and Finance Ministries must review jointly the role of inter-ministerial IT committee (CII). New terms of reference should unify the computerized management system for all budget operations (preparation, execution, and accounting). 3.70 With the elections safely over, it is now imperative to reverse the deteriorations in public financial management, which occurred during the election period. In particular, steps should be taken immediately to address the slippages in the following three areas: budget conference, fluidity in expenditure execution, and non-emergency use of the emergency procedure. 3.71 For the preparation of the 2009 budget, budget conference must be resumed, and effective participation of line ministries must be ensured. Indicative expenditures ceilings (such as the amounts allocated in the 2008 budget, adjusted for inflation and higher overall budget envelope) should be communicated to each sector at the beginning of the process and rules concerning the organization of budget discussions between the Budget Ministry and line ministries should be implemented. Budget and Planning should associate line ministries in the discussion of the investment program (first half of 2008). A capacity-building program for line ministries (guidelines, training, implementation timetable and monitoring instrument) should be prepared by the Budget Ministry and the line ministries (first half of 2008) and implemented as soon as possible. Eventually the Budget Ministry and the line ministries will be connected in a network. The resurrection of the budget conference, and realistic proposals from line ministries (especially priority ministries such as health and education) would signal better dialogue at the budget preparation stage and are expected to improve budget execution. 3.72 The new government has already decided to return to more normal public expenditure procedures, strictly limiting the non-emergency use of the emergency procedure (use of letters to the Budget Ministry).47 In cases of true emergencies (for example, natural disasters), the system should provide for immediate payments ­ to be regularized at a later stage. The use of the emergency procedure for non-emergencies should be curtailed within the next 18 months to pre-elections level, and then gradually decreased to none. 3.73 An often-cited reason for using the emergency procedure for non-emergencies was the delay in processing expenditure items using the expenditure circuit (chaîne de la dépense). Contributing to the delay in the processing were ELDPs and ESOs, the manual steps added during the electoral period to the otherwise automated circuit. These steps 47Some countries determine in advance which percentage of public spending operations can use exceptional procedures, unless in case of natural disasters. 65 should now be eliminated, and commitments and payment authorizations be validated online. The elimination should occur as soon as technically feasible, and well before the end of 2008. 3.74 The three reforms summarized in the preceding three paragraphs will constitute pre-conditions for the World Bank to resume the discussions for development policy operations. 3.75 Eventually, accounting operations will improve when monthly Treasury balances are prepared automatically even if it is on the basis of a simplified double-entry accounting system. For the time being, the Treasury balances are static, cannot be produced automatically, and require several interventions from computer technicians notably for retained earnings. To produce Treasury balances automatically, the software needs to be modified so that it corrects technical anomalies. It is also essential: (i) to improve the productivity of Treasury accountants; (ii) to improve on-the-job training of staff by their supervisors; (iii) to make the Treasury accountable for producing reliable balances without lengthening the accounting process through manual reconciliation committees; and (iv) to harmonize accounting nomenclatures with the budget nomenclature48 (March 2008). 3.76 Cash management helps prioritize expenditures in case of temporary cash flow problems. Monthly (or more frequent) cash management plans should be prepared on the basis of realistic projections of revenue and expenditures. The plans should be prepared by a Committee including the main budget and financial management operators, including line ministries.49 The best solution should be for the Treasury to prepare cash management plans based on payment authorizations (not actual payments). It should be possible to prepare these plans on the 25th day of the previous month and no later than on the 5th of the current month. The plans could be adjusted around the 20th to take into account actual revenues and emergency spending. The Treasury must be authorized to decide on priorities. In addition the Treasury should submit to the Budget Ministry on the 25th of the previous month the list of authorized payments to be executed. Eventually, a projection of expenditures in foreign currency would also be very useful for the Treasurer. A timetable will be prepared (March 2008) for measures to be taken to improve cash management. The program will also include the use of monitoring tools to compare projections and execution. 3.77 Reporting systems are critical for good budget management and accounting. Line ministries should prepare reports on execution of sector expenditures. These reports, which should be reviewed and used by the Budget and Finance ministries, could also be published on a quarterly basis on the web site of the Budget Ministry. User associations and NGOs should be able to read these reports and review data concerning the populations they represent. Comprehensive computerized ESBs should be prepared on a monthly basis (2009) and published on a quarterly basis. Technical improvements should 48Harmonization of revenues nomenclature is underway with help from French TA. 49Notably representatives of social line ministries or other ministries that will be involved in the preparation of Medium-term expenditure frameworks (MTEFs) on a pilot basis. 66 also make it possible to produce complete computerized Treasury balances and TOFEs on a monthly basis. A good reporting system would help analyze and eventually reduce discrepancies in rates of execution. 3.78 To widen the circulation of budget data, the Finance and Budget ministries should systematically publish monthly updates on their web sites. This would improve the credibility of public financial management operations. 3.79 Systematic efforts should be made to organize the traceability of public expenditures up to their final destination. However, beneficiaries may not always know what has been spent for them (for instance if a public contract is signed in Kinshasa to finance projects to be implemented in a province). As a result, the beneficiary services or the office of the Governor will not be able to monitor execution. Two specific measures could improve the traceability of money spent for activities outside the capital city: (i) publish public contracts and project specifications to better inform beneficiary and provincial services and encourage them to verify execution; and (ii) involve the sous- gestionnaires of line ministries who should be accountable for expenditures financed by local revenue or transfers.50 Elected officials should be encouraged to monitor financial transactions and be trained accordingly. The financial management teams in governors' offices should also be strengthened (2008-2009). 3.80 Line ministries should systematically prepare quarterly reports on execution of provincial expenditures and compare results with budget estimates. User's associations and specialized NGOs should be able to review ESBs and obtain data on execution of public spending for the benefit of the populations they represent. Monitoring of pro-poor spending 3.81 Since 2002, the budget nomenclature is in line with international standards.51 The computerized management information system uses codes based on that nomenclature. In 2003 the government adopted a definition of pro-poor expenditures based on the functional classification of government operations. The pro-poor expenditures are funded by HIPC-financed debt relief measures and government contributions. HIPC resources are located in a sub-account of the Treasury with the Central Bank entitled HIPC grants.52 The account is credited on the basis of scheduled debt maturities. HIPC funds are a part of the government budget. Execution of pro-poor spending is based on standard procedures. 3.82 Available instruments make it possible to prepare, execute and monitor pro-poor spending using standard procedures. A special coding has been introduced and pro-poor spending can be monitored through the expenditure circuit from the commitment to the payment phase and depending on the source of financing. 50Transfer is the process of transferring to local or provincial government's revenue collected by central government agencies. 51The functional classification is in line with the Classification of Government Functions published by the United Nations and the 2001 Government Finance Statistics of the IMF. 52Execution of HIPC funds in 2003 and 2005 was audited in 2007. 67 3.83 Pro-poor spending is also identified in budget documents and budget execution reports. Budget execution reports detail all public finance operations from the commitment to the payment phase by category of expenditure, by department, by function and by province. It is therefore possible to monitor and control pro-poor spending. 3.84 By the end of 2003, the government created a committee,53 including representatives of the sectors, government institutions and the civil society, to monitor pro-poor spending. Since June 2004, the committee has begun to meet more regularly to evaluate on a case by case basis the eligibility of expenditures to be funded by HIPC resources. 53Initially the role of the committee was expected to include not only the review of budget allocations to be funded by HIPC resources but also the monitoring of execution. 68 TA TA TA) assistance IMF Yes Yes Yes No No Yes No Yes No Yes & No No No Yes IMF French requirements (French Technical French 2009 12/31 3/31 January 2008 3/31 9/30 6/30 6/30 3/31 management 2007 12/31 11/31 7/31 12/31 12/31 12/31 12/31 financial 69 a to public Line at r's of law CII line te the budget The prepare Line existing of with sector isni ices basis on to in rationale public es M( the two involve the of accounting TORs each process. nt (Off ingd DCB of and Framework nistrii for to centralized execution the for data monthly including law working preparation, M better of endations reviewers basis dvisers.a inister's and the public s/EDPSB/DTO).e meurt execution to tea inclu a Offices) of M( ins payments on process. peer the TA the staff jointly budgetr Offic plan monitoring gni monitoring timetable Treasury ed a recomm of on s Finance a the manual, e and and iew fo e tor budgetl and appropri nister'si forecasts of Framework expenditures ize from nagementa of M management, prepar law Ministry timetable rev ister' nda m of Actions group moni centralized norma include ng Office) table a financ nalizationfi on preparation the of cash mpare drafters regulations. draft riest prepar (Min to organ and asehp ESBs the provides Budget ings co planning for the the create public for Budgetr ceil et should and expenditure Planni to minis CII the budget return ation fo publication Ministers) ngthen nte on Framework a and Summary from plementati the ministries Minister's budg plan public action stre valid accounting validate the im accounting ). timetable law of for a process of beneficiaries to Finance help to support the The nthlyo timetable regulations. 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