Report No.24882-UG The Republic of Uganda Public Expenditure' Review Report on the Progress and Challenges of Budget Reforms September 23, 2002 Poverty Reduction and Economic Management 2 Country Department for Uganda Africa Region Document of the World Bank I GOVERNMENT FISCAL YEAR FY02 = 2001/ 02 = July 1, 2001 to June 30, 2002 CURRENCY EQUIVALENTS Currency Unit = Ugandan Shilling (Ush) Market mid-rate: US$1.00 = Ush 1815 (September 30, 2002) ABBREVIATIONS AND ACRONYMS AGOA African Growth and Opportunity Act MOES Ministry of Education and Sports AIA Appropriations in aid MOH Ministry of Health AIDS Acquired immunodeficiency syndrome MTBF Medium-Term Budget Framework BFP Budget Framework Paper MTCS Medium-Term Competitiveness Strategy BPED Budget Policy and Evaluation Department MTEF Medium-Term Expenditure Framework BTVET Business, Technical, Vocational Education and Training MWLE Ministry of Water, Lands and Environment CCS Commitment control system NGO Nongovernmental organization CG Consultative group PAF Poverty Action Fund CSO Civil society organizations PBR Pupil-book ratio DANIDA Danish International Development Agency PCR Pupil-classroom ratio DDP District development plan PEAP Poverty Eradication Action Plan DFID Department for International Development PER Public Expenditure Review DSC District service commission PERWG Public Expenditure Review Working Group DWD Directorate of Water Department PHC Primary Health Care EFA Education for All PMA Plan for Modernization of Agriculture EFMP Economic and Financial Management Project PMAU Poverty Monitoring and Analysis Unit ESIP Education Strategic Investment Plan PNFP Private not for Profit EU European Union PRSC Poverty Reduction Support Credit FY Fiscal year PRSP Poverty Reduction Strategy Paper GDP Gross domestic product PSF Private Sector Foundation HIPC Highly Indebted Poor Countries Debt Initiative PTR Pupil-teacher ratio HIV Human immunodeficiency virus SFG School facility grant HSSP Health Sector Strategic Plan SWAP Sector wide approach IFMS Integrated financial management system SWGs Sector working groups IMF International Monetary Fund UCB Uganda Commercial Bank LGBFP Local Government Budget Framework Paper UDB Uganda Development Bank LGDP Local Government Development Program UEB Uganda Electricity Board LTEF Long-Term Expenditure Framework UPE Universal primary education MDGs Millennium Development Goals UPPAP Uganda Participating Poverty Assessment Project M&E Monitoring and evaluation URA Uganda Revenue Authority MFPED Ministry of Finance, Planning and Economic Development VAT Value added tax MOES Ministry of Education and Sports WHO World Health Organization Vice President: Callisto Madavo Director: Judy O'Connor Sector Manager: Frederick Kilby Task Team Leader: R. Sudharshan Canagarajah PREFACE This Public Expenditure Review (PER) Report for Uganda is the outcome of the budget-related activities carried out during the budget process for the fiscal year 2002-03. Specifically, this report captures the details of the budget reforms designed and implemented during the budget process, the analytical work carried out on specific budget-related themes, and outcome of the consultations between the various stakeholders involved. This report, written by Sudharshan Canagarajah (Task Team Leader), reflects the outputs and outcome of PER-related work that was facilitated by the PER working group, which constitutes representatives from the Ministry of Finance, Planning and Economic Development (MFPED) and major budget support donors. I am especially thankful to the MFPED for organizing the multi-stakeholder PER workshop in Kampala May 20-21, 2002, during which many of the issues raised in the report were discussed in detail, which benefited immensely in writing this report. I am thankful to Fred Muhumuza (Economic Policy Research Center, Uganda), who provided excellent research assistance in writing this report. In addition, I have benefited from comments and suggestions by Florence Kuteesa (Director/Budget), Ishmael Magona (Commissioner/Budget Policy), Martin Brownbridge (Macro Economic Adviser), Peter Fairman (Senior Economic Adviser), Fiona Davies (Macro Economist), Giuilio Federico (Economist, Budget Policy), and John Rudman (Budget Policy Adviser), all from MFPED. I have also significantly benefited from suggestions and comments by the Uganda country team members of the World Bank, especially Francis Ato Brown, Peter Okwero, Harriet Nannyonjo, Satu Kahkonen, Robert Blake, Alema Siddiky, and Rita Babihuga. I also want to acknowledge with appreciation the detailed comments I received from the peer reviewers, Richard Allen, Allister Moon, and Benno Ndulu, which improved the quality of the report. The PER report decision meeting provided additional useful suggestions. It was attended by many Uganda country team members, and from the MFPED side Mr. Chris Kassami (Permanent Secretary/Secretary to the Treasury) and Mrs. Mary Muduuli (Deputy Secretary to the Treasury). I am also thankful to Garvan McCann (Ireland Aid) and Paul Mullard (Department for International Development, UK), who provided assistance in carrying out some of the special thematic studies as part of this PER report. I am also thankful to the overall guidance provided by Frederick Kilby (Sector Manager) and James Adams and Judy O'Connor, who served as country directors for Uganda during the period this report was written and finalized. Finally, I am grateful to Mellen Candage for her editorial support and Vikki Taaka, Agnes Kaye, Roboid Covington, Tanisha McGill and Momar Gueye for their assistance in coordinating the various PER activities and formatting this report. I acknowledge with appreciation the help in various forms from all these people without whose assistance this report could not have been completed. Table of Contents PREFACE ................................................................I EXECUTIVE SUMMARY, FINDINGS AND RECOMMENDATIONS .................................................i I. INTRODUCTION. il Budget Reform Challenges .ii II. MACROECONOMIC AND FIsCAL PERFORMANCE .iii Structural and Growth Indicators. iii Revenue Performance .iv Government Expenditure .v Integration of Donor Resources .vii The Export Sector .viii The Financial Sector. ix III. THE BUDGET PROCESS .x Issues Relating to the Medium-Term Expenditure Framework .x IV. BUDGET EFFICIENCY IssuEs .xi Challenges and Recommendations .xi V. BUDGET EXECUTION AND PROGRAM ILEMENTATION. .xii VI. BUDGET MONrIORING, EVALUATION, AND REPORTING .xiv VII. PUBLIC EXPENDrrURE MANAGEMENT IN A DECENTRALIZED CONTEXT ......................................... xvi Vm. CONCLUSION .............. xviii AN OVERVIEW OF MACRO AND FISCAL DEVELOPMENTS ...............................................1 A. INTRODUCTION .1 B. A REVIEW OF UGANDA'S ECONOMIC PERFORMANCE .3 C. MACROECONOMIC PERFORMANCE: ACHIEVEMENTS AND CHALLENGEs .4 Performance of the Financial Sector .4 The Export Sector .6 Trends and Implications of Domestic Revenue .7 D. IMPLICATIONS FOR POVERTY ERADICATION .8 E. MACROECONOMIC IMPLICATIONS OF THE SIZE OF THE FISCAL ENvELoPE .8 F. CHALLENGES IN IMPLEMENTING PEAP .10 G. CONCLUSION.10 2. UGANDA'S BUDGET PROCESS: ACHIEVEMENTS AND CHALLENGES ......................... 11 B. BUDGET PROCESS - PHASE 1 .13 C. BUDGET PROCESS - PHASE 2 ............................................. 15 D. MEDIUM-TERM BUDGET FRAMEWORK (MTBF) .15 E. MEDIuM-TERM EXPENDrrURE FRAMEWORK (MTEF) .18 E. ASSESSMENT OF THE BUDGET PROCESS .............................................. , , , .,. 24 F. CHALLENGES IN THE BUDGET PROCESS .25 G. THE WAY FORWARD .27 3. ISSUES IN BUDGET EFFICIENCY: HEALTH, EDUCATION, AND WATER SECTOR .... 29 A. INTRODUCTION ........... : 29 B. HEALTH .30 Background .30 Allocative and Operational Efficiency .31 Equity .33 Challenges for the Future .............................. 34 C. EDUCATION .............................. 35 Background .............................. 35 Allocative and Operational Efficiency .............................. 36 Equity .............................. 38 Challenges for the Future .............................. 40 D. WATER AND SANITATION .............................. 41 Background .............................. 41 Rural Water .................... 42 Urban Water .................... 43 Other Services .................... 44 Challenges for the Future .................... 44 E. CONCLUSION .................... 46 4. BUDGET EXECUTION AND PROGRAM IMPLEMENTATION .47 A. BACKGROUND .47 B. SPECIAL ISSUES ON BUDGET EXECUTION .49 Public Administration .49 Structure and Operations of Public Administration .50 Challenges for the Future .52 C. POVERTY ACTION FUND .53 Achievements under the PAF .54 Challenges Facing the PAF Structure .55 The Way Forward .58 D. CONCLUSION .58 5. BUDGET MONITORING, EVALUATION, AND REPORTING .59 A. BACKGROUND .59 B. THE CURRENT STATE OF MONITORING, EVALUATION, AND REPORTING .60 Data Problems .61 Evidence from Tracking Studies .62 Capacity for Effective and Timely Auditing .62 C. CHALLENGES FOR THE FUTURE .63 D. CONCLUSION .64 6. CHALLENGES FOR THE FUTURE: PUBLIC EXPENDITURE MANAGEMENT IN A DECENTRALIZED ENVIRONMENT ..65 A. INTRODUCTION .65 B. CURRENT CHALLENGES AND EFFORTS .66 Planning and Budgeting Issues .67 Capacity and Human Resource Management Issues .68 Issues of Multiple Funds Transfer Procedures and Actors .70 Local Revenues .71 Monitoring and Reporting Problems .71 C. CHALLENGES FOR THE FUTURE .71 Institutional Capacity Building .71 Increasing Local Government Autonomy .72 Local Government Budget Execution .73 Local Government Revenue Collection .73 Reporting and Accountability .73 D. CONCLUSION .74 7. SUMMARY AND CONCLUSIONS .75 A. MACROECONOMIC AsPECTS OF FISCAL CHALLENGES .75 B. BUDGET PROCESS .76 C. BUDGET EFFICIENCY .77 D. BUDGET EXECUTION AND PROGRAM IMPLEMENTATION ................................................................. 78 E. BUDGET MONITORING, EVALUATION, AND REPORTING ................................................................. 79 F. INTERGOVERNMENTAL RELATIONS AND FISCAL DECENTRALIZATION ............................................ 80 G. CONCLUSION ............................................................................ 81 ANNEXES ............................................................................ 83 ANNEX 1: DEVELOPMENTS IN THE BUDGET PROCESS IN UGANDA 1997-2001 . . 85 ANNEX 2: MEDIUM-TERM EXPENDITURE FRAMEWORK FIRST HALF PERFORMANCE FY2001/02 ............................................................................ 91 ANNEX 3: MEDIUM-TERM EXPENDITURE FRAMEWORK 2001/02-2004/05 . . 93 ANNEX 4: STATEMENT BY THE WORLD BANK ON BEHALF OF DEVELOPMENT PARTNERS ON BUDGET STRATEGY AND BUDGET PERFORMANCE 2001/02 .................................................................... 97 ANNEX 5: STATEMENT BY THE BY THE WORLD BANK ON BEHALF OF DEVELOPMENT PARTNERS ON MTEF 2002/02-2004/05 ............................................................................ 101 BIBLIOGRAPHY ............................................................................1 05 LIST OF FIGURES AND TABLES FIGURES FIGURE 1.1: TRENDS IN EXPORT REVENUES 1996/97 - 2000/01 ...................................................... 6 FIGURE 1.2: REVENUE PERFORMANCE AS A PERCENTAGE OF GDP 1996/97-2000/01 .................................7 FIGURE 3.1: HOSPITAL UTILIZATION BY THE POOR AND NON-POOR 1992-2000 .......................................... 34 FIGURE 3.2: PRIMARY ENROLLMENTS BY GENDER AND POVERTY 1992-2000 ............................................ 39 FIGURE 4.1: COMPOSITION OF PUBLIC ADMINISTRATION .50 FIGURE 4.2: DIVERGENCE BETWEEN BUDGETED AND ACTUAL RELEASES FOR 2000/01 .57 FIGURE 6.1: A THREE-WAY ACCOUNTABILITY RELATIONSHIP IN UGANDA'S INTERGOVERNMENTAL SYSTEM-RESOURCE AND INFORMATION FLOWS .66 TABLES TABLE 1.1: SELECTED MACROECONOMIC INDICATORS FOR POVERTY ERADICATION GOALS . 4 TABLE 1.2: KEY MACROECONOMIC INDICATORS .4 TABLE 1.3: REGIONAL DISTRIBUTION OF LOCAL GOVERNMENT REVENUE GRANTS IN PERCENTAGES (2001/02) .8 TABLE 1.4: EXTERNAL DEBT AND FOREIGN INFLOWS AS A SHARE OF GDP .9 TABLE 2.1: BUDGET PROCESS FOR THE YEAR 2002/03 .13 TABLE 2.2: RESOURCE ENVELOPE 2002/03-2004/05 (USH. BILLION) .16 TABLE 2.3: URA REVENUE PERFORMANCE 2001/02 (USH. BILLIONS) .16 TABLE 2.4: SECTORAL SHARES OF EXPENDITURE OVER THE MEDIUM TERM .1 9 TABLE 2.5: DISTRIBUTION OF BUDGET INCREASES FOR 2002/3 .20 TABLE 2.6: MEDIUM-TERM EXPENDITURE FRAMEWORK 2002/02-2004/05 .21 TABLE 2.7. WAGE BILL ALLOCATIONS AND MTEF PROJECTIONS FOR 2002/03-2004/05 .23 TABLE 3.1: QUALITATIVE PERFORMANCE AGAINST FIVE-YEAR TARGETS .31 TABLE 3.2: UTILIZATION OF HEALTH CARE BY THOSE REPORTING SICK BY POVERTY LEVELS; 1992-2000 .33 TABLE 3.3: PHYSICAL PERFORMANCE IN THE EDUCATION SECTOR .36 TABLE 3.4: RECURRENT EXPENDITURE SHARES FOR EDUCATION BY SUB SECTOR 1999/00-2003/04 . 36 TABLE 3.5: MEDIUM-TERM PERFORMANCE TARGETS FOR PRIMARY SUB SECTOR 2000/01-2002/03 . 37 TABLE 3.6: MEAN PUPIL-TEACHER RATIOS BY TYPE OF SECONDARY SCHOOL AND LOCATION, 2000 . 39 TABLE 3.7: SUMMARY OF PLANNED EXPENDITURE AGAINST THE MTEF CEILING IN BILLIONS OF USH. 42 TABLE 3.8. PHYSICAL PERFORMANCE OF THE WATER AND SANITATION SECTOR 1999/2000 To 2001/02... 43 TABLE 4.1: BUDGETTRENDS IN PUBLIC ADMINISTRATION 1997/98-2001/02 .51 TABLE 4.2: WAGE BILL ALLOCATIONS, PAF AS A PERCENTAGE OF TOTAL IN BILLION USH .56 EXECUTIVE SUMMARY, FINDINGS, AND RECOMMENDATIONS I. INTRODUCTION 1. Since 1997 the management of fiscal policy in Uganda has undergone major transformations, including a broadening and deepening of the budget process (see Annex 1 for a detailed discussion of Uganda's budget reforms between 1997 and 2001). More recently, public expenditure issues have focused on improving participation, enhancing transparency and accountability in the utilization of resources, and creating a better understanding of resource constraints in addressing priority poverty issues. In line with this focus, the country has made progress toward increased administrative and fiscal decentralization of public expenditure issues. Fiscal decentralization has increased local government autonomy, reduced the administrative burden at the center, and offered an opportunity for building a strong and effective mechanism for delivering services in a manner that is focused on the eradication of poverty. The budget process, which has two distinct phases, is done in a participatory and consultative manner involving several stakeholders, including donors, civil society, and the private sector. Both phase I and 2 of the budget process have been opened up to the various stakeholders beyond the executive and development partners. Phase 1, which includes significant input by sector working groups (SWGs), has been opened up to a wider range of stakeholders and the SWGs are now also participating in phase 2, which involves external evaluation of the cabinet-approved budget. The introduction of the Poverty Action Fund (PAF) has provided a mechanism for increasing and improving the delivery of resources to local governments under conditional grants. It has also provided a platform for enhancing output-based planning and reporting systems at the lower levels of government. Through all these changes, the budget process is increasingly becoming an effective mechanism for improving the quality of expenditure management and policy choices in Uganda. 2. As a means of improving the budget process, the Ugandan government has introduced two recent initiatives. One initiative is that the government's preferred mode of aid flows is now budget support. Budget support gives the government greater flexibility in allocating its expenditures according to Poverty Eradication Action Plan (PEAP) priorities. The government has therefore requested donors to make budget support the preferred modality of aid so as to enable improved budgetary processes, and more and more donors are providing their assistance this way. The government recognizes, however, that some donors are not in a position to shifi to budget support in the near future. Because the government is committed to ensuring that total government expenditure is aligned as much as possible with PEAP priorities, it has announced its desire to account for all project aid within the Medium-Term Expenditure Framework (MTEF) such that all MTEF ceilings (formally effective 2003/04) will not only reflect budget but also project support. The increasing transparency of the budget process has improved the quality of budget planning and choices and also has allowed greater predictability of the budget. This means that over time the allocations and actual spending figures have converged. 3. With the advent of budget support and deepening of the budget process, the agenda on public expenditure issues has broadened from a mere review of budget allocations to overall budget management issues. There is increasing pressure for budget execution, accountability, and monitoring are to be considered important elements of the public expenditure review (PER) work. In addition, there is greater discussion about fiscal decentralization strategy as a central mechanism to improve service delivery to the poor and confirm service efficiency. 4. To consolidate these developments a new Budget Act 2001 has been implemented that stipulates the phasing of the entire process so that the different actors can have time to give input. Increased participation has come with an increased need for monitoring and reporting so that information about past performance can be used in the current and future rounds. In the context of Poverty Reduction Support Credit (PRSC) reforms, it has been decided that PAF and overall budget reporting be combined and quarterly reports made available on request. Semiannual and annual reports will be distributed in hard copies and also placed on the Ministry of Finance website. Budget Reform Challenges 5. In spite of the progress made, there are still challenges in terms of ensuring that activities supported by the budget result in desired outputs and outcomes such that the attained macroeconomic stability can be augmented with economic growth and poverty reduction. The current focus on inputs, with little or no regard for impacts, has led to growth of the budget in quantitative terms, leaving several questions unanswered about the quality of outcomes. 6. Over the years, there has been a relatively slower rate in implementing the two pillars of the PEAP: namely, governance and actions to increase incomes of the poor. With regard to governance, monitoring of progress has partly been hampered by the absence of viable indicators. Regarding incomes of the poor, there is an urgent need to increase the role of incomes from non-farn activities, offer better access to markets, as well as improve the human capital element. 7. In the area of planning and budget making processes, the abilities and roles of the different participating stakeholders and the time available for preparing and making their submissions needs to be continuously revisited to ensure convergence toward the ideal. Participation should not simply be equated to consultation and involvement but should be seen to make an effective contribution in determining priorities and monitoring flows and inputs. 8. The new Budget Act, which sought to offer more time to the legislature to consider the budget, has resulted in a substantially shorter budget time frame for SWGs, which are unable to reap all the benefits of the improved budget process. On the other hand, the parliamentarians need further capacity to perform their role effectively under the new Budget Act. 9. Another challenge facing the planning, budgeting, and budget execution process is that of ensuring that the capacity and behavior of the implementing institutions is consistent with the set objectives. The PAF is said to have offered an inadequate focus on institutional capacity and the systems for delivering outputs to the level that is consistent with the desired long-term goals. Consequently, the absorptive capacity of a number of districts has lagged behind while the inability to make credible reports has resulted in withholding of additional funds and, hence, delays in achieving the desired objectives. II. MACROECONOMIC AND FISCAL PERFORMANCE Structural and Growth Indicators 10. The objective of maintaining macroeconomic stability has largely been attained, as the inflation outcome of 3.5 percent is within the target of 5 percent. Real gross domestic product (GDP) at market prices grew by 5.7 percent in 2001/02, which was the same rate attained during 2000/01, although it remains below the targeted 7 percent set for eradication of absolute poverty by 2017. Economic growth has been evenly balanced among agriculture, industry, and services. The agricultural sector grew by 4.8 percent in 2001/02 compared with 4.6 percent registered in 2000/01. Events in the performance of the infrastructure and financial sector remained promising, as steady progress was made toward the enactment of new regulations. 11. In general terms, the structure of the economy changed slightly, with agriculture contributing 41 percent of total GDP in 2000/01 compared with 42.2 percent in 1997/98. Monetary agricultural GDP grew by 5.5 percent in 2001/02 compared with 4.3 percent in 2000/01, while non-monetary agricultural growth slowed from 5.0 percent in 2000/01 to 3.8 percent during 2001/02. The growth rate in construction increased from 2.9 percent in 2000/01 to 6.6 percent in 2001/02. Similarly, wholesale and retail trade and community services registered high growth rates of 5.5 percent and 5.9 percent, respectively. Growth in manufacturing declined from 8.9 percent in 2000/01 to 5.0 percent in 2001/02. 12. The current account balance on the balance of payments, excluding grants, declined by 8.2 percent in 2001/2002 compared with a 2.3 percent decline the previous year. Domestic revenue as a ratio of GDP remained low, at 11.7 percent, while public expenditure as a ratio of GDP increased to just over 23.0 percent in 2001/02. The fiscal deficit, excluding grants, rose to 11.5 percent of GDP, as compared with 10.2 percent in 2000/01. Local government revenue also remained low, covering less than 10 percent of total district resources. 13. The composition and structure of the overall economy should be seen as raising significant challenges to the success and sustainability of other economic policies. For example, the structure of the economy is growing faster in non-tradable sectors such as construction, services, and administration, all of which reduce the capacity of the economy to generate both domestic and foreign-exchange revenues. To maintain these growth rates and public spending, the government will be required to continue relying on iii external resources. The situation is likely to become worse if the foreign inflows are used to fund consumption as opposed to capital development activities. 14. Overall, the most significant challenge facing the country is how to sustain economic growth rates at a level that is commensurate with poverty eradication goals. The revenue shortfalls, poor export performarice, need for further improvement in the financial sector, and the need to modernize agriculture are some of the important areas that future policies must address with a bias to attaining tangible outputs and impacts relating to poverty. Revenue Performance 15. Issues regarding domestic revenue performance continue to dominate the economic debate. Revenue collection as a ratio of GDP is still low compared with target levels. The Uganda Revenue Authority (URA) revenue to GDP ratio for 2001/02 increased to 11.4 percent, from 10.7 percent in 2000/01, but was still lower than the budget estimate in real terms by about 4 percent. Thus, the growth rates in revenue in terms of GDP experienced in the mid-1990s have slowed considerably. Non-tax revenue remains below 1.0 percent of GDP and is partly a result of lack of sufficient incentives from collecting institutions and poor submissions and accountability by some ministries involved in the collection of such revenues. 16. The shortfalls in revenue collection have been attributed to the weakening of tax administration, the culture of noncompliance, difficulties in bringing the informal sector into the tax net, the recent granting of value added tax (VAT) exemptions, and the lowering of import duty rates as part of the trade reform program. 17. Despite the implementation of reforms aimed at improving the efficiency of the URA, progress in terms of revenue returns from the URA during fiscal year (FY) 2000/01 was patchy. Some of this revenue shortfall has resulted from base variables performing differently from projections (for example, the exchange rate depreciated far less than projected). With the exception of income tax, all other categories performed below projected levels. However, it is worth mentioning firstly, that the reform program is just beginning, so the results will not be immediate. Secondly, the extremely strong performance by income taxes demonstrates the impact that the reforms can have if properly implemented. 18. Over the medium term the target is to increase domestic revenue by 0.5 percentage points per annum over the next three years. However, the current projections of revenue as a percentage of GDP for next three years are much lower: 12.3, 12.5, and 12.6 percent, respectively. Between 2000/01 and 2001/02, revenue collections have improved by 0.9 percentage points from 10.8 percent to 11.7 percent of GDP. The increase, however, is mainly a result of the downward revision of the GDP estimate and inclusion of non-tax revenue collected by government departments following the abolition of the appropriations in aid (AIA) provision. All these trends indicate the delicate situation concerning revenue targets and performance. Given the limited scope for expanding the tax base and the limited success of URA reforms, this will be an area of concern for Uganda in the short to medium term. iv 19. The government has also made efforts to improve non-URA collections by ministries, following the abolition of appropriations in aid. Although revenue collections in this area have been 25 percent higher than projected, it was mainly a result of a much better than expected performance in passport fees. Collection of passport fees, which was transferred to the URA, was almost 300 percent above the target. Loan repayments remained less than 50 percent of their target because of underpayment by the Uganda Electricity Board (UEB) and the Uganda Development Bank (UDB), leading to further under runs in revenue performance. 20. Given the current structure of the economy, curbing corruption and eradicating smuggling are key areas that are likely to pose significant challenges to the efforts of raising domestic tax revenues. The structure of the economy, which has a large subsistence sector and several activities operating in the informal sector, makes it difficult to widen the spread of the tax net in a more effective and efficient way. 21. Another challenge facing revenue collection is the impact of changing regional and international trade arrangements. Taxes from international trade have performed poorly over the past few years partly as a result of changes required by regional and international trade arrangements. Given that taxes on international trade contribute the largest share of revenue collection, the potential impact of this development needs to be evaluated and appropriate policies designed and implemented. Some steps have already been taken in this direction. The government, in collaboration with development partners, is carrying out a study on "Tariff Revenues and Industry Competitiveness under an East African Customs Union" to evaluate the likely impact on revenues and the competitiveness of different firms in Uganda. 22. The above observations indicate the critical need for the government to identify additional measures that can increase both tax and non-tax revenue. The failure to increase such revenue would necessitate a corresponding reduction in expenditures. This situation clearly highlights the precarious nature of revenue performance for the medium term. 23. Under new management, the URA is beginning to make a determined effort to increase its efficiency. With considerable mass media publicity, corrupt staff are being weeded out. The government is providing the URA with funding to upgrade and integrate its information technology system and to modernize its equipment, for example, through the purchase of scanners. Government Expenditure 24. Total government expenditure, including transfers to local governments, increased by 18 percent in 2001/02 over 2000/01. As a percentage of GDP, expenditure increased from 21.0 percent to just over 23.0 percent over the same period. The PAF has contributed greatly toward directing government expenditure to poverty-reducing activities and in institutionalizing the reporting systems, which have in turn enhanced transparency and accountability in the budget management process. v 25. However, the continued revenue shortfalls and supplementary expenditures to some votes, mainly in the public administration sector (mainly political governance expenditure), have resulted in disproportionate budget cuts and hence disruption of activities in the unprotected non-PAF areas. Continuation of this practice will undermine the planning and budgeting process and weaken the credibility of the entire public expenditure management process. Furthermore, mismanagement of existing funds will affect spending on development programs in the priority sectors. 26. Another budget issue during 2001/02 was the increase of interest payments as a percentage of total expenditure, whereas these payments had been on a downward trend in previous years. Both interest on external and domestic public debt increased, the latter because of a large increase in treasury bill issuance in response to increased inflows in donor funding of the budget, the monetary effect of which had to be sterilized. An ideal remedy to problems of preventable increases in government expenditures must be sought. 27. Among the measures being taken by the government to control unwarranted expenditures is the new Public Finance Accountability Bill 2002, which is about to be tabled to Parliament, to replace the 1964 Public Finance Act. A major feature of the Bill is that all supplementary expenditure must be approved by Parliament, prior to the release of funds. In addition, a new integrated financial management system (IFMS) is to be introduced to enable government to more efficiently plan and execute the budget and account for all spending. An integrated part of the IFMS is a new budgetary classification system incorporating international best practices in public-sector accounting. This system is to be introduced at the beginning of the next budget cycle (2002/03). 28. The projected increase in expenditure is lower than the nominal increase in GDP, reflecting the government's desire to reduce the fiscal deficit in terms of GDP, under the assumption that revenue growth in terms of GDP cannot itself do the job. The desire to reduce the fiscal deficit in terms of GDP is motivated both by the need to reduce the strain of monetary sterilization operations on the foreign-exchange markets and the domestic money market, and the desire to reduce dependence on donor funding. 29. One way to reduce the increasing pressure to extend the fiscal envelope and accommodate pressing needs in priority PEAP areas is to tap international opportunities intended for specific sectors or activities. For example, recent discussions on Millennium Development Goals (MDGs) have increased the focus on how to attain these targets within the time frame by making additional resources available to a country. In addition, the recently launched global fund for health to fight malaria, tuberculosis, and human immunodeficiency virus/acquired immunodeficiency syndrome (HIV/AIDS) is increasing the pressure for the government to increase the budget ceilings for health. Similarly, recent initiatives on Education for All funds (EFAs) intend to provide additional resources for education. 30. Much as these initiatives offer opportunities for additional resources, as long as the resources are sourced externally, they create the same problems as the current donor inflows. Thus, despite the importance of these endeavors the government's challenge is how to ensure its fiscal envelope is adhered to and macro instability is not caused by lack vi of fiscal discipline and sensitivity to budget ceilings. Thus, the government of Uganda will find it difficult to increase spending ceilings to match inflows of global funds, although it will welcome the inflows as general budget support to be incorporated into macro economically consistent budget ceilings in due course. 31. Although the poor performance of domestic revenues means the government must continue increasing inflows of donor funds and external loans, it must nonetheless continue to commit itself to reducing the fiscal deficit over the medium term. This effort can be achieved by ensuring that the rate of increases of public expenditures is lower than that of revenue collection. This goal is an uphill task if revenue collection does not grow in terms of GDP, given the nature of expenditures, some of which are constitutionally provided for. Integration of Donor Resources 32. As already noted, the government's preference is to have all the donors avail resources through the budget support modality so as to enable improved budgetary processes. Although this procedure presents some solutions to the problems of resource transfers, predictability, and accountability, it does not solve the dangers of increased donor inflows on the entire economy. 33. The continued growth of public expenditure against a background of low domestic revenue inflows has necessitated the continuation of a high level of external financing in the form of grants, donations and concessional loans. Financing the budget deficit in this manner has implications for key macroeconomic indicators such as inflation, exchange rates, and export-sector competitiveness. Fiscal discipline is a critical component of macroeconomic stability. Domestic bank borrowing to fund the deficit would jeopardize macroeconomic stability through higher inflation or higher real interest rates. Excessive external borrowing may create an unsustainable debt burden in addition to affecting the overall macro situation regardless of the terms of borrowing. For example, excessive reliance on external grants and highly concessional loans to finance the deficit may also have undesirable macroeconomic consequences. 34. Excessive use of donor resources to finance domestic expenditures can cause an appreciation of the real exchange rate, which may negatively affect the tradable sector. Export competitiveness will decrease, resulting into less foreign currency revenues and hence an unsustainable debt position. Currently, there are concerns about the long-term sustainability of the country's external debt and overall fiscal stance. Uganda's large external current account deficit, excluding grants, has been financed in recent years by donor inflows and, to a lesser extent, direct foreign investment. Net donor inflows increased from 8.8 percent of GDP in 1995/96 to 12.5 percent in 2001/02. As a result of these concerns, the government is committed to scaling back the fiscal deficit by increasing revenue and reducing its dependence on donor support. Consequently, donor inflows are expected to fall to 10.3 percent of GDP by 2004/05. 35. The above developments in foreign inflows have created concern regarding the country's debt sustainability position. Uganda was one of the first countries to qualify for the Highly Indebted Poor Countries (HIPC) debt relief initiative, and as such is due to vii receive in excess of US$2 billion of debt relief in nominal terms over 20 years. The level of debt relief extended to Uganda under the HIPC initiative was judged sufficient to deliver a debt/export ratio of 150.percent or less over the medium term. However, as a result of weaker than expected export earnings, primarily as a result of the decline in global commodity prices, Uganda's debt/export ratio is currently above 200 percent. The sustainability of increased external debt is a critical issue since the high economic growth and poverty reduction prospects belie some less favorable macroeconomic indicators. Hence, efficient and productive use of external funds to finance government programs will be important in addressing debt sustainability. To address external debt sustainability, increasing domestic revenues and foreign exchange realization through exports will remain major challenges of public expenditure management in particular and overall economic management in general. Even though the external debt management capacity in Uganda is good, there is room for strengthening such capacity. The Export Sector 36. Performance in the export sector was less than adequate. Export promotion activities were delayed partly because of delays in the disbursement of donor budget support funds, which meant that the government could not meet the required initial expenditure projections on time, except by drawing down on its reserves. As noted in the previous section, the increase in donor resources may have actually played a double role through reduction of competitiveness of the export sector. Otherwise, additional constraints on the performance of the export sector include the continued deterioration of the international price for coffee, the low investment in the fish sector, and the inadequate state of support infrastructures. All these have resulted in a reduction in foreign- exchange reserves to an equivalent of 4.4 months of imports of goods and non-factor services, slightly below the target of five months. 37. Total exports of goods and non-factor services for 2001/02 are estimated at US$636 million while remittances from abroad are expected to amount to US$587 million. Although coffee exports by volume increased by 6.6 percent in 2001/02, the value declined by 23 percent because of a 30 percent decline in the international price. 38. The government strategy of export diversification helped to compensate for the coffee revenue shortfall, as non-coffee exports during 2001/02 provided US$346 million. The government has kept the drive to increase exports in. support of rapid economic growth and structural transformation among its highest priorities over the medium term. The government programs for supporting exports are the Medium-Term Competitiveness Strategy, the Plan for Modernization of Agriculture, and the Strategic Exports Program. 39. Success in this area will depend on how the above strategies combine with the practical input of government efforts and cooperation with all stakeholders, including development partners, to overcome the key internal and external constraints. The challenges in the export sector will take more than the country can do on its own given that some factors in this sector are exogenous to the economy, as shown by the decline in international prices and limited access to external markets for primary products. Such developments underscore the critical need to diversify the export sector and facilitate the private sector so that government strategies are in line with the challenges. viii 40. To address the constraints in the export sector, the government has tabled a document that seeks to strengthen activities that encourage strategic exports. The government has initiated a dialogue to help identify those priority activities that will strengthen strategic exports. To break into the export markets, local production tailored toward exports has got to be of high quality and value. 41. Even then, the bottlenecks imposed by destination countries including subsidies and tariff and non-tariff barriers must be addressed through mutual understanding and implementation of international protocols on trade. Already, a number of countries have given signs of support for these objectives through specific trade initiatives, including the European Union's (EU)"Everything But Arms," the United States' African Growth and Opportunity Act (AGOA), and recent trade agreements concluded with Japan. 42. Nevertheless, the challenge still remains of translating the opportunities embedded in these arrangements and initiatives into practical realities. The government has noted with concern the worrying signs of half-hearted commitments, as some of the countries supposed to be key to the success of the initiatives have continued to offer subsidies to their local producers in areas where Uganda is supposed to have comparative advantage. 43. As noted above, the concerns over the appreciation effect of donor inflows on the domestic currency, and corresponding lowering- of the competitiveness of the export sector need to be addressed through wide stakeholder discussions, in addition to issues of limited market access resulting from unfavorable trade arrangements vis-a-vis Uganda. The Financial Sector 44. The banking industry has been strengthened in a number of key areas, mainly through tightening of prudential regulations, increased frequency of on-site inspections and surveillance, and improvement of supervision methodologies. There has also been an improvement in the financial depth of the economy, as shown by the increase in the M2/GDP ratio from 11.8 percent in June 2001 to 14 percent in September 2002. In addition, the non-performing assets as a ratio of total outstanding loans have declined from 50 percent in June 1995 to 5 percent in March 2002. 45. The performance of the financial sector, despite impressive signs of success, still has significant room for improvement. The private sector's access to credit is still limited to a few entities, with the problem becoming worse in rural areas. Overall, commercial banks' extension of credit to the private sector credit grew by only 2 percent over the course of the financial year. The effectiveness of the current micro credit schemes in reaching all those who are in need and making a sustainable impact on their business performance and incomes remains a challenge for the future. In addition, it remains to be seen as to whether the privatization of Uganda Commercial Bank will improve the performance of the financial sector in terms of volume and quality of services. All of these reform measures are expected to deepen financial markets and encourage more private investment, leading to higher economic growth rates. Ix III. THE BUDGET PROCESS 46. With the advent of budget support and deepening of the budget process, the agenda on public expenditure issues has broadened from a mere review of budget allocations to overall budget management issues. There is an increasing recognition that budget execution, accountability, and monitoring are all-important elements of the PER work. This year, therefore, the PER workshop continued to focus on broadening and deepening the involvement of civil society and Parliament. The enactment of the Budget Act 2001, requiring the budget proposals to reach Parliament by April 1, is expected to increase the role of Parliament before the final budget proposals are submitted in June. The remaining challenges include ensuring that all stakeholders have adequate capacity to contribute substantively to the budget process through the available channels. Issues Relating to the Medium-Term Expenditure Framework 47. Although the MTEF has started to include projections for donor project financing, the quality of such information is still very low. Resources of donor-funded projects, which may be passed on directly to line ministries or districts, -need to be incorporated in the budget process. 48. The government is committed to PEAP and PAF, as is reflected in the distribution of additional budget increases. Additional increases are expected in the health, education, and agricultural sectors. Overall, almost 60 percent of the increase will go to wage-related expenditures, resulting in significant growth in the wage expenditure component of almost 15 percent. Non-wage expenditure will grow by 6 percent, and development expenditure will decline slightly compared with last year. The share of defense is expected to increase by 0.8 percentage points next year because of the government's commitment to keep defense spending at 2 percent of GDP in addition to the Ush. 10 billion that was approved as one off expenditure for this and next year. 49. Pay reform has been identified as a priority area over the medium term. Ush. 27 billion has been allocated to fund pay increases for middle and senior management and low-level workers. The challenge is that the amounts allocated are inadequate in relation to the requirements. However, progress of comprehensive public-sector reform is expected to generate the resources needed to pay much higher wages and salaries, but this will only be possible through political will and larger initial spending at first to finance the retrenchment costs. 50. The low quality of improvements in the Budget Framework Papers (BFPs), which has been attributed to the short duration of the budget preparation process and the lack of capacity for the SWGs, remains an area to be addressed. There is a need to start the budget process on time to allow timely participation at the lower levels and provision of technical assistance to deserving stakeholders, especially at stages where there is greatest payoff. 51. In the case of agriculture there is a need to move swiftly in implementing the set programs, as this will ensure that the identified priority areas will benefit and contribute to the much needed poverty reduction in rural and agrarian Uganda. As part of x implementing the cress-sectoral PMA, there needs to be greater attention to linkages with other sectors, in order to make swift progress. 52. There is a challenge of strengthening monitoring and evaluation (M&E) in the context of budget performance, especially in the areas of monitoring both outputs and outcomes. M&E should become an important learning tool by which the future budget cycle processes can be improved. IV. BUDGET EFFICIENCY ISSUES 53. Budget efficiency refers to how the limited resources are effectively utilized to meet the priority needs of the country. Allocative efficiency refers to allocation of resources such that they reflect the priorities of the sector, while operational efficiency refers to how the allocated resources are transformed into outputs and outcomes, which are consistent with the sector and the Poverty Reduction Strategy Paper (PRSP). All the sectors that were analyzed-health, education, and water and sanitation-have made great progress in allocative efficiency but were encountering major challenges in achieving operational efficiency. 54. The health sector reflected budget underperformance, largely attributed to delays in recruitment and payroll cleaning. There also were problems with decentralized drug procurement and delayed tendering and implementation of civil works in the districts. In spite of these problems, utilization of health services by the poor increased by 2 percent between 1992 and 2000, although both coverage and quality of health care services for the poor still need to increase if health outcomes are to improve. 55. There is a significant failure to take into consideration the budgetary implications of some policy decisions in sectors such as health and education. For example, the abolition of cost sharing and increasing the number of government scholarships at the university did not take into account the fiscal implications of their implementation. It is essential to consider the fiscal sustainability of policy decisions. 56. The low value for money in the water sector was partly attributed to measures the ministry has undertaken to build capacity at the local government level, which has increased the unit cost of additional water points. In addition, interference in tendering procedures by district tender boards and misuse of office equipment by senior district officials have resulted in cost-ineffective service provision. Challenges and Recommendations 57. In terms of equity, many challenges need to be tackled in the medium term to enable limited budget resources to address the priority needs of the poor. The water sector still has major challenges ahead to address efficiency and equity concerns. The ongoing value for money and tracking studies, in the context of the forthcoming Water Sector Review, will provide an excellent platform to address these challenges over the medium term. 58. It was noted that the water sector spends 50 percent of its budget at the center in spite of the fact that more than 90 percent of its beneficiaries live in the rural areas. Thus, xi the national distribution of water resources is an area that needs urgent attention. An important contribution to this objective will be the recruitment of water officers at the district level. This will help to provide better management and monitoring services. 59. The resource allocations to the health sector are still inadequate in relation to requirements, which call for efforts to reduce duplication and wastage of already scarce resources. To meet this challenge, there is an urgent need for a strong partnership between the Ministry of Health (MOH) and Private Not for Profit (PNFP) providers. Such resource constraints also call for caution on the planned reforms for the PAF, as health cannot afford shortfalls in its allocation. In addition, the flow of resources to and within the health sector need to be timely to enable the use of limited resources to deliver the much-needed services expeditiously. Decentralized drug procurement needs to be made more efficient to ensure that greater value for money is realized. 60. In the case of the education sector, the increased pressure on limited resources- teachers, classrooms, desks, and books-from higher levels of primary enrollment associated with universal primary education (UPE) needs to be addressed if the anticipated improved education outcomes are to be realized. Although the primary education sub sector is quite robust, the post-primary-training and higher-education sectors have displayed major imbalances in terms of allocative/operational efficiency and equity. A rigorous and cost-effective plan for post-primary education has yet to be prepared. V. BUDGET EXECUTION AND PROGRAM IMPLEMENTATION 61. During FY2001/02, budget release performance was generally satisfactory. Both wage and non-wage expenditures were above targets while development expenditure fell short by 10 percent. District votes over performed compared with central government votes, which were largely affected by the need to accommodate domestic revenue shortfalls and supplementary expenditures by other votes. Expenditure in the PAF areas was satisfactory at 98 percent, although there was underperformance in non-wage expenditures mainly on account of poor performance of equalization and non-sectoral grants. 62. Problems have been found with budget execution, although the government has taken measures to address the problems of arrears through the implementation of the commitment control system (CCS). Currently, the CCS is applied to all central government non-wage non statutory expenditure. Enforcement is a problem; some agencies are not submitting proper monthly returns. In 2000/01 non-wage and development expenditure recorded a decline in arrears on the order of 45 and 23 percent, respectively, in comparison to the previous year. Although this is commendable, the effort must be extended to the local government level, where the challenges are even greater with no CCS. Part of the problem comes at the budget preparation stage, as under budgeting for items such as utilities and rent leads to arrears. Another problem is the practice of suppliers extending credit outside the CCS. This situation clearly highlights the considerable amount of work that needs to be undertaken to make progress in this area. xii 63. With regard to the supplementaries associated with the public administration sector, the government has undertaken a study to identify the problem areas and hopes to prepare a cabinet brief to discuss how to streamline activities within this sector. The study has identified several areas of cost savings, not just within the public administration sector but right across government. The study also has clearly highlighted distortions and inequalities that have crept into government over the past several years through growing cases of supplementary expenditures, the cost of the political system, duplication of services, and growth of autonomous agencies in the sector. These inequities need to be addressed as part of public-sector reform. 64. Recent reviews such as the HIPC tracking study have indicated that the Ugandan budget system is generally weak in terms of its budget execution and reporting. Several reallocations are made after the budget has been approved. Last year allocations were made for strategic exports and parliamentary salary increases and emoluments, which were approved long after the budget speech that forced cuts in other priority areas. Defense and public administration consistently overrun their budget, which results in cuts in other sectors. It is expected that the new Public Finance and Accountability Bill, which is currently tabled before the Parliament and will hopefully come into effect next year, will reduce the incentive for supplementaries and make it difficult to undermine the budget discipline through overruns. 65. The decentralization of service delivery has necessitated that funds flow in a timely manner to local authorities and service delivery centers. Although progress has been made in reducing the delays in flow of funds from the Ministry of Finance, Planning and Economic Development (MFPED) and line ministries, according to recent tracking studies there are still cases of substantial delays in resource flows. It has also been observed that limited capacity at the local government and line ministry level accounts for most delay in the flow of funds and leads to disruption of services. 66. Tracking studies in health and education sectors have brought about a better understanding of various budget-execution problems by identifying delay in flow of funds and lack of capacity problems. However, the corresponding reforms to improve these problems have been slow to come. In addition, there is inadequate information to understand how the public funds are used. For instance, there is little information on the operational efficiency and equity of service delivery. There is a need to do more cost- effectiveness analysis and benefit-incidence analysis such that not only budget formulation but also budget execution can be pro poor. 67. The implementation of the PAF protection mechanism, intended to protect core PEAP expenditures, has sometimes been done at the expense of other important interrelated areas, which therefore need some support in the future. The government has initiated a study to identify the challenges and provide possible suggestions for reform. A cautious and phased removal of the current protection offered by the PAF is likely to be an optimal strategy. 68. However, the PAF reform cannot go far until overrun problems are addressed adequately because overruns undermine the objective of removing the PAF protection, which therefore will be detrimental to attaining PEAP targets. In particular, the effect of xiii supplementaries, which result in budget cuts for other sectors, can be devastating to poverty eradication efforts. The implications of these developments on the long-term credibility of the budget process and execution are discussed. In this regard, it is imperative that political interference in planning and budgeting execution issues be greatly reduced or better still eliminated. VI. BUDGET MONITORING, EVALUATION, AND REPORTING 69. The current setup of national M&E includes all arrangements for tracking and providing feedback on progress made on the PEAP objectives. The system includes all procedures, systems, and standards of information generation and management and the corresponding reviews accompanying implementation of national development programs and projects. The M&E system is characterized by substantial overlaps and duplication, partly as a result of several stakeholders and participants. 70. Public expenditure accounting and reporting must go hand-in-hand with overall budget performance reporting to ensure that decisions on inputs in the next round will be based on information from past performance. For example, at the point of progress review, there is a need to establish whether past allocations of resources and the actual implementation are indeed moving the economy and communities toward the set goals and targets. 71. Uganda has made great strides in using tracking studies to identify problems in the flow of funds and has taken appropriate measures to address the challenges. To date, however, these studies have played an important role only in the health and education sectors, which have registered fewer problems as a result. This trend is increasingly being recommended for adoption by other sectors and is being supported by development partners largely through technical and financial assistance. 72. Other sectors need to do tracking studies in order to improve flow of funds and enable efficient use of limited resources. However, as noted in the budget efficiency chapter, there is a need to undertake benefit-incidence analysis to understand how the poor and needy people are benefiting from these programs, which are primarily intended to serve them. Also, the tracking studies have been largely concerned with flow of fund issues, and very few studies have been concerned with effective use of funds to achieve the desired objectives efficiently and equitably. 73. Although reporting of the PAF was noted to have made substantial progress in priority sectors, the capacity at the local government level is still very limited and needs urgent attention. This situation may be seen in the case of audited final accounts, which are submitted within the statutory limits for central governments, but the same is not true of local government accounts. This development has already been identified as a major need under the fiscal decentralization program and should be addressed as soon as possible. 74. Strengthening of M&E systems will be only half the job done if the reports on findings are not availed to all the relevant stakeholders in a timely manner. Such information will enable timely and appropriate reviews of the MTEF through better xiv forecasts of the future that are based on past experiences. Publications of annual budget reports need to be supplemented with better output information. CCS has shown that it is possible to do financial reporting on all government programs. Hence, simple output monitoring systems should be developed and implemented even at the lower levels of government. 75. The M&E system should start with clearly expressed goals and targets and ensure coverage of data collection ranging from inputs through to outcome levels. Efficiency in this process demands minimization of costs of unnecessary overlaps and linking up of different actors and interest groups to pool scarce and scattered resources for mutual benefit. Proper reporting of the findings by different actors should be harmonized and disseminated to the various groups of decision makers at all levels. 76. The future reports also should include data analysis in order to provide information that will help to guide future planning and budgeting decisions. The reports should not only include numbers but also implications for the future. Participation in data collection and lower-level reporting should improve as participants begin to see benefits for themselves coming out of the evaluation reports. However, the generation of quality decision making information to include in the M&E reports may require analytical skills and technical facilitation that are not currently available at various levels of government. Therefore, this area should be specifically addressed. The need for additional resources to support the upgrading of analytical skills within the MFPED and other line ministries has featured in a number of government reports, and it is now time for action. 77. The feedback and accountability aspects require a strong auditing mechanism, consisting of staff and equipment, which are generally lacking in the auditor general's office. The ultimate goal of an intergovernmental monitoring system should be to generate information for better decision making at all levels of government, to promote institutional performance, and to enhance accountability. The task for Uganda to get to such levels clearly surpasses the current abilities of the office of the auditor general. The situation is worsened by capacity problems at the local government level. Government reports indicate that the requirement of submitting audited accounts to the legislature within 12 months of the end of the fiscal year is met by the central but not by the local governments. 78. In response, the government has put in place measures to increase the quality and regularity of internal budget reporting. Measures have been undertaken, with the support of the Department for International Development (DFID), to strengthen the capacity through training and also to ensure independence of the Office of the Auditor General. In the area of providing feedback, measures are being undertaken by the government, with the support of donors, to strengthen the capacity of each line ministry and also at the local government level to monitor and report on budget outturns, including outputs and outcomes. 79. . Given that the monitoring of outcomes and impacts is a medium- to long-term agenda, there is a need to establish appropriate indicators to continuously monitor and evaluate progress toward the desired goals. The linkages between planning and xv implementation need to be clearly articulated in order to establish relevant activities and events that should be monitored using relevant indicators. This calls for developing the capacity to rigorously evaluate the economic development impact of various public policies and expenditures. 80. Issues of reliability and accuracy of the data also need to be given due consideration. The processes of collecting, storing, processing, and reporting of results require not only high levels of human capacity but also a minimum package of technical equipment. The tasks of ensuring data quality and coverage, together with developing and computing relevant indicators for certain objectives and actions, are also going to be daunting. VII. PUBLIC EXPENDITURE MANAGEMENT IN A DECENTRALIZED CONTEXT 81. Fiscal decentralization involves introduction of various levels of government that make coordination of activities, monitoring, and accountability of critical importance. Management of public expenditures demands a robust intergovernmental fiscal and administrative system with an efficient and accountable relationship among MFPED, line ministries, and districts as well as between districts and their constituents. As a result of decentralization, there has been an increase in the number and diversity of transfer mechanisms from central government and donors to the local governments. 82. Fiscal decentralization poses significant challenges for the government in terms of planning, budgeting, and implementation of the set policies. It requires building credible institutions with adequate capacities at all levels of government, maintaining harmonious relationships between the different actors and stakeholders, and ensuring that local and national plans work toward the same goals. For example, many of the mechanisms for affecting resource flows in Uganda are not yet well adapted to the decentralized framework. In addition, the local governments have little power over allocation of resources, given that most of their resources are in the form of conditional grants. The lower levels of government also have little involvement in decision making, partly as a result of capacity problems. 83. A number of complaints have been raised about the structure of transfers, including the limitations it imposes on local governments in pursuing their locally identified priorities. Another complaint has been the formula used in computing transfers such as equalization grants. For example, recent developments indicate that, given poverty trends, the northern region requires revenue grant transfers of 29 percent as opposed to the current 22 percent of the total allocation. Thus, the formula, which partly takes into account population size, geographical area, and poverty levels (based on consumption), needs to be revisited. 84. Another critical issue is the local government revenue-generating capacity and its linkage to the magnitude of transfers. More developed local governments will tend to have higher expenditure requirements because they have more infrastructure to maintain, but at the same time they should have more revenue-generating capacity. With the exception of the Local Government Development Program (LGDP) (which only applied to development expenditure), grants are not linked to local revenue-generating capacity, xvi though this will be a feature under the new fiscal transfer system that will be piloted in FY2002/03. 85. Additionally, there are no clear linkages between a number of initiatives at the central government and the districts, and even within the districts themselves. For example, in most cases there is no strong linkage between the district development plans (DDPs) and the local government budget papers. The lack of such cross-linkages has resulted in a situation whereby scarce resources are not being maximized. Furthermore, this lack of linkages between the various levels of policymakers and implementers can result in planning and budget execution failures, as each level or set of government institutions pursue objectives that cannot converge to the established national development goals. Yet the alternative of letting the center dictate what should be done by and at all levels of government would not result in decentralized service delivery. Priorities for national development should strongly reflect preferences from the grassroots, which should be determined through community participation in the planning process. 86. Another challenge facing the Ugandan government where the PER should make a contribution is how to develop a tier of government and institutions that are responsive, adaptive, effective, and accountable in developing and implementing strategies for poverty eradication using the ongoing and proposed public-sector reforms. Although Uganda has a well-defined intergovernmental system, the challenges have been in implementing reforms that support such a system. The government has been backtracking in terms of continued heavy reliance on sectoral conditional grants, the failure to develop strong administrative systems at the local government level which can handle payroll management, and the failure to define well-developed systems of standards setting and M&E. In addition, the challenges for the medium term will revolve around how to enable intergovernmental relations to influence the budget and vice versa. 87. The government has already taken note of these impediments, which tend to slow progress toward poverty eradication. Plans are under way to examine how to streamline and harmonize the present systems and processes of transferring resources to the local governments. It is worth noting, however, that the problems with fiscal decentralization also include low capacity levels, facilitation, and ensuring fruitful community and civil society participation in planning and decision making. Such participation is critical if the planning and budgeting for services under local governments is to be responsive to the needs of local communities and accountable to them as well. 88. Capacity problems at the districts and within line ministries have hindered flows of resources, as coordination and submission of reports are not always done on time. This situation has also let policy execution lag behind schedule and, hence, has denied communities access to vital resources and services. Most local governments have problems in attracting and retaining quality personnel who are necessary for delivering quality services on time. This problem of retaining high caliber staff highlights the forgotten role of personnel management in the production of sectoral outputs. Among other things, this capacity problem has implications for efficiency in decentralized procurement and efficient management of service delivery. xvii 89. Budget reporting to council and central government is fragmented and ineffective. It also does not give comprehensive and accurate information on local government revenue and expenditure performance during the fiscal year. As already noted, line ministries are also faced with major problems in dealing with quarterly reporting from a growing number of conditional grants and to different stakeholders. Desk officers in ministries and at the districts are also overburdened with continuous visits from multiple groups of evaluators and supervisors, resulting from uncoordinated systems between the various levels of government. 90. Another important challenge for the future with regard to the fiscal decentralization strategy is to establish government processes with potential areas of risk or challenge, which will need further attention in order for the overall strategy to be successfully implemented. For example, the removal of protection currently being enjoyed by the PAF areas is bound to subject such sectors to an uncertain future in terms of resource inflows. VIII. CONCLUSION 91. This annual PER report provides an important opportunity for reviewing the budget process as a whole and for identifying both achievements and challenges. In the case of Uganda this has the added advantage of addressing fiduciary concerns of budget support for donors. Naturally, these features have increased the interest and participation of all stakeholders in the PER process, specifically in budget workshops, the annual PER workshop, the PER report, and related studies. 92. This PER report identifies the major challenges in public expenditure management in Uganda in the advent of budget support. It is important that the government, together with development partners, develop a systematic program and a sequenced approach to address identified concerns so that Uganda's efforts to address macro stability, fiscal sustainability, and poverty reduction can be achieved prudently. The challenge now is how to use this report as a basis for identifying improvements in the budget process and supporting them through the appropriate instruments (for example, PRSC, Economic and Financial Management Project [EFMP II], LGDP etc) and assistance from other development partners. xviii 1. AN OVERVIEW OF MACRO AND FISCAL DEVELOPMENTS A. INTRODUCTION 1.1 During the past decade, the management of fiscal policy in Uganda has undergone major transformations, especially in terms of broadening and deepening of the budget processes. In this context, the focus of the PER process has been in the areas of improving budgetary processes, improving transparency and accountability of resource utilization, and creating a better understanding of the resource constraints in addressing priority sector issues. The PER process has also initiated a better understanding of macroeconomic considerations of government spending and, correspondingly, the optimal level of external flows. These issues have and will continue to attract the attention and interest of policymakers and development planners over the medium term in Uganda's public expenditure reform program. 1.2 In addition, Uganda has started making a decisive move toward increased decentralization of the budget process. Decentralization of administrative and service delivery responsibilities has called for corresponding fiscal decentralization, which demands new initiatives in the budgeting process. Fiscal decentralization has increased local government autonomy, reduced the administrative burden at the center, and offered an opportunity for building a strong and effective mechanism for delivering services in a manner that gives priority to the eradication of poverty. Also, the change to integrated systems under sector wide approaches (SWAPs) has changed the relationship between the ministries and their funding agencies, thereby necessitating reforms in both donor and government systems. Donor financing has been integrated within the national budget, and bottom-up planning strategies enhanced. 1.3 The entire budget process has been opened up to various stakeholders beyond the executive and development partners. Phase 1, which includes a significant input of SWGs has been opened to a wider range of stakeholders. In addition, the SWGs have been encouraged to participate in phase 2, which involves external evaluation of the Cabinet-approved budget and the review of the budgetary systems and performance. 1.4 The introduction of the PAF has provided a mechanism for increasing and improving the delivery of resources to the local governments via conditional grants. The PAF has also provided a platform for enhancing output-based planning and reporting systems at the lower levels of government. These innovations have made significant improvements in the quality of budget choices and have reduced the variation between projected expenditure levels and those actually realized. 1.5 In addition, the reform process has resulted in substantial gains in the quality and timeliness of BFPs and the MTEF. By identifying policy issues related to spending decisions and linking projected resources to expenditures over the medium term, the budget process has become quite successful in delivering macroeconomic stability. Key economic indicators are shown in tables 1.1 and 1.2. As evidenced by the PER consultation prior to the Consultative Group (CG) meeting in May 2001 and other subsequent deliberations among government, civil society, and donors, the budget process is increasingly becoming an effective mechanism to improve the quality of expenditure management and policy choices in Uganda. This consultative process was further exemplified in the November 2001 budget workshop and May 2002 PER workshops in FY2001/02. 1.6 However, there are still several challenges in terms of ensuring that activities supported by the budget result in desired outputs and outcomes such that the attained macroeconomic stability can be augmented with economic growth and poverty eradication. Apart from improving the processes, there should be a positive change in the efficiency of implementing the programs supported by the budget. A number of issues can be raised concerning the efficacy of the current budgeting framework. There is a need to strengthen and elaborate further the PER processes put in place-in terms of the institutional, administrative, and capacity underpinnings of budget programming and implementation-in order to make the most useful developmental impact on growth and poverty reduction. For example, the ability and role of the different participating stakeholders and the time available for preparing and making the expected submissions need to be continuously revisited to ensure convergence toward the ideal. Participation should go beyond mere consultation and become effective in determining priorities and monitoring of flows and impacts. The focus on inputs, with little or no regard for impacts, has led to substantial growth of public expenditure, in quantitative terms, with several questions remaining about quality of outcomes. 1.7 It is necessary to establish whether the capacity and behavior of implementing institutions are consistent with the set objectives. The PAF, for example, is said to have offered an inadequate focus on institutional capacity and the systems for delivering outputs to a level that is consistent with the desired long-term goals. Consequently, the absorption of resources has lagged behind in a number of districts, while the inability to make credible reports has resulted in withholding of resources for future periods. All these issues and many others call for a regular review of the budget making and implementation process and procedures. Such reviews will ensure that lessons of best practices from the past are used to improve both current and future budget processes. This type of review is one of the important objectives of the PER workshop. 1.8 Over the long term, the credibility of the budget process will depend on the progress made in upstream or budget preparation processes. Therefore, the current budget process must be reviewed and evaluated in order to inform the subsequent budget reforms on the modifications and improvements required to overcome the shortcomings in the downstream or budget execution and reporting phase. Moreover, these challenges are happening at a time when donor aid management is changing from project-oriented financing to budget support. The implications of such transitions on budget process management need to be established and appropriate strategies designed and implemented. 1.9 In the medium term, certain challenges are facing the implementation of the public expenditure reforms. These challenges include preparation of the budget in a way that incorporates all the donor-funded projects, improvements in budget execution and 2 monitoring, and completion of fiscal decentralization. Progress on these issues will have an important impact on the future of budget management in particular and public expenditure issues in general. 1.10 The rest of the report is arranged as follows: The next section reviews the country's economic performance over the previous year and its implications for the size of the fiscal envelope. It attempts to bring out both the achievements and risks of the current macro framework in order to identify areas of challenge. Chapter 2 discusses the budget process and issues concerning participation roles, capabilities, and concerns of the different stakeholders. Here we discuss how phases 1 and 2 of the budget preparation process performed over the last budget cycle and we identify some of the weaknesses and challenges for improving budget process in the medium term. Chapter 3 looks at an important issue concerning the implementation of the budget, namely, budget efficiency of various public-sector interventions. This year we give special attention to budget efficiency issues in three main priority sectors: health, education, and water and sanitation. These three sectors are important elements of PEAP's pillar 4 on increasing the quality of the life of the poor. 1.11 Chapter 4 looks at broad challenges in budget execution-an area that has had limited progress over the years in Uganda. We give special attention to two main issues: (1) issues related to lack of budget discipline and political involvement in budget execution; and (2) budget protection mechanisms, such as Uganda's PAF that has protected some sectors at the expense of others, and the implications that continuing such mechanisms will have on attaining PEAP targets. Chapter 5 discusses the challenges Uganda faces in terms of improving budget monitoring, evaluation, and reporting and its linkages to the increasing desire for donors to have fiduciary assurances of budget support. Chapter 6 discusses the issue of Uganda's intergovernmental system and efforts in decentralization and the challenges it poses in budget preparation, execution, and reporting. The challenges of creating institutional capacity, creating harmonious relationships between the different levels of government in planning, budgeting, and implementation are also emphasized. Chapter 6 also highlights the need to discuss more clearly a program for sequencing public expenditure reforms in order to improve the budget processes in Uganda over the medium term. The report ends with a summary of conclusions. B. A REVIEW OF UGANDA'S ECONOMIC PERFORMANCE 1.12 In this section selected trends in macroeconomic indicators are used to review recent economic fiscal and monetary developments in order to capture emerging developments and challenges. Therefore, the section provides a basis for assessing the reorientation of expenditures toward poverty eradication. The results of past economic policies and activities in terms of macroeconomic stability, financial sector development, market operations, industrial development, revenue collection, and general economic growth can act as good indicators for future policy trends. Similarly, the performance of key sectors such as education, health, water and environment, transport, and communications is a good indicator on the value for money and relevancy of budget allocations in light of the plarned economic objectives. 3 C. MACROECONOMIC PERFORMANCE: ACHIEVEMENTS AND CHALLENGES 1.13 During recent years the economic performance of Uganda was in line with the government's main objectives of maintaining macroeconomic stability and broad-based economic growth. In 2001/02, the average annual rate of underlying inflation of 3.5 percent was within the targeted 5 percent. The real GDP growth rate was 5.7 percent, which, although less than the medium-term target of 7 percent, maintained the pace of growth seen during the previous financial year. As indicated in table 1.1, in order for the country to achieve the target of reducing absolute poverty to less than 10 percent by 2017, GDP growth rates have to be sustained at 7 percent and above, while inflation should be kept below 5 percent per annum. This goal will require implementation of further structural reforms to create an enabling environment for the private sector and increased private foreign investment. The increase in foreign direct investment from US$60 million in 1993/94 to US$146 million in 2001/02 is commendable, but needs to be augmented further. Table 1.1: Selected Macroeconomic Indicators for Poverty Eradication Goals Indicator/Period 2000/01 2001102 2002/03 2003/04 2004/05 Outcome Outcome Projected Projected Projected Annual real GDP growth at market 5.7 5.7 6.6% 6.7% 6% prices Annual average inflation rate 6.3 -1.8 3.5% 3.5% 3.5% Gross reserves -months of imports 5.6 6. 6.6 7.1 7.3 Source: MFPED/lntemational Monetary Fund (IMF) staff estimates. 1.14 Despite a decline in the cash crops sub sector, mainly because of adverse terms of trade and the coffee wilt disease, the performance of the agricultural sector improved compared with the previous year. The agriculture sector grew by 4.8 percent compared with 4.6 percent during the previous year. Good performance was reported in the food crops sub sector, which grew by 6.2 percent in 2001/02, despite having grown by 7.7 percent in 2000/01. Table 1.2 presents the key macroeconomic indicators for the past few years and projections for the next two fiscal years. The industry and services sectors also displayed lower growth performance during 2001/02 compared with the 2000/01 overall GDP growth rate (see table 1.2) Performance of the Financial Sector 1.15 The role and performance of the financial sector in the economy has continued to improve. The measure of financial depth, M2/GDP, increased from 11.8 percent in June 2001 to 14 percent in September 2002. In addition, the non-performing assets as a ratio of total outstanding loans declined from 50 percent in June 1995 to 5 percent in March 2002. Savings and certificates of deposits rose from Ush. 353 billion in June 2001 to Ush. 460 billion in June 2002. Nonetheless, the overall savings level would be higher if it were not for the substantial amou*nts of savings held in the form of real estate and foreign currency assets. Savings in many rural areas are usually in the form of commodity stocks, livestock, and land. House construction as a form of saving for the future may also have affected the level of financial savings. 4 Table 1.2: Key Macroeconomic Indicators INDICATOR 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 Annual average headline inflation (%) 0.2 5.9 4.5 -2.0 1.0 3.9 National accounts, % growth rates: Agriculture 5.8 5.6 '4,6 4.8 - - Industry 10.9 3.1 6.5 5.7 Services 6.5 6.5 7.2 6.4 - - GDP at market prices 7.4 5.3 5.7 5.7 6.6 6.7 Real per capita GDP 1.7 2.8 3.3 3.2 4.3 4.2 National accounts, % GDP at market prices: Gross domestic investment 19.8 19.5 19.9 20.6 22.3 22.2 Public investment 5.4 6.4 6.4 6.0 6.7 6.6 Private investment 14.4 13.1 13.5 14.6 15.5 15.9 Gross domestic savings 7.5 6.2 5.5 5.8 6.8 7.8 Balance of payments, % of GDP Current account balance, excluding grants -13.2 -13.0 -13.8 -14.0 -17.7 -15.5 External indicators: Debt service/exports (% before HIPC relief) 24.2 27.2 26.6 24.2 24.4 21.5 Debt service/exports (% after HIPC relief) 24.2 13.7 15 12.2 13 13.2 Reserves in months of imports 6.3 5.9 5.6 6.0 6.6 7.1 Government finance, % of GDP Domestic revenue 11.7 11.3 10.8 11.7 12.3 12.5 Public expenditure 17.8 20.7 21 23.3 23.1 22.2 Overall deficit excluding grants -6.1 -9.4 -10.2 -11.5 -10.8 -9.7 External borrowing, net 3.2 2.2 3.4 4.7 3.8 3 Domestic borrowing 0.0 -1.0 -0.1 -0.1 -0.1 -0.1 Nominal GDP at market prices (Ush. billion) 8145 8906 10009 10665 11658 12980 1.16 All these developments have followed significant improvements in the banking laws, such as the tightening of prudential regulations of the banking systems and increased frequency of on-site inspections and surveillance. The minimum unimpaired paid-up capital requirement for commercial banks was increased to Ush. 2.0 billion in January 2000 and is scheduled to be increased further to Ush. 4.0 billion by January 2003. This increase is expected to act as a cushion against losses and offer strong protection to depositors' funds. The government has continued to make important financial-sector reforms, including privatizing the Uganda Commercial Bank (UCB) and strengthening corporate governance of the sector. 1.17 However a number of immediate, short-term measures are required to consolidate the excellent progress made to date. The approval and adoption of the Financial Institutions Statute is expected to ensure that banks are prudentially managed and that the 5 safety of deposits is not jeopardized through mismanagemeIihd fraud. The proposed law spells out the duties and necessary stringent management controls for the key players in the risk-management process. The Export Sector 1.18 Delays in disbursement of donor budget support funds (less than 75 percent) meant that the government was unable to meet the reserves target because it had to draw down on foreign-exchange reserves equivalent to six months of imports of goods and non-factor services, which is above the target of five months. MTEF projections do indicate that the reserves position is not likely to improve to meet the target over the medium term. Additional policies will be required to further propagate and consolidate the improvements attained in the nontraditional export sector. 1.19 Essentially, nontraditional exports refer to commodities that have only featured in Uganda's export trade over the past dozen years. In 2001/02 nontraditional export earnings were higher than traditional exports by US$ 260 million, clearly indicating the great potential for this export sub sector and the need for diversification of the entire export sector. The government already is looking into developing a range of strategic exports, including fish, horticulture, tea, and information and communication technology. Figure 1.1 shows the trends in the performance of traditional, nontraditional, and total exports over the past five years. Figure 1.1: Trends in Export Revenues 1996/97 - 2000/01 0 1996)97 1997/98 199&'99 18999/0 2D0tWOl I--Tt E,qaxts -UTrM * Ni rar Source: MFPED. 1.20 Infrastructure impediments are a major constraint to private-sector investments and export growth in Uganda. The government has taken some vigorous steps to improve the infrastructure and power sectors. Progress on strengthening and reform of the infrastructure has continued, with some key landmarks being attained. Performance of the 10-year main roads program was largely on target during the current year as 90 percent of the current targets were met. The target was to carry out routine maintenance on 17,513 km of roads and periodic maintenance of 2,215 km under the district roads program. During the year, the Cabinet approved the reforms and privatization of Uganda Railways Corporation and the enactment of a new railway sector law. These actions are 6 expected to provide an enabling environment for private-sector participation and establishment of a railways sector regulator under the relevant line ministry. The potential of the power sector is to be boosted by the start of construction work on the AES hydropower project after approval of funding by the boards of the International Finance Corporation and the World Bank. Trends and Implications of Domestic Revenue 1.21 The current account balance, excluding grants, declined by 8 percent in 2001/2002, more than the decline of 2 percent recorded in the previous year. Domestic revenue as a ratio of GDP, which increased from 7.1 percent in 1991/1992 to 12.1 percent in 1996/1997, has since stagnated at around 10 to 11 percent a year. This year the expected outturn is 11.7 percent, mainly because of a downward revision of the GDP by about 7 percent and abolition of AIA. On the other hand, public expenditure, as a ratio of GDP, increased from 21.0 percent in 2000/2001 to 23.3 percent in the current year. The overall deficit, excluding grants, increased from 10.2 percent in 2000/01 to 11.5 percent in 2001/02. All these figures indicate the need to improve revenue performance by focusing on strengthening tax administration, curbing tax evasion, and increasing the contribution of non-tax revenue. Figure 1.2: Revenue Performance as a Percentage of GDP 1996/97 - 2000/01 l [ETotalRevenue Revenue Perfonnance 1996/97 - 2000/01 luTax Revenue 0 Nontax Revenue | T ; 12 1 12 Pe rce nt of GDP 6 7 28 0 1996/97 1997/98 1998/99 1999/00 2000/01 Source: MFPED 1.22 Non-tax revenue remains below 1 percent of GDP, with only Ush. 54.1 billion of the anticipated Ush. 86.5 billion being collected in the current year. A number of measures have been adopted to improve non-tax revenue collections, including abolishing AIA such that all collections are remitted to the consolidated fund, reviewing and updating rates and charges, and carrying out in-phase transfer collections of the tax to the URA to minimize leakages. These measures are to be augmented by increasing incentives for institutions collecting this type of tax. 1.23 Local government revenue has an important role to play in the delivery of services; yet, such revenue has remained at 10 percent or less of the total funds available to local governments. This situation is partly due to a lack of capacity at the sub-county level , a lack of technical knowledge, political interference, and lack of supervision by the 7 higher authorities. It is, therefore, necessary to realize the potential of local government revenue through appropriate measures to improve tax administration and tax policy. These goals are expected to be areas of focus in the forthcoming LGDP II and other bilateral local government capacity-building programns. D. IMPLICATIONS FOR POVERTY ERADICATION 1.24 The biggest threats to poverty eradication remain the low rate of economic growth, which has been less than the required 7 percent, and increasing inequality both between regions and persons. Recent household surveys indicate that inequality in Uganda has increased between rural and urban areas and also between regions. While overall national poverty has been on the decline, between 1997 and 2000, there was a marked increase from 60 percent to 66 percent in the northern region. This regional reversal in the trend calls for a clear assessment and reorientation of public expenditures toward poverty eradication. 1.25 Given the observed trends in economic growth and regional inequality in poverty trends it becomes essential to review the regional distribution of local government grants by sector, which partly depends on population size (85 percent), and geographical area (15 percent). Table 1.3 below, based on figures for 2001/02, shows a fair distribution- implying that the causes of the observed differences may be the result of other factors. Table 1.3: Regional Distribution of Local Government Revenue Grants in Percentages (2001/02) Sector/Region Central West East North Health 20 28 27 24 Education 24 29 26 21 Water 31 34 14 22 Roads 24 27 27 21 Agriculture 23 27 27 23 Total 25 27 26 22 Source: MFPED 1.26 Recent analytical work by the MFPED has highlighted that the current allocation of public expenditures is not totally poverty sensitive. Based on population, geographical area, and poverty level it is argued that the northern region, which is most poverty prone, should receive at least 29 percent instead of the current level of 22 percent. MFPED is currently reviewing its formula for various sectoral conditional grants to ensure that they are poverty sensitive (Government of Uganda [GOU] 2002). E. MACROECONOMIC IMPLICATIONS OF THE SIZE OF THE FISCAL ENVELOPE 1.27 The current realizations in macroeconomic outcomes have important implications for the size of the fiscal envelope. More recently, the growth rate of domestic revenue collections has been stagnant in the context of an increasing need for public expenditure on service delivery. This situation has necessitated a continuation of a high level of external financing in the form of grants and concessional loans. The management of the budget deficit has implications for key macroeconomic indicators such as inflation, exchange rates, and export-sector competitiveness. Fiscal discipline is a critical component of macroeconomic stability, mainly because the use of domestic bank 8 borrowing to fund the deficit is always inflationary, while excessive external borrowing will create an unsustainable debt burden. It is therefore important to restrict aggregate government expenditure even though this will have a crucial bearing on sectoral spending limits. The government has to determine an aggregate spending level that is in line with maintenance of a stable macroeconomic situation. 1.28 Although it is possible for the country to make use of concessional funds offered by donors to support increases in the provision of public services, beyond what is possible through the use of domestic revenues, there are limits to the size of an acceptable fiscal deficit. Unlimited external borrowing can create appreciation of the currency and result in a reduction in export competitiveness. Excessive use of donor resources can cause an appreciation of the real exchange rate, which will negatively affect the tradable sector. Export competitiveness will decrease, resulting in less foreign currency revenues and, hence, an unsustainable debt position. 1.29 There already are concerns about the long-term sustainability of the country's external debt and overall fiscal stance. Net foreign inflows as a percentage of GDP increased from 9.2 percent in 1995/96 to 13.3 percent in 2000/01 and are expected to rise to 14.6 percent in 2001/02. The stock of external debt as a percentage of GDP decreased from 58.3 percent to 55 percent in 2000/01. The sustainability of increased external debt is a critical issue since the high economic growth and poverty reduction prospects belie some less favorable macroeconomic indicators. Table 1.4 shows some key indicators of external debt and foreign inflows. Table 1.4: External Debt and Foreian Inflows as a Share of GDP 92193 93/94 94/95 95196 96197 97/98 98t99 99/00 00/01 01/02 Actual Estimate Foreign Official Inflows total 16.3 12.5 11.8 9.2 9.3 9.9 9.9 10.4 13.3 14.6 Loans 7.7 6.8 6.6 4.7 4.4 4.0 4.5 4.1 4.4 6.0 Grants 8.6 5.7 5.3 4.6 4.9 5.8 5.4 6.3 8.9 8.6 otw HIPC Grants 0.8 1.0 1.7 1.7 Private Inflows 3.4 7.6 5.7 7.0 5.1 8.3 6.3 1.6 2.2 3.0 External Debt Total 81.9 75.0 58.8 58.2 58.4 55.7 58.8 58.8 55.0 51.8 Multilateral 56.4 45.4 37.5 41.2 42.4 42.4 47.5 47.5 51.3 48.6 Bilateral 20.2 17.5 12.7 13.0 12.0 12.2 12.6 11.1 3.2 2.9 Commercial Banks/Non-Banks 7.5 5.3 2.9 2.8 2.3 2.1 1.3 1.4 0.7 0.5 Source: World Bank database and staff estimates. 1.30 The macroeconomic effects and sustainability of incrcased aid depend on how the government uses such aid, and how the consequences are transmitted to the economy. In the case of Uganda, there is evidence that increased aid inflows have been financing increased consumption. Consumption as a ratio of GDP has increased more than investment, while imports, also as a ratio of GDP, have increased more than exports- resulting in a widening current account deficit. These developments raise the question as to whether the country's current level of public spending and external debt are sustainable. 1.31 One other problem that can arise out of excessive funding of the fiscal deficit is an increase in domestic inflation. If government borrowing from the domestic banking 9 sector is not restricted it can result in an increase in money supply, which in turn can translate into a higher consumer price inflation that is above the national target of 5 percent or less. It is therefore important that government domestic borrowing activities be regulated to a level that is favorable to the goal of macroeconomic stability. F. CHALLENGES IN IMPLEMENTING PEAP 1.32 The Ugandan government has continued to reallocate its public resources to activities that directly contribute to poverty eradication, particularly in the areas of health care, primary education, and water services. The slow progress made in these areas is a clear indicator of the need to do more to strengthen the capacity of the public sector to translate resources into services that will make a difference in the lives of poor people (GOU 2002). Although the abolition of user fees is said to have enhanced access to health services by the poor, signs have been increasing of deteriorating quality in services rendered. High infant, child, and maternal mortality rates persist, and the government vaccination program is on the decline. In the education sector, the UPE policy has increased attendance but has also created unfavorable pupil-textbook and teacher-pupil ratios (GOU 2002). There are also increasing concerns about high absenteeism and dropout rates, especially among poor children and girls. 1.33 Over the years, the government has been relatively slow in implementing programs under pillars 2 and 3, namely, improving governance and actions to raise the incomes of the poor. With regard to governance, monitoring of progress has been hampered by the absence of viable indicators. Although the democratization process has continued to evolve in a progressive manner, a lot of effort is still needed to facilitate institutions and mechanisms for enhancing a versatile democratic system. It is critical for policymakers to consider adopting direct actions to help the poor increase their incomes and close the widening gap of income disparities. The government should increase the role of non-farm activities, increase access to markets, and improve the human capital element in order to address rural poverty (GOU 2002). G. CONCLUSION 1.34 The above discussion highlights how the macro objectives and related risks have important implications for the size of the government budget in terms of both revenues and expenditures. As a result of the tight fiscal constraint, the government has been forced to prioritize its programs to ensure that value for money is realized through the limited public spending possible. The government intends to reduce the fiscal deficit over the medium term and reduce its reliance on external support of the budget. Currently, around 58 percent of the budget, equivalent to 12 percent of GDP, is externally funded. The government of Uganda hopes to reduce the deficit mainly by increasing revenues as a share of GDP, but expenditures will likely also have to fall as a share of GDP. There are short-terms costs associated with achieving these macroeconomic targets, however, both for sustaining sectoral programs and for attaining overall PEAP targets. 10 2. UGANDA'S BUDGET PROCESS: ACHIEVEMENTS AND CHALLENGES A. INTRODUCTION 2.1 Over the past five years, Uganda has made systematic strides in making its budget process more open and has built up the capacity of various stakeholders to ensure quality participation in the budget process. The budget process in Uganda has been divided into two phases. Phase I involves the beginning of the budget process whereby budget ceilings are communicated and SWGs are asked to prepare their BFPs. Civil society and development partners have started playing an increasingly active role in this process. Phase 2 deals with the presentation of the Cabinet-approved MTEF to Parliament for review and comment by civil society and development partners. There has been further deepening of consultations on budget efficiency and budget monitoring issues in this process as well, which has improved the credibility of budget allocations. 2.2 Budget predictability has improved substantially over the years in Uganda. The transparency of the budget process has improved the quality of budget planning and choices and also has permitted greater predictability of the budget. This predictability means that over time the allocations and actual spending figures have converged. For instance, the absolute variability of the budget actually was reduced from about 25 percent in the early 1990s to less than 5 percent last year. This is indeed commendable. That said, it must be noted that individual sectors still have substantial variations in budget execution. As noted later, some of the PAF sectors perform at around 95 percent, while other sectors such as public administration have systematic overruns. 2.3 The Ugandan government has introduced two recent initiatives to improve the budget process. One initiative is that the government's preferred mode of aid is now budget support, which gives the government greater predictability when planning the MTEF. Through the second initiative, the government desires to account for all project aid such that all MTEF ceilings (starting FY2002/03) will not only reflect budget but also project support. This change, apart from giving a reasonable level of confidence in the ceilings, also enables sectors to be accountable for the inputs in terms of outputs and outcomes. 2.4 In Uganda, the World Bank has been the lead donor in providing support to the PER process. In addition to the traditional role of the Bank in the PER process of providing overall support, the PRSC-initiated reforms have necessitated the Bank's need to have better information on budget execution and value for money of the choices in the budget. Hence, the Bank has facilitated the formation of a PER working group (PERWG) this year. This forum, which consists of government (mainly budget-related units in MFPED) and key budget support donors, allows continuous discussion of PER issues. Thus, the Bank has been involved in providing support for phase 1 and phase 2 of the budget process to facilitate broad participation and to give civil society and development partners a forum in which to review and assess the budget choices made in the BFP. The Bank has been providing technical and financial assistance in deepening the phase I and 2 activities. In addition, various development partners have provided technical assistance through SWGs with the aim of deepening the budget preparation process and improving the budget choices over time. 2.5 The Bank's budget support instrument, PRSC, has been strongly linked to the PER given that the primary focus of PRSC1 and 2 has been on improving efficient, equitable, and sustainable allocation of public resources. PER is the vehicle through which budget-related dialogue can be systematically undertaken and, indeed, PER has enabled continuous dialogue on these issues to achieve the PRSC targets. In this context, PER reform areas have underlined the priority areas in which Bank support has concentrated in assisting with value-for-money studies in health, education, and water or ensuring that better budget performance information is made available. Therefore, PER has helped the central focus of PRSC of improving efficient service delivery. This objective has been further augmented by the Country Financial and Accountability Assessment and the Country Portfolio Performance Review, which have ensured that efficiency gains are realized in financial management and procurement reforms, respectively. 2.6 The government of Uganda has requested donors for budget support as the preferred modality of aid to enable improved budgetary processes. Thus, increasingly more and more donors are providing their assistance that way. For instance, the Bank provides almost half of its assistance in this mode, while other donors (for example, DFID) are expected in the next few years to move almost exclusively to budget support. In the course of this year, some other donors have also moved increasingly to budget support (for example, Irish Aid, EU, and the Netherlands), and the Danish International Development Agency (DANIDA) is presently considering budget support. This move to budget support, apart from focusing the attention of the donor community on the budget choices that are made, also enables donors to focus on outcomes of the overall budget and sector wide reforms rather than on projects. This move has, however, also raised the level of complexity of managing donor expectations of reporting (for fiduciary concerns) and local government expectations of decentralization. The donor budget support has also raised a more complex issue in the determination of ceilings, which is an additional concern for some donors who want to earmark support to specific sectors. Following last September's Partnership Principles' workshop, donors have an increased understanding of the illogicality of earmarked sector support. 2.7 With the advent of budget support and deepening of the budget process, the agenda on public expenditure issues has broadened from a mere review of budget allocations to overall budget management issues. There is increasing pressure that budget execution, accountability, and monitoring are all considered important elements of the PER work. In addition, there is greater discussion about fiscal decentralization strategy as a central mechanism through which service delivery can be improved to the poor and service efficiency in general can be confirmed. The PERWG has come under increasing pressure to undertake studies in these issues and progressively more stakeholder discussions are beginning to accommodate these concerns through various fora. 12 B. BUDGET PROCESS - PHASE 1 2.8 Over the past few years the Ugandan government has undertaken various bold steps to deepen the budget preparation process and improve the level of participation of various stakeholders. As a first step of the budget process, during the summer of 2001 MFPED commissioned a study on how to strengthen the role of SWGs. Based on this study, the Budget Policy and Evaluation Department (BPED) revised the budget process timetable (Floscher 2001). Table 2.1 reflects the changes made to the budget process and budget cycle on the basis of this study. In addition, this year was the first year of implementation of the new Budget Act 2001, which sought to give the legislature a greater role for legislature in the budget preparation process. The result was that the budget preparation process was advanced several weeks, with the BFP submitted to Parliament on April 1. However, this also resulted in the budget process getting substantially shortened for SWGs, which could not reap all the benefits of the improvements in the budget process that were introduced. Table 2.1: Budget Process for the Year 2002/03 Activity Date Consultative budget workshop Nov 2001 Budget workshops for local governments Dec 2001/Jan 2002 Preparation of sector BFPs Nov/Dec 2001 Submission of sector BFPs Dec 2001/Jan 2002 Interministerial consultations on BFPs Jan/Feb 2002 Submission of national BFP to Cabinet March 2002 Submission of macroeconomic plan and indicative budget framework to Parliament April 1, 2002 Comments from Parliament and PER workshop Mid-May 2002 Budget Day June 13, 2002 Source: MFPED. 2.9 The budget workshop was held in November for all stakeholders collectively so that they could be aware of the budget process and could play an effective role in the preparation of the BFP. This year, in addition to the usual stakeholders from line ministries, civil society, and development partners, the parliamentarians also played an active role. This was a welcome measure given that, according to the Budget Act, they are supposed to play an increasingly active role in the budget process. The workshop, which was organized by MFPED, set out the basic framework for budgetary choices, the respective sectoral ceilings, and the process by which budgetary decisions are to be made through SWGs and clarified the roles of various stakeholders. In addition, there was a clear discussion of the output orientation of the budget and how to integrate results- oriented management into the budget process. This year, greater emphasis was placed on providing more detailed guidelines to SWGs to ensure that the BFPs are more output oriented. Subsequently, the BFPs from the justice, law, and order sector and accountability sector were substantially improved from the previous year. The BFPs for health, water, and education are already output-oriented. 2.10 The November budget workshop was preceded this year by the quarterly PAF review meeting to discuss the annual budget performance report and PAF report. The objective was to ensure that there is a forum to discuss the outputs and outcomes of the 13 overall budget in addition to formal reporting of the budget performance in terms of PAF resource flows. A large number of stakeholders again attended this workshop and candidly discussed the challenges facing budget reporting overall. It was pointed out that the BFPs need to become more output oriented. In the context of PRSC-supported reforms, it was also decided that PAF and overall budget reporting will be combined into one. In the future the quarterly reports will be made available on request, while semiannual and annual reports will be distributed through hard copies and placed on the Ministry's website (www.finance.go.ug). The government of Uganda should be commended for meeting these objectives this year and for beginning to focus on improving the quality of reporting. 2.11 Following the budget workshops, SWGs started meeting as respective sectors to prepare their BFPs. Given the delayed start of the budget process, however, the SWGs did not have adequate time to improve their presentations through more frequent consultations. This factor was evident in the overall quality of BFP submissions this year. Other than those sectors that have a sector review process, most other sectors were not able to make substantial progress in their BFPs compared with the previous year. The only exceptions were the justice, law, and order sector and the accountability sector, which were able to improve their BFPs, through internal consultations with the help of additional technical assistance. Given the outcome of the budget process and BFP outputs this year, it was noted that additional technical assistance must be provided in order to enhance the output orientation of BFPs. MFPED and PERWG have discussed plans for putting in place technical support for the SWGs before the next budget cycle. 2.12 Following this meeting the SWGs held a two-day retreat in December to discuss the outputs of the SWGs, especially those needing additional guidance. Line ministries and development partners attended the retreat and discussed BFPs in the context of output orientation, performance indicators, prioritization of sector programs and issues related to results-oriented management. Apart from giving feedback to the respective SWGs, the retreat also enabled attendees to assess lessons for the future in terms of providing appropriate support to weaker SWGs. 2.13 After the November budget workshop, local government BFP (LGBFP) workshops were held in December, and a further workshop was held in January for the new districts. The objective was to provide information to local government officials on the budget process and provide them with their appropriate expenditure ceilings so they could prepare their LGBFPs. Because local governments in Uganda are responsible for almost one-third of the budget and more than three-fourths of PAF expenditures, LGBFPs are an important mechanism through which to strengthen the role of local government and identify and address challenges for broader decentralization. At these meetings sector BFPs were shared with local governments to facilitate the LGBFP preparation process. 2.14 In January and February sector BFPs were discussed with the Minister of Finance. Subsequently, MFPED prepared a national BFP, which was presented to the Cabinet in March. The national BFP also included the macroeconomic framework and put forward a number of new expenditure options relative to the November ceilings that had emerged during the sectoral consultations. This process involved extensive consultations with 14 many sectors because the tight budget ceilings necessitated prioritizing expenditure choices. After Cabinet discussions, the national BFP was formally presented to the Parliament on March 26, ahead of the April 1 deadline proposed by the new Budget Act. The Parliament provided its feedback through the budget committee after a series of consultations on May 15. MFPD prepared a written response a few days later and then discussed these issues with Parliamentary Budget Committee. C. BUDGET PROCESS - PHASE 2 2.15 The PER workshop was held on May 20-21 to discuss the previous year's budget performance (specifically, the first three quarters for which information was available). A special effort was made this year to discuss budget efficiency issues. The government also presented the Medium-Term Budget Framework (MTBF)IMTEF for FY2002/03 - FY2004/05, which was discussed at the PER meetings. Given the real constraints in the fiscal envelope for the next three years (where budget grows nominally by 7 percent per annum), it has become necessary to ensure that potential efficiency gains within the budget are realized. This has necessitated a series of special studies and discussions on tracking expenditure flows, benefit-incidence analyses, and value-for-money studies. This year, the government of Uganda focused on the health, education, and water sectors. The plan is to broaden this focus to incrementally include other sectors in the coming year to continue to improve budget choices and budget execution. 2.16 This year again the PER workshop focused on broadening and deepening the involvement of civil society and Parliament. The selected few participated actively and confirmed that the discussions on macro challenges, fiscal constraints, and budget efficiency issues for the medium term were discussed in detail. In addition, two special topics were discussed this year. The first topic was the continuing overruns of the public administration sector and the implications for overall budget efficiency. The second topic was how to reform the PAF procedures so that the protection provided to some sectors does not undermine overall budget efficiency and financing of other non-PAF priority activities. We discuss these two issues in the next chapter. 2.17 Based on the inputs from Parliament and discussions at the PER workshop, MFPED revised the BFP/MTEF and presented it to the Cabinet. Following further revisions at the margin, the budget for FY2002/03 and the MTEF was submitted by the Minister of Finance to the Parliament on June 13. 2.18 In the sections that follow, we briefly summarize the revenue and expenditure issues for the medium term before discussing the budget choices reflected in the FY2002/03 budget allocations. D. MEDIUM-TERM BUDGET FRAMEWORK (MTBF) 2.19 Since 1997/8 domestic revenues have virtually remained unchanged as a proportion of GDP at around l1 to 12 percent. Despite reforms that were aimed at improving efficiency of the URA, very little progress has been seen in terms of revenue returns from the URA in the last fiscal year (see table 2.3). Although some of this revenue shortfall is from base variables performing differently from projections (for 15 example, the exchange rate depreciated far less than projected), except income tax all other categories performed below projected levels. Table 2.2: Resource Envelope 2002/03-2004/05 (Ush. Billion) 2001/02 2001/02 2002/03 2003/04 2004/05 Approved Budget Projections Domestic resources 1,335.0 1,246.8 1,456.6 1,660.0 1,849.6 O/w URA 1,259.0 1,207.4 1,392.1 1,575.30 1,763.1 O/w non-URA 41.0 39.4 40.5 47.5 47.5 O/w loan repayments 35.0 11.9 24.0 37.3 39.0 Budget support 884.1 797.6 8126 771.3 713.1 O/w grants 494.6 434.3 481.9 482.6 453.9 O/w loans 389.5 363.3 330.7 288.7 259.1 Total resource inflows 2,219.1 2,044.4 2,269 2,431 2,563 Minus External debt repayment -101.0 -126.6 -121.9 -152. -1762 domestic financing -67.5 11.0 -59.6 -33.8 -10.8 Arrears -132.0 -114.1 -50.0 -45.0 -41.0 Total available for MTEF/budget expenditures 1,918.6 1,968.1 2,037.6 2,200.2 2,334.7 Memo items GDP 11479 10697.7 11691.1 13019.1 1430S.0 URA4revenuesas%ofGDP 12.0% 11.3% 11.9% 12.1% 12.3% Source: MFPED 2.20 In addition, this fiscal year the government also made efforts to improve non- URA collection by ministries, following the abolition in AIA. Collections have been 25 percent higher than projected, partly through much better than expected performance in passport fees, collection for which was transferred to the URA (collection was almost 300 percent above target). Loan repayments have been less than 50 percent of their target because of nonpayment by the UEB and UDB, leading to further under runs in revenue performance last year. Table 2.3: URA Revenue Performance 2001/02 (Ush. Billions) Tax head Budget Outturn (July-Feb.) Proj. Year Outturn Income tax 262.9 172.4 285.1 Import duty 164.2 82.7 126.9 Excise duty 374.1 235.3 360.9 VAT 436.4 249.4 385.2 Fees & licenses 57.4 37.1 55.2 Total 1258.7 777.0 1213.34 Source: MFPED 2.21 Even though revenues for the past five years have been hovering at around the same level as percent of GDP (10 tol 1 percent), expenditures have increased by about 5 percentage points. Most of this increase has been financed exclusively by donor inflows. This increase has, however, confirmed that critical PEAP priorities are being addressed. 16 This increase in expenditures has naturally increased the external dependence of the budget in carrying out government programs. The situation has also led to growing concerns among policymakers of the adverse effects of extemal flows on international competitiveness and also the sustainability of various PEAP programs without appropriate measures to increase revenues. 2.22 The higher external flows have been in the form of HIPC debt relief, budget support, and additional projects to address PEAP priorities. In this regard PAF expenditures have grown by a large percentage over the last five-year period, from under 2 percent of GDP to more than 7 percent. 2.23 Over the medium term the target is that revenue will increase by 0.5 per annum over the next three years. According to current projections, however, the figures for the next three years are 12.3, 12.5, and 12.7 percent of GDP, respectively. Between last year and this year, revenue has increased by 0.9 percentage points, that is, 10.8 to 11.7, mainly the result of a downward revision of the GDP estimate by about 7 percent. All these indicate the delicate situation of the revenue targets and performance. Given the limited scope for expanding the tax base and the limited success of URA reforms, this will be an area of concern for Uganda in the short to medium term. 2.24 Nevertheless, improved URA performance should finally be forthcoming as a result of new management, a concerted effort to eliminate corruption, and increascd funding from the government for purchasing modern technology (such as scanners). Non-tax revenue is also likely to increase significantly as the reform program in this area continues, with accountability and reporting requirements being tightened and rates increased. 2.25 According to the MTBF (see table 2.2), foreign financing is expected to decline over time. Next year the budget support is expected to increase from 2001/02 by 8 percent to Ush. 861 billion. After that it will be Ush. 880 billion in 2003/04 and Ush. 872 billion 2004/05. In addition, it is worth noting that the budget support for this year has performed at 89 percent of the target. The performance for the end of the fiscal year is expected to be Ush. 797 billion, which is lower than the budgeted level of Ush. 884 billion. The budget support figures given in the MTBF include almost $100 million in each of the coming three years resulting from savings from HIPC debt relief. Because donor project aid does not go through the Consolidated Fund Account, it is not part of the budget support figures given above. Donor project aid figures are increasingly being incorporated as part of the MTEF although the quality of such information is not very good. However, the government's target to reduce the fiscal deficit is inclusive of project aid and, hence, there is a need to improve the coverage and quality of such information. 2.26 This year there is a Ush. 55 billion shortfall relative to revenue projections. This shortfall is mainly from underperformance of URA returns and a downward revision of electricity tariffs and the resulting impact on loan repayments by the UEB. Thus, the government needs to identify additional measures that can increase the tax or non-tax revenue. Failing such measures, corresponding cuts have to be incurred in expenditures if revenues continue to under perform. As noted, this situation clearly highlights the precarious nature of revenue performance for the medium term. 17 2.27 There are increasing pressures to extend the fiscal envelope to accommodate pressing needs in priority PEAP areas. Recent discussions on MDGs have increased the focus on how to attain these targets within the time frame by making additional resources available to a country. In addition, the recently launched global funds for health to fight malaria, tuberculosis, and HIV/AIDS are also becoming an increasing pressure on the government to increase the budget ceilings for health. Similarly, the EFA drive is expecting a similar treatment for education in the MTEF. Despite the importance of these endeavors the government is taking a tough stand on ensuring adherence to its fiscal envelope so that macro instability is not caused by lack of fiscal discipline and insensitivity to budget ceilings. Thus, the government of Uganda will not increase spending ceilings to match inflows of global funds, although it will welcome the inflows as general budget support to be budgeted for in due course. 2.28 Since the government prefers budget support as the main mode of assistance most development partners are switching to budget support. This switch has naturally meant that there is greater predictability of resource flows, unlike project aid. Consequently, budget support as a share of GDP has increased over time to about 7 percent of GDP. Thus, the government is able to plan its medium-term expenditures with reliable figures on budget support. Some new development partners have fully joined the support mode; others, including the World Bank, are increasing their share of budget support from less than a third to almost half. 2.29 The projected increase in expenditure is lower than the nominal increase in GDP. Over the medium term the government's objective is to reduce the share of external financing of the budget and confirm that fiscal deficit is reduced. As a result, the government's net savings over the medium term will be in the order of 1 percent of GDP, given the pressures to provide for various PEAP goals. These savings will enable the clearing of domestic arrears and will enable for expansion in credit to the private sector, which is expected to grow at around 15 percent a year from last year's level of less than 10 percent. These targets are consistent with the government's macroeconomic policy objective of promoting private-sector growth. 2.30 The budget assumptions are relatively ambitious for FY2002/03. A large increase is envisioned in domestic revenue mobilization through URA reforms and spending is projected to grow, despite the fiscal ceilings established, because of to pressures to increase spending on health and education, among many others. Unlike other years, the revenue shortfalls cannot be accommodated through expenditure cuts without substantial downward revision of sector programs. Although the external financing plans are consistent with donor plans, it is expected that some donors may be willing to provide additional resources if that would mean corresponding increases in sectors that are under funded. The problem, though, is that then other sector ceilings have to be reduced. Over the medium term, however, the government will clearly need to increase revenue and control expenditure pressures if it is to achieve its fiscal objectives. E. MEDIUM-TERM EXPENDITURE FRAMEWORK (MTEF) 2.31 The MTEF is derived from the MTBF and covers the same period, FY2002/03 - FY2004/05. While the MTEF has started to include projections for donor project 18 financing, the quality of such information is suspect. Integrating donor projects within the MTEF is one of the areas of reforms identified under PRSC. The current set up leads actual budgetary programming to be limited to government-funded expenditures from domestic revenue and budget support. Thus, the MTEF is effectively limited to only government-funded expenditures. After deducting external debt amortization payments and net savings of government from domestic revenue and donor budget support, the balance is available for the MTEF. The sectoral distribution of the MTEF is described in table 2.4. It is expected that starting in FY2003/04, spending ceilings will include donor projects. Table 2.4: Sectoral Shares of Expenditure over the Medium Term Sector 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 Outturn Outturn Outturn Approved Projections Projections Projections Estimates (in percent) Security 19.9 15.4 13.9 12.0 12.8 12.6 13.1 Roads and 6.2 8.1 8.5 8.9 7.4 7.3 7.1 works Agriculture 1.0 1.5 1.5 2.6 2.3 2.3 2.0 Education 26.9 26.3 24.9 24.1 24.8 24.8 24.3 Health 6.5 6.5 7.4 8.9 9.6 10.1 10.7 Water 1.2 1.5 2.4 2.8 2.4 2.4 2.4 Law and order 7.2 7.3 6.5 6.8 7.0 6.5 6.4 Accountability 0.6 0.8 1.1 1.2 1.3 1.3 1.3 EF and SS * 2.7 4.6 5.0 7.4 7.4 7.7 7.7 Public 20.7 20.3 20.2 17.1 17.7 16.4 15.7 administration Interest 7.1 7.7 8.5 8.2 7.1 7.7 7.8 payments All sectors 100.0 100.0 100.0 100.0 100.0 100.0 100.0 EF and SS: Economic functions and social services. Source: MFPED. 2.32 As with last year's budget, this year's budget also focuses on supporting PEAP implementation and the presidential manifesto on increasing exports. Similar to last year, exports will receive Ush. 50 billion worth of interventions, which is expected in the medium term to result in almost tripling export revenue from Ush. 400 million to Ush. 1.5 billion. 2.33 Overall, the budget envelope that is consistent with macroeconomic stability and other key macro targets is Ush. 2,037 billion, which is about 119 billion above the FY2000/01 amount, an increase of less than 7 percent in nominal terms. Table 2.5 shows how this increase has been allocated to priority sectors. This year, to finance under funded activities, an additional Ush. 76.2 billion had to be identified, which was derived by imposing a 7 percent across-the-board reduction in non statutory development and non-wage expenditure. 19 2.34 It is clear from table 2.5 that PAF areas have been well provided despite the modest increase in the overall resource envelope. PAF expenditures increased overall by Ush. 55 billion, which amounts to almost 45 percent of the increase in the budget for this year. This increase is fully funded by government resources and, as a result, the PAF expenditures are expected to increase to 36 percent of the government's discretionary budget next year- almost a percentage point increase from this year. This increase is consistent with the government's commitment to increase spending to directly poverty reducing areas. Total resources available for the PAF will increase from Ush. 631 billion this year to Ush. 680 billion in 2002/03. 2.35 Before discussing sectoral shares, we wish to mention two issues based on the budget speech: the budget focus for the coming year and the allocation and distribution of the increase between last year and this year. According to the government, the budget focus for the corming year will be based on three themes: (1) continued attention to PEAP goals through the PAF, (2) reducing the level of fiscal deficit, and (3) promoting strategic exports. The BFP addresses all these objectives. As noted in the preceding paragraph, the government has highlighted its commitment to PEAP and PAF through an increased allocation overall (36 percent) and a larger share from the overall increase in this year's budget. As discussed, the government also has reiterated its commitment to reducing the fiscal deficit by ensuring that expenditures do not grow as fast as GDP over the medium term. The government of Uganda wishes to reduce the fiscal deficit from 11 percent in 2002/03 to almost 8 percent in 2004/05. In this way, the government intends to reduce its dependence on donor funds even if domestic revenue increases do not materialize. Finally, the BFP highlights the government's commitment to the strategic exports initiative by again providing Ush. 50 billion, which it is hoped will be invested in areas where public spending will harness private participation in production, processing, and marketing of strategic exports. Table 2.5: Distribution of Budget Increases for 2002/3 Categories Allocation Ush. (billions) Pay reform for grades U1-U5B 17 Pay increase of about 3 percent for lower grade workers 10 Main roads maintenance 3 5 Counterpart funding for main roads projects 4 Makerere University support to an additional 2,000 students 6 Defense 30.4 Justice, law and order sector 14.0 Parliamentary Commission 11.5 Primary teachers wages (PAD) 24.3 Secondary teachers wages 12.6 Health sector (including Ush. 6.5 billion for national primary health care delivery (PAF) 31.3 LGDP 8.8 2.36 The projected increase of Ush. 124 billion between 2001/02 and 2002/03 is distributed consistently with the major priorities to which the government has committed itself in dialogue with development partners. Almost 60 percent of this increase goes to wage-related expenditures, which makes wage expenditures grow by a large proportion- 20 almost 14 percent-in next year's budget. Non-wage and development expenditures grow at 5 percent and 1.5 percent, respectively. In terms of sectors, as table 2.5 shows, education gets Ush. 37 billion, health gets Ush. 31 billion, Parliament gets Ush. 11.5 billion, pay reform implementation gets Ush. 27 billion, and defense gets Ush. 30 billion. The allocation to defense includes an extra Ush. 10 billion, which development partners agreed to this and next year as one off expense. Overall, the allocation of the increases clearly indicates the government's commitment to PEAP and priority sectors, including public-sector performance issues related to pay reform. Table 2.6: Medium-Term Expenditure Framework 2002/02-2004/05 2001/02 2002/03 2003/04 2004/05 Sector Approved Projections Projections Projections Estimates Security 229.24 261.66 276.81 306.84 Roads 170.24 150.47 160.22 166.74 Agriculture 49.05 46.87 49.85 48.00 Education 458.27 505.17 546.44 567.38 Health 170.06 195.97 221.75 250.51 Water 54.03 48.75 52.75 55.04 Law and order 128.55 142.15 143.92 150.04 Accountability 22.76 26.64 28.30 30.79 Economic functions and social services 139.86 150.18 169.09 180.06 Public administration 325.31 360.13 360.14 371.79 Interest payments due 155.10 144.60 169.40 183.00 Grand total 1918.70 2,037.60 2200.20 2334.68 2.37 Reviewing the projected spending levels and key sectoral trends of the MTEF for the coming year in table 2.6 we observe the following: Health: Health is the fastest growing sector for the next fiscal year, increasing by almost Ush. 26 billion or 15 percent of its current level. This growth is driven mainly by the support for implementation of the HSSP, Uganda's commitment to international goals in this sector, and the shift of project to budget support by some donors. Ninety percent of health funding goes for front line service provision as a result of recent reforms. Recent studies also show that the poor are benefiting increasingly from the health care provision. The growth in the health budget is expected to continue over the medium term resulting in a level of almost 11 percent of the MTEF by 2004/05 compared with less than 9 percent this year. It is expected that the government will accommodate at least some of the inflows from the global funds against malaria, HIV/AIDS, and tuberculosis, which will boost health sector spending even further. Education: In nominal terms education receives the largest nominal increase next year-about Ush. 40 billion. This increase is mainly the 21 result of the large rise in the wage bill for primary and secondary teachers compared with the 2000/02 allocation. It is expected that this higher provision will help avoid under budgeting for teachers' wages, which was a problem this year. Education is projected to get a quarter of the overall budget next year. About 69 percent of this money will go to primary education, 13.7 percent goes to secondary, 4.3 percent to Business, Technical, Vocational Education and Training (BTVET), and 9.4 percent goes to tertiary. In this year's budget, teacher training also will be protected by PAF. Compared with 1996, when only 36 percent of the primary allocation reached schools, in 2002, 95 percent is excepted to reach schools-a worthy achievement. Agriculture: The budget for this sector has more than doubled from last to this year, from Ush. 24 billion to almost Ush. 49 billion, and this level will be maintained next year. Thus, the sector's share in the overall budget will increase from 1.5 to 2.3 percent of the MTEF, which is in line with the government policy of investment in modernization of agriculture and production of strategic exports. However, as has been noted in the Background to the Budget (GOU 2002), the challenge is to move swiftly in implementing the programs to ensure that the priority areas rightly identified will benefit and contribute to much needed poverty reduction in rural and agrarian Uganda. Justice, Law, and Order: The allocation for this sector is expected to increase by about 11 percent over last year (about Ush. 14 billion), in response to progress being made by the sector in developing a SWAP. The government agrees with development partners and other stakeholders that this sector may need additional funding after the plan is updated to reflect baseline surveys, more focused objectives and priorities, the recurrent costs of institutions, clear specification of outputs and performance indicators, and much greater clarity in the presentation of its BFP. Because that this sector has implications for achieving PEAP targets it should receive further attention and allocation. Because the sector is minimally protected by PAF, it is suffering cutbacks of almost 30 percent as a result of revenue shortfalls, a problem that should be addressed soon. This is one sector that seems to have suffered from having inadequate funding to carry out its objectives. Public Administration: The ceiling for this sector is not expected to grow between this and next year and, in fact, over the medium term it will decline. This decline is attributable to reductions in the Electoral Commission and is also in response to concerns that this sector is absorbing resources that have high opportunity costs in terms of addressing PEAP targets. Over time the budget allocations for this sector will be streamlined to confirm there is value for money in supporting the many institutions-with their broad and sometimes duplicative mandates-this sector supports. The president commissioned a study on the possibility of more efficient public administration spending. The study has highlighted distortions and inequities that have crept into government 22 over the past several years and has raised the urgent need to rationalize these agencies in the context of comprehensive civil service reform. Pay Reform: This is a priority area of reform of the government over the medium term and is elected to receive a favorable allocation (see table 2.7). For instance, we noted in Table 2.5 an additional Ush. 27 billion has been allocated to fund pay increases for middle and senior management and low-level workers. This amount will be allocated across votes after discussions with the Ministry of Public Service, so the ceilings of most sectors will therefore increase by an additional amount. This is an area of reform that is also supported by PRSC. The budget this year has accommodated resources to implement the five-year wage reform program the government of Uganda has developed. The amounts allocated are inadequate in relation to requirements, but faster progress can only be achieved within the context of comprehensive public-sector reform that would generate the resources to pay much higher wages and salaries. Defense: The share of defense is still high and will increase by 0.8 percentage points next year. This increase reflects the government's commitment to keep defense spending at 2 percent of GDP plus the Ush. 10 billion that was approved as one off expenditure for this and next year. Given that GDP will be growing faster than government expenditures in the medium term, however, defense expenditures are expected to grow faster than other sectors and will be an area of concern in the coming years. Table 2.7: Wage Bill Allocations and MTEF Projections for 2002/03-2004/05 Budget Projection Category 2001/2002 2002/2003 2003/2004 2004/2005 Ush. Billions Ush. Billions Ush. Billions Ush. Billions Defense 118.25 124.16 130.37 136.89 PAF - teachers 155.56 179.87 188.38 188.38 PAF - other 41.83 48.2 53.45 59.06 Other 230.63 268.2 2,26.25 275.18 Total 546.27 586.64 626.68 651.58 MTEF Wage Bill 546.27 627.7 651.2 671.2 Source: MFPED 2.38 Naturally, the increases highlighted above have meant that non-wage and development expenditures across the board have to accommodate some of the cuts. This situation is unavoidable given the need to prioritize program and public investments of activities. This is all the more reason that budget efficiency issues, which seek to increase value for money, will become a theme over the medium term in all sectors. This year's PER workshop started discussions on this issue with health, education, and water, and it is expected that additional sectors will be studied next year in order to improve budget efficiency. 23 2.39 It is worth noting that the government's commitment to decentralization is also highlighted by budget allocations in the MTEF. Transfers to local governments have increased in line with increases in PAF, growing by 10 percent next year as primary and secondary teachers' wages, primary health care, and LGDP allocations have increased. Next year the government is expected to transfer almost Ush. 660 billion, about 50 percent of the budget, net of those services that cannot be decentralized, consistent with its commitment to increased decentralized service delivery. 2.40 This year's budget process has highlighted the importance of rigorous prioritization, which will become the rule of the game in the future and which the SWGs have already, in a painful way, learned as most of their proposals for additional funding could not be met. Prioritizing is expected to be the reality of the medium-term fiscal challenges for Uganda. Through the process of PEAP revision and sector reviews it will become important for sectors to prioritize their programs to confirm that the resources available are effectively utilized to address important needs in their sectors. 2.41 Despite these challenges, the development partners supported government's overall MTEF and the budget for the next year, subject to the above observations related to sectors that might need additional funding to carry out their mandates. The donors, therefore, confirmed at the annual PER meeting that the MTEF does provide an appropriate basis for donor budget support. Donors emphasized, however, that given the tight budget limits for most priority sectors, the budget execution during the year will be kept to the set allocations so some sectors are not allowed overruns at the expense of others. E. ASSESSMENT OF THE BUDGET PROCESS 2.42 Phase 1 of the budget process this year was substantially crunched into a very short time period, which made it extremely difficult to realize many gains in terms of improvements in the budget process. Although the SWGs are now more institutionalized, their lack of technical capacity combined with demands on them to carry out more rigorous tasks, has meant that progress has been very slow. For example, although much more effort was put into ensuring the output orientation of BFPs this year-by developing detailed guidelines-with the exception of a few sectors little progress was made because of time and capacity constraints. In addition, it has become clear that in sectors such as agriculture, accountability is more cross-sectoral in nature and, hence, output-oriented BFPs cannot be easily prepared without closer links with other sectors and SWGs. Similarly, other sectors do not have easily quantifiable outputs, which will make it difficult for them to prepare output-oriented BFPs. All these issues will remain a challenge in the medium term. 2.43 In addition, although improvements have occurred in the LGBFPs, they are still very weak. The efforts to synchronize the LGBFPs with central BFPs have not been very effective. Here again this budget cycle has shown the need for more time and technical assistance so that such gains can be made. Because a large share of the budget is increasingly being decentralized it is essential that the LGBFPs appropriately reflect priorities at the local level. This accomplishment will also enable the monitoring of 24 outputs at the local level and will ensure that the decentralized resources are transparently used and accounted for. 2.44 The quality of involvement of external stakeholders has improved but there is further need for capacity building and technical assistance, particularly among civil society, parliamentarians, and development partners. This year civil society has again played an important role through various SWGs and through the PER workshop. Still, only a handful of civil society organizations (CSOs) play this role and some are not able to play an effective role because of capacity constraints. This area needs further assistance. Thanks to the new Budget Act, the parliamentarians have been involved in the budget process from an early stage. This year parliamentarians played an active role in the budget workshop from November onwards. In addition the MTEF and BFP were given to them in March/April, in advance of the budget speech, which enabled them to have a series of discussions with MFPED and to provide written comments. Discussions with parliamentarians have indicated a need for technical assistance and further training workshops to facilitate effective participation and debate on the budget process. Despite this, it is worth noting that this year the submission from the budget committee was of good quality and, in the spirit of balancing the budget in proposing areas for additional spending, they also suggested areas for cuts. 2.45 Finally, this year the increasing share of budget support resources by donors and commitment to MDGs necessitated a series of discussions among development partners, donors, the government, and civil society on a variety of MTEF/BFP issues. The quality of dialogue at both the intra- and interagency level has improved, and there have been more candid discussions on the possibilities and challenges within the fiscal constraints. This improved quality of dialogue among development partners, SWGs, and the government paves the way to ensure that budget efficiency issues are discussed and programs are prioritized in the context of the budget process. The government discussed these partnership principles as PEAP Volume 3 in September 2001, which has paved the way for better coordination between all stakeholders in addressing PEAP priorities. The government should follow up soon with a plan of action that will highlight a timeline for implementation of the partnership principles. 2.46 As part of phase 2, the external review of the budget process included more than the development partners who are usually involved. Through the new Budget Act and PER workshop additional space was created this year for more quality participation by civil society, parliamentarians, and development partners. Given the fiscal constraint and the greater pressure on Uganda to meet MDGs, the depth of the dialogue on allocations has moved to a level that was unseen hitherto. Although we think that this process was improved over last year, there is a need for additional progress to enable more participatory dialogue to take place. Post-PER workshop discussions have focused on the need to confirm that all stakeholders are provided with all the relevant information and technical support to ensure they can fully participate. This was not the case this year. F. CHALLENGES IN THE BUDGET PROCESS 2.47 Based on the above review, it is worth identifying areas where challenges remain and where efforts should concentrate in the coming year. 25 2.48 The minimal improvements in BFPs can be traced to the short duration of the budget preparation process and lack of capacity for SWGs. Stakeholders identified both these areas as needing urgent attention. The first step should be to move the budget process forward and give more time to SWGs. Second, the much needed technical assistance should be provided to deserving stakeholders, possibly at stages where there is the greatest payoff. 2.49 Integration of project aid and the wage bill in the MTEF is still weak. As discussed earlier, this area has been a concern for some time, and MFPED has started taking steps but progress has been slow at best. This integration needs urgent attention and support. PRSC has identified these reforms as high priority, and donors should work with the government to address these needs. Although this is an area of budget preparation, it will be useful to assist SWGs to accommodate these challenges in the coming years as part of their BFPs. Another important step is to ensure much greater contact between Ministry of Public Service (MPS) and MFPED very early in the budget process (preferably September). More discussion is needed between desk officers in sector ministries and their counterparts in MFPED, although skill capacities remain a problem. 2.50 We have noted the participation of external stakeholders throughout the budget process, although this participation is not particularly in-depth. This situation is because the focus of the reforms on participation has focused on getting people involved rather than ensuring that the participation produces quality improvements. This again is an area for further work and support such that quality gains can be made through broadening participation. 2.51 In the same vein, the CSO participation did not substantially improve between last and this year mainly because of capacity constraints. Despite needs, support in this area has not been forthcoming. This is an area in which think tanks and development partners can provide substantive support such that the CSO role becomes even more effective. 2.52 One area that has been weak is the monitoring of outputs and outcomes. This monitoring becomes an important learning tool by which the future budget cycle processes can be improved. BPED has taken some steps based on past experience but they have not been formalized. Here again there is need for additional measures to facilitate the strengthening of M&E in the context of budget performance and confirm that it actually improves the budget process for better prioritization and allocation. 2.53 Issues of decentralization have not featured very clearly in the BFP process because decentralization is very much seen as a fiscal endeavor without corresponding concern about implementation of decentralized administration. This deficiency has naturally led to weak accountability, low transparency, and limited success in terms of outputs, resulting in both budget preparation and budget execution challenges. Although LGDP and other capacity-building programs address these issues, they are addressed in a non-comprehensive manner such that efficiency gains that underpin the decentralization drive are not realized. This area needs further attention in order to meet the goals of efficiency and equity concerns in service delivery. It is worth noting that the government 26 intends to pilot its fiscal decentralization strategy in the coming fiscal year, starting with 10 districts and 3 municipalities. 2.54 One area of concern in Uganda's budget process in the past three years is the lack of budget discipline in a few sectors. Evidence shows that very few steps have been taken to address these issues despite repeated mention of this during budget review discussions. It is, however, expected that the new Public Finance and Accountability Bill, which comes into effect this fiscal year, will reduce the incentive for overruns and for seeking supplementaries that undermine the credibility of budget process. Although this is a budget execution issue, it has implications for the budget preparation process because continuous overruns will undermine the need to prepare and adhere to BFPs that are within the ceilings. G. THE WAY FORWARD 2.55 As part of improving Uganda's budget process we identify below a few areas in which'the World Bank will concentrate its efforts over the medium term. 2.56 First, the link between the PEAP and the budget is tenuous. Because of a lack of prioritization and costing of actions in the PEAP, PEAP priorities are not factored fully into the discussions at the budget preparation stage. Hence, as part of PEAP revisions, the Bank will provide support to PEAP target setting, sequencing, and costing actions. This information will then be used in SWGs to enable them to realize budget linkages. 2.57 Second, recent reviews of the PAF have highlighted that PAF protection has been applied mainly to service delivery sectors. It is becoming increasingly clear that some of the sectors and activities that are not protected also have implications for the outcomes from PAF-supported programs. Hence, PAF modalities should be reworked to confirm that overall budget efficiency is not undermined by the narrow focus on pillars 3 and 4 of the PEAP. 2.58 Third, the Bank needs to provide support to improve the working of SWGs and the BFPs they prepare such that some of the budget allocation challenges can be addressed at the outset. The BPED has agreed to work with development partners to identify areas in which technical capacity needs are evident and to organize sources of assistance before the next budget cycle begins. 2.59 Fourth, the new Budget Act has opened up the budget process and also created greater room for effective participation by the legislature. However, as noted, the performance has not been satisfactory because of capacity and time constraints of parliamentarians.. This area needs special attention to ensure that goverriment and development partners help to improve the effective participation of parliamentarians in the next budget cycle. 2.60 Finally, it is clear that the role of civil society has improved over the past few years. However, it is mostly the few have been involved from the beginning and their level of effective contribution has not changed very much. There is a need for some 27 innovative ways to work with CSOs to enable them to participate at every stage of the budget cycle and contribute specific inputs to strengthen the overall budget process. 2.61 These challenges will form the work program for PER in the coming budget cycle and will be areas in which the Bank and other donors can effectively contribute to improvements in the budget process. 28 3. ISSUES IN BUDGET EFFICIENCY: HEALTH, EDUCATION, AND WATER SECTOR A. INTRODUCTION 3.1 In developing countries, a persistent problem revolves around budget efficiency issues. This problem basically refers to how the limited public resources are effectively utilized to meet the priority needs of the country in an efficient and equitable manner. Thus, budget efficiency cuts across all stages of the budget process, namely, budget preparation, budget execution, and budget monitoring and reporting. Looked at from another angle budget efficiency refers to how public resources are utilized by public institutions and public servants in delivering public services. It is obvious that with increasing budget constraints to accommodate growing demands for public resources the scrutiny on budget efficiency and value for money becomes even more heightened. In addition, in Uganda budget efficiency issues have attracted greater attention because of the fiduciary risk-management objective. 3.2 In Uganda, in recent years the government has initiated studies, especially in the health, education, and water sectors, which seek to further understand and address challenges related to flow of funds, incidence of benefits from public programs, and overall value for money of public investments. These studies have facilitated all stakeholders to obtain a better understanding of the achievements in this area and the remaining challenges such that the potential gains in efficiency within tight fiscal constraints can be realized. 3.3 This year three sectors were discussed at the annual PER meeting on the basis of value for money, tracking studies, or benefit-incidence analyses that have been carried out in those sectors in recent years. These sectors are health, education, and water and sanitation, which together account for about 38 percent of total government spending. Because these are also the major sectors under PEAP's pillar 4, which seeks to improve the quality of life of the poor, apart from efficiency, equity concerns also were the subject of reforms carried out through SWAPs and budget support (PRSC). 3.4 Budget efficiency is understood to comprise two areas: allocative efficiency and operational efficiency. Allocative efficiency refers to allocation of resources such that they reflect the priorities of the sector, while operational efficiency refers to how the allocated resources are transformed into outputs and outcomes that are consistent with sector and PRSP objectives. Most of the sectors and reform efforts have concentrated traditionally on the former although some gains have also been made in the latter. However, for sectors which have had SWAPs, the major challenge now seems to be on the latter. This focus on operational efficiency does not mean the allocative efficiency issues have been resolved satisfactorily or completely. 3.5 In addition to budget efficiency issues, these sectors, because of their importance in addressing the welfare of the poor, have been looked at through another lens, namely equity. Equity has been interpreted to mean how the benefits from the publicly funded programs are realized such that the most needy get priority in the public provision of basic services. In addition, gender and regional equity dimensions are increasingly becoming major challenges in service delivery. 3.6 Below we discuss the efficiency and equity challenges in the health, education, and water sectors. B. HEALTH Background 3.7 Over the years the MOH has demonstrated its commitment to improving budget performance by ensuring that resources are allocated that translate into better health services for the poor. The Health Sector Strategic Plan (HSSP 2001-2006) provides the framework for guiding the center and districts in developing appropriate plans to implement the national health policy objectives in the context of attaining PEAP and MDG targets. The linkage with MTEF and Annual Joint Reviews of the Sector provide an opportunity to ensure improved allocative/operational efficiency and equity of health service programs. 3.8 Overall budget underperformance in terms of budget versus outturn has been at around 94 percent because of delays in recruitment and payroll cleaning in the past three years. Problems with procurement and delayed tendering and implementation of civil works in districts were also noted. In addition, problems with delayed releases and accountability in some health projects have caused under-spending in the health development budget for the first half of this fiscal year. 3.9 The performance of the sector in terms of PEAP targets has been somewhat mixed. Although the decline in Expanded Program of Immunization (EPI) coverage has been arrested it still remains unacceptably low, while AIDS prevalence seem to have made the most dramatic progress. As table 3.1 below highlights, most indicators are unacceptably low, undermining the sector's contribution to overall growth in the medium term. 30 Table 3.1: Qualitative Performance Against Five-Year Targets Program Indicator Expected 1999/2000 Performance Performance Forecast Outcome Baseline to Date 2002/03 2003/04 2004/05 Value 2001/02 Health service Out Patients Increased access 0.40 0.43 0.45 0.47 0.50 delivery Department (OPD) of population to utilization health services Immunization Diphtheria Reduction in 41.4% 46% 50% 54% 60% Pertussis Tetanus morbidity & (DPT) 3 coverage mortality from imnunisable transmission HIV/AIDS HIV prevalence Reduction in 6.9% 6.1% 5.8% 5.4% 5.0% control rate from Ante HIV/AIDS Natal Care (ANC) transmission surveillance data Reproductive Institutional 38% 38% 70% health deliveries as a percentage of total expected births Human Percentage of Improved 33% 40% 43% 46% 50% resources approved posts quality of health (1998/99) development filled by trained service delivery health workers 3.10 Notwithstanding sizable budgetary increases in the past three years, the health sector claims it is still substantially under funded, with a per capita rate of US$6. The medium target is to increase the share of the health budget from its current level of 10 percent to almost 15 percent. These funding inadequacies have constrained the capacity of the government of Uganda to implement the HSSP, that is to procure medical equipment, drugs and supplies; attract and retain staff, especially in hard-to-reach areas; and upgrade Health Center (HC) 1I and HC m. It has been argued that under-five mortality is high because of the failure to meet HCII and m level demand for additional equipment and transport facilities. These identified needs have been given priority in the FY2002/03 budget. Allocative and Operational Efficiency 3.11 As part of allocative efficiency, the MOH has ensured that resources are allocated consistently with the PEAP, thereby enabling the scarce resources to maximize health benefits. For instance, the HSSP launched in August 2000 is very conscious of the efficient use of limited resources. The emphasis has been on providing the minimum health package, targeting the rural poor in particular. Hence, the services have focused on communicable diseases, child and maternal health, and preventive health care. Also consistent with decentralized service delivery, primary health care (PHC) funds allocated to districts have increased more than fivefold. The PHC budget, including PHC and national service delivery, has increased from 14 percent in 1999 to 42 percent in 2003. While this reallocation of resources answers the allocative efficiency issues, it does not say very much about the operational efficiency of these allocations. 3.12 Thus, as noted, the major challenges, like all other sectors, for the health sector remain in operational efficiency, that is, the capacity to utilize the optimum set of limited inputs cost-effectively to achieve major health program objectives. In this regard it is 31 necessary to focus on allocation versus utilization, timely resource flows, assessing the efficiency of program outlays, optimum use of input mix, and assessing efficacy of delivery and accountability systems. It is clear that substantial progress has been made in ensuring that allocation and utilization are synchronized under the reforms that have been carried out, which include the Joint Health Sector Reviews using instruments such as the PHC Planning Guidelines and the BFP of the MOH. 3.13 In the area of inputs there has been a major focus on determining the health sector work force and in ensuring that salaries are paid regularly and promptly. Discussions with the Ministry of Education and Sports (MOES) are under way on modalities for supporting health-training institutions to support the health sector program. Considerable progress has been made in enabling resources to flow fast and on a timely basis to frontline health service delivery points. Through tracking studies, however, it was observed that financial disbursements from the MOH to districts are still taking 20 days instead of the 5-day limit. This observation has initiated some actions to address this issue promptly. 3.14 In addition, in terms of output-oriented reforms, an augmented effort has been initiated to reverse the decline in childhood immunization rates. The recent abolition of cost sharing has almost doubled access and utilization of health services. The government's multisectoral effort to attack HIV/AIDS has resulted in lower incidence in many selected sites. In some cases the rate has declined by half. 3.15 The key operational challenges in the health sector are mainly delay in releases and accountability of funds, fragmented procurement of drugs by the districts, delayed and poor management of tenders by the central MOH and districts, and poor human resource management. The salary increases in the public sector have prompted many PNFP staff to move to government facilities, thereby undermining the contribution of the PNFP. 3.16 This evidence indicates that progress is being made, but more still needs to be done. Namely, the inputs must result in improvements in health outcomes. The recent PRSP progress report highlighted that the infant mortality rate has stagnated between 1995 and 2000 Uganda Demographic and Health Surveys. More concerted efforts are needed on the part of health and other related interventions to improve the health quality of the poor and children (GOU 2002). 3.17 The MOH argues that although it has achieved a lot through improved efficiency, it cannot improve further without sufficient increases in funding. According to the MOH, additional resources are needed to meet the growing challenges in the area of health. This observation is also supported by the World Health Organization's (WHO) Commission on Macroeconomics and Health (2001) study, which was completed recently. For instance, the MOH notes that the drug component for minimum health care package per person will cost $2.40 per person. The current funding of around $1.00 is inadequate. It is clear that additional resources are necessary for improvements in health outcomes, but the additional funding will have to be accommodated through tradeoffs with other sector priorities. Thus, some of these additional resource requests should be 32 discussed with other sectors. The operational inefficiencies mentioned above also need to be elaborated further and addressed. Equity 3.18 Another closely related issue to the efficiency issue, is that of equity of service provision. Two recent studies, one by the government of Uganda and WHO and another by the government of Uganda and the World Bank, agree that the HSSP has resulted in improving the benefit incidence in favor of the poor, although there is still room for progress. A large number of poor do not seek health care services and their utilization pattern has not changed substantially since 1992. This situation is particularly the case when equity issues are discussed on a regional basis. Table 3.2: Utilization of Health Care by Those Reporting Sick by Poverty Levels; 1992-2000 Year Group No/Self-treat Government Private 1992 Lowest 20% 54.14 17.62 28.23 1992 Highest 20% 36.27 16.52 47.22 1992 Total 44.87 18.06 37.07 1997 Lowest 20% 56.92 18.9 24.18 1997 Highest 20% 35.79 17.94 46.28 1997 Total 44.8 20.88 34.32 2000 Lowest 20% 43.92 18.93 37.15 2000 Highest 20% 20.97 19.13 59.89 2000 Total 30.58 19.79 49.63 Source: Household Surveys. 3.19 The World Bank study clearly establishes that health service utilization increased among the poor by 2 percentage points between 1992 and 2000. Hospital usage by the poorest 20 percent increased from less than 30 percent in 1992 to more than 60 percent in 2000 (see figure 3.1 below). The study also notes that total costs increased by about 67 percent between 1992 2000 for all households, but the poor have continued to spend around the same proportion of household expenditure on health care. Both poor and rich have increased usage of private clinics despite related cost implications. The poor use private health care more than government services. This fact calls attention to the concerns regarding health care service quality, which will remain an important challenge in the future (see table 3.2). The study also highlights that the proportion of the poor who do not seek health service because of distance has declined from around 22 percent in 1992 to 13 percent in 2000, reflecting MOH progress in improving accessibility to health facilities. 3.20 Recent studies from the Uganda Participatory Poverty Assessment Project (UPPAP) and the Poverty Monitoring and Analysis Unit (PMAU) highlight that the coverage and quality of health care services for the poor need to increase if health outcomes are to improve. The studies make the argument that improved targeting of the poor will alleviate some of the equity concerns in health care delivery. 33 Figure 3.1: Hospital Utilization by the Poor and Non-poor 1992-2000 Hospital Utilization by the Poor and Nonpoor 1992-2000 90 70 8 S =,60 HE-- - l - Poorest 20% 0 o 40 - - _ _ U - - 1 l . 1 * Richest20% I 2 30 - -_ ' t'_ | - L ° Total_. 1992 1997 2000 ___ Year l Challenges for the Future 3.21 In recent years, SWAPs have improved allocative and operational efficiency in health care, although further improvements are still needed in the latter. Similarly, equity concems need greater attention to enable the poor to benefit from health services. The case for additional funding for health seem justifiable given the challenges in addressing health needs, but the focus of health care services will have to shift from mere coverage to effective coverage whereby quality health care services are provided for all such that they will result in improved health outcomes. 3.22 To meet the challenges in the health sector there is a need to focus further on the following areas: 3.23 Given the resource constraints to provide public health care to all, there is an urgent need for partnership between the MOH and PNFP to reduce duplication and wastage of resources. This effort will make certain that optimal use is made of limited resources in providing public health care services for those who need them most. 3.24 It has become clear that health targets-whether PEAP or MDG-need to be consistent with MTEF/Long-Term Expenditure Framework (LTEF) ceilings. This consistency will enable longer-term planning and prioritizing to make informed choices with available resources. Work has commenced in this area but there is a need to complete it soon. 3.25 As observed, the health sector has made strides in addressing allocative and operational efficiency but there is a further need for progress in equity dimensions. This situation points to the need to do benefit incidence analysis and take suitable measures to reform health service provision such that the limited resources address the needs of the poor and the most needy. 34 3.26 Because the health sector is already constrained by resource availability, any reforms to PAF should be taken cautiously. The health sector cannot afford shortfalls in its allocation during the course of the year resulting from revenue shortfalls and overruns in other sectors. 3.27 Similarly, the flow of funds must be timely to enable use of limited resources to provide most needed services. Delays in flows of funds must be addressed in order to improve quality and timely service delivery. PHC conditional grant tracking studies have shown that delays in flow of funds are not within the sphere of the MOH and need the attention and action of MFPED. Action has been initiated in the area, but rapid progress needs to be made. C. EDUCATION Background 3.28 Over the past few years, the education sector has made substantial progress in making its budgets more output oriented. Similar to the health sector, the education sector has also been ensuring budget efficiency through its SWAP for a long time. As the oldest SWAP in the country, the education sector has been addressing budget-related issues in a comprehensive manner for some years. Based on the Dakar World Education Forum 2000, and more recently on MDGs, budget efficiency and equity issues have been highlighted as primary challenges for the future. These initiatives have underlined the sector policy reforms. Therefore, the budget preparation process in education has enabled substantial progress in improving allocative and operational efficiency compared with most other sectors. The challenges for education remain in the operational efficiency and equity in relation to post-primary and tertiary education. The Education Strategic Investment Plan (ESIP), consistent with MDGs and the PEAP, highlights efficiency and equity issues as its priority. 3.29 As part of addressing the challenges in the education sector, the MOES has allocated more to the wage bill for primary and secondary, capitation grants, textbooks, and classroom construction in its budget for the next year. Table 3.3 shows that the MOES has made progress in ensuring that primary teachers are increasingly integrated in the payroll, although the same progress is not observable in terms of secondary school teachers. In addition, private sector participation is being encouraged to ensure improved access and coverage of both primary and post-primary education. For example, currently more than 80 percent of the primary schools in Kampala and more than 25 percent in the rest of the country are privately run. UPE has somewhat addressed access and equity issues at the primary level; however, there is increasing concern that some of these gains were made at the cost of quality improvements, for example, high pupil-classroom ratios (PCR), pupil-teacher ratios (PTR), and pupil-book ratios (PBR). Also, the major challenges in education in the medium term remain in achieving allocative and operational efficiency at post-primary and tertiary levels. 35 Table 3.3: Physical Performance in the Education Sector Description of Benchmarks 1999/2000 2000/2001 200112002 Forecast Actual % Forecast Actual % Forecast Actual % No. of primary teachers on 117,000 88,043 75 125,000 i03,404 83 117,000 112,000 96 payroll Classroom construction in 53,000 47,174 89 57,000 53,495 94 63,500 61,212 96 primary schools (stock) No. of secondary teachers on 14,638 12,348 84 15,180 12,846 85 18,676 12,936 69 payroll No. of teachers training in 19,910 11,183 56 22,924 18,806 82 31,245 22,397 72 Primary Teacher Colleges No. of teachers training in 9,500 9,500 95 9,500 9,000 94 8,400 8,028 96 National Teacher Colleges Allocative and Operational Efficiency 3.30 By minimizing input costs and maximizing the outputs and outcomes for a given set of input, education has focused on improving allocative efficiency. Education has addressed budget efficiency at the budget preparation stage more so than other sectors. In addition, it has used budget implementationJexecution reviews, internal audits, and tracking studies to improve resources flow efficiency and has conducted many end-of- project evaluations to improve operational efficiency. 3.31 One of thie challenges for education has been getting the right balance between different sub sectors and the appropriate mix of inputs and ensuring value for money in investments. This debate is more stark at the post-basic education level and tertiary level in education than at the primary level. For example, in next year's budget primary education will receive 69 percent, secondary 13.7 percent, BTVET 4.3 percent, and tertiary 9.4 percent. Compared with 1995/96 when only 43 percent was given to primary education, the current allocation pattern shows the priority given to primary education. However, as table 3.4 shows, over the medium term the recurrent expenditure allocation to secondary education will increase compared to with primary education given the changing nature of challenges in the education sector. Table 3.4: Recurrent Expenditure Shares for Education by Sub sector 1999/00-2003/04 Sub sector 1999/00 2000/01 2001/02 2002/03 2003/04 Percentage Primary 67 67 65 63 63 Secondary 16 16 16 18 17 BTVET 3 3 4 4 4 Tertiary 14 11 11 12 13 Other 4 3 3 3 3 Total 100 100 100 100 100 Source: MTEF 1998/99-2002/03 & 2000/01-2004/05. 3.32 In addition, there is growing pressure to find resources to meet the additional expenses in post-primary education because of the influx of UPE graduates. With the 36 UPE cohort expected to enter secondary schools next year, there is increasing pressure on secondary schools to address both efficiency and equity concerns, which have been highlighted in the past. For example, currently post-primary per unit costs are seven times higher than at the primary level in Uganda. These post-primary costs are much higher than what most other developing countries experience, which is more on the order of two to three times the unit cost of primary education. The MOES has taken up this challenge and has systematically tried to address the issue through its sector review in the past year or so. It has also undertaken extensive analytical studies to guide decision making such that priority services are protected in education. It is apparent that efficiency gains can be made within the post-primary sector to substantially address the increased demand for secondary education. 3.33 Equitable access to basic education and improved quality has been emphasized through the ESIP. The use of systematic monitoring of indicators such as PCR, PTR, and PBR has enabled the tracking of progress over time (see table 3.5). School facility grants (SFGs) and UPE capitation grants have enabled the realization of equity and quality targets. The PAF protection for all primary education-related expenses has protected key areas in education from revenue shortfall-related budget cuts. Table 3.5: Medium-Term Performance Targets for Primary Sub sector 2000/01-2002/03 Financial Year 2000/01 2001/02 2002/03 Target Actual Target Target Enrollments 5917216 5917216 6097000 6218940 Number of teachers on payroll* 101000 103404 117000 125000 PTR 63:1 57:1 54:1 50:1 PCR 121:1 98:1 92:1 89:1 PBR 6:1 6.7:1** 0** 3:1 Source: MOES. *Reported at Education Sector Review in March every year, but figures quoted are as of June (at the end of the fiscal year). **From increased enrollments and curriculum reform. ***Old stock was abandoned after introduction of a new syllabus. 3.34 Education has gone one step further to review the efficiency of textbook procurement as a way of addressing operational efficiency given the large numbers procured and the large outlays involved. Reforms in textbook procurement have ensured efficiency gains, with generous discounts on textbooks leading to almost a 65 percent fall in prices. This achievement has demonstrated that operational efficiency needs to be thought of more holistically. Also, studies have been carried out to ensure an appropriate mix of inputs to achieve the desired outcome. The decentralization of decision making has enabled better value for money in procurement of goods and services and enabled appropriate use of SFG and UPE grants. 3.35 In addition, the education sector has started a pilot project to decentralize the MTBF in Rakai, Masindi, Lira, and Kumi districts as of 2000/01. Thus, while observing minimum quality standards, districts are given discretion in implementing programs using SFG, UPE, wage bill, and instructional materials. Currently, studies are being designed to review this experience but early indications are that this pilot has been successful in achieving budget efficiency and equity. 37 3.36 As a means of using transparency to assist in operational efficiency, the systematic monitoring and publication of good and not-so-good performers has provided an incentive for districts to do better. In addition, head teachers are required to display grant transfers on notice boards so as to improve transparency and accountability. Also, as a way of ensuring that the sanctions for poorly performing districts and schools does not adversely affect the children, MOES has stopped the practice of withholding of funds for districts or schools that operate outside the guidelines and instead is sanctioning responsible government officials. 3.37 To improve allocative and operational efficiency, tracking studies have been carried out on capitation grants in 1996, 1999, and 2001. Uganda's education sector was one of the pioneers in using tracking studies to improve performance in Sub-Saharan Africa. This tracking is also now being used increasingly as a fiduciary instrument in PER work for other sectors. Thanks to these studies, the central government contributions per pupil that reached schools increased from 36 percent in 1996 to more than 90 percent in 2001. The 1999 tracking study pointed out the need to revise the UPE allocation formula to give priority to issues such as girl child education, disability pupil enrollments, retention, and to give weight to remoteness of the school. These studies also highlighted other operational efficiency constraints such as lack of adherence by head teachers to the expenditure formula and the substantial delays in the flow of funds. If not for these studies, these problems would have been overlooked, which stresses the value of the sector review process. As a result of the tracking studies the flow of funds has now been made much faster and predictable, which in turn has implications for improving operational efficiency. Also, after the identification of a low teacher trainee pass rate and its impact on primary education, the problem of providing necessary facilities to expedite teacher training is being addressed. In addition, as of 2002/03, the teacher training budget will be financially protected under the PAF. Equity 3.38 Inequity toward female students and those with disabilities have been other areas of focus in education. The construction of toilets and ramps has paid off somewhat in improving the coverage for the latter group. However, currently more than 15 percent of children are out of school or do not enter the school system ,and there is a high dropout rate. All of these problems are associated mostly with the poor. It is important to determine how to attract these students into the schools. It is worth noting that the MOES has initiated a study on dropouts and has started preparing a policy on how to address the disadvantaged population. 3.39 In addition, it is clear that the gender equity in enrollment rates makes the situation look even worse when considered in terms of girls, except at the primary level. Between 1992 and 1999 the education sector made substantial progress in increasing enrollment rates and reducing the gender gap at the primary level, as can be seen in figure 3.2. At the primary level in 1999 there were net enrollment rates of 81.7 percent for girls and 82.7 percent for boys. However, the lack of inputs by poor parents, combined with low facilities at schools in rural and poor areas, have resulted in only a 63 percent completion rate at the primary level, again with gender disparities. 38 Figure 3.2: Primary Enrollments by Gender and Poverty 1992-2000 Primary Enrollment by Gender and Poverty Level 1992-2000 90 80 r ID 60 ; iSlX 3 T 11 E | g 1ls k | loverall c 50 - 0 ipoorest 2 F Drichest20 Source: Household survey Data 1992 3.40 Similarly, at the post-primary level access to education for girls and the poor is uneven and unfavorable. The current PTR of 20:1 at the secondary level indicates inefficient use of resources which, together with lack of management incentives, leads to efficiency and equity concerns (see table 3.6 ). Also, at the current enrollment rate of 35 percent at the secondary level, it is extremely difficult to address equity concerns. Currently, boys over represent girls by 20 to 35 percent at the S l-S4 levels and almost 60 percent at S5-SA6 levels, which indicates the challenge that remains to be addressed. Table 3.6: Mean Pupil-Teacher Ratios by Type of Secondary School and Localon, 2000 Government aid Part government aid No government aid Rural Peri- Urban Rural Peri- Urban Rural Peri- Urban urban urban urban Day 0 21 23.4 17 19.6 19.7 23.4 13.1 13.9 11.8 O/A 22.7 20.2 19.5 22 22.8 19.8 17.2 22.2 18.2 Part-time 0 19.6 19.9 19.6 19.1 13.6 14.2 14.8 boarding O/A 17.6 18.8 21.5 18.5 18.7 19 16.8 18.3 17.4 Boarding 0 17.1 14.5 15.2 26.6 15.7 10.7 13.1 4.2 O/A 15.3 15.7 17.5 16.8 17.5 15.8 16.7 15.2 22.8 Mixed 0 21.1 21.9 17 19.7 20.2 20.1 13.3 14 12.9 O/A 20 20.1 19.6 20.1 20.3 19.5 17.7 19.2 18.2 Boys 0 13.3 23 9.2 11.8 only O/A 14.9 15.8 19.8 12.8 17.6 16.6 13.9 11.8 16.9 Girls 0 13.2 14.4 12.5 7.2 12.5 10.8 only O/A 13.7 12.9 15.2 13.3 15.4 15 14.7 10.5 20.1 Source: Teacher Utilization Study, 2000. 0 = ordinary level. O/A = ordinary and advanced level. 3.41 The studies carried out as part of the Education Sector Review have highlighted some of the problems the sector faces. The failure rate in technical and farm schools of 40 percent has been linked to poor equipment and unqualified tutors. The failure rate for primary teachers' colleges, caused by similar problems, has had an adverse impact on quality of primary education. High teacher absenteeism resulting from HIV/AIDS at the primary level has also been highlighted as having an adverse impact on quality education. The excessive unit costs for training doctors at Mbarara of Ush. 12 million per year was 39 revealed through these studies. All these problems highlight the efficiency gains that could enable better utilization of existing resources to address equity concerns. Tracking studies and benefit-incidence studies can help determine what is needed to further improve the equity dimension of education. Challenges for the Future 3.42 The main need is to develop a policy framework and strategy, which will enable allocative efficiency to be realized. While the primary education sub sector is quite robust, the post-primary education, training, and higher education sectors display major imbalances in terms of allocative operational efficiency and equity, all of which need urgent attention. Discussions are under way on strategies to address these issues, but action needs to take place soon to meet the emerging challenges. 3.43 As mentioned, the quality of primary education has been affected by increasing teacher absenteeism because of teachers who are affected by HIV/AIDS. It is important that both the MOH and MOES discuss and take appropriate action to treat these teachers, provide counseling so they can continue to be in service, and also provide mentoring to new teachers to ensure that education quality is not compromised. In addition, because of UPE there have been large increases in enrollment, which have put additional pressure on limited available resources- teachers, classrooms, desks, and books-which naturally leads to poor learning outcomes. These issues need urgent attention to enable the increased primary enrollment to result in improved educational outcomes. 3.44 Given the high reliance on external sources for funding education services, the question one has to confront is the level of reliability of donor funds in the medium term. This question of reliability naturally has implications for financing recurrent costs and development expenditures, which are essential for improving service coverage and quality. According to current estimates for EFA, Uganda would need an additional 50 percent from its current allocation of US$160 million to US$240 to address education challenges. Given that a quarter of the overall budget goes to education, despite requests for increased allocation one has to address the issue of absorptive capacity in priority areas. In addition, as already highlighted, the efficiency gains that are possible within the existing resource envelope need to be tackled as a priority; if not, there is a danger that additional funding to education could result in inefficient investments. 3.45 Similar to the health sector, education has enjoyed the PAF protection and has been able to achieve its goals without expenditure shortfalls. However, the emerging dialogue on PAF reform is of concern given that reductions in allocations resulting from revenue shortfalls or budget overruns in other sectors could be costly in terms of their impact on the education sector. 3.46 Some of the recent policy decisions taken in education indicate that there was not much consideration of budgetary implications. It is essential to take into account the fiscal sustainability of political objectives and policy decisions. To ensure that resources are available for policy choices, policy decisions need to be made within the budget/MTEF process. The abolition of cost sharing and increasing the number of 40 government scholarships at university are two cases in which fiscal implications were clearly not considered. 3.47 As mentioned, education has been at the forefront of addressing decentralized service delivery. The fiscal decentralization pilot exercise needs to be urgently studied and its results need to be discussed and lessons used in future decentralization efforts. This effort will enable realization of the efficiency gains expected from improved decentralization. 3.48 Unlike the health sector, which undertook a benefit-incidence study, the education sector has yet to do such a study to understand how much equity issues are being covered by current policies. Some studies in the past have tried to determine coverage of education by poverty levels, but there is need to do better in order to understand whether the poorest and neediest are benefiting from public investments in education. In addition to these issues at the primary and post-primary levels, similar problems are also evident in university scholarships. Further studies are needed to ensure that limited public resources serve the needs of the poor as opposed to subsidizing the well-off. 3.49 Uganda has conducted excellent studies in tracking flow of funds, which has ensured that various bottlenecks in the process are addressed. Although this has enabled funds to reach their intended destinations, the utilization of these funds should be reviewed to achieve operational efficiency gains. This is another area that requires work in the future. D. WATER AND SANITATION Background 3.50 The PEAP revision and UPPAP studies in 2000 clearly highlighted the need to invest in water and sanitation as important areas for improving quality of life. The result was substantial public investments in the water sector. For instance, the budget allocated to this sector increased from Ush. 13.5 billion in 1999/2000 to Ush. 34.4 billion in 2000/02 and Ush. 51.8 billion in 2001/02. Some recent studies and reviews, however, have indicated that there have not been commensurate improvements in outputs and outcomes. In fact, there have been increasing concerns that the unit cost of water provision has been substantially increasing, thus raising concerns about operational efficiency. Indicative cost of an additional water source has increased from Ush. 4 million to more than Ush. 9.7 million in the past five years. Although some of this increase is attributable to changes in types of water points developed and support provided to decentralized administration, there is still concern that there has been low value for money in the investments. 3.51 The MTEF for 2002/03-2004/05 (table 3.7) shows an increasing share of project contributions-of almost two-thirds--over the next three years. The increased share of development expenditure highlights the need to build more water points to meet coverage targets. The sectoral allocation also reflects priorities: provision of water through new water points, piped water to rural areas, construction of sanitation to rural area, and subcontracting water supply and sanitation operations in small towns to the private 41 sector. In addition, the government plans to construct a new water treatment plant in Gaba and to rehabilitate the water systems of seven major towns to improve service quality. Table 3.7: Summary of Planned Expenditure Against the MTEF Ceiling in Billions of Ush. Water 2002/03 2003/04 2004/05 Sector Wage Non-Wage Development Expenditure2 Total Total Total Expenditure Expenditure' Government of Uganda3 MTEF 0.44 1.72 48.62 50.78 54.65 56.99 (total) Donor 0 0 86.5 86.5 89.45 92.49 projects4 Total 0.44 1.85 135.12 137.28 144.1 149.48 1 . Includes the operations and maintenance grant for small towns water managed by urban authorities. 2. Includes the district development grant 3. Excludes self-funding by National Water and Sewerage Corporation. 4. Includes donor contributions to the National Water and Sewerage Corporation and are all implemented at the center. 3.52 To more clearly understand the issue of cost efficiency, a value-for-money study has been initiated on rural and urban water sectors. This study will assess and evaluate the process of engaging private firms and their capacity to provide water and sanitation services in the districts, as well as the ability of districts to effectively monitor implementation performance. The study is being carried out all over the country by eight teams, in each of the eight technical support units into which all districts have been divided. In addition, a tracking study is being planned to asses the flow of funds to districts and town units to highlight bottlenecks and delays in the release and transmission of monies through the system. This study will also improve accountability and efficient operation of water sector grants. Rural Water 3.53 Safe water and sanitation coverage has improved from 50 to 53 percent in the past two years. A large segment of the rural population, however, still has no access to clean water for drinking or production. In addition, 824 protected springs and 930 shallow wells have been constructed in the past year. The number of boreholes completed was 40 percent below target at 855. This has been the subject of major contention in terms of lower output than targets (see table 3.8 below). Resources have also been used to rehabilitate 459 boreholes. The number of school latrines is also about 40 percent below target at 1,300, while rain water tanks are about 30 percent below target at 1,090. Because the increased budget has not met the targets established in terms of outputs, there are clearly issues to address regarding water sector budget efficiency. 42 Table 3.8: Physical Performance of the Water and Sanitation Sector 1999/2000 to 2001/02 Year/ Performance 1999/00 2000/01 2001/02 Target Actual Target Actual Annual Actual Target (Dec 2001) Water coverage (%) 54.7 50 52 53 54 54.8 Protected Springs 900 504 1595 824 1500 465 Shallow Wells 1000 671 1860 930 3200 296 Deep Borehole 1060 2192 1272 855 2080 245 Borehole Rehabilitated 0 0 325 459 1500 555 Gravity Flow Scheme (taps) 22 28 33 11 29 (462) 31 (446) Piper Water/Rural Growth Center 0 - 90 0 252 0 School latrines - - 2263 1300 1313 13781 Rain water tanks - 318 1435 1090 537 1302 Source: Water Sector BFP 2001/02-2003/04 (March 2001), Water BFP 2002/03-2004/05, Ql & Q2 PAF Report. 3.54 The major concern in the water sector has been the fact that, despite recent reforms in the water sector, which resulted in increased outlays, there has not been a commensurate increase in water points. However, the water sector for its part has argued that some of the activities that have been part of the reforms do not directly address increasing the number of water points, leading to the perception of low value for money. The Directorate of Water Department (DWD) has spent resources over the past few years to develop and implement active community participation in water and sanitation services. In addition, the funds allocated to the center were used for policy development and management. Resources also were allocated to programs on human resource development and training. A major drive was launched to decentralize responsibility for service provision in rural water so that districts can directly provide services. Moreover, the Ministry of Water, Lands and Environment (MWLE) has invested additional resources in primary school latrines, rehabilitation of bore holes, and district capacity building, which also accounts for low outturns in terms of water points. Naturally, all these investments do not result in additional water points but get reflected as higher unit cost per water point built. Urban Water 3.55 In Uganda, only 68 percent of the population in urban areas have access to safe water. Only 12 percent have direct in-house water connections and only about 5 percent of the urban population has sewers. These findings show the dismal state of this sector and why additional effort is needed to ensure "water for all" by 2015. Thus, under the Urban Water Supply and Sanitation drive, the government of Uganda plans to implement strategies to improve ownership and management of assets through public bodies, efficiency in service delivery through private-sector participation, and regulating by an independent regulator to ensure quality. However, it is important to ensure that customers are willing to pay for a level of service that might cost more. Also, the government needs to undertake reforms that will reduce operating costs and secure private participation in quality service delivery. The seven major towns, including Kampala, account for 55 percent of the urban population, 65 percent of active connections, 72 percent of active sewer connections, and 80 percent of all revenue. These figures clearly show the inequality of urban water and sewerage service provision. It is noted that the gestation period for water and sanitation projects is long, and therefore 43 investments do not immediately translate into outputs. Also, the capacity building program of Urban Water Supply and Sanitation, which will have long-term benefits, is not evident in number of newly established water points. Other Services 3.56 Substantial progress has been made in water for production. Interventions in the past few years have been concentrated in the Karamoja region Water for Livestock project. The interventions have focused on increasing accessibility of water for livestock production in rural areas, thus contributing to increased livestock production and, in turn, poverty reduction. 3.57 Besides the issues detailed above, the physical and institutional infrastructure of water and sanitation need urgent rehabilitation. Also, the water sector has to put more effort and resources into attending to quality-of-water issues. Challenges for the Future 3.58 The water sector has noted the need to recruit water officers in each district who can provide valuable input in terms of water management and monitoring. However, some districts have refused to comply, which is leading to poor planning and management and, in turn, low value for money in water investments. The affected districts are Kitgum, Pader, Bundibugyo, Katakwi, Tororo, Jinja, Kibaale, Kaberamaido, Sironko, Nakapiripirit, and Kapchorwa. This lack of commitment by districts should be addressed as a matter of priority. 3.59 It has been observed that some of the health welfare indicators are highly correlated with the water and sanitation situation. But poor coordination within and among various other stakeholders has led to inconsistent outcomes. This lack of coordination between the water and health sectors is leading to some unfavorable outcomes in terms of health and infant mortality rates. Despite sanitation and hygiene linkages between the MWLE, MOH, and MOES, the operations are not coordinated enough, leading to poor outcomes and operational efficiency of inputs. 3.60 A related challenge is institutional coordination between government and nongovernmental organization (NGO) service providers. Given such limited resources, it is essential that the DWD relationship with NGOs is improved so that DWD policies are consistent and complement NGO plans in the sector. For example, it has been observed that some programs by development partners and NGOs are not captured, making it difficult to evaluate overall performance of the water sector. Progress is needed in this area to ensure that all beneficiaries are effectively covered with limited resources. 3.61 Budget operational efficiency issues have been complicated by too much interference in tendering procedures by district tender boards, leading to low value for money. In addition, the MWLE's limited resources have not been optimally used because water office equipment is often misused by senior district officials, leading to weak supervision and monitoring by water officials. The issue of community contribution has also been complicated by some politicians, who have misled 44 communities by saying that PAF resources will supplement inadequate resources and also by implying that NGOs are supplementing community participation and contributions. Both these issues have undermined the efforts of the MWLE to improve community participation at every stage of water and sanitation provision to enable sustained access. 3.62 Districts and some small towns have weak intemal audit and financial management systems. For example, there are no monthly bank reconciliations, no vote books, and in some districts Chief Administrative Officers (CAO) do not sanction payment. These problems have not been rectified with appropriate training and capacity building, so they also have led to low operational efficiency. 3.63 One problem that has plagued the sector for some time is weak private-sector participation in both provision and management. This problem has been linked in part to payment methods. For example, an inability to pay in advance limits many small service providers in participating in rural areas and small towns. 3.64 It is clear that districts need to build their institutional capacity as a means of improving operational efficiency and equity. This effort will ensure that sustainable institutions and systems are maintained to provide quality services. Also, it has been noted that some donor-supported projects tend to be more expensive than those carried out under conditional grants, indicating overall low operational efficiency. Some recent investments in urban areas have been in asset renewal, which does not increase coverage but leads to maintenance and rehabilitation of existing water points. Hence, water resource management issues have been given priority because of the poor maintenance culture that, in tum, has led to low sustainability of existing water points. In this context, operation and maintenance allocations should be carefully considered since more than half the population is still not served by any water point. 3.65 Despite these issues the water sector still spends 50 percent of the budget at the center, while more than 90 percent of beneficiaries are living in rural areas and hence receive a very small share of the overall budget. This situation needs to be immediately reviewed and restricted to ensure that value for money and equity are achieved. In this case, it might be useful to do a value-for-money study that assesses the funds released to the center rather than only concentrating on district conditional grants. 3.66 It has also been noted that the current allocation of district conditional grants is not done on a transparent or objective basis. This situation needs to be rectified to improve budget efficiency. 3.67 The value-for-money studies and tracking studies under way and the forthcoming Water Sector Review in September 2002 will provide an important opportunity to address many of these challenges. It is clear that many challenges in terms of allocative and operational efficiency and equity issues in the water and sanitation sector need urgent attention. 45 E. CONCLUSION 3.68 The above discussion has shown the benefits of tracking studies and value-for- money studies for improving sectoral efficiency; hence, such studies should be conducted in other sectors as well. In the future PER discussions on these issues should be broadened beyond the health, education, and water sectors. Furthermore, it would be beneficial to have the discussions before the BFPs are prepared to allow incorporation of the outputs of the discussions. 46 4. BUDGET EXECUTION AND PROGRAM IMPLEMENTATION A. BACKGROUND 4.1 Issues related to budget execution, such as institutional capacities, systems and processes, expenditure management, accounting and evaluation, and the link between budget discipline and political involvement, have a great impact on the successful implementation of a budget with a poverty-eradication focus. If the budget process is to successfully match national and local priorities to project and program implementation, then the budget execution process must also keep harmony between the two. Expenditure-tracKing studies can provide valuable information on how much of the releases are getting to their destination, thereby reducing reliance on information on how much was spent. Focusing on concepts and principles alone can divert attention from operational constraints, which may represent insurmountable limitations to the systems that are expected to deliver the desired services. It is possible to attain flexibility in policies and processes, but not in institutions and people because that may result in severe interference by various interest groups and a subsequent reduction in the quality and quantum of service delivery. 4.2 During the FY2001/02, budget release performance, was on the whole, satisfactory. Performance by broad expenditure categories shows that both wage and non-wage were above the targets while development expenditures fell short by almost 10 percent. District votes over-performed compared with central votes, which were affected by the need to accommodate domestic revenue shortfalls and supplementary expenditures for other votes. Expenditure in the PAF areas was satisfactory, at 98 percent, although there was underperformance in non-wage expenditures mainly on account of poor performance of equalization and non-sectoral grants. 4.3 There is an active internal audit system, which has allowed the government to implement a program of commitment control for non-wage recurrent and development expenditure. The CCS was introduced in 1999/2000. At the commitment stage, the CCS establishes a quarterly commitment and expenditure limits for each vote, project, or item. Cash releases are then made to match the agreed quarterly expenditure limits. The introduction of the CCS was so effective that it resulted in an immediate decline of new arrears from about Ush. 87 billion on June 30, 1999, to Ush. 20 billion one year later. The CCS for the development budget was introduced in 2000/2001. In 2000/01 non- wage and development expenditure recorded a decline in arrears on the order of 45 and 23 percent, respectively, in comparison with the previous year. This is indeed commendable. 4.4 However, although the CCS has succeeded in reducing the level of new arrears, it needs to be extended to other areas of expenditure that are not yet covered. At present, the CCS only applies to the central government non-wage recurrent expenditure or an equivalent of 43 percent of the budgeted expenditures for 2001/2002. The system does not cover central government salaries and wages, pensions, and statutory expenditure, including court awards and compensation. In addition, there is no CCS at the local government level so the extent of arrears at this level has not yet been addressed in a systematic way. 4.5 It is important that the government implements the plans to extend the CCS to other areas of central government and the entire local government operations, perhaps beginning with central government funding. This approach is also expected to draw benefits from the implementation of the IFMS, which should have commitment control as its primary objective. 4.6 Despite the progress made in budget implementation during the current and previous few years, recent reviews have indicated that the Ugandan budget system is generally weak in terms of budget execution and reporting. For example, several reallocations are made after the budget has been made and approved, and the reporting and monitoring mechanisms are inadequate, slow, and lack local ownership, which makes it difficult to learn from past experiences and adaptations. An example of the impact of such developments is the higher-than-envisioned expenditure in wages for primary school teachers experienced this year, which translated into PAF wage expenditures that were above the target. Some specific challenges and issues in budget execution are described in the following sections. 4.7 The last-minute allocations and supplementary expenditures, which provide additional resources to certain sectors and votes outside the mainstream stipulated processes, undermine the credibility of the entire budgeting system. Continuation of such a trend of overruns, apart from undermining the credibility of the budget process and MTEF ceilings, may result in lack of budget discipline in other sectors. In particular, two sectors, defense and public administration, had by the third quarter experienced respective overruns of 3 percent and 9 percent above the pro rata performance. Additional last-minute expenditure pressures on the budget process were experienced from the strategic exports initiative and Parliament's emoluments and salary increases. The former was primarily accommodated through reallocations and corrigenda, while the latter had to be financed through supplementary expenditures. Continuation of such practices can become a big problem in the entire budget making and execution process and poses a risk of loosening budget discipline, which has been built up over the years. 4.8 The presence of reallocations, supplementary expenditures, and the resultant budget cuts necessitate further tightening of the fiscal envelope for other sectors, thereby making it difficult for them to carry out their intended programs. The situation is worsened by the presence of the PAF structure, which offers protection against budget reductions to sectors that are directly related to poverty eradication, implying that the entire burden of budget cuts is shouldered by very few sectors. The PAF should be seen as promoting a narrow interpretation of pro-poor programming and therefore limiting growth of funding in other emerging sectors, which have great significance in ensuring sustainability of current development gains. The PAF primarily supports programs in Pillars 3 and 4 of the PEAP. Therefore, spending on other PEAP pillars has often lagged behind and yet they too have a significant impact on the entire poverty eradication program. 48 4.9 The persistence of supplementaries and budget overruns prompted the government to enact a new Public Finance and Accountability Act (2002). The Act requires any request for supplementaries to be pre-approved by Parliament and the reasons for doing so to be clearly stated. This is expected to make the process of getting supplementaries more cumbersome and less straightforward, as Parliament may object to the request, and hence reduce the incentive for seeking such funding. 4.10 The decentralization of service delivery has necessitated that funds flow in a timely manner to the local authorities and service delivery centers. This is both a budget implementation and reporting issue because disbursements are in most cases tied to accountability of previous releases. Yet the institutional aspects of budgeting and administration at the local level are still unclear. For instance, it has been observed that local governments have limited capacity and facilitation to report on expenditures, which results in delays for additional funds and hence disruption of service delivery. In this regard, some of the delays and constraints are linked to the budgetary institutions at the center, including line ministries. 4.11 Benefit incidence and value for money, which has largely been limited to education and health sectors, is lacking in all the other sectors. Consequently, there is limited or no information on the value for money of expenditures and benefit incidence of the expenditures realized. This observation implies that several sectors cannot learn from each other and adapt the best practices. For budget efficiency to be enhanced in all sectors, it is important to capture lessons from the various sectors to ensure that the incremental gains are realized for overall budget improvement. B. SPECIAL ISSUES ON BUDGET EXECUTION 4.12 To offer a practical review of the budget execution and implementation issues, this report considers trends in public administration expenditures and the PAF structure and its implications on overall budget performance. The former is expected to offer insights into budget discipline and political involvement, while the latter deals with budget protection practice under PAF, which could undermine budget allocations in other priority areas. Later, the report considers the seemingly forgotten role of personnel management in planning and implementation toward attainment of desired goals. Implications of these budget execution issues for monitoring, evaluation, and reporting for accountability purposes are handled in the following chapter. Public Administration 4.13 The public administration sector includes institutions such as State House, Ministry of Foreign Affairs, local governments (unconditional grants), the URA, the legislature, public service (including pensions), the Electoral Commission, and the MFPED. Others include the Office of the Prime Minister, and mass mobilization activities, and the Local Government Finance Commission. The relative composition of the public administration sector is described in figure 4.1 below. Each of these institutions is important in the effective functioning of government such that their expenditure would be duly justified. Therefore, the public administration sector should be adequately funded, but subject to resource availability. 49 4.14 However, given the size and therefore impact of this sector on the general performance of the economy, the efficiency of expenditures on public administration should be given due consideration. Already there are growing concerns that the budget of public administration has grown too rapidly over the past few years. Public administration as a sector has also consistently failed to fit within its budget, claiming a larger share of supplementary expenditures and therefore negatively affecting budget releases to other sectors. This problem may partly be attributed to many institutions that are trying to undertake far too many activities for the budgetary resources allocated to them. Such lack of budget discipline may also be linked to political involvement, especially political appointments and commissions, which have significant budgetary implications. Budget overruns and political involvement should therefore be seen as two interrelated ways of undermining the credibility of the budget process and imposing undesired constraints on budget execution. Much as a democratic society needs a credible political system it is important that expenditure on such a system remains within the economy's abilities. Figure 4.1: Composition of Public Administration Others 7%0l Foreign Affairs and Missions Local 6% i Government Electoral 23% Commission- * i n-w 10% Parliament Public Service 11% 15% URA State House & 13% Office of the President 15% Source: MFPED Structure and Operations of Public Administration 4.15 Several institutional and operational developments associated with the public administration sector have resulted in negative consequences on the overall budget performance. The developments include the rapid and continuing growth of budget allocations to the sector, increasing lack of budget discipline as depicted by the growing cases of supplementary expenditures, the cost of the political system, duplication of services, and the growth and cost implications of autonomous agencies within government. 50 4.16 Public administration has grown into the second largest sector in the government budget. In the current fiscal year, expenditure on public administration was equivalent to Ush. 320 billion or 20 percent of the entire government spending. The public administration budget has grown rapidly over the past few years, at an average rate of 16 percent. Thus the sector has claimed an increasing share of GDP, rising from 2.9 percent of GDP in 1997/98 to 3.6 percent in 2001/02. As can be seen in table 4.1, the growth has not only been in the official budget allocations but also in over expenditure. Table 4.1: Budget Trends in Public Administration 1997/98-2001/02 Year Budget Overrun Percentage of Overrun 1997/98 184.3 19.62 10.6 1998/99 195.53 16.32 8.3 1999/00 245.03 6.34 2.6 2000/01 264.85 36.79 13.9 2001/02 325.3 26 8.0 Source: MFPED. 4.17 In addition to growth of budget allocations, there is significant evidence of lack of budget discipline as the spending on public administration has consistently exceeded its budget allocation over the past five years. Over the past few years public administration has claimed an average of 70 percent of all supplementary expenditures. Since 1997, public administration has spent on average more than its annual budget (by almost Ush. 20 billion per annum) by around 10 or more percent per year, except 1999. The operation of a hard budget constraint by the government means that overspending by the public administration sector has direct negative effects on other sectors. One area's over expenditure is another area's budget cut. The areas affected most by such budget cuts are those that are not protected, that is including non-PAF and non-wage items. Because the non-protected areas represent a small proportion of the entire budget (less than 20 percent), any budget cut is likely to have a significant impact, at times up to 20 percent, on the budget allocations to such sectors. In fact, if public administration had stayed within its budgetary limitations, the non-PAF expenditures would have increased by 6 percent in the past five years. 4.18 The cost of the public administration sector can, to a large extent, be attributed to its structure and composition. Spending on the political system has an explicit relationship with key political institutions, aspects of the political process, and political appointments to public offices. Political institutions include Parliament, the Movement Secretariat, and a number of constitutional and non-constitutional commissions. Political appointments to public office include advisors, ambassadors, additional ministers, and resident district commissioners , most of whom are outside the constitutional provision. The country has 62 cabinet ministers-a sharp increase from 21 in 1995/96-305 members of parliament, 35 advisors and special assistants, and 86 resident district commissioners and their assistants. In the current fiscal year, the direct budgetary costs associated with political appointees is estimated at Ush. 34 billion. 4.19 Apart from several commissions established through the provisions of the 1995 Constitution there is a growing number of non-constitutional commissions. Operations 51 and management of ad hoc commissions and their budgetary implications have introduced difficulties in planning and budget execution. The Amnesty Commission, for example, is housed within the Ministry of Internal Affairs for budget allocations but is given autonomy such that the Permanent Secretary cannot monitor its activities, including budget submissions and program implementation. 4.20 A number of operating activities in the public administration sector are duplicated. There is a general tendency to duplicate activities as commissions, secretariats, and other semiautonomous agencies proliferate. For example, presidential advisors work alongside cabinet ministers, while several commissions and secretariats are doing work that is related or similar to that being done in departments in government ministries. Monitoring of district-level activities by central government involves considerable duplication efforts. Each ministry sends a separate monitoring team to the field, and at times different departments within the same ministry may send out separate teams. Apart from the heavy costs of transport and field allowances incurred by these teams, a great burden is imposed on district authorities by hosting the continuous flow of visitors. The development budget of the MFPED is also problematic in this area, and contains a total of 43 projects. A wide range of projects have been placed under the Ministry of Finance, sometimes because the projects are intersectoral and require implementation capacity that is thought to be inadequate in the relevant sectoral ministry, or because of the initial source of funding. 4.21 Duplication also occurs as a result of uncoordinated donor initiatives, which generate separate units with overlapping mandates. Examples include the UPPAP, the PMAU, and the Finance Ministry's poverty eradication section. Similarly, the Uganda Investment Authority, under MFPED, is in charge of coordinating and attracting new investments, which is a similar mandate as that given to the Ministry of Tourism, Trade and Industry. There are indications that the Ministry of Foreign Affairs is intending to make promotion of investment a core theme in its work overseas. Rather than building capacity within the line ministries, such parallel initiatives have eventually widened the gap between parastatals and their counterparts in government ministries. 4.22 In addition to the above cases of duplication, several cases of strategic initiatives and linkages within the government are not clearly coordinated, although they are loosely managed under public administration. Examples include the Medium-Term Competitive Strategy , Plan for Modernization of Agriculture , the strategic exports program, and the American Growth and Opportunity Act. The location and activities of several of these initiatives, in relation to each other, are not clearly defined and coordinated. Challenges for the Future 4.23 Based on the review above, it is clear that the public administration sector needs to be reformed in order to realize high returns in terms of better budget allocation and better public expenditure management. The institutions in the public administration sector should start with improving their processes of planning, prioritization, and costing of activities. As already noted, the process of approving supplementary expenditures through the Parliament is expected to improve budget discipline as it will be harder for ministries to simply overrun their budgets. There should be clear and tight guidelines for 52 requesting and approval of supplementaries to ensure that they are used for emergencies and not as a means of topping-up budgets. Reform of the public administration sector should take into consideration ways of eradicating the current tendencies of duplication. 4.24 The President commissioned a study on the possibility of more efficient public administration spending. The recommendations identified several areas of cost savings, not just within the sector (which also includes the political governance sector) but right across government. The study highlighted distortions and inequities that have crept into government over the past several years through the establishment of commissions and semiautonomous agencies. Many of these commissions and agencies have staff earning remuneration much higher than that in the traditional civil service, and are governed by expensive boards that are not doing an adequate job in exerting governance. Many of these agencies have been established with the encouragement of donors. Donor support will be necessary to rationalize these agencies, which is likely to take place within the context of comprehensive civil service reform. 4.25 One of the motivations for opening up the budget process was to provide an opportunity to discuss with external audiences issues related to lack of internal budget discipline and also to bind the executive and to raise the political cost of deviation. Therefore, what is needed is an early involvement of the executive (especially the President) at the planning and budgeting stages rather than at the execution stage. There is also a need to identify the important constituencies (for example, CSOs) and ensure that they have adequate capacity to gainfully participate. In some cases there is need for government restructuring and constitutional review to ensure that the causes of excess spending are neither created nor given an incentive. It is possible that the Public Finance and Accountability Act will only address procedural matters, yet there might be some deep-rooted weaknesses within the entire system. For example, is the rising cost of the public administration sector a result of recruitment of more people, poor controls including internal audit and cash management systems, or payroll management? In this respect, there is a need to analyze the entire system, including the treasury and CCS, to come up with a comprehensive solution. This effort will raise the focus on reallocations both within and without the sectors/ministries. It is also possible that capacity problems and other weaknesses within the system are having a negative impact on the enforcement of the hard budget constraints. C. POVERTY ACTION FUND 4.26 The PAF is a virtual poverty fund that identifies and protects budgetary expenditures that have direct poverty-reducing impacts. PAF was introduced in 1998 as a response to concerns over accountability and reorientation of the budget, given additional resources from HIPC and other donors, toward pro-poor expenditures. However, creating an enclave within the budget and protecting its allocations in the context of revenue shortfalls has negative implications on the overall implementation of the PEAP. Additionally, the increasing local government participation is likely to raise the wage bill, which will require more protection. This challenge is currently being reviewed and discussed so that an appropriate solution can be found. 53 4.27 The initial expectations from the PAF included enhanced responsiveness to poverty reduction of the public sector, improved accountability and transparency in budgeting, and promotion of an open and transparent process for monitoring and review of progress. To this end, the PAF has registered a number of achievements, including an increase in confidence of donors and civil society in the government's commitment to poverty-eradication programs. The PAF mechanism has contributed to the perception that the government is actively addressing poverty and increasingly opening up its processes to scrutiny from various stakeholders. Additional important achievements resulting from the PAF structure are described below. Achievements under the PAF 4.28 The PAF has been instrumental in introducing mechanisms for promoting budget allocations to sectors with strong pro-poor perspectives. It has contributed tremendously toward a clear understanding of what constitutes pro-poor programming, as well as directing resources toward the identified programs. From a small component of 18 percent of the government budget, the PAF has been expanded to 35 percent because of the need to include other identified sectors and sub sectors with strong dimensions on poverty eradication. The development and application of the PAF selection criteria, and the mechanism for processing applications by new sectors, has been instrumental in shaping the process that will guide future budgetary allocations. 4.29 The PAF has led to establishment of structures and systems for transferring funds to the local governments and the management of such funds in a transparent and accountable manner. It has protected pro-poor sectors from budget cuts by providing guaranteed disbursements of budgeted amounts-subject to program performance. Over the past four years, there has been a big increase in resources transferred to local governments. On average, three-quarters of PAF funds are transferred to local governments. Most of the transfers are channeled through the PAF as conditional grants tied to pro-poor sector expenditures. 4.30 The PAF structure has been critical in the development and institutionalization of systems for regular budget reporting and review, which are linked to enhanced transparency and accountability, and subsequent disbursement of additional funds. The central government and local governments have improved monitoring of programs and accountability using the 5 percent of PAF resources that are specifically earmarked for this purpose. 4.31 The PAF structure has been critical in the mobilization of resources, initially as a conduit for HIPC funds and later by providing a framework for increased budget support. Levels of donor budget support to the PAF have increased from just over US$20 million in 1998/99 to more than US$130 million in 2001/02. The government's commitment to channel resources to pro-poor sectors and predetermine budget allocations and guarantees of disbursement are combined with acceptable systems for accountability to provide a substantial degree of comfort for development partners wishing to move toward budget support. The PAF continues to provide a framework at the sector level that ensures resources earmarked for sectors actually get to those sectors. The predictability of 54 resource flows and accountability of such resources has created a basis for a stable, long- term partnership between the government and development partners. 4.32 In conclusion it should be noted that, from its initial focus of ensuring that HIPC resources are spent with a strong focus on poverty reduction, the PAF has evolved into a mechanism for introducing new pro-poor programs and a primary source of government transfers to local governments. In many areas, therefore, PAF may be seen as a lead factor in the attainment of several successes under the PEAP. Challenges Facing the PAF Structure 4.33 In spite of its impressive performance, the PAF has come under criticism as a constraint to several other developments, which are essential for sustainability of its own success. Already there are ongoing efforts aimed at mainstreaming PAF principles into the wider public-sector process. It is largely believed that PAF has limited growth of funding for other emerging pro-poor sectors. Given the constraint of slowing growth in resources available to the public sector, continued commitment to PAF allocations should be seen as limiting reallocations between sectors that are essential to other PEAP pillars. In this regard, the PAF is worsening problems in other sectors that have emerged from constraints under the MTEF. The PAF structure has promoted a narrow interpretation of pro-poor programming and has therefore skewed expenditures toward service delivery without due regard to ensuring sustainability of the entire development process. 4.34 The comprehensive nature of the PEAP as a development plan means that zoning out and protecting certain sectors under the PAF defeats the original objective of comprehensive development. The presence of cross-cutting issues in the implementation of development policies makes it difficult to justify the PAF rationale for poverty eradication. The failure to implement the PEAP in a balanced way has undermined the pursuit of more sustainable options and outcomes through a systematic sector prioritization process. Sector programs, both within and outside the PAF, have not been properly aligned toward the achievement of PEAP outcomes, even though such outcomes may be clearly articulated. 4.35 The PAF has promoted de-concentrated administration as opposed to decentralized service delivery. There is an inherent conflict between the sector-driven approach of allocating funds nationally toward the achievement of sector targets, and that of decentralization, which promotes local autonomy in decision making. This conflict has undermined local ownership and, to an extent, sustainability of investments. The PAF only channels funds to part of the local government budget and therefore does not promote a balanced implementation of the PEAP at the local level. The local governments have few decision making powers because the bulk of their allocations are protected under PAF and provided as conditional grants. The end result of this development is likely to be less interaction between the central and local governments, implying that the fora for reviewing and making strategic decisions on implementation of the PEAP are uncoordinated and fragmented. 4.36 The special status accorded to the PAF has promoted a narrow interpretation of what constitutes poverty-reducing programs, thereby resulting in a partial interpretation 55 of the PEAP. The current criteria for selection of PAF programs has skewed budget allocations toward the provision of services since poverty is seen in the context of welfare and direct service provision. This situation provides a perverse incentive for sector strategies to be adjusted toward service and welfare delivery in order to qualify for the PAF. The size of sector allocations under the PAF have largely been driven by donor budget support earmarked to specific sectors or sub sectors, resulting in intersectoral allocations that do not promote a balanced implementation of the PEAP. 4.37 As noted, sectors have focused on attracting more resources and have ended up supporting investments that produce outputs that have no ability to generate resources for fresh investments and maintenance. There are no strong implications for generation of funds to support recurrent expenditures required to maintain service delivery. In the end, the entire government budget has not been fully oriented toward a comprehensive implementation of the PEAP, leading to critical questions about sustainability. 4.38 Sustainability problems arising from a partial implementation of the PEAP are partly reflected in the limited ability of the economy to generate domestic resources. Revenue collections have, for several years, stagnated at less than 12 percent of GDP. The revenue shortfall for 2000/01 was Ush. 36.2 billion and is expected to be at least Ush. 55 billion in the current year. Funding available to the public sector has limited the absorptive capacity of the economy, which is now limiting the growth of the resource envelope available to new pro-poor sectors. The PAF has limited the ability of the government to carry out rational reallocations within and between sectors in order to arrive at a long-term, sustainable solution. Given the new constraint in the growth of the MTEF, emerging pro-poor sectors, and to an extent those already under the PAF, have remained largely under funded. 4.39 The PAF system of reporting, accountability, and release of funds has also resulted in a large administrative structure, which should be seen as a burden on both local and central government. Consequently, the wage bill under the PAF represents a large component of the total wage bill. The protection offered to this component may result in significant variations in other non-PAF sectors. Table 4.2 indicates that wage allocations under PAF as a percentage of the total are protected at 38 percent. The PAF structure should therefore be seen as having a potential for negative implications on overall planning and budget execution for other non-PAF sectors. Table 4.2: Wage Bill Allocations, PAF as a Percentage of Total in Billion Ush 2001/02 2002/03 2003/04 2004/05 Category Budget Projections PAF 197.39 228.07 241.83 247.44 Total 546.27 586.64 626.68 651.58 PAF as a percentage of total 36.1 38.9 38.6 38.0 Source: MFPED. 4.40 The limited sensitivity in budget execution processes, which largely results from protection of PAF areas, has contributed to an inadequate focus on putting in place systems and institutional capacities to ensure attainment of results oriented toward PEAP goals. The PAF has focused on setting up accountability mechanisms for review of 56 performance of government programs, at the expense of reviewing and reforming the systems for delivering outputs and strengthening of respective institutions. The weak capacities in institutions supposed to implement the budget have partly resulted in wide variations in budget performance. The report for 2000/01 indicated that shortfalls in the MOES, and EF and SS represented implementation bottlenecks rather than any particular reallocations away from these sectors. Figure 4.2 indicates the divergence between budget and actual releases for the different sectors, part of which was a result of lack of capacity in implementing institutions. Such shortfalls in sectors such as roads and works can translate into severe constraints to economic production. In addition, the shortfalls in one sector provide incentives for over performance in other sectors such as public administration. 4.41 It is worth noting that there were more cases of underperformance in the PAF areas compared to public administration. This implies that apart from protecting PAF areas against any budget cuts the tight criteria for accessing PAF funds may be acting as a hindrance to access of all the budgeted funds. This could be a result of poor or delayed reporting of funds released earlier, which as indicated may be a result of low capacities at the districts. Figure 4.2: Divergence between Budgeted and Actual Releases for 2000/01 Divergence in Budget Outturns FY2000101 40- . - 30 . --- - 1 ElSecurity l , 20 M . - . . . 0 rads and works I .S .. - 0 agriculture = 10 --.----.. :- Q~~~~education D -20 | - - _ Cl public admin -30 - , interest _- so-Y8e: NlF PED Sector 4.42 The increased focus and dedication on the PAF has partly resulted in the limited emphasis on the role of personnel management in identification of sectoral inputs. The weaknesses within the district service commissions, the persistence of vacant positions in the district staff teams, and staff-retention problems remain largely unattended to, yet they have a significant impact on planning, budget execution, and performance. The PAF does not satisfactorily address the issues of efficiency and success given a budget constraint. Hence, maximization of output, in terms of both quality and quantity, for a given resource constraint cannot be realized if institutional capacities have not been strengthened. 57 The Way Forward 4.43 Despite the current challenges faced by the PAF, there is strong consensus within the government and among various stakeholders that there is some value in it, which should not be lost. For example, the PAF has an image that is easy to market to donor constituencies in their respective countries. Thus, the current policy challenge is how to restructure the budget process to ensure a comprehensive pursuit of the PEAP objectives without losing the benefits offered by the PAF. There is a need to widen and reorient policy programming into a system whereby each sector delivers outputs that are specific to the desired PEAP outcomes. Sustainable strategies for financing the PEAP should be developed to ensure that current financing strategies do not result in future limitations. Future allocation procedures must ensure that all proposed sector investments allow sustainable improvements in delivery of outputs and gains in poverty reduction outcomes. 4.44 The removal of PAF mechanisms, as they are known today, will require new structures for public expenditure management, accounting, and evaluation that are satisfactory to the government and its development partners. Strong CCSs, to prevent unjustified reallocations, will have to be established to ensure flexible implementation and adherence to set PEAP goals. The new system will have to face the challenges of coordination and continuity of various programs with no fixed initial criteria for guiding allocations and the subsequent disbursements. Unless and until budget overruns are eliminated, it will be difficult to justify relaxing the current PAF protection for priority sectors. D. CONCLUSION 4.45 The above discussion echoes the remarks made at this year's PER meeting that the PAF reform discussions cannot go far until overrun problems are addressed adequately. Overruns undermine the objective of removing the PAF protection, and any reforms in such an environment will be detrimental to attaining PEAP targets. In particular, the trend of supplementaries by defense and public administration result in budget cuts for other sectors and can be devastating to poverty-eradication efforts. The implications of these developments on the long-term credibility of the budget process and execution have not been given due importance. In this regard, it is imperative that political interference in planning, budgeting, and execution issues be greatly reduced or, better still, eliminated. 58 5. BUDGET MONITORING, EVALUATION, AND REPORTING A. BACKGROUND 5.1 This chapter addresses the issues of monitoring budget performance, evaluation, and reporting of the findings for purposes of improving future plans and budgets through past experiences. The chapter highlights the importance of the monitoring and evaluation process together with its associated aspects such as data accuracy and availability, roles and responsibilities of the different actors, and reporting of findings to stakeholders. 5.2 Regular and rigorous monitoring of resource flows and their usage is an important ingredient of financial accountability. Monitoring and evaluation belongs to part of the policy process that links the different parts of the decision making process together. For example, at the point of progress review, one should be able to establish whether the allocation of resources and actual implementation are indeed moving the communities or nation toward the set goals and targets. 5.3 A reliable and effective budget monitoring system covering the various levels and sectors of government is critical for evolution and strengthening of public-expenditure mechanisms that eventually lead to convergence to the desired goals. Such a monitoring system will generate timely information not only on the transfers and disbursement of public resources, but also on the productivity of these resources in terms of efficiency of public investment, output performance, and local economic development impact. In addition to measuring the efficiency and effectiveness of intergovernmental finance, evaluation data should be able to inform policy review at all levels of government, and thereby improve the medium-term expenditure planning. 5.4 Benchmarking of fiscal performance, outputs, and impacts has emerged as a standard technique to promote public-sector performance. Benchmarking can be used not only to monitor and compare trends across various dimensions of well being (such as healthcare, schooling, crime prevention, and economic development) but also to attract private investment. An integrated benchmarking system may need to be first focused on expenditure and financial management, and later on broadened to include a range of output and impact indicators. 5.5 While program evaluation by government departments is key to improving vertical accountability of government institutions, the use of benchmarking and other public participation mechanisms at the various levels of government can be used to enhance downward and horizontal accountability. In particular, well-publicized benchmarking of fiscal and operational performance, local economic development, and other aspects of well-being can generate healthy competition and attract private investment, which will generate other positive externalities. 5.6 Public expenditure accounting and reporting must go hand-in-hand with overall budget performance reporting in order to ensure informed inputs in the following rounds of the budget cycle. Currently, budget performance reports only focus on the financial reporting. While it is commendable that the government has moved toward producing even quarterly reports on a timely basis, the usefulness of these reports is limited because they do not contain any output data. This area needs attention in the medium term. If the lower levels of government and communities are to participate effectively in the planning and budgeting processes then they must be informed of past performances as established in the different reviews. Reports on findings from different monitoring activities should be disseminated to various stakeholders in order to strengthen participation. 5.7 With regard to efficiency, the government has carried out a number of expenditure tracking studies aimed at establishing the value and hence the efficiency with which services are being realized. Tracking of expenditure flows, which has been carried out in the health and education sectors, has yielded important policy implications that are useful for the budget processes of planning and execution. The publication of information on disbursements is expected to enhance the certainty, predictability, and transparency of transfers to the district and lower levels of government. B. THE CURRENT STATE OF MONITORING, EVALUATION, AND REPORTING 5.8 The current setup of national M&E includes many arrangements for tracking and providing feedback on progress on the PEAP, and is therefore characterized by substantial overlaps and duplication. It includes all procedures, systems, and standards of information generation and management and the corresponding reviews accompanying implementation of national development programs and projects. The system includes a mechanism of providing feedback and reviews of interrelationships between expenditure and development activities on the one hand, and effects on poverty trends on the other. 5.9 The objective of M&E is to report on what the government and its development partners are doing to alleviate poverty, but also to provide facts on realized outcomes so that future plans can recursively move toward the maximization of value -for money. M&E should therefore contribute toward the improvement of public service performance, increase effectiveness of public service delivery, and enhance enforcement of accountability. 5.10 The government has taken note of the need to improve the M&E functions, including improvements in coordination. There are multiple mechanisms for managing money, for maintaining accountability, routine management reporting, and carrying out of ad hoc studies and reviews. This type of operation has become a big burden to frontline desk officers and department managers. Considerable resources are currently being spent, within ministries and local governnent units involved in service delivery, on servicing the different information requirements by the numerous primary beneficiaries of the M&E reports. 5.11 The current state of government systems and institutions needs great improvements in order to match the level of the required M&E of a decentralized fiscal system. Technical skills for developing performance-tracking capacities both within 60 central and local governments are either lacking or scarce. Thus, one should expect inadequacy in carrying out cost efficiency, expenditure tracking, evaluation of client- satisfaction, and credible official public surveys. Even the stock of capacities scattered within the various governrment sectors may not be known and yet this would help to exploit the benefits of cross-fertilization within government. 5.12 The problem of capacity for budget monitoring and reporting is more pronounced at the local government level as opposed to the center. In the case of the central government, non-wage recurrent and development commitment/expenditure reports are required by the 15' of the following month. PAF quarterly reports of activity expenditure are due before the last day of the month after the close of the quarter. Local governments are also supposed to submit monthly accountability statements on all expenditures incurred from central government transfers. Failure to comply with the reporting requirements results in the withholding of the next cash releases until compliance occurs. These conditional ties, although good, may be seen as not being sensitive to the capacity problems of local government and may indeed adversely affect the poor in less-developed districts. Data Problems 5.13 There are also significant data problems both in terms of stock and quality. An intergovernmental monitoring system should aim among other things to generate central and local government level fiscal data that are robust in terms of coverage as well as reliability. With regard to coverage, the data should ideally go beyond transfers and expenditures, and incorporate relevant information on disbursements, cash management, and levels of idle cash balances. Reliability will depend on a number of issues, including submission of timely reports from the various levels of government, verification by transferring departments, and regular reconciliation methods. When parallel flows of information are not available, short-term verification measures such as random expenditure tracking surveys should be employed. In Uganda, such tracking mechanisms have been employed mainly in the health and education sectors. In the current circumstances, the government lacks the ability and resources to carry out such activities in all sectors and at the different levels of government. Tracking surveys are currently being used sporadically to address specific issues but are not part of any overall approach to budget monitoring and analysis, especially of outputs and impacts. 5.14 Deficiencies in the quality of returns and their analysis continue to exist in several ministries, including the MFPED. The problem is currently being addressed and requires additional resources and training in order to improve the analytical skills and further refinement of the systems and the range of data required. 5.15 The government has already embarked on several approaches, such as the Poverty Monitoring and Evaluation Strategy, which has been finalized for implementation and is aimed at improving M&E of development programs in light of the set goals. The approaches are built around the four pillars of the PEAP and supported by PRSC, showing the reform strategies (objectives and actions) and progress indicators (outcomes and outputs). For every objective there is a corresponding outcome indicator, which will be monitored to ensure that the right actions are being undertaken. Verification of 61 outcomes will depend on analyses based on such data as generated in surveys and public expenditure data. The government intends to continue with household surveys and national integrity surveys, which will be combined with ministerial and departmental level data and assessment reports by the various agencies and institutions. Evidence from Tracking Studies 5.16 A recent report on tracking poverty-reducing spending in Uganda has indicated that the government has satisfactorily met the 15 criteria for the tracking of poverty- reducing expenditure. There is still a need to develop, implement, and strengthen the tools for tracking outcomes of poverty-reducing expenditures at both central and local government levels. This effort will greatly benefit from the successful implementation of the IFMS, which is supported by the EFMP II project. Other related capacity needs at the center and local government level are being identified by the PER and supported through PRSC, LGDP, and other technical assistance programs of multi- and bilateral partners. 5.17 The health sector tracking study found that delays in reporting and hence disbursement of funds, apart from arising from factors such as logistical problems at request and approval stage, also had a bearing on capacity problems within the line ministries. Although the health units provide regular financial activity reports to the supervising entities, it is not done in a timely manner. The quality of the reports is poor, and none of the implementing entities accounted downwards to the people, as evidenced by the failure to display publicly the amount of grants received from the central government or the outputs of the M&E activities. More than 50 percent of the health sub districts did not possess sufficient logistical support to carry out scheduled monitoring activities. Capacity for Effective and Timely Auditing 5.18 The feedback and accountability aspects require a strong auditing mechanism, comprising staff and equipment, which are generally lacking in the auditor general's office. The ultimate goal of an intergovernmental monitoring system should be to generate information for better decision making at all levels of government, promotion of institutional performance, and enhanced accountability. The task for Uganda to get to such levels clearly surpasses the current abilities of the office of the auditor general. The situation is worsened by the capacity problems at the local government level. Government reports indicate that the requirement of submitting audited accounts to the legislature within 12 months of the end of the fiscal year is met by the central but not the local governments. 5.19 In response, the government has put in place measures to increase the quality and regularity of internal budget reporting. Measures have been undertaken, with the support of DFID, to strengthen the capacity through training and also ensure independence of the Office of the Auditor General. In the area of providing feedback, measures are being undertaken by government with the support of donors to strengthen the capacity of each line ministry and also at the local government level to monitor and report on budget outturns, including outputs and outcomes. 62 5.20 Presently, audited accounts are presented to the legislature within 12 months of the end of the fiscal year with some exception for the local governnent. Long delays by local governments in submitting accounts have led to corresponding delays in the auditing of accounts. C. CHALLENGES FOR THE FUTURE 5.21 Because the monitoring of outcomes and impacts is a medium- to long-term agenda there is need for establishment of appropriate indicators to continuously monitor and evaluate progress toward the desired goals. The increasing role of local governments in fostering an investment-friendly environment demands options for better evaluating the growth and poverty-reduction implications of fiscal performance. This calls for developing the capacity to rigorously evaluate the economic development impact of various public policies and expenditures. The linkages between planning and implementation need to be clearly articulated in order to establish activities and events that should be monitored using relevant indicators. Issues of reliability and accuracy of the data also need to be given due consideration. The processes of collecting, storing, processing, and reporting of results require not only high levels of human capacity but also a minimum package of technical equipment. 5.22 The tasks of ensuring data quality and coverage, together with developing and computing relevant indicators for certain objectives and actions is also going to be daunting. For example, although the line ministry budget reports are received within an acceptable time interval, there are concerns about the quality of the data received and the capacity to analyze and monitor such data. 5.23 Strengthening of M&E systems will be half the job done if the reports on findings are not availed to all the relevant stakeholders in a timely manner. Such information will enable timely and appropriate reviews of the MTEF through better forecasts of the future that are based on past experiences. Publications of annual budget reports need to be supplemented with better output information. CCS has shown that it is possible to do financial reporting on all government programs. Hence, if a simple output monitoring system is developed it can be implemented. 5.24 An additional dimension to the reports should be an analysis of the data in order to generate information that will help to guide future planning and budgeting decisions. The reports should not only include numbers but also implications for the future. Participation in data collection and lower-level reporting should be expected to improve as the participants begin to see benefits for themselves coming out of the evaluation reports. However, the generation of quality decision making information to include in the M&E reports may require analytical skills and technical facilitation, both of which are currently not available at various levels of government. Therefore, this area needs to be specifically addressed. The need for additional resources to support the upgrading of analytical skills within the MFPED and other line ministries has featured-in a number of government reports. This is an aspect that should be taken up systematically through programs similar to EFMP II at the central government level and the LGDP at the district level. In the meantime, reliance can be made on existing capacities within and outside the government. 63 5.25 The aspects of coordinating M&E activities and interests of various stakeholders still need a practical resolution. There are multiple stakeholder views of what data are most relevant and important and which set of indicators should be considered optimal. One of the recommended options is establishment of an overarching or apex-level national system of M&E arrangements. This does not necessarily entail one institution acting as a channel for all or as a kind of central database for all information. The goal of such a coordinating body should be to help guide public action toward relevancy and effectiveness in making progress on the PEAP and poverty eradication. It should be aimed at ensuring convergence and complementarities from the existing standards and initiatives. This should result in generation of coherent decision making in the perspective of the national development goals. 5.26 The M&E system should start with clearly expressed goals and targets and ensure coverage of data collection ranging from inputs through to outcome levels. Efficiency in this process demands minimization of costs of unnecessary overlaps and linking up of different actors and interest groups in order to pool the scarce and scattered resources for mutual benefit. Proper reporting of the findings by different actors should be harmonized and disseminated to the various groups of decision makers at all levels. D. CONCLUSION 5.27 It is clear that Uganda's budget process is weak when it comes to monitoring, evaluation, and reporting. These weaknesses obviously limit the prospects of learning from past experience and reforming budget processes. Therefore, it is paramount that appropriate measures are taken to improve these systems as a way of improving budget processes and improving budget efficiency in addressing development programs. The government of Uganda has taken some small steps in the right direction. The challenge is to expedite the implementation of these reforms without undue delay. 64 6. CHALLENGES FOR THE FUTURE: PUBLIC EXPENDITURE MANAGEMENT IN A DECENTRALIZED ENVIRONMENT A. INTRODUCTION 6.1 According to the 1995 Constitution, decentralization is a vital component of the structure of governance in Uganda. The process of decentralization is at the heart of implementing the PEAP and is therefore expected to play a vital role in eradicating absolute poverty by 2017. In light of decentralization of responsibilities for service provision to districts, the development of capable local-level institutions is key to the achievement of government objectives as articulated in the PEAP. To deliver the services necessary for poverty eradication, the devolution of power has got to be matched with a corresponding fiscal decentralization and capacity building at the local government level. Fiscal decentralization involves introduction of various levels of government, which makes coordination of activities, monitoring, and accountability of critical importance. Analysis of intergovernmental fiscal relationships is crucial for the identification of options for supporting the output orientation of the MTEF. Such an approach would be in line with the PRSC objective of supporting the government's budget and the MTEF with a program to improve service delivery through vigorous monitoring of outputs as well as reform of critical public management systems 6.2 Management of public expenditures demands a robust intergovernmental fiscal and administrative system with an efficient and accountable relationship among the MFPED, line ministries, and districts, as well as between districts and their constituents. A relationship of this nature may be depicted in a triangular form, as is shown in figure 6.1 below. The figure highlights the complex, three-way resource and information flow channels. For example, the non-tax revenue collected by sector ministries, which can no longer be appropriated at the collection level, would flow from the line ministries to the MFPED. Similarly, some of the local government taxes cannot be appropriated at that level, which would imply that they too have to flow to the consolidated account/MFPED. The MFPED is in charge of coordinating and harmonizing the overall national plans and should therefore receive plans from the sector ministries and local governments at the district and lower levels and, in turn, release financial resources for implementation of the plans. Another set of flows involves performance and accountability reports and supervision guidelines. The lines of reporting will also follow a similar trajectory. Finance will receive and provide reports on budgetary transactions and outcomes to line ministries and districts. Figure 6.1: A Three-Way Accountability Relationship in Uganda's Intergovernmental System-Resource and Information Flows DISTRICTS Ministry of Finance, Planning .... ......... Sector Ministries and Economic Development ___ Key: - ..-..-...Information Flows Resource Flows 6.3 Needless to say, there are some links in this triangular relationship that are stronger than others. The recent HIPC tracking study highlighted that in Uganda the link between districts and central/sector ministries is the weakest in terms of all levels of the budget process. These weaknesses obviously have implications for effective service delivery in an increasingly decentralized-fiscally and administratively-context B. CURRENT CHALLENGES AND EFFORTS 6.4 Fiscal decentralization poses significant challenges for the government in terms of planning, budgeting, and implementation of the set policies. It requires building credible institutions with adequate capacities at all levels of government, maintaining harmonious relationships between the different actors and stakeholders, and ensuring that local and national plans coincide toward the same goals. Capacity problems include creating incentives for frontline workers, improving payroll management, and enhancing accountability in personnel and financial management. There is a need for building district-level capacity in core public management skills and strengthening local governments' planning and budgeting frameworks. The lower levels of government, in particular, have little involvement in decision making partly as a result of capacity problems. In addition, fiscal decentralization has increased the number and diversity of trarisfer mechanisms from central government and donors to the local governments. Yet many of these mechanisms are not well adapted to the decentralized framework. The local governments still have little power over much of the allocated resources given that most of the transfers are in the form of conditional grants. 66 6.5 Weak linkages between the various levels of policymakers and implementers can result in planning and budget execution failures as each level or set of government institutions pursues objectives that do not converge to the established national development goals. Yet the alternative of letting the center dictate what should be done by and at all levels of government would not result in decentralized service delivery. According to the decentralized service delivery framework, priorities for national development should strongly reflect grassroots preferences determined through community participation in the planning process. 6.6 The challenge facing the Ugandan government, and where the PER should make a contribution, is in the area of how the ongoing and proposed public sector reforms- fiscal, budgetary, and administrative-can help to develop a tier of government and institutions that are responsive, adaptive, effective, and accountable in developing and implementing strategies for poverty eradication. The current structure of government has inherent weaknesses particularly with regard to planning and sharing of experiences. There are no clear linkages between a number of initiatives at the central government and the districts, and even within the districts themselves. The government and its development partners are working on a program to develop capacity and a conducive working environment both in the districts and the relevant line ministries (for example, the Capacity and Performance Enhancement Program (CAPEP) project). Planning and Budgeting Issues 6.7 The planning and budgeting cycles between the different levels of government need to be fully harmonized in a way that would offer mutual benefits. It is important to harmonize the local and national budget cycles, and make practical allowances for local governments' budget processes to make and receive feedback from the national budget activities. Similarly, lower government levels should be duly integrated into the district plans, which will involve linking the process of the DDPs with the preparation of the LGBFPs. The similarities between both of these medium-term planning instruments and the fact that they are implemented in parallel should be a cause for concern. The weak linkage between the DDPs and the LGBFPs has resulted in no maximization of scarce resources. Moreover, the credibility of districts' medium-term plans largely depends on a sound fiscal framework, based on both indicative planning figures issued by the center and credible forecasting of own-resource revenues and donor financing. There are additional challenges of ensuring that the entire planning process and budget cycles are in line with the provisions of the Budget Act 2001. 6.8 There is a need to continue with efforts aimed at strengthening the local governments' planning and budgeting framework at the district level. The LGBFP is the key vehicle for developing and costing medium-term district plans, particularly in priority sectors. However, the system of several conditional grants, instituted by line ministries, is likely to undermine the robustness of local planning and budgeting. For example, conditionalities on fiscal transfers may impose unnecessary restrictions on allocative choices between wage and non-wage recurrent expenditures and between specific items of non-wage recurrent expenditures. Thus, although conditionalities limit the illegitimate transfer of resources, they also tend to limit the flexibility of making legitimate changes in the mix of inputs to improve performance at the facility level. Moreover, the districts 67 that face the conditionalities do not have a clear mechanism by which the specific conditions-if found to be unworkable-can be negotiated. For their part, line ministries have faced difficulties in "disciplining" districts that fail to meet conditionalities since mechanisms for enforcement are not clear. 6.9 On their part, district authorities have expressed support for continued conditional grants, albeit under more flexible terms. It is possible that greater flexibility in the use of inputs can be attained along with more output monitoring. In this case, the failure to meet performance benchmarks can then be followed by appropriate action, including selected sanctions. The current weaknesses in monitoring performance at the local level and the publication of the relevant data are being addressed through the PRSC. This should be enhanced by the government's intention to move toward a results-oriented management framework. 6.10 Strengthening local government planning and budgeting has been identified as another aspect of decentralized delivery of services that is to be supported in the context of the PRSC. Districts need to be equipped with better information and greater authority to make trade-offs between wage, non-wage recurrent, and capital expenditures. In line with this, the LGDP and the EFMPII operations are supporting efforts to make local government budgets more comprehensive and contestable, within a framework that safeguards the government's fiduciary interests. Of particular interest is the rationalization of the budget process in the districts. The MFPED has already conducted a number of training and review workshops to communicate a standardized approach to LGBFPs in the district since these papers provide an important avenue for extending the MTEF to the districts. Given the limited capacity of many districts, there is a need to streamline LGBFPs and DDPs into a single three-year rolling plan that can serve as a useful instrument for local authorities. Capacity and Human Resource Management Issues 6.11 In the area of personnel management, the key issues include developing and strengthening incentives for frontline workers and finding appropriate ways to manage the payroll. Access and usage of a number of services is restricted by delays in paying frontline workers and weak monitoring of performance. Multiple factors, including bottlenecks at the center and in the districts, have prevented appointment staff from accessing the payroll. A big concern for the frontline staff is to be paid even after they are in post. Moreover, real wage levels remain a critical issue for attracting and maintaining competent managerial and technical staff. The government has already expressed concern about the potential deleterious impacts of capacity problems on sector performance, including access, usage, and quality. 6.12 There are concerns that weaknesses in the recruitment and personnel management at the district level-specifically the functioning of district service commissions (DSCs) and staffing of personnel officers-have prevented deployment of qualified frontline workers in a number of sectors, especially education and health. The effectiveness of local governments in hiring, deploying, and managing personnel has been identified as critical to short- to medium-term performance of service delivery systems. Districts and DSCs continue to suffer from a range of constraints, including a lack of resources to 68 undertake basic functions such as advertising vacancies and interviewing candidates. There are also fears that the independence of DSCs may be compromised by political interference and even direct participation by the district council members. As a result, the appointment of district staff lacks transparency, faces unjustified delays and, in some cases, has been undertaken without proper certification. 6.13 The aggregate established ceilings on recruitment of personnel have not been found to be a binding constraint in a number of sectors. Instead, the lack of qualified applicants for vacant posts has been an outstanding problem. Thus, the main reasons for failing to attract qualified staff include an inadequate number of qualified applicants and low pay. Nevertheless, the district officials are concerned with the way in which the ceilings are set as well as the frequency of adjustment. For example, the adjustments in the education sector were too slow to reflect changes in enrollment. The process of setting ceilings is highly centralized, with central ministries exerting significant influence over defining staffing norms, setting overall ceilings, and enforcing staffing requirements within districts. In some cases the district officials do not understand the concept of an established ceiling, often confusing it with staffing norms for individual facilities. Thus, the centralized process by which ceilings are set ought to be made more transparent. In addition, regular consultation should be conducted in order to make the ceilings more realistic. 6.14 In some cases, the districts have been forced to hire supernumerary or unqualified staff outside the ceiling, especially in the education and health sectors. These staff are paid out of user fees, where applicable, as well as block grants. It may be necessary to conduct regular censuses to establish the size and qualifications of supernumerary staff at the facility level, say through school mapping and headcount exercises in the case of the education sector. The "not very clear" terms under which such people work can result in high turnover rates. Consequently, the hiring processes, in case of high frequency, can prove to be costly if retention issues, even of other staff, are not addressed. 6.15 There is widespread recognition of the problem of the local level capacity to undertake routine human resource management functions, most notably the recruitment of front-line personnel. This problem followed the devolution of authority to the districts for recruiting and managing such personnel. The ability of the DSCs to carry out their basic functions is being hindered by the failure to compensate commissioners given the resource constraints at the district level. As a result, several districts have developed backlogs in screening and hiring of candidates, particularly teachers. Similar constraints can be found impacting personnel officers, who are said to lack adequate administrative support, basic stationery, and record management facilities. 6.16 In response to the capacity problems associated with decentralized service delivery, studies have been carried out in connection with decentralized personnel management. Issues considered critical for establishing an efficient decentralized personnel management system include establishment control, pool of qualified applicants, payroll management, and rights and obligations of frontline staff. It is hoped that efforts to decentralize pay and personnel information systems to districts will reduce the processing cycle for accessing the payroll. The implementation of this policy will, however, take some time and will also require special incentives and facilitation of 69 districts to appoint qualified personnel officers at the district level, improvements in operations of the DSCs, and strengthening system-wide payroll monitoring. It may be necessary to fund DSCs as a line item in the central government budget to cover operating costs and ensure independence from political interference. There is also a need to review the staffing and structure of district personnel officers to strengthen the human resource management infrastructure within the district. Issues of Multiple Funds Transfer Procedures and Actors 6.17 Management and financial accountability has problems arising from the profusion of different transfer systems and bank accounts. Line ministries are also faced with major problems in dealing with quarterly reporting from a growing number of conditional grants as well as the recent increase in the number of districts. Additionally, there is concern about the different design and type of conditionalities under the Ministry of Local Government, LGDP, and the PAF conditional grant regulations, and about the bureaucratic load of multiple procedures, bank accounts, and lines of reporting. 6.18 Resources to the PAF areas are channeled to local governments in the form of conditional grants. Conditional grants constitute resources for implementing PEAP programs that are deemed to have a direct impact on reducing poverty. Other forms of transferring funds to local governments include unconditional grants, equalization grants, and the LGDP. The unconditional grant refers to resources given to local governments to run decentralized services. The local governments are given autonomy to determine allocation of these resources according to locally perceived priorities. The LGDP is designed to effect devolution of the development budget resources to local governments. An equalization grant is given to the most needy districts/local governments, defined as those whose expenditure needs are above average while their fiscal capacities are below average. 6.19 A number of complaints have been raised about this structure of transfers, including the limitations it imposes on local governments in pursuing their locally identified priorities and the formula used in computing transfers such as equalization grants. For example, recent developments indicate that, given the poverty trends, the northern region requires revenue grant transfers of 29 percent as opposed to the current 22 percent (see table 1.3). Thus, the formula, which partly takes into account population size, geographical area, and poverty levels (based on consumption), needs to be revisited. 6.20 The government has already taken note of these impediments, which tend to slow progress toward poverty eradication. Plans are under way to examine how to streamline and harmonize the present systems and processes of transferring resources to the local governments. However, it is worth noting that the problems with fiscal decentralization also include low capacity levels, facilitation, and ensuring fruitful community and civil society participation in planning and decision making. Such participation is critical if the planning and budgeting for services under local governments is to be responsive to the needs of the local communities and accountable to them as well. 70 Local Revenues 6.21 The current state of revenue collection by the local governments does not offer enough incentives for greater action on the side of local governments. Local revenues are essential to the long-term sustainability of service delivery by the local governments. The recent big increases in transfers from the central government are believed to have undermined local government revenue-raising efforts. However, part of the recent decline in local revenue collections may be attributed to political interference associated with election campaigns. Recent studies and discussions indicate the need to strengthen political commitment at the national and local government levels as critical for increased local revenue collections. 6.22 Other problems associated with local revenue collections include the fragmentation of sources of revenue between the various levels of local government, an inadequate legal framework for local taxation, and a narrow tax base. Also, local governments have a poor tax administration capacity both in terms of personnel for assessment and enforcement, and the corresponding facilitation. The lack of systematic sensitization is reported to have resulted in poor public awareness of the role of taxes. This situation has been reinforced by the absence of clear linkages between taxation and service delivery. 6.23 Unless some of these issues, which are largely external to the individual local governments, are fully addressed it may be unfair to impose penalties for low local revenue collections in specific districts. Therefore, the targets for each district may have to be set in a more thoughtful manner. Monitoring and Reporting Problems 6.24 Budget reporting to the council and central government is fragmented and ineffective. It also does not give comprehensive and accurate information on local government revenue and expenditure performance during the financial year. As already noted, line ministries are also faced with major problems in dealing with quarterly reporting from a growing number of conditional grants, and to different stakeholders. Desk officers in ministries and at the districts are also overburdened with continuous visits from multiple groups of evaluators and supervisors, resulting from uncoordinated systems between the various levels of government. As observed earlier, the education sector has stopped imposing sanctions on districts that do not adhere to the UPE capitation guidelines and is now focusing instead on applying sanctions on officials who are responsible for such outcomes. This change has the benefit of not penalizing children for the excesses of public officials and institutions. C. CHALLENGES FOR THE FUTURE Institutional Capacity Building 6.25 As noted above, a lot of effort has been made in the area of building institutional capacity both at the central and local government levels. Throughout the 1990s, the Uganda government was seeking to advance and sustain the country's transformation 71 through at least three long-term strategic initiatives: decentralization, civil service reform, and a national capacity building plan. As part of the fiscal adjustment program, which continued through the early 1990s, the government succeeded in undertaking several measures to halt the decline in standards and efficiency of public administration and creating a well-motivated civil service for efficient and effective delivery of services. 6.26 Thus, the last decade offered a window of opportunity within which significant changes were made in the formal structure of the state institutions. A capacity-building secretariat in the MFPED was tasked with the policy and coordination role to guide capacity-building efforts in the country. Several capacity-building priorities, which emerged during the preparation of the plan, included legal and judicial systems, the accountancy profession, local training institutions, staff planning, economic policy analysis, and technical and vocational training. A number of these capacity-building priorities have been taken up in EFMP and LGDP programs. 6.27 In spite of these efforts, there is still an outstanding need to advance the reforms in the civil service beyond the immediate fiscal concerns associated with wage bill sustainability to longer-term issues of incentives and operational effectiveness. This challenge is more outstanding at the local government level where issues of remuneration, improvements in payroll administration, restructuring in line with functional decentralization, and strengthening of personnel and ethics management are still critical. Such a development is made even more critical by the realization that decentralization is a key driving force for state transformation. Thus, the efficacy of the reforms in the civil service will largely depend on the extent to which they responsively support the development of local governments, especially in the area of institutional capacity and streamlining of procedures governing the intergovernmental relationships. 6.28 Unless capacity of institutions at the district level is strengthened, it may be difficult to establish a planning and budgeting structure at the lower levels of government that conforms with that at the center. Yet the local government budget process is a vital component of fiscal decentralization. To strengthen the planning and budgeting of local governments, one might expect establishment of a mechanism that involves the Local Government Finance Commission , the Ministry of Local Government, Uganda Local Authorities Association, and line ministries. One of the tasks to be accomplished by such a mechanism could be the collective review of the district frameworks for the preparation and harmonization of LGBFPs and DDPs. This would not be a substitute for district- level processes, but might enhance incentives for districts to improve the quality of budget plans and implementation record, both by raising their profile and enhancing a competitive element. The mechanism might also offer an opportunity for exploring issues of coherence among national strategy, local budgets, and donor financing. Such a mechanism might take on increasing value as a coordination instrument if the current conditional financing, especially under PAF, is phased out. Increasing Local Government Autonomy 6.29 Increasing the level of autonomy for the districts and other levels of government over planning, budgeting, and spending has potential for ensuring that delivery of services is tailored toward the specific needs of each district. However, this poses the 72 challenge of proper assessment and management of the trade-offs between top-down and bottom-up planning systems. The current levels of institutional capacity at the districts and the fragile accounting systems can lead to deviation of development efforts from the national goal of poverty eradication. Without any conditionality, it is possible for a given local government to pursue its own agenda, which may not be largely consistent with the desired national goals. However, this is more a theoretical possibility and unwarranted fear of the central government. In fact, cross-country experience on decentralization does not provide many examples of such excesses by local government. Local Government Budget Execution 6.30 Another important challenge for the future with regard to the fiscal decentralization strategy is to establish government processes with potential areas of risk or challenges with regard to budget execution at local government levels, which need further attention in order for the strategy to be successfully implemented. For example, the removal of protection currently being enjoyed by the PAF areas is bound to subject such sectors to an uncertain future in terms of resource inflows. Moreover, the uncertainty imposed by budget cuts and wide deviations between annual budget releases and indicative figures in the MTEF can be constraining future planning and budgeting. In such cases expenditures have to be cut more or less in an ad hoc manner because of the lack of a clear mechanism. Local Government Revenue Collection 6.31 The observation that local governments do not have adequate incentives for greater action on revenue collection needs to be clearly factored into future policy frameworks. Local revenues are essential to the long-term sustainability of service delivery by the local governments. It may be necessary to link local government spending to the realized local revenues in order to offer incentives for more local revenue collection. Once again institutional capacity problems have to feature highly in this regard. Most local governments still have a weak tax administration capacity for tax assessment and enforcement. Reporting and Accountability 6.32 Budget monitoring, evaluation, and reporting are made even more important in a fiscally decentralized environment. The government has decentralized administrative and financial management in order to reduce poverty through enhanced service delivery. Local governments play a central role in providing basic infrastructure and social services, thereby promoting local economic development and poverty eradication. The government is continuing to develop legal, administrative, and fiscal frameworks for empowering local governments to enable them to engage community and private-sector participation in service delivery. Such a system is expected to yield an efficient and participatory resource allocation and utilization mechanism. In this context, a synchronized and mutually supportive budget cycle, with effective dialogue between central and local governments, will require quality fiscal data and relevant indicators of efficiency in resource utilization, outputs, and the likely outcomes and impacts. 73 D. CONCLUSION 6.33 The above discussion clearly highlights the fact that Uganda's budget system can utilize public resources more efficiently and effectively only when it is embedded in a robust intergovernmental fiscal and administrative system. Such a system should be consistent with the constitutional and legal reforms of the past decade, on which the decentralization structure is derived. Although Uganda has a well-defined intergovernmental system, the challenges have been in implementing reforms that support such a system. The government has been slow in implementing local governnent reforms, as reflected through its continued heavy reliance on sectoral conditional grants; its failure to develop strong administrative systems at the local government level, which can handle payroll management and other tasks; and its failure to define well-developed systems of standards setting and M&E. In addition, the challenges for the medium term will revolve around how to enable intergovernmental relations to influence the budget process and vice versa. It is important to explore how public-sector reforms-fiscal, budgetary, and administrative-will sequentially assist in developing an accountable local tier of government. Given the limited progress to date, these important issues should certainly occupy the budget reform agenda in the medium term. 74 7. SUMMARY AND CONCLUSIONS 7.1 The annual PER report provides an important opportunity to review the budget process as a whole and to identify both achievements and challenges. In the case of Uganda this process has the added advantage of addressing fiduciary concerns of budget support for donors. These fiduciary concerns have increased the interest and participation of all stakeholders in the PER process - specifically budget workshops, the annual PER workshop, the PER report, and related studies. The challenge now is to use this report as a basis for identifying improvements in the budget process, developing a sequenced strategy for implementation, and supporting the strategies through appropriate instruments (for example, PRSC, EFMP II, LGDP) and assistance from other development partners. A. MACROECONOMIC ASPECTS OF FISCAL CHALLENGES 7.2 Chapter 1 discussed the macro challenges Uganda faces and how these are linked to fiscal considerations. We noted that for the past three years Uganda has not been able to meet its growth targets of 7 percent per annum, which obviously raises concerns about Uganda's ability to reduce absolute poverty by 2017. We highlighted the need to ensure that all activities supported by the budget result in the desired outputs and outcomes such that the attained macroeconomic stability can be augmented with economic growth that is essential for poverty eradication. Otherwise, the focus on inputs, with little or no emphasis on impacts, has led to growth in public expenditures in quantitative terms, leaving several questions about the quality of outcomes. 7.3 Chapter 1 observed that the objective of macro stability has largely been achieved, with inflation at less than 5 percent for the past three years and low exchange- rate volatility. All sectors display satisfactory growth rates that are higher than the previous year. Because of the unprecedented terms of trade shock, however, total receipts from exports declined from 12.3 percent of GDP in 1999 to 10.7 percent in 2001/02. 7.4 Foreign-exchange revenues have remained fragile in light of continued deterioration in realizations from traditional exports. Foreign-exchange reserves dropped to an equivalent of four months of imports of goods and non-factor services, instead of the targeted five months. This situation must be addressed urgently. 7.5 These macro developments, combined with lower revenue collections, have resulted in fiscal constraints. Revenue collection as a percentage of GDP has, over the past few years, stagnated at a low level of less than 12 percent. Non-tax revenue, in particular, has remained below 1 percent of GDP. Combined with the increases in total government expenditure over the past five years, this revenue decline has resulted in a huge fiscal deficit, which has to be funded through external resources. Currently, around 58 percent of the budget, equivalent to 12 percent of GDP, is externally funded. 7.6 Although the additional donor support has enabled the government of Uganda to address priority PEAP targets without delay, it cannot be a viable strategy in the long term. Obviously, this reliance of the PEAP on external resources has raised concerns about the adverse effects of excess external resource inflows on macroeconomic stability. Although currently there are no signs of adverse effects, the level of fiscal deficit is not sustainable in the long run. Uganda has to take appropriate measures to increase its revenue collections and reduce its expenditure targets to be in line with its macro targets. As noted, the government has taken heed of these issues and has begun putting in place measures to address the macro concerns related to these challenges, especially through appropriate policy options aimed at increasing revenue collections and reducing the fiscal deficit. B. BUDGET PROCESS 7.7 Chapter. 2 noted the substantial progress Uganda has made in the past five years in terms of deepening the budget preparation process and extending it to many stakeholders. This has improved the budget choices and assisted in budget execution. In phase I of budget preparation, SWGs are increasingly playing a positive role in identifying priorities and preparing BFPs, which are more output oriented. In phase 2 of review of the budget choices, this year there was an increasing level of interest and participation by development partners, civil society, and parliamentarians. Parliamentarians have developed a keen interest in this review stage with the advent of the new Budget Act 2001. 7.8 The challenges include ensuring that all stakeholders have adequate capacity to contribute substantively to the budget process through these channels. Budget preparation needs to incorporate both contributions of resources and information or ideas of all stakeholders including donors, the private sector, civil society, and communities. Resources of donor-funded projects, which may be passed on directly to line ministries or districts, need to be incorporated in the budget process. 7.9 This chapter also noted that the transparency of the budget process has improved the quality of budget planning and choices and also has produced greater predictability of the budget. This achievement was partly made possible by most development partners switching to budget support, which has resulted in resource flows that are easier to predict compared with project aid. The increase in budget support to 7 percent of GDP means that the government is able to plan its medium-term expenditure with more reliable figures. 7.10 Although the current reforms in the URA are expected to boost domestic revenues, it will be difficult to increase revenues in the medium term, so the government has got to control expenditure pressures if it is to achieve its fiscal objectives. In line with this observation, we noted the government's commitment to reducing the fiscal deficit by ensuring that expenditures do not grow as fast as GDP over the medium term. The strategy involves ensuring that any expenditure increases are consistent with the priorities agreed upon by the government and development partners. These areas include wage increases and areas where public spending will harness private participation in production, processing, and marketing of strategic exports. In this way the government 76 intends to reduce its dependence on donor funds even if domestic revenue increases do not materialize. 7.11 Additional budget increases are expected in the health, education, and agricultural sectors. In the case of agriculture, the challenge is to move swiftly in implementing the programs to ensure that the priority areas rightly identified will benefit and contribute to the much needed poverty reduction in rural and agrarian Uganda. The share of defense is expected to increase by 0.8 percentage points next year because of the government's commitment to keep defense spending at 2 percent of GDP in addition to the Ush. 10 billion that was approved as one off expenditure for this and next year. 7.12 The allocation to the justice, law, and order sector is expected to increase by Ush. 14 billion while the ceiling on the public administration sector is not expected to grow between this and next year. In fact, over the medium term, this ceiling is expected to decline. The health sector has the largest percentage increase, and education has the largest absolute increase, indicating the priority the budget gives to implementing the PEAP. 7.13 Among the future challenges, we observe a weak integration of project aid and the wage bill in the MTEF, and a lack of a substantial improvement in participation by the civil society, mainly resulting from capacity constraints. The strengthening of M&E in the context of budget performance, especially in the areas of monitoring of both outputs and outcomes, can become an important learning tool through which to improve future budget cycle processes. C. BUDGET EFFICIENCY 7.14 Chapter 3 discussed budget efficiency issues. This year we treated budget efficiency as a separate issue given its increasing importance in a fiscally constrained environment. Over the medium term, the lack of extra resources to finance all identified activities will force sectors to prioritize their interventions. Moreover, they also need to ensure that resources are being allocated efficiently for various intrasectoral priorities and that they are effectively used to confirmn operational efficiency. In addition, in line with PEAP objectives, it is important that publicly funded programs are equitably distributed, giving greater attention to the poor. 7.15 We noted that all the sectors analyzed-health, education, and water and sanitation-have made great progress in allocative efficiency but are experiencing major challenges in achieving operational efficiency. Sectors that have had SWAPs for a long time, namely health and education, have made the most progress in these areas. In terms of equity, however, many challenges need to be considered in the medium term to enable limited budget resources to address priority needs of the poor. Of the three sectors discussed, we observed that the water sector has major challenges ahead in addressing efficiency and equity concerns. The ongoing value-for-money and tracking studies, in the context of the forthcoming Water Sector Review, will provide an excellent platform to address these challenges over the medium term. 77 7.16 The budget underperformance within the health sector was largely a result of delays in recruitment and payroll cleaning in addition to problems with procurement and delayed tendering and implementation of civil works in the districts. In spite of these problems, utilization of health services by the poor increased by 2 percent between 1992 and 2000 although both coverage and quality of health care services for the poor still need to improve if health outcomes are to improve. Progress needs to be made immediately to boost immunization coverage to arrest increases in infant mortality rates. 7.17 To meet the challenges in the health sector there is an urgent need for a strong partnership between the MOH and PNFP to reduce duplication and wastage of already scarce resources. This situation also calls for caution on the planned reforms for the PAF, because the health sector cannot afford shortfalls in its allocation. The flow of resources to the health sector needs to be timely to enable the use of limited resources to deliver much-needed services expeditiously. 7.18 In the case of education, while the primary education sub sector is quite robust, the post-primary training and higher education sectors have displayed major imbalances in terms of allocative and operational efficiency and equity. The increased pressure on limited resources-teachers, classrooms, desks and books-from higher levels of primary enrollment associated with UPE, need to be addressed if the anticipated improved education outcomes are to be realized. 7.19 We also highlighted some failures to take into consideration the budgetary implications of certain policy decisions in the education sector. The cases of abolishing cost sharing and increasing the number of government scholarships at the university are good examples. It is essential to consider the fiscal sustainability of political objectives of policy decisions. 7.20 We recognize a major concern in the water sector, namely that, despite recent reforms in the sector, which resulted in increased outlays, there has not been a commensurate increase in water points. This situation is partly explained by increases in community participation in water and sanitation services, which do not necessarily imply an increase in water points. Furthermore, additional resources were spent on human resource development and training. 7.21 Despite this trend in addressing human resource capacity problems, there is still need to recruit water officers at the district level to provide better management and monitoring services. Low value for money in the water sector is also attributed to interference in tendering procedures by district tender boards and misuse of office equipment by senior district officials. The national distribution of water resources is an area that needs urgent attention in terms of efficiency and equity. In particular, we observe that the water sector spends 50 percent of its budget at the center in spite of the fact that more than 90 percent of its beneficiaries live in rural areas. D. BUDGET EXECUTION AND PROGRAM IMPLEMENTATION 7.22 Chapter 4 discussed problems related to budget execution. The budget execution process in Uganda experiences substantial problems and difficulties compared with the 78 budget preparation process. Although the government has taken measures to address the problems of arrears through the implementation of CCSs, there is still only a limited coverage of CCS at the central government. This system needs to be extended to the rest of the central government and to the local government level, where the challenges are even greater. A considerable amount of work needs to be undertaken to make progress in this area. 7.23 Besides general budget execution problems we discussed two special topics in this year's PER report. First, we discussed the issue of budget overruns in sectors such as public administration over the past five years and how it is undermining budget credibility. We noted that the government has undertaken a study to identify problem areas and hopes to prepare a cabinet brief to discuss how to streamline public administration activities. Second, we discussed how the PAF protection over the past five years, intended to protect core PEAP expenditures, has sometimes been done at the expense of other important, interrelated areas, which therefore need some support in the future. Here again the government has initiated a study to identify the challenges and provide possible suggestions for reform. A cautious and phased removal of the current protection offered by the PAF is likely to be an optimal strategy. 7.24 As was noted in the PER meeting, the PAF reform discussions cannot go far until overrun problems are addressed adequately. Overruns undermine the objective of removing the PAF protection, and any reforms in such an environment will be detrimental to attaining PEAP targets. In particular, the trend of supplementaries by defense and public administration result in budget cuts for other sectors and can be very devastating to poverty eradication efforts. The chapter discussed the implications of these developments on the long-term credibility of the budget process and execution. In this regard, it is imperative to reduce or, better still, eliminate political interference in planning and budgeting execution issues. E. BUDGET MONITORING, EVALUATION, AND REPORTING 7.25 In Uganda, budget reporting, including M&E, needs extensive attention. We note that, in the past few years, the internal budget reports have been submitted on time. There is concern, however, that this timeliness has been achieved somewhat at the expense of quality of data received and the capacity to analyze and monitor such data. Thus, even though the threat of sanctions has enhanced timely reporting, it has undermined quality improvements in budget reporting, which need some immediate supplementary assistance. 7.26 Much as the PAF reporting has made progress in priority sectors, the capacity at the local government level is still very limited and needs urgent attention. This may be seen in the case of audited final accounts, which are submitted within the statutory limits for central governments, but the same is not true of local government accounts. This development has already been identified as a major need under the fiscal decentralization program and should be addressed as soon as possible. 7.27 Uganda has made great strides in using tracking studies to identify problems in flow of funds and has taken appropriate measures to address the challenges. However, 79 these studies have played an important role only in the health and education sectors to date, and these sectors have registered fewer problems as a result. Other sectors too need to do tracking studies in order to improve flow of funds and enable efficient use of limited resources. This trend is increasingly being recommended for adoption by other sectors and is being supported by development partners largely through technical and financial assistance. However, as noted in the budget efficiency chapter, there is a need to undertake benefit-incidence analysis to understand how the poor and needy are benefiting from these programs, which are primarily intended to serve them. F. INTERGOVERNMENTAL RELATIONS AND FISCAL DECENTRALIZATION 7.28 Chapter 6 discussed the growing challenges for budget preparation, execution, and monitoring at the local government level. In this regard Uganda has made progress at the central ministry level but still has great needs at the local government level. We observe that decentralization requires building credible institutions with adequate capacities at all levels and maintaining harmonious relationships between the different actors and stakeholders. One of the critical challenges facing the Uganda government is the need to develop a tier of government and institutions that are responsive, adaptive, effective, and accountable in developing and implementing strategies for poverty eradication. Only then will the local and national priorities, and resultant policies, converge toward the set goals such as efficient service delivery, sustainable growth, and poverty eradication. 7.29 With increased attention on decentralized service delivery, it is paramount that the government takes measures to address capacity constraints at the local level. Otherwise, there is a danger that some of the gains made at the center will not be able to realize their full potential. In this regard, the LGDP and other donor programs are seeking to address the need for capacity building at the local government level. Rapid progress is needed, however, in order to realize the potential benefits of decentralized delivery of public programs. 7.30 The large number of actors and procedures for information and resource flows have complicated planning, budgeting, monitoring, and reporting mechanisms, consequently increasing the burden on both central government line ministries and local government or district staff. This situation has worsened the capacity problems of implementing the poverty-eradication programs. 7.31 The persistent low revenue collections by local governments need to be adequately addressed; otherwise it will likely result in an unsustainable position for service delivery in the long term. The problems identified in this area include inadequate capacities and facilitation both for assessment and collection, lack of a legal framework for local revenue collections, and a generally low tax base. The report also highlighted the effects of political commitment and interference and limited community awareness. 7.32 Caution is urged regarding the challenges posed by increased risks and uncertainties for the future, particularly in the sectors that are currently being protected by the PAF. Specifically, the uncertainty imposed by budget cuts and the wide deviations between annual budget releases and indicative figures in the MTEF are seen as 80 constraining future planning and budgeting. Abrupt budget cuts by the central government are likely to result in ad hoc reductions at all levels of government due to the absence of a clear mechanism for managing budget cuts. G. CONCLUSION 7.33 This PER report has identified the major challenges in public expenditure management in Uganda in the advent of budget support. It is important for the government and its development partners to develop a systematic program and a sequenced approach to address identified concerns to allow Uganda to achieve macro stability, fiscal sustainability, and poverty reduction. 81 ANNEXES ANNEX 1: DEVELOPMENTS IN THE BUDGET PROCESS IN UGANDA 1997-2001 A1.1 Current developments in the budget process can best be understood by reviewing events over the past four years. In 1997/98, Uganda adopted a new approach toward PER. This decision, which was made by the government and its development partners, was to be an annual exercise bearing a close relationship to the government budget cycle and hence giving support to reforms in the budget process. The PER was divided into two phases. The first phase focused on the government's preparation of the budget framework and strategy. The second phase focused on external evaluation of the strategy, budgetary systems, and performance, in collaboration with domestic stakeholders. The main objectives of the PER process were: * Opening of the budget process within the executive, * Opening of the budget process to stakeholders beyond the executive, * Integrating donor financing within the budget, and * Technical support to the two phases of the process. Opening the Process Within the Executive A1.2 In the period before 1997/98 a three-year budget framework was used as the primary instrument for defining budget strategy, including establishment of annual budget allocations to ministries. Consultation within this process was limited to central government technocrats within ministries. The detailed process of resource allocation therefore allowed little involvement of either the executive or representatives of various stakeholder groups. Thus, the objective of the 1997/98 budget-cycle was to develop a more open process of budget formulation and review, to build on the budget framework institutions that were already in place. There were two major dimensions to this objective. First, there was a component of enhancing the process of internal consultation, especially in the stages prior to submission of the BFP to the Cabinet. This effort included giving a greater role to line ministries in preparation of the paper, which had hitherto been prepared largely by the MFPED after bilateral discussions with line ministries. Under the new system, initial sector contributions to the BFP were to be prepared by SWGs, comprising staff from line ministries with cross-cutting responsibilities, representation from MFPED, and from other stakeholders such as members of Parliament and local governments. The introduction of cross-sector workshops at key stages in the cycle introduced a multilateral approach to budget consultation, which had previously been exclusively bilateral. A1.3 Openness in the budget process was in part a response to well-recognized weaknesses in the existing budget performance. A more open and contestable process of budget preparation within the executive was seen as a step toward establishing a broader and more stable consensus on budget strategy. This was expected to result in more binding decisions and greater predictability in sector financing. In addition, the broader base for budget formulation and publication, and review of the framework in the second phase of the process, could be expected to raise the political costs of budget deviation, and hence improve the context for establishing greater accountability of the executive. Opening Up Beyond the Executive A1.4 The objective of opening up the budget process to external review was aimed at involving both donors and local stakeholders. The involvement of donors was partly aimed at integrating the donor finances in the budget strategy under the arrangement of budget support. As noted, the reforms of 1997/98 required an external review of the budget framework/MTEF, after Cabinet resolution, and prior to presentation of the detailed annual budget. In making a public commitment on medium-term expenditure plans, the government invited a similar degree of forward commitment by donors. In a situation where half, or more, of the public expenditure is financed externally, it was necessary to open up the budget process to allow the donors to participate fully in making binding decisions on budgetary allocations. Consultations with donors, within the annual budget cycle, provided a base for donors to switch toward budget support, while also providing a reference point for assessing the coherence of project financing with overall budget strategy. Technical Support to the Budget Process Al.5 The PER had an explicit objective of providing technical support during the first phase of formulating the budget framework and strategy, including specialist support for the SWGs. The involvement of donors in the second phase also had an implicit objective of providing a catalyst for development of domestic capacity for budget analysis and feedback outside the executive. Review of Progress for 1997-2001 A1.6 This section looks at the progress made in implementing the aforementioned PER reforms over the past four years. While significant progress has been achieved in opening up the process to the executive and beyond, the strategy for pursuing the objective of providing technical support had to be reformulated. A1.7 With regard to opening up the budget process within the executive, the process of internal consultation on the framework has been fully institutionalized and is largely fairly robust. Budget workshops have helped to encourage a more open dialogue on budget strategy and performance. In addition, the workshops have developed a greater understanding of the budget process by the line ministries. The SWGs have had to take on an increasing role and formal responsibilities in the development of the sector expenditure plans. A1.8 The opening up of the budget process beyond the executive can be looked at from two perspectives. First, there is participation by the donors, which, as noted above, was intended to ease the transition to budget support and provide technical support. Second, there was a component of participation by the local stakeholders including the legislature, civil society, and research and academic institutions. Civil society, including the Private Sector Foundation (PSF), Uganda Manufacturers Association, and a host of other NGOs, can participate at the stage of preparing the budget framework by getting involved with SWGs and also during the annual PER consultations. In particular, among the NGOs, the Uganda Debt Network has had an active role in both SWGs and PER 86 consultations. Such participation has offered a potential for educating and or representing other interest groups, thereby reducing the transaction costs of broader participation. Research institutions such as the Economic Policy Research Center have diversified their clientele recently with the Parliamentary Budget Office interest in utilizing such research outfits in commissioning budget analysis, and holding seminars with selected budget committees. Al.9 The legislature has made provision for strong participation by passing the Budget Act 2001, which allows Parliament to make. an early input in the budget framework and annual budget proposals. Following this legal requirement, MFPED had to revise the budget timetable in order to accommodate the consultation requirements of the Budget Act 2001. The Act made provision for establishment of a Parliamentary Budget Office, which is playing an important role in enhancing understanding of the budget process, and related constraints and choices. The budget office is supposed to help the legislature to develop its own oversight in budgetary issues. Such new mandates have stimulated increased demand for reporting on budget performance, and better coverage of outputs and outcomes as a way of ensuring adequate value for money and the use of powers of parliamentary committees to hold ministries accountable. A1.10 The basis has been laid for the legislature to make the budget system function more effectively by taking a long-term view of the budget as well. Parliament can also focus on the oversight role, including allocations over a long-term horizon expressed in the MTEF and the LTEF. The scope for influence over outcomes, which are medium- to long-term phenomena, is arguably greater for any given sector at the intensive rather than the extensive margin. The intensive margin involves pressing for better performance reporting and a more effective use of a given resource envelope. The extensive margin, on the other hand, involves soliciting for additional resources within what may already be a tightly constrained budget aggregate. A1. 1 On the aspects of integrating donor financing, the MTEF has been used by the government as a core reference point for coordination of donor financing. The combination of the PER consultations and the CG meeting has helped to rationalize the process as well as make a clearer connection between donor financing and the budget framework. The movement toward greater use of budget support, use of budget framework as a coordinating instrument, and related budget reforms is expected to expose any ambiguities in the underlying model for decision making in the budgetary process. The implicit transparency in the process, when fully developed, should be able to guide the process toward a desired convergence point. A1.12 The objective of technical support to the budget strategy formnulation and external review was largely not retained. Although a large, multisectoral PER mission was necessary to start the process, especially through offering initial technical assistance to the SWGs, it was later observed that this would not be an ideal vehicle for offering such support. It was preferred that such support be provided through periodic support by specialists working in the sectors, over a longer horizon. The institutionalization of the role of SWGs should allow various donors and or other institutional arrangements to provide the necessary technical support outside the PER umbrella. 87 Challenges and Recommendations Arising from the Period 1997-2001 A1.13 It is evident from the past four years that there are several significant challenges to the PER process. These include the challenges of capacity, in terms of staff numbers and skills within the SWGs, and time constraints given the fact that the budget process is sequential in nature. A delay at one stage is likely to impact negatively on the progress and degree of input by other participants. The submission of the BFP to the Cabinet has quite often fallen behind schedule just like the initial workshop with representatives from the districts. Timing of the BFP has always been at risk of slippage, and later submission should be expected in view of the greatly expanded scope of the exercise. One of the key implications of such a late submission is that it makes it difficult to carry out significant changes at this stage, at least for the immediate annual budget. There is, therefore, a tendency for the submission to seek an implied endorsement of the document with scope for marginal adjustments, rather than a presentation of strategic choices. In this way, the BFP becomes less of a decision making instrument, and more a presentational or procedural device. Such a development could also contribute to concerns on the legitimacy of sector ceilings, since the MFPED would have to carry the responsibility of revising ceilings without the authority deriving from a full review of the framework by both the Cabinet and other stakeholders. Al.14 At the beginning of 2001, some SWGs still had a loose match between the scope of the group and the underlying line ministry responsibilities. This challenge was most evident in sectors where the group had to develop sector expenditure plans across disparate fields. However, it is worth noting that in some cases, the SWGs had evolved more pragmatically and developed a reasonable effective match between scope of the group and line ministry responsibilities. In addition, there were situations whereby SWGs had been redefined in order to get a better match. These developments were expected to ensure a proper approach to handling of cross-cutting issues within both the planning and budgeting processes. Al. 15 It should, however, be noted that SWGs had not yet made satisfactory progress in increasing the output orientation and reporting on output performance in sector framework submissions. The annual PER consultations on the framework could be developed to bring a bit of competitive pressure to bear on SWGs and ministries in this area. Al.16 Some participants clearly harbored expectations of joint engagement in budget decisions through their participation. However, external participants in sector groups have been relatively few and apparently fairly modest in any lobbying role. Over the coming budget cycles, it might be necessary to formalize the terms of external participation, clarifying the consultative role, and including commitments on information sharing. Nevertheless, over the past four years, a good start has been made in encouraging external participation. Al. 17 The process of identifying strategic policy choices within the budget may not be as easy in the current budgeting framework as was the case before the reforms. More areas of expenditure are now locked in to explicit sector commitments, often tied to donor financing, within the PAF. Thus, the identification of structured choices at the level of broad strategy impose more demands on the MFPED in terms of coordination 88 and analytic capacity. It is no longer a case of developing sector programs within fixed ceilings and then listing expenditure options included within each sector. As an increasing proportion of expenditure is driven by medium-term sector strategies, the choice zone may have to shift to years in the medium term or even beyond the three-year frame. A1.18 A number of national policies, with significant budget implications, quite often continue to be made outside the budget process. The budget process has no privileged role in determining policy. It would be possible to imagine circumstances in which policy is determined and its fiscal implications analyzed through other processes with sufficient discipline that very few additional decisions are required in the budget process. Otherwise, the budget process remains with the task of reconciling policy with available resources. Preferably, such reconciliation should be achieved in budget formulation else it has to be achieved through budget cuts and reallocations during budget execution. Al.19 With regard to civil society participation, there were expressions of skepticism about the real impact of inputs on budget decisions or performance. There are still strong views that MFPED has a dominating influence on the process and that the staff were too thinly spread to engage in real debate on options. The CSOs believed that there was lack of transparency on derivation of sector ceilings, and that key decisions were made, in separate agreements with donors, before consultation. The PSF, in particular, believes that the government is less responsive to formal PSF participation in the open consultation process than traditional direct lobbying outside the process by the Uganda Manufacturers Association. PSF believes that important budgetary implications of the competitive strategy have not been fully factored into the budget. The government needs to give more feedback on the outcome of consultation. Al.20 Expectations still differ widely on the appropriate role of the legislature. Given some evident uncertainty on the practical implications of the Budget Act, it may be particularly important to establish a de facto interpretation of the new legislation. The new requirements of the legislature in the budget process have imposed an additional burden on existing capacity in line ministries and especially on the MFPED. Priority should be given to minimizing overlap with other consultation demands. From this perspective, it will be important to explore how the PER consultations can be useful to the legislature. Over the medium term, it will be important to develop such consultations as a public annual event designed primarily to meet the interests of civil society and the legislature, and only secondarily the concerns of donors. Al.21 Some concerns were expressed about the role of donors in the budget process. First, the sector programs are still developed to an advanced stage outside the budget process with inadequate reference to budget constraints. This generates pressure to accommodate prior agreements with donors in subsequent development of the framework. Second, budget support is often provided apparently as general support but with an array of measures designed to influence allocations and demonstrate additionality of the budget. For example, funding in the justice sector was operating through a holding account whereby funds have to be returned to the donors if not utilized. The concept of "notional earmarking" is frequently employed, which seems to express strong informal 89 pressure from donors for particular allocations, without any transparent and predictable implications that can be assessed by legitimate budget decision makers. A1.22 Donor financing of projects and sector programs is sometimes decided jointly, between donors and sectors, through joint sector reviews or other processes outside the budget process, and then entered into the medium-term framework as prior obligations. The Cabinet may formally endorse the framework, but the net effect of this approach may be that its influence on the decision is no greater and conceivably may be less than if donors participated directly in Cabinet decisions. This approach tends to make the overall transparency of the decision making process inferior. What seems to be increasingly evident in the development of the budgetary system is the risk that lack of transparency in the role of donors in budgetary decision making may also undermine the transparency of other aspects of the system, particularly the external participation, which is critical for long-term sustainability of budgetary reform. A1.23 The PAF continues to operate as a shadow earmarking arrangement. Concern was expressed that the PAF provides blanket protection and assured increases for expenditure with a nominal association with poverty reduction, regardless of inadequacies in execution and performance. A1.24 Issues of technical support to the various participants and at different levels of the budget process, which were not retained as earlier envisaged in the initial reform strategy in 1997/98, may need to be reconsidered. In view of MFPED concerns on capacity, it might be helpful to think about technical support to MFPED in enhancing the analysis of strategic choices in the framework exercise. Development of capacity should also be considered among the various participants within the legislature, civil society, and private sector. For example the Parliamentary Budget Office has expressed a need for additional capacity training for the staff. A1.25 Finally, long-term domestic responsibility for the consultation process should be developed gradually. Whereas joint leadership by government and donors may be inevitable in the near term, the role of donors should eventually be taken over by domestic stakeholders. These could formally be led by the legislature or a coalition of several key stakeholders. 90 ANNEx 2: MEDIUM-TERM EXPENDITURE FRAMEWORK FIRST HALF PERFORMANCE FY2001/02 (Excluding Arrears and Taxes) 2001/02 Approved Budget 2001M lst Half Rdeases ~~~~~~~~~2001/02 lst Half Performance 2001102 Approved Budget 2001/021st Half Ealeanes I~~~~~~~Retive toPortaBdt SECTOR/VOTE Total ecld Total Cad Total cad Total in Ush. blIloos Noo.wage Domsestic Donor Non-wage Domestic Donor Non-wage Domestic Donor wage -Recurrent 10e Project Wage Recurrent Dev Project Wage Recurrent 0ev Project SECURITY 001 ISO/ESO 9.84 8.06 0.53 18.43 4.84 3.44 0.20 8.47 98.4* 85.2% 74.1% 91.9% 021 DecsedDs118.25 82.12 7.50 207.87 59.13 53.12 3.16 115.41 100.0* 129.4% 84.1% 111.0* 321 Dees pesos(stattory) 2.94 2.94 0.916 0.96 65.3% 65.3% SUBTOTAL SECURITY 128.09 93.12 81.03 229.24 63.97 57.52 3.35 124.84 99.9% 123.5% 83.5% 108.% ROADS AND WORKS 016 Works, hsousing and conmmunications 2.21 22.03 121.09 145.33 0.88 10.16 45.36 56.40 79.8% 92.2% 74.9* 77.6* 050 District roM ad snanutesce 20.91 20.91 3.24 13.24 126.6* 126.6% 050 Urban road mosaoenne4.141 4.00 2.08 2.08 104.0* 104.0* SUBTOTAL ROADS -2.21 46.93 121.09 170.24 0.82.84.6 71.72 79.8% 1081.6* 74.9% 84.%_ AGRICULTURE 010 Agriculturv, -an 1a Industry and fisheries 1.43 2.83 28.76 33.02 0.75 1.02 10.75 12.52 104.5% 72.1% 74.8* 75.8% 043 NationalfResearch Orpgdanton (NARO) - 2.82 5.18 8.00 . 1.14 2.02 3.16 81.3* 77.9* 79.1* 050 distirict Agricuttural extension 2.47 3.00 . 5.47 1.04 1.42 - 2.45 84.0* 94.6% 89.8% 050 National agrmlcslt aadvisory services 7 257 2.57 - . 0.45 0.45 35.1% 35.1% SUBTOTAL AGRICULTURtE 3.90 81.65 36.51 49.08 1.78 3.58 13.22 1839 91.S% 829% 72.4% 75.8% EDUCAITON 036 Upanda Managment Insdtilte .0.44 . 0.44 . 0.22 . 0.22 99.1* 99.1* 013 Educaton and Sports (Indprimneduc) 7.19 41.25 50.47 98.91 3.31 16.63 18.18 38.12 92.2* 80.6* 72.0* 77.1% 024 MakereroUniversity - 29.08 0.27 29.35 . 14.84 0.08 14.92 102.1* 58.3% 101.7% 042 MbaramaUniversity 2.83 1.79 0.43 5.04 1.30 0.87 0.13 2.30 92.2* 97.0* 58.3* 91.0% 044 Institute of Teacbser Eduoabn (ITK) 2.43 0.74 0.16 1.22 0.37 0.13 100.0* 100.1* 159.8% 102.9% 040 Education Service Conunlsston 0.324 0.61 0.15 0.125 0.05 77.4* 100.1* 61.7* 88.0* 050 Disttct prhmary eoc hnd SFG 46.74 55.90 80.88 19.11 31.38 104.0* 81.8% 112.3% 101.8* 850 District eamidary eduction 42.81 7.38 .23.37 3.69 . 109.2% 100.0* 107.8* 050 District tertil aryIsitutions 9.81 - -3.81 . 77.7* 77.7% 050 DistrIc health uiraning schools - 1.93 - 0.97 99.8* 99.8% SUBTOTAL EDUCATION 22095 129.95 107.38 458.27 114.02 56.99 49.93 220.94 -103.2* 87.7* 93.0% 96.4% HEALTH 014 Health 3.50 29.92 10.10 43.52 1.32 14.51 4.25 20.01 75.3* 97.0* 84.1% 92.2* 019 Bulabika Hospital 1.00 1.52 1.12 3.65 0.35 0.76 0.10 1.21 69.3* 99.8% 18.0* 66.3* 02.3 Mulago Hospital Complex 7.76 9.72 2.09 19.57 3.43 3.83 0.47 7.73 88.5% 78.8% 44.6* 79.0* 032 HealthiServlcComnsio 0.50.72 0.04 1.11 0.09 0.35 0.01 0.45 49.7* 98.8% 46.7% 81.3% 301 Uganda AIDS Conunlstin 0.520 0.63 1.076 2.229 0.260 0.31 0.540 1.115 100.0* 99.5* 100.4* 100.1* 050 . Dlstrct NGO Hesptalsfprhoary healthcare .11.59 - 11.59 .5.26 . 5.26 90.7% 90.7% 050 District primary Healtticare 35.04 14.87 10.98 60.89 17.20 7.18 5.33 29.71 98.29. 96.5* 97.0* 917.6* 050 District hospitals .8.87 - 8.87 - 4.43 - 4.43 100.0* 100.0* 050 District referral hospItal (had otise ddeprted) 13.20 5.42 . 18.62 4.8 2.1754 73.2* 100.0* 8 1.0* SUBTOTAL HEALTH 61.38 83.27 25.41 170.06 27.49 39.34 10.69 77.52 89.6* 94.5% 84.2% 91.2% WATER 012 Water 0.44 0.44 27.78 28.68 0.22 0.17 11.54 11.94 101.8% 75.5* 83.1* 83.2% 050 District ..tr rco oulid grants . 1.31 24.05 25.35 - 0.63 12.76 13.39 96.4* 106.1* 105.6% SUBTOTAL WATER 0.44 1.76 51im 54.03 0.22 0.80 24.30 25.32 101.8% 91.0% 93.8% 93.7 % JUSTICE, LAW, AND ORtDER 038 Uganda police (imd LDUa) 38.22 22.69 2.95 63.86 17.91 9.03 1.00 27.93 93.7% 79.6* 67.6* 87.5% 039 Uganda prison 6.62 9.69 1.30 17.60 3.33 3.46 0.25 7.03 100.5% 71.3* 38.5% 79.9% 022 Internal affalro 1.04 5.17 1.19 7.40 0.32 3.37 0.14 4.03 100.2* 130.3* 24.3% 109.D* 045 DPP7 2.12 0.98 0.26 3.37 0.75 0.49 0.08 1.31 70.3* 99.6* 58.3% 77.9% 307 Justice court awards (stattory) . 2.00 - 2.00 . - . . 0.0% 0.0% 007 justice, attorney Geneal cxd conqmpeoaon 1.21 4.59 8.79 14.59 0.46 2.25 3.15 5.86 76.9% 97.9* 71.6* 80.3% 2001/02 Approved Budgm 2001/02 Ixt Half Rebases 2001/02 Ist Hair Performanu SECTORNOTE Total exci Total e.d Relative to Pro-rats Budget ToW ed Total in UstL billions Non-wage Doomstic Donor Non-wage Domatic Donor Non-wklgt Domestic Donor Wage Recumot D" pml-t w.g. Recurrent DCV Fpjcct t Dev Project 007 J-Iice, attorney General - wmptantion - 2.00 - 2,00 0.88 - 0.88 WU% 88.0% 311 Judiciary (natutory) 7.19 6.91 2.01 16.09 3.52 3.45 0.69 7.66 98.1% 100,01/6 68.71/6 95.21% 048 Judicial Senim ComraisAon 0.44 0.27 O.D4 0.75 0.04 0.13 0.02 0.19 19.6% 96.49/6 77.21% 50.6% 337 Law Rcforw Commission 0.34 0.46 0.08 0.88 0.17 0.21 0.03 0.41 100.0% 9061% 72.1% 92.61/. SUBTOTAL JUSTICEJAW, AND ORDER 57.17 5C76 16.62 123.55 26.70 23.26 5.35 55.31 93.4% 85.0% 64.4% 86.1% ACCOUNTABILITY oot Ethia and integrity 0.04 0.39 O.D4 0.47 0.02 0.14 001 0.18 114.61/6 73.0% 58.3% 75.29/6 008 bfFPED accountabiUty 0.44 1.51 1.95 O20 0,66 - 0.86 92.21/6 87.5% 88.6% 017 A"t 1.31 3.30 0.14 4,75 0.44 1.49 0.07 2,00 67.3% 90.0% 1 DO. 01/. 84.01/6 331 tnspcctor Gencral of Government (statutory) 1.08 4.11 0.13 5.33 0-56 L97 0 09 102.8% 9 5.7% 132.1% 94.1% 050 2.61 Diftflet ltmnt for monitoring and acco-otability 10.27 - 10.27 4.49 4,49 97.4% 87,4% SUBTOTAL ACCOUNTABELM 2.87 --- 1.22 9.74 0.17 10.13 85.1% 89.3% 108.1% $9.0% ECONOMIC FUNCTIONS AND SOCLAL SERVICES 029 Energy and adnersh inaturti resource!] exd W&S 0.62 2.13 5.79 8.54 0.30 0.82 1.69 2.8i 96.8% 77.2% 59.3% 65.81/6 023 Touristn, trade and industry 0.43 2.44 5.30 8.17 0.21 1.16 2.29 3,66 97.3% 95.3% 86.5% 99.7% 012 lAnds and wvimnmmt 1,53 4.43 9.56 15 53 0.77 1.44 2.96 5 18 101.01% 65.1% 61.91% 66.71/. 030 Gender, labor and sodal development 0.95 4.07 6.36 11.39 0.48 1.70 2.79 4.98 102.21/. 93.5% 87.8% 87.4% 104 Office of the Prime fffinhur (development) 10.68 10.68 - 4.65 4.65 97.1% 87.1% 108 Plansme, e4aning & econ dev (developcoent) 31.56 31.56 9.06 9.06 57.4% 57,4% 125 LxxJ govemumat dev (exd roads) 0.73 0.73 - 0,14 0.14 3T41A 37.4% 050 District equafindon grant 4.40 4.40 0.64 - 0.64 28.9% 28.91% 050 Local government devdopment pmgmm (LGDP) 31.92 31.92 IS 37 1837 115.1% 1 1 S. 1% 050 Nonsmomi concudonni grant 1.01 5.06 6.07 - - 0. W. 0.01/6 0.0% 050 Dutch district devdopment gmnt - - 10.89 10.89 3.34 3.34 61.41/6 61.41/. SUBTOTAL ECONOPMC FUNCnONS AND 4.54 22.54 112.79 139.86 1.77 5.76 45.30 S2,93 77.3% 51.2% 803% 75.5% SOCIAL SERVICFS PUBUC ADMUqISTRAInON 004 Office of the Prime Nfiuistcr (eld dev) 0.620 2.63 3.25 0.214 1.06 - 1.27 69.01% 80.8% 78.5% 006 Foreign affairs 1.00 7.08 0.58 8.66 0.34 3.17 0.01 3.52 67.4% 89,5% 4.8% 91.3% OAO Missiout abroad 10.59 10,59 513 5 13 96 9% 96.91% 003 NWED (czd URA, continpacy. acc. & dft) 1.16 10.10 - 11.26 0.53 5 57 6.10 92.0% 1103% 103.4% 008 URA 4015 4.20 4495 20.38 20.38 1 DO, 0% 0.01/6 90.71/6 002 State House 1.11 20.47 17.40 38.99 0,57 13.93 7.50 22.00 103.81% 136,1% 96.21/. 112,9% 005 Public semice 0.99 159 170 5.27 0.43 1.01 0.97 2.30 86.01/6 783% 101.81/6 $7.3% 027 Public Service Commission 0.55 1.01 O54 2.10 0.25 0.51 0.18 0.93 90.1% 1003% 66.3% 88.9% 025 Local Swernment (exci dev) 0.45 2 09 2.53 0.21 1.07 1.28 91,21/6 102.9% 1 00. S% 034 Man mobilixadon 2.11 3.37 0.93 6.41 0.76 1.31 0.26 2.33 72.2% 78,01% 55.3% 72,9% 001 Office of the PreAdmi (eid ISOIEW, E&I) 3.58 6 57 3rl8 13.33 1.99 2.32 0.90 5.21 1 1 L3% 70,5% 56.6% 78.21% 300 Spccilled offi"n - ularies (statutory) 0.29 - 0.29 0.13 - - 0 13 90.01% 90.0% 305 Pubbc seMce pension/comp (statutory) 44.19 44.19 22.10 22,10 100,0% 100.0% 315 Padiamentary Commission (statutory) 5.10 15.53 2.63 23.26 2.55 12.69 1.37 16.60 1 000% 163,4% 104.0% 142.9% 033 LoW Govi Finmee Comm 0.13 010 001 1.14 0.17 0.39 0,00 0.55 101.1% 90% 58.3% 97,6% 347 Upuda Human Righb Comm (statutory) 1.13 L35 O04 2.52 0.46 0.67 0.00 1 14 91.1% I 00, 0% 11.71% 90A% 349 Electoral Commildon (Statutory) 3.04 29.00 I 910 32.851 1.52 24.00 0.556 26.076 100.0% 171.4% 61.4% 158.91% 050 Unwndidonal gmat (urban authorities) 4.66 - 4.66 - 2.33 - 2.33 1 DO. 05/6 100.01/6 050 Uncondificami gnut distdct) 37.88 3119 69.06 18.94 15.53 34.47 100.01% 99,6% 99.81% SUErTOTAL PUBLIC ADMINLTF'RATION 59.33 232.96 33.02 325.31 29.06 133.15 11.64 173.85 97.9% 114.3% 70.5% 106.9% UMREST PAYNFFA"S DUE Domestic lntemt 92,90 92 90 48.21 48.21 103.8% 103,8% Externali.terest 62.20 26.86 26.86 96,4% 86.4% 6120 SUBTOTAL 155.10 155.10 75.07 75.07 %.S% 9 G. a Total line ministries 229.2 414.7 371.5 1,015.4 107.9 204.6 134.4 "6.9 94.1% 98.7% 72.4% 88.0% Total district pmgmm 297.9 191.6 136.3 615.6 150.1 $3.7 71.6 305.4 100.8% 9L2% 105.1% ".2% LIKE MM + DISTRICT PROG 527.0 5%.3 507.3 1,631.0 257.9 288.3 206.0 752.3 97.9% %.7% 81.2% 92.2% Statutory inwmt - 155.1 155.1 - 75.1 - 75.1 96.8% 96.8% Stgtotory exel interest 13.7 106.1 7.8 132.6 9.2 "A 3.3 79.8 9&1% 125.1% $4.1% 118.9% GRAND T'OTAL 54&7 957.5 515.5 1,919.7 267.1 429.7 209.3 906.1 97.9% 100.2% 91,2% 94.5% ANNEx 3: MEDIUm-TERm EXPENDiTuRE FRAMEWORK 2001/02-2004/05 2000/01 Appro,,ed Budget Esdmates Outtum 2000/01 2001/02 Approved Budget Estimates 2001/02 Pmvisional Outtum Totid Total Total Total Total inci. Total excl. excl. inel. excl. excl. SECTORfVOTE Non- Domestic Donor Donor Donor Non. Domestic Donor Non- Domestic Dortor Donor Dowr Non- Domestic Dowr Wage Wage Wage Wage p,oect Praied Pi R-,,-, r1_ Priect W-, Recu 11- pmaea Pmoect p W-, Remnew n- P-i- SECLTRITY 00i ISO/ESO 8.74 634 0.50 15.59 15.58 9.74 03 0.35 17.12 9.84 9.06 0,53 18A3 18.43 9.27 7.56 0.36 17.20 021 Defence exrA LDUs 113 .60 67.17 11, I 91.3819 1.38 113 .5 J.73 5.2 188. 54 118.25 822.192 7.50 207.9974 2027.987 108.4! 85.84 4.1! 198.40 3'.I Defence Pensions (Staurt-) 2 So 190 180 2 79 ! 2 79 4 2 4 2 31 2 31 SUB-TOTAL SECURnY 122.34 76.31 11.10 209.75 209.75 122.31 80.55 5.59 208.45 128.09 93.12 8.03 229.24 229.24 117.68 95.71 4.56 217.95 ROADS AND WORKS 016 WorkiL HmWne and CommurLicafions 1.87 18.49 99.68 176.94 120.04 29698 1.56 17.05 91.86 110.47 2.21 22.03 121.09 71.00 145.33 216.33 1.65 19.11 95.56 116.32 050 Distfict Road 18.00 18.00 Moo - 17 33 17 33 - 20 91 - 20-91 20.91 la.% - 19.96 .1. Ub,, R,ad M,m,temm 4 00 4 00 - 3 go . 3 90 SUB-TOTAL ROADS 1.87 36.49 99.69 176.94 138.04 31498 1.56 3 4._3 8 9116 127.90 2.21 46.93 121.09 71.00 170.24 241.24 1.65 41.88 95.56 139.09 AGRICULTURE 010 AgFicultum Animal lndustrv and Fisheries 1.25 2.05 8.00 54.72 11.30 66.02 1.27 1.65 11.60 14.52 1.43 2.83 28.76 56.40 33.02 99.42 136 1.48 22.95 25.79 043 National Resenth Omanisshon (NAP-0) - 2.62 3.79 23.58 6.42 30.00 2.09 2.76 4.85 2.82 5. 18 22.78 8.00 30.78 - 1.60 3.68 5.28 050 Distiict Amiadhuai Eirtension 3.31 1.10 - - 4.41 4.41 1.18 1.10 - 2.29 2,47 3.00 - 5.47 5.47 1.95 2.90 - 4.85 050 National ATicIWMI Advisory Sayi- - 2 00 - - 2.00 2 00 0 is - - 0 is -- - . -2.57 . 2 57 2 57 - - 2-42 2-42 SUB-TOTAL AGRICULTURE 4.56 7.79 11.80 78.30 24.13 102.44 2.44 4.99 14.37 21.79 3.90 9.65 36.51 79-18 49.05 128.24 3.31 5.98 29.05 38.34 EDUCATION 036 Ummd, Maniaement Immure - 0.40 - - 0.40 0.40 - 0.40 0.40 - 0.44 - 0.44 0.44 - 0.40 - 0.40 0'3 Education and Soons fincl Pfim Edue) 5.91 42.75 43.08 35.66 91.74 127.40 5.89 36.06 38.78 80.74 7.19 41.25 50.47 45.96 98.91 144.87 5.28 32.62 38.27 76.18 024 Makerere Universkv - 22.06 0.25 6.46 22.31 28.77 22.06 0.19 2124 - 26.65 0.27 5.52 26.92 32.44 - 24.50 0.17 26.90 042 N(bararn UnivemW 2.41 1.6.5 0.41 4.47 4.47 2.41 1.65 0.29 4.35 2.83 1.79 0,43 5.04 5.04 2.45 1.59 0.27 4-31 G44 hLsfitute ofTeachff Educauon (TIEK) 2.15 0.66 0.17 2.98 2.98 2.15 0.66 0.17 2.98 2.43 0.74 0.16 3.33 3.33 2.29 0.62 0.14 3.06 040 Educadon Savice Commission 0.2,5 0.48 0.04 0.77 0.77 0.24 0.48 0.04 0.76 0.324 0.61 0.15 1.09 1.09 0.24 0,74 0-10 1.09 046 Makeme Universitv Budnm Sdtool - - 143 - 2.43 2.43 - 2.23 - 050 District Primarv Educ ind SFG 144.00 40.57 45.91 230.48 230.48 126.83 38.56 47.11 212.50 155.56 46.74 55.90 258.19 258.19 154.02 41A7 52.64 247.82 050 DLstiict Secandwy Educadon 36.22 4.75 - 40.97 40.97 36.31 4.75 - 41'06 42.81 7.38 - 50.19 50.19 44.08 7.38 - 51.46 District Tafim Institutions 7.92 - 7.92 7.92 6.65 6.65 9,81 - 9.81 9.81 7.09 TD9 00,10, District Healjb Trainin, Schml, - 1 76 - 1,76 1.76 - 1 32 1 32 1 93 - 1 93 1 Ql - 1,9i 1 93 SUB-TOTAL EDUCATION 199.97 115.07 89.86 42.12 40339 445.92 190.48 105.94 96.56 372.99 220.95 129.95 107.38 51.48 459,27 509.76 215.44 113.19 91.60 420-24 HEALTli 014 Health 2.98 22.29 9.57 123.85 34.84 158.69 3.06 20.95 9.97 32.98 3.50 29.92 10.10 112.78 43.52 156.31 2.96 24.72 8.30 35.99 019 ButabBca HOSDIW 0.59 1.14 O06 - 1-78 1.78 0.53 1.18 O04 1.76 1.00 1.52 1.12 15.55 3.65 19.19 0.62 1.34 0.62 2.59 023 Mulno Hosvital Coamlex 5.63 5.62 2.16 11.21 13.41 24.62 5.94 5.93 2.35 14.22 7.76 9.72 2.09 4.08 19.57 23.66 6.49 8.29 1.35 16-13 032 Health Service Conunission 0.26 0.54 0.04 0.94 0.84 0.19 0.54 0.04 0.76 0.35 0.72 0.04 1.11 1.11 0.16 0.89 0.03 1.08 395 URanda Aids Commisgon 0.50 0.42 0.08 0.992 0.99 0.50 0.55 0.09 1.13 0,520 0.63 1.08 2.23 2.23 0.48 0.69 0.72 1.88 050 Distnct NGO HosmWs/NnuLrv Health Care - 6.72 - 6.72 6.72 1.82 6.54 - 8.37 - 11.59 - 11.59 11.59 - 11.59 11.58 050 Dtstnct Pnmmv Health Care 9.62 8.82 9.96 28.39 28.39 5.16 8.80 10.01 23.97 35.04 14,87 10.98 60.89 60.99 32.92 1416 10.16 57.94 050 District Howiub - 6.32 - 6.32 6.32 - 5.80 - 5.80 - 8.87 - 8.87 8.97 - 8.87 8.87 000 Mstrict Refirml H-*ml, 7 Q6_ 1 79 - 11 71 11 75 A 77 __ 1 69 - 11 91 13 20 5 42 - M62 19 62 8 86 5 41 - 14 77 SUB-TOTAL HEALTH 36.70 55.66 21.87 135.05 114.23 249.29 34.60 53.98 21.50 110.07 61.38 83.27 25.41 132.41 170.06 302.47 52.49 76.66 21.19 150.33 WATEP. 012 Water 0.39 0.44 13.37 97.48 14.20 111.68 0.39 0.44 13.37 14.20 0.44 0.46 27.78 53.3 1 28.68 81.99 0.38 0.27 20.02 20.68 050 District Water Conditional r--t 1 19 21 00 - 22 19 22 19 - I 1( it on 22 19 1 31 24,05 - 25 35 2535 - --I 2-1 DAR 24.46 SUB-TOTAL WATER 0.39 1.63 34.37 97.48 36.39 133.97 0.39 1.63 34.37 36.39 0.44 1.76 51.83 53.31 54.03 107.34 0.38 1.54 43.20 45.13 JUSTICE/LAW AND ORDER 038 Uganda Pohm (inci LDUs) 25.10 20.66 4.04 49.80 49.90 24.91 22.28 3.95 51.14 38.22 22.69 2.95 - 63.86 63.86 32.95 18.94 2.96 54.66 039 U-nd, Prisons 4.55 8.07 0.33 12.95 12.95 4.01 9.61 0.57 14.20 6.62 9.69 1.30 17.60 17,60 6,47 6.93 0.85 14.26 022 lntemal Affairs 0.72 1.95 1.13 3.81 3.81 0.85 4.20 0.79 5.94 1.04 5.17 1.19 7.40 T40 1.05 6.63 0.23 T91 045 DPP 0.85 0.35 0.06 0.06 1.26 1.32 1.11 0.40 0.04 1,56 2.12 0.98 0.26 0.69 3.37 4.06 1.37 0.92 0.17 2.46 307 Justice Court Awards (Stann ry) - 2.00 2.00 2.00 1.93 - 1.93 - 2.00 - 2.00 2.00 1.77 - 1.77 007 Jusfim Attorwv General exel ComDensation 1.18 1.95 3.66 679 6.79 0.89 3.76 2,86 7.51 1.21 4.59 9.79 14.59 14.59 0.94 4.77 6.52 12.13 007 Jusficm Attomey General - Comvensation - 2.00 2-00 2.00 2.00 2.00 2.00 1.08 - 1.08 311 Judiciarv (StatLitorvi 7.03 5.91 1.91 4.64 14.859 19.50 6.79 5.91 1.82 14.52 7.18 6.91 2.01 4.63 16.09 20.72 6.02 5.53 1.30 12.85 048 Judicial Service Commission 0.19 0.23 0.04 - 0.46 0.46 0.12 0.23 0.03 0.38 0.44 0.27 0.04 - 0.75 0.75 0.08 0.26 0.03 0.36 337 LAw Refaffn Commission (Suftdorv) 0.12 034 0 08 . 0 54 0 54 0 13 OAQ 0 06 0 59 0 34 QA6 0 08 - 0 88 0 98 0.31 0 37 0,11 0.80 SUB-TOTAL JUSTICE/lAW AND ORDER 39.74 43.46 11.26 4.70 94.46 99.16 38,82 48.72 10.12 97.66 57.17 54.76 16.62 5.32 128.55 133.87 49.11 47.10 12.07 108.29 ACCOUNTABILrrY 001 Ethics and fineem 0.04 0.37 0.04 0.23 0.45 0.68 0.04 0.37 0.04 0.45 0.04 0.39 O04 0.47 0,47 0.04 0.19 0.03 0.25 008 MFPED Accmnmbilitv 0.40 1.43 - 1.83 1.83 0.40 1.43 . L83 0.44 1.51 1.95 1.95 0.41 IA7 - 1.58 017 Audit 0.87 2.52 0.12 - 3.51 3.51 0.91 2.52 0.12 3.44 131 3.30 0.14 4.75 4.75 0.80 3.08 0.10 3.98 331 lnsDWor Cmmnl of Government (IGG) 0.65 3.04 0.11 0.88 3.798 4.67 0.74 3.17 0.11 4,02 1.08 4.11 0.13 0.83 533 6.16 1.01 3.85 0.12 4.99 050 Di3trict Grant for Monitoriniz and - 7.51 - 7.51 7.51 6.56 - 6.56 - 10.27 . 10.27 10.27 - 9.12 - 9.12 RI TR.TOTAL ACCONTARFF.rrY I 95 14 RR 0 27 1 10 17 10 19 21 1 98 14 06 0 27 16 31 2 87 19 58 0 3 1 0 93 22 76 23 59 2 26 17 40 0,24 19 91 200D/01I An,roved Budient Esti-tles Outturn 2000/01 2001/02 Aonroyed Budiznt Eotim tesi. 2001/02 Provi.sional Qarturns Total Total Total enI imc. exce. SECTOR/VOTE Non- Domestic Donor Donor Donor Non- Domestic Donor Non. Domestic Donor Donor Donor Non- Domestic Donor Wae ea Decv Projec ProjecE Project W-a Rewfcure Dnv Pr4oect Wane Recurrent Dev Proiect Project Project Waae Recuffent Dev Projet ECONOMIC FUNCT'IONS AND SOCIAL SERVICES 029 Energyand MInemals 0.54 0.76 0.21 23.23 1.51 24.74 0.49 0.87 0.34 L70 0.62 2.13 5.79 26.79 0.54 35.32 0.56 L.34 2.29 4.10 028 Tourism, Trdecand lndustuy 0.38 2.13 3.52 20.47 6.03 34.50 0.35 2.44 3.23 6.03 0.43 2.44 5.30 11.65 8.17 20.02 0.40 2.66 4.16 7.21 012 Lands and Environnment 1.37 1.91 4.36 19.78 7.64 27.42 1.31 2.78 5.20 9.37 1.53 4.43 9.56 29.34 15.53 44.87 1.41 2.87 7.53 11.81 030 Gender, Labtour tal Social Development 0.84 3.73 3 17 9.55 7.74 17.29 0.79 2.97 3.88 7.64 0.95 4.07 6.36 5.31I 11.38 16.69 0.89 2.98 5.33 9.21 Ofriceofthe PrimncMIvinister (Development) - - 7.56 31.17 7.56 38.74 - 7.01 7.01 - - 10.68 24.63 10.68 35.30 -- 0.71 8.71 Finance, Planning &Eon Dev (Development) - - 20.76 74.23 20.76 94.99 - - 18.71 18.71 -- 31,56 49.39 31.56 00 95 -- 26.49 26.49 local Goverrmient Dcv (mclc Roads) - 070 36.08 0.70 36.78 - - 0.57 0.57 -- 0.73 29.08 0.73 29.81 -- 0.30 0.30 050 District Functional MAlt Literacy Grant - - - -- --- .--- 050 District EqualisalionOract 4.00 - - 4.00 4.00 - 2085 - 2.85 - 4.40 - - 4.40 4.40 - 2.94 - 2.94 050 Local Government D,velopment Programme (LGDP) 26.10 - 26.10 26.10 - - 14.39 14.39 - - 31.92 16.25 31.92 48.17 - 26.86 26.86 050 Non-Sectoral Conditional Grant 2.20 4 50 - - 6.70 6.70 - 0.20 - 0.20 1.01 5.06 - - 6.07 6.0X 4.30 - 4.38 050 Dutch District Development Grant - - 6.63 - 6.63 6.63 - - 6.55 6.55 - - 10.89 - 10.89 10.89 -- 8.34 8.34 SUB-TOTAL ECONOMIC FUN4TOSAN S533 1.2 73.02 222.52 95.37 317.89 2.94 12.12 59.96 75.02 4.54 22.54 112.79 192.63 139.86 332.49 3.25 17.17 90.04 10.A66 PUBLIC ADMINISTRATION 004 Ofrim of the Prime M[mister (excl Dev 0.51 2.93 - - 3.44 3.44 0.35 3.68 - 4.03 0.62 2.63 - - 3.25 3.25 0.40 2.15 - 2.55 006 Foreign Afritirs 0.82 12.33 0.08 - 13.23 13.23 0.58 15.14 0.06 15.77 1.00 7.08 0.58 5.91 8.66 14.57 0.64 6.71 0.02 7.37 MissiDm Abroad - - . - - - 10.59 - - 10.59 10.59 - 11.67 - 11.67 008 MIFPED (exclIURA, Contiaigency, Accountabiloy &Dev) 1.05 6.51 - - 7.56 7.56 0.98 7.40 8.38 1.16 10.10 - - 11.26 11.26 1.00 15.16 - 16.16 008 URA - 35.00 4.00 - 39 00 39.00 0. 18 35.00 4.00 39.18 - 40.75 4.20 - 44.95 44.95 - 37.36 4.20 41.56 002 State Hoase 0.95 19.35 8 70 - 29.00 29.00 0.91 30.04 7.73 38.68 1.11 20.47 17.40 - 38.98 38.98 1.11 26.82 11.63 39.56 005 Pablic Service 0.86 2.37 0.67 10.76 3.90 14.67 0.65 2 19 0.56 3.41 0.99 2.58 1.70 2.88 5.27 8.15 0.79 1.66 1.55 4.00 027 Public Service Cotuotosion 0.52 0.72 0.64 - 1.29 1.29 0.45 0.72 0.94 1.21 0.55 1L01 0.54 - 2 10 2.10 0.45 0.98 0.49 1.92 025 Local Goverrnment (eclflev) 0 41 1.86 - - 2.27 2.27 0.63 1.25 - 1.88 0.45 2.08 2.53 2.53 0.36 1.72 - 2.08 034 Mas Mobilisation 2.11 3.20 0.89 - 6.28 6.20 1.88 3.84 0.63 6.35 2.11 3.37 0.93 - 6 41 6 41 1.92 1.78 0.64 4.33 001 O*O'iceof thtePresident (ecllISOIESO andE&1) 3.05 4.20 1.40 - 8.65 8.65 2.46 3.81 1.67 7.94 3.58 6.57 3.18 1 1.71 13.33 25.03 3.80 4.07 2.20 10.07 300 Specified Ornicem - Salaries (Statutory) 0.29 - - - 0.29 0 29 0.11 - - 0.11 0.29 - - 0.29 0.29 0.26 -- 0.26 Public Service Pensioo/Cosp (Statutory) - 25.90 - - 25.90 25.90 1.22 27.29 - 28.50 - 44.19 - - 44.19 44.19 - 36.83 - 36.83 315 Parliamentary Commisoion (Statutory) 4.860 17.140 2.500 - 24.500 24.50 3.71 21.66 3.57 28.94 5.10 15.53 2.63 - 23.26 23.26 5.77 28.39 4.03 38.19 033 Local Govt Finance Comm 0.25 0.24 0.01 - 0.50o 0.50 0.45 0.25 0.01 0.70 0.33 0.80 0.01 - 1.14 1.14 0.30 0.73 0.01 1.04 Uganida Human Rigbts Consm (Statutory) 1.02 0.65 0.06 0.52 1.733 2.26 1.53 0.65 0.94 2 22 1.13 1.35 0.94 - 252 2.52 0.93 L.24 0.94 2.21 349 Electoral Comsmission (Stawwtoy) 3.04 20.99 1.72 - 25.75 25.75 3.04 37.20 1.72 42.05 3.04 28.00 1.81 - 32.85 32.85 2.79 37.07 0.81 40.67 050 Unoonditiol Gtant (UrbanAuthorities) - 4.16 - - 4.16 4.16 - 4.16 - 4.16 - 4.66 - - 4.66 4.66 - 4.66 - 4.66 050 UnoonditisoalGrant (District) 37.64 29.85 - - 67.49 67.49 37.64 30.50 68.14 37.88 31.18 - 69.06 69.06 34.92 3 1.23 66.15 SUB-TOTAL PUBLIC ADMINISTRATION 57.38 187.40 20.07 11.29 264.85 276.14 56.75 224.86 20.03 301.64 59.33 232.93 33.02 20.49 325.28 345.77 55.33 250.23 23.58 331.13 INTERLEST PAYNMENTS DUE 050 Domfestic Interest - 44.90 - - 44.90 44.90 - 58.70 - 58.70 - 92 90 - - 92.90 92.90 - 83.68 - 83.68 050 Exteroallnterenst 62.20 - - 62.20 62.20 - 68.90 - 68.90 - 62.20 - - 62.20 62.20 - 56.10 - 56.10 SUB-TOTA INEETAMNS-107.10 - - 107.10 107.10 - 127.60 127.60 - 150.10 - - 155.10 155.10 - 139.70 139.78 CONTrINGENCY FUNDAUINALLOCATED 5.67 6.94 - 10.26 12.61 22.87 - - - - 4.78 8.91 2.55 - 16.24 16.24 Total Line Mfinistries 207.21 342.20 257.23 773.73 806.64 1,580.37 199.74 349,78 238.15 787.68 242.40 420.11 371.46 584.95 1,033.97 1,618.92 208.36 383.76 282.37 874.49 Total Local GovermuncratProgrammes 250.09 141.26 109.60 - 50094 500.94 224.77 129.82 99.06 453.64 284.56 176.16 136,30 16.25 597.02 613.27 274.90 165.06 123.61 563.64 Line Ministries +Loc. Govt Pnigrammes 457.30 483.46 366.82 773.73 1,307.58 2,081.32 424.51 479.60 337.21 1,241.32 526.96 596.27 507.76 601.20 1l63099 2,232.20 483.34 548.82 405.97 1,438.14 StatutryIntaemstPayments - 107.10 - - 107.10 107.10 - 127,60 - 127.60 IS15.10 - - 155.10 155.10 - 139.78 - 139.78 Statutory"exluding Intermt Paymsents 17 51 79.18 6.47 6.94 103.16 109.19 17 76 101.63 7.41 126.80 18.69 106.12 7.78 5 46 132.58 138.05 17.56 118.04 7.13 142.73 GRAND TOTAL 474.81 669.74 373.29 779.77 1,517.84 2,297.61 442.27 708.82 344.62 1,495.72 545.65 857.50 515.53 606.67 1,918.7 2,525.34 500.90 806.64 413.1 1,720.65 Memo:; PAF Expenditure Wage Non- Dcv. Total Centra 1.31 30.60 132.42 164.33 Districts 194.07 122.14 136.30 452.51 Statutory 1.60 4.97 1.21 7.78 Total 194.98 157.71 269.92 624.61 7r65701 tS,,rr Psni-sino 70n314 Thma Pd as,s~ 71113410 t5,nle.o p-,ina- Total Total Total Total Total Total exci. imd. excl. mci. MrCI. incL SECTOR/VOTE Non-Wage Domestic Donor Donor Donor Non-Wage Domestic Donor Donor Donor Non,Wage Domestic Donor Donor Donor Wage Recurrnt Dcv Project Project Project Wage Recurrent Dcv Project Project Projec Wage Recurrent Dcv Project Project Project SECURITY 001 ISO/ESO 12.31 9.53 1.49 23.33 23.33 12.31 9.88 0.54 - 22.72 22.72 12.31 9.84 0.56 - 22.70 22.70 021 Defence excl LDUs 128.00 99.40 10.94 - 238.33 238.33 130.37 114.55 9.17 - 254.09 234.09 136.89 137.00 10.25 -284.14 294.14 321 Defence Pensions (Statutrr - - - - - - - - - - - - - SUB-TOTAL SECURrrY 140.31 108.93 12.43 - 261.66 261.66 142.68 124.43 9.71 276.81 276.81 149.20 146.84 10.81 -306.84 306.84 ROADS AND WORKS 016 Workt.Housinstand Commnunications 2.72 20.18 104.28 166.18 127.18 293.36 2.72 21.47 111.217 172.83 135.46 308.29 2.72 22.38 115.81 179.74 140.91 320.65 050 District Road Mainteanjce 18.81 - - 1881 18.81 - 20.18 20.18 20.18 - 21.05 - - 21.05 21.05 050 Urban Road Maitenance - 4.48 - 4.48 4.48 - 4.59 - - 4.59 4.59 - 4.78 - - 4,78 4.78 SUB-TOTAL ROADS 2.72 43.47 194.28 166.18 150.47 316.65 2.72 46.24 111.27 172.83 160.22 333.05 2.72 48.21 115.81 179.74 166.74 346.48 AGRICULTURE 010 Agarlclur. Animal Industry and Fisheries 2.07 3.19 22.04 66.99 27.30 88.29 2.07 2.89 26.20 63.43 31.17 94.60 2.07 3.0 23 29 65.97 28.38 94 34 043 National Research Oraanisation (NARO) - 2.59 5.34 25.34 7.93 33.27 - 2.96 4.97 26.35 7.93 34.28 - 3.09 5.14 27.41 8.23 35.64 050 District AxriculturExteenion 3.06 2.92 - - 5.98 5.98 3.06 3.03 - - 6.09 6.09 3.06 3.16 - - 6.23 6.23 050 National Axicultural Adviasrv Services - - 5.66 - 5.66 5.66 -- 4.66 4.66 4.66 - - 5.17 - 5.17 5.17 SUB-TOTAL AGRICULTURE 5.13 8.69 33.04 86.33 46.87 133.20 5.13 8.89 35.83 89.78 49.85 139.63 5.13 9.27 33.60 93.37 48.00 141.38 EDUCATION 036 Ueanda Mananetnent Institut - 0.40 - - 0.40 0.40 - 0.44 - - 0.44 0.44 - 0.46 - - 0.46 0.46 013 Educationand Snorts(incl Prim Educic 7.41 46.26 47.04 39.82 100.72 140.4 9.47 45.60 54.87 41.41 109.94 151.35 9.940 47.57 57.28 43.07 114.79 157,86 024 Makerere Universitv - 28.29 0.13 5.80 28.41 34.21 38.12 0.14 6.03 38.25 44.29 - 39.82 0.14 6.27 39.96 46.24 042 Mbarara Univetntv 3.09 2.49 0.60 - 5.98 5.98 3.09 2.73 0.43 - 6.25 6.25 3.12 2.81 0.45 - 6.38 6.38 04.4 Institute ofTeacher Education (ITEK) 2.50 0.66 0.18 3.34 3.34 2.55 0.77 0.19 - 3.51 3.51 2.68 0.80 0.20 3.68 3.68 040 Education Sevice Commoission 0.45 1.07 0.12 - 1.63 1.63 0.45 1.15 0.05 - 1.64 1.64 0.45 0.88 0.05 - 1.37 1.37 046 Makerere Univernity Business School - 2.91 - - 2.91 2.91 - 3.50 - - 3.50 3.50 - 3.65 - - 365 3.65 050 District Primarv Educ incl SFtG 185.07 41.53 53.88 - 280.49 280.49 190.38 47.76 60.73 - 298.86 298.86 192.38 52.18 67.98 312.53 312.53 050 District Secondary Education 58.25 7.73 - - 65.98 65.98 58.25 10.31 - - 68.56 68.56 58.25 10.75 - - 69.00 69.00 050 District Tertiary Instaittions 13.42 - - 13.42 13.42 13.42 - - - 13.42 13.42 13.42 - - 13.42 13.42 050 DistrirtHelsTrainin, Schools - 1 89 - - 19 1g-L89 - 205 2 - 05 205 - 2 14 - - 2 14 214 STIRTOTATAI Frstlr'ATIIOI 7701 7 113 74 tOt 74 45467 505 11 55079 777463 157 43 116 41 474 546 44 59l A00 Ft 780 141 04 176409 49314 541IR 616 13 HEALTH 014 Henlth 3.56 31.18 21.08 101.14 55.83 156.97 3.68 38.69 24.10 105.19 66.47 171.66 3.86 47.00 25.13 109.39 75.99 185.39 019 ButabikeaHospital 1.02 1.48 1.63 22.61 4.14 26.75 1.05 1.61 0.14 23.51 2.01 26.32 1.11 1.68 0.15 24.45 2.93 27.39 (A023 Mulaao Hospital Comvle, 7.96 9.80 1.95 - 19.71 19.71 8.15 11.06 2.11 - 21.33 21.33 8.56 11.49 2.20 - 22.2,5 22.25 032 Health Service Commission 0.37 0.83 0.04 - 1.24 1.24 0.37 0.75 0.04 - 1.16 1.16 0.39 0.78 0.04 - 1.22 1.22 395 Uaanda Aids Compissison 0.54 0.70 1. 18 18.21 2.42 20.63 0.60 0.77 1.24 1893 2.61 21.54 0.63 0.85 1.30 19.69 2.78 22.47 050 District NGO HosoitalstPrimarv Health Cue - 16.61 - - 16.61 16.61 - 21.27 - - 21.27 21.27 - 26.40 - - 26.40 26.40 050 District Primrv Health Care 43.86 19.67 7.58 - 71.10 71.10 45.31 22.16 12.14 - 79.61 79.61 49.88 24.21 17.01 - 91.10 91.10 050 District Hospitals - 8.71 - .71 8.71 - 9.40 -9.40 9.40 - 9.80 - 9.80 9.80 000 District Referral HOoseials 10 96 5 25 - - 1621 16 21 11 36 5 74 - - 17 10 17.10 12 06 5 99 - - 18 04 1804 91tISTAITTAIL4tRAIll 48t70 94 73 33 44 1419 q6 9597 117 93 70 S3 II3 11144 97 147431 771 75 349 39 76448 I? 179 45894 1535 1 50 51 40405i WATFR 012 Water 0.53 0.43 22.01 77.30 22.97 100.27 0.53 0.47 24.46 80.39 25.46 105.86 0.53 0.49 25.58 83.61 26.60 110.21 050 Distric Water Conditional Grot - 1 29 24 49 - 25 78 25 78 - 1 45 25 82 - 27 27 27 27 - Isa8 26 85 - 28 44 28 44 51It5~~~~Tt3TAt WATtinR 053~~~~~i 1 71 45 710 48 75 17405 s53 I9 5071 go09 57 73 13317 0 53 2 07 57 43 83461 55 04 138 45S RJUSTICEFLAW AND ORDER 038 Ucanda Police(incl LDUs) 31.37 25.82 2.75 - 66.94 66.94 40.14 23.90 2.908 67.02 67.02 42.14 24.93 3.11 - 70.19 70.19 039 Unanda Priwons 8.14 9.38 1.21 - 18.73 18.73 8.14 10.17 1.31 - 19.62 19.62 8.14 10.61 1.37 - 20.12 20.12 022 Internal Affairs 1.12 4.60 1.11 - 6.83 6.83 1.~12 5.39 1.20 - 7.71 7.71 1.15 5.62 1.26 - 8.03 8.03 045 DPP 2.18 0.95 0.25 0.44 3.30 3.82 2.23 1.03 0.27 0.46 3.53 3.98 2.34 1.08 0.28 0.48 3.69 4.17 307 Justice Court Awards (Stanttry5 - 2.20 - - 2.20 2.20 - 2.31 - - 2.31 2.31 - 2.43 - - 2.43 2.43 007 Justice. Attomey Generalexcl Conroensation 1.26 6.66 15.23 23.15 23.15 1.27 4.71 16.14 - 22.12 22.12 1.33 4.92 16.68 - 22.94 22.94 007 Justice. AtOorneGeneral -ComDensation 1.95 - - 1.95 1.95 - 2.12 - - 2.12 2.12 - 2.21 - 2.21 2.21 311 JudiciaLrv (Statutorv) 7.18 7.56 2.11 4.91 16.85 21.76 7.53 7.94 2.22 5.11 17.69 22.80 7.91 8.34 2.33 5.31 18.58 23.89 048 Judicial Service Comminton 0.49 0.27 0.04 - 0.79 0.79 0.49 0.29 0.04 - 0.82 0.82 0.49 0.30 0.04 - 0.83 0.83 337 1 - Rrf,,, C.onuind-ioe(StatutoryI 0 34 0~91 0 05 1 33 1 33 0 36 0353 0 09 - 0 98 0 98 0.38 0356 0 09 - 503 1 03 SITISOTTAI ITTlTrtlFAAWA4n nRlnrFR 590A7 4433 in 9771 53 is 47 IS 141S1 61 77 SR840 74 75 5 57 141397 149 49 618 AR 100O 75 14 579 15n0(4 155 R7 ACCOUNTABILITY 001 Ethics and Integrity 0.05 0.37 0.04 - 0.45 0.45 0.05 0.40 0.04 - 0.49 0.49 0.05 0.42 0.04 - 0.51 0.5 008 MfFPED Accountability 0.56 1.55 - - 2.11 2.11 0.56 1.89 - - 2.45 2.45 0.56 1.97 - - 2.53 2.53 017 Audit 1.52 3.38 0.14 - 5.04 5.04 1.52 3.63 0.15 - 5.30 5.30 1.90 3.93 0.15 - 5.99 5.99 33 1 Inspector General ofGoveniment (IGG) (Sta.tutory) 1.08 5.58 0.14 0.67 6.80 7.47 1.19 5.72 0.14 0.69 7.06 7.75 1.31 6.18 0.15 0.72 7.64 8.36 050 District Grmnnfor Monitoring nd Accountability - 12.24 - - 12.24 12.24 - 13.00 - - 13.00 13.00 - 14.12 - - 14.12 14.12 SUB- TOTAL ACCOUNTABILITY 3.22 23.12 0.31 0.67 26.64 27.31 3.33 24.64 0.33 0.69 28.30 28.99 3.83 26.62 0.35 0.72 30.79 31.51 ECONOMIfC FUNCTIONS AND SOCIAL SERVICES 029 Energyand Minemals 1.22 2.07 1.53 5.63 4.82 10.45 1.22 2.14 2.27 5.86 5.63 11.48 1.22 2.24 2.52 6.09 5.98 12.06 028 Tourism. Trade and Industry 0.56 2.52 4.65 29.60 7.73 37.42 0.56 2.55 5.29 30.88 8.40 39.27 0.56 2.66 5.49 32.11 8.70 40.82 012 Lands and Environment 1.96 4.18 11.35 28.00 17.49 45.49 1.96 4.63 16.53 29.12 23.12 52.24 1.96 4.58 21.26 30.28 27.80 58.08 2002/03 Budget projections 2003/4 Budget Prjojctions 2004/05 Budget Projections Tota] TOWs Total Total Tots] Total excl. incL MCI. tac. "cxc. intcl. SECTORNVOTE Non-Wage Domestic Donor Dontor Donor Non-Wage Domestic Donor Donor Donor Non-Wage Domes;tic Donor Donor Donor Wage Recurrent Dcv Project Project Projec Wage Recurrent Dcv Project Project Project Wage Recurrent Dev Project Project Project 030 Gender,Labour and Social D"evopment 1.29 4.4854 6.09 4.32 11.86 16.18 1.29 4.28 8.14 4.49 13.71 18.20 1.29 4.47 10.16 4.67 15.91 20.58 104 Olffce of thePrimoeMlfnister (Developmenat) - - 10.26 43.85 10.26 54.11 - - 11.17 45.60 11.17 56.78 - - 9.39 47.43 9.39 56.82 108 Finance, Plarinrg & Econ De, (Development) - - 34.58 36.32 34.58 70.90 - 35.36 37.77 35.36 73.13 -- 36.74 39.28 36.74 76.02 125 Local Governmnent Dev(excl Roads) - - 0.90 39.82 0.00 40.72 - - 1.14 41.41 1.14 42.56 -- 1.19 43.07 1.19 44.26 050 District Functiomal Adult Literacy Grant - 1.42 - 1.42 1.42 - 1.99 - 1.99 1.99 -2.79 - 2.79 2.79 050 District Equalisaion Grant - 4.33 - 4 33 4.33 4.88 - - 4.88 4.88 -5.33 - - 5.33 5.33 050 Local Government Development Progrnrre(LGDP) - - 41.90 - 41.~90 41.90 - 47.71 - 47.71 47.71 - 49.74 49.74 49.74 050 Non-Sectoral Conditional Grantt 1.18 4.99 - - 6.17 6.17 1.42 5.38 - - 6.80 6.80 1.69 5.69 - - 7.38 7.38 050 Durtch District Development Grant - - 8.71 - 8.71 8.71 - - 9.17 - 9.17 9.17 -- 9.11 - 9.11 9.11 SUB-TOTAL ECONOMIC FtJNCTIONS AN4D SS 6.20 24.00 119.98 187.63 150.18 337.81 6.44 25.86 136.80 195.14 169.09 364.23 6.70 27.75 145.60 202.94 180.06 383.00 PUBLIC ADMINSTRATION 004 Ofrice ofthsePrime Minister (xcrrcDev) 0.73 2.45 - - 3.19 3.19 0.73 2.68 - - 3.42 3.42 0.73 2.81 - - 3.54 3.54 006 Foreign Affais L.38 8.89 0.43 11.04 10.71 21.75 1.38 7.16 0.59 11.48 9.12 20.60 1.38 7.48 0.61 11,94 9.47 21.41 OAO Missions Abroad 1 6.06 0.50 - 16.56 16.56 15.29 0.50 - 15.79 15.79 - 15 07 0.50 - 15.57 15.57 098 NIPED (excl URA, Contingcrsy, Accoonrability & l.34 10.61 11l.95 11.95 1.34 16.63 - 17.97 17.97 1.34 16.93 - 18.27 18.27 008 UYRA - 62.74 - - 62.74 62.74 - 56.70 - - 56.70 56.70 - 59.28 - - 59.28 59.28 002 Stare House 1.50 20.82 20.23 - 42.55 42.55 1.50 22.25 16.98 40.73 40.73 1.50 23 20 17.45 - 42.16 42.16 005 Public Service 1.20 2.43 0.76 2.36 4.38 6 74 1 20 2.67 1.24 2.45 5.11 7.56 1.20 2.79 1.32 2.55 5.31 7.86 027 Public Service Commission 0.64 1.01 0.45 - 2.09 2.09 0.64 lOS5 0.55 - 2.24 2.24 0.64 1.10 0.57 - 2.31 2.31 025 LocalGovernroent (excl Dev) 0.55 2.17 - 2.72 2.72 0.55 2.10 - - 2.65 2.65 0.55 2.18 - - 2.73 2.73 034 Mass Mobilisation 2.38 3.44 0.59 - 6.41 6.41 2.48 3.53 0.67 - 6.68 6.68 2.59 3.68 0.71 - 6.90 6.99 001 Office of thtePresident (ecl ISOIESO aridE&l) 4.54 6.23 1.50 0.74 12.27 13.01 4.54 6.64 2.72 0.77 14.09 14.86 4.54 7.13 2.85 0.80 14 52 15.32 30-0 Specified Officers - Salaries (Statutory) 0.32 - - - 0.32 0.32 0.32 - - - 0.32 0.32 0.34 - - - 0.34 0.34 'C 305 Public Serice PensiornlConip (Statutory) - .51.84 - - 51.84 51.84 - 5.4- - 544 5.4 - 571-- 5.6 5.6 315 Parliamenetary Commsissiona(Stattrory) 6 82 24.90 1.58 - 33.30 33.30 6.82 24.90 1 76 - 33.49 33.49 6.87 24.90 2.84 - 34.61 34.61 033 Local Govt Finance Comm 0.41 0.81 00 -l 1 23 1.23 0.41 0.8.4 0.01 - 1.26 1 26 0.41 0.87 0.01 - 1.29 1.29 347 Uganda HumnaRights Comm (Statdrtoy) 1.15 1.48 0 04 5.54 2.68 8.22 1.21 1.56 0.04 5.76 2.81 8.57 1.27 1.64 0.05 5.99 2.95 8.94 349 Elcctoral Commnission (Statutr.oy) 4.04 l2.90 0.81 17.75 17.75 4.19 8.95 1.50 - 14.64 14. 64 4.35 8.95 1.60 - 14.90 14.90 050 Uncoadttional Grant (Urban Aurthorities) - 4.85 4.85 4.85 - 5.15 - - 5.15 5.15 - 5.37 - - 5.37 5.37 050 Uaconditiotral Grant (Distfict) 42.10 30.48 - - 72.58 72.58 42.10 31.44 - - 73.54 73.54 42.10 32.92 - 75.02 75.02 INTEREST PAYMENTS DUE 950 DomesticInteret - 73.60 - - 73.60 73.60 - 100.80 - - 100.80 100.80 - 113.50 11l3.50 113.50 050 External Interest - 71.00 - 71.00 71.00 - 68.60 - - 68.60 68.60 - 69 50 - 69.50 69.50 SUB-TOTALINTERET PAYMENTS - 144.60 - 144.60 144.60 - 169.40 - - 169.40 169.40 183.00 1 83.00 183.00 Total Lirne Mfinistri es 259.30 473.82 353.26 701.39 1,086.38 1,787.77 274.98 509.88 391.38 729.45 1,176.23 1,905.6 288.32 554.08 407.98 758.63 1,250.3 2,005.36 Total ,ocA GovernmentrPrognrammes 346.95 181.96 142.22 671.13 671.13 353.94 204.02 160.23 - 718.19 718.19 360.78 222.26 175.86 - 758.90 758.90 Line hnIlistries + Loc. Gov't Progirammres 606.24 655.78 495.48 701.39 1,757.50 2,458.90 628.92 713.89 551.61 729.45 1,894.42 2,623.8 649.09 776.34 583.84 758.63 2,009.2 2,764.25 Stawutry Interest Payments - 144.60 - - 144.60 144.60 - I69.40 - 169.40 169.40 - 183.00 - - 183.00 183.00 Ststutory excluding Interest Paymnents 21.47 108.08 5.95 29.33 135.50 164.82 22 23 107.12 6 99 30.50 136.34 166.84 23.06 110.99 8.35 31 72 142.40 177.77 GRANDI3TOTAL 627.71 909.46 501.43 730.72 2,037.60 2,768.32 651.15 990.41 558.60 759.95 2,200.2 2,960. 1 672.15 1,070.34 592.20 790.34 2,334.6 3,125.02 Wage Non-Wage Dev. Tota Wage Non-Wage Dev. Total Wage Non-Wage Dcv. Total Central 1.52 34.37 133.52 169.40 1.43 49.60 151.31 202.41 1.90 57.91 161.16 220.97 Districts 233.17 128.29 142.22 503.68 240.17 145.68 160.23 54.08 247.00 161.29 175.86 584.15 Statutry 1.62 5.42 1.32 8.37 1.79 5.65 1.39 8.82 1.94 6 19 1.45 9.58 Total 236.32 168.08 277.06 681.45 243.39 200.99 312.93 757.30 250.84 225.38 338.47 814.69 ANNEX 4: STATEMENT BY THE WORLD BANK ON BEHALF OF DEVELOPMENT PARTNERS ON BUDGET STRATEGY AND BUDGET PERFORMANCE 2001/02 A4.1 We, on behalf of development partners present, would like to thank the Hon Minister for his detailed presentation on the performance of the first three quarters of the current year's budget and an exposition of how they met the challenges they faced. At a time when global economic trends have been unfavorable and terms of trade have hit a 40-year low, one has to commend Uganda's budget and macroeconomic performance over this year. The government needs to be commended on keeping the budget largely on track despite pressures for supplements from all quarters through the course of the year. However, the budget performance over the current year has highlighted a couple of areas of concern. A4.2 First, the revenue targets were not met again this year. Compared with last year's Ush. 60 billion, we expect a shortfall of almost 80 billion, which accounts for a 6 percent shortfall. This continuing trend needs to be arrested, at a time of fiscal constraints, to ensure that further shortfalls in revenue do not hinder allocation of resources to identified priorities. A4.3 The poor performance of revenues under URA despite reform measures continues to be of concern. Although exchange rate effect has a role to play in this, it is still an area of concern. For example, import duty, excise duty and VAT have all under performed in relation to their targets and need further attention. However, it is worth noting that income tax returns have over performed. A4.4 Despite over performance in some non-URA items (for example, passports (1.1 billion or three times the estimate), Bank of Uganda (21.8 billion of which is in terms of arrears from last year), because of shortfalls in other areas, such as revenues collected by ministries and agencies, the overall target will not be met this year. A4.5 Loan repayment reached less than 50 percent of its target because of nonpayment from UEB and UDB. We know that the government has been drawing down on its reserves for shortfalls in revenue and donor flows. However, we all know that the government has not been able to keep its target of reserves of five months in the last two years and that it does not intend to in the medium term. This clearly shows the danger of being complacent about the situation. Although we agree that the government's objective of reducing the fiscal deficit in the medium term is a welcome one, the weak revenue performance does not enable the government to address this without risks. A4.6 All these trends indicate the need to address revenue issues through comprehensive reforms and ensure that unprogrammed revenue shortfalls do not adversely affect the existing tight fiscal constraints. A4.7 Second, this year we again experienced expenditure pressures cropping up at the last minute in the budget process, mainly from two sources: the strategic exports initiative and the Parliaments' emoluments and salary increases. The former was primarily accommodated through the reallocations and corrigenda, while the latter had to be financed through supplementary expenditures. Naturally, these reallocations necessitate further tightening of the fiscal envelope for other sectors and made it difficult to carry out their intended programs. This was especially the case in the justice, law, and order sector, as well as some other sectors. On a related note, we would like to request the government to do a technical audit that will provide additional information to understand what activities were funded by strategic export initiatives this year and what outputs were achieved. This we believe is essential for ensuring transparency in the budget process and ensuring value for money. A4.8 Third, this year again last-minute reallocations and supplementaries provided additional resources to certain sectors and votes-in fact, to the usual culprits-which was not contested. We believe this trend of overruns has to be arrested if the budget process and MTEF ceilings are to become a credible way of ensuring budget discipline among sectors. A4.9 Fourth, on the issue of resource flows, donor flows fell short by almost 10 percent because exchange-rate appreciation meant a shortfall on the order of 12 percent. This is an area where further progress has to be made, and we are sure development partners are aware of this and are trying their best to improve predictability of the external flows. However, it is important to note that the government also needs to ensure that it meets the prior actions it agrees upon with development partners to reduce the uncertainty in donor flows. A4. 10 Fifth, this year we have observed two sectors that have raised concerns because of their overruns since the first half. These sectors are defense and public administration, which were 3 and 9 percent, respectively, above pro-rata performance up to the third quarter. These overruns have become a problem for the overall budget management and need to be addressed as a matter of urgency. If not, we risk losing budget discipline, which we have built up over the years. Also, this does not set a good example for all the other essential sectors, for example, justice, law, and order and health, which possibly have much less than what they deserve and need to be given priority first. Some General Observations A4. 11 Budget release performance on the whole has been satisfactory. Performance by broad expenditure categories shows both wage and non-wage expenditures are above target while development expenditures fell short by almost 10 percent. By votes, district votes over performed central votes. Central vote performance was affected by the need to accommodate domestic revenue shortfall and supplementaries for other votes. A4. 12 The PAF performance was satisfactory overall at 98 percent. PAF wage expenditures were above target because of higher than envisioned expenditures in primary teacher wages. The major area in which PAF under performed is in non-wage expenditures, mainly because of the poor performance of equalization and non-sectoral grants. A4. 13 We also welcome government initiatives to follow up the discussions on partnership principles in September 2001 with a study on PAF modalities and how over the medium term these might be phased without losing the benefit they have provided for 98 budget discipline. We think that further work is required to understand how the study findings can help design a credible operational strategy for budget formulation and execution consistent with HIPC and PEAP objectives. In this regard, if protection for PAF expenditures is to be reduced, protection should also be reduced for other sensitive sectors, for example, defense. A4.14 Economic functions and social services was the lowest performing sector at 81 percent of budget outturn at the end of third quarter. In terms of categories, wage, non- wage and development all fell below their pro rata in the first half. Some of the reasons for this need further attention, for example, poor performance of non-tax revenue in energy and minerals, difficulties in implementation of lands and environment projects, a land tenure reform project, and noncompliance with the CCS. A4.15 This fiscal year the government has to be commended on producing the budget performance reports-at half year and the end of the third quarter-and making them available to all stakeholders on request. We, however, believe that these reports need to become more output oriented than they currently are to ensure they are more useful evaluations of budget impact and outcomes. This we believe will be the challenges for the government in the medium term. 99 ANNEX 5: STATEMENT BY THE By THE WORLD BANK ON BEHALF OF DEVELOPMENT PARTNERS ON MTEF 2002/02-2004/05 Macro Framework A5.1 We would like to thank the Minister for his clear presentation on the MTEF and budget for next year. We believe that it clearly articulates the macro scenarios and constraints under which the government has to plan the fiscal program for the coming three years. It also highlights the challenges the government faces in implementing the PEAP in addressing priority concerns in governance, increasing income of the poor, and improving quality of service delivery for the poor. We would however, like to underscore that the constraints might be even greater if we believe that the growth rates and the revenue targets assumptions are optimistic. Although we believe that, through focusing on macro stability and prudent fiscal management, the current spending levels are achievable, the potential for slippages resulting from external factors is not to be underestimated. The inflation targets set out in the MTEF are clearly achievable if the government sticks to fiscal discipline. MTEF A5.2 The budget process has improved predictability, with a large share of donor flows being given in terms of budget support. The challenge is to include with more certainty project funds, so that MTEF ceilings can be realistic benchmarks with which sectors can work. Integrating the external projects into the sector ceilings will help achieve macro stability with fiscal flexibility. It will also improve budgetary planning and help to ensure that all expenditures within each sector, whether funded through the government budget or through external project modalities, are fhlly consistent with sectoral priorities and with the overall fiscal constraints. However, we are concerned that certain sectors do not adhere to their ceilings and are given additional allocations without adequate justification(for example, defense and public administration) at the expense of more deserving sectors, which undermines the budget process. In this regard we welcome the measures taken by the government in terms of the defense review and public administration study, which we believe should provide a basis for improving budget efficiency in these sectors. A5.3 Given the need to reduce the fiscal deficit and ensure macro stability the government has highlighted the need to slow growth in nominal government expenditures over the next three years in the range of 7 percent per annum. This is lower than the expected nominal GDP growth. However, this highlights the need to focus more on budget efficiency issues and internal allocations as the principal means by which priority activities under each sector have the resources they need. A5.4 We note that the spending increases for this year give due recognition to PAF areas. Of the projected overall increase of 124 billion, 55 billion or 45 percent goes to PAF. This is a very welcome move and ensures priority is given to PEAP implementation. In fact this puts the PAF share of total government expenditures at 36 percent, which is higher than last year's 34 percent and is consistent with the objective of increasing the share of PAF over the medium term. A5.5 We also note that the largest increase compared with last year's allocation is going to health (15 percent). Over the medium term this sector will receive a greater share. This is very much in line with our belief that health is a priority sector in the medium term and needs to be given preference. Similarly, increases next year for education are also welcome given its centrality in achieving the PEAP targets. A5.6 However, we have a few concerns over the allocation pattern of next year's budget. - First, a very large increase in next year's budget takes place in defense. Although we know this includes the one off expenditure of 10 billion for this and next year, we still believe that defense expenditure is an area that needs to be closely monitored. As you know the allocation to defense is pegged to GDP, which is growing faster than government expenditures, implying that these expenditures grow as a share of the budget. In the context of competing priorities we may want to take a fresh look at this limit. We would urge the government to hold discussions to address this issue in the context of the defense review, which is currently under way. We also believe that there should be greater accountability for defense expenditures to the responsible authorities. - Second, we are also concerned with the level of funding proposed for the justice, law, and order sector. This sector prepared an extensive sector strategic plan but does not have resources to implement it. In fact the sector's total budget is not increasing at the rate at which overall government expenditures are increasing, implying a falling share over time. Furthermore, the sector is minimally protected by PAF and suffers cutbacks on an annual basis of more than 30 percent. The under funded work plan is also frequently influenced by aspects beyond the sector's control to accommodate activities that were not envisaged in the sector work plan. - We continue to be very concerned about the huge amounts of money that are paid out by the government to settle claims for compensation, old debts, purchase of property, etc. These payments divert resources from priority expenditures, and the justification for these payments needs to be closely examined. - Third, on health, although there are increases programmed in the MTEF, given the weak performance of the health indicators and the need for improvements in various interventions, it is useful to consider how additional resources can be programmed for this sector. In this regard, development partners are willing to provide additional resources for justice, law, and order and health and would like the government to consider these deserving sectors for possible additional allocations in the event that such additional resources are actually available. - Fourth we would like to understand how the resources under the budget allocated for strategic exports are utilized. We believe the lack of transparency in funding these activities, especially at a time when there are 102 important priorities that lack additional resources, need to be addressed such that all stakeholders will respect the budget process. We also believe these resources should not be used to provide unwanted and unjustifiable subsidies to private enterprises as past evidence indicates. This year, like last year, almost another 50 billion is being allocated to strategic exports, resources that have a high opportunity cost in terms of achieving other priority PEAP targets. A5.7 We strongly support the government's objective of boosting exports but we believe that expenditures in this area should be subject to the same scrutiny as in other sectors to ensure that they provide value for money. In this regard, there is a lack of clarity with respect to what expenditures are actually affected under this heading, making careful analysis difficult. Accordingly, we would appreciate more detailed information as to what specific expenditures are covered under this program. In addition, we believe that The government should set out clear principles to guide its interventions in the export sector and that these interventions should be in the areas of public goods-agricultural research and extension, disease control, etc. Well-planned interventions in these areas can provide very high returns, especially if directed to support agriculture and PMA broadly. We do not believe that the government should hand out subsidies, such as cheap loans, tax breaks, and subsidized rail freight, on a selective basis to individual investors however superficially attractive their projects may appear. Such an approach inevitably creates pressures from other investors for similar treatment and undermines the predictability of government policies, which has been a strength of the Ugandan policymaking process. A5.8 Finally, we would like to reiterate that if there were additional resources available by increasing the fiscal envelope or by reallocation then we believe that priority should be given to sectors such as health and justice, law, and order over defense and public administration in the MTEF. In this regard, the government needs to consider how resources from global funds such as health and education can be integrated in the current ceilings. Other Issues A5.9 We also believe that when the government of Uganda enters into agreements with development partners they should clearly indicate the constraints that they experience in the context of the partnership principles discussed in September 2001. Although from a fiscal point of view actually rolling over of funds does not seem feasible, it would be useful to consider how this problem can be dealt with in cases where donors need such assurances. A5. 10 The assumptions in the MTEF that donor budget support flows decline over time may need to be revisited as our discussions with development partners indicate that some budget support donors are amenable to increasing their shares to address priority activities in certain sectors that are under funded in their view. Such additional flows are not expected to be of sufficient magnitude to affect the government's objective, which we share, of reducing donor dependency in the medium term as described in the MTEF. We also welcome the measures the government is taking to manage external debt prudently. 103 Continuing these measures will be critical to ensure long-term debt sustainability. We also look forward to discussing with the government ongoing analytic work currently under way to understand the impact of aid flows on the local economy. A5.11 We commend the government's commitment to improve output orientation of the budget and putting additional effort through SWGs to ensure this does happen. We would like to reiterate our commitment and support for this as we believe this is the way to improve budget efficiency. We also believe that results-oriented management is an important initiative and further attention needs to be given to internalize it with the budget process. A5.12 One of the important areas that needs MTEF/government focus is pay reform strategy and its implementation. We appreciate that the next year's budget has made provisions for pay increases broadly to lower-rank workers as well as professional and technical personnel. However, we understand that this is inadequate to implement the strategy proposed and would request that priority is given to this area given its importance in addressing improvements in service delivery and cost efficiency and reducing corruption. However, we would also like to note that the government needs to address constraints imposed by the overall size of the wage bill and proliferation of semiautonomous agencies-especially under public administration-having different pay structures, which makes the rationalization and implementation of a consistent pay strategy extremely difficult. A5. 13 Similarly, we would like to commend the government on the progress it has made in finalizing its fiscal decentralization strategy and the plans for implementing it as a way of improving service delivery and ensuring local ownership of government programs. We would like to reiterate our commitment to support these initiatives and request that government gives adequate priority to this issue through its MTEF allocations. A5.14 We support the government's overall MTEF and budget for next year, subject to these observations, and believe that as presented it provides an appropriate basis for donor budget support. We would also like to emphasize that, in the execution of the budget during the course of the year, these spending priorities are respected. 104 BIBLIOGRAPHY The word processed describes informally reproduced works that may not be commonly available through libraries. Folscher, Alte. 2001. The Allocative Budget Process and the Work of the Sector Working Groups, Africa Helm. Report Prepared for MFPED with DFID support, October 2001. Government of Uganda. 2001. Budget Speech, June 2001. Republic of Uganda, MFPED. Government of Uganda. 2001. Background to the Budget 2001/02. Republic of Uganda, MFPED. Government of Uganda. 2002. Budget Speech, June 2002. Republic of Uganda, MFPED. Government of Uganda, 2002. Background to the Budget 2002/03. Republic of Uganda, MFPED. Government of Uganda. 2001. Budget Consultative Workshop, various documents. Government of Uganda. 2002. Summary of the Background to the Budget, Second PRSP Progress Report. Republic of Uganda, MFPED. Hauge, Arlid. 2002. "Uganda National M&E Issues." Draft paper for scoping M&E Issues. World Bank. Processed. International Monetary Fund and International Development Association. 2001. Tracking of Poverty-Reducing Public Spending in Heavily Indebted Poor Countries (HIPC). International Development Association and International Monetary Fund. 2002. Joint Staff Assessment of PRSP Progress Report, June 2002. Liang, Xiaoyan. 2001. Secondary Education: Coverage, Equity and Efficiency. World Bank, AFTHl. Ministry of Finance, Planning and Economic Development. 2002. Semi-Annual Budget Performance Report, FY 2001/2002. Republic of Uganda, Budget Policy and Evaluation Department. Ministry of Finance, Planning and Economic Development. 2002. Budget Performance for the First Three Quarters of FY 2001/02 and Implications for PRSC-II. Republic of Uganda, Budget Policy and Evaluation Department. Ministry of Finance, Planning and Economic Development. 2002. "The Macroeconomic Framework and the Resource Envelope." Presentation at the Public Expenditure Review Workshop, May 2002, Republic of Uganda. Ministry of Finance, Planning and Economic Development. 2002. The Macroeconomic Plan and Indicative Budget Framework for FY 2002/02-2004/05. Submission to Parliament under the Budget Act 2001 (section 4), March 2002. Republic of Uganda. Ministry of Finance, Planning and Economic Development. 2002. Background to the Budget Financial Year 2002/2003. Republic of Uganda, June 2002. Ministry of Finance, Planning and Economic Development. 2002, "Budgetary Aspects of Public Administration." Presentation at Public Expenditure Review 2002 Workshop. Republic of Uganda, MFPED. Ministry of Finance, Planning and Economic Development. 2002. "The Role and Future of Poverty Action Fund." Presentation at Public Expenditure Review 2002 Workshop. Republic of Uganda, MFPED. Ministry of Education and Sports. 2002. Budget Efficiency: Budget-Tracking Studies. Public Expenditure Review Workshop, May 2002. Republic of Uganda. Ministry of Education and Sports. 2001. Teacher Utilization Studies, Volume II. Final Report on Secondary Schools. Republic of Uganda. Ministry of Health. 2001. PHC Conditional Grant Tracking Study, September 2001. Ministry of Health. 2002. Budget Efficiency and Equity in Incidence of Health Service Benefits. Public Expenditure Review Workshop, May 2002. Republic of Uganda. Ministry of Water, Lands and Environment. 2002. Value for Money in Water Sector. Public Expenditure Review Workshop, May 2002. Republic of Uganda. Moon, Allister. 2001. Public Expenditure Reviews and Budget Process in Uganda and Tanzania. World Bank. Processed. Ndungu, M., and Williamson T. 2002.: Financing Poverty Reduction in Uganda. Report Prepared for the Ministry of Finance, Planning and Economic Development. Republic of South Africa. "Improving the Monitoring of Inter-governmental Fiscal Performance." Scoping Note for the Proposed ESW/Ta Activity. Republic of Uganda. 2002. Fiscal Decentralization Strategy Paper. Fiscal Decentralization Working Group, January 2002. van Arkedi, B., and Anne-Marie Aigner. 2002. More Effective Public Administration Budgeting. Report for Presidential Committee on Reforming Public Administration, March 2002, Kampala. World Bank Africa Region and the Republic of Uganda. 2001. Is Uganda's Debt Sustainable? Effects of Increased Foreign Aid. Concept Paper, November 2001. World Bank.(2001. Uganda FY2001 PER: Final Report. June 2001. World Bank. 2001. Report on the Tracking of Poverty Reducing Spending in Uganda. November 2001. 106 World Bank. 2001. Public Expenditure Review: A Program for Supporting Budget Reforms. Concept Paper, November 2001. World Bank. 2002. Poverty Reduction Support Credit 2 and 3, various aide memoirs. World Bank. 2002. "Uganda: Has Health Services Reached the Poor?" PowerPoint presentation by Shiyan Chao, May 2002. World Bank. 2002. "Budget Strategy and Performance, 2001/02." Statement presented on behalf of all development partners at the Public Expenditure review Workshop 2002. World Bank, 2002. "Medium Term Expenditure Framework 2002/03-2004/05." Statement presented on behalf of all development partners at the Public Expenditure Workshop 2002. 107 IMAGING Report No.: 24882 UG Type: ER