metadata: authors: 0: author: Lacey,Robert Mark
docna: 0: docna: The management of public expenditures : an
            evolving Bank approach
docty: Policy Research Working Paper
subtopic: Economic Conditions and Volatility,Public Sector Economics,International Trade and Trade Rules,Macroeconomic Management,Public Financial Management,Public Finance Decentralization and
            Poverty Reduction
teratopic: Poverty Reduction
abstracts: cdata!: World Bank lending and advice to support
            institutional and policy reform of public expenditure
            management is of recent and limited, but rapidly expanding
            scope. The paper begins with a brief overview of the
            Bank's recent work on public expenditures. The analysis
            indicates the lack of a consistent approach to the
            institutional and procedural aspects of public expenditure
            management. The paper goes on to discuss the Bank's
            changing approach towards public expenditures, starting with
            concepts of economic planning and public investment
            programs. It describes how the Bank's concerns have
            pushed beyond the confines of investment programming into
            the wider area of the planning and management of public
            expenditure. The paper then discusses some of the
            difficulties and issues involved in this process. The paper
            attempts to offer some tentative operational guidelines
            based partly on recent experience, and partly on "state
            of the art" in some industrialized and developing
            countries. These are summarized in annexes II and III, while
            annex IV distils some of the main sequential features of the
            budgetary decision-making process.
repnme: repnme: The management of public expenditures : an
            evolving Bank approach
display_title: The management of public
            expenditures : an evolving Bank approach
listing_relative_url: /research/1989/01/700589/management-public-expenditures-evolving-bank-approach
topicv3: Macroeconomic Vulnerability and Debt
            m1326057 1104,Education, Skills Development and Labor
            Market m1326135 1484,Public Finance Management m1326316 716,Macroeconomic Monitoring m1326902 440,Trade m1326924 698
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Poverty Reduction
origu: Policy Plan & Prog Review Dept
no_of_pages: 87
author_keys: 0: author_key: 91336
model_extractions: **Polac,Pnning, and Research**

# **World Devolopmenl Reportn**

The Bank is paying increasing, though stil unsystematic, attention to the institutional dimension of public expenditure management. This implies analysis of the processes and procedures by which programs are put together with an assessment of the strengths and weaknesses of the institutions involved and the links between them. Advising governments on these aspects requires more expertise than most Bank staff members possess. The Bank should develop staff skills in this area through:

- Better coordination in the Bank of public expenditure reform issues.

* More intensive, systematic staff training, and more contact with academics and other outside experts through such vehicles as seminars.

* Closer collaboration and more systematic exchange of views between operational staff and the Policy, Planning, and Research complex, including incorporation of feedback from the seminars held by the Economic Development Institute.

* A closer working relationship with the IMF, especially the Fiscal Affairs Department.

* Development of a well-designed program of operationally oriented, detailed case studies of specific country experiences tsuccesses and failures) from which to draw lessons for future operations and country and economic sector work.

Addressing these issues may also have implications for the type of lending instrument the Bank uses. Reforms of public spending are usually dealt with through structural adjustment loans, backed up by technical assistance operations - but these may not always be suitable. If major policy decisions are required to bring about important long-term structu l' changes, a broader, more flexible lending instrume-.: may be more appropriate.

One approach being explored is to fimance a time slice of the country's public investment program (either on a sector-by-sector or aggregate basis, depending on the scope of the reforms to be introduced) to support not only more appropriate programs but also institutional and procedural reforms of the ways in which public expenditures are prepared and implemented. This approach could combine quick-disbursing balance of payments support with the longerterm approach needed to encourage institutional reform.

This is a background paper for the 1988 World Development Report. Copies are available free from the World Bank, 1818 H Street NW, Washington DC, 20433. Please contact Lupita Matthiesen, room S13-067, extension 33757.

The PPR Woiking Paper Series disseminates the findings of work under way in the Bank's Policy, Planning, and Research Complex. An objective of the series is to get these findings out quickly, even if prcsentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official policy of the Bank.

Produced at the PPR Dissemination Center
## TABLE OF CONTENTS

# Page

## SUMMARY AND CONCLUSIONS

|Introduction|1|
|---|---|
|Overview of the Bank's Recent Experience|2|
|The Planning Concept|4|
|The Macroeconomic Framework|10|
|Investment Programming and Project Preparation|11|
|The Link<br>Between<br>Planning<br>and Budgeting|16|
|OtherAspects<br>of Budgetary<br>Organization|19|
|The Comprehensiveness<br>of the<br>Budget|21|
|Classification of Budget Items|25|
|Budget Implementation and Control of Expenditures|27|
|More Effective Financial Management Information Systems|31|
|Coping With Uncertainty|32|
|Comprehensive Budgetary Reform|35|

## Annexes

- I Management of Public Expenditures: Checklist of Institutional Questions to be Addressed

- II Budgetary Reform: Some Country Experiences

- III The Budgetary Decision-Making Process
Pa&e 1 of 6

# THE MANAGEMENT OF PUBLIC EXPENDITURES: AN EVOLVING BANK APPROACH

# Summary and Conclusions

# Improving Public Expenditure Management: the Main Issues

(i) Effective public expendtlture management has become vital to developing countries in the context of the severe fiscal adjustments of the 1980s. Unfortunately, however, neither the conceptual tools nor the administrative instruments at their immediate disposal have been adequate in equipping governments to meet these challenges. First, on the conceptual plane, financial shortages and a changed view of the role of government have combined with a much more uncertain environment, externally and internally, to undermine the perceived usefulness of long term, comprehensive planning as a development tool. However, this has not yet been replaced by an alternative paradigm. Consequently, in their understandable preoccupation with the short term, policy makers in developing countries may frequently be unaware of the trade-offs between different expenditure patterns within and between sectors. Second, administratively, the increased size and complexity of the public sector had clearly overstretched the management capabilities of many governments even before the crisis of the 1980s. Fiscal constraints have accentuated the management problem through their devastating effect on real wages for many public servants at managerial level. The consequent draina-- of talent and damaged morale of those who remain has made it still more difficult for governments to cope with the competing claims made on limited fiscal resources.

(ii) Effective public expenditure management makes heavy demands on government institutions. Each of its sub-activities -- the formulation of the macroeconomic framework, project preparation and investment programming, the link between planning and budgeting, the coverage, preparation and classification of the budget., and budget implementation and expenditure control -- has an institutional and political, as well as a technical or economic, dimension. A review of the experience of many countries trying to address these issues reveals an awesome array of problems which are at least as likely to have institutional roots as technical ones. Economic analysis and forecasting, even in the relatively short term, is often so deficient that it leaves the authorities unprepared for major deviations from the program necessit_ted, for example, by a substantial external shock. Unable to cope with the uncertainties inherent in the planning and budgetary processes, governments are forced to react
Page 2 of 6 with damaging, ill-thought-out, across the board cuts. Frequently, it will be found that the linkages between the macroeconomic framework and the investment program, and between both and the budget process, are fragile or non-existent. Many governments encounter considerable difficulty in formulating an investment program that is more than an aggregation of wishlists drawn up by the different spending agencies. Control over the external borrowings of government agencies is frequently less than desirable, and even where this exists, donor pressure can at times undermine attempts to exclude significant but economically unljustifiable capital expenditures from the investment program. Phasing of capital spending is often inadequate or non-existent, while the recurrent cost implications of public investments are rarely taken into account. Classifieation of bttdgetary items may not facilitate a policy or objectives oriented approach to public expenditure planning. Budgetary coverage, both in terms of institutions and major categories of expenditure, may be partial, impeding the ability of the core ministries to exercise effective control. On the other hand, the organization of the spending agencies, their technical capabilities for financial and economic analysis, and their linkages with core ministries may be such that an integratid and coordinated approach to revenues and expenditures is, at best, severely impeded. Accounting and financial information systems, which used to work reasonably well, have deteriorated in many couv-iies, and in some cases have disintegrated to the point where they ha come inoperable. Their restoration is a prerequisite, though far frok. fficient condition, for strengthened public expenditure management.

(iii) Government responses to these immense difficulties have been, perhaps inevitably, piecemeal. Most of them have concentrated on expenditure control with an inevitably short term perspes-ive. Others, however, have attempted major organizational reforms, combined, in some cases, with wholesale changes to the planning and budgetary systems. Success has been decidedly mixed.

(iv) While tightening expenditure control at the center may be a necessary and valid response, at least in the short term, it is far from synonymous with good public expenditure management. Even when it is accompanied by strengthening of core institutions, care should be taken not to neglect the sectoral ministries and line agencies where institutional improvements are equally vital. There are, moreover, important questions of accountability and autonomy at stake. Strengthened central control carries the danger of overdetailed intervention by core ministries. Long term institutional reform should concentrate on improving the capacities of both core and line agencies to manage expenditures in accordance with the objectives of economic policy. This, in turn, means developing measurable objectives and evaluation systems linked to appropriate rewards and penalties.
Page 3 of 6 (v) In an effort to improve the links between the planning and budgetary processes, the Bank has frequently become involved in recommending or supporting organizational changes with a view to integrating the functions of budgeting and investment planning. These efforts have had mixed success and may, in many cases, be a red herring. While organizational changes are important, they can sometimes be an unsatisfactory substitute for deeper procedural and policy reforms. It is essential not to confuse the two.

(vi) Dissatisfaction with many aspects of public exppnditure management has led several governments, sometimes with active support from the Bank and other external agencies, to attempt wholesale reform of the entire budgetary or planning process. Some governments have endeavored to introduce techniques such as program or performance budgeting. While these contain many useful lessons, they should, from an institutional and political viewpoint, be approached with caution. Following a few simplo (but frequently ignored) rules will greatly enhance the chances of success for reforms, be they partial or general. They should make the greatest possible use of existing institutions: the grafting of new ones onto traditional structures often serves merely to increase confusion. Reform should proceed gradually and should involve all the principal actors from the outset. The effort needs to be guided by a centrally placed agency responsible for coordinating training and the dissemination 3f information. New processes and procedures should be tried out in suitable pilot ministries and agencies and gradually extended to the rest of the administration. Moreover, reform efforts need to be carefully planned. They are often costly in terms of the human and financial resources needed to carry them out. Failure to provide for this will undermine the reform effort itself and the credibility of its goals.

(vii) To stand a reasonable chance of addressing the complex institutional and technical issues involved in public expenditure management, governments require an analytical framework which would enable them to forecast and program spending over a three to five year period (updated annually), taking account of both likely resource constraints and the link with the economy at large. Such a framework -- which can be described in summary as Medium Term Expenditure Planning or MTEP -- carries many of the virtues of the comprehensive planning approach to public finance, an area singularly apt to benefit from them, while attempting to avoid the drawbacks. It would contain a macroeconomic framework, linking public expenditures and revenues to other economic variables; projections of the major items of current expenditure; a multi-year, phased public investment program distinguishing between high and lower priority projects; and projections of revenues from tax and non-tax sources as well as borrowing needs. It should also be formulated in such a way as to help policy makers cope with uncertainty by preparing alternative expenditure policy strategies corresponding with different economic and financial scenarios. It would thus help to achieve consistency between expenditures and macroeconomic assumptions as well as placing due emphasis on public expenditure as a policy instrument.
Page 4 of 6 (viii) Although a full MTEP exercise may be beyond the immediate capacitv of many governments, it nonetheless provides a consistent analytical framework for expenditure management and a relevant goal towards which to strive. Many of its features have been successfully adopted by a number of countries.

# Implications for the Bank

(ix) The importance of the institutional dimension of public expenditure management has become increasingly recognized in the Bank in recent years. The number of structural adjustment and technical assistance operations which address these issues is increasing, especially though not exclusively in Sub-Sanaran Africa. More attention is also being paid to them in economic and sector work (CESW). Although it is still possible to encounter major public investment reviews which concentrate almost entirely on the size and composition of the nublic investment program, with scant regard for overall expenditure management problems, these are now rare. However, Bank work in this area ctill needs to be more systematic; at the msoment, in both reviews and lending operations, there is substantial variation in the scope and depth of coverage given to institutional issues. This may not necessarily be in response to any corresponding variation in the extent of institutional problems in the particular country, but may rather reflect the professional knowledge and interests of the Bank staff members concerned. A more systematic approach to the political and institutional aspects of public expenditure management needs to be routinely built 5into Bank reviews and operational work. The high institutional content of some recent reviews is an encouraging tendency which should be developed further through training, both "on the job" and otherwise, and through the judicious use of outside expertise.

(x) The institutional dimension of public expenditure management is a highly complex and sensitive area. The multiplicity and diversity of public agencies, interest groups and individuals with a vital stake in the process means that the political dimension is of primary importance. The role of the Bank is thus a particularly delicate one. Governments understandably resent outside interference in such a political area as the allocation of public expenditures. In this context, it is noteworthy that the Bank often finds itself with a more problematic role to play than the Fund. The latter is concerned witB the "bottom line" of total revenues and expenditures and the consequent fiscal gap, whereas the Bank analyses not only the size but the composition of public investment and, increasingly, expenditure programs. Experience indicates, however, that the key element to better investment programming in particular, and public expenditure management in general, lies in the Rrocess by which programs are identified, prepared, approved and implemented; if the process can be strengthened then this should lead to better programs of a more appropriate size.
Page 5 of 6 (xi) To advise governments on the institutional dimensions of this process requires greater expertise in the practicalities of public expenditure management than most Bank staff currently possesA In the short term this can be partially alleviated by outside exp^rtise. In the long run, a more conscious effort should be made to develop staff skills in this area through: more intensive and systematic staff training;

- bettc tternal Bank coordination of public expenditure reform issU5s staff working on a particular country are often not fully aware _c_ similar efforts in the 'ame region let alone elsewhere in the Bank. The potential offered by the reorganized structure for taking more systematic advantage of work carried out at a sector or spending agency level by "project" staff should be more fully exploited. The minimal coordination provided by occasional public expenditure reviews shoulG be replaced by more frequent and regular instruments;

- the development of a stronger methodology, guidelines, and a checklist of questions for the use of operational staff;

- more coordination and collaboration between operational staff and EDI; not only do the courses on public expenditure management offered by the Institute contain valuable material for Bank staff, but they could also be a useful vehicle for obtaining feedback from government participants who are the daily practitioners in this area;

- more extended and intensified collaboration between the Bank and the Fund (especially the Fiscal Affairs Department). The work of both institutions could greatly benefit from more frequent and systematic exchanges of views, regular exchange of documents, participation in missions, etc.

- greater contact with academic and other experts outside the Bretton Woods institutions, as well as participation in seminars, conferences etc.; and

- a well-designed program of operationally-oriented, detailed case studies of specific country experiences (successes and failures) from which to draw lessons for future operations and CESW.
Page 6 of 6 (xii) The lending instrument so far most closely associated with public expenditure reforms has been the SAL, frequently backed up by technical assistance loans of varying effectiveness. It is questionable whether these are always the most suitable instruments. The long-term nature of the issues to be tackled, and the variation in country experience, calls for flexibility in operational approach and style. If major policy decisions are required to bring about important structural changes, then policy-based lending may be the best way to support this; however, it may be more productive, especially from the point of view of sustainability, to use longer term, broader, and more flexible instrument than the traditional SAL or sector loan. An interesting approach, which is already being explored in some parts of the Bank would be to finance a time-slice of the country's public investment program (on a sector-by-sector, but preferably on an aggregate basis) to support not only a more appropriate size and composition of the program itself, but also institutional and procedural reforms in the D2.3cess by w.ich public expenditures are prepared and implemented. This could, if carefully designed, combine the appeal (from the Government's standpoint) of quick disbursing balance of payments support with the longer term approach required to encourage and support institutional, reforms.
# THE MANAGEMENT OF PUBLIC EXPENDITURES: AN EVOLVING BA1%K APPROACH

# Introduction

1. World Bank lending and advice to support institutional and policy reform of public expenditure management is of recent origin and of limited, but rapidly expanding, scope. The area where this concern has been most sharply focussed is on the management of public investment programs. Such programs are frequently a drag on public sector activities and hence in need of attention. However, in seeking to improve the decision-making process with a view, for example, to curbing inappropriate or excessive investment, or ensuring a more economic use of public resources, the Bank has inevitably been led away from exclusive concentration on the investment program E= seand towards wider expenditure issues. At the most superficial level, this can be seen in the accelerating substitution of public expenditure reviews at the expense of public investment reviews. More significantly, it reflects an increasing awareness that the difficulties of investment programing cannot be dealt with in isolation from the more general problems of public expenditure management, including the budgetary process, the institutional capacity of both core and line agencies, relations between core and line agencies, and the political economy of budgetary reform. This intensifying focus on institutional issues arises from the well-founded belief that reforms are unlikely to be durable unless the related institutional capacity is strengthened. This type of change is often difficult to effect given characteristic shortages of skilled manpower in most developing countries. It therefore requires both a longer time period for implementation than most Bank-supported activities and presents a new challenge in terms of devising appropriate lending instruments. It is leading the Bank into areas of increasing institutional complexity and political and technical controversy where there are no easy guidelines or precise solutions.

2. This paper attempts to address some of these issues in the light of recent Bank experience. Despite the fact that that experience is short, the paper attempts to develop some guidelines for the future direction of the Bank's work in this area. However, the conclusions should be taken as indicative, not only because prescriptions should be tailored to fit each country's circumstances, but also because institutional reform by its nature does not lend itself to strict models or blueprint approaches.

3. The paper begins with a brief overview of the Bank's recent work on public expenditures both in the context of country economic and sector work (CESW) and lending operations. Itis based primarily on the projects and documents listed in Annex I. This analysis indicates the lack of a consistent or systematic approach to the institutional and procedural aspects of public expenditure management. As background to an attempt to develop more consistency, the paper goes on to discuss the Bank's changing approach towards public expenditures, starting with the concepts of economic
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planning and public investment programs It describes how the BanPs concerns have pushed beyond the confines of investment programing alto the wider area of the planning and management of public expenditure and ';rom there to the reform of budgetary processes and prcradures. This covers not only the link between the expenditure program and the budget, which is the principal administrative instrument for program i plementation, but also the budgetary process itself. The paper then discusses some of the difficulties and issues involved in this process, particularly from the political, institutional and procedural standpoints. This is followed by an analysis of alternative approaches to budgetary reform which are evolving outside as well as inside the Sank and which aim to improve the budget's utility as an effective instrument of economic policy. It attempts to offer some tentative operational guidelines based partly on recent experience, and partly on the "state of the art" in some industrialized and developing countries. These are summarized in Annexes II and III, while Annex IV distils some of the main sequential features of the ba. 'tary decisionmaking process.

# Overview of the Bank's Recent Experience

4. The Bank has traditionally approached public expenditure management issues through three closely interrelated activities: structural adjustment lending operations (SALs), technical assistance, and country economic and sector work (CESW). All structural adjustment loans support, inter alia, a rationalized public investment program, the size and composition of which is discussed with the Bank and included in the loan documentation. In addition, in nearly all cases, the country has entered into a Standby Arrangement or Extended Fund Facility (EFF) agreement with the IMF which normally supports a number of measures to reduce or rationalize public current expenditures with a view to increasing public savings. By the very nature of the agreements concerned, these programs tend to be focussed on the short term. The Fund also automatically requezts Bank endorsement of the public investment program for an EFF and, increasingly, for Standby Arrangements also.

5. The extent to which the Bank has gone beyond these "traditional" concerns (size and composition of the investment program plus short-term financial stabilization normally with parallel support from the Fund) varies considerably between SALs. Thirty-six such loans and credits, approved between November 1981 and June 1986, featured rationalization of public investment programs, and most incorporated IMF-supported budget deficit reduction measures. However, few explicitly included institutional or procedural reforms to back them up. The lack of sufficient institutional underpinning carries the danger that programs will not be sustained beyond the short term. Alth- gh there have been improvements in public investment programing in most cG .tries undertaking strcutural adjustment programs, the

- 1/ No specific public expenditure reform loan or credit has yet been submitted to the Board, though some potential operations are in early stages of preparation.
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administrative and institutional support frameworks are still fragile. Permanent improvement will require continuing vigilance on all aspects of in3titutional structure, including retention of capable staff, use of economic crite_ia for project selection and evaluation in operating agencies, and inter-ministerial planning and budget coordination. In some of the more recent Bank-supported adjustment programs, total public sector expenditures, including both current and investment expenditures, are considesed appropriate targets for policy reform.

6. The second principal lending instrument used to approach public expenditure management issues has been technical assistance lending. Unlike *.._ SkLs, these loans and credits focus more on long-term, institutional problems which they seek to overcome no mally through the financing of temporary expatriate assistance and through training. Typicallv, they would include strengthening key functions in the core agencies (finance and planning ministries, plus in some cases the central bank or office of the comptroller and accountant general) such as macroeconomic strategy formulation, investment programming, budget preparation and expenditure control, and the establishment of central accounting and monitoring systems. Line agencies are covered more rarely since sectoral management capabilities are frequently the focus of Bank project work. In most cases, the TA projects are too recent to permit judgements concerning success or failure.2 However, several of them have taken considerably longer to get off the ground than was anticipated at appraisal, reflecting to some extent administrative delays (in finding and appointing expatriate experts, for instance, or completing complicated formalities for the contracting of consultants), but also lack of government interest. This, in turn, reflects some resistance among governments (notably in Latin America) to "studies for their owr sake" especially in politically sensitive areas such as budgetary procedures. For those operations more focussed on implementation than on study, it is perhaps unrealistic to expect most governments to undertake deep-seated and politically difficult actions in the absence of more powerful financial incentives than those provided by most technical assistance operations.

7. The third instrument used by the Bank is country economic and sector work (CESW), notably public investment and expenditure reviews, a considerable number of which are performed each year. These activities are evolving in a way which, on balance, shows an increasing concsrn for institutional issues and a widening of interest from investment to problems of current expenditure management. An analysis of the more recent reviews, prepared by the Bank's Country Econbomics Department (CECEM), shows that several of them address issues such as: (i) the ability to plan and appraise projects; (ii) the decision-making process concerning which projects are included in the investment program; (iii) the ability to monitor and evaluate projects; and (iv) budgetary procedure. However, the coverage and depth accorded to such subjects varies considerably among the reviews: a 2/ See, however, Annex III for a partial discussion of the Administrative Reform Project in Jamaica.
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,ew deal with none of them, while the attention given to item (i) and to a lesser extent item (ii) generally exceeds that afforded to items (iii) and (iv). It is clear that there is no consistent or systematic approach to these issues. Some staff question whether the Bank has the expertise necessary to make recommendations in this area and the credibility to follow them up with appropriate lending instruments. Such self questioning is to be expected and is characteristic of most new or rapidly evolving activities which the Bank.undertakes.

8. In addition to public expenditure reviews, the Bank sometimes uses its regular reports on the economies of borrowing countries, or similar vehicles, to discuss public expenditure management issues. Again, the coverage give'.i to institutional and procedural problems varies greatly and does not follow any consistent or systematic format.

9. Exceptionally, CESW is used as a tool for detailed Bank collaboration with Government in implementing improved investment programing and budgetary systems and procedures. A leading example is that of Zambia where the CESW approach had zhe great advantage of direct involvement by Bank staff who had been engaged for some time in an intense policy dialogue with the authorities. However, this is very expensive in use of staff time, 3 and does not, unlike a lending operation, involve the Government in implementation deadlines. Although it may be appropriate to commence with such a process rather than policy oriented approach, in order to build longterm sustainability of the reform effort, this does not, as Zambia's subsequent experience has shown, eliminate the necessity of deep-seated policy level commitment to change.

# The Planning Concept

10. The planning experience4 is immensely varied among developing countries, where more than 300 plans have been formulated during the past 30 years. At the risk of over-simplifying, countries may be divided into four broad categories: (i) those where e-omprehensive, central medium-term planning has been practiced with the full backing of the political authorities (Eastern Europe plus some countries in South Asia, especially India, and North Africa) and seeks to directly influence private as well as public spending; (ii) those where planning is seen as a means of controlling and directing public expenditure and of setting a framework of active

- 3/ In fiscal year 1985 alone, 51 staff weeks were used in Zambia with a further 18 planned for the next two fiscal years. This does not include the substantial amount of time devoted to these issues in the context of economic missions, preparation of Consultative Group meetings, and the broader policy and sector dialogue.

- 4/ The discussion in this section draws upon work carried out by Ramgopal Agarwala in preparation of the 1983 World Development Report and subsequently. Much of this is also summarized in his "Planning in Developing Countries: Lessons of Experience" Staff Working Paper No. 576.
- 5 -

cooperation with a strong private sector including foreign investment; here, flexibility and adaptability to changing circumstances are the hallmarks (Korea, Taiwan, Singapore, Malaysia); (iii) those where central plans were formulated but where comprehensive planning was only nominally adhered to by the political authorities often to assist in mobilizing external<sup>5</sup> aid (most of Sub-Saharan Africa); and (iv) those where there is little or no emphasis on central planning and where private investments are guided essentially by price signals arising from a relatively free functioning market (Hong Kong, Thailand, Colombia).

11. Since the 1950s and 1960s, a major change has taken place in the attitude of developing countries towards centralized comprehensive planning, and correspondingly in that of the Bank. In many of the category (i) countries, most notably India, planning, though by no means abandoned, has lost some of its emphasis and unquestioned political support; even in East European countries and the People's Republic of China, there is a tendency towards greater reliance on market forces and individual incentives. Most category (iii) countries have dropped any pretence at taking central planning exercises seriously; Ministries of Planning or their equivalent are still scattered through Sub-Saharan Africa but they are more and more dedicated to the vetting of investment projects and programs rather than the elaboration of self-contained documents providing a blueprint for development. Where such exercises still continue, they are frequently little more than academic with no real political backing. Indicative planning continues in many of the category (ii) countries, especially in East Asia, reflecting the special relationship between the Government and the private sector. However, these plans, although at times technically sophisticated, are not characterized by strict adherence to targets, but by consultation and flexibility.

12. There are a number of reasons for these changes, some of them due to trends in the economics profession itself, and others to the different circumstances and challenges which developing country governments have to face. First, within the profession, the rise of planning coincided with a view<sup>6</sup> that developing countries are characterized by accumulated cultural, social and institutional rigidities, which inhibit or prevent change. Consequently, in economic terms, agents cannot respond readily to price signals and the supply of most goods and services tends to be price inelastic. Hence "getting the prices right" (even if possible) can only be expected to have a limited impact at best, while only determined government action to change the structure of production and trade and to reallocate resources within the economy can bring about modernization and development. Hence the need for governments not only to closely direct economic actions, but to establish and control a wide range of prices of goods and services. Governments responded readily to these economic paradigms since they had the

- 5/ Where, however, several other instruments of a dirigiste approach, e.g. price controls, are applied in a largely ad hoc fashion.

- 6/ Encapsulated in what came to be called the "structuralist" view of development.
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effect, inter ali, of increasing still further the relative status and self-importance of officials already well established in many countries by the bureaucratic mores inherited from the colonial powers.

13. This view of the development process has, in recent years, changed considerably: most economists, within and outside government, now believe that, in developed and developing countries alike, quantities are in fact more flexible and resources more mobile than previously assumed, economic agents do respond to price signals, and markets, despite recognized imperfections and partial failures, tend in many cases to be better allocators of resources than governments. This change ir. attitude is, to some extent, the child of disillusion. The experience of detailed and comprehensive planning, as a logical corollary of the structuralist approach, was generally a severe disappointment. Even where some targets were achieved this was at the price of stunted growth and feeble institutional development outside the public sector itself. Overambitious planning spawned large public projects, some of which remain a costly burden. Similarly, the growth of a vast array of state institutions to achieve central government objectives encouraged the formation of interest groups which in many cases represent a financial burden on the State and can hinder the execution of development policy. 7 Detailed planning failed to respond to changes in the international economic environment. Even in those developing countries endowed with highly sophisticated economic expertise (e.g. India), analytical techniques and the administrative apparatus proved incapable of coping with the complexity of economic change. In most countries, the institutional framework could not begin to confront the requirements of a serious economic planning effort. Consequent heavy reliance on expatriate expertise further alienated the plans from the national reality.

14. Second, the role of central planning, with all its institutional connotations, received a major blow with the onset of the financial and economic crises which afflicted much of the developing world following the oil shocks of the 1970's. Projections, based principally on the notion that the future would be a slightly modified extrapolation of the past, lost their practical meaning. Moreover, sheer financial survival became the order of the day, and there was, therefore, little scope or desire to see beyond the short term. This affected not merely the concept of medium or long-term national planning but also investment programing and the management of public expenditure in general which now tends to assume an intensely shortterm and highly selective focus.

15. While few would question the severe limits to the usefulness of detailed, comprehensive planning, there is a distinct danger that the crisis may make many governments lose sight of its virtues. Partly through ideological change, but mainly through the force of circumstances, the 7/ Public enterprises in most of Sub-Saharan Africa are a case in point. See J. Nellis: "Public Enterprises in Sub-Saharan Africa", World Bank Discussion Papers No. 1, 1986.
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authorities of many developing countries have de facto resorted to reliance on traditional budgetary' methods for allocating resources. Under this approach, it is inevitable that short-term considerations will dominate. Ministries of Finance frequently impose control through the establishment of overall ceilings on government expenditure. If resources are less than anticipated, then the problem is resolved by across-the-board cuts. This implies scant regard for the quality of expenditure composition: since some categories are considered untouchable (e.g. personnel), then it is inevitable that budgetary ceilings, unaccompanied by planning, will lead to a progressive deterioration in the structure of expenditures, in the budget as an instrument of economic policy, and in the quality of government services. This is the pattern whiLh has become depressingly familiar in recent years, especially though far from exclusively, in Sub-Saharan Africa.

16. The approach increasingly favored by the Bank in its dialogue with governments places greater emphasis on programing public, as opposed to total, expenditures within an overall framework of greater reliance on market prices and private sector decision-making. This implies shifting the focus away from some coincepts of planning, which were earlier in vogue, and which conjure up a vision of government intervention in private decisionmaking. It should not, however, suggest a wholesale rejection of the concept and usefulness of planning. On the contrary, it explicitly recognizes that public expenditure programing cannot take place in a vacuum, and that some sort of systematic forecasting framework is a sine aua non for effective public expenditure management. In fact it is the public sector which should attempt to plan its own activities better without, however, trying to plan those of the private sector.

17. While choices in the short run may be severely limited by constraints, both exogenous and endogenous, to the public sector and the economy as a whole, over a longer period choice may become dramatically expanded. Options may emerge concerning not only the composition and size of the public expenditure program, but also between different totals and allocations of current and capital expenditures (some of them functions of .the investment choices made), as well as their phasing. Political decisionmakers and their technical advisers are frequently unaware of the trade-offs between different expenditure patterns even within, let alone between, sectors. Comprehensive awareness and consideration of these issues entails the coordination of macroeconomic analysis with public expenditure planning and budgeting over, say, a three-to-five year horizon. This coordination process may also be described as medium-term expenditure planning (MTEP), which, in essence, carries many of the virtues of the comprehensive planning approach to the area of public finances, an area which is singularly apt to benefit from them, while attempting to avoid the drawbacks.

18. In outline, the characteristics of an MTEP would be built from the following components:

- (a) macroeconomic analysis linking the growth of national income, savings, investment and balance of payments to public expenditures and revenues;
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- (b) a rolling, multi-year public investment program with phased outlays reviewed annually;

- (c) a fiscal plan, including:

- (i) -evenue forecasts at existing rates of taxation consistent with the macroeconomic assumptions;

- (ii) forecast of non-tax revenues (surplus of public enterprises, fees, user charges, etc.) based on macroeconomic projections but without any changes in policy;

- (iii) estimation of additional revenues which may be mobilized by, for example, higher tax rates, a different tax structure, or institutional and administrative reforms in tax collection;

- (iv) estimation of additional income resulting from changes in the policy framework for public enterprises, public sector pricing policy, charges in the social sectors, etc.;

- (v) estimates of resources ava<sup>4</sup> lable from domestic and external borrowing and grants; and

- (vi) projections of current expenditure including debt-servicing, defense, administration and recurrent expenditure on development (sub-divided between committed and anticipated discretionary expenditures).

19. Consistency may be insured by establishing balances, year by year, for the plan period, between the sum of domestically genqrated resources and net inflow of external resources on the one hand, and total public expenditure (including public capital spending and net transfers to autonomous public entities) on the other. Given the inherent uncertainties in forecasting exercises, the trade offs to be considered, and the iterations that would be required to achieve consistency, it would in most countries be more feasible to formulate the MTEP over a three rather than a five-year period. Ideally, it should be a rolling program, updated annually.

20. Clearly, the MTEP exercise is fraught with difficulties. Export volumes and prices, interest rates, and the availability of foreign capital can all vary due to changes in external conditions. Also, governments change, and with them perceptions as to the principal objectives of economic policy. Moreover, in most developing countries, the exercise is "unrealistic" in the sense that if governments were able to formulate, and subsequently adhere to, a multi-year rolling MTEP this would in and of itself be a clear indication that they had their public sector finance problems under control, at least from an institutional and managerial standpoint. It is, nevertheless, useful in providing an analytical framework for public sector expenditure planning, which ensures consistency with macroeconomic assumptions and is itself a benchmark against which existing systems of planning and budgeting may be judged. Moreover, it
-9-

greatly facil.tates the view of public expenditure as a policy instrument rather than meraly stressing the "good housekeeping" aspect of budgeting. Once a government has formulated a policy framework in the context, for example, of a structural adjustment program, this can then be broken down into constituent parts, some of which will likely involve the establishment of targets and the enactment of reforms in the public sector. An MTEP exercise can illuminate the revenue and expenditure implications of achieving these targets, thereby enabling a sharper focus on the extent and depth of the specific reform measures required. It also facilitates analysis of the projected impact of the policy measures on the rest of the economy through the systematic linkage between the public sector variables and the macroeconomic model.

21. The institutional problems encountered in the establishment and successful operation of such a system of reformed public expenditure planning are formidable. For the Bank to be of greater assistance to developing country governments in overcoming them, it is necessary for staff to be fully aware of the issues involved and how they might be tackled. While not neglecting the traditional concerns such as the composition and size of the public investment program, and whether or not major projects are subjected to cost benefit analysis, this does involve going considerably beyond them into areas which are fraught with political as well as institutional difficulties.

22. Each separate sub-activity of public expenditure planning -- the formulation of the macroeconomic framework, project preparation and investment programming, the link between planning and budgeting, the coverage, preparation and classification of the budget, and budget implemenitation and expenditure control -- has an institutional and political, as well as a technical or economic, dimension. This dimension raises a number of key questions which need to be answered if the potential obstacles to reform are to be more fully understood. The detail with which each issue needs to be addressed will inevitably vary in accordance with each country's circumstances. Frequently, however, it will be found that the linkages between the macroeconomic framework and the investment program, and between both and the budget process, are fragile or non-existent. The demise of compreheisive economic planning is in danger of bringing in its wake a withering of all planning capabilities in many developing countries to the detriment of effective expenditure management. Many governments encounter considerable difficulty in formulating an investment program that is more than an aggregation of wish-lists drawn up by the different spending agencies. Macroeconomic analysis and forecasting, even in the relatively short term, is often so deficient that it leaves the authorities unprepared for major deviations from the program necessitated, for example, by a substantial external shock. Classification of budgetary items does not facilitate a policy or objectives oriented approach to public expenditure plannine. Control over the external borrowings of different government agencies is frequently less than desirable, and even where this exists, donor pressure can at times undermine attempts to exclude significant but economically unjustifiable capital expenditures from the investment program. Phasing of capital spending is often inadequate or non-existent, while the recurrent cost implications of public investments are rarely taken into
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account. The organization of the spending agencies, their technical capabilities for financial and economic analysis, and their linkages with core ministries are such that an integrated and coordinated approach to revenues and expenditures is, at best, severely impeded.

23. The rest of this paper attempts to analyze these and other difficulties, from the standpoint of identifying the institutional reforms which may be necessary if public expenditure planning is to become an effective policy instrument.

# The Macroeconomic Framework

24. When the Bank undertakes a public expenditure review, it normally includes an assessment and projection of the macroeconomic framework for a period of three to five years ahead. This provides not only background and a cortext for public expenditures, but is also the basis for revenue fore asts. However, it is often unclear from the reviews whether the authorities themselves are capable of carrying out a similar exercise or, if s^, whether this is consistent with that of the Bank. To be sure, the review is normally discussed with the government, but this discussion frequently focusses on the results of the pro. ctions rather than how they were produced. Moreover, the time lag between the initial review mission and the discussion with the government is sometimes of such duration that the Bank's assumptions may have lost much of their relevance.

25. Institutionally and technically, the Bank should assess: (i) what capabilities exist for macroeconomic analysis in the country concerned; (ii) what agencies are responsible for it; (iii) in what format the projections are produced (e.g. in a medium-term plan, through a forecasting model, through an annual economic report); (iv) whether the model or methodology used is sufficiently flexible to permit consideration of alternative scenarios; and (v) whether it permits the analysis of the impact of alternative expenditure strategies on economic variables. Even where such capabilities exist, institutional factors may impede their usefulness or practical application. Where, for example, are they located within the administrative machine? How effectively do they communicate and coordinate with other parts of the administration? How seriously are they taken by dhe highest political authorities and by those responsible, in both the core and line ministries, for the preparation of plans and budget estimates? Is there adequate coordination of the efforts of different agencies with consequent consistency of assumptions and results? If the answers to these questions reduce the relevance and effectiveness of plans and budget estimate, what measures are required to correct the situation?

26. A related set of questions concerns the quality of background material and guidance provided to those responsible for planning expenditures. Those Bank reviews which have addressed this issue usually find this of low quality or altogether absent. Again this is by no means confined to the leaz developed countries: a recent report on a major Latin American country found that no norms were provided to parastatals or spending ministries concerning macroeconomic variables such as the expected
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rate of inflation, exchange rate movements, etc. Each agency thus produces its own with resultant inconsistencies which must be resolved, if at all, at a later stage of the expenditure cycle.

27. Finally, what kind of feedback is provided by macroeconomic analysis into the budget execution and monitoring process? Are contingency review meetings attended by forecasters? Are strategic choices analyzed when resources are less than anticipated? If so, by whom? Do the institutions involved have the capacity and the authority to carry their task out adequately? Are governments provided with the necessary information and guidance to react in any way other than simple across-the-board cuts? Again, the answer to these questions is frequently in the negative.

# Investment Programing and Project PreRaration

28. The institutional arrangements which exist for the preparation of medium-term plans and investment programs vary enormously from country to country, but in only rare cases could they be described as acceptably satisfactory according to the criteria r.3rmally applied by the Bank. This is perhaps less than encouraging in view of the immense effort which the Bank has put in over the years to improving public investment programing. This is not to say that these efforts have resulted in unmitigated failure. Some improvements have taken place, especially within the framework of a general economic reform program whether or not directly supported by Bank structral or sectoral adjustment lending. In a considerable number of countries, thanks to financial pressures, public investment expenditures have been substantially reduced to levels more consistent with overall resource availability. To a lesser extent, the composition of programs has also been improved especially where Bank financial assistance has been directly provided. Nevertheless, among the difficulties which remain in many countries are:

- (a) Considerable and deliberate overprograming, reflecting an unwillingness or inability to make hard decisions as to priorities. This leads not only to the formulation of programs way out of line with domestic or foreign resource availability, but also to too many projects being started at the same time, excessive dispersion of available skills, slowdowns in project implementation and lower returns from investment.

- (b) The lack of criteria for choosing which projects should or should not be included in the program. This has been addressed, with varying degrees of success, through Bank and other technical assistance to both planning ministries and spending agencies. Bank reports contain many recommendations for improved project appraisal capability. Over the years, thousands of officials from developing countries have been trained in analytical methods, through EDI courses and other means. Nevertheless, although no systematic survey or assessment of country practices has been undertaken, it is clear from references in expenditure reviews and other documents that a permanent institutional capacity is being built up only gradually and in a limited number of countries. In
12

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some parts of Latin America,<sup>8</sup> a high level of project appraisal capability has become established in public sector utilities and other implementing agencies to which the Bank has lent; in other countries of the region, the picture is less encouraging. In SubSaharan Africa, there have been many attempts to develop project appraisal techniques in core ministries. Despite all this effort, relatively few countries have systematically established procedures or institutional capacity for economic project appraisal at either s.ectoral or core ministry level. Even in Turkey, a recipient of five structural adjustment loans, a 1985 public expenditure review found "important eeficiencies in project preparation and selection even in the case of agencies with high technical competence." Political considerations seems to dominate in project choice. There is still a widespread ignorance and/or mistrust of cost benefit techniques, well justified in many sectors. Such techniques are, perhaps, most widely accepted in transport where they are more refined, and where there is reasonably good knowledge of recurrent cost implications and of trade-offs between capital and recurrent expenditures. In other areas (especially agriculture and the social sectors), such knowledge is less developed and hard data is often difficult to come by. This is not to argue against the use of cost benefit techniques with the appropriate institutional backing; at best, they can lead to vast improvements in public investment programming, and at worst they can be conducive towards a more rational political debate on project choice. Perhaps that partially explains the slow progress in promoting their use. In poorer countries, with a high proportion of donor-financed projects, there may perhaps be more projects subject to economic analysis, though donor pressures to proceed are also strong. In any event, few projects financed by other donors seem to meet Bank standards of analysis.

(c) The lack of priorities and ranking of projects. Governments, together with the Bank, have tried to address this through the formulation of "core" investment programs. An agreement is reached that the government abandon a policy of partially funding all or most projects, and distinguishes between "core" projects which should receive funds under all circumstances and standby projects which are funded only when additional resources are available. It is important to emphasize here that "funding' includes not merely capital, but all current resources required to complete and operate a priority project. "Core" programs should also be concentrated on strategic projects and should exclude white elephants even where funding is assured. However, such programs need to be formulated against the background of consistent overall macroeconomic objectives and should take account of the constraints faced by the public sector and by the economy at large through the balance of payments, etc. Their 8/ For example, in Chile and, at least until recently, Panama.
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preparation therefore frequently runs up against t'ne same institutional and manpower constraints facing the formulation of macroeconomic strategies. In Sub-Saharan Africa, it is far from un'known for the core program to be hastily prepared by Bank staff, in advance of a Consultative Group meeting, with marginal participation on behalf of nationals.

- (d) Lack of coordination among donors and donor pressure for unjustified projects. Theoretically, "core" programs should provide a framework within which donors can agree to concentrate their efforts. However, difficulties can and do arise when a donor's pet project, perhaps already underway, finds itself excluded from the "core" program. Despite much rhetoric to the contrary, there is incomplete recognition of Bank leadership and coordination of donor support for investment programs ever. when this is institutionalized through Bank-organized Consultative Croup (CG) meetings. Examples of successful resistance to donor pressure for economically unjustified projects are not unknown (e.g. in Panama and Chile), though they are still exceeded by failures. Reluctance to accept a Bank leadership role stems from both donor and recipient governments for fairly obvious political reasons. It can only be gradually overcome through increases in the scope and depth of Bank CESW and policy-based dialogue with governments.

- (e) Poor coordination between macro-analysis and expenditure planning can also lead to a lack of appreciation of the impact of the general policy framework on the success of a public investment program. In some countries, the opportunity provided by a Banksupported structural adjustment program has been taken to increase government awareness of inappropriate policies which impose a heavy fiscal burden and devour resources that would otherwise be available for investment. Chief among these are: (i) pricing policies leading to large subsidies which are not only a direct strain on the budget but may also discourage production and hence reduce resources; (ii) substantial and unproductive overemployment in the public service; (iii) inadequate control over the expenditures of local authorities and autonomous agencies; (iv) public ownership of inefficient and loss-making enterprises, established with the intention of remedying market failures or achieving social objectives, but in practice doing neither; and (v) the general incentive and policy framework. If there is, in broad terms, a failure to encourage efficiency through economic incentives, then this will, of course, affect the quality of both public and private investment. Poor private investment decisions can in turn feed back on the public sector through not only fewer resources but also a sense that the public sector "must do everything."

- (f) Poor implementation and operation of projects, often due to general underfunding, lack of prior analysis, including identification of interlinkages between projects, and failure to foresee current expenditure implications for operation and maintenance.
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29. As a result of the fact%.s listed above, the pAblic investment portfolios of many borrowing countries are less than satisfactory, containing poor quality projects and rates of return well below expectations. Bank dialogue has responded to this by stressing the need to improve the productivity of existing investments, particularly in view of the scarcity of resources for new projects. In some countries, governments have thus been stimulated into placing greater emphasis on maintenance, rehabilitation and changing inappropriate pricing policies, an emphasis made easier by direct Bank support through project or sector lending.

30. Although important partial improvements have been attained in a minority of borrower countries, it is recognized within the Bank that a great deal remains to be done in achieving lasting improvements to public investment planning and programing. Much of this can be summed up under the heading: "the institutional dimension of reform." To begin to addrass this dimension, Bank staff need to go beyond the programs' size and composition and consider a number of key institutional questions, 9 the answers to which could at least initiate measures aimed at a solution.

31. First, is the planning function adequately coordinated or is it fragmented over a number of institutions? In Egypt, for example, it was found that the Ministry of Planning prepares five-year and annual plans and coordinates and channels foreign aid. The National Investment Bank finances approved projects and monitors physical progress. The Ministry of Finance mobilizes domestic resources for project finance. The Ministry of Economy is responsible for channelling foreign expertise and grants and transfers. Second, if there is fragmentation, why does it exist? Is it because of historical factors, the addition of new functions which overlap with existing ones, or the result of a deliberate decision to split judicial power so that the real authority rests elsewhere? Third, what would be necessary, in the context of each individual country, to achieve greater effective coordination? Could this be accomplished by simple merger or combination of the efforts of existing institutions, or, more typically, is the lack of coordination the result of deeper factors? Fourth, to what extent is each phase of the planning function related to different sets of interest groups with varying political priorities, and how far does this account for what may appear from the outside to be institutional fragmentation?

32. Fifth, it is important to plot the Rrocess by which the investment program is actually put together. The first step would be to examine existing laws and regulations; monitoring what occurs in practice is, however, more difficult. Perhaps the best way to do this, which would also answer some of the questions raised in the previous paragraph, would be to track typical investment decisions from their inception to their inclusion in the investment program. This is by no means an easy task and involves understanding and penetration of the governmental decision-making process.

- 9/ Some already address a number of these issues. However, as stated earlier, there is considerable variation in Bank treatment of them and a notable lack of a systematic approach.
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Recommendations at a technical level (e.g. improving project evaluation techoiques) would, however, be of little use outside the political context in which they will be applied. It is important to distinguish clearly between the political and technical phases in the decision-making process, so that it becomes as transparent as possible. This will enhance the chances of effective resistance to abuses.

.33. Typically, though not exclusively, a project will originate in a sector ministry or autonomous executing agency (e.g. a public enterprise). Are these agencies capable of generating sensible capital expenditure proposals? Are coherent sector strategies developed or is there, rather, a "bottom up" approach to project selection influenced by the availability of donor finance and the political-power and administrative skills of a particular minister in getting a project approved by Cabinet before it is properly vetted? What are the capabilities in a sector ministry or executing agency for developing a medium term strategy and for project evaluation, including the practical application of cost benefit techniques? In some cases, there may be no clearly delineated responsibility for such activities. In others there may be a proliferation of such agencies with duplication and overlapping functions impeding the development of a coherent sector strategy. For example, in Zaire's transport sector, planning units were established in each of the major public enterprises responsible for the bulk of the sector's public investments, and in the sectoral ministry. There is, moreover, a transport unit in the Ministry of Planning. The role of each is not clearly defined and differentiated. The resulting overlap in responsibilities results in poor communication, repetition, waste of resources, and an inability to clearly identify and resolve critical issues.

34. A related set of issues concerns the links and division of responsibilities between core and sector ministries. Often there is a tension between them which is far from creative. Some of this is inevitable: sector ministries are driven by technical considerations while core agencies are driven by financial ones. The core/line agency relationship is complex and varies greatly from country to country. Much depends on the financial links -- whether, for example, the line agencies funding comes from the central budget or from its own or independent sources. In many countries, a large proportion of public expenditure is administered by public enterprises, the efficiency of which depends on a greater autonomy and accountability than they are frequently granted. In Turkey, the Government has expanded the use of extra-budgetary funds over which the se_.tor ministries have a greater degree of independent control. The issue, however, becomes problematic when overall expenditure control mechanisms are weak, technical capacity, at both central and sectoral levels, questionable, and political intervention pervasive. This situation often leads core ministries, themselves overstretched, to intervene at a level of detail inevitably incompatible with their knowledge of the sectors and institutions concerned. Factors such as these not only lead to poor management, but defies the principle of autonomy and accountability required at the level of those responsible for implementing and operating projects.
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35. Sixth, to what extent do existing institutional mechanisms and incentives impede the translation of broad priorities into coherent expenditure programs? All too frequently government bureaucracies place a high premium on following established procedures even when these conflict with declared objectives, and encourage centralized decision-making while discouraging initiative. There may be a myriad of checks and regulations to prevent improper, wasteful or unauthorized expenditures, which at times can contradict the aim of investing in economically justified development projects. Accountability is often diffuse and there appears to be little concern, even at the highest levels, as to whether targets are met or not. Indeed, a greater premium is sometimes placed on failure to spend alloted sums. This is partly because spending targets are regarded as ends in themselves rather than the means to achieving an objective. This in turn reflects the difficulties involved in establishing measures of output and performance in much of the public sector, and getting all parties to agree to them. Ex post evaluation is sometimes carried out, rather perfunctorily to meet donor requirements, but usually little attempt is made to draw lessons from it to streamline procedures or improve agency performance.

36. In summary, efforts to improve institutional investment planning capabilities should concentrate on:

- (a) the coordination of the planning effort among the core agencies;

- (b) improvements to the process of investment planning and budgeting, including the ability of implementing agencies to generate and evaluate projects and of line ministries to review them within the context of coherent sector st-ategies;

- (c) improving the link between investment planning and financial allocation through, for example, the establishment of rolling plans to decide on expenditure priorities and the sensible phasing of expenditures; and

- (d) strengthening control and scrutiny by the central planning authority to which a project appraisal unit should be attached.

# The Link Between Planning and Budgeting

37. One notable trend in most recent Bank reviews as well as in policy-based and technical assistance operations has been a widening of concern to encompass not only investment but public expenditure in general. This explicitly recogTizes the importance of the institutional dimension and of an integrated approach and represents a marked departure from the traditional separation of Bank and Fund concerns, with the former focusing on "planning" issues and the latter on "budgeting." This blurring of demarcation lines was inevitable in the context of policy-based lending where it quickly became apparent that the Bank had little option but to become involved in issues pertaining to the whole of public financial management.
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38. "Government budgets are the principal administrative instruments through which public investment (or expenditure) prfgrams are transformed into tangible achievements." 10 Unfortunately, few countries, perhaps only one in ten, have a system of multi-year budgeting which would facilitate the integration of multi-year programs with annual budgets. It is also discouragingly true that after great effort has been devoted to formulating an investment plan, the budget, even for the first year following the plan's adoption may bear little or no relation to it. In Sierra Leone, for example, a 1985 review found that "there is no evidence that the overall goals of the plan, sectoral objectives or inter-industry relations are taken into account in preparing the yearly development expenditure budget and in selecting the projects for the sectoral inveatment programs. Sometimes, a project is included for political reasons in disregard of considerations such as total costs, availability of funds and long run development objectives. In other cases, the availability of funds becomes the determining factor, regardless of the project's repercussions on other sectors, on the balance of payments and on the Government budget." Similarly, in Kenya, it was found that the manner in which new projects have been planned, appraised, approved and included in the budget differs significantly from the pattern stipulated in Treasury circulars and the guidelines for the preparation, appraisal and approv-.l of new public investment projects, despite the existence of a system of forward budgeting designed precisely to provide a link between the development plan and the annual budget.

39. Common reasons for the failure to provide an adequate link are:

- (a) "Crosswalk" documents 11 and systems such as forward budgets do not, unlike the regular annual budget, have the force of law. Consequently, less attention is inevitably paid to them by both legislators and civil servants.

- (b) Forward budgets are frequently overambitious and try to tranrfer to the planning and forecasting framework the full complexity of budgetary classification and line items.

- 1C/ Chapter on Public Investment Programs in "Investing in Development: Lessons of World Bank Experience" by Warren C. Baum and Stokes M. Tolbert, O.U.P. 1985.

- 11/ A "crosswalk documelAt" provides cross references between, for example, two budgets which use different systems of classification. The most common form consists of a matrix which helps the reader to determine where an item (or the portion of an item to be financed during the year in question) in the multi-year planning budget may be found in the annual budget presented to the legislature.
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- (c) On the other hand, the development plans which should form the strategic basis for budgetary formulation, though specifying general sectoral ceilings, frequently do not contain a consistent and comprehensive list of projects and programs.

- (d) The iiistitutional mechanism for interministerial discussions based on project submissions by the sector ministries, and involving both the planning and finance ministries, frequently break down in practice.

- (e) For both legal and practical reasons, those responsible for preparing the development plan and (if it exists) the forward budget frequently have less prestige than those who prepare the annual budget which actually determines the allocation of financial resources. Less attention is therefore paid to their work by major actors at all stages of the process.

- (f) Those responsible for preparing and executing the annual budget are often subject to overall budgetary ceilings which may have to be suddenly and arbitrarily lowered in response to a drop in resource availability. This inevitably affects the credibility of the planning exercise.

- (g) The time available for completing the budget cycle is often barely sufficient and does not make allowance for the more complex requirements of negotiating and incorporating plan targets.

40. In an effort to improve the links between the planning and budgetary processes, the Bank has frequently become involved in recommending or supporting organizational changes with a view to integrating the functions of budgeting and investment planning. These efforts have had mixed success and may, in many cases, be a red herring. While organizational changes are important, they can sometimes be an unsatisfactory substitute for deeper procedural and policy reforms. It is essential not to confuse the two.

41. The approaches taken towards the changes are basically of three types: (i' the planning agency takes over the budget function (Brazil, Korea, Panama); (ii) the budgeting office of the ministry of finance takes over the planning function (Bahamas, Bahrain, Haiti, Mauritania, Kenya, Tanzania and Zambia); and (iii) establishment of budget offices, on the US model, which are organizationally independent of both the finance and planning ministries (Thailand, Philippines, Nigeria). Most of the organizational mergers under (i) and (ii) faced varying degrees of difficulty due mainly to the fact that each agency had developed its own separate identity which it did not lose when integrated with others. Several countries, consequently, reverted to separate budget and planning agencies, while others have gone through a cyclical process, with the separation of functions followed by integration and eventually by reversion to separate agencies again. It is important to recognize that there is a political as well as a technical dimension to this question. The addition or subtraction of ministries and departments from a government bureaucracy sometimes reflects shifts in the political wind and can make reform efforts more difficult rather than easier to sustain.
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42. Even in the light of this mixed experience, it remains true that, ceteris garibus, combining planning and budgeting offices under one ministry is likely to improve coordination of expenditure programs. It is not, however, either a necessary nor a sufficient condition. At the political level, moreover, combining finance and planning functions into one ministry may create too powerful a core agency. Much more important than the issue of location are a proper decision-making authority, sufficient trained staff, and an adequate flow of information for the formulation of consolidated public sector budgets. Moreover, a separate planning authority cen provide important checks and balances which could be absent if all key core functions were concentrated in o.Le ministry. Chile, which is one of the leading examples of better budgetary administration among developing countries, shows how integration of plans and budgets can be tackled through procedural measures rather than organization mergers: any projects not appraised according to methods approved by the planning agency, and reviewed by that agency, cannot be included in the budget. India and Thailand have also developed successfully operating "crosswalk" procedures. These and other examples should be studied in more depth with a view to applying the lessons learnt to other countries.

43. In simmary, both successes and failures seem to point to the following general recommendations. First, the prestige and importance of the planning process should be given full legal recognition. Whichever body is in charge of overall investment programing should have the effective power of veto over which projects are included in the annual budget. Second, if this body is separate from the finance mirnstry, then there must be very close coordination and cooperation between them. The planners must be sensitive to, and fully cognizant of, the resource constraints facing the government. It is not infrequent that lack of such coordination leads to the preparation of excessively large investment programs which subsequently underm'ne the credibility of the planning process. Third, the procedures linking the plan to the budget should be kept as administratively simple as. possible to avoid overtaxing the institutional and technical capacities available to most governments. Fourth, the process should be organized to allow ample time for full discussion by all iinterested parties. It may well be that in the final analysis the finance minister or head of government will have to act as arbiter; but if the system is to succeed it is essential that all interested parties fully participate in the preparatory process. Fifth, the miiaistry or department responsible for the plan should be closely linked, and in close alliance, with that responsible for the annual budget. If this is not the case, then it is inevitable that the exigencies and time pressures of the annual budgeting exercise will take precedence anid the exercise will be perceived as a Finance Ministry preserve.

# Other AsRects of Budgetary Organization

44. As well as the link between planning and budgeting, and the ability of the planning agency and sectoral ministries to perform their tasks, it is important to focus on the organization of the finance ministry itself to determine whether it aids or impedes the use of the budget as an effective policy instrument. It is of little use recommending, for example, a greater emphasis on objectives to be achieved through budgetary allocations if there is no office in the ministry of finance which is
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familiar with analyzing government operations along these lines. At times, the finance ministry may be unaware of the number of civil servants in each of the spending ministries, let alone the activities which they are supposed to be accomplishing (indeed, the spending ministries themselves are themselves unaware of this in a number of countries). Similar ignorance may exist on the price/ volume relationships between items of non-wage current expenditures. Until such basic data gaps are filled, the finance ministry will be unable to do more than crudely negotiate global expenditure ceilings with line ministries. The only information it will have at its disposal will be the previous years' expendttures (perhaps even that may be outdated), and overall ceilings often based on optimistic estimates of future revenues.

45. A useful start can always be made by carrying out an organizational diagnostic of the finance ministry from the viewpoint of objectives-oriented budgeting. This will swiftly identify both the institutional and information gaps. Frequently, the latter can be partly filled through the installation of electronic data processing systems in both core and line ministries. Many countries have greatly improved public sector financial management through the automation of the wage bill and method of payment (though see paragraphs 64-66 for a discussion of the prerequisites for the successful introduction of automated systems). Institutional deficiencies are rather more difficult to tackle. Even here, however, they may be elements in the existing organizational structure that can be built upon relatively quickly. Most finance ministries include, for example, some sort of inspectorate of finances which is supposed to fulfill internal auditing functions and therefore focus on the operations of spending agencies. Such inspectorates could be strengthened into a new office that examines the desirability and efficiency of government activities in a more integrated fashion.

46. Another problem area which could be initially addressed through an organizational audit of the finance ministry would be that of superimposition of overlapping functions, particularly those of treasury, budget directorate and audit. As with investment decisions, it would be useful to track current expenditure allocations through the system from their initiation to their inclusion in the annual budget. This would likely highlight a considerable number of methodological, procedural and information difficulties.

47. Other institutional factors which affect the efficiency of budget preparation, and which need to be taken into account when proposing reforms are:

- (a) The system's "heritage." Procedures and institutional relationships differ according to whether the country's budgetary system is influenced by the traditions of Britain (which tends to emphasize expenditures rather than revenues in the budgetary process as a result of which expenditures can sometimes be presented to the legislatures unaccompanied by revenue estimates); France (strong financial control and a central treasury which is not merely a cashier but also a banker); other European countries
- 21 -

(in the Netherlands and Germany greater reliance on commercial principles of budgeting including depreciation allowances and accrual accounting, in Portugal and Italy a more legal approach with annual specification of budgetary allotments by law); the US (a general budget and numerous trust funds that are not subject to legislative approa^h); and hybrid systems such as those in Latin America that reflect the Spanish tradition combined with later US influence and the results of individual country experiences. 12

- (b) The budget calendar. As noted above, one of the problems frequently encountered when introducing reforms is insufficient time for the necessary preparation and negotiations. Budgeting is an activity which tends to "bunch" as critical dates (e.g. the submission of estimates to Cabinet or the legislature) approach. 13 The extent to which this can be avoided by stretching the process out is limited, first, by the annual framework and, second, by the fact that data and estimates can swiftly become outdated. Moreover, flexibility is important since estimates are subject to change at each stage of the political hierarchy. Producing a rational policy instrument from this complex exercise presents many difficulties, often compounded by exogenous factors such as a high inflation rate and uncertain trade-based revenues.

- (c) The appropriateness of the fiscal year which should talce account of factors such as the crop cycle, the anntal- businessa cele, ete.

- (d) Adequacy of budgetary circulars and guidelines which are the main instruments available to the core agencies for ensuring that estimates are in accordance with, as a minimum, expected revenue constraints, and, at best, with policy guidelines. Despite their importance, budget circulars can all too easily become routine documents which become notorious for what they do not cover rather than for what they explain.

- 12/ For a fuller treatment of the implications of different budgetary traditions, see A. Premchand: "Government Budgeting and Expenditure Control," IMF publication, 1983.

- 13/ As a minimum, the preparation of a budget will involve nine separate processes, each involving substantial demands on institutional and human resources: (i) preparation of budget estimate forms and guidelines by core ministries; (ii) preparation of revenue and expenditure estimates by line ministries and agencies; (iii) review of consolidation of agency proposals by responsible ministries; (iv) transmission of ministry requests to core agencies; (v) negotiations between core agencies and line ministries; (vi) preparation of draft budget; (vii) Cabinet approval of draft budget; (viii) transmission of Cabinet revisions; and (ix) preparation of final budget and its presentation to the legislature (see Annex IV for a fuller discussion).
- 22 -

# The Comprehensiveness of the Budget

48. Few developing countries currently prepare a consolidated public sector budget. This failure not only places severe limitations on investment programing and its full integration with tta budget, it also reduces the possibility of using fiscal policies for stabilization purposes. A 1980 study of Costa Rica's economic administration noted that some 550 autonomous institutions enjoyed legal financial independence and operated outside the control of the central authorities. Moreover, even within the Central Government, about 10 percent of expenditures took place outside the budget. Some specialized ministries had their own independent budgets while about half of total tax collections were earmarked for specific purposes. In 1979, a major step forward was taken with the setting up of a National Budgetary Authority; prior to that the responsibility for what little central budget preparation and control existed was split between the Ministries of Finance and Planning. Drastic reduction of earmarking, and progress in centralizing and consolidating the budgetary process were major components in Costa Rica's structural adjustment program supported by a policy-based lending operation in 1984.

49. Other examples abound. In Ecuador, the national budget was found to cover only 62 percent of public revenues and 43 percent of expenditures, with the rest accounted for by special funds and autonomous agencies and public enterprises. In Brazil, the growth of autonomous federal agencies and powerful public enterprises progressively weakened the once strong hold which the Federal Treasury had on central government receipts and expenditures. In the Ivory Coast in the late 1970's, the budget was split between the Treasury and two other agencies, while a multitude of extrabudgetary accounts were maintained. In Egypt,<sup>14</sup> a 1980 budgetary reform brought a number of special funds and separate accounts into the central budget, and the current budget was thus unified.<sup>15</sup> However, responsibility for financing public investments was transferred to a newly established National Investment Bank so that there were in effect two central budgeting agencies.

50. Frequently, the budget coverage reflects definitional problems resolved more by custom than by economic considerations. Defining the concept of "public investment" is not, for example, without its difficulties. Should it cover only investment by central government agencies? Should it include only those projects financed wholly or partially through the budget? What about investment by public enterprises?

- 14/ "Public Finance in Egypt" by S. Ahmed, Staff Working Paper, 1984.

- 15/ This should not necessarily be regarded as salutory since it may limit the autonomy and accountability of enterprise management.
- 23

Or by joint ventures? Should it cover all capital expenditures (as defined by the IMF which excludes only defensel6 but includes office furniture and equipment, as well as police stations, courts and prisons) or only that which is expected to lead to "development"? Even in a narrow "development" context, should investment be defined to include only expenditure on the creation of physical assets, or also other "development" expenditure, e.g. on raising the level of health services or expanding education? Development or investment expenditure often includes some recurrent and operating costs during construction which can easily lead to some current costs continually being hidden under the investment umbrella. Current Bank practice favors defining a public investment program which includes the investments of wholly owned state enterprises but excludes joint ventures except in individual cases where the government share is so dominant that the company is treated de facto as a 100 percent public enterprise. All projects funded by external aid or borrowing tend to be included (except defense), whether or not the resources are channelled through the government budget. In addition, the program usually covers the government's entire capital budget irrespective of any evaluation of its developmental impact. This at least has the operational advantage of consistency with IMF definitions. Current expenditures on "developmental" items such as health and education, or on the supply of agricultural inputs, are usually excluded from the investment program except where the country has a medium-term development plan; in such cases, all expenditure included in the plan as developmental is admitted into the investment program. This latter point is yet another reason why the Bank's interest has evolved beyond the purely investment concept to a wider concern with public expenditure as a whole.<sup>17</sup> 51. On the institutional level, the achievement of full budget coverage is far from easy. In the case of state enterprises, government marketing boards, or officially sponsored but financially autonomous development agencies, it is first necessary to define, as precisely as possible, the financial relationship between these entities and the State. This definition must include not only direct flows of funds but implicit subsidies or charges brought about by government policy as well as an updated and economically accurate picture of the entity's balance sheet and current financial operations. This is frequently a difficult technical exercise which taxes the quality of available data to the hilt. In many lesser-developed countries this data is largely unavailable to government despite the existence of elaborate rules and regulations "obliging" entities to provide the information on a systematic basis. In Zaire, for example, the government is only provided with the accounts, frequently unaudited and inaccurate, of the largest and most important public enterprises some 18

- 16/ Defense 'capital" spending is essentially consumption and should therefore be placed above the line.

- 17/ One useful distinction is that between discretionary and nondiscretionary expenditures. The former would include not only capital spending Rer se, but also recurrent items other than, say, debt servicing obligations and (at least in the short run) the civil service wage bill.
- 24 -

months after the event; for the lesser enterprises there are often no accounts at all. The usual result is that the full implications of the government-public enterprise relationship are not appreciated by the core ministries until a financial crisis occurs. Then governments find their ability to restrain the budget deficit hampered not only by commitments to subsidies and public enterprise pricing policies, but also by non-payment of debts between public entities, declining working capital (which must be supplemented by the Treasury), cumulative losses, non-payment of interest, and finally effective default on loans necessitating central government intervention to assume the debt service burden.18 52. Nevertheless, extending budgetary coverage to autonomous agencies, and especially to public enterprises, should be undertaken with great care. The full unification of public enterprise budgets with that of the central government is both unnecessary and undesirable since it violates the principle of operational autonomy without which greater efficiency is difficult if not impossible to achieve. Coordination consistent with the proper degree of autonomy could be improved through the following measures:<sup>19</sup>

- (a) ensuring the adoption of a uniform budget year (with the possible exception of those entities whose revenues rely heavily on crop cycles, e.g. marketing boards);

- (b) preparation of entity budgets in advance of the central budget, and in consultation with the Treasury;

- (c) effective central government control over external and domestic borrowing by autonomous entities, except for those competitive enough to obtain funds without a government guarantee;

- (d) inclusion of major autonomous agency investments in the public investment program;

- (e) explicit provision in both central and entity budgets for all receipts and payments anticipated between the government and public entities; and

- (f) a system of cash flow monitoring and forecasting permitting the revision of budgetary estimates of transfers at least on a six monthly basis.

- 18/ See A. Premchand: op.cit. for a fuller treatment of these issues.

- 19/ Most of these elements have been suggested by the Bank in its dialogue with governments concerning reforms to the institutional mechanisms for monitoring and evaluating state enterprise performance. See especially M. Shirley: "Managing State-Owned Enterprises," Staff Working Paper No. 577, 1983.
- 25 -

53. Clearly most countries have as yet been unable to institute most of these measures, though important partial successes have been achieved. In Zaire, for example, Bank technical assistance has been instrumental in establishing a debt control agency which has vastly improved central government's ability to control and monitor public enterprise external borrowing. Similarly, in Thailand, Bank advice was an important element in establishing better monitoring of public entity borrowing. In some Latin American countries, most notably Chile and (until recently) Panama, core ministries are able to exercise effective budgetary and administrative control over all public sector expenditure.20 In these countries, fully integrated and consolidated public sector accounts are produced annually, cash flow information is generated, and the state of public finances may be easily monitored on a quarterly if not a monthly basis. In Sub-Saharan Africa, Botswana was found to have "a well ordered and effective system for the formulation, preparation and execution of its annual budget .... The crucial relationship between (the recurrent and development) sectors of the budget are appreciated in Botswana and this was a major factor in the remerging of the planning function with finance in 1970.n21 Moreover, the government exercises effective control "over a small, manageable number of parastatals." In each of these "success stories" Bank and Fund technical assistance and/or financial support were important contributory elements.

# Classification of Budget Items

54. Irrespective of organizational structure and the role of the different tiers in the planning and budgeting process, Bank experience shows that reclassification of traditional budget categories is necessary if the budget is to become an effective tool of development policy. These traditional categories, which still have a surprisingly tenacious hold in a wide range of developing and industrialized countries, were established primarily as a basis for legislative oversight and a source of information about the end uses of each unit's expenditure. The classification is usually into items like salaries, equipment, supplies and services, etc., and shows what each organization is authorized to spend under each heading. They yield almost no informaton on the objectives of spending such as, for example, raising the level of literacy in a certain area or providing another with irrigation.

55. One of the most common devices used to address this issue has been to divide the budget into a recurrent and a capital or development budget. The former would include all "consumption" items while the other would ideally include not merely investments in infrastructure but all expenditures which might contribute to development. As noted earlier in

- 20/ Though whether this power is appropriately utilized is another question.

- 21/ Nimrod Raphaeli, Jacques Roumani and A.C. MacKellar: "Public Sector Management in Botswana: Lessons in Pragmatism," Staff Working Paper No. 709, 1984.
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connection with the question of budget coverage, conceptual and definitional difficulties have sparked a good deal of controversy concerning such a separation of the budget. Supporters of the dual budget claim that it enables a clearer identification of the uses of borrowed funds and also a stronger focus on the importance of generating current account savings as a policy goal. Opponents argue that it places too much emphasis on infrastructure investments as the basis for development. There is, moreover, increasing concern within the Bank about frequent government failure to provide sufficient domestic resources to projects and other purposes deemed essential for development. This refers not only to matching capital funds but also to recurrent funds for the successful operation and maintenance of completed projects.<sup>22</sup> However, this failure would seem to argue in favor of rather than against the separate accounting and budgeting of capital and curzent expenditures. Although controversies abound on the merits of different classifications and measures of capital outlays, a separation would certainly facilitate a systematic approach to both the "local currency" problem of matching capital allocation and the "recurrent cost" problem. It also makes it easier to avoid the "camel's nose" syndrome: the allocation of a certain manageable sum to a project in the first year, the phasing of which involves far larger expenditures in years 2, 3, etc. when the girth of the camel makes itself felt. This can only be avoided through a system of multi-year budgeting and the use of a common system of classification for the investment program and the capital and budgets. Bank efforts should focus more on assisting governments to classify their budgets in such a way that the public investment program and other development spending car. be tracked through line items of appropriation and expenditures.23 56. In practice, the choice of whether or not to consolidate capital and current budgets has important institutional as well as accounting implications. These concern, above all, the respective roles of the finance and planning ministries as discussed in paragraphs 40-42 above. In Zambia, for example, control of not only the investment program, but also of the capital budget, was vested in the Planning Commission, while the Ministry of Finance controlled the recurrent budget only. This provided the Planning Commission with the authority to promote its own vision of capital-led development, while relegating the Ministry of Finance to a less important

- 22/ This "recurrent cost" problem has been examined in depth by Peter Heller in "The Problem of Recurring Costs in the Budgetary and Planning Process" (1982). He proposes a proforma for project summaries which would be used to extrapolate associated current cost requirements or, alternatively, the calculation of sectoral ratios based on historical data. There have been several cursory, and a few detailed, checks of such ratios by Bank missions which have found them on balance unstable. However, the Bank could usefully carry out much more detailed research in this amea.

- 23/ This is seldom achieved in practice though some countries such as India, and more recently Thailand, have devised "crosswalk" documents between program and budget items.
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accounting function. Under the guise of moving towards budgetary consolidation, de fagto control of capital expenditures was transferred to the Ministry of Finance, while the Planning Commission was given the largely theoretical authority to plan the allocation of the complete budget. This was an essential first step towards the eventual goal (still to be achieved) of unifying the closely linked functions of planning, budgeting expenditure control and evaluation.

57. As with so much else connected with budgetary reform, reclassification is clear and simple on the conceptual plane, but complex when it comes to implementation. Within each ministry, when the classifications that civil servants have become accustomed to change, disruption and some resentment are inevitable. Also, politicians and senior functionaries may feel threatened by the greater transparency and "orientation towards objectives" implied by a reclassification exercise. This will occur even when current classification is properly coded in a manner which permits automation. In many countries, however, this is not the case. Not only is the classification and coding system inadequate from a functional standpoint, it is sometimes so haphazard that it cannot be automated. In Morocco, for example, the codes attached to ministries and line items change each year. Any modification in a ministry's or department's political status involves a change in its coding. There, as in many other countries, reclassification along development-oriented lines will be a major exercise which will have to be preceded by detailed work at individual ministry level to bring the current system into order. Once this is done, electronic data processing can be introduced. This is essential to allow flexibility in adjusting and updating budgetary classifications to reflect changing policies and circumstances.

# Budget ImDlementation and Control of Expenditures

58. So far the discussion has focussed on the concepts, procedures and structures for the formulation of investment programs and budgets. Of equal or greater importance, however, are the problems of budget execution and program implementation. Bank approaches to this have been from the standpoint of two objectives: first, the timeliness and adequacy of the flow of budgeted funds to executing agencies and, second, the effectiveness of treasury control over public expenditures and enforcement of spending limits. There is, of course, a tension between these two objectives which manifests itself particularly strongly during periods of financial crisis.

59. The first approach is exemplified by experiences in the agricultural sectors of Zaire, Kenya and Madagascar which illustrate in useful detail the process of authorization, disbursement and monitoring of public expenditure. In all three countries, delays in the release of funds were found to be a major factor affecting project implementation, resulting in under-spending of budgeted amounts. Systematic monitoring of expenditure was rare and budgets were seldom revised during the course of the year.
28 This is not always due to the treasury's delayed release of budgeted funds as an instrument in dealing with financial crises. Sometimes, budgets themselves are unrealistically formulated in terms of real resource availability. In Morocco, a recent review of public expenditure found that of the investment expenditures voted by the legislative authority, just over half were incorporated into the spending plans of executing agencies authorized by the Treasury, and that of these latter amounts slightly less than half (i.e. about a quarter of the original appropriations) were actually spent.

60. In the absence of carefully implemented institutional and procedural reforms, severe financial constraints will always militate against orderly project implementation. Tightly controlled release of budget funds becomes inescapable when IMF conditionality imposes quarterly (or even in some cases monthly) spending ceilings. Of course, in principle, once budget allocations are properly approved and made, the responsibility for implementing the budget, along with the requisite freedom to do so, should rest with the spending agency. However, for this to be compatible with stringent and strictly applied spending limits, it would be necessary for these agencies to be equipped with adequate financial management capability. This is an issue on which substantially greater Bank attention should be focussed. Few would dispute that, except in the short term, tight central control is counterproductive because it is impossible for central agencies to comprehend the full spectrum and detail of government operations. However, greater freedom for spending agencies would have to be matched by a degree of accountability, not mere!- for executing and monitoring of spending but for the achievement of results, which few at present would be capable of assuming. Bank assistance needs to be directed towards building up sectoral financial management capability to estimate and monitor costs, to fulfill program tasks within specific cost ceilings, and to help governments devise measures to ensure accountability.

61. Ensuring a timely flow of funds for specific program and project implementation is, however, cnly one of the aspects of expenditure control. An equally important requirement is the reinforcement of the core ministries' ability to exercise control over public expenditures as a whole; indeed, in the short run, given the severe financial constraints under which most borrowers operate, the greater attention must be focussed on the core agencies. In order to minimize the damage to development objectives caused by revenue shortfalls and general financial austerity, it is important that the capacity for control of expenditures be extended beyond the ability to enforce global spending limits to that of influencing the composition of expenditures in accordance with development priorities.

62. In many countries it is nonetheless necessary to recognize that even the first of these abilities is sorely absent. It would be no exaggeration to say that the issue of expenditure control is usually the
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most important and difficult problem area in the budget cycle. Whereas budgeting procedures **per** jj can be at least marginally improved without encountering formidable political obstacles, it nearly always requires considerable political determination, administrative skill and time to institute solid control procedures for all major outlays. To assist governments in this difficult task, it is necessary to become familiar with current procedures and the "rules of the game," both theoretical and practical, which regulate them. Key questions which should be addressed include:

- (a) How many categories of expenditure are there which require separate procedures for making commitments and issuing payment orders, and how many different agencies are involved? In Zaire, for instance, there are at least eight different expenditure tranches (four of them involving different categories of remuneration), the control of which (commitments and payments) is the responsibility of 12 different institutions.

- (b) What percentage of total commitments does the finance ministry control? Again, in Zaire, the ministry controlled only about 30 percent, essentially those for the operating expenditures of the line ministries and the small proportion of total capital expenditures financed out of the central government budget. Wage and salary commitments of the Presidency, the military and government-financed political institutions escape the ministry's remit entirely.

- (c) How many separate budgets are there? In several countries, commitments are made by semi-autonomous institutions without any participation on the part of the Finance Ministry. Nevertheless, the operating expenses of these institutions are frequently financed by government, often through an annex to the main budget or in a separate budget document altogether. Sometimes, indeed, there is no prior documentation at all and the treasury finds itself with payLent obligations for which no allowance has been made.

- (d) What is the system for ordering and controlling actual payments? In some countries, sector ministries have complete autonomy in the receipt and spending of earmarked funds and even of donor finance. This often takes place in the absence of guidelines or of a system of ex Rost accountability.

- (e) Even when all, or most, payments are issued through the finance ministry this may not imply control over, or even awareness of, the amount or composition of outlays. Sometimes the payment orders may simply serve to transfer alloted sums (perhaps a fixed proportion of annual commitments) to the spending agency which determines both how much is spent and on what. This may be partially modified by the requirement of a finance ministry
- 30 -

endorsement on all departmental checks issued. However, this does not solve the basic problem: control over payment orders, while important, is usually too late because a liability has already been incurred on which the government cannot renege.

- (f) To what extent are existing rules and procedures, even if adequate in theory, bypassed in practice? It is inevitable that, from time to time, political pressures will be put on a finance minister to circumvent normal procedures to speed up a payment or to authorize a payment not included in eitner the normal or supplementary budget. The important question, however, is whether this occurs frequently and with regularity.

- (g) It is also important to guard against the opposite tendency: because the institutional framework is often so weak, and in particular because the finance ministry's pA ante control over commitments is so partial, the only way in which the ministry can control the total level of spending is through delaying tactics. Requests for payment orders or endorsements are bogged down within the ministry's bureaucratic system, checks are issued but not sent, etc., etc. While an understandable last resort, this is an extremely inefficient way of controlling public expenditures which has very damaging consequences for the country's development effort. It involves delays in the execution of development projects and programs which can dramatically reduce their rate of return; it distorts the structure of spending in favor of wages and salaries since these cannot be delayed (except In extremis); it undermines the real accountability of the implementing agency; and it is highly vulnerable to political pressure (a powerful minister can appeal over the finance minister's head to finance favorite activities to the further detriment of development projects).

63. To address these problems over the medium term, it is necessary to recognize the political dimension of the issue. First, studies and Bank staff reports should make it clear to the authorities that budgetary control is weak either because of the inadequacy of existing rules and regulations or because, though adequate, they are regularly and frequently circumvented. In the latter case, it should be clearly pointed out that this is an ominous precedent which may evolve into a tendency throughout the administration to ignore or to interpret loosely the laws, rules and regulations. Although budget formulation is as much, or perhaps more, a political process of negotiation than a technical one, governments should be encouraged to recognize that once the budget has been decided upon and formally approved, its aim is defeated if at any time the agreed allocation of resources can be altered or spending limits ignored. Clearly, there must be flexibility and sensitivity to changing needs, but the mechanisms and procedures for review and response to changing circumstances should be clearly spelled out and adhered to.
- 31 -

# More Effective Financial Management Information Systems

64. Once governments accept the above principles as a starting point, then the next step would be to install procedures to improve central expenditure control. At the heart of such procedures, and the prerequisite to more deep-seated reform, is a public accounting system which provides the timely, regular, detailed and accurate information necessary for expenditure monitoring and evaluation. This would nearly always require the installation of electronic data processing methods, since a manual operation would be unlikely to cope with the size and complexity of a modern government accounting system. The installation of electronic data processing should not, however, be regarded as a substitute for the institutional and procedural reforms which are necessary to permit any accounting system, whatever its technical sophistication, to work as intended. Among the preconditions for success are: (a) the existence of detailed budgets for all government departments, institutions and agencies (including the military and the presidency); (b) the existence of up-to-date files on existing personnel and detailed organigrams for each agency;<sup>24</sup> (c) an adequate system of reporting and review for monitoring the expenditures of all government agencies which depend upon the central budget; (d) proper procedures for ensuring adequate scrutiny of payments; (e) clearly delineated responsibilities among departments and their personnel; (f) a classification of the major items of revenue and expenditure consistent with a streamlined accounting structure; and (g) an adequately trained staff with sufficient incentives to remain in government service.<sup>25</sup> 65. A few other simple rules which will enhance the chances of successful installation of improved management information systems are:<sup>26</sup> (a) keep the system as simple as possible; (b) all the key players, in both core and line agencies, must understand the system and have an effective input in designing and improving it; (c) identify at an early stage what can be done given the short term staffing constraints and order the equipment accordingly; (d) apply the system as flexibly as possible since it is difficult, if not impossible, to be precise in advance concerning where new systems are likely to be most useful (elaborate feasibility studies are thus

- 24/ See B. Nunberg: "Public Sector Pay and Employment Policy Issues in Bank Lending: An Interim Review of Experience." PPR Working Paper (forthcoming) for an analysis of the difficulties involved in public sector manpower planning

- 25/ In Kenya it was found recently that nearly all statistical surveys processed by the Government's Computing Center could have been done faster manually. The root cause of this was unfilled vacancies for programmers and systems analysts because of better job prospects in the private sector. (See Clay G. Wescott: "Building Information Management Systems for Developing Countries," paper presented at a conference on Policy Aspects of Microcomputers in Developing Countries, National Research Council, Washington DC, January, 1988.

- 26/ Wescott: op. cit.
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likely to be a waste of time and money, at least until several pilot projects have been completed); (e) train and retrain more people than seem to be needed to cope with the likely losses to the private sector; (f) focus training on substance, not on technology; (g) share the benefits of the new system, particularly the increased volume of (hopefully) relevant information, as widely as possible, and certainly with all key actors whose work performance could be improved by possessing it; and (h) start with the core ministries (especially finance): sector ministries often have their own sources of donor financing which can complicate later attempts at achieving consistency between sub-systems.

66. It is really only when a reasonably well functioning system of central control has been established that it becomes meaningful to consider wider planning and budgeting principles such as objective-oriented spending or greater autonomy and accountability of line agencies. A well-functioning expenditure control system should permit: (a) greater flexibility on the part of spending ministries in reallocating resources to sustain core activities and support key objectives;27 (b) concentration of scarce resources on delivering key services which are essential for economic recovery and the development of human resources.

# Coping With Uncertaintv

67. Perhaps the greatest challenge facing governments who wish to improve their public expenditure management is dealing with the uncertainties inherent in all budgeting and planning exercises. Budgeting techniques have not been well designed to cope vith uncertainty; indeed, they may be said to thrive on stebility. As Naomi Caiden so aptly puts it,<sup>28</sup> "budgeting works best where year-to-year adjustments are marginal, where it is possible to make firm commitments in advance of expenditures, where the recent past is a good guide to the immediate future, and where results may be easily and promptly evaluated." This is a far cry from the reality facing policy makers in most developing countries, particularly those where fiscal revenues rely to a significant extent on commodity export taxes, and where the publi_ investment program depends on uncertain external financing. Even in less externally-dependent economies, the vicissitudes of an increasingly unstable environment render forecasting hazardous. Resource availability estimates and budget allocations may require frequent readjustment during the course of the fiscal year. To maintain a rational resource allocation under such circumstances is an immensely difficult task, which is demandiug not only upon the individuals concerned with policy making at a high level, but also in terms of the flexibility of the institutions and procedures involved.

- 27/ One of the consequences and features of inadequate control systems is that expenditure realignments, especially in or out of personnel costs, can only be carried out by the core agencies; this reduces flexibility and impedes implementation.

- 28/ Naomi Caiden: "Public Budgeting amidst Uncertainty and Instability," in "Public Budgeting and Finance," Washington DC, Spring, 1980.
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68. Uncertain revenues are, however, only one of the causes of unpredictablility in budgeting. The growth of the public sector, both in size and complexity, has made it much more difficult to predict levels and allocations of expenditure. Institutional and managerial capacities have not kept pace with this growth. Even within the short range perspective of the fiscal year, the cost of programs are underestimated, they run out of money and require supplementary appropriations.29 Since resources are finite, this means less is available for other programmed activities. Such difficulties are even more acute for the growing proportion of activities which require to be programmed on a multi-year rather than on an annual basis. Such programs often do not get the stable long term commitments of funds which they require. In an atmosphere of semi-permanent fiscal crisis, core ministries tighten and cen;ralise control procedures, and are reluctant to commit funds for more than the shortest legally permitted time. The authorities managing longer-te-m programs cannot, therefore, plan ahead in the knowledge that the end of each budget year will not bring about harmful reductions or even a cut- off in funding. Alternatively, administrations faced with uncertainty attempt to do too much too quickly. Appropriations are not spent and large balances accumulate towards the end of the fiscal year. This can lead to "panic spending" as agencies fear that .the balances will lead to reduced allocations in the next budget round.

69. The state of the art on budgetir,g and expenditure planning offers little to governments trying to cope with uncertainty. Refuge is often taken behind sweeping global reform proposals (see the next section) whereas a more modest, partial approach may be of greater practical relevance. Even here, however, there are few short term palliatives. Over the longer run, governments can be better equipped to deal with budgetary uncertainty through:

- (a) judicious use of sensitivity analysis and alternative revenue and expenditure scenarios;

- (b) drawing on comparative analysis and experiences of other governments and the private sector;

- (c) the adoption of differential time spans reflecting the varying nature of programs;

29/ Supplementary budgets are themselves a common source of abuse of the system. In Zambia, for instance, this combines with diffuse expenditure authority in a highly detrimental manner. The Central Bank maintains a "revaluation account" under which payments are automatically made, irrespective of whether authorization was given in the budget. In effect, this allows spending ministries to overdraw their accounts and initiate new projects without approval from the Ministry of Finance, with retroactive authority provided through the suplementary budget. The results are as might be predicted: in 1986, the supplementary budget was almost as large as the original operating budget, yielding a very large overall deficit.
- 34 -

- (d) placing much more emphasis on the implementation stage of the budgetary process (most analysis and reform proposals concentrate on the preparation stage) in terms of planning budget implementation processes, reviewing how officials work with budgets during the year, making adequate arrangements to ensure cash flow at critical periods, establishing self-pacing disbursement schedules, and initiating an incentive system for compliance with budgetary mandates;

- (e) making fuller use of new accounting and electronic data processing techniques to compare, track, and assess expenditures wich a view to achieving greater decentralization and more effective accountability at line agency level; and

- (f) greater reliar.ce on medium term financial programming with appropriate contingencies for shortfalls in anticipated resources and a closer link between revenues and expenditure planning.

70. Botswana presents an interesting example of how to cope with revenue uncertainties. The Government is highly dependent on trade and commodity-related income with customs duties and mineral royalties accounting for almost three-quarters of total revenues (excluding development grants). Accordingly, the country's sixth National Development Plan (NDP) contains four budget scenarios. The base case is the most optimistic both in terms of expenditure (it assumes an end to the then current drought) and revenues (increased mineral exports and drawing of foreign borrowing above historical levels). 3 The other three scenarios were designed to test whether policy actions (either new revenue measures, or reductions and reallocations of expenditures) would be needed under less favorable conditions. They assumed, respectively, higher drought relief expenditure, lower diamond export receipts, and less external aid funding. The model used could also predict the effects of all three phenomena occurring at once, though this "disaster" scenario was not published in the NDP. The approach adopted by the Government was highly useful, not only in terms of predicting the macroeconomic impact of deteriorating revenues, but also in preparing the authorities for the eventualities and having wellthought-out policy responses ready for them.

71. Before, however, attempting to apply this methodology elsewhere, it is important to note that in Botswana it forms part of a well-functioning planning and budgeting system with institutions and procedures that should be the envy of some developed, let alone developing, economies. Among its principal attributes are: (a) well-prepared macroeconomic projections to underpin the Plan, using a model adopted to the country's needs and characteristics; (b) a thoroagh preparation process for both the NDP and thp annual budget, involving each ministry and spending agency at each stage o

- 30/ Though it is interesting to note, en gassant, that the Bank report considered the revenue projections even in the base case to be somewhat conservative, due mainly to different exchange rate suppositions.
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the process; (c) a manpower planning system and population growth projections designed to guide expenditures in the social sectors as well as civil service size and salaries; (d) a carefully designed public investment program, using (where appropriate) project evaluation techniques, and choosing projects on the basis of national development priorities; and (e) recurrent cost implications for capital expenditures that are explicitly calculated and taken into account. In brief, the system possesses many of the attributes of the medium term financial planning "model" discussed in paragraph 18 of this paper. The so-called weaknesses described in the Bank report, and the recommendations for addressing them, could almost be described as fine-tuning. Unless these fundamental characteristics are in place, at least to a significant degree, the application of modelling techniques to deal with fiscal uncertainty will be of little use.

# ComDrehensive Budgetary Reform

72. The pervasive nature of the deficiencies throughout the budgetary system have persuaded some governments and observers that traditional procedures show little promise of enabling budgets to fulfill their role as instruments of economic policy in the wider sense. This has led to attempts in both industrialized and developing countries to introduce wholesale reforms to the budgetary process which seek a clearer definition of the objectives and outputs expected from budgetary allocations, a multi-year framework showing costs and expected results and a system of evaluation for feedback into subsequent budgeting. These objectives are common to a number of new methods which have been introduced in recent decades including Planning, Programing Budgeting System (PPBS), Rationalization of Budgetary Choice (RBC), and Zero Based Budgeting (ZBB).

73. PPBS is a refinement of the concept of performance budgeting which was partially introduced in the United States as early as 1912. Performance budgeting, as well as introducing the concept of objectives, embodied classification of expenditures by program and activity. The proponents of PPBS want to carry this further by adding the notions of need and efficiency with the aim of quantifying as far as possible the extent to which the chosen objectives have been met with the means used. In addition, PPBS has a multi-annual dimension which should facilitate the linkage between the planning and budgetary process.

74. The schemata of a typical PPBS process is summarized in Chart 1.31 There are three basic phases following the name of the method: planning, programing and budgeting. The planning phase seeks through study to identify present and future requirements (objectives) and to evaluate 31/ For a fuller treatment, see A. Premchand: "Restructuring Budgeting Systems in Developing Countries: Relevance of the PPBS System" (1977) and L. Caramfalvi: "La Reforme Budgetaire: Quelques Experiences Recentes" paper presented at an IMF Budget and Expenditure Control seminar in 1984.
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different possible solutions with a view to selecting the optimum one. It is in this phase that system analysis techniques come into their own. The programing phase takes the proposals of the planning phase and integrates them into programs. These should not only be internally coherent and consistent among themselves but should form a hierarchy of priorities. This would be pyramid-shaped with the top priority category of programs and subprograms at the summit. Decisions concerning categories, programs and actions would be taken at different levels of the political hierarchy. The setting of broad priorities (program categories) concerning health policy, agricultural policy, etc., would be a cabinet level responsibility, while the optimization of individual programs would be the task of sector ministries. Each would be multi-year and would indicate the total cost and timetable. Every year, each program would be revised and updated in the light of experience and reprojected forward. The third phase, that of budgeting, is the translation of each multi-year program into a set of specific annual actSons, and determines who does what and with what resources. Inevitably, this is the most difficult stage of the process. The organic structure of the budget administration is different from that implied by a programing approach and cannot be easily altered. Moreover, problems suchtas the apportionment between programs of expenditures which are not 'directly imputable (like wages, for example) must be solved at this stage. Finally, the system provides the means for control and Rost hoc evaluation uf results which should then be fed back into the planning and programing phases.

75. RCB. introduced in France. is very similar to PPBS, to which it owes its inspiration. Differences between the French and US experiences, although important, reflect implementation rather than substance. Both experiments were initially attempted in a context of expanding resources and rapid economic growth. The third variant, ZBB, uses essentially the same techniques but adapts them to a more austere environment of unstable and even diminishing real revenues. As its title indicates, this method starts from the basic assumption that the fact that a given activity has had resources devoteo to it previously does not automatically entitle it to a continued renewal of those resources. All activities, except in some cases of those forming part of a continuing, already-approved program, should start from the assumption that they have to be fully planned and justified from scratch.

76. System-wide budgetary reforms have generated a great deal of controversy. In particular, installation and operation of a complete PPBS has not fully succeeded even in the sophisticated administrations of some industrialized countries. They have proved to be lengthy and administratively complex undertakings requiring extensive revisions of traditional accounting systems and institutional habits. In some cases, for example in the United States, insufficient attention was paid to making them compatible with the political process and too much emphasis was placed on technical considerations. Nevertheless, they are far from being wasted efforts, and the experiments of both industrialized and developing countries are rich in lessons for those developing countries considering embarking upon a similar exercise. Annex III contains a more detailed discussion of
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the pitfalls encountered in the United States and Belgium with the introduction of PPBS; of the slow but not wholly discouraging installation of RBC in France; and of the Dutch experience which has relied on a more gradualistic, decer.tralized approach. To complement the discussion, two recent examples of budgetary reform in developing countries are described: the forward budget in Kenya, refined by the introduction in 1985 of the Budget Rationalization Program; and the National Public Expenditure Plan of Papua New Guinea introduced in 1979.

77. In general terms, there would appear to be two groups of reasons for the failure of reform efforts, even in the most successful countries, to live up to their initial expectations. First, the inherent complexity involved in the new methods was not made fully explicit at the outset. This prevented adequate preparation of the planning mechanism and procedures, the accounting system and the requirements for electronic data processing. The muddling through and improvisation that followed both slowed down the new system's installation and reduced its credibility in the bureaucracy. Second, as indicated above, the technical aspects were overemphasised at the expense of the political dimension.

78. Since the budgetary process is, in essence, one of political bargaining, then it should be obvious that the political implications of a major reform should be fully and explicitly taken into account. Yet this is seldom, if ever, the case. The very nature of the political debate surrounding the budget changes profoundly as a result of the introduction of programing methods. The approval of a traditional budget presented ander the usual form of votes and line items is very different from that of a program budget with quantified objectives. In order for politicians to feel secure in the rejection or approval of a budgetary item, it is important for them to have access to the same information as those who have prepared the program. This is difficult to achieve in the case of sophisticated and complex programs. For example, few ministers or legislators in France have the time or.inclination to read and absorb the extensive and detailed material made available to them In the program budget annexes. Moreover, politicians are aware that the probable consequences of their decisions to approve or refuse an expenditure application will be much more transparent if costs and objectives are clearly identified and quantified than otherwise. This is by no means necessarily desirable for them.<sup>32</sup> 79. In nearly all countries, the budget is strictly regulated by a complex set of laws which govern not only its structure but the means of presentation, approval and execution. The introduction of new methods ignores this at its peril. The kind of reforms discussed here require 32/ At one extreme, "traditional" budgetary allocation can be viewed wholly as a political process, resulting from negotiations between interested parties, the results of which reflect the relative power of each. At this extreme, not only is there no market mechanism in the economic sense, and hence no "prices" attached to inputs and outputs, but the introduction of such "prices" might be viewed by politicians as, at best, unnecessary and, at worst, threatening.
38 fundamental changes in budgetary legislation. For example, in most cases the law enshrines the principle of annual budgeting; program budgets, by contrast, imply a multi-annual framework. The outcome of this dichotomy is that in none of the cases examined does the program budget have the force of law. This inevitably reinforces the tendency to regard it as a supplementary exercise somewhat removed from whe-e the "real" decisions are made.

80. Institutionally, it is almost certain that a reformed budgetary system will collide with an administrative structure and mores largely incompatible with it. Either the institutions must adapt to the new method or the new method will be forceably adapted to the institutional structure to become eventually "neutralized" or even rejected. The experiences described in Annex I suggests that the latter is far more common than the former. To prevent or at least mitigate this requires considerable effort, forethought and expenditure which should be explicitly recognized at the outset. First, there is a need to build up support for the change at a "grass roots" level within the administration. The imposition of change from the tcp by executive order is nearly always fatal. The new methods should be introduced gradually on a pilot basis in carefully selected ministries which are willing to be used as guinea pigs. The fullest possible amount of information on the new system and its broad objectives should be widely disseminated among those potentially affected. In particular, the role of 'outsiders" (experts and analysts) should be explained to reduce sensations of insecurity and irritation. Second, it should be recoganized that this will be an expensive, thouRh productive, process. At least three new cost categories will have to be met: information, training and equipment. The depth and scope of data required for program budgeting is greatly in excess of that for a normal budgetary exercise. Allowance should be made for the human and financial resources that this implies. Similarly, training should not be regarded as simply a "classroom" exercise of instructing the operatives of the new method. Rather, the government should tap all sources of expertise, both national and international, organize seminars, publish articles, and conduct experimental workshops in which participants should be made to feel pioneers in a new process. Training should be regarded as a continuous process of "learning by doing." It should also be recognized that program budgeting is impossible without full access by both core and sector ministries to electronic data processing. The full costs of equiping and training the administration should again be gauged on a pilot basis.

81. Third, while avoiding the pitfalls of dictation from the core ministries, it is important to establish a thoroughly professional unit, probably located in the ministry of finance, which is responsible for coordinating and guiding the reform effort. This unit shculd have the full backing of the higher political authorities, should be responsible for the dissemination of information, manuals, etc., and should advise ministries on the acquisition of appropriate external support. However, the decision of whether or not to hire outside expertise and to allocate resources to the reform effort should remain the responsibility of the executing ministry.
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82. Fourth, it should be recognized that the process of reform, to be successful, must be gradual. It should be extended beyond the pilot ministries only as others become thoroughly prepared. Partial reforms, such as the use of cost benefit techniques and the preparation of sector strategies, could precede the full reform effort. It is noteworthy in this connection that Holland, which has perhaps the most encouraging experiences in wholesale budgetary reform, has been discussing and debating new methods since 1950; by 1986 program budgeting had been extended to about 40 percent of expenditures.

83. Fifth, procedures should be kept as simple as possible and should be consistent with the availability of qualified human resources. For example, an attempt to subject all detailed line items to a forward budgeting procedure or the full range of official activities to a programing approach will be impractical in most countries whether indxistrialized or developing. As the experience of Kenya shows, failure to be selective can swiftly damage the reform effort. On the other hand, while being selective, developing countries should avoid the error of Papua New Guinea where the new method was confined only to activities which could be regarded as marginal. A good start might be to introduce cost-benefit techniques, forward budgeting and performance budgeting to those ministries which account for the lion's share of the core investment program, concentrating initially on those expenditures, both capital and current, which are linked to the core program.

84. Finally, overambition is highly counterproductive in this field, and it is important to avoid trying to swiftly replace the traditional system in its entirety by a totally new approach. This will inevitably cause resistance at all levels of public institutions, and will eventually result in disillusion. Rather, developing countries should remember that there are many features of a programing budgeting approach which are useful, indeed vital, if a proper link between pLanning and budgeting is to be achieved and if the budget is to become an effective policy instrument. There is, for example, the basic principle that government objectives should be clearly specified, in as quantifiable a manner as possible, and that budgetary categories are reclassified so as to be able to track more easily the attainment of these objectives. There is also the tenet that major investment decisions, together with their current expenditure implications, should be objectively scrutinized and subject to cost benefit analysis. While recognizing, therefore, that the experiences described in Annex III illustrate the limits of, and constraints to, budgetary reform, and that few would argue for the wholesale import and installation of new sytems in developing countries, it is nonetheless important to avoid an unthinking rejection of the program budget approach. Carefully and selectively applied, it has much to offer developing country governments anxious to improve the al.location of public resources.