Report No.24882-UG

The Republic of UgandaPublic Expenditure' ReviewReport on the Progress and Challenges ofBudget ReformsSeptember 23, 2002

Poverty Reduction and Economic Management 2Country Department for UgandaAfrica Region

Document of the World BankI

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GOVERNMENT FISCAL YEARFY02 = 2001/ 02 = July 1, 2001 to June 30, 2002

CURRENCY EQUIVALENTS

Currency Unit = Ugandan Shilling (Ush)Market mid-rate: US$1.00 = Ush 1815 (September 30, 2002)

ABBREVIATIONS AND ACRONYMS

AGOA African Growth and Opportunity Act MOES Ministry of Education and Sports

AIA Appropriations in aid MOH Ministry of Health

AIDS Acquired immunodeficiency syndrome MTBF Medium-Term Budget Framework

BFP Budget Framework Paper MTCS Medium-Term Competitiveness Strategy

BPED Budget Policy and Evaluation Department MTEF Medium-Term Expenditure Framework

BTVET Business, Technical, Vocational Education and Training MWLE Ministry of Water, Lands and Environment

CCS Commitment control system NGO Nongovernmental organization

CG Consultative group PAF Poverty Action Fund

CSO Civil society organizations PBR Pupil-book ratio

DANIDA Danish International Development Agency PCR Pupil-classroom ratio

DDP District development plan PEAP Poverty Eradication Action Plan

DFID Department for International Development PER Public Expenditure Review

DSC District service commission PERWG Public Expenditure Review Working Group

DWD Directorate of Water Department PHC Primary Health Care

EFA Education for All PMA Plan for Modernization of Agriculture

EFMP Economic and Financial Management Project PMAU Poverty Monitoring and Analysis Unit

ESIP Education Strategic Investment Plan PNFP Private not for Profit

EU European Union PRSC Poverty Reduction Support Credit

FY Fiscal year PRSP Poverty Reduction Strategy Paper

GDP Gross domestic product PSF Private Sector Foundation

HIPC Highly Indebted Poor Countries Debt Initiative PTR Pupil-teacher ratio

HIV Human immunodeficiency virus SFG School facility grant

HSSP Health Sector Strategic Plan SWAP Sector wide approach

IFMS Integrated financial management system SWGs Sector working groups

IMF International Monetary Fund UCB Uganda Commercial Bank

LGBFP Local Government Budget Framework Paper UDB Uganda Development Bank

LGDP Local Government Development Program UEB Uganda Electricity Board

LTEF Long-Term Expenditure Framework UPE Universal primary education

MDGs Millennium Development Goals UPPAP Uganda Participating Poverty Assessment Project

M&E Monitoring and evaluation URA Uganda Revenue Authority

MFPED Ministry of Finance, Planning and Economic Development VAT Value added tax

MOES Ministry of Education and Sports WHO World Health Organization

Vice President: Callisto MadavoDirector: Judy O'ConnorSector Manager: Frederick KilbyTask Team Leader: R. Sudharshan Canagarajah

PREFACE

This Public Expenditure Review (PER) Report for Uganda is the outcome of thebudget-related activities carried out during the budget process for the fiscal year 2002-03.Specifically, this report captures the details of the budget reforms designed andimplemented during the budget process, the analytical work carried out on specificbudget-related themes, and outcome of the consultations between the variousstakeholders involved. This report, written by Sudharshan Canagarajah (Task TeamLeader), reflects the outputs and outcome of PER-related work that was facilitated by thePER working group, which constitutes representatives from the Ministry of Finance,Planning and Economic Development (MFPED) and major budget support donors. I amespecially thankful to the MFPED for organizing the multi-stakeholder PER workshop inKampala May 20-21, 2002, during which many of the issues raised in the report werediscussed in detail, which benefited immensely in writing this report.

I am thankful to Fred Muhumuza (Economic Policy Research Center, Uganda),who provided excellent research assistance in writing this report. In addition, I havebenefited from comments and suggestions by Florence Kuteesa (Director/Budget),Ishmael Magona (Commissioner/Budget Policy), Martin Brownbridge (Macro EconomicAdviser), Peter Fairman (Senior Economic Adviser), Fiona Davies (Macro Economist),Giuilio Federico (Economist, Budget Policy), and John Rudman (Budget Policy Adviser),all from MFPED. I have also significantly benefited from suggestions and comments bythe Uganda country team members of the World Bank, especially Francis Ato Brown,Peter Okwero, Harriet Nannyonjo, Satu Kahkonen, Robert Blake, Alema Siddiky, andRita Babihuga. I also want to acknowledge with appreciation the detailed comments Ireceived from the peer reviewers, Richard Allen, Allister Moon, and Benno Ndulu, whichimproved the quality of the report. The PER report decision meeting provided additionaluseful suggestions. It was attended by many Uganda country team members, and fromthe MFPED side Mr. Chris Kassami (Permanent Secretary/Secretary to the Treasury)and Mrs. Mary Muduuli (Deputy Secretary to the Treasury). I am also thankful toGarvan McCann (Ireland Aid) and Paul Mullard (Department for InternationalDevelopment, UK), who provided assistance in carrying out some of the special thematicstudies as part of this PER report. I am also thankful to the overall guidance provided byFrederick Kilby (Sector Manager) and James Adams and Judy O'Connor, who served ascountry directors for Uganda during the period this report was written and finalized.Finally, I am grateful to Mellen Candage for her editorial support and Vikki Taaka,Agnes Kaye, Roboid Covington, Tanisha McGill and Momar Gueye for their assistancein coordinating the various PER activities and formatting this report. I acknowledge withappreciation the help in various forms from all these people without whose assistance thisreport could not have been completed.

Table of Contents

PREFACE ................................................................ I

EXECUTIVE SUMMARY, FINDINGS AND RECOMMENDATIONS ................................................. i

I. INTRODUCTION. il

Budget Reform Challenges .iiII. MACROECONOMIC AND FIsCAL PERFORMANCE .iii

Structural and Growth Indicators. iii

Revenue Performance .ivGovernment Expenditure .vIntegration of Donor Resources .viiThe Export Sector .viiiThe Financial Sector. ix

III. THE BUDGET PROCESS .xIssues Relating to the Medium-Term Expenditure Framework .x

IV. BUDGET EFFICIENCY IssuEs .xiChallenges and Recommendations .xi

V. BUDGET EXECUTION AND PROGRAM ILEMENTATION. .xiiVI. BUDGET MONrIORING, EVALUATION, AND REPORTING .xivVII. PUBLIC EXPENDrrURE MANAGEMENT IN A DECENTRALIZED CONTEXT ......................................... xvi

Vm. CONCLUSION .............. xviii

AN OVERVIEW OF MACRO AND FISCAL DEVELOPMENTS ............................................... 1

A. INTRODUCTION .1B. A REVIEW OF UGANDA'S ECONOMIC PERFORMANCE .3

C. MACROECONOMIC PERFORMANCE: ACHIEVEMENTS AND CHALLENGEs .4Performance of the Financial Sector .4The Export Sector .6Trends and Implications of Domestic Revenue .7

D. IMPLICATIONS FOR POVERTY ERADICATION .8E. MACROECONOMIC IMPLICATIONS OF THE SIZE OF THE FISCAL ENvELoPE .8F. CHALLENGES IN IMPLEMENTING PEAP .10G. CONCLUSION.10

2. UGANDA'S BUDGET PROCESS: ACHIEVEMENTS AND CHALLENGES ......................... 11

B. BUDGET PROCESS - PHASE 1 .13C. BUDGET PROCESS - PHASE 2 ............................................. 15D. MEDIUM-TERM BUDGET FRAMEWORK (MTBF) .15E. MEDIuM-TERM EXPENDrrURE FRAMEWORK (MTEF) .18E. ASSESSMENT OF THE BUDGET PROCESS .............................................. , , , .,. 24

F. CHALLENGES IN THE BUDGET PROCESS .25G. THE WAY FORWARD .27

3. ISSUES IN BUDGET EFFICIENCY: HEALTH, EDUCATION, AND WATER SECTOR .... 29

A. INTRODUCTION ........... : 29B. HEALTH .30

Background .30Allocative and Operational Efficiency .31Equity .33

Challenges for the Future .............................. 34C. EDUCATION .............................. 35

Background .............................. 35Allocative and Operational Efficiency .............................. 36Equity .............................. 38Challenges for the Future .............................. 40

D. WATER AND SANITATION .............................. 41Background .............................. 41Rural Water .................... 42Urban Water .................... 43Other Services .................... 44Challenges for the Future .................... 44

E. CONCLUSION .................... 46

4. BUDGET EXECUTION AND PROGRAM IMPLEMENTATION .47

A. BACKGROUND .47B. SPECIAL ISSUES ON BUDGET EXECUTION .49

Public Administration .49Structure and Operations of Public Administration .50Challenges for the Future .52

C. POVERTY ACTION FUND .53Achievements under the PAF .54Challenges Facing the PAF Structure .55The Way Forward .58

D. CONCLUSION .58

5. BUDGET MONITORING, EVALUATION, AND REPORTING .59

A. BACKGROUND .59B. THE CURRENT STATE OF MONITORING, EVALUATION, AND REPORTING .60

Data Problems .61Evidence from Tracking Studies .62Capacity for Effective and Timely Auditing .62

C. CHALLENGES FOR THE FUTURE .63D. CONCLUSION .64

6. CHALLENGES FOR THE FUTURE: PUBLIC EXPENDITURE MANAGEMENT IN ADECENTRALIZED ENVIRONMENT .. 65

A. INTRODUCTION .65B. CURRENT CHALLENGES AND EFFORTS .66

Planning and Budgeting Issues .67Capacity and Human Resource Management Issues .68Issues of Multiple Funds Transfer Procedures and Actors .70Local Revenues .71Monitoring and Reporting Problems .71

C. CHALLENGES FOR THE FUTURE .71Institutional Capacity Building .71Increasing Local Government Autonomy .72Local Government Budget Execution .73Local Government Revenue Collection .73Reporting and Accountability .73

D. CONCLUSION .74

7. SUMMARY AND CONCLUSIONS .75

A. MACROECONOMIC AsPECTS OF FISCAL CHALLENGES .75

B. BUDGET PROCESS .76C. BUDGET EFFICIENCY .77

D. BUDGET EXECUTION AND PROGRAM IMPLEMENTATION ................................................................. 78

E. BUDGET MONITORING, EVALUATION, AND REPORTING ................................................................. 79F. INTERGOVERNMENTAL RELATIONS AND FISCAL DECENTRALIZATION ............................................ 80

G. CONCLUSION ............................................................................ 81

ANNEXES ............................................................................ 83

ANNEX 1: DEVELOPMENTS IN THE BUDGET PROCESS IN UGANDA 1997-2001 . . 85ANNEX 2: MEDIUM-TERM EXPENDITURE FRAMEWORK FIRST HALF PERFORMANCE

FY2001/02 ............................................................................ 91ANNEX 3: MEDIUM-TERM EXPENDITURE FRAMEWORK 2001/02-2004/05 . . 93

ANNEX 4: STATEMENT BY THE WORLD BANK ON BEHALF OF DEVELOPMENT PARTNERS ON BUDGETSTRATEGY AND BUDGET PERFORMANCE 2001/02 .................................................................... 97

ANNEX 5: STATEMENT BY THE BY THE WORLD BANK ON BEHALF OF DEVELOPMENT PARTNERS ON

MTEF 2002/02-2004/05 ............................................................................ 101

BIBLIOGRAPHY ............................................................................ 1 05

LIST OF FIGURES AND TABLES

FIGURES

FIGURE 1.1: TRENDS IN EXPORT REVENUES 1996/97 - 2000/01 ...................................................... 6

FIGURE 1.2: REVENUE PERFORMANCE AS A PERCENTAGE OF GDP 1996/97-2000/01 ................................. 7FIGURE 3.1: HOSPITAL UTILIZATION BY THE POOR AND NON-POOR 1992-2000 .......................................... 34FIGURE 3.2: PRIMARY ENROLLMENTS BY GENDER AND POVERTY 1992-2000 ............................................ 39FIGURE 4.1: COMPOSITION OF PUBLIC ADMINISTRATION .50FIGURE 4.2: DIVERGENCE BETWEEN BUDGETED AND ACTUAL RELEASES FOR 2000/01 .57FIGURE 6.1: A THREE-WAY ACCOUNTABILITY RELATIONSHIP IN UGANDA'S INTERGOVERNMENTAL

SYSTEM-RESOURCE AND INFORMATION FLOWS .66

TABLES

TABLE 1.1: SELECTED MACROECONOMIC INDICATORS FOR POVERTY ERADICATION GOALS . 4TABLE 1.2: KEY MACROECONOMIC INDICATORS .4TABLE 1.3: REGIONAL DISTRIBUTION OF LOCAL GOVERNMENT REVENUE GRANTS IN PERCENTAGES

(2001/02) .8TABLE 1.4: EXTERNAL DEBT AND FOREIGN INFLOWS AS A SHARE OF GDP .9TABLE 2.1: BUDGET PROCESS FOR THE YEAR 2002/03 .13TABLE 2.2: RESOURCE ENVELOPE 2002/03-2004/05 (USH. BILLION) .16TABLE 2.3: URA REVENUE PERFORMANCE 2001/02 (USH. BILLIONS) .16TABLE 2.4: SECTORAL SHARES OF EXPENDITURE OVER THE MEDIUM TERM .1 9

TABLE 2.5: DISTRIBUTION OF BUDGET INCREASES FOR 2002/3 .20TABLE 2.6: MEDIUM-TERM EXPENDITURE FRAMEWORK 2002/02-2004/05 .21TABLE 2.7. WAGE BILL ALLOCATIONS AND MTEF PROJECTIONS FOR 2002/03-2004/05 .23TABLE 3.1: QUALITATIVE PERFORMANCE AGAINST FIVE-YEAR TARGETS .31TABLE 3.2: UTILIZATION OF HEALTH CARE BY THOSE REPORTING SICK BY POVERTY LEVELS;

1992-2000 .33TABLE 3.3: PHYSICAL PERFORMANCE IN THE EDUCATION SECTOR .36TABLE 3.4: RECURRENT EXPENDITURE SHARES FOR EDUCATION BY SUB SECTOR 1999/00-2003/04 . 36TABLE 3.5: MEDIUM-TERM PERFORMANCE TARGETS FOR PRIMARY SUB SECTOR 2000/01-2002/03 . 37TABLE 3.6: MEAN PUPIL-TEACHER RATIOS BY TYPE OF SECONDARY SCHOOL AND LOCATION, 2000 . 39TABLE 3.7: SUMMARY OF PLANNED EXPENDITURE AGAINST THE MTEF CEILING IN BILLIONS OF USH. 42TABLE 3.8. PHYSICAL PERFORMANCE OF THE WATER AND SANITATION SECTOR 1999/2000 To 2001/02... 43TABLE 4.1: BUDGETTRENDS IN PUBLIC ADMINISTRATION 1997/98-2001/02 .51TABLE 4.2: WAGE BILL ALLOCATIONS, PAF AS A PERCENTAGE OF TOTAL IN BILLION USH .56

EXECUTIVE SUMMARY, FINDINGS, ANDRECOMMENDATIONS

I. INTRODUCTION

1. Since 1997 the management of fiscal policy in Uganda has undergone majortransformations, including a broadening and deepening of the budget process (see Annex1 for a detailed discussion of Uganda's budget reforms between 1997 and 2001). Morerecently, public expenditure issues have focused on improving participation, enhancingtransparency and accountability in the utilization of resources, and creating a betterunderstanding of resource constraints in addressing priority poverty issues. In line withthis focus, the country has made progress toward increased administrative and fiscaldecentralization of public expenditure issues. Fiscal decentralization has increased localgovernment autonomy, reduced the administrative burden at the center, and offered anopportunity for building a strong and effective mechanism for delivering services in amanner that is focused on the eradication of poverty. The budget process, which has twodistinct phases, is done in a participatory and consultative manner involving severalstakeholders, including donors, civil society, and the private sector. Both phase I and 2of the budget process have been opened up to the various stakeholders beyond theexecutive and development partners. Phase 1, which includes significant input by sectorworking groups (SWGs), has been opened up to a wider range of stakeholders and theSWGs are now also participating in phase 2, which involves external evaluation of thecabinet-approved budget. The introduction of the Poverty Action Fund (PAF) hasprovided a mechanism for increasing and improving the delivery of resources to localgovernments under conditional grants. It has also provided a platform for enhancingoutput-based planning and reporting systems at the lower levels of government. Throughall these changes, the budget process is increasingly becoming an effective mechanismfor improving the quality of expenditure management and policy choices in Uganda.

2. As a means of improving the budget process, the Ugandan government hasintroduced two recent initiatives. One initiative is that the government's preferred modeof aid flows is now budget support. Budget support gives the government greaterflexibility in allocating its expenditures according to Poverty Eradication Action Plan(PEAP) priorities. The government has therefore requested donors to make budgetsupport the preferred modality of aid so as to enable improved budgetary processes, andmore and more donors are providing their assistance this way. The governmentrecognizes, however, that some donors are not in a position to shifi to budget support inthe near future. Because the government is committed to ensuring that total governmentexpenditure is aligned as much as possible with PEAP priorities, it has announced itsdesire to account for all project aid within the Medium-Term Expenditure Framework(MTEF) such that all MTEF ceilings (formally effective 2003/04) will not only reflectbudget but also project support. The increasing transparency of the budget process hasimproved the quality of budget planning and choices and also has allowed greater

predictability of the budget. This means that over time the allocations and actualspending figures have converged.

3. With the advent of budget support and deepening of the budget process, theagenda on public expenditure issues has broadened from a mere review of budgetallocations to overall budget management issues. There is increasing pressure for budgetexecution, accountability, and monitoring are to be considered important elements of thepublic expenditure review (PER) work. In addition, there is greater discussion aboutfiscal decentralization strategy as a central mechanism to improve service delivery to thepoor and confirm service efficiency.

4. To consolidate these developments a new Budget Act 2001 has been implementedthat stipulates the phasing of the entire process so that the different actors can have timeto give input. Increased participation has come with an increased need for monitoringand reporting so that information about past performance can be used in the current andfuture rounds. In the context of Poverty Reduction Support Credit (PRSC) reforms, it hasbeen decided that PAF and overall budget reporting be combined and quarterly reportsmade available on request. Semiannual and annual reports will be distributed in hardcopies and also placed on the Ministry of Finance website.

Budget Reform Challenges

5. In spite of the progress made, there are still challenges in terms of ensuring thatactivities supported by the budget result in desired outputs and outcomes such that theattained macroeconomic stability can be augmented with economic growth and povertyreduction. The current focus on inputs, with little or no regard for impacts, has led togrowth of the budget in quantitative terms, leaving several questions unanswered aboutthe quality of outcomes.

6. Over the years, there has been a relatively slower rate in implementing the twopillars of the PEAP: namely, governance and actions to increase incomes of the poor.With regard to governance, monitoring of progress has partly been hampered by theabsence of viable indicators. Regarding incomes of the poor, there is an urgent need toincrease the role of incomes from non-farn activities, offer better access to markets, aswell as improve the human capital element.

7. In the area of planning and budget making processes, the abilities and roles of thedifferent participating stakeholders and the time available for preparing and making theirsubmissions needs to be continuously revisited to ensure convergence toward the ideal.Participation should not simply be equated to consultation and involvement but should beseen to make an effective contribution in determining priorities and monitoring flows andinputs.

8. The new Budget Act, which sought to offer more time to the legislature toconsider the budget, has resulted in a substantially shorter budget time frame for SWGs,which are unable to reap all the benefits of the improved budget process. On the otherhand, the parliamentarians need further capacity to perform their role effectively underthe new Budget Act.

9. Another challenge facing the planning, budgeting, and budget execution processis that of ensuring that the capacity and behavior of the implementing institutions isconsistent with the set objectives. The PAF is said to have offered an inadequate focuson institutional capacity and the systems for delivering outputs to the level that isconsistent with the desired long-term goals. Consequently, the absorptive capacity of anumber of districts has lagged behind while the inability to make credible reports hasresulted in withholding of additional funds and, hence, delays in achieving the desiredobjectives.

II. MACROECONOMIC AND FISCAL PERFORMANCE

Structural and Growth Indicators

10. The objective of maintaining macroeconomic stability has largely been attained,as the inflation outcome of 3.5 percent is within the target of 5 percent. Real grossdomestic product (GDP) at market prices grew by 5.7 percent in 2001/02, which was thesame rate attained during 2000/01, although it remains below the targeted 7 percent setfor eradication of absolute poverty by 2017. Economic growth has been evenly balancedamong agriculture, industry, and services. The agricultural sector grew by 4.8 percent in2001/02 compared with 4.6 percent registered in 2000/01. Events in the performance ofthe infrastructure and financial sector remained promising, as steady progress was madetoward the enactment of new regulations.

11. In general terms, the structure of the economy changed slightly, with agriculturecontributing 41 percent of total GDP in 2000/01 compared with 42.2 percent in 1997/98.Monetary agricultural GDP grew by 5.5 percent in 2001/02 compared with 4.3 percent in2000/01, while non-monetary agricultural growth slowed from 5.0 percent in 2000/01 to3.8 percent during 2001/02. The growth rate in construction increased from 2.9 percentin 2000/01 to 6.6 percent in 2001/02. Similarly, wholesale and retail trade andcommunity services registered high growth rates of 5.5 percent and 5.9 percent,respectively. Growth in manufacturing declined from 8.9 percent in 2000/01 to 5.0percent in 2001/02.

12. The current account balance on the balance of payments, excluding grants,declined by 8.2 percent in 2001/2002 compared with a 2.3 percent decline the previousyear. Domestic revenue as a ratio of GDP remained low, at 11.7 percent, while publicexpenditure as a ratio of GDP increased to just over 23.0 percent in 2001/02. The fiscaldeficit, excluding grants, rose to 11.5 percent of GDP, as compared with 10.2 percent in2000/01. Local government revenue also remained low, covering less than 10 percent oftotal district resources.

13. The composition and structure of the overall economy should be seen as raisingsignificant challenges to the success and sustainability of other economic policies. Forexample, the structure of the economy is growing faster in non-tradable sectors such asconstruction, services, and administration, all of which reduce the capacity of theeconomy to generate both domestic and foreign-exchange revenues. To maintain thesegrowth rates and public spending, the government will be required to continue relying on

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external resources. The situation is likely to become worse if the foreign inflows are usedto fund consumption as opposed to capital development activities.

14. Overall, the most significant challenge facing the country is how to sustaineconomic growth rates at a level that is commensurate with poverty eradication goals.The revenue shortfalls, poor export performarice, need for further improvement in thefinancial sector, and the need to modernize agriculture are some of the important areasthat future policies must address with a bias to attaining tangible outputs and impactsrelating to poverty.

Revenue Performance

15. Issues regarding domestic revenue performance continue to dominate theeconomic debate. Revenue collection as a ratio of GDP is still low compared with targetlevels. The Uganda Revenue Authority (URA) revenue to GDP ratio for 2001/02increased to 11.4 percent, from 10.7 percent in 2000/01, but was still lower than thebudget estimate in real terms by about 4 percent. Thus, the growth rates in revenue interms of GDP experienced in the mid-1990s have slowed considerably. Non-tax revenueremains below 1.0 percent of GDP and is partly a result of lack of sufficient incentivesfrom collecting institutions and poor submissions and accountability by some ministriesinvolved in the collection of such revenues.

16. The shortfalls in revenue collection have been attributed to the weakening of taxadministration, the culture of noncompliance, difficulties in bringing the informal sectorinto the tax net, the recent granting of value added tax (VAT) exemptions, and thelowering of import duty rates as part of the trade reform program.

17. Despite the implementation of reforms aimed at improving the efficiency of theURA, progress in terms of revenue returns from the URA during fiscal year (FY)2000/01 was patchy. Some of this revenue shortfall has resulted from base variablesperforming differently from projections (for example, the exchange rate depreciated farless than projected). With the exception of income tax, all other categories performedbelow projected levels. However, it is worth mentioning firstly, that the reform programis just beginning, so the results will not be immediate. Secondly, the extremely strongperformance by income taxes demonstrates the impact that the reforms can have ifproperly implemented.

18. Over the medium term the target is to increase domestic revenue by 0.5percentage points per annum over the next three years. However, the current projectionsof revenue as a percentage of GDP for next three years are much lower: 12.3, 12.5, and12.6 percent, respectively. Between 2000/01 and 2001/02, revenue collections haveimproved by 0.9 percentage points from 10.8 percent to 11.7 percent of GDP. Theincrease, however, is mainly a result of the downward revision of the GDP estimate andinclusion of non-tax revenue collected by government departments following theabolition of the appropriations in aid (AIA) provision. All these trends indicate thedelicate situation concerning revenue targets and performance. Given the limited scopefor expanding the tax base and the limited success of URA reforms, this will be an area ofconcern for Uganda in the short to medium term.

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19. The government has also made efforts to improve non-URA collections byministries, following the abolition of appropriations in aid. Although revenue collectionsin this area have been 25 percent higher than projected, it was mainly a result of a muchbetter than expected performance in passport fees. Collection of passport fees, whichwas transferred to the URA, was almost 300 percent above the target. Loan repaymentsremained less than 50 percent of their target because of underpayment by the UgandaElectricity Board (UEB) and the Uganda Development Bank (UDB), leading to furtherunder runs in revenue performance.

20. Given the current structure of the economy, curbing corruption and eradicatingsmuggling are key areas that are likely to pose significant challenges to the efforts ofraising domestic tax revenues. The structure of the economy, which has a largesubsistence sector and several activities operating in the informal sector, makes itdifficult to widen the spread of the tax net in a more effective and efficient way.

21. Another challenge facing revenue collection is the impact of changing regionaland international trade arrangements. Taxes from international trade have performedpoorly over the past few years partly as a result of changes required by regional andinternational trade arrangements. Given that taxes on international trade contribute thelargest share of revenue collection, the potential impact of this development needs to beevaluated and appropriate policies designed and implemented. Some steps have alreadybeen taken in this direction. The government, in collaboration with developmentpartners, is carrying out a study on "Tariff Revenues and Industry Competitiveness underan East African Customs Union" to evaluate the likely impact on revenues and thecompetitiveness of different firms in Uganda.

22. The above observations indicate the critical need for the government to identifyadditional measures that can increase both tax and non-tax revenue. The failure toincrease such revenue would necessitate a corresponding reduction in expenditures. Thissituation clearly highlights the precarious nature of revenue performance for the mediumterm.

23. Under new management, the URA is beginning to make a determined effort toincrease its efficiency. With considerable mass media publicity, corrupt staff are beingweeded out. The government is providing the URA with funding to upgrade andintegrate its information technology system and to modernize its equipment, for example,through the purchase of scanners.

Government Expenditure

24. Total government expenditure, including transfers to local governments, increasedby 18 percent in 2001/02 over 2000/01. As a percentage of GDP, expenditure increasedfrom 21.0 percent to just over 23.0 percent over the same period. The PAF hascontributed greatly toward directing government expenditure to poverty-reducingactivities and in institutionalizing the reporting systems, which have in turn enhancedtransparency and accountability in the budget management process.

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25. However, the continued revenue shortfalls and supplementary expenditures tosome votes, mainly in the public administration sector (mainly political governanceexpenditure), have resulted in disproportionate budget cuts and hence disruption ofactivities in the unprotected non-PAF areas. Continuation of this practice will underminethe planning and budgeting process and weaken the credibility of the entire publicexpenditure management process. Furthermore, mismanagement of existing funds willaffect spending on development programs in the priority sectors.

26. Another budget issue during 2001/02 was the increase of interest payments as apercentage of total expenditure, whereas these payments had been on a downward trendin previous years. Both interest on external and domestic public debt increased, the latterbecause of a large increase in treasury bill issuance in response to increased inflows indonor funding of the budget, the monetary effect of which had to be sterilized. An idealremedy to problems of preventable increases in government expenditures must be sought.

27. Among the measures being taken by the government to control unwarrantedexpenditures is the new Public Finance Accountability Bill 2002, which is about to betabled to Parliament, to replace the 1964 Public Finance Act. A major feature of the Billis that all supplementary expenditure must be approved by Parliament, prior to the releaseof funds. In addition, a new integrated financial management system (IFMS) is to beintroduced to enable government to more efficiently plan and execute the budget andaccount for all spending. An integrated part of the IFMS is a new budgetaryclassification system incorporating international best practices in public-sectoraccounting. This system is to be introduced at the beginning of the next budget cycle(2002/03).

28. The projected increase in expenditure is lower than the nominal increase in GDP,reflecting the government's desire to reduce the fiscal deficit in terms of GDP, under theassumption that revenue growth in terms of GDP cannot itself do the job. The desire toreduce the fiscal deficit in terms of GDP is motivated both by the need to reduce thestrain of monetary sterilization operations on the foreign-exchange markets and thedomestic money market, and the desire to reduce dependence on donor funding.

29. One way to reduce the increasing pressure to extend the fiscal envelope andaccommodate pressing needs in priority PEAP areas is to tap international opportunitiesintended for specific sectors or activities. For example, recent discussions on MillenniumDevelopment Goals (MDGs) have increased the focus on how to attain these targetswithin the time frame by making additional resources available to a country. In addition,the recently launched global fund for health to fight malaria, tuberculosis, and humanimmunodeficiency virus/acquired immunodeficiency syndrome (HIV/AIDS) is increasingthe pressure for the government to increase the budget ceilings for health. Similarly,recent initiatives on Education for All funds (EFAs) intend to provide additionalresources for education.

30. Much as these initiatives offer opportunities for additional resources, as long asthe resources are sourced externally, they create the same problems as the current donorinflows. Thus, despite the importance of these endeavors the government's challenge ishow to ensure its fiscal envelope is adhered to and macro instability is not caused by lack

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of fiscal discipline and sensitivity to budget ceilings. Thus, the government of Ugandawill find it difficult to increase spending ceilings to match inflows of global funds,although it will welcome the inflows as general budget support to be incorporated intomacro economically consistent budget ceilings in due course.

31. Although the poor performance of domestic revenues means the government mustcontinue increasing inflows of donor funds and external loans, it must nonethelesscontinue to commit itself to reducing the fiscal deficit over the medium term. This effortcan be achieved by ensuring that the rate of increases of public expenditures is lower thanthat of revenue collection. This goal is an uphill task if revenue collection does not growin terms of GDP, given the nature of expenditures, some of which are constitutionallyprovided for.

Integration of Donor Resources

32. As already noted, the government's preference is to have all the donors availresources through the budget support modality so as to enable improved budgetaryprocesses. Although this procedure presents some solutions to the problems of resourcetransfers, predictability, and accountability, it does not solve the dangers of increaseddonor inflows on the entire economy.

33. The continued growth of public expenditure against a background of lowdomestic revenue inflows has necessitated the continuation of a high level of externalfinancing in the form of grants, donations and concessional loans. Financing the budgetdeficit in this manner has implications for key macroeconomic indicators such asinflation, exchange rates, and export-sector competitiveness. Fiscal discipline is a criticalcomponent of macroeconomic stability. Domestic bank borrowing to fund the deficitwould jeopardize macroeconomic stability through higher inflation or higher real interestrates. Excessive external borrowing may create an unsustainable debt burden in additionto affecting the overall macro situation regardless of the terms of borrowing. Forexample, excessive reliance on external grants and highly concessional loans to financethe deficit may also have undesirable macroeconomic consequences.

34. Excessive use of donor resources to finance domestic expenditures can cause anappreciation of the real exchange rate, which may negatively affect the tradable sector.Export competitiveness will decrease, resulting into less foreign currency revenues andhence an unsustainable debt position. Currently, there are concerns about the long-termsustainability of the country's external debt and overall fiscal stance. Uganda's largeexternal current account deficit, excluding grants, has been financed in recent years bydonor inflows and, to a lesser extent, direct foreign investment. Net donor inflowsincreased from 8.8 percent of GDP in 1995/96 to 12.5 percent in 2001/02. As a result ofthese concerns, the government is committed to scaling back the fiscal deficit byincreasing revenue and reducing its dependence on donor support. Consequently, donorinflows are expected to fall to 10.3 percent of GDP by 2004/05.

35. The above developments in foreign inflows have created concern regarding thecountry's debt sustainability position. Uganda was one of the first countries to qualifyfor the Highly Indebted Poor Countries (HIPC) debt relief initiative, and as such is due to

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receive in excess of US$2 billion of debt relief in nominal terms over 20 years. The levelof debt relief extended to Uganda under the HIPC initiative was judged sufficient todeliver a debt/export ratio of 150.percent or less over the medium term. However, as aresult of weaker than expected export earnings, primarily as a result of the decline inglobal commodity prices, Uganda's debt/export ratio is currently above 200 percent. Thesustainability of increased external debt is a critical issue since the high economic growthand poverty reduction prospects belie some less favorable macroeconomic indicators.Hence, efficient and productive use of external funds to finance government programswill be important in addressing debt sustainability. To address external debtsustainability, increasing domestic revenues and foreign exchange realization throughexports will remain major challenges of public expenditure management in particular andoverall economic management in general. Even though the external debt managementcapacity in Uganda is good, there is room for strengthening such capacity.

The Export Sector

36. Performance in the export sector was less than adequate. Export promotionactivities were delayed partly because of delays in the disbursement of donor budgetsupport funds, which meant that the government could not meet the required initialexpenditure projections on time, except by drawing down on its reserves. As noted in theprevious section, the increase in donor resources may have actually played a double rolethrough reduction of competitiveness of the export sector. Otherwise, additionalconstraints on the performance of the export sector include the continued deterioration ofthe international price for coffee, the low investment in the fish sector, and the inadequatestate of support infrastructures. All these have resulted in a reduction in foreign-exchange reserves to an equivalent of 4.4 months of imports of goods and non-factorservices, slightly below the target of five months.

37. Total exports of goods and non-factor services for 2001/02 are estimated atUS$636 million while remittances from abroad are expected to amount to US$587million. Although coffee exports by volume increased by 6.6 percent in 2001/02, thevalue declined by 23 percent because of a 30 percent decline in the international price.

38. The government strategy of export diversification helped to compensate for thecoffee revenue shortfall, as non-coffee exports during 2001/02 provided US$346 million.The government has kept the drive to increase exports in. support of rapid economicgrowth and structural transformation among its highest priorities over the medium term.The government programs for supporting exports are the Medium-Term CompetitivenessStrategy, the Plan for Modernization of Agriculture, and the Strategic Exports Program.

39. Success in this area will depend on how the above strategies combine with thepractical input of government efforts and cooperation with all stakeholders, includingdevelopment partners, to overcome the key internal and external constraints. Thechallenges in the export sector will take more than the country can do on its own giventhat some factors in this sector are exogenous to the economy, as shown by the decline ininternational prices and limited access to external markets for primary products. Suchdevelopments underscore the critical need to diversify the export sector and facilitate theprivate sector so that government strategies are in line with the challenges.

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40. To address the constraints in the export sector, the government has tabled adocument that seeks to strengthen activities that encourage strategic exports. Thegovernment has initiated a dialogue to help identify those priority activities that willstrengthen strategic exports. To break into the export markets, local production tailoredtoward exports has got to be of high quality and value.

41. Even then, the bottlenecks imposed by destination countries including subsidiesand tariff and non-tariff barriers must be addressed through mutual understanding andimplementation of international protocols on trade. Already, a number of countries havegiven signs of support for these objectives through specific trade initiatives, including theEuropean Union's (EU)"Everything But Arms," the United States' African Growth andOpportunity Act (AGOA), and recent trade agreements concluded with Japan.

42. Nevertheless, the challenge still remains of translating the opportunitiesembedded in these arrangements and initiatives into practical realities. The governmenthas noted with concern the worrying signs of half-hearted commitments, as some of thecountries supposed to be key to the success of the initiatives have continued to offersubsidies to their local producers in areas where Uganda is supposed to have comparativeadvantage.

43. As noted above, the concerns over the appreciation effect of donor inflows on thedomestic currency, and corresponding lowering- of the competitiveness of the exportsector need to be addressed through wide stakeholder discussions, in addition to issues oflimited market access resulting from unfavorable trade arrangements vis-a-vis Uganda.

The Financial Sector

44. The banking industry has been strengthened in a number of key areas, mainlythrough tightening of prudential regulations, increased frequency of on-site inspectionsand surveillance, and improvement of supervision methodologies. There has also been animprovement in the financial depth of the economy, as shown by the increase in theM2/GDP ratio from 11.8 percent in June 2001 to 14 percent in September 2002. Inaddition, the non-performing assets as a ratio of total outstanding loans have declinedfrom 50 percent in June 1995 to 5 percent in March 2002.

45. The performance of the financial sector, despite impressive signs of success, stillhas significant room for improvement. The private sector's access to credit is still limitedto a few entities, with the problem becoming worse in rural areas. Overall, commercialbanks' extension of credit to the private sector credit grew by only 2 percent over thecourse of the financial year. The effectiveness of the current micro credit schemes inreaching all those who are in need and making a sustainable impact on their businessperformance and incomes remains a challenge for the future. In addition, it remains to beseen as to whether the privatization of Uganda Commercial Bank will improve theperformance of the financial sector in terms of volume and quality of services. All ofthese reform measures are expected to deepen financial markets and encourage moreprivate investment, leading to higher economic growth rates.

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III. THE BUDGET PROCESS

46. With the advent of budget support and deepening of the budget process, theagenda on public expenditure issues has broadened from a mere review of budgetallocations to overall budget management issues. There is an increasing recognition thatbudget execution, accountability, and monitoring are all-important elements of the PERwork. This year, therefore, the PER workshop continued to focus on broadening anddeepening the involvement of civil society and Parliament. The enactment of the BudgetAct 2001, requiring the budget proposals to reach Parliament by April 1, is expected toincrease the role of Parliament before the final budget proposals are submitted in June.The remaining challenges include ensuring that all stakeholders have adequate capacityto contribute substantively to the budget process through the available channels.

Issues Relating to the Medium-Term Expenditure Framework

47. Although the MTEF has started to include projections for donor project financing,the quality of such information is still very low. Resources of donor-funded projects,which may be passed on directly to line ministries or districts, -need to be incorporated inthe budget process.

48. The government is committed to PEAP and PAF, as is reflected in the distributionof additional budget increases. Additional increases are expected in the health,education, and agricultural sectors. Overall, almost 60 percent of the increase will go towage-related expenditures, resulting in significant growth in the wage expenditurecomponent of almost 15 percent. Non-wage expenditure will grow by 6 percent, anddevelopment expenditure will decline slightly compared with last year. The share ofdefense is expected to increase by 0.8 percentage points next year because of thegovernment's commitment to keep defense spending at 2 percent of GDP in addition tothe Ush. 10 billion that was approved as one off expenditure for this and next year.

49. Pay reform has been identified as a priority area over the medium term. Ush. 27billion has been allocated to fund pay increases for middle and senior management andlow-level workers. The challenge is that the amounts allocated are inadequate in relationto the requirements. However, progress of comprehensive public-sector reform isexpected to generate the resources needed to pay much higher wages and salaries, but thiswill only be possible through political will and larger initial spending at first to financethe retrenchment costs.

50. The low quality of improvements in the Budget Framework Papers (BFPs), whichhas been attributed to the short duration of the budget preparation process and the lack ofcapacity for the SWGs, remains an area to be addressed. There is a need to start thebudget process on time to allow timely participation at the lower levels and provision oftechnical assistance to deserving stakeholders, especially at stages where there is greatestpayoff.

51. In the case of agriculture there is a need to move swiftly in implementing the setprograms, as this will ensure that the identified priority areas will benefit and contributeto the much needed poverty reduction in rural and agrarian Uganda. As part of

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implementing the cress-sectoral PMA, there needs to be greater attention to linkages withother sectors, in order to make swift progress.

52. There is a challenge of strengthening monitoring and evaluation (M&E) in thecontext of budget performance, especially in the areas of monitoring both outputs andoutcomes. M&E should become an important learning tool by which the future budgetcycle processes can be improved.

IV. BUDGET EFFICIENCY ISSUES

53. Budget efficiency refers to how the limited resources are effectively utilized tomeet the priority needs of the country. Allocative efficiency refers to allocation ofresources such that they reflect the priorities of the sector, while operational efficiencyrefers to how the allocated resources are transformed into outputs and outcomes, whichare consistent with the sector and the Poverty Reduction Strategy Paper (PRSP). All thesectors that were analyzed-health, education, and water and sanitation-have madegreat progress in allocative efficiency but were encountering major challenges inachieving operational efficiency.

54. The health sector reflected budget underperformance, largely attributed to delaysin recruitment and payroll cleaning. There also were problems with decentralized drugprocurement and delayed tendering and implementation of civil works in the districts. Inspite of these problems, utilization of health services by the poor increased by 2 percentbetween 1992 and 2000, although both coverage and quality of health care services forthe poor still need to increase if health outcomes are to improve.

55. There is a significant failure to take into consideration the budgetary implicationsof some policy decisions in sectors such as health and education. For example, theabolition of cost sharing and increasing the number of government scholarships at theuniversity did not take into account the fiscal implications of their implementation. It isessential to consider the fiscal sustainability of policy decisions.

56. The low value for money in the water sector was partly attributed to measures theministry has undertaken to build capacity at the local government level, which hasincreased the unit cost of additional water points. In addition, interference in tenderingprocedures by district tender boards and misuse of office equipment by senior districtofficials have resulted in cost-ineffective service provision.

Challenges and Recommendations

57. In terms of equity, many challenges need to be tackled in the medium term toenable limited budget resources to address the priority needs of the poor. The watersector still has major challenges ahead to address efficiency and equity concerns. Theongoing value for money and tracking studies, in the context of the forthcoming WaterSector Review, will provide an excellent platform to address these challenges over themedium term.

58. It was noted that the water sector spends 50 percent of its budget at the center inspite of the fact that more than 90 percent of its beneficiaries live in the rural areas. Thus,

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the national distribution of water resources is an area that needs urgent attention. Animportant contribution to this objective will be the recruitment of water officers at thedistrict level. This will help to provide better management and monitoring services.

59. The resource allocations to the health sector are still inadequate in relation torequirements, which call for efforts to reduce duplication and wastage of already scarceresources. To meet this challenge, there is an urgent need for a strong partnershipbetween the Ministry of Health (MOH) and Private Not for Profit (PNFP) providers.Such resource constraints also call for caution on the planned reforms for the PAF, ashealth cannot afford shortfalls in its allocation. In addition, the flow of resources to andwithin the health sector need to be timely to enable the use of limited resources to deliverthe much-needed services expeditiously. Decentralized drug procurement needs to bemade more efficient to ensure that greater value for money is realized.

60. In the case of the education sector, the increased pressure on limited resources-teachers, classrooms, desks, and books-from higher levels of primary enrollmentassociated with universal primary education (UPE) needs to be addressed if theanticipated improved education outcomes are to be realized. Although the primaryeducation sub sector is quite robust, the post-primary-training and higher-educationsectors have displayed major imbalances in terms of allocative/operational efficiency andequity. A rigorous and cost-effective plan for post-primary education has yet to beprepared.

V. BUDGET EXECUTION AND PROGRAM IMPLEMENTATION

61. During FY2001/02, budget release performance was generally satisfactory. Bothwage and non-wage expenditures were above targets while development expenditure fellshort by 10 percent. District votes over performed compared with central governmentvotes, which were largely affected by the need to accommodate domestic revenueshortfalls and supplementary expenditures by other votes. Expenditure in the PAF areaswas satisfactory at 98 percent, although there was underperformance in non-wageexpenditures mainly on account of poor performance of equalization and non-sectoralgrants.

62. Problems have been found with budget execution, although the government hastaken measures to address the problems of arrears through the implementation of thecommitment control system (CCS). Currently, the CCS is applied to all centralgovernment non-wage non statutory expenditure. Enforcement is a problem; someagencies are not submitting proper monthly returns. In 2000/01 non-wage anddevelopment expenditure recorded a decline in arrears on the order of 45 and 23 percent,respectively, in comparison to the previous year. Although this is commendable, theeffort must be extended to the local government level, where the challenges are evengreater with no CCS. Part of the problem comes at the budget preparation stage, as underbudgeting for items such as utilities and rent leads to arrears. Another problem is thepractice of suppliers extending credit outside the CCS. This situation clearly highlightsthe considerable amount of work that needs to be undertaken to make progress in thisarea.

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63. With regard to the supplementaries associated with the public administrationsector, the government has undertaken a study to identify the problem areas and hopes toprepare a cabinet brief to discuss how to streamline activities within this sector. Thestudy has identified several areas of cost savings, not just within the public administrationsector but right across government. The study also has clearly highlighted distortions andinequalities that have crept into government over the past several years through growingcases of supplementary expenditures, the cost of the political system, duplication ofservices, and growth of autonomous agencies in the sector. These inequities need to beaddressed as part of public-sector reform.

64. Recent reviews such as the HIPC tracking study have indicated that the Ugandanbudget system is generally weak in terms of its budget execution and reporting. Severalreallocations are made after the budget has been approved. Last year allocations weremade for strategic exports and parliamentary salary increases and emoluments, whichwere approved long after the budget speech that forced cuts in other priority areas.Defense and public administration consistently overrun their budget, which results in cutsin other sectors. It is expected that the new Public Finance and Accountability Bill,which is currently tabled before the Parliament and will hopefully come into effect nextyear, will reduce the incentive for supplementaries and make it difficult to undermine thebudget discipline through overruns.

65. The decentralization of service delivery has necessitated that funds flow in atimely manner to local authorities and service delivery centers. Although progress hasbeen made in reducing the delays in flow of funds from the Ministry of Finance, Planningand Economic Development (MFPED) and line ministries, according to recent trackingstudies there are still cases of substantial delays in resource flows. It has also beenobserved that limited capacity at the local government and line ministry level accountsfor most delay in the flow of funds and leads to disruption of services.

66. Tracking studies in health and education sectors have brought about a betterunderstanding of various budget-execution problems by identifying delay in flow offunds and lack of capacity problems. However, the corresponding reforms to improvethese problems have been slow to come. In addition, there is inadequate information tounderstand how the public funds are used. For instance, there is little information on theoperational efficiency and equity of service delivery. There is a need to do more cost-effectiveness analysis and benefit-incidence analysis such that not only budgetformulation but also budget execution can be pro poor.

67. The implementation of the PAF protection mechanism, intended to protect corePEAP expenditures, has sometimes been done at the expense of other importantinterrelated areas, which therefore need some support in the future. The government hasinitiated a study to identify the challenges and provide possible suggestions for reform.A cautious and phased removal of the current protection offered by the PAF is likely tobe an optimal strategy.

68. However, the PAF reform cannot go far until overrun problems are addressedadequately because overruns undermine the objective of removing the PAF protection,which therefore will be detrimental to attaining PEAP targets. In particular, the effect of

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supplementaries, which result in budget cuts for other sectors, can be devastating topoverty eradication efforts. The implications of these developments on the long-termcredibility of the budget process and execution are discussed. In this regard, it isimperative that political interference in planning and budgeting execution issues begreatly reduced or better still eliminated.

VI. BUDGET MONITORING, EVALUATION, AND REPORTING

69. The current setup of national M&E includes all arrangements for tracking andproviding feedback on progress made on the PEAP objectives. The system includes allprocedures, systems, and standards of information generation and management and thecorresponding reviews accompanying implementation of national development programsand projects. The M&E system is characterized by substantial overlaps and duplication,partly as a result of several stakeholders and participants.

70. Public expenditure accounting and reporting must go hand-in-hand with overallbudget performance reporting to ensure that decisions on inputs in the next round will bebased on information from past performance. For example, at the point of progressreview, there is a need to establish whether past allocations of resources and the actualimplementation are indeed moving the economy and communities toward the set goalsand targets.

71. Uganda has made great strides in using tracking studies to identify problems inthe flow of funds and has taken appropriate measures to address the challenges. To date,however, these studies have played an important role only in the health and educationsectors, which have registered fewer problems as a result. This trend is increasinglybeing recommended for adoption by other sectors and is being supported by developmentpartners largely through technical and financial assistance.

72. Other sectors need to do tracking studies in order to improve flow of funds andenable efficient use of limited resources. However, as noted in the budget efficiencychapter, there is a need to undertake benefit-incidence analysis to understand how thepoor and needy people are benefiting from these programs, which are primarily intendedto serve them. Also, the tracking studies have been largely concerned with flow of fundissues, and very few studies have been concerned with effective use of funds to achievethe desired objectives efficiently and equitably.

73. Although reporting of the PAF was noted to have made substantial progress inpriority sectors, the capacity at the local government level is still very limited and needsurgent attention. This situation may be seen in the case of audited final accounts, whichare submitted within the statutory limits for central governments, but the same is not trueof local government accounts. This development has already been identified as a majorneed under the fiscal decentralization program and should be addressed as soon aspossible.

74. Strengthening of M&E systems will be only half the job done if the reports onfindings are not availed to all the relevant stakeholders in a timely manner. Suchinformation will enable timely and appropriate reviews of the MTEF through better

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forecasts of the future that are based on past experiences. Publications of annual budgetreports need to be supplemented with better output information. CCS has shown that it ispossible to do financial reporting on all government programs. Hence, simple outputmonitoring systems should be developed and implemented even at the lower levels ofgovernment.

75. The M&E system should start with clearly expressed goals and targets and ensurecoverage of data collection ranging from inputs through to outcome levels. Efficiency inthis process demands minimization of costs of unnecessary overlaps and linking up ofdifferent actors and interest groups to pool scarce and scattered resources for mutualbenefit. Proper reporting of the findings by different actors should be harmonized anddisseminated to the various groups of decision makers at all levels.

76. The future reports also should include data analysis in order to provideinformation that will help to guide future planning and budgeting decisions. The reportsshould not only include numbers but also implications for the future. Participation indata collection and lower-level reporting should improve as participants begin to seebenefits for themselves coming out of the evaluation reports. However, the generation ofquality decision making information to include in the M&E reports may requireanalytical skills and technical facilitation that are not currently available at various levelsof government. Therefore, this area should be specifically addressed. The need foradditional resources to support the upgrading of analytical skills within the MFPED andother line ministries has featured in a number of government reports, and it is now timefor action.

77. The feedback and accountability aspects require a strong auditing mechanism,consisting of staff and equipment, which are generally lacking in the auditor general'soffice. The ultimate goal of an intergovernmental monitoring system should be togenerate information for better decision making at all levels of government, to promoteinstitutional performance, and to enhance accountability. The task for Uganda to get tosuch levels clearly surpasses the current abilities of the office of the auditor general. Thesituation is worsened by capacity problems at the local government level. Governmentreports indicate that the requirement of submitting audited accounts to the legislaturewithin 12 months of the end of the fiscal year is met by the central but not by the localgovernments.

78. In response, the government has put in place measures to increase the quality andregularity of internal budget reporting. Measures have been undertaken, with the supportof the Department for International Development (DFID), to strengthen the capacitythrough training and also to ensure independence of the Office of the Auditor General. Inthe area of providing feedback, measures are being undertaken by the government, withthe support of donors, to strengthen the capacity of each line ministry and also at the localgovernment level to monitor and report on budget outturns, including outputs andoutcomes.

79. . Given that the monitoring of outcomes and impacts is a medium- to long-termagenda, there is a need to establish appropriate indicators to continuously monitor andevaluate progress toward the desired goals. The linkages between planning and

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implementation need to be clearly articulated in order to establish relevant activities andevents that should be monitored using relevant indicators. This calls for developing thecapacity to rigorously evaluate the economic development impact of various publicpolicies and expenditures.

80. Issues of reliability and accuracy of the data also need to be given dueconsideration. The processes of collecting, storing, processing, and reporting of resultsrequire not only high levels of human capacity but also a minimum package of technicalequipment. The tasks of ensuring data quality and coverage, together with developingand computing relevant indicators for certain objectives and actions, are also going to bedaunting.

VII. PUBLIC EXPENDITURE MANAGEMENT IN A DECENTRALIZED CONTEXT

81. Fiscal decentralization involves introduction of various levels of government thatmake coordination of activities, monitoring, and accountability of critical importance.Management of public expenditures demands a robust intergovernmental fiscal andadministrative system with an efficient and accountable relationship among MFPED, lineministries, and districts as well as between districts and their constituents. As a result ofdecentralization, there has been an increase in the number and diversity of transfermechanisms from central government and donors to the local governments.

82. Fiscal decentralization poses significant challenges for the government in terms ofplanning, budgeting, and implementation of the set policies. It requires building credibleinstitutions with adequate capacities at all levels of government, maintaining harmoniousrelationships between the different actors and stakeholders, and ensuring that local andnational plans work toward the same goals. For example, many of the mechanisms foraffecting resource flows in Uganda are not yet well adapted to the decentralizedframework. In addition, the local governments have little power over allocation ofresources, given that most of their resources are in the form of conditional grants. Thelower levels of government also have little involvement in decision making, partly as aresult of capacity problems.

83. A number of complaints have been raised about the structure of transfers,including the limitations it imposes on local governments in pursuing their locallyidentified priorities. Another complaint has been the formula used in computing transferssuch as equalization grants. For example, recent developments indicate that, givenpoverty trends, the northern region requires revenue grant transfers of 29 percent asopposed to the current 22 percent of the total allocation. Thus, the formula, which partlytakes into account population size, geographical area, and poverty levels (based onconsumption), needs to be revisited.

84. Another critical issue is the local government revenue-generating capacity and itslinkage to the magnitude of transfers. More developed local governments will tend tohave higher expenditure requirements because they have more infrastructure to maintain,but at the same time they should have more revenue-generating capacity. With theexception of the Local Government Development Program (LGDP) (which only appliedto development expenditure), grants are not linked to local revenue-generating capacity,

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though this will be a feature under the new fiscal transfer system that will be piloted inFY2002/03.

85. Additionally, there are no clear linkages between a number of initiatives at thecentral government and the districts, and even within the districts themselves. Forexample, in most cases there is no strong linkage between the district development plans(DDPs) and the local government budget papers. The lack of such cross-linkages hasresulted in a situation whereby scarce resources are not being maximized. Furthermore,this lack of linkages between the various levels of policymakers and implementers canresult in planning and budget execution failures, as each level or set of governmentinstitutions pursue objectives that cannot converge to the established nationaldevelopment goals. Yet the alternative of letting the center dictate what should be doneby and at all levels of government would not result in decentralized service delivery.Priorities for national development should strongly reflect preferences from thegrassroots, which should be determined through community participation in the planningprocess.

86. Another challenge facing the Ugandan government where the PER should make acontribution is how to develop a tier of government and institutions that are responsive,adaptive, effective, and accountable in developing and implementing strategies forpoverty eradication using the ongoing and proposed public-sector reforms. AlthoughUganda has a well-defined intergovernmental system, the challenges have been inimplementing reforms that support such a system. The government has beenbacktracking in terms of continued heavy reliance on sectoral conditional grants, thefailure to develop strong administrative systems at the local government level which canhandle payroll management, and the failure to define well-developed systems ofstandards setting and M&E. In addition, the challenges for the medium term will revolvearound how to enable intergovernmental relations to influence the budget and vice versa.

87. The government has already taken note of these impediments, which tend to slowprogress toward poverty eradication. Plans are under way to examine how to streamlineand harmonize the present systems and processes of transferring resources to the localgovernments. It is worth noting, however, that the problems with fiscal decentralizationalso include low capacity levels, facilitation, and ensuring fruitful community and civilsociety participation in planning and decision making. Such participation is critical if theplanning and budgeting for services under local governments is to be responsive to theneeds of local communities and accountable to them as well.

88. Capacity problems at the districts and within line ministries have hindered flowsof resources, as coordination and submission of reports are not always done on time.This situation has also let policy execution lag behind schedule and, hence, has deniedcommunities access to vital resources and services. Most local governments haveproblems in attracting and retaining quality personnel who are necessary for deliveringquality services on time. This problem of retaining high caliber staff highlights theforgotten role of personnel management in the production of sectoral outputs. Amongother things, this capacity problem has implications for efficiency in decentralizedprocurement and efficient management of service delivery.

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89. Budget reporting to council and central government is fragmented and ineffective.It also does not give comprehensive and accurate information on local governmentrevenue and expenditure performance during the fiscal year. As already noted, lineministries are also faced with major problems in dealing with quarterly reporting from agrowing number of conditional grants and to different stakeholders. Desk officers inministries and at the districts are also overburdened with continuous visits from multiplegroups of evaluators and supervisors, resulting from uncoordinated systems between thevarious levels of government.

90. Another important challenge for the future with regard to the fiscaldecentralization strategy is to establish government processes with potential areas of riskor challenge, which will need further attention in order for the overall strategy to besuccessfully implemented. For example, the removal of protection currently beingenjoyed by the PAF areas is bound to subject such sectors to an uncertain future in termsof resource inflows.

VIII. CONCLUSION

91. This annual PER report provides an important opportunity for reviewing thebudget process as a whole and for identifying both achievements and challenges. In thecase of Uganda this has the added advantage of addressing fiduciary concerns of budgetsupport for donors. Naturally, these features have increased the interest and participationof all stakeholders in the PER process, specifically in budget workshops, the annual PERworkshop, the PER report, and related studies.

92. This PER report identifies the major challenges in public expendituremanagement in Uganda in the advent of budget support. It is important that thegovernment, together with development partners, develop a systematic program and asequenced approach to address identified concerns so that Uganda's efforts to addressmacro stability, fiscal sustainability, and poverty reduction can be achieved prudently.The challenge now is how to use this report as a basis for identifying improvements in thebudget process and supporting them through the appropriate instruments (for example,PRSC, Economic and Financial Management Project [EFMP II], LGDP etc) andassistance from other development partners.

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1. AN OVERVIEW OF MACRO AND FISCALDEVELOPMENTS

A. INTRODUCTION

1.1 During the past decade, the management of fiscal policy in Uganda has undergonemajor transformations, especially in terms of broadening and deepening of the budgetprocesses. In this context, the focus of the PER process has been in the areas ofimproving budgetary processes, improving transparency and accountability of resourceutilization, and creating a better understanding of the resource constraints in addressingpriority sector issues. The PER process has also initiated a better understanding ofmacroeconomic considerations of government spending and, correspondingly, theoptimal level of external flows. These issues have and will continue to attract theattention and interest of policymakers and development planners over the medium term inUganda's public expenditure reform program.

1.2 In addition, Uganda has started making a decisive move toward increaseddecentralization of the budget process. Decentralization of administrative and servicedelivery responsibilities has called for corresponding fiscal decentralization, whichdemands new initiatives in the budgeting process. Fiscal decentralization has increasedlocal government autonomy, reduced the administrative burden at the center, and offeredan opportunity for building a strong and effective mechanism for delivering services in amanner that gives priority to the eradication of poverty. Also, the change to integratedsystems under sector wide approaches (SWAPs) has changed the relationship betweenthe ministries and their funding agencies, thereby necessitating reforms in both donor andgovernment systems. Donor financing has been integrated within the national budget,and bottom-up planning strategies enhanced.

1.3 The entire budget process has been opened up to various stakeholders beyond theexecutive and development partners. Phase 1, which includes a significant input ofSWGs has been opened to a wider range of stakeholders. In addition, the SWGs havebeen encouraged to participate in phase 2, which involves external evaluation of theCabinet-approved budget and the review of the budgetary systems and performance.

1.4 The introduction of the PAF has provided a mechanism for increasing andimproving the delivery of resources to the local governments via conditional grants. ThePAF has also provided a platform for enhancing output-based planning and reportingsystems at the lower levels of government. These innovations have made significantimprovements in the quality of budget choices and have reduced the variation betweenprojected expenditure levels and those actually realized.

1.5 In addition, the reform process has resulted in substantial gains in the quality andtimeliness of BFPs and the MTEF. By identifying policy issues related to spendingdecisions and linking projected resources to expenditures over the medium term, thebudget process has become quite successful in delivering macroeconomic stability. Key

economic indicators are shown in tables 1.1 and 1.2. As evidenced by the PERconsultation prior to the Consultative Group (CG) meeting in May 2001 and othersubsequent deliberations among government, civil society, and donors, the budgetprocess is increasingly becoming an effective mechanism to improve the quality of

expenditure management and policy choices in Uganda. This consultative process wasfurther exemplified in the November 2001 budget workshop and May 2002 PERworkshops in FY2001/02.

1.6 However, there are still several challenges in terms of ensuring that activitiessupported by the budget result in desired outputs and outcomes such that the attainedmacroeconomic stability can be augmented with economic growth and povertyeradication. Apart from improving the processes, there should be a positive change in theefficiency of implementing the programs supported by the budget. A number of issuescan be raised concerning the efficacy of the current budgeting framework. There is a

need to strengthen and elaborate further the PER processes put in place-in terms of theinstitutional, administrative, and capacity underpinnings of budget programming andimplementation-in order to make the most useful developmental impact on growth andpoverty reduction. For example, the ability and role of the different participatingstakeholders and the time available for preparing and making the expected submissionsneed to be continuously revisited to ensure convergence toward the ideal. Participationshould go beyond mere consultation and become effective in determining priorities andmonitoring of flows and impacts. The focus on inputs, with little or no regard forimpacts, has led to substantial growth of public expenditure, in quantitative terms, with

several questions remaining about quality of outcomes.

1.7 It is necessary to establish whether the capacity and behavior of implementinginstitutions are consistent with the set objectives. The PAF, for example, is said to haveoffered an inadequate focus on institutional capacity and the systems for deliveringoutputs to a level that is consistent with the desired long-term goals. Consequently, the

absorption of resources has lagged behind in a number of districts, while the inability to

make credible reports has resulted in withholding of resources for future periods. Allthese issues and many others call for a regular review of the budget making andimplementation process and procedures. Such reviews will ensure that lessons of bestpractices from the past are used to improve both current and future budget processes.This type of review is one of the important objectives of the PER workshop.

1.8 Over the long term, the credibility of the budget process will depend on theprogress made in upstream or budget preparation processes. Therefore, the currentbudget process must be reviewed and evaluated in order to inform the subsequent budgetreforms on the modifications and improvements required to overcome the shortcomingsin the downstream or budget execution and reporting phase. Moreover, these challengesare happening at a time when donor aid management is changing from project-orientedfinancing to budget support. The implications of such transitions on budget processmanagement need to be established and appropriate strategies designed and implemented.

1.9 In the medium term, certain challenges are facing the implementation of thepublic expenditure reforms. These challenges include preparation of the budget in a waythat incorporates all the donor-funded projects, improvements in budget execution and

2

monitoring, and completion of fiscal decentralization. Progress on these issues will havean important impact on the future of budget management in particular and publicexpenditure issues in general.

1.10 The rest of the report is arranged as follows: The next section reviews thecountry's economic performance over the previous year and its implications for the sizeof the fiscal envelope. It attempts to bring out both the achievements and risks of thecurrent macro framework in order to identify areas of challenge. Chapter 2 discusses thebudget process and issues concerning participation roles, capabilities, and concerns of thedifferent stakeholders. Here we discuss how phases 1 and 2 of the budget preparationprocess performed over the last budget cycle and we identify some of the weaknesses andchallenges for improving budget process in the medium term. Chapter 3 looks at animportant issue concerning the implementation of the budget, namely, budget efficiencyof various public-sector interventions. This year we give special attention to budgetefficiency issues in three main priority sectors: health, education, and water andsanitation. These three sectors are important elements of PEAP's pillar 4 on increasingthe quality of the life of the poor.

1.11 Chapter 4 looks at broad challenges in budget execution-an area that has hadlimited progress over the years in Uganda. We give special attention to two main issues:(1) issues related to lack of budget discipline and political involvement in budgetexecution; and (2) budget protection mechanisms, such as Uganda's PAF that hasprotected some sectors at the expense of others, and the implications that continuing suchmechanisms will have on attaining PEAP targets. Chapter 5 discusses the challengesUganda faces in terms of improving budget monitoring, evaluation, and reporting and itslinkages to the increasing desire for donors to have fiduciary assurances of budgetsupport. Chapter 6 discusses the issue of Uganda's intergovernmental system and effortsin decentralization and the challenges it poses in budget preparation, execution, andreporting. The challenges of creating institutional capacity, creating harmoniousrelationships between the different levels of government in planning, budgeting, andimplementation are also emphasized. Chapter 6 also highlights the need to discuss moreclearly a program for sequencing public expenditure reforms in order to improve thebudget processes in Uganda over the medium term. The report ends with a summary ofconclusions.

B. A REVIEW OF UGANDA'S ECONOMIC PERFORMANCE

1.12 In this section selected trends in macroeconomic indicators are used to reviewrecent economic fiscal and monetary developments in order to capture emergingdevelopments and challenges. Therefore, the section provides a basis for assessing thereorientation of expenditures toward poverty eradication. The results of past economicpolicies and activities in terms of macroeconomic stability, financial sector development,market operations, industrial development, revenue collection, and general economicgrowth can act as good indicators for future policy trends. Similarly, the performance ofkey sectors such as education, health, water and environment, transport, andcommunications is a good indicator on the value for money and relevancy of budgetallocations in light of the plarned economic objectives.

3

C. MACROECONOMIC PERFORMANCE: ACHIEVEMENTS AND CHALLENGES

1.13 During recent years the economic performance of Uganda was in line with the

government's main objectives of maintaining macroeconomic stability and broad-basedeconomic growth. In 2001/02, the average annual rate of underlying inflation of 3.5

percent was within the targeted 5 percent. The real GDP growth rate was 5.7 percent,

which, although less than the medium-term target of 7 percent, maintained the pace of

growth seen during the previous financial year. As indicated in table 1.1, in order for the

country to achieve the target of reducing absolute poverty to less than 10 percent by

2017, GDP growth rates have to be sustained at 7 percent and above, while inflation

should be kept below 5 percent per annum. This goal will require implementation of

further structural reforms to create an enabling environment for the private sector and

increased private foreign investment. The increase in foreign direct investment from

US$60 million in 1993/94 to US$146 million in 2001/02 is commendable, but needs to

be augmented further.

Table 1.1: Selected Macroeconomic Indicators for Poverty Eradication GoalsIndicator/Period 2000/01 2001102 2002/03 2003/04 2004/05

Outcome Outcome Projected Projected Projected

Annual real GDP growth at market 5.7 5.7 6.6% 6.7% 6%

prices

Annual average inflation rate 6.3 -1.8 3.5% 3.5% 3.5%

Gross reserves -months of imports 5.6 6. 6.6 7.1 7.3

Source: MFPED/lntemational Monetary Fund (IMF) staff estimates.

1.14 Despite a decline in the cash crops sub sector, mainly because of adverse terms of

trade and the coffee wilt disease, the performance of the agricultural sector improved

compared with the previous year. The agriculture sector grew by 4.8 percent compared

with 4.6 percent during the previous year. Good performance was reported in the food

crops sub sector, which grew by 6.2 percent in 2001/02, despite having grown by 7.7

percent in 2000/01. Table 1.2 presents the key macroeconomic indicators for the past

few years and projections for the next two fiscal years. The industry and services sectors

also displayed lower growth performance during 2001/02 compared with the 2000/01

overall GDP growth rate (see table 1.2)

Performance of the Financial Sector

1.15 The role and performance of the financial sector in the economy has continued to

improve. The measure of financial depth, M2/GDP, increased from 11.8 percent in June

2001 to 14 percent in September 2002. In addition, the non-performing assets as a ratio

of total outstanding loans declined from 50 percent in June 1995 to 5 percent in March

2002. Savings and certificates of deposits rose from Ush. 353 billion in June 2001 to

Ush. 460 billion in June 2002. Nonetheless, the overall savings level would be higher if

it were not for the substantial amou*nts of savings held in the form of real estate and

foreign currency assets. Savings in many rural areas are usually in the form of

commodity stocks, livestock, and land. House construction as a form of saving for the

future may also have affected the level of financial savings.

4

Table 1.2: Key Macroeconomic IndicatorsINDICATOR 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04Annual average headline inflation (%) 0.2 5.9 4.5 -2.0 1.0 3.9National accounts, % growth rates:

Agriculture 5.8 5.6 '4,6 4.8 - -

Industry 10.9 3.1 6.5 5.7Services 6.5 6.5 7.2 6.4 - -GDP at market prices 7.4 5.3 5.7 5.7 6.6 6.7Real per capita GDP 1.7 2.8 3.3 3.2 4.3 4.2

National accounts, % GDP at market prices:Gross domestic investment 19.8 19.5 19.9 20.6 22.3 22.2Public investment 5.4 6.4 6.4 6.0 6.7 6.6Private investment 14.4 13.1 13.5 14.6 15.5 15.9Gross domestic savings 7.5 6.2 5.5 5.8 6.8 7.8

Balance of payments, % of GDPCurrent account balance, excluding grants -13.2 -13.0 -13.8 -14.0 -17.7 -15.5

External indicators:

Debt service/exports (% before HIPC relief) 24.2 27.2 26.6 24.2 24.4 21.5Debt service/exports (% after HIPC relief) 24.2 13.7 15 12.2 13 13.2Reserves in months of imports 6.3 5.9 5.6 6.0 6.6 7.1

Government finance, % of GDPDomestic revenue 11.7 11.3 10.8 11.7 12.3 12.5Public expenditure 17.8 20.7 21 23.3 23.1 22.2Overall deficit excluding grants -6.1 -9.4 -10.2 -11.5 -10.8 -9.7External borrowing, net 3.2 2.2 3.4 4.7 3.8 3Domestic borrowing 0.0 -1.0 -0.1 -0.1 -0.1 -0.1

Nominal GDP at market prices (Ush. billion) 8145 8906 10009 10665 11658 12980

1.16 All these developments have followed significant improvements in the bankinglaws, such as the tightening of prudential regulations of the banking systems andincreased frequency of on-site inspections and surveillance. The minimum unimpairedpaid-up capital requirement for commercial banks was increased to Ush. 2.0 billion inJanuary 2000 and is scheduled to be increased further to Ush. 4.0 billion by January2003. This increase is expected to act as a cushion against losses and offer strongprotection to depositors' funds. The government has continued to make importantfinancial-sector reforms, including privatizing the Uganda Commercial Bank (UCB) andstrengthening corporate governance of the sector.

1.17 However a number of immediate, short-term measures are required to consolidatethe excellent progress made to date. The approval and adoption of the FinancialInstitutions Statute is expected to ensure that banks are prudentially managed and that the

5

safety of deposits is not jeopardized through mismanagemeIihd fraud. The proposed

law spells out the duties and necessary stringent management controls for the key players

in the risk-management process.

The Export Sector

1.18 Delays in disbursement of donor budget support funds (less than 75 percent)

meant that the government was unable to meet the reserves target because it had to draw

down on foreign-exchange reserves equivalent to six months of imports of goods and

non-factor services, which is above the target of five months. MTEF projections do

indicate that the reserves position is not likely to improve to meet the target over the

medium term. Additional policies will be required to further propagate and consolidate

the improvements attained in the nontraditional export sector.

1.19 Essentially, nontraditional exports refer to commodities that have only featured in

Uganda's export trade over the past dozen years. In 2001/02 nontraditional export

earnings were higher than traditional exports by US$ 260 million, clearly indicating the

great potential for this export sub sector and the need for diversification of the entire

export sector. The government already is looking into developing a range of strategic

exports, including fish, horticulture, tea, and information and communication technology.Figure 1.1 shows the trends in the performance of traditional, nontraditional, and totalexports over the past five years.

Figure 1.1: Trends in Export Revenues 1996/97 - 2000/01

01996)97 1997/98 199&'99 18999/0 2D0tWOl

I--Tt E,qaxts -UTrM * Ni rar

Source: MFPED.

1.20 Infrastructure impediments are a major constraint to private-sector investments

and export growth in Uganda. The government has taken some vigorous steps to

improve the infrastructure and power sectors. Progress on strengthening and reform of

the infrastructure has continued, with some key landmarks being attained. Performance

of the 10-year main roads program was largely on target during the current year as 90

percent of the current targets were met. The target was to carry out routine maintenance

on 17,513 km of roads and periodic maintenance of 2,215 km under the district roads

program. During the year, the Cabinet approved the reforms and privatization of Uganda

Railways Corporation and the enactment of a new railway sector law. These actions are

6

expected to provide an enabling environment for private-sector participation andestablishment of a railways sector regulator under the relevant line ministry. Thepotential of the power sector is to be boosted by the start of construction work on theAES hydropower project after approval of funding by the boards of the InternationalFinance Corporation and the World Bank.

Trends and Implications of Domestic Revenue

1.21 The current account balance, excluding grants, declined by 8 percent in2001/2002, more than the decline of 2 percent recorded in the previous year. Domesticrevenue as a ratio of GDP, which increased from 7.1 percent in 1991/1992 to 12.1 percentin 1996/1997, has since stagnated at around 10 to 11 percent a year. This year theexpected outturn is 11.7 percent, mainly because of a downward revision of the GDP byabout 7 percent and abolition of AIA. On the other hand, public expenditure, as a ratio ofGDP, increased from 21.0 percent in 2000/2001 to 23.3 percent in the current year. Theoverall deficit, excluding grants, increased from 10.2 percent in 2000/01 to 11.5 percentin 2001/02. All these figures indicate the need to improve revenue performance byfocusing on strengthening tax administration, curbing tax evasion, and increasing thecontribution of non-tax revenue.

Figure 1.2: Revenue Performance as a Percentage of GDP 1996/97 - 2000/01

l [ETotalRevenue Revenue Perfonnance 1996/97 - 2000/01luTax Revenue

0 Nontax Revenue | T ;

12 112

Pe rce nt of GDP 6 7

28 0

1996/97 1997/98 1998/99 1999/00 2000/01Source: MFPED

1.22 Non-tax revenue remains below 1 percent of GDP, with only Ush. 54.1 billion ofthe anticipated Ush. 86.5 billion being collected in the current year. A number ofmeasures have been adopted to improve non-tax revenue collections, includingabolishing AIA such that all collections are remitted to the consolidated fund, reviewingand updating rates and charges, and carrying out in-phase transfer collections of the tax tothe URA to minimize leakages. These measures are to be augmented by increasingincentives for institutions collecting this type of tax.

1.23 Local government revenue has an important role to play in the delivery ofservices; yet, such revenue has remained at 10 percent or less of the total funds availableto local governments. This situation is partly due to a lack of capacity at the sub-countylevel , a lack of technical knowledge, political interference, and lack of supervision by the

7

higher authorities. It is, therefore, necessary to realize the potential of local governmentrevenue through appropriate measures to improve tax administration and tax policy.These goals are expected to be areas of focus in the forthcoming LGDP II and otherbilateral local government capacity-building programns.

D. IMPLICATIONS FOR POVERTY ERADICATION

1.24 The biggest threats to poverty eradication remain the low rate of economicgrowth, which has been less than the required 7 percent, and increasing inequality bothbetween regions and persons. Recent household surveys indicate that inequality inUganda has increased between rural and urban areas and also between regions. Whileoverall national poverty has been on the decline, between 1997 and 2000, there was amarked increase from 60 percent to 66 percent in the northern region. This regionalreversal in the trend calls for a clear assessment and reorientation of public expenditurestoward poverty eradication.

1.25 Given the observed trends in economic growth and regional inequality in povertytrends it becomes essential to review the regional distribution of local government grantsby sector, which partly depends on population size (85 percent), and geographical area(15 percent). Table 1.3 below, based on figures for 2001/02, shows a fair distribution-implying that the causes of the observed differences may be the result of other factors.

Table 1.3: Regional Distribution of Local Government Revenue Grants in Percentages(2001/02)

Sector/Region Central West East NorthHealth 20 28 27 24Education 24 29 26 21Water 31 34 14 22Roads 24 27 27 21Agriculture 23 27 27 23Total 25 27 26 22Source: MFPED

1.26 Recent analytical work by the MFPED has highlighted that the current allocationof public expenditures is not totally poverty sensitive. Based on population, geographicalarea, and poverty level it is argued that the northern region, which is most poverty prone,should receive at least 29 percent instead of the current level of 22 percent. MFPED iscurrently reviewing its formula for various sectoral conditional grants to ensure that theyare poverty sensitive (Government of Uganda [GOU] 2002).

E. MACROECONOMIC IMPLICATIONS OF THE SIZE OF THE FISCAL ENVELOPE

1.27 The current realizations in macroeconomic outcomes have important implicationsfor the size of the fiscal envelope. More recently, the growth rate of domestic revenuecollections has been stagnant in the context of an increasing need for public expenditureon service delivery. This situation has necessitated a continuation of a high level ofexternal financing in the form of grants and concessional loans. The management of thebudget deficit has implications for key macroeconomic indicators such as inflation,exchange rates, and export-sector competitiveness. Fiscal discipline is a criticalcomponent of macroeconomic stability, mainly because the use of domestic bank

8

borrowing to fund the deficit is always inflationary, while excessive external borrowingwill create an unsustainable debt burden. It is therefore important to restrict aggregategovernment expenditure even though this will have a crucial bearing on sectoral spendinglimits. The government has to determine an aggregate spending level that is in line withmaintenance of a stable macroeconomic situation.

1.28 Although it is possible for the country to make use of concessional funds offeredby donors to support increases in the provision of public services, beyond what ispossible through the use of domestic revenues, there are limits to the size of an acceptablefiscal deficit. Unlimited external borrowing can create appreciation of the currency andresult in a reduction in export competitiveness. Excessive use of donor resources cancause an appreciation of the real exchange rate, which will negatively affect the tradablesector. Export competitiveness will decrease, resulting in less foreign currency revenuesand, hence, an unsustainable debt position.

1.29 There already are concerns about the long-term sustainability of the country'sexternal debt and overall fiscal stance. Net foreign inflows as a percentage of GDPincreased from 9.2 percent in 1995/96 to 13.3 percent in 2000/01 and are expected to riseto 14.6 percent in 2001/02. The stock of external debt as a percentage of GDP decreasedfrom 58.3 percent to 55 percent in 2000/01. The sustainability of increased external debtis a critical issue since the high economic growth and poverty reduction prospects beliesome less favorable macroeconomic indicators. Table 1.4 shows some key indicators ofexternal debt and foreign inflows.

Table 1.4: External Debt and Foreian Inflows as a Share of GDP92193 93/94 94/95 95196 96197 97/98 98t99 99/00 00/01 01/02

Actual Estimate

Foreign Official Inflows total 16.3 12.5 11.8 9.2 9.3 9.9 9.9 10.4 13.3 14.6Loans 7.7 6.8 6.6 4.7 4.4 4.0 4.5 4.1 4.4 6.0

Grants 8.6 5.7 5.3 4.6 4.9 5.8 5.4 6.3 8.9 8.6otw HIPC Grants 0.8 1.0 1.7 1.7

Private Inflows 3.4 7.6 5.7 7.0 5.1 8.3 6.3 1.6 2.2 3.0

External Debt Total 81.9 75.0 58.8 58.2 58.4 55.7 58.8 58.8 55.0 51.8Multilateral 56.4 45.4 37.5 41.2 42.4 42.4 47.5 47.5 51.3 48.6Bilateral 20.2 17.5 12.7 13.0 12.0 12.2 12.6 11.1 3.2 2.9Commercial Banks/Non-Banks 7.5 5.3 2.9 2.8 2.3 2.1 1.3 1.4 0.7 0.5

Source: World Bank database and staff estimates.

1.30 The macroeconomic effects and sustainability of incrcased aid depend on how thegovernment uses such aid, and how the consequences are transmitted to the economy. Inthe case of Uganda, there is evidence that increased aid inflows have been financingincreased consumption. Consumption as a ratio of GDP has increased more thaninvestment, while imports, also as a ratio of GDP, have increased more than exports-resulting in a widening current account deficit. These developments raise the question asto whether the country's current level of public spending and external debt aresustainable.

1.31 One other problem that can arise out of excessive funding of the fiscal deficit isan increase in domestic inflation. If government borrowing from the domestic banking

9

sector is not restricted it can result in an increase in money supply, which in turn cantranslate into a higher consumer price inflation that is above the national target of 5percent or less. It is therefore important that government domestic borrowing activitiesbe regulated to a level that is favorable to the goal of macroeconomic stability.

F. CHALLENGES IN IMPLEMENTING PEAP

1.32 The Ugandan government has continued to reallocate its public resources toactivities that directly contribute to poverty eradication, particularly in the areas of healthcare, primary education, and water services. The slow progress made in these areas is aclear indicator of the need to do more to strengthen the capacity of the public sector totranslate resources into services that will make a difference in the lives of poor people(GOU 2002). Although the abolition of user fees is said to have enhanced access tohealth services by the poor, signs have been increasing of deteriorating quality in servicesrendered. High infant, child, and maternal mortality rates persist, and the governmentvaccination program is on the decline. In the education sector, the UPE policy hasincreased attendance but has also created unfavorable pupil-textbook and teacher-pupilratios (GOU 2002). There are also increasing concerns about high absenteeism anddropout rates, especially among poor children and girls.

1.33 Over the years, the government has been relatively slow in implementingprograms under pillars 2 and 3, namely, improving governance and actions to raise theincomes of the poor. With regard to governance, monitoring of progress has beenhampered by the absence of viable indicators. Although the democratization process hascontinued to evolve in a progressive manner, a lot of effort is still needed to facilitateinstitutions and mechanisms for enhancing a versatile democratic system. It is critical forpolicymakers to consider adopting direct actions to help the poor increase their incomesand close the widening gap of income disparities. The government should increase therole of non-farm activities, increase access to markets, and improve the human capitalelement in order to address rural poverty (GOU 2002).

G. CONCLUSION

1.34 The above discussion highlights how the macro objectives and related risks haveimportant implications for the size of the government budget in terms of both revenuesand expenditures. As a result of the tight fiscal constraint, the government has beenforced to prioritize its programs to ensure that value for money is realized through thelimited public spending possible. The government intends to reduce the fiscal deficitover the medium term and reduce its reliance on external support of the budget.Currently, around 58 percent of the budget, equivalent to 12 percent of GDP, is externallyfunded. The government of Uganda hopes to reduce the deficit mainly by increasingrevenues as a share of GDP, but expenditures will likely also have to fall as a share ofGDP. There are short-terms costs associated with achieving these macroeconomictargets, however, both for sustaining sectoral programs and for attaining overall PEAPtargets.

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2. UGANDA'S BUDGET PROCESS: ACHIEVEMENTS ANDCHALLENGES

A. INTRODUCTION

2.1 Over the past five years, Uganda has made systematic strides in making its budgetprocess more open and has built up the capacity of various stakeholders to ensure qualityparticipation in the budget process. The budget process in Uganda has been divided intotwo phases. Phase I involves the beginning of the budget process whereby budgetceilings are communicated and SWGs are asked to prepare their BFPs. Civil society anddevelopment partners have started playing an increasingly active role in this process.Phase 2 deals with the presentation of the Cabinet-approved MTEF to Parliament forreview and comment by civil society and development partners. There has been furtherdeepening of consultations on budget efficiency and budget monitoring issues in thisprocess as well, which has improved the credibility of budget allocations.

2.2 Budget predictability has improved substantially over the years in Uganda. Thetransparency of the budget process has improved the quality of budget planning andchoices and also has permitted greater predictability of the budget. This predictabilitymeans that over time the allocations and actual spending figures have converged. Forinstance, the absolute variability of the budget actually was reduced from about 25percent in the early 1990s to less than 5 percent last year. This is indeed commendable.That said, it must be noted that individual sectors still have substantial variations inbudget execution. As noted later, some of the PAF sectors perform at around 95 percent,while other sectors such as public administration have systematic overruns.

2.3 The Ugandan government has introduced two recent initiatives to improve thebudget process. One initiative is that the government's preferred mode of aid is nowbudget support, which gives the government greater predictability when planning theMTEF. Through the second initiative, the government desires to account for all projectaid such that all MTEF ceilings (starting FY2002/03) will not only reflect budget but alsoproject support. This change, apart from giving a reasonable level of confidence in theceilings, also enables sectors to be accountable for the inputs in terms of outputs andoutcomes.

2.4 In Uganda, the World Bank has been the lead donor in providing support to thePER process. In addition to the traditional role of the Bank in the PER process ofproviding overall support, the PRSC-initiated reforms have necessitated the Bank's needto have better information on budget execution and value for money of the choices in thebudget. Hence, the Bank has facilitated the formation of a PER working group(PERWG) this year. This forum, which consists of government (mainly budget-relatedunits in MFPED) and key budget support donors, allows continuous discussion of PERissues. Thus, the Bank has been involved in providing support for phase 1 and phase 2 ofthe budget process to facilitate broad participation and to give civil society anddevelopment partners a forum in which to review and assess the budget choices made in

the BFP. The Bank has been providing technical and financial assistance in deepeningthe phase I and 2 activities. In addition, various development partners have providedtechnical assistance through SWGs with the aim of deepening the budget preparationprocess and improving the budget choices over time.

2.5 The Bank's budget support instrument, PRSC, has been strongly linked to thePER given that the primary focus of PRSC1 and 2 has been on improving efficient,equitable, and sustainable allocation of public resources. PER is the vehicle throughwhich budget-related dialogue can be systematically undertaken and, indeed, PER hasenabled continuous dialogue on these issues to achieve the PRSC targets. In this context,PER reform areas have underlined the priority areas in which Bank support hasconcentrated in assisting with value-for-money studies in health, education, and water orensuring that better budget performance information is made available. Therefore, PERhas helped the central focus of PRSC of improving efficient service delivery. Thisobjective has been further augmented by the Country Financial and AccountabilityAssessment and the Country Portfolio Performance Review, which have ensured thatefficiency gains are realized in financial management and procurement reforms,respectively.

2.6 The government of Uganda has requested donors for budget support as thepreferred modality of aid to enable improved budgetary processes. Thus, increasinglymore and more donors are providing their assistance that way. For instance, the Bankprovides almost half of its assistance in this mode, while other donors (for example,DFID) are expected in the next few years to move almost exclusively to budget support.In the course of this year, some other donors have also moved increasingly to budgetsupport (for example, Irish Aid, EU, and the Netherlands), and the Danish InternationalDevelopment Agency (DANIDA) is presently considering budget support. This move tobudget support, apart from focusing the attention of the donor community on the budgetchoices that are made, also enables donors to focus on outcomes of the overall budget andsector wide reforms rather than on projects. This move has, however, also raised thelevel of complexity of managing donor expectations of reporting (for fiduciary concerns)and local government expectations of decentralization. The donor budget support hasalso raised a more complex issue in the determination of ceilings, which is an additionalconcern for some donors who want to earmark support to specific sectors. Following lastSeptember's Partnership Principles' workshop, donors have an increased understandingof the illogicality of earmarked sector support.

2.7 With the advent of budget support and deepening of the budget process, theagenda on public expenditure issues has broadened from a mere review of budgetallocations to overall budget management issues. There is increasing pressure thatbudget execution, accountability, and monitoring are all considered important elements ofthe PER work. In addition, there is greater discussion about fiscal decentralizationstrategy as a central mechanism through which service delivery can be improved to thepoor and service efficiency in general can be confirmed. The PERWG has come underincreasing pressure to undertake studies in these issues and progressively morestakeholder discussions are beginning to accommodate these concerns through variousfora.

12

B. BUDGET PROCESS - PHASE 1

2.8 Over the past few years the Ugandan government has undertaken various boldsteps to deepen the budget preparation process and improve the level of participation ofvarious stakeholders. As a first step of the budget process, during the summer of 2001MFPED commissioned a study on how to strengthen the role of SWGs. Based on thisstudy, the Budget Policy and Evaluation Department (BPED) revised the budget processtimetable (Floscher 2001). Table 2.1 reflects the changes made to the budget process andbudget cycle on the basis of this study. In addition, this year was the first year ofimplementation of the new Budget Act 2001, which sought to give the legislature agreater role for legislature in the budget preparation process. The result was that thebudget preparation process was advanced several weeks, with the BFP submitted toParliament on April 1. However, this also resulted in the budget process gettingsubstantially shortened for SWGs, which could not reap all the benefits of theimprovements in the budget process that were introduced.

Table 2.1: Budget Process for the Year 2002/03Activity Date

Consultative budget workshop Nov 2001

Budget workshops for local governments Dec 2001/Jan 2002

Preparation of sector BFPs Nov/Dec 2001

Submission of sector BFPs Dec 2001/Jan 2002

Interministerial consultations on BFPs Jan/Feb 2002

Submission of national BFP to Cabinet March 2002

Submission of macroeconomic plan and indicative budget framework to Parliament April 1, 2002

Comments from Parliament and PER workshop Mid-May 2002

Budget Day June 13, 2002

Source: MFPED.

2.9 The budget workshop was held in November for all stakeholders collectively sothat they could be aware of the budget process and could play an effective role in thepreparation of the BFP. This year, in addition to the usual stakeholders from lineministries, civil society, and development partners, the parliamentarians also played anactive role. This was a welcome measure given that, according to the Budget Act, theyare supposed to play an increasingly active role in the budget process. The workshop,which was organized by MFPED, set out the basic framework for budgetary choices, therespective sectoral ceilings, and the process by which budgetary decisions are to be madethrough SWGs and clarified the roles of various stakeholders. In addition, there was aclear discussion of the output orientation of the budget and how to integrate results-oriented management into the budget process. This year, greater emphasis was placed onproviding more detailed guidelines to SWGs to ensure that the BFPs are more outputoriented. Subsequently, the BFPs from the justice, law, and order sector andaccountability sector were substantially improved from the previous year. The BFPs forhealth, water, and education are already output-oriented.

2.10 The November budget workshop was preceded this year by the quarterly PAFreview meeting to discuss the annual budget performance report and PAF report. Theobjective was to ensure that there is a forum to discuss the outputs and outcomes of the

13

overall budget in addition to formal reporting of the budget performance in terms of PAFresource flows. A large number of stakeholders again attended this workshop andcandidly discussed the challenges facing budget reporting overall. It was pointed out thatthe BFPs need to become more output oriented. In the context of PRSC-supportedreforms, it was also decided that PAF and overall budget reporting will be combined intoone. In the future the quarterly reports will be made available on request, whilesemiannual and annual reports will be distributed through hard copies and placed on theMinistry's website (www.finance.go.ug). The government of Uganda should becommended for meeting these objectives this year and for beginning to focus onimproving the quality of reporting.

2.11 Following the budget workshops, SWGs started meeting as respective sectors toprepare their BFPs. Given the delayed start of the budget process, however, the SWGsdid not have adequate time to improve their presentations through more frequentconsultations. This factor was evident in the overall quality of BFP submissions thisyear. Other than those sectors that have a sector review process, most other sectors werenot able to make substantial progress in their BFPs compared with the previous year. Theonly exceptions were the justice, law, and order sector and the accountability sector,which were able to improve their BFPs, through internal consultations with the help ofadditional technical assistance. Given the outcome of the budget process and BFPoutputs this year, it was noted that additional technical assistance must be provided inorder to enhance the output orientation of BFPs. MFPED and PERWG have discussedplans for putting in place technical support for the SWGs before the next budget cycle.

2.12 Following this meeting the SWGs held a two-day retreat in December to discussthe outputs of the SWGs, especially those needing additional guidance. Line ministriesand development partners attended the retreat and discussed BFPs in the context ofoutput orientation, performance indicators, prioritization of sector programs and issuesrelated to results-oriented management. Apart from giving feedback to the respectiveSWGs, the retreat also enabled attendees to assess lessons for the future in terms ofproviding appropriate support to weaker SWGs.

2.13 After the November budget workshop, local government BFP (LGBFP)workshops were held in December, and a further workshop was held in January for thenew districts. The objective was to provide information to local government officials onthe budget process and provide them with their appropriate expenditure ceilings so theycould prepare their LGBFPs. Because local governments in Uganda are responsible foralmost one-third of the budget and more than three-fourths of PAF expenditures,LGBFPs are an important mechanism through which to strengthen the role of localgovernment and identify and address challenges for broader decentralization. At thesemeetings sector BFPs were shared with local governments to facilitate the LGBFPpreparation process.

2.14 In January and February sector BFPs were discussed with the Minister of Finance.Subsequently, MFPED prepared a national BFP, which was presented to the Cabinet inMarch. The national BFP also included the macroeconomic framework and put forwarda number of new expenditure options relative to the November ceilings that had emergedduring the sectoral consultations. This process involved extensive consultations with

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many sectors because the tight budget ceilings necessitated prioritizing expenditurechoices. After Cabinet discussions, the national BFP was formally presented to theParliament on March 26, ahead of the April 1 deadline proposed by the new Budget Act.The Parliament provided its feedback through the budget committee after a series ofconsultations on May 15. MFPD prepared a written response a few days later and thendiscussed these issues with Parliamentary Budget Committee.

C. BUDGET PROCESS - PHASE 2

2.15 The PER workshop was held on May 20-21 to discuss the previous year's budgetperformance (specifically, the first three quarters for which information was available).A special effort was made this year to discuss budget efficiency issues. The governmentalso presented the Medium-Term Budget Framework (MTBF)IMTEF for FY2002/03 -FY2004/05, which was discussed at the PER meetings. Given the real constraints in thefiscal envelope for the next three years (where budget grows nominally by 7 percent perannum), it has become necessary to ensure that potential efficiency gains within thebudget are realized. This has necessitated a series of special studies and discussions ontracking expenditure flows, benefit-incidence analyses, and value-for-money studies.This year, the government of Uganda focused on the health, education, and water sectors.The plan is to broaden this focus to incrementally include other sectors in the comingyear to continue to improve budget choices and budget execution.

2.16 This year again the PER workshop focused on broadening and deepening theinvolvement of civil society and Parliament. The selected few participated actively andconfirmed that the discussions on macro challenges, fiscal constraints, and budgetefficiency issues for the medium term were discussed in detail. In addition, two specialtopics were discussed this year. The first topic was the continuing overruns of the publicadministration sector and the implications for overall budget efficiency. The secondtopic was how to reform the PAF procedures so that the protection provided to somesectors does not undermine overall budget efficiency and financing of other non-PAFpriority activities. We discuss these two issues in the next chapter.

2.17 Based on the inputs from Parliament and discussions at the PER workshop,MFPED revised the BFP/MTEF and presented it to the Cabinet. Following furtherrevisions at the margin, the budget for FY2002/03 and the MTEF was submitted by theMinister of Finance to the Parliament on June 13.

2.18 In the sections that follow, we briefly summarize the revenue and expenditureissues for the medium term before discussing the budget choices reflected in theFY2002/03 budget allocations.

D. MEDIUM-TERM BUDGET FRAMEWORK (MTBF)

2.19 Since 1997/8 domestic revenues have virtually remained unchanged as aproportion of GDP at around l1 to 12 percent. Despite reforms that were aimed atimproving efficiency of the URA, very little progress has been seen in terms of revenuereturns from the URA in the last fiscal year (see table 2.3). Although some of thisrevenue shortfall is from base variables performing differently from projections (for

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example, the exchange rate depreciated far less than projected), except income tax allother categories performed below projected levels.

Table 2.2: Resource Envelope 2002/03-2004/05 (Ush. Billion)2001/02 2001/02 2002/03 2003/04 2004/05

Approved Budget Projections

Domestic resources 1,335.0 1,246.8 1,456.6 1,660.0 1,849.6

O/w URA 1,259.0 1,207.4 1,392.1 1,575.30 1,763.1

O/w non-URA 41.0 39.4 40.5 47.5 47.5

O/w loan repayments 35.0 11.9 24.0 37.3 39.0

Budget support 884.1 797.6 8126 771.3 713.1

O/w grants 494.6 434.3 481.9 482.6 453.9

O/w loans 389.5 363.3 330.7 288.7 259.1

Total resource inflows 2,219.1 2,044.4 2,269 2,431 2,563

MinusExternal debt repayment -101.0 -126.6 -121.9 -152. -1762

domestic financing -67.5 11.0 -59.6 -33.8 -10.8

Arrears -132.0 -114.1 -50.0 -45.0 -41.0

Total available forMTEF/budget expenditures 1,918.6 1,968.1 2,037.6 2,200.2 2,334.7Memo items

GDP 11479 10697.7 11691.1 13019.1 1430S.0

URA4revenuesas%ofGDP 12.0% 11.3% 11.9% 12.1% 12.3%

Source: MFPED

2.20 In addition, this fiscal year the government also made efforts to improve non-URA collection by ministries, following the abolition in AIA. Collections have been 25percent higher than projected, partly through much better than expected performance inpassport fees, collection for which was transferred to the URA (collection was almost 300percent above target). Loan repayments have been less than 50 percent of their targetbecause of nonpayment by the UEB and UDB, leading to further under runs in revenueperformance last year.

Table 2.3: URA Revenue Performance 2001/02 (Ush. Billions)Tax head Budget Outturn (July-Feb.) Proj. Year Outturn

Income tax 262.9 172.4 285.1

Import duty 164.2 82.7 126.9

Excise duty 374.1 235.3 360.9

VAT 436.4 249.4 385.2

Fees & licenses 57.4 37.1 55.2

Total 1258.7 777.0 1213.34

Source: MFPED

2.21 Even though revenues for the past five years have been hovering at around thesame level as percent of GDP (10 tol 1 percent), expenditures have increased by about 5percentage points. Most of this increase has been financed exclusively by donor inflows.This increase has, however, confirmed that critical PEAP priorities are being addressed.

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This increase in expenditures has naturally increased the external dependence of thebudget in carrying out government programs. The situation has also led to growingconcerns among policymakers of the adverse effects of extemal flows on internationalcompetitiveness and also the sustainability of various PEAP programs withoutappropriate measures to increase revenues.

2.22 The higher external flows have been in the form of HIPC debt relief, budgetsupport, and additional projects to address PEAP priorities. In this regard PAFexpenditures have grown by a large percentage over the last five-year period, from under2 percent of GDP to more than 7 percent.

2.23 Over the medium term the target is that revenue will increase by 0.5 per annumover the next three years. According to current projections, however, the figures for thenext three years are 12.3, 12.5, and 12.7 percent of GDP, respectively. Between last yearand this year, revenue has increased by 0.9 percentage points, that is, 10.8 to 11.7, mainlythe result of a downward revision of the GDP estimate by about 7 percent. All theseindicate the delicate situation of the revenue targets and performance. Given the limitedscope for expanding the tax base and the limited success of URA reforms, this will be anarea of concern for Uganda in the short to medium term.

2.24 Nevertheless, improved URA performance should finally be forthcoming as aresult of new management, a concerted effort to eliminate corruption, and increascdfunding from the government for purchasing modern technology (such as scanners).Non-tax revenue is also likely to increase significantly as the reform program in this areacontinues, with accountability and reporting requirements being tightened and ratesincreased.

2.25 According to the MTBF (see table 2.2), foreign financing is expected to declineover time. Next year the budget support is expected to increase from 2001/02 by 8percent to Ush. 861 billion. After that it will be Ush. 880 billion in 2003/04 and Ush. 872billion 2004/05. In addition, it is worth noting that the budget support for this year hasperformed at 89 percent of the target. The performance for the end of the fiscal year isexpected to be Ush. 797 billion, which is lower than the budgeted level of Ush. 884billion. The budget support figures given in the MTBF include almost $100 million ineach of the coming three years resulting from savings from HIPC debt relief. Becausedonor project aid does not go through the Consolidated Fund Account, it is not part of thebudget support figures given above. Donor project aid figures are increasingly beingincorporated as part of the MTEF although the quality of such information is not verygood. However, the government's target to reduce the fiscal deficit is inclusive of projectaid and, hence, there is a need to improve the coverage and quality of such information.

2.26 This year there is a Ush. 55 billion shortfall relative to revenue projections. Thisshortfall is mainly from underperformance of URA returns and a downward revision ofelectricity tariffs and the resulting impact on loan repayments by the UEB. Thus, thegovernment needs to identify additional measures that can increase the tax or non-taxrevenue. Failing such measures, corresponding cuts have to be incurred in expendituresif revenues continue to under perform. As noted, this situation clearly highlights theprecarious nature of revenue performance for the medium term.

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2.27 There are increasing pressures to extend the fiscal envelope to accommodatepressing needs in priority PEAP areas. Recent discussions on MDGs have increased thefocus on how to attain these targets within the time frame by making additional resourcesavailable to a country. In addition, the recently launched global funds for health to fightmalaria, tuberculosis, and HIV/AIDS are also becoming an increasing pressure on thegovernment to increase the budget ceilings for health. Similarly, the EFA drive isexpecting a similar treatment for education in the MTEF. Despite the importance ofthese endeavors the government is taking a tough stand on ensuring adherence to its fiscalenvelope so that macro instability is not caused by lack of fiscal discipline andinsensitivity to budget ceilings. Thus, the government of Uganda will not increasespending ceilings to match inflows of global funds, although it will welcome the inflowsas general budget support to be budgeted for in due course.

2.28 Since the government prefers budget support as the main mode of assistance mostdevelopment partners are switching to budget support. This switch has naturally meantthat there is greater predictability of resource flows, unlike project aid. Consequently,budget support as a share of GDP has increased over time to about 7 percent of GDP.Thus, the government is able to plan its medium-term expenditures with reliable figureson budget support. Some new development partners have fully joined the support mode;others, including the World Bank, are increasing their share of budget support from lessthan a third to almost half.

2.29 The projected increase in expenditure is lower than the nominal increase in GDP.Over the medium term the government's objective is to reduce the share of externalfinancing of the budget and confirm that fiscal deficit is reduced. As a result, thegovernment's net savings over the medium term will be in the order of 1 percent of GDP,given the pressures to provide for various PEAP goals. These savings will enable theclearing of domestic arrears and will enable for expansion in credit to the private sector,which is expected to grow at around 15 percent a year from last year's level of less than10 percent. These targets are consistent with the government's macroeconomic policyobjective of promoting private-sector growth.

2.30 The budget assumptions are relatively ambitious for FY2002/03. A large increaseis envisioned in domestic revenue mobilization through URA reforms and spending isprojected to grow, despite the fiscal ceilings established, because of to pressures toincrease spending on health and education, among many others. Unlike other years, therevenue shortfalls cannot be accommodated through expenditure cuts without substantialdownward revision of sector programs. Although the external financing plans areconsistent with donor plans, it is expected that some donors may be willing to provideadditional resources if that would mean corresponding increases in sectors that are underfunded. The problem, though, is that then other sector ceilings have to be reduced. Overthe medium term, however, the government will clearly need to increase revenue andcontrol expenditure pressures if it is to achieve its fiscal objectives.

E. MEDIUM-TERM EXPENDITURE FRAMEWORK (MTEF)

2.31 The MTEF is derived from the MTBF and covers the same period, FY2002/03 -FY2004/05. While the MTEF has started to include projections for donor project

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financing, the quality of such information is suspect. Integrating donor projects withinthe MTEF is one of the areas of reforms identified under PRSC. The current set up leadsactual budgetary programming to be limited to government-funded expenditures fromdomestic revenue and budget support. Thus, the MTEF is effectively limited to onlygovernment-funded expenditures. After deducting external debt amortization paymentsand net savings of government from domestic revenue and donor budget support, thebalance is available for the MTEF. The sectoral distribution of the MTEF is described intable 2.4. It is expected that starting in FY2003/04, spending ceilings will include donorprojects.

Table 2.4: Sectoral Shares of Expenditure over the Medium TermSector 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05

Outturn Outturn Outturn Approved Projections Projections Projections

Estimates(in percent)

Security 19.9 15.4 13.9 12.0 12.8 12.6 13.1

Roads and 6.2 8.1 8.5 8.9 7.4 7.3 7.1worksAgriculture 1.0 1.5 1.5 2.6 2.3 2.3 2.0

Education 26.9 26.3 24.9 24.1 24.8 24.8 24.3

Health 6.5 6.5 7.4 8.9 9.6 10.1 10.7

Water 1.2 1.5 2.4 2.8 2.4 2.4 2.4

Law and order 7.2 7.3 6.5 6.8 7.0 6.5 6.4

Accountability 0.6 0.8 1.1 1.2 1.3 1.3 1.3

EF and SS * 2.7 4.6 5.0 7.4 7.4 7.7 7.7

Public 20.7 20.3 20.2 17.1 17.7 16.4 15.7

administrationInterest 7.1 7.7 8.5 8.2 7.1 7.7 7.8

payments

All sectors 100.0 100.0 100.0 100.0 100.0 100.0 100.0

EF and SS: Economic functions and social services.Source: MFPED.

2.32 As with last year's budget, this year's budget also focuses on supporting PEAPimplementation and the presidential manifesto on increasing exports. Similar to last year,exports will receive Ush. 50 billion worth of interventions, which is expected in themedium term to result in almost tripling export revenue from Ush. 400 million to Ush.1.5 billion.

2.33 Overall, the budget envelope that is consistent with macroeconomic stability andother key macro targets is Ush. 2,037 billion, which is about 119 billion above theFY2000/01 amount, an increase of less than 7 percent in nominal terms. Table 2.5 showshow this increase has been allocated to priority sectors. This year, to finance underfunded activities, an additional Ush. 76.2 billion had to be identified, which was derivedby imposing a 7 percent across-the-board reduction in non statutory development andnon-wage expenditure.

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2.34 It is clear from table 2.5 that PAF areas have been well provided despite themodest increase in the overall resource envelope. PAF expenditures increased overall byUsh. 55 billion, which amounts to almost 45 percent of the increase in the budget for thisyear. This increase is fully funded by government resources and, as a result, the PAFexpenditures are expected to increase to 36 percent of the government's discretionarybudget next year- almost a percentage point increase from this year. This increase isconsistent with the government's commitment to increase spending to directly povertyreducing areas. Total resources available for the PAF will increase from Ush. 631 billionthis year to Ush. 680 billion in 2002/03.

2.35 Before discussing sectoral shares, we wish to mention two issues based on thebudget speech: the budget focus for the coming year and the allocation and distribution ofthe increase between last year and this year. According to the government, the budgetfocus for the corming year will be based on three themes: (1) continued attention to PEAPgoals through the PAF, (2) reducing the level of fiscal deficit, and (3) promoting strategicexports. The BFP addresses all these objectives. As noted in the preceding paragraph,the government has highlighted its commitment to PEAP and PAF through an increasedallocation overall (36 percent) and a larger share from the overall increase in this year'sbudget. As discussed, the government also has reiterated its commitment to reducing thefiscal deficit by ensuring that expenditures do not grow as fast as GDP over the mediumterm. The government of Uganda wishes to reduce the fiscal deficit from 11 percent in2002/03 to almost 8 percent in 2004/05. In this way, the government intends to reduce itsdependence on donor funds even if domestic revenue increases do not materialize.Finally, the BFP highlights the government's commitment to the strategic exportsinitiative by again providing Ush. 50 billion, which it is hoped will be invested in areaswhere public spending will harness private participation in production, processing, andmarketing of strategic exports.

Table 2.5: Distribution of Budget Increases for 2002/3Categories Allocation

Ush. (billions)Pay reform for grades U1-U5B 17Pay increase of about 3 percent for lower grade workers 10

Main roads maintenance 3 5Counterpart funding for main roads projects 4

Makerere University support to an additional 2,000 students 6

Defense 30.4

Justice, law and order sector 14.0

Parliamentary Commission 11.5

Primary teachers wages (PAD) 24.3

Secondary teachers wages 12.6

Health sector (including Ush. 6.5 billion for national primary health care delivery (PAF) 31.3

LGDP 8.8

2.36 The projected increase of Ush. 124 billion between 2001/02 and 2002/03 isdistributed consistently with the major priorities to which the government has committeditself in dialogue with development partners. Almost 60 percent of this increase goes towage-related expenditures, which makes wage expenditures grow by a large proportion-

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almost 14 percent-in next year's budget. Non-wage and development expendituresgrow at 5 percent and 1.5 percent, respectively. In terms of sectors, as table 2.5 shows,education gets Ush. 37 billion, health gets Ush. 31 billion, Parliament gets Ush. 11.5billion, pay reform implementation gets Ush. 27 billion, and defense gets Ush. 30 billion.The allocation to defense includes an extra Ush. 10 billion, which development partnersagreed to this and next year as one off expense. Overall, the allocation of the increasesclearly indicates the government's commitment to PEAP and priority sectors, includingpublic-sector performance issues related to pay reform.

Table 2.6: Medium-Term Expenditure Framework 2002/02-2004/052001/02 2002/03 2003/04 2004/05

Sector Approved Projections Projections ProjectionsEstimates

Security 229.24 261.66 276.81 306.84

Roads 170.24 150.47 160.22 166.74

Agriculture 49.05 46.87 49.85 48.00

Education 458.27 505.17 546.44 567.38

Health 170.06 195.97 221.75 250.51

Water 54.03 48.75 52.75 55.04

Law and order 128.55 142.15 143.92 150.04

Accountability 22.76 26.64 28.30 30.79

Economic functions and social services 139.86 150.18 169.09 180.06

Public administration 325.31 360.13 360.14 371.79

Interest payments due 155.10 144.60 169.40 183.00

Grand total 1918.70 2,037.60 2200.20 2334.68

2.37 Reviewing the projected spending levels and key sectoral trends of the MTEF forthe coming year in table 2.6 we observe the following:

Health: Health is the fastest growing sector for the next fiscal year,increasing by almost Ush. 26 billion or 15 percent of its current level.This growth is driven mainly by the support for implementation of theHSSP, Uganda's commitment to international goals in this sector, and theshift of project to budget support by some donors. Ninety percent ofhealth funding goes for front line service provision as a result of recentreforms. Recent studies also show that the poor are benefitingincreasingly from the health care provision. The growth in the healthbudget is expected to continue over the medium term resulting in a levelof almost 11 percent of the MTEF by 2004/05 compared with less than 9percent this year. It is expected that the government will accommodate atleast some of the inflows from the global funds against malaria,HIV/AIDS, and tuberculosis, which will boost health sector spending evenfurther.

Education: In nominal terms education receives the largest nominalincrease next year-about Ush. 40 billion. This increase is mainly the

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result of the large rise in the wage bill for primary and secondary teacherscompared with the 2000/02 allocation. It is expected that this higherprovision will help avoid under budgeting for teachers' wages, which wasa problem this year. Education is projected to get a quarter of the overallbudget next year. About 69 percent of this money will go to primaryeducation, 13.7 percent goes to secondary, 4.3 percent to Business,Technical, Vocational Education and Training (BTVET), and 9.4 percentgoes to tertiary. In this year's budget, teacher training also will beprotected by PAF. Compared with 1996, when only 36 percent of theprimary allocation reached schools, in 2002, 95 percent is excepted toreach schools-a worthy achievement.

Agriculture: The budget for this sector has more than doubled from lastto this year, from Ush. 24 billion to almost Ush. 49 billion, and this levelwill be maintained next year. Thus, the sector's share in the overallbudget will increase from 1.5 to 2.3 percent of the MTEF, which is in linewith the government policy of investment in modernization of agricultureand production of strategic exports. However, as has been noted in theBackground to the Budget (GOU 2002), the challenge is to move swiftlyin implementing the programs to ensure that the priority areas rightlyidentified will benefit and contribute to much needed poverty reduction inrural and agrarian Uganda.

Justice, Law, and Order: The allocation for this sector is expected toincrease by about 11 percent over last year (about Ush. 14 billion), inresponse to progress being made by the sector in developing a SWAP.The government agrees with development partners and other stakeholdersthat this sector may need additional funding after the plan is updated toreflect baseline surveys, more focused objectives and priorities, therecurrent costs of institutions, clear specification of outputs andperformance indicators, and much greater clarity in the presentation of itsBFP. Because that this sector has implications for achieving PEAP targetsit should receive further attention and allocation. Because the sector isminimally protected by PAF, it is suffering cutbacks of almost 30 percentas a result of revenue shortfalls, a problem that should be addressed soon.This is one sector that seems to have suffered from having inadequatefunding to carry out its objectives.

Public Administration: The ceiling for this sector is not expected to growbetween this and next year and, in fact, over the medium term it willdecline. This decline is attributable to reductions in the ElectoralCommission and is also in response to concerns that this sector isabsorbing resources that have high opportunity costs in terms ofaddressing PEAP targets. Over time the budget allocations for this sectorwill be streamlined to confirm there is value for money in supporting themany institutions-with their broad and sometimes duplicativemandates-this sector supports. The president commissioned a study onthe possibility of more efficient public administration spending. The studyhas highlighted distortions and inequities that have crept into government

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over the past several years and has raised the urgent need to rationalizethese agencies in the context of comprehensive civil service reform.

Pay Reform: This is a priority area of reform of the government over themedium term and is elected to receive a favorable allocation (see table2.7). For instance, we noted in Table 2.5 an additional Ush. 27 billion hasbeen allocated to fund pay increases for middle and senior managementand low-level workers. This amount will be allocated across votes afterdiscussions with the Ministry of Public Service, so the ceilings of mostsectors will therefore increase by an additional amount. This is an area ofreform that is also supported by PRSC. The budget this year hasaccommodated resources to implement the five-year wage reform programthe government of Uganda has developed. The amounts allocated areinadequate in relation to requirements, but faster progress can only beachieved within the context of comprehensive public-sector reform thatwould generate the resources to pay much higher wages and salaries.

Defense: The share of defense is still high and will increase by 0.8percentage points next year. This increase reflects the government'scommitment to keep defense spending at 2 percent of GDP plus the Ush.10 billion that was approved as one off expenditure for this and next year.Given that GDP will be growing faster than government expenditures inthe medium term, however, defense expenditures are expected to growfaster than other sectors and will be an area of concern in the comingyears.

Table 2.7: Wage Bill Allocations and MTEF Projections for 2002/03-2004/05Budget Projection

Category 2001/2002 2002/2003 2003/2004 2004/2005

Ush. Billions Ush. Billions Ush. Billions Ush. Billions

Defense 118.25 124.16 130.37 136.89

PAF - teachers 155.56 179.87 188.38 188.38

PAF - other 41.83 48.2 53.45 59.06

Other 230.63 268.2 2,26.25 275.18

Total 546.27 586.64 626.68 651.58

MTEF Wage Bill 546.27 627.7 651.2 671.2

Source: MFPED

2.38 Naturally, the increases highlighted above have meant that non-wage anddevelopment expenditures across the board have to accommodate some of the cuts. Thissituation is unavoidable given the need to prioritize program and public investments ofactivities. This is all the more reason that budget efficiency issues, which seek toincrease value for money, will become a theme over the medium term in all sectors. Thisyear's PER workshop started discussions on this issue with health, education, and water,and it is expected that additional sectors will be studied next year in order to improvebudget efficiency.

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2.39 It is worth noting that the government's commitment to decentralization is alsohighlighted by budget allocations in the MTEF. Transfers to local governments haveincreased in line with increases in PAF, growing by 10 percent next year as primary andsecondary teachers' wages, primary health care, and LGDP allocations have increased.Next year the government is expected to transfer almost Ush. 660 billion, about 50percent of the budget, net of those services that cannot be decentralized, consistent withits commitment to increased decentralized service delivery.

2.40 This year's budget process has highlighted the importance of rigorousprioritization, which will become the rule of the game in the future and which the SWGshave already, in a painful way, learned as most of their proposals for additional fundingcould not be met. Prioritizing is expected to be the reality of the medium-term fiscalchallenges for Uganda. Through the process of PEAP revision and sector reviews it willbecome important for sectors to prioritize their programs to confirm that the resourcesavailable are effectively utilized to address important needs in their sectors.

2.41 Despite these challenges, the development partners supported government'soverall MTEF and the budget for the next year, subject to the above observations relatedto sectors that might need additional funding to carry out their mandates. The donors,therefore, confirmed at the annual PER meeting that the MTEF does provide anappropriate basis for donor budget support. Donors emphasized, however, that given thetight budget limits for most priority sectors, the budget execution during the year will bekept to the set allocations so some sectors are not allowed overruns at the expense ofothers.

E. ASSESSMENT OF THE BUDGET PROCESS

2.42 Phase 1 of the budget process this year was substantially crunched into a veryshort time period, which made it extremely difficult to realize many gains in terms ofimprovements in the budget process. Although the SWGs are now more institutionalized,their lack of technical capacity combined with demands on them to carry out morerigorous tasks, has meant that progress has been very slow. For example, although muchmore effort was put into ensuring the output orientation of BFPs this year-bydeveloping detailed guidelines-with the exception of a few sectors little progress wasmade because of time and capacity constraints. In addition, it has become clear that insectors such as agriculture, accountability is more cross-sectoral in nature and, hence,output-oriented BFPs cannot be easily prepared without closer links with other sectorsand SWGs. Similarly, other sectors do not have easily quantifiable outputs, which willmake it difficult for them to prepare output-oriented BFPs. All these issues will remain achallenge in the medium term.

2.43 In addition, although improvements have occurred in the LGBFPs, they are stillvery weak. The efforts to synchronize the LGBFPs with central BFPs have not been veryeffective. Here again this budget cycle has shown the need for more time and technicalassistance so that such gains can be made. Because a large share of the budget isincreasingly being decentralized it is essential that the LGBFPs appropriately reflectpriorities at the local level. This accomplishment will also enable the monitoring of

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outputs at the local level and will ensure that the decentralized resources are transparentlyused and accounted for.

2.44 The quality of involvement of external stakeholders has improved but there isfurther need for capacity building and technical assistance, particularly among civilsociety, parliamentarians, and development partners. This year civil society has againplayed an important role through various SWGs and through the PER workshop. Still,only a handful of civil society organizations (CSOs) play this role and some are not ableto play an effective role because of capacity constraints. This area needs furtherassistance. Thanks to the new Budget Act, the parliamentarians have been involved inthe budget process from an early stage. This year parliamentarians played an active rolein the budget workshop from November onwards. In addition the MTEF and BFP weregiven to them in March/April, in advance of the budget speech, which enabled them tohave a series of discussions with MFPED and to provide written comments. Discussionswith parliamentarians have indicated a need for technical assistance and further trainingworkshops to facilitate effective participation and debate on the budget process. Despitethis, it is worth noting that this year the submission from the budget committee was ofgood quality and, in the spirit of balancing the budget in proposing areas for additionalspending, they also suggested areas for cuts.

2.45 Finally, this year the increasing share of budget support resources by donors andcommitment to MDGs necessitated a series of discussions among development partners,donors, the government, and civil society on a variety of MTEF/BFP issues. The qualityof dialogue at both the intra- and interagency level has improved, and there have beenmore candid discussions on the possibilities and challenges within the fiscal constraints.This improved quality of dialogue among development partners, SWGs, and thegovernment paves the way to ensure that budget efficiency issues are discussed andprograms are prioritized in the context of the budget process. The government discussedthese partnership principles as PEAP Volume 3 in September 2001, which has paved theway for better coordination between all stakeholders in addressing PEAP priorities. Thegovernment should follow up soon with a plan of action that will highlight a timeline forimplementation of the partnership principles.

2.46 As part of phase 2, the external review of the budget process included more thanthe development partners who are usually involved. Through the new Budget Act andPER workshop additional space was created this year for more quality participation bycivil society, parliamentarians, and development partners. Given the fiscal constraint andthe greater pressure on Uganda to meet MDGs, the depth of the dialogue on allocationshas moved to a level that was unseen hitherto. Although we think that this process wasimproved over last year, there is a need for additional progress to enable moreparticipatory dialogue to take place. Post-PER workshop discussions have focused on theneed to confirm that all stakeholders are provided with all the relevant information andtechnical support to ensure they can fully participate. This was not the case this year.

F. CHALLENGES IN THE BUDGET PROCESS

2.47 Based on the above review, it is worth identifying areas where challenges remainand where efforts should concentrate in the coming year.

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2.48 The minimal improvements in BFPs can be traced to the short duration of thebudget preparation process and lack of capacity for SWGs. Stakeholders identified boththese areas as needing urgent attention. The first step should be to move the budgetprocess forward and give more time to SWGs. Second, the much needed technicalassistance should be provided to deserving stakeholders, possibly at stages where there isthe greatest payoff.

2.49 Integration of project aid and the wage bill in the MTEF is still weak. Asdiscussed earlier, this area has been a concern for some time, and MFPED has startedtaking steps but progress has been slow at best. This integration needs urgent attentionand support. PRSC has identified these reforms as high priority, and donors should workwith the government to address these needs. Although this is an area of budgetpreparation, it will be useful to assist SWGs to accommodate these challenges in thecoming years as part of their BFPs. Another important step is to ensure much greatercontact between Ministry of Public Service (MPS) and MFPED very early in the budgetprocess (preferably September). More discussion is needed between desk officers insector ministries and their counterparts in MFPED, although skill capacities remain aproblem.

2.50 We have noted the participation of external stakeholders throughout the budgetprocess, although this participation is not particularly in-depth. This situation is becausethe focus of the reforms on participation has focused on getting people involved ratherthan ensuring that the participation produces quality improvements. This again is an areafor further work and support such that quality gains can be made through broadeningparticipation.

2.51 In the same vein, the CSO participation did not substantially improve between lastand this year mainly because of capacity constraints. Despite needs, support in this areahas not been forthcoming. This is an area in which think tanks and development partnerscan provide substantive support such that the CSO role becomes even more effective.

2.52 One area that has been weak is the monitoring of outputs and outcomes. Thismonitoring becomes an important learning tool by which the future budget cycleprocesses can be improved. BPED has taken some steps based on past experience butthey have not been formalized. Here again there is need for additional measures tofacilitate the strengthening of M&E in the context of budget performance and confirmthat it actually improves the budget process for better prioritization and allocation.

2.53 Issues of decentralization have not featured very clearly in the BFP processbecause decentralization is very much seen as a fiscal endeavor without correspondingconcern about implementation of decentralized administration. This deficiency hasnaturally led to weak accountability, low transparency, and limited success in terms ofoutputs, resulting in both budget preparation and budget execution challenges. AlthoughLGDP and other capacity-building programs address these issues, they are addressed in anon-comprehensive manner such that efficiency gains that underpin the decentralizationdrive are not realized. This area needs further attention in order to meet the goals ofefficiency and equity concerns in service delivery. It is worth noting that the government

26

intends to pilot its fiscal decentralization strategy in the coming fiscal year, starting with10 districts and 3 municipalities.

2.54 One area of concern in Uganda's budget process in the past three years is the lackof budget discipline in a few sectors. Evidence shows that very few steps have beentaken to address these issues despite repeated mention of this during budget reviewdiscussions. It is, however, expected that the new Public Finance and AccountabilityBill, which comes into effect this fiscal year, will reduce the incentive for overruns andfor seeking supplementaries that undermine the credibility of budget process. Althoughthis is a budget execution issue, it has implications for the budget preparation processbecause continuous overruns will undermine the need to prepare and adhere to BFPs thatare within the ceilings.

G. THE WAY FORWARD

2.55 As part of improving Uganda's budget process we identify below a few areas inwhich'the World Bank will concentrate its efforts over the medium term.

2.56 First, the link between the PEAP and the budget is tenuous. Because of a lack ofprioritization and costing of actions in the PEAP, PEAP priorities are not factored fullyinto the discussions at the budget preparation stage. Hence, as part of PEAP revisions,the Bank will provide support to PEAP target setting, sequencing, and costing actions.This information will then be used in SWGs to enable them to realize budget linkages.

2.57 Second, recent reviews of the PAF have highlighted that PAF protection has beenapplied mainly to service delivery sectors. It is becoming increasingly clear that some ofthe sectors and activities that are not protected also have implications for the outcomesfrom PAF-supported programs. Hence, PAF modalities should be reworked to confirmthat overall budget efficiency is not undermined by the narrow focus on pillars 3 and 4 ofthe PEAP.

2.58 Third, the Bank needs to provide support to improve the working of SWGs andthe BFPs they prepare such that some of the budget allocation challenges can beaddressed at the outset. The BPED has agreed to work with development partners toidentify areas in which technical capacity needs are evident and to organize sources ofassistance before the next budget cycle begins.

2.59 Fourth, the new Budget Act has opened up the budget process and also createdgreater room for effective participation by the legislature. However, as noted, theperformance has not been satisfactory because of capacity and time constraints ofparliamentarians.. This area needs special attention to ensure that goverriment anddevelopment partners help to improve the effective participation of parliamentarians inthe next budget cycle.

2.60 Finally, it is clear that the role of civil society has improved over the past fewyears. However, it is mostly the few have been involved from the beginning and theirlevel of effective contribution has not changed very much. There is a need for some

27

innovative ways to work with CSOs to enable them to participate at every stage of thebudget cycle and contribute specific inputs to strengthen the overall budget process.

2.61 These challenges will form the work program for PER in the coming budget cycleand will be areas in which the Bank and other donors can effectively contribute toimprovements in the budget process.

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3. ISSUES IN BUDGET EFFICIENCY: HEALTH,EDUCATION, AND WATER SECTOR

A. INTRODUCTION

3.1 In developing countries, a persistent problem revolves around budget efficiencyissues. This problem basically refers to how the limited public resources are effectivelyutilized to meet the priority needs of the country in an efficient and equitable manner.Thus, budget efficiency cuts across all stages of the budget process, namely, budgetpreparation, budget execution, and budget monitoring and reporting. Looked at fromanother angle budget efficiency refers to how public resources are utilized by publicinstitutions and public servants in delivering public services. It is obvious that withincreasing budget constraints to accommodate growing demands for public resources thescrutiny on budget efficiency and value for money becomes even more heightened. Inaddition, in Uganda budget efficiency issues have attracted greater attention because ofthe fiduciary risk-management objective.

3.2 In Uganda, in recent years the government has initiated studies, especially in thehealth, education, and water sectors, which seek to further understand and addresschallenges related to flow of funds, incidence of benefits from public programs, andoverall value for money of public investments. These studies have facilitated allstakeholders to obtain a better understanding of the achievements in this area and theremaining challenges such that the potential gains in efficiency within tight fiscalconstraints can be realized.

3.3 This year three sectors were discussed at the annual PER meeting on the basis ofvalue for money, tracking studies, or benefit-incidence analyses that have been carriedout in those sectors in recent years. These sectors are health, education, and water andsanitation, which together account for about 38 percent of total government spending.Because these are also the major sectors under PEAP's pillar 4, which seeks to improvethe quality of life of the poor, apart from efficiency, equity concerns also were the subjectof reforms carried out through SWAPs and budget support (PRSC).

3.4 Budget efficiency is understood to comprise two areas: allocative efficiency andoperational efficiency. Allocative efficiency refers to allocation of resources such thatthey reflect the priorities of the sector, while operational efficiency refers to how theallocated resources are transformed into outputs and outcomes that are consistent withsector and PRSP objectives. Most of the sectors and reform efforts have concentratedtraditionally on the former although some gains have also been made in the latter.However, for sectors which have had SWAPs, the major challenge now seems to be onthe latter. This focus on operational efficiency does not mean the allocative efficiencyissues have been resolved satisfactorily or completely.

3.5 In addition to budget efficiency issues, these sectors, because of their importancein addressing the welfare of the poor, have been looked at through another lens, namely

equity. Equity has been interpreted to mean how the benefits from the publicly fundedprograms are realized such that the most needy get priority in the public provision ofbasic services. In addition, gender and regional equity dimensions are increasinglybecoming major challenges in service delivery.

3.6 Below we discuss the efficiency and equity challenges in the health, education,and water sectors.

B. HEALTH

Background

3.7 Over the years the MOH has demonstrated its commitment to improving budgetperformance by ensuring that resources are allocated that translate into better healthservices for the poor. The Health Sector Strategic Plan (HSSP 2001-2006) provides theframework for guiding the center and districts in developing appropriate plans toimplement the national health policy objectives in the context of attaining PEAP andMDG targets. The linkage with MTEF and Annual Joint Reviews of the Sector providean opportunity to ensure improved allocative/operational efficiency and equity of healthservice programs.

3.8 Overall budget underperformance in terms of budget versus outturn has been ataround 94 percent because of delays in recruitment and payroll cleaning in the past threeyears. Problems with procurement and delayed tendering and implementation of civilworks in districts were also noted. In addition, problems with delayed releases andaccountability in some health projects have caused under-spending in the healthdevelopment budget for the first half of this fiscal year.

3.9 The performance of the sector in terms of PEAP targets has been somewhatmixed. Although the decline in Expanded Program of Immunization (EPI) coverage hasbeen arrested it still remains unacceptably low, while AIDS prevalence seem to havemade the most dramatic progress. As table 3.1 below highlights, most indicators areunacceptably low, undermining the sector's contribution to overall growth in the mediumterm.

30

Table 3.1: Qualitative Performance Against Five-Year TargetsProgram Indicator Expected 1999/2000 Performance Performance Forecast

Outcome Baseline to Date 2002/03 2003/04 2004/05Value 2001/02

Health service Out Patients Increased access 0.40 0.43 0.45 0.47 0.50delivery Department (OPD) of population to

utilization health servicesImmunization Diphtheria Reduction in 41.4% 46% 50% 54% 60%

Pertussis Tetanus morbidity &(DPT) 3 coverage mortality from

imnunisabletransmission

HIV/AIDS HIV prevalence Reduction in 6.9% 6.1% 5.8% 5.4% 5.0%control rate from Ante HIV/AIDS

Natal Care (ANC) transmissionsurveillance data

Reproductive Institutional 38% 38% 70%health deliveries as a

percentage of totalexpected births

Human Percentage of Improved 33% 40% 43% 46% 50%resources approved posts quality of health (1998/99)development filled by trained service delivery

health workers

3.10 Notwithstanding sizable budgetary increases in the past three years, the healthsector claims it is still substantially under funded, with a per capita rate of US$6. Themedium target is to increase the share of the health budget from its current level of 10percent to almost 15 percent. These funding inadequacies have constrained the capacityof the government of Uganda to implement the HSSP, that is to procure medicalequipment, drugs and supplies; attract and retain staff, especially in hard-to-reach areas;and upgrade Health Center (HC) 1I and HC m. It has been argued that under-fivemortality is high because of the failure to meet HCII and m level demand for additionalequipment and transport facilities. These identified needs have been given priority in theFY2002/03 budget.

Allocative and Operational Efficiency

3.11 As part of allocative efficiency, the MOH has ensured that resources are allocatedconsistently with the PEAP, thereby enabling the scarce resources to maximize healthbenefits. For instance, the HSSP launched in August 2000 is very conscious of theefficient use of limited resources. The emphasis has been on providing the minimumhealth package, targeting the rural poor in particular. Hence, the services have focusedon communicable diseases, child and maternal health, and preventive health care. Alsoconsistent with decentralized service delivery, primary health care (PHC) funds allocatedto districts have increased more than fivefold. The PHC budget, including PHC andnational service delivery, has increased from 14 percent in 1999 to 42 percent in 2003.While this reallocation of resources answers the allocative efficiency issues, it does notsay very much about the operational efficiency of these allocations.

3.12 Thus, as noted, the major challenges, like all other sectors, for the health sectorremain in operational efficiency, that is, the capacity to utilize the optimum set of limitedinputs cost-effectively to achieve major health program objectives. In this regard it is

31

necessary to focus on allocation versus utilization, timely resource flows, assessing the

efficiency of program outlays, optimum use of input mix, and assessing efficacy ofdelivery and accountability systems. It is clear that substantial progress has been made inensuring that allocation and utilization are synchronized under the reforms that have been

carried out, which include the Joint Health Sector Reviews using instruments such as the

PHC Planning Guidelines and the BFP of the MOH.

3.13 In the area of inputs there has been a major focus on determining the health sectorwork force and in ensuring that salaries are paid regularly and promptly. Discussions

with the Ministry of Education and Sports (MOES) are under way on modalities for

supporting health-training institutions to support the health sector program. Considerableprogress has been made in enabling resources to flow fast and on a timely basis to

frontline health service delivery points. Through tracking studies, however, it wasobserved that financial disbursements from the MOH to districts are still taking 20 days

instead of the 5-day limit. This observation has initiated some actions to address this

issue promptly.

3.14 In addition, in terms of output-oriented reforms, an augmented effort has been

initiated to reverse the decline in childhood immunization rates. The recent abolition ofcost sharing has almost doubled access and utilization of health services. Thegovernment's multisectoral effort to attack HIV/AIDS has resulted in lower incidence in

many selected sites. In some cases the rate has declined by half.

3.15 The key operational challenges in the health sector are mainly delay in releasesand accountability of funds, fragmented procurement of drugs by the districts, delayedand poor management of tenders by the central MOH and districts, and poor humanresource management. The salary increases in the public sector have prompted many

PNFP staff to move to government facilities, thereby undermining the contribution of the

PNFP.

3.16 This evidence indicates that progress is being made, but more still needs to be

done. Namely, the inputs must result in improvements in health outcomes. The recentPRSP progress report highlighted that the infant mortality rate has stagnated between1995 and 2000 Uganda Demographic and Health Surveys. More concerted efforts are

needed on the part of health and other related interventions to improve the health qualityof the poor and children (GOU 2002).

3.17 The MOH argues that although it has achieved a lot through improved efficiency,it cannot improve further without sufficient increases in funding. According to the MOH,additional resources are needed to meet the growing challenges in the area of health.

This observation is also supported by the World Health Organization's (WHO)Commission on Macroeconomics and Health (2001) study, which was completedrecently. For instance, the MOH notes that the drug component for minimum health care

package per person will cost $2.40 per person. The current funding of around $1.00 is

inadequate. It is clear that additional resources are necessary for improvements in healthoutcomes, but the additional funding will have to be accommodated through tradeoffs

with other sector priorities. Thus, some of these additional resource requests should be

32

discussed with other sectors. The operational inefficiencies mentioned above also needto be elaborated further and addressed.

Equity

3.18 Another closely related issue to the efficiency issue, is that of equity of serviceprovision. Two recent studies, one by the government of Uganda and WHO and anotherby the government of Uganda and the World Bank, agree that the HSSP has resulted inimproving the benefit incidence in favor of the poor, although there is still room forprogress. A large number of poor do not seek health care services and their utilizationpattern has not changed substantially since 1992. This situation is particularly the casewhen equity issues are discussed on a regional basis.

Table 3.2: Utilization of Health Care by Those Reporting Sick by Poverty Levels;1992-2000

Year Group No/Self-treat Government Private

1992 Lowest 20% 54.14 17.62 28.231992 Highest 20% 36.27 16.52 47.221992 Total 44.87 18.06 37.071997 Lowest 20% 56.92 18.9 24.181997 Highest 20% 35.79 17.94 46.281997 Total 44.8 20.88 34.322000 Lowest 20% 43.92 18.93 37.152000 Highest 20% 20.97 19.13 59.892000 Total 30.58 19.79 49.63Source: Household Surveys.

3.19 The World Bank study clearly establishes that health service utilization increasedamong the poor by 2 percentage points between 1992 and 2000. Hospital usage by thepoorest 20 percent increased from less than 30 percent in 1992 to more than 60 percent in2000 (see figure 3.1 below). The study also notes that total costs increased by about 67percent between 1992 2000 for all households, but the poor have continued to spendaround the same proportion of household expenditure on health care. Both poor and richhave increased usage of private clinics despite related cost implications. The poor useprivate health care more than government services. This fact calls attention to theconcerns regarding health care service quality, which will remain an important challengein the future (see table 3.2). The study also highlights that the proportion of the poor whodo not seek health service because of distance has declined from around 22 percent in1992 to 13 percent in 2000, reflecting MOH progress in improving accessibility to healthfacilities.

3.20 Recent studies from the Uganda Participatory Poverty Assessment Project(UPPAP) and the Poverty Monitoring and Analysis Unit (PMAU) highlight that thecoverage and quality of health care services for the poor need to increase if healthoutcomes are to improve. The studies make the argument that improved targeting of thepoor will alleviate some of the equity concerns in health care delivery.

33

Figure 3.1: Hospital Utilization by the Poor and Non-poor 1992-2000

Hospital Utilization by the Poor and Nonpoor 1992-2000

90

70 8

S =,60

HE-- - l - Poorest 20%

0 o 40 - - _ _ U - - 1 l . 1 * Richest20% I

2 30 - -_ ' t'_ | - L ° Total_.

1992 1997 2000

___ Year l

Challenges for the Future

3.21 In recent years, SWAPs have improved allocative and operational efficiency in

health care, although further improvements are still needed in the latter. Similarly, equity

concems need greater attention to enable the poor to benefit from health services. The

case for additional funding for health seem justifiable given the challenges in addressing

health needs, but the focus of health care services will have to shift from mere coverage

to effective coverage whereby quality health care services are provided for all such that

they will result in improved health outcomes.

3.22 To meet the challenges in the health sector there is a need to focus further on the

following areas:

3.23 Given the resource constraints to provide public health care to all, there is an

urgent need for partnership between the MOH and PNFP to reduce duplication and

wastage of resources. This effort will make certain that optimal use is made of limited

resources in providing public health care services for those who need them most.

3.24 It has become clear that health targets-whether PEAP or MDG-need to be

consistent with MTEF/Long-Term Expenditure Framework (LTEF) ceilings. This

consistency will enable longer-term planning and prioritizing to make informed choices

with available resources. Work has commenced in this area but there is a need to

complete it soon.

3.25 As observed, the health sector has made strides in addressing allocative and

operational efficiency but there is a further need for progress in equity dimensions. This

situation points to the need to do benefit incidence analysis and take suitable measures to

reform health service provision such that the limited resources address the needs of the

poor and the most needy.

34

3.26 Because the health sector is already constrained by resource availability, anyreforms to PAF should be taken cautiously. The health sector cannot afford shortfalls inits allocation during the course of the year resulting from revenue shortfalls and overrunsin other sectors.

3.27 Similarly, the flow of funds must be timely to enable use of limited resources toprovide most needed services. Delays in flows of funds must be addressed in order toimprove quality and timely service delivery. PHC conditional grant tracking studies haveshown that delays in flow of funds are not within the sphere of the MOH and need theattention and action of MFPED. Action has been initiated in the area, but rapid progressneeds to be made.

C. EDUCATION

Background

3.28 Over the past few years, the education sector has made substantial progress inmaking its budgets more output oriented. Similar to the health sector, the educationsector has also been ensuring budget efficiency through its SWAP for a long time. As theoldest SWAP in the country, the education sector has been addressing budget-relatedissues in a comprehensive manner for some years. Based on the Dakar World EducationForum 2000, and more recently on MDGs, budget efficiency and equity issues have beenhighlighted as primary challenges for the future. These initiatives have underlined thesector policy reforms. Therefore, the budget preparation process in education hasenabled substantial progress in improving allocative and operational efficiency comparedwith most other sectors. The challenges for education remain in the operationalefficiency and equity in relation to post-primary and tertiary education. The EducationStrategic Investment Plan (ESIP), consistent with MDGs and the PEAP, highlightsefficiency and equity issues as its priority.

3.29 As part of addressing the challenges in the education sector, the MOES hasallocated more to the wage bill for primary and secondary, capitation grants, textbooks,and classroom construction in its budget for the next year. Table 3.3 shows that theMOES has made progress in ensuring that primary teachers are increasingly integrated inthe payroll, although the same progress is not observable in terms of secondary schoolteachers. In addition, private sector participation is being encouraged to ensure improvedaccess and coverage of both primary and post-primary education. For example, currentlymore than 80 percent of the primary schools in Kampala and more than 25 percent in therest of the country are privately run. UPE has somewhat addressed access and equityissues at the primary level; however, there is increasing concern that some of these gainswere made at the cost of quality improvements, for example, high pupil-classroom ratios(PCR), pupil-teacher ratios (PTR), and pupil-book ratios (PBR). Also, the majorchallenges in education in the medium term remain in achieving allocative andoperational efficiency at post-primary and tertiary levels.

35

Table 3.3: Physical Performance in the Education SectorDescription of Benchmarks 1999/2000 2000/2001 200112002

Forecast Actual % Forecast Actual % Forecast Actual %

No. of primary teachers on 117,000 88,043 75 125,000 i03,404 83 117,000 112,000 96payroll

Classroom construction in 53,000 47,174 89 57,000 53,495 94 63,500 61,212 96primary schools (stock)

No. of secondary teachers on 14,638 12,348 84 15,180 12,846 85 18,676 12,936 69payrollNo. of teachers training in 19,910 11,183 56 22,924 18,806 82 31,245 22,397 72Primary Teacher Colleges

No. of teachers training in 9,500 9,500 95 9,500 9,000 94 8,400 8,028 96National Teacher Colleges

Allocative and Operational Efficiency

3.30 By minimizing input costs and maximizing the outputs and outcomes for a givenset of input, education has focused on improving allocative efficiency. Education hasaddressed budget efficiency at the budget preparation stage more so than other sectors.In addition, it has used budget implementationJexecution reviews, internal audits, andtracking studies to improve resources flow efficiency and has conducted many end-of-project evaluations to improve operational efficiency.

3.31 One of thie challenges for education has been getting the right balance betweendifferent sub sectors and the appropriate mix of inputs and ensuring value for money ininvestments. This debate is more stark at the post-basic education level and tertiary levelin education than at the primary level. For example, in next year's budget primaryeducation will receive 69 percent, secondary 13.7 percent, BTVET 4.3 percent, andtertiary 9.4 percent. Compared with 1995/96 when only 43 percent was given to primaryeducation, the current allocation pattern shows the priority given to primary education.However, as table 3.4 shows, over the medium term the recurrent expenditure allocationto secondary education will increase compared to with primary education given thechanging nature of challenges in the education sector.

Table 3.4: Recurrent Expenditure Shares for Education by Sub sector 1999/00-2003/04Sub sector 1999/00 2000/01 2001/02 2002/03 2003/04PercentagePrimary 67 67 65 63 63Secondary 16 16 16 18 17BTVET 3 3 4 4 4Tertiary 14 11 11 12 13Other 4 3 3 3 3Total 100 100 100 100 100Source: MTEF 1998/99-2002/03 & 2000/01-2004/05.

3.32 In addition, there is growing pressure to find resources to meet the additionalexpenses in post-primary education because of the influx of UPE graduates. With the

36

UPE cohort expected to enter secondary schools next year, there is increasing pressure onsecondary schools to address both efficiency and equity concerns, which have beenhighlighted in the past. For example, currently post-primary per unit costs are seventimes higher than at the primary level in Uganda. These post-primary costs are muchhigher than what most other developing countries experience, which is more on the orderof two to three times the unit cost of primary education. The MOES has taken up thischallenge and has systematically tried to address the issue through its sector review in thepast year or so. It has also undertaken extensive analytical studies to guide decisionmaking such that priority services are protected in education. It is apparent thatefficiency gains can be made within the post-primary sector to substantially address theincreased demand for secondary education.

3.33 Equitable access to basic education and improved quality has been emphasizedthrough the ESIP. The use of systematic monitoring of indicators such as PCR, PTR, andPBR has enabled the tracking of progress over time (see table 3.5). School facility grants(SFGs) and UPE capitation grants have enabled the realization of equity and qualitytargets. The PAF protection for all primary education-related expenses has protected keyareas in education from revenue shortfall-related budget cuts.

Table 3.5: Medium-Term Performance Targets for Primary Sub sector 2000/01-2002/03Financial Year 2000/01 2001/02 2002/03

Target Actual Target TargetEnrollments 5917216 5917216 6097000 6218940

Number of teachers on payroll* 101000 103404 117000 125000

PTR 63:1 57:1 54:1 50:1

PCR 121:1 98:1 92:1 89:1

PBR 6:1 6.7:1** 0** 3:1

Source: MOES.*Reported at Education Sector Review in March every year, but figures quoted are as of June (at the end of the fiscalyear).**From increased enrollments and curriculum reform.***Old stock was abandoned after introduction of a new syllabus.

3.34 Education has gone one step further to review the efficiency of textbookprocurement as a way of addressing operational efficiency given the large numbersprocured and the large outlays involved. Reforms in textbook procurement have ensuredefficiency gains, with generous discounts on textbooks leading to almost a 65 percent fallin prices. This achievement has demonstrated that operational efficiency needs to bethought of more holistically. Also, studies have been carried out to ensure an appropriatemix of inputs to achieve the desired outcome. The decentralization of decision makinghas enabled better value for money in procurement of goods and services and enabledappropriate use of SFG and UPE grants.

3.35 In addition, the education sector has started a pilot project to decentralize theMTBF in Rakai, Masindi, Lira, and Kumi districts as of 2000/01. Thus, while observingminimum quality standards, districts are given discretion in implementing programsusing SFG, UPE, wage bill, and instructional materials. Currently, studies are beingdesigned to review this experience but early indications are that this pilot has beensuccessful in achieving budget efficiency and equity.

37

3.36 As a means of using transparency to assist in operational efficiency, the

systematic monitoring and publication of good and not-so-good performers has provided

an incentive for districts to do better. In addition, head teachers are required to display

grant transfers on notice boards so as to improve transparency and accountability. Also,

as a way of ensuring that the sanctions for poorly performing districts and schools does

not adversely affect the children, MOES has stopped the practice of withholding of funds

for districts or schools that operate outside the guidelines and instead is sanctioning

responsible government officials.

3.37 To improve allocative and operational efficiency, tracking studies have been

carried out on capitation grants in 1996, 1999, and 2001. Uganda's education sector was

one of the pioneers in using tracking studies to improve performance in Sub-Saharan

Africa. This tracking is also now being used increasingly as a fiduciary instrument in

PER work for other sectors. Thanks to these studies, the central government

contributions per pupil that reached schools increased from 36 percent in 1996 to more

than 90 percent in 2001. The 1999 tracking study pointed out the need to revise the UPE

allocation formula to give priority to issues such as girl child education, disability pupil

enrollments, retention, and to give weight to remoteness of the school. These studies also

highlighted other operational efficiency constraints such as lack of adherence by head

teachers to the expenditure formula and the substantial delays in the flow of funds. If not

for these studies, these problems would have been overlooked, which stresses the value

of the sector review process. As a result of the tracking studies the flow of funds has now

been made much faster and predictable, which in turn has implications for improving

operational efficiency. Also, after the identification of a low teacher trainee pass rate and

its impact on primary education, the problem of providing necessary facilities to expedite

teacher training is being addressed. In addition, as of 2002/03, the teacher training

budget will be financially protected under the PAF.

Equity

3.38 Inequity toward female students and those with disabilities have been other areas

of focus in education. The construction of toilets and ramps has paid off somewhat in

improving the coverage for the latter group. However, currently more than 15 percent of

children are out of school or do not enter the school system ,and there is a high dropout

rate. All of these problems are associated mostly with the poor. It is important to

determine how to attract these students into the schools. It is worth noting that the

MOES has initiated a study on dropouts and has started preparing a policy on how to

address the disadvantaged population.

3.39 In addition, it is clear that the gender equity in enrollment rates makes the

situation look even worse when considered in terms of girls, except at the primary level.

Between 1992 and 1999 the education sector made substantial progress in increasing

enrollment rates and reducing the gender gap at the primary level, as can be seen in figure

3.2. At the primary level in 1999 there were net enrollment rates of 81.7 percent for girls

and 82.7 percent for boys. However, the lack of inputs by poor parents, combined with

low facilities at schools in rural and poor areas, have resulted in only a 63 percent

completion rate at the primary level, again with gender disparities.

38

Figure 3.2: Primary Enrollments by Gender and Poverty 1992-2000

Primary Enrollment by Gender and Poverty Level 1992-2000

9080 r ID 60 ; iSlX 3 T 11 E | g 1ls k | loverall

c 50 - 0 ipoorest

2 F Drichest20

Source: Household survey Data 1992

3.40 Similarly, at the post-primary level access to education for girls and the poor isuneven and unfavorable. The current PTR of 20:1 at the secondary level indicatesinefficient use of resources which, together with lack of management incentives, leads toefficiency and equity concerns (see table 3.6 ). Also, at the current enrollment rate of 35percent at the secondary level, it is extremely difficult to address equity concerns.Currently, boys over represent girls by 20 to 35 percent at the S l-S4 levels and almost 60percent at S5-SA6 levels, which indicates the challenge that remains to be addressed.

Table 3.6: Mean Pupil-Teacher Ratios by Type of Secondary School and Localon, 2000Government aid Part government aid No government aid

Rural Peri- Urban Rural Peri- Urban Rural Peri- Urbanurban urban urban

Day 0 21 23.4 17 19.6 19.7 23.4 13.1 13.9 11.8O/A 22.7 20.2 19.5 22 22.8 19.8 17.2 22.2 18.2

Part-time 0 19.6 19.9 19.6 19.1 13.6 14.2 14.8boarding O/A 17.6 18.8 21.5 18.5 18.7 19 16.8 18.3 17.4Boarding 0 17.1 14.5 15.2 26.6 15.7 10.7 13.1 4.2

O/A 15.3 15.7 17.5 16.8 17.5 15.8 16.7 15.2 22.8Mixed 0 21.1 21.9 17 19.7 20.2 20.1 13.3 14 12.9

O/A 20 20.1 19.6 20.1 20.3 19.5 17.7 19.2 18.2Boys 0 13.3 23 9.2 11.8only O/A 14.9 15.8 19.8 12.8 17.6 16.6 13.9 11.8 16.9Girls 0 13.2 14.4 12.5 7.2 12.5 10.8only O/A 13.7 12.9 15.2 13.3 15.4 15 14.7 10.5 20.1Source: Teacher Utilization Study, 2000.0 = ordinary level.O/A = ordinary and advanced level.

3.41 The studies carried out as part of the Education Sector Review have highlightedsome of the problems the sector faces. The failure rate in technical and farm schools of40 percent has been linked to poor equipment and unqualified tutors. The failure rate forprimary teachers' colleges, caused by similar problems, has had an adverse impact onquality of primary education. High teacher absenteeism resulting from HIV/AIDS at theprimary level has also been highlighted as having an adverse impact on quality education.The excessive unit costs for training doctors at Mbarara of Ush. 12 million per year was

39

revealed through these studies. All these problems highlight the efficiency gains thatcould enable better utilization of existing resources to address equity concerns. Trackingstudies and benefit-incidence studies can help determine what is needed to furtherimprove the equity dimension of education.

Challenges for the Future

3.42 The main need is to develop a policy framework and strategy, which will enableallocative efficiency to be realized. While the primary education sub sector is quiterobust, the post-primary education, training, and higher education sectors display majorimbalances in terms of allocative operational efficiency and equity, all of which needurgent attention. Discussions are under way on strategies to address these issues, butaction needs to take place soon to meet the emerging challenges.

3.43 As mentioned, the quality of primary education has been affected by increasingteacher absenteeism because of teachers who are affected by HIV/AIDS. It is importantthat both the MOH and MOES discuss and take appropriate action to treat these teachers,provide counseling so they can continue to be in service, and also provide mentoring tonew teachers to ensure that education quality is not compromised. In addition, because ofUPE there have been large increases in enrollment, which have put additional pressure onlimited available resources- teachers, classrooms, desks, and books-which naturallyleads to poor learning outcomes. These issues need urgent attention to enable theincreased primary enrollment to result in improved educational outcomes.

3.44 Given the high reliance on external sources for funding education services, thequestion one has to confront is the level of reliability of donor funds in the medium term.This question of reliability naturally has implications for financing recurrent costs anddevelopment expenditures, which are essential for improving service coverage andquality. According to current estimates for EFA, Uganda would need an additional 50percent from its current allocation of US$160 million to US$240 to address educationchallenges. Given that a quarter of the overall budget goes to education, despite requestsfor increased allocation one has to address the issue of absorptive capacity in priorityareas. In addition, as already highlighted, the efficiency gains that are possible within theexisting resource envelope need to be tackled as a priority; if not, there is a danger thatadditional funding to education could result in inefficient investments.

3.45 Similar to the health sector, education has enjoyed the PAF protection and hasbeen able to achieve its goals without expenditure shortfalls. However, the emergingdialogue on PAF reform is of concern given that reductions in allocations resulting fromrevenue shortfalls or budget overruns in other sectors could be costly in terms of theirimpact on the education sector.

3.46 Some of the recent policy decisions taken in education indicate that there was notmuch consideration of budgetary implications. It is essential to take into account thefiscal sustainability of political objectives and policy decisions. To ensure that resourcesare available for policy choices, policy decisions need to be made within thebudget/MTEF process. The abolition of cost sharing and increasing the number of

40

government scholarships at university are two cases in which fiscal implications wereclearly not considered.

3.47 As mentioned, education has been at the forefront of addressing decentralizedservice delivery. The fiscal decentralization pilot exercise needs to be urgently studiedand its results need to be discussed and lessons used in future decentralization efforts.This effort will enable realization of the efficiency gains expected from improveddecentralization.

3.48 Unlike the health sector, which undertook a benefit-incidence study, the educationsector has yet to do such a study to understand how much equity issues are being coveredby current policies. Some studies in the past have tried to determine coverage ofeducation by poverty levels, but there is need to do better in order to understand whetherthe poorest and neediest are benefiting from public investments in education. In additionto these issues at the primary and post-primary levels, similar problems are also evidentin university scholarships. Further studies are needed to ensure that limited publicresources serve the needs of the poor as opposed to subsidizing the well-off.

3.49 Uganda has conducted excellent studies in tracking flow of funds, which hasensured that various bottlenecks in the process are addressed. Although this has enabledfunds to reach their intended destinations, the utilization of these funds should bereviewed to achieve operational efficiency gains. This is another area that requires workin the future.

D. WATER AND SANITATION

Background

3.50 The PEAP revision and UPPAP studies in 2000 clearly highlighted the need toinvest in water and sanitation as important areas for improving quality of life. The resultwas substantial public investments in the water sector. For instance, the budget allocatedto this sector increased from Ush. 13.5 billion in 1999/2000 to Ush. 34.4 billion in2000/02 and Ush. 51.8 billion in 2001/02. Some recent studies and reviews, however,have indicated that there have not been commensurate improvements in outputs andoutcomes. In fact, there have been increasing concerns that the unit cost of waterprovision has been substantially increasing, thus raising concerns about operationalefficiency. Indicative cost of an additional water source has increased from Ush. 4million to more than Ush. 9.7 million in the past five years. Although some of thisincrease is attributable to changes in types of water points developed and supportprovided to decentralized administration, there is still concern that there has been lowvalue for money in the investments.

3.51 The MTEF for 2002/03-2004/05 (table 3.7) shows an increasing share of projectcontributions-of almost two-thirds--over the next three years. The increased share ofdevelopment expenditure highlights the need to build more water points to meet coveragetargets. The sectoral allocation also reflects priorities: provision of water through newwater points, piped water to rural areas, construction of sanitation to rural area, andsubcontracting water supply and sanitation operations in small towns to the private

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sector. In addition, the government plans to construct a new water treatment plant inGaba and to rehabilitate the water systems of seven major towns to improve servicequality.

Table 3.7: Summary of Planned Expenditure Against the MTEF Ceiling in Billions of Ush.Water 2002/03 2003/04 2004/05

Sector Wage Non-Wage Development Expenditure2 Total Total TotalExpenditure Expenditure' Government of Uganda3

MTEF 0.44 1.72 48.62 50.78 54.65 56.99

(total)

Donor 0 0 86.5 86.5 89.45 92.49projects4

Total 0.44 1.85 135.12 137.28 144.1 149.481 . Includes the operations and maintenance grant for small towns water managed by urban authorities.2. Includes the district development grant3. Excludes self-funding by National Water and Sewerage Corporation.4. Includes donor contributions to the National Water and Sewerage Corporation and are all implemented at the

center.

3.52 To more clearly understand the issue of cost efficiency, a value-for-money studyhas been initiated on rural and urban water sectors. This study will assess and evaluatethe process of engaging private firms and their capacity to provide water and sanitationservices in the districts, as well as the ability of districts to effectively monitorimplementation performance. The study is being carried out all over the country by eightteams, in each of the eight technical support units into which all districts have beendivided. In addition, a tracking study is being planned to asses the flow of funds todistricts and town units to highlight bottlenecks and delays in the release andtransmission of monies through the system. This study will also improve accountabilityand efficient operation of water sector grants.

Rural Water

3.53 Safe water and sanitation coverage has improved from 50 to 53 percent in the pasttwo years. A large segment of the rural population, however, still has no access to cleanwater for drinking or production. In addition, 824 protected springs and 930 shallowwells have been constructed in the past year. The number of boreholes completed was 40percent below target at 855. This has been the subject of major contention in terms oflower output than targets (see table 3.8 below). Resources have also been used torehabilitate 459 boreholes. The number of school latrines is also about 40 percent belowtarget at 1,300, while rain water tanks are about 30 percent below target at 1,090.Because the increased budget has not met the targets established in terms of outputs,there are clearly issues to address regarding water sector budget efficiency.

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Table 3.8: Physical Performance of the Water and Sanitation Sector 1999/2000 to 2001/02Year/ Performance 1999/00 2000/01 2001/02

Target Actual Target Actual Annual ActualTarget (Dec 2001)

Water coverage (%) 54.7 50 52 53 54 54.8Protected Springs 900 504 1595 824 1500 465Shallow Wells 1000 671 1860 930 3200 296Deep Borehole 1060 2192 1272 855 2080 245Borehole Rehabilitated 0 0 325 459 1500 555Gravity Flow Scheme (taps) 22 28 33 11 29 (462) 31 (446)Piper Water/Rural Growth Center 0 - 90 0 252 0School latrines - - 2263 1300 1313 13781Rain water tanks - 318 1435 1090 537 1302

Source: Water Sector BFP 2001/02-2003/04 (March 2001), Water BFP 2002/03-2004/05, Ql & Q2 PAF Report.

3.54 The major concern in the water sector has been the fact that, despite recentreforms in the water sector, which resulted in increased outlays, there has not been acommensurate increase in water points. However, the water sector for its part has arguedthat some of the activities that have been part of the reforms do not directly addressincreasing the number of water points, leading to the perception of low value for money.The Directorate of Water Department (DWD) has spent resources over the past few yearsto develop and implement active community participation in water and sanitationservices. In addition, the funds allocated to the center were used for policy developmentand management. Resources also were allocated to programs on human resourcedevelopment and training. A major drive was launched to decentralize responsibility forservice provision in rural water so that districts can directly provide services. Moreover,the Ministry of Water, Lands and Environment (MWLE) has invested additionalresources in primary school latrines, rehabilitation of bore holes, and district capacitybuilding, which also accounts for low outturns in terms of water points. Naturally, allthese investments do not result in additional water points but get reflected as higher unitcost per water point built.

Urban Water

3.55 In Uganda, only 68 percent of the population in urban areas have access to safewater. Only 12 percent have direct in-house water connections and only about 5 percentof the urban population has sewers. These findings show the dismal state of this sectorand why additional effort is needed to ensure "water for all" by 2015. Thus, under theUrban Water Supply and Sanitation drive, the government of Uganda plans to implementstrategies to improve ownership and management of assets through public bodies,efficiency in service delivery through private-sector participation, and regulating by anindependent regulator to ensure quality. However, it is important to ensure thatcustomers are willing to pay for a level of service that might cost more. Also, thegovernment needs to undertake reforms that will reduce operating costs and secureprivate participation in quality service delivery. The seven major towns, includingKampala, account for 55 percent of the urban population, 65 percent of activeconnections, 72 percent of active sewer connections, and 80 percent of all revenue.These figures clearly show the inequality of urban water and sewerage service provision.It is noted that the gestation period for water and sanitation projects is long, and therefore

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investments do not immediately translate into outputs. Also, the capacity buildingprogram of Urban Water Supply and Sanitation, which will have long-term benefits, isnot evident in number of newly established water points.

Other Services

3.56 Substantial progress has been made in water for production. Interventions in thepast few years have been concentrated in the Karamoja region Water for Livestockproject. The interventions have focused on increasing accessibility of water for livestockproduction in rural areas, thus contributing to increased livestock production and, in turn,poverty reduction.

3.57 Besides the issues detailed above, the physical and institutional infrastructure ofwater and sanitation need urgent rehabilitation. Also, the water sector has to put moreeffort and resources into attending to quality-of-water issues.

Challenges for the Future

3.58 The water sector has noted the need to recruit water officers in each district whocan provide valuable input in terms of water management and monitoring. However,some districts have refused to comply, which is leading to poor planning andmanagement and, in turn, low value for money in water investments. The affecteddistricts are Kitgum, Pader, Bundibugyo, Katakwi, Tororo, Jinja, Kibaale, Kaberamaido,Sironko, Nakapiripirit, and Kapchorwa. This lack of commitment by districts should beaddressed as a matter of priority.

3.59 It has been observed that some of the health welfare indicators are highlycorrelated with the water and sanitation situation. But poor coordination within andamong various other stakeholders has led to inconsistent outcomes. This lack ofcoordination between the water and health sectors is leading to some unfavorableoutcomes in terms of health and infant mortality rates. Despite sanitation and hygienelinkages between the MWLE, MOH, and MOES, the operations are not coordinatedenough, leading to poor outcomes and operational efficiency of inputs.

3.60 A related challenge is institutional coordination between government andnongovernmental organization (NGO) service providers. Given such limited resources, itis essential that the DWD relationship with NGOs is improved so that DWD policies areconsistent and complement NGO plans in the sector. For example, it has been observedthat some programs by development partners and NGOs are not captured, making itdifficult to evaluate overall performance of the water sector. Progress is needed in thisarea to ensure that all beneficiaries are effectively covered with limited resources.

3.61 Budget operational efficiency issues have been complicated by too muchinterference in tendering procedures by district tender boards, leading to low value formoney. In addition, the MWLE's limited resources have not been optimally usedbecause water office equipment is often misused by senior district officials, leading toweak supervision and monitoring by water officials. The issue of communitycontribution has also been complicated by some politicians, who have misled

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communities by saying that PAF resources will supplement inadequate resources and alsoby implying that NGOs are supplementing community participation and contributions.Both these issues have undermined the efforts of the MWLE to improve communityparticipation at every stage of water and sanitation provision to enable sustained access.

3.62 Districts and some small towns have weak intemal audit and financialmanagement systems. For example, there are no monthly bank reconciliations, no votebooks, and in some districts Chief Administrative Officers (CAO) do not sanctionpayment. These problems have not been rectified with appropriate training and capacitybuilding, so they also have led to low operational efficiency.

3.63 One problem that has plagued the sector for some time is weak private-sectorparticipation in both provision and management. This problem has been linked in part topayment methods. For example, an inability to pay in advance limits many small serviceproviders in participating in rural areas and small towns.

3.64 It is clear that districts need to build their institutional capacity as a means ofimproving operational efficiency and equity. This effort will ensure that sustainableinstitutions and systems are maintained to provide quality services. Also, it has beennoted that some donor-supported projects tend to be more expensive than those carriedout under conditional grants, indicating overall low operational efficiency. Some recentinvestments in urban areas have been in asset renewal, which does not increase coveragebut leads to maintenance and rehabilitation of existing water points. Hence, waterresource management issues have been given priority because of the poor maintenanceculture that, in tum, has led to low sustainability of existing water points. In this context,operation and maintenance allocations should be carefully considered since more thanhalf the population is still not served by any water point.

3.65 Despite these issues the water sector still spends 50 percent of the budget at thecenter, while more than 90 percent of beneficiaries are living in rural areas and hencereceive a very small share of the overall budget. This situation needs to be immediatelyreviewed and restricted to ensure that value for money and equity are achieved. In thiscase, it might be useful to do a value-for-money study that assesses the funds released tothe center rather than only concentrating on district conditional grants.

3.66 It has also been noted that the current allocation of district conditional grants isnot done on a transparent or objective basis. This situation needs to be rectified toimprove budget efficiency.

3.67 The value-for-money studies and tracking studies under way and the forthcomingWater Sector Review in September 2002 will provide an important opportunity to addressmany of these challenges. It is clear that many challenges in terms of allocative andoperational efficiency and equity issues in the water and sanitation sector need urgentattention.

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E. CONCLUSION

3.68 The above discussion has shown the benefits of tracking studies and value-for-money studies for improving sectoral efficiency; hence, such studies should be conductedin other sectors as well. In the future PER discussions on these issues should bebroadened beyond the health, education, and water sectors. Furthermore, it would bebeneficial to have the discussions before the BFPs are prepared to allow incorporation ofthe outputs of the discussions.

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4. BUDGET EXECUTION AND PROGRAMIMPLEMENTATION

A. BACKGROUND

4.1 Issues related to budget execution, such as institutional capacities, systems andprocesses, expenditure management, accounting and evaluation, and the link betweenbudget discipline and political involvement, have a great impact on the successfulimplementation of a budget with a poverty-eradication focus. If the budget process is tosuccessfully match national and local priorities to project and program implementation,then the budget execution process must also keep harmony between the two.Expenditure-tracKing studies can provide valuable information on how much of thereleases are getting to their destination, thereby reducing reliance on information on howmuch was spent. Focusing on concepts and principles alone can divert attention fromoperational constraints, which may represent insurmountable limitations to the systemsthat are expected to deliver the desired services. It is possible to attain flexibility inpolicies and processes, but not in institutions and people because that may result in severeinterference by various interest groups and a subsequent reduction in the quality andquantum of service delivery.

4.2 During the FY2001/02, budget release performance, was on the whole,satisfactory. Performance by broad expenditure categories shows that both wage andnon-wage were above the targets while development expenditures fell short by almost 10percent. District votes over-performed compared with central votes, which were affectedby the need to accommodate domestic revenue shortfalls and supplementary expendituresfor other votes. Expenditure in the PAF areas was satisfactory, at 98 percent, althoughthere was underperformance in non-wage expenditures mainly on account of poorperformance of equalization and non-sectoral grants.

4.3 There is an active internal audit system, which has allowed the government toimplement a program of commitment control for non-wage recurrent and developmentexpenditure. The CCS was introduced in 1999/2000. At the commitment stage, the CCSestablishes a quarterly commitment and expenditure limits for each vote, project, or item.Cash releases are then made to match the agreed quarterly expenditure limits. Theintroduction of the CCS was so effective that it resulted in an immediate decline of newarrears from about Ush. 87 billion on June 30, 1999, to Ush. 20 billion one year later.The CCS for the development budget was introduced in 2000/2001. In 2000/01 non-wage and development expenditure recorded a decline in arrears on the order of 45 and23 percent, respectively, in comparison with the previous year. This is indeedcommendable.

4.4 However, although the CCS has succeeded in reducing the level of new arrears, itneeds to be extended to other areas of expenditure that are not yet covered. At present,the CCS only applies to the central government non-wage recurrent expenditure or anequivalent of 43 percent of the budgeted expenditures for 2001/2002. The system does

not cover central government salaries and wages, pensions, and statutory expenditure,including court awards and compensation. In addition, there is no CCS at the localgovernment level so the extent of arrears at this level has not yet been addressed in asystematic way.

4.5 It is important that the government implements the plans to extend the CCS toother areas of central government and the entire local government operations, perhapsbeginning with central government funding. This approach is also expected to drawbenefits from the implementation of the IFMS, which should have commitment control asits primary objective.

4.6 Despite the progress made in budget implementation during the current andprevious few years, recent reviews have indicated that the Ugandan budget system isgenerally weak in terms of budget execution and reporting. For example, severalreallocations are made after the budget has been made and approved, and the reportingand monitoring mechanisms are inadequate, slow, and lack local ownership, which makesit difficult to learn from past experiences and adaptations. An example of the impact ofsuch developments is the higher-than-envisioned expenditure in wages for primary schoolteachers experienced this year, which translated into PAF wage expenditures that wereabove the target. Some specific challenges and issues in budget execution are describedin the following sections.

4.7 The last-minute allocations and supplementary expenditures, which provideadditional resources to certain sectors and votes outside the mainstream stipulatedprocesses, undermine the credibility of the entire budgeting system. Continuation of sucha trend of overruns, apart from undermining the credibility of the budget process andMTEF ceilings, may result in lack of budget discipline in other sectors. In particular, twosectors, defense and public administration, had by the third quarter experiencedrespective overruns of 3 percent and 9 percent above the pro rata performance.Additional last-minute expenditure pressures on the budget process were experiencedfrom the strategic exports initiative and Parliament's emoluments and salary increases.The former was primarily accommodated through reallocations and corrigenda, while thelatter had to be financed through supplementary expenditures. Continuation of suchpractices can become a big problem in the entire budget making and execution processand poses a risk of loosening budget discipline, which has been built up over the years.

4.8 The presence of reallocations, supplementary expenditures, and the resultantbudget cuts necessitate further tightening of the fiscal envelope for other sectors, therebymaking it difficult for them to carry out their intended programs. The situation isworsened by the presence of the PAF structure, which offers protection against budgetreductions to sectors that are directly related to poverty eradication, implying that theentire burden of budget cuts is shouldered by very few sectors. The PAF should be seenas promoting a narrow interpretation of pro-poor programming and therefore limitinggrowth of funding in other emerging sectors, which have great significance in ensuringsustainability of current development gains. The PAF primarily supports programs inPillars 3 and 4 of the PEAP. Therefore, spending on other PEAP pillars has often laggedbehind and yet they too have a significant impact on the entire poverty eradicationprogram.

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4.9 The persistence of supplementaries and budget overruns prompted thegovernment to enact a new Public Finance and Accountability Act (2002). The Actrequires any request for supplementaries to be pre-approved by Parliament and thereasons for doing so to be clearly stated. This is expected to make the process of gettingsupplementaries more cumbersome and less straightforward, as Parliament may object tothe request, and hence reduce the incentive for seeking such funding.

4.10 The decentralization of service delivery has necessitated that funds flow in atimely manner to the local authorities and service delivery centers. This is both a budgetimplementation and reporting issue because disbursements are in most cases tied toaccountability of previous releases. Yet the institutional aspects of budgeting andadministration at the local level are still unclear. For instance, it has been observed thatlocal governments have limited capacity and facilitation to report on expenditures, whichresults in delays for additional funds and hence disruption of service delivery. In thisregard, some of the delays and constraints are linked to the budgetary institutions at thecenter, including line ministries.

4.11 Benefit incidence and value for money, which has largely been limited toeducation and health sectors, is lacking in all the other sectors. Consequently, there islimited or no information on the value for money of expenditures and benefit incidence ofthe expenditures realized. This observation implies that several sectors cannot learn fromeach other and adapt the best practices. For budget efficiency to be enhanced in allsectors, it is important to capture lessons from the various sectors to ensure that theincremental gains are realized for overall budget improvement.

B. SPECIAL ISSUES ON BUDGET EXECUTION

4.12 To offer a practical review of the budget execution and implementation issues,this report considers trends in public administration expenditures and the PAF structureand its implications on overall budget performance. The former is expected to offerinsights into budget discipline and political involvement, while the latter deals withbudget protection practice under PAF, which could undermine budget allocations in otherpriority areas. Later, the report considers the seemingly forgotten role of personnelmanagement in planning and implementation toward attainment of desired goals.

Implications of these budget execution issues for monitoring, evaluation, and reportingfor accountability purposes are handled in the following chapter.

Public Administration

4.13 The public administration sector includes institutions such as State House,Ministry of Foreign Affairs, local governments (unconditional grants), the URA, thelegislature, public service (including pensions), the Electoral Commission, and theMFPED. Others include the Office of the Prime Minister, and mass mobilizationactivities, and the Local Government Finance Commission. The relative composition ofthe public administration sector is described in figure 4.1 below. Each of theseinstitutions is important in the effective functioning of government such that theirexpenditure would be duly justified. Therefore, the public administration sector shouldbe adequately funded, but subject to resource availability.

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4.14 However, given the size and therefore impact of this sector on the generalperformance of the economy, the efficiency of expenditures on public administrationshould be given due consideration. Already there are growing concerns that the budgetof public administration has grown too rapidly over the past few years. Publicadministration as a sector has also consistently failed to fit within its budget, claiming alarger share of supplementary expenditures and therefore negatively affecting budgetreleases to other sectors. This problem may partly be attributed to many institutions thatare trying to undertake far too many activities for the budgetary resources allocated tothem. Such lack of budget discipline may also be linked to political involvement,especially political appointments and commissions, which have significant budgetaryimplications. Budget overruns and political involvement should therefore be seen as twointerrelated ways of undermining the credibility of the budget process and imposingundesired constraints on budget execution. Much as a democratic society needs acredible political system it is important that expenditure on such a system remains withinthe economy's abilities.

Figure 4.1: Composition of Public Administration

Others7%0l

Foreign Affairsand Missions Local

6% i GovernmentElectoral 23%

Commission- * i n-w10%

Parliament Public Service11% 15%

URA State House &13% Office of the

President15%

Source: MFPED

Structure and Operations of Public Administration

4.15 Several institutional and operational developments associated with the publicadministration sector have resulted in negative consequences on the overall budgetperformance. The developments include the rapid and continuing growth of budgetallocations to the sector, increasing lack of budget discipline as depicted by the growingcases of supplementary expenditures, the cost of the political system, duplication ofservices, and the growth and cost implications of autonomous agencies withingovernment.

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4.16 Public administration has grown into the second largest sector in the governmentbudget. In the current fiscal year, expenditure on public administration was equivalent toUsh. 320 billion or 20 percent of the entire government spending. The publicadministration budget has grown rapidly over the past few years, at an average rate of 16percent. Thus the sector has claimed an increasing share of GDP, rising from 2.9 percentof GDP in 1997/98 to 3.6 percent in 2001/02. As can be seen in table 4.1, the growth hasnot only been in the official budget allocations but also in over expenditure.

Table 4.1: Budget Trends in Public Administration 1997/98-2001/02Year Budget Overrun Percentage of Overrun

1997/98 184.3 19.62 10.6

1998/99 195.53 16.32 8.3

1999/00 245.03 6.34 2.6

2000/01 264.85 36.79 13.9

2001/02 325.3 26 8.0

Source: MFPED.

4.17 In addition to growth of budget allocations, there is significant evidence of lack ofbudget discipline as the spending on public administration has consistently exceeded itsbudget allocation over the past five years. Over the past few years public administrationhas claimed an average of 70 percent of all supplementary expenditures. Since 1997,public administration has spent on average more than its annual budget (by almost Ush.20 billion per annum) by around 10 or more percent per year, except 1999. The operationof a hard budget constraint by the government means that overspending by the publicadministration sector has direct negative effects on other sectors. One area's overexpenditure is another area's budget cut. The areas affected most by such budget cuts arethose that are not protected, that is including non-PAF and non-wage items. Because thenon-protected areas represent a small proportion of the entire budget (less than 20percent), any budget cut is likely to have a significant impact, at times up to 20 percent,on the budget allocations to such sectors. In fact, if public administration had stayedwithin its budgetary limitations, the non-PAF expenditures would have increased by 6percent in the past five years.

4.18 The cost of the public administration sector can, to a large extent, be attributed toits structure and composition. Spending on the political system has an explicitrelationship with key political institutions, aspects of the political process, and politicalappointments to public offices. Political institutions include Parliament, the MovementSecretariat, and a number of constitutional and non-constitutional commissions. Politicalappointments to public office include advisors, ambassadors, additional ministers, andresident district commissioners , most of whom are outside the constitutional provision.The country has 62 cabinet ministers-a sharp increase from 21 in 1995/96-305members of parliament, 35 advisors and special assistants, and 86 resident districtcommissioners and their assistants. In the current fiscal year, the direct budgetary costsassociated with political appointees is estimated at Ush. 34 billion.

4.19 Apart from several commissions established through the provisions of the 1995Constitution there is a growing number of non-constitutional commissions. Operations

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and management of ad hoc commissions and their budgetary implications haveintroduced difficulties in planning and budget execution. The Amnesty Commission, forexample, is housed within the Ministry of Internal Affairs for budget allocations but isgiven autonomy such that the Permanent Secretary cannot monitor its activities, includingbudget submissions and program implementation.

4.20 A number of operating activities in the public administration sector areduplicated. There is a general tendency to duplicate activities as commissions,secretariats, and other semiautonomous agencies proliferate. For example, presidentialadvisors work alongside cabinet ministers, while several commissions and secretariats aredoing work that is related or similar to that being done in departments in governmentministries. Monitoring of district-level activities by central government involvesconsiderable duplication efforts. Each ministry sends a separate monitoring team to thefield, and at times different departments within the same ministry may send out separateteams. Apart from the heavy costs of transport and field allowances incurred by theseteams, a great burden is imposed on district authorities by hosting the continuous flow ofvisitors. The development budget of the MFPED is also problematic in this area, andcontains a total of 43 projects. A wide range of projects have been placed under theMinistry of Finance, sometimes because the projects are intersectoral and requireimplementation capacity that is thought to be inadequate in the relevant sectoral ministry,or because of the initial source of funding.

4.21 Duplication also occurs as a result of uncoordinated donor initiatives, whichgenerate separate units with overlapping mandates. Examples include the UPPAP, thePMAU, and the Finance Ministry's poverty eradication section. Similarly, the UgandaInvestment Authority, under MFPED, is in charge of coordinating and attracting newinvestments, which is a similar mandate as that given to the Ministry of Tourism, Tradeand Industry. There are indications that the Ministry of Foreign Affairs is intending tomake promotion of investment a core theme in its work overseas. Rather than buildingcapacity within the line ministries, such parallel initiatives have eventually widened thegap between parastatals and their counterparts in government ministries.

4.22 In addition to the above cases of duplication, several cases of strategic initiativesand linkages within the government are not clearly coordinated, although they are looselymanaged under public administration. Examples include the Medium-Term CompetitiveStrategy , Plan for Modernization of Agriculture , the strategic exports program, and theAmerican Growth and Opportunity Act. The location and activities of several of theseinitiatives, in relation to each other, are not clearly defined and coordinated.

Challenges for the Future

4.23 Based on the review above, it is clear that the public administration sector needsto be reformed in order to realize high returns in terms of better budget allocation andbetter public expenditure management. The institutions in the public administrationsector should start with improving their processes of planning, prioritization, and costingof activities. As already noted, the process of approving supplementary expendituresthrough the Parliament is expected to improve budget discipline as it will be harder forministries to simply overrun their budgets. There should be clear and tight guidelines for

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requesting and approval of supplementaries to ensure that they are used for emergenciesand not as a means of topping-up budgets. Reform of the public administration sectorshould take into consideration ways of eradicating the current tendencies of duplication.

4.24 The President commissioned a study on the possibility of more efficient publicadministration spending. The recommendations identified several areas of cost savings,not just within the sector (which also includes the political governance sector) but rightacross government. The study highlighted distortions and inequities that have crept intogovernment over the past several years through the establishment of commissions andsemiautonomous agencies. Many of these commissions and agencies have staff earningremuneration much higher than that in the traditional civil service, and are governed byexpensive boards that are not doing an adequate job in exerting governance. Many ofthese agencies have been established with the encouragement of donors. Donor supportwill be necessary to rationalize these agencies, which is likely to take place within thecontext of comprehensive civil service reform.

4.25 One of the motivations for opening up the budget process was to provide anopportunity to discuss with external audiences issues related to lack of internal budgetdiscipline and also to bind the executive and to raise the political cost of deviation.Therefore, what is needed is an early involvement of the executive (especially thePresident) at the planning and budgeting stages rather than at the execution stage. Thereis also a need to identify the important constituencies (for example, CSOs) and ensurethat they have adequate capacity to gainfully participate. In some cases there is need forgovernment restructuring and constitutional review to ensure that the causes of excessspending are neither created nor given an incentive. It is possible that the Public Financeand Accountability Act will only address procedural matters, yet there might be somedeep-rooted weaknesses within the entire system. For example, is the rising cost of thepublic administration sector a result of recruitment of more people, poor controlsincluding internal audit and cash management systems, or payroll management? In thisrespect, there is a need to analyze the entire system, including the treasury and CCS, tocome up with a comprehensive solution. This effort will raise the focus on reallocationsboth within and without the sectors/ministries. It is also possible that capacity problemsand other weaknesses within the system are having a negative impact on the enforcementof the hard budget constraints.

C. POVERTY ACTION FUND

4.26 The PAF is a virtual poverty fund that identifies and protects budgetaryexpenditures that have direct poverty-reducing impacts. PAF was introduced in 1998 as aresponse to concerns over accountability and reorientation of the budget, given additionalresources from HIPC and other donors, toward pro-poor expenditures. However, creatingan enclave within the budget and protecting its allocations in the context of revenueshortfalls has negative implications on the overall implementation of the PEAP.Additionally, the increasing local government participation is likely to raise the wage bill,which will require more protection. This challenge is currently being reviewed anddiscussed so that an appropriate solution can be found.

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4.27 The initial expectations from the PAF included enhanced responsiveness topoverty reduction of the public sector, improved accountability and transparency inbudgeting, and promotion of an open and transparent process for monitoring and reviewof progress. To this end, the PAF has registered a number of achievements, including anincrease in confidence of donors and civil society in the government's commitment topoverty-eradication programs. The PAF mechanism has contributed to the perceptionthat the government is actively addressing poverty and increasingly opening up itsprocesses to scrutiny from various stakeholders. Additional important achievementsresulting from the PAF structure are described below.

Achievements under the PAF

4.28 The PAF has been instrumental in introducing mechanisms for promoting budgetallocations to sectors with strong pro-poor perspectives. It has contributed tremendouslytoward a clear understanding of what constitutes pro-poor programming, as well asdirecting resources toward the identified programs. From a small component of 18percent of the government budget, the PAF has been expanded to 35 percent because ofthe need to include other identified sectors and sub sectors with strong dimensions onpoverty eradication. The development and application of the PAF selection criteria, andthe mechanism for processing applications by new sectors, has been instrumental inshaping the process that will guide future budgetary allocations.

4.29 The PAF has led to establishment of structures and systems for transferring fundsto the local governments and the management of such funds in a transparent andaccountable manner. It has protected pro-poor sectors from budget cuts by providingguaranteed disbursements of budgeted amounts-subject to program performance. Overthe past four years, there has been a big increase in resources transferred to localgovernments. On average, three-quarters of PAF funds are transferred to localgovernments. Most of the transfers are channeled through the PAF as conditional grantstied to pro-poor sector expenditures.

4.30 The PAF structure has been critical in the development and institutionalization ofsystems for regular budget reporting and review, which are linked to enhancedtransparency and accountability, and subsequent disbursement of additional funds. Thecentral government and local governments have improved monitoring of programs andaccountability using the 5 percent of PAF resources that are specifically earmarked forthis purpose.

4.31 The PAF structure has been critical in the mobilization of resources, initially as aconduit for HIPC funds and later by providing a framework for increased budget support.Levels of donor budget support to the PAF have increased from just over US$20 millionin 1998/99 to more than US$130 million in 2001/02. The government's commitment tochannel resources to pro-poor sectors and predetermine budget allocations and guaranteesof disbursement are combined with acceptable systems for accountability to provide asubstantial degree of comfort for development partners wishing to move toward budgetsupport. The PAF continues to provide a framework at the sector level that ensuresresources earmarked for sectors actually get to those sectors. The predictability of

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resource flows and accountability of such resources has created a basis for a stable, long-term partnership between the government and development partners.

4.32 In conclusion it should be noted that, from its initial focus of ensuring that HIPCresources are spent with a strong focus on poverty reduction, the PAF has evolved into amechanism for introducing new pro-poor programs and a primary source of governmenttransfers to local governments. In many areas, therefore, PAF may be seen as a leadfactor in the attainment of several successes under the PEAP.

Challenges Facing the PAF Structure

4.33 In spite of its impressive performance, the PAF has come under criticism as aconstraint to several other developments, which are essential for sustainability of its ownsuccess. Already there are ongoing efforts aimed at mainstreaming PAF principles intothe wider public-sector process. It is largely believed that PAF has limited growth offunding for other emerging pro-poor sectors. Given the constraint of slowing growth inresources available to the public sector, continued commitment to PAF allocations shouldbe seen as limiting reallocations between sectors that are essential to other PEAP pillars.In this regard, the PAF is worsening problems in other sectors that have emerged fromconstraints under the MTEF. The PAF structure has promoted a narrow interpretation ofpro-poor programming and has therefore skewed expenditures toward service deliverywithout due regard to ensuring sustainability of the entire development process.

4.34 The comprehensive nature of the PEAP as a development plan means that zoningout and protecting certain sectors under the PAF defeats the original objective ofcomprehensive development. The presence of cross-cutting issues in the implementationof development policies makes it difficult to justify the PAF rationale for povertyeradication. The failure to implement the PEAP in a balanced way has undermined thepursuit of more sustainable options and outcomes through a systematic sectorprioritization process. Sector programs, both within and outside the PAF, have not beenproperly aligned toward the achievement of PEAP outcomes, even though such outcomesmay be clearly articulated.

4.35 The PAF has promoted de-concentrated administration as opposed todecentralized service delivery. There is an inherent conflict between the sector-drivenapproach of allocating funds nationally toward the achievement of sector targets, and thatof decentralization, which promotes local autonomy in decision making. This conflicthas undermined local ownership and, to an extent, sustainability of investments. ThePAF only channels funds to part of the local government budget and therefore does notpromote a balanced implementation of the PEAP at the local level. The localgovernments have few decision making powers because the bulk of their allocations areprotected under PAF and provided as conditional grants. The end result of thisdevelopment is likely to be less interaction between the central and local governments,implying that the fora for reviewing and making strategic decisions on implementation ofthe PEAP are uncoordinated and fragmented.

4.36 The special status accorded to the PAF has promoted a narrow interpretation ofwhat constitutes poverty-reducing programs, thereby resulting in a partial interpretation

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of the PEAP. The current criteria for selection of PAF programs has skewed budgetallocations toward the provision of services since poverty is seen in the context of welfareand direct service provision. This situation provides a perverse incentive for sectorstrategies to be adjusted toward service and welfare delivery in order to qualify for thePAF. The size of sector allocations under the PAF have largely been driven by donorbudget support earmarked to specific sectors or sub sectors, resulting in intersectoralallocations that do not promote a balanced implementation of the PEAP.

4.37 As noted, sectors have focused on attracting more resources and have ended upsupporting investments that produce outputs that have no ability to generate resources forfresh investments and maintenance. There are no strong implications for generation offunds to support recurrent expenditures required to maintain service delivery. In the end,the entire government budget has not been fully oriented toward a comprehensiveimplementation of the PEAP, leading to critical questions about sustainability.

4.38 Sustainability problems arising from a partial implementation of the PEAP arepartly reflected in the limited ability of the economy to generate domestic resources.Revenue collections have, for several years, stagnated at less than 12 percent of GDP.The revenue shortfall for 2000/01 was Ush. 36.2 billion and is expected to be at leastUsh. 55 billion in the current year. Funding available to the public sector has limited theabsorptive capacity of the economy, which is now limiting the growth of the resourceenvelope available to new pro-poor sectors. The PAF has limited the ability of thegovernment to carry out rational reallocations within and between sectors in order toarrive at a long-term, sustainable solution. Given the new constraint in the growth of theMTEF, emerging pro-poor sectors, and to an extent those already under the PAF, haveremained largely under funded.

4.39 The PAF system of reporting, accountability, and release of funds has alsoresulted in a large administrative structure, which should be seen as a burden on bothlocal and central government. Consequently, the wage bill under the PAF represents alarge component of the total wage bill. The protection offered to this component mayresult in significant variations in other non-PAF sectors. Table 4.2 indicates that wageallocations under PAF as a percentage of the total are protected at 38 percent. The PAFstructure should therefore be seen as having a potential for negative implications onoverall planning and budget execution for other non-PAF sectors.

Table 4.2: Wage Bill Allocations, PAF as a Percentage of Total in Billion Ush2001/02 2002/03 2003/04 2004/05

Category Budget ProjectionsPAF 197.39 228.07 241.83 247.44Total 546.27 586.64 626.68 651.58PAF as a percentage of total 36.1 38.9 38.6 38.0

Source: MFPED.

4.40 The limited sensitivity in budget execution processes, which largely results fromprotection of PAF areas, has contributed to an inadequate focus on putting in placesystems and institutional capacities to ensure attainment of results oriented toward PEAPgoals. The PAF has focused on setting up accountability mechanisms for review of

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performance of government programs, at the expense of reviewing and reforming thesystems for delivering outputs and strengthening of respective institutions. The weakcapacities in institutions supposed to implement the budget have partly resulted in widevariations in budget performance. The report for 2000/01 indicated that shortfalls in theMOES, and EF and SS represented implementation bottlenecks rather than any particularreallocations away from these sectors. Figure 4.2 indicates the divergence betweenbudget and actual releases for the different sectors, part of which was a result of lack ofcapacity in implementing institutions. Such shortfalls in sectors such as roads and workscan translate into severe constraints to economic production. In addition, the shortfalls inone sector provide incentives for over performance in other sectors such as publicadministration.

4.41 It is worth noting that there were more cases of underperformance in the PAFareas compared to public administration. This implies that apart from protecting PAFareas against any budget cuts the tight criteria for accessing PAF funds may be acting as ahindrance to access of all the budgeted funds. This could be a result of poor or delayedreporting of funds released earlier, which as indicated may be a result of low capacities atthe districts.

Figure 4.2: Divergence between Budgeted and Actual Releases for 2000/01

Divergence in Budget Outturns FY2000101

40- . -

30 . --- - 1 ElSecurity

l , 20 M . - . . . 0 rads and worksI .S .. - 0 agriculture

= 10 --.----.. :- Q~~~~education

D -20 | - - _ Cl public admin

-30 - , interest _-

so-Y8e: NlF PEDSector

4.42 The increased focus and dedication on the PAF has partly resulted in the limitedemphasis on the role of personnel management in identification of sectoral inputs. Theweaknesses within the district service commissions, the persistence of vacant positions inthe district staff teams, and staff-retention problems remain largely unattended to, yetthey have a significant impact on planning, budget execution, and performance. The PAFdoes not satisfactorily address the issues of efficiency and success given a budgetconstraint. Hence, maximization of output, in terms of both quality and quantity, for agiven resource constraint cannot be realized if institutional capacities have not beenstrengthened.

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The Way Forward

4.43 Despite the current challenges faced by the PAF, there is strong consensus withinthe government and among various stakeholders that there is some value in it, whichshould not be lost. For example, the PAF has an image that is easy to market to donorconstituencies in their respective countries. Thus, the current policy challenge is how torestructure the budget process to ensure a comprehensive pursuit of the PEAP objectiveswithout losing the benefits offered by the PAF. There is a need to widen and reorientpolicy programming into a system whereby each sector delivers outputs that are specificto the desired PEAP outcomes. Sustainable strategies for financing the PEAP should bedeveloped to ensure that current financing strategies do not result in future limitations.Future allocation procedures must ensure that all proposed sector investments allowsustainable improvements in delivery of outputs and gains in poverty reduction outcomes.

4.44 The removal of PAF mechanisms, as they are known today, will require newstructures for public expenditure management, accounting, and evaluation that aresatisfactory to the government and its development partners. Strong CCSs, to preventunjustified reallocations, will have to be established to ensure flexible implementationand adherence to set PEAP goals. The new system will have to face the challenges ofcoordination and continuity of various programs with no fixed initial criteria for guidingallocations and the subsequent disbursements. Unless and until budget overruns areeliminated, it will be difficult to justify relaxing the current PAF protection for prioritysectors.

D. CONCLUSION

4.45 The above discussion echoes the remarks made at this year's PER meeting thatthe PAF reform discussions cannot go far until overrun problems are addressedadequately. Overruns undermine the objective of removing the PAF protection, and anyreforms in such an environment will be detrimental to attaining PEAP targets. Inparticular, the trend of supplementaries by defense and public administration result inbudget cuts for other sectors and can be devastating to poverty-eradication efforts. Theimplications of these developments on the long-term credibility of the budget process andexecution have not been given due importance. In this regard, it is imperative thatpolitical interference in planning, budgeting, and execution issues be greatly reduced or,better still, eliminated.

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5. BUDGET MONITORING, EVALUATION, ANDREPORTING

A. BACKGROUND

5.1 This chapter addresses the issues of monitoring budget performance, evaluation,and reporting of the findings for purposes of improving future plans and budgets throughpast experiences. The chapter highlights the importance of the monitoring and evaluationprocess together with its associated aspects such as data accuracy and availability, roles

and responsibilities of the different actors, and reporting of findings to stakeholders.

5.2 Regular and rigorous monitoring of resource flows and their usage is an importantingredient of financial accountability. Monitoring and evaluation belongs to part of the

policy process that links the different parts of the decision making process together. Forexample, at the point of progress review, one should be able to establish whether theallocation of resources and actual implementation are indeed moving the communities or

nation toward the set goals and targets.

5.3 A reliable and effective budget monitoring system covering the various levels and

sectors of government is critical for evolution and strengthening of public-expendituremechanisms that eventually lead to convergence to the desired goals. Such a monitoringsystem will generate timely information not only on the transfers and disbursement of

public resources, but also on the productivity of these resources in terms of efficiency of

public investment, output performance, and local economic development impact. Inaddition to measuring the efficiency and effectiveness of intergovernmental finance,evaluation data should be able to inform policy review at all levels of government, and

thereby improve the medium-term expenditure planning.

5.4 Benchmarking of fiscal performance, outputs, and impacts has emerged as astandard technique to promote public-sector performance. Benchmarking can be used notonly to monitor and compare trends across various dimensions of well being (such as

healthcare, schooling, crime prevention, and economic development) but also to attractprivate investment. An integrated benchmarking system may need to be first focused on

expenditure and financial management, and later on broadened to include a range ofoutput and impact indicators.

5.5 While program evaluation by government departments is key to improvingvertical accountability of government institutions, the use of benchmarking and other

public participation mechanisms at the various levels of government can be used to

enhance downward and horizontal accountability. In particular, well-publicizedbenchmarking of fiscal and operational performance, local economic development, andother aspects of well-being can generate healthy competition and attract private

investment, which will generate other positive externalities.

5.6 Public expenditure accounting and reporting must go hand-in-hand with overallbudget performance reporting in order to ensure informed inputs in the following roundsof the budget cycle. Currently, budget performance reports only focus on the financialreporting. While it is commendable that the government has moved toward producingeven quarterly reports on a timely basis, the usefulness of these reports is limited becausethey do not contain any output data. This area needs attention in the medium term. If thelower levels of government and communities are to participate effectively in the planningand budgeting processes then they must be informed of past performances as establishedin the different reviews. Reports on findings from different monitoring activities shouldbe disseminated to various stakeholders in order to strengthen participation.

5.7 With regard to efficiency, the government has carried out a number ofexpenditure tracking studies aimed at establishing the value and hence the efficiency withwhich services are being realized. Tracking of expenditure flows, which has been carriedout in the health and education sectors, has yielded important policy implications that areuseful for the budget processes of planning and execution. The publication ofinformation on disbursements is expected to enhance the certainty, predictability, andtransparency of transfers to the district and lower levels of government.

B. THE CURRENT STATE OF MONITORING, EVALUATION, AND REPORTING

5.8 The current setup of national M&E includes many arrangements for tracking andproviding feedback on progress on the PEAP, and is therefore characterized bysubstantial overlaps and duplication. It includes all procedures, systems, and standards ofinformation generation and management and the corresponding reviews accompanyingimplementation of national development programs and projects. The system includes amechanism of providing feedback and reviews of interrelationships between expenditureand development activities on the one hand, and effects on poverty trends on the other.

5.9 The objective of M&E is to report on what the government and its developmentpartners are doing to alleviate poverty, but also to provide facts on realized outcomes sothat future plans can recursively move toward the maximization of value -for money.M&E should therefore contribute toward the improvement of public service performance,increase effectiveness of public service delivery, and enhance enforcement ofaccountability.

5.10 The government has taken note of the need to improve the M&E functions,including improvements in coordination. There are multiple mechanisms for managingmoney, for maintaining accountability, routine management reporting, and carrying outof ad hoc studies and reviews. This type of operation has become a big burden tofrontline desk officers and department managers. Considerable resources are currentlybeing spent, within ministries and local governnent units involved in service delivery, onservicing the different information requirements by the numerous primary beneficiariesof the M&E reports.

5.11 The current state of government systems and institutions needs greatimprovements in order to match the level of the required M&E of a decentralized fiscalsystem. Technical skills for developing performance-tracking capacities both within

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central and local governments are either lacking or scarce. Thus, one should expectinadequacy in carrying out cost efficiency, expenditure tracking, evaluation of client-satisfaction, and credible official public surveys. Even the stock of capacities scatteredwithin the various governrment sectors may not be known and yet this would help toexploit the benefits of cross-fertilization within government.

5.12 The problem of capacity for budget monitoring and reporting is more pronouncedat the local government level as opposed to the center. In the case of the centralgovernment, non-wage recurrent and development commitment/expenditure reports arerequired by the 15' of the following month. PAF quarterly reports of activityexpenditure are due before the last day of the month after the close of the quarter. Localgovernments are also supposed to submit monthly accountability statements on allexpenditures incurred from central government transfers. Failure to comply with thereporting requirements results in the withholding of the next cash releases untilcompliance occurs. These conditional ties, although good, may be seen as not beingsensitive to the capacity problems of local government and may indeed adversely affectthe poor in less-developed districts.

Data Problems

5.13 There are also significant data problems both in terms of stock and quality. Anintergovernmental monitoring system should aim among other things to generate centraland local government level fiscal data that are robust in terms of coverage as well asreliability. With regard to coverage, the data should ideally go beyond transfers andexpenditures, and incorporate relevant information on disbursements, cash management,and levels of idle cash balances. Reliability will depend on a number of issues, includingsubmission of timely reports from the various levels of government, verification bytransferring departments, and regular reconciliation methods. When parallel flows ofinformation are not available, short-term verification measures such as randomexpenditure tracking surveys should be employed. In Uganda, such tracking mechanismshave been employed mainly in the health and education sectors. In the currentcircumstances, the government lacks the ability and resources to carry out such activitiesin all sectors and at the different levels of government. Tracking surveys are currentlybeing used sporadically to address specific issues but are not part of any overall approachto budget monitoring and analysis, especially of outputs and impacts.

5.14 Deficiencies in the quality of returns and their analysis continue to exist in severalministries, including the MFPED. The problem is currently being addressed and requiresadditional resources and training in order to improve the analytical skills and furtherrefinement of the systems and the range of data required.

5.15 The government has already embarked on several approaches, such as the PovertyMonitoring and Evaluation Strategy, which has been finalized for implementation and isaimed at improving M&E of development programs in light of the set goals. Theapproaches are built around the four pillars of the PEAP and supported by PRSC,showing the reform strategies (objectives and actions) and progress indicators (outcomesand outputs). For every objective there is a corresponding outcome indicator, which willbe monitored to ensure that the right actions are being undertaken. Verification of

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outcomes will depend on analyses based on such data as generated in surveys and publicexpenditure data. The government intends to continue with household surveys andnational integrity surveys, which will be combined with ministerial and departmentallevel data and assessment reports by the various agencies and institutions.

Evidence from Tracking Studies

5.16 A recent report on tracking poverty-reducing spending in Uganda has indicatedthat the government has satisfactorily met the 15 criteria for the tracking of poverty-reducing expenditure. There is still a need to develop, implement, and strengthen thetools for tracking outcomes of poverty-reducing expenditures at both central and localgovernment levels. This effort will greatly benefit from the successful implementation ofthe IFMS, which is supported by the EFMP II project. Other related capacity needs at thecenter and local government level are being identified by the PER and supported throughPRSC, LGDP, and other technical assistance programs of multi- and bilateral partners.

5.17 The health sector tracking study found that delays in reporting and hencedisbursement of funds, apart from arising from factors such as logistical problems atrequest and approval stage, also had a bearing on capacity problems within the lineministries. Although the health units provide regular financial activity reports to thesupervising entities, it is not done in a timely manner. The quality of the reports is poor,and none of the implementing entities accounted downwards to the people, as evidencedby the failure to display publicly the amount of grants received from the centralgovernment or the outputs of the M&E activities. More than 50 percent of the health subdistricts did not possess sufficient logistical support to carry out scheduled monitoringactivities.

Capacity for Effective and Timely Auditing

5.18 The feedback and accountability aspects require a strong auditing mechanism,comprising staff and equipment, which are generally lacking in the auditor general'soffice. The ultimate goal of an intergovernmental monitoring system should be togenerate information for better decision making at all levels of government, promotion ofinstitutional performance, and enhanced accountability. The task for Uganda to get tosuch levels clearly surpasses the current abilities of the office of the auditor general. Thesituation is worsened by the capacity problems at the local government level.Government reports indicate that the requirement of submitting audited accounts to thelegislature within 12 months of the end of the fiscal year is met by the central but not thelocal governments.

5.19 In response, the government has put in place measures to increase the quality andregularity of internal budget reporting. Measures have been undertaken, with the supportof DFID, to strengthen the capacity through training and also ensure independence of theOffice of the Auditor General. In the area of providing feedback, measures are beingundertaken by government with the support of donors to strengthen the capacity of eachline ministry and also at the local government level to monitor and report on budgetoutturns, including outputs and outcomes.

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5.20 Presently, audited accounts are presented to the legislature within 12 months ofthe end of the fiscal year with some exception for the local governnent. Long delays bylocal governments in submitting accounts have led to corresponding delays in theauditing of accounts.

C. CHALLENGES FOR THE FUTURE

5.21 Because the monitoring of outcomes and impacts is a medium- to long-termagenda there is need for establishment of appropriate indicators to continuously monitorand evaluate progress toward the desired goals. The increasing role of local governmentsin fostering an investment-friendly environment demands options for better evaluatingthe growth and poverty-reduction implications of fiscal performance. This calls fordeveloping the capacity to rigorously evaluate the economic development impact ofvarious public policies and expenditures. The linkages between planning andimplementation need to be clearly articulated in order to establish activities and eventsthat should be monitored using relevant indicators. Issues of reliability and accuracy ofthe data also need to be given due consideration. The processes of collecting, storing,processing, and reporting of results require not only high levels of human capacity butalso a minimum package of technical equipment.

5.22 The tasks of ensuring data quality and coverage, together with developing andcomputing relevant indicators for certain objectives and actions is also going to bedaunting. For example, although the line ministry budget reports are received within anacceptable time interval, there are concerns about the quality of the data received and thecapacity to analyze and monitor such data.

5.23 Strengthening of M&E systems will be half the job done if the reports on findingsare not availed to all the relevant stakeholders in a timely manner. Such information willenable timely and appropriate reviews of the MTEF through better forecasts of the futurethat are based on past experiences. Publications of annual budget reports need to besupplemented with better output information. CCS has shown that it is possible to dofinancial reporting on all government programs. Hence, if a simple output monitoringsystem is developed it can be implemented.

5.24 An additional dimension to the reports should be an analysis of the data in orderto generate information that will help to guide future planning and budgeting decisions.The reports should not only include numbers but also implications for the future.Participation in data collection and lower-level reporting should be expected to improveas the participants begin to see benefits for themselves coming out of the evaluationreports. However, the generation of quality decision making information to include inthe M&E reports may require analytical skills and technical facilitation, both of which arecurrently not available at various levels of government. Therefore, this area needs to bespecifically addressed. The need for additional resources to support the upgrading ofanalytical skills within the MFPED and other line ministries has featured-in a number ofgovernment reports. This is an aspect that should be taken up systematically throughprograms similar to EFMP II at the central government level and the LGDP at the districtlevel. In the meantime, reliance can be made on existing capacities within and outsidethe government.

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5.25 The aspects of coordinating M&E activities and interests of various stakeholdersstill need a practical resolution. There are multiple stakeholder views of what data aremost relevant and important and which set of indicators should be considered optimal.One of the recommended options is establishment of an overarching or apex-levelnational system of M&E arrangements. This does not necessarily entail one institutionacting as a channel for all or as a kind of central database for all information. The goal ofsuch a coordinating body should be to help guide public action toward relevancy andeffectiveness in making progress on the PEAP and poverty eradication. It should beaimed at ensuring convergence and complementarities from the existing standards andinitiatives. This should result in generation of coherent decision making in theperspective of the national development goals.

5.26 The M&E system should start with clearly expressed goals and targets and ensurecoverage of data collection ranging from inputs through to outcome levels. Efficiency inthis process demands minimization of costs of unnecessary overlaps and linking up ofdifferent actors and interest groups in order to pool the scarce and scattered resources formutual benefit. Proper reporting of the findings by different actors should be harmonizedand disseminated to the various groups of decision makers at all levels.

D. CONCLUSION

5.27 It is clear that Uganda's budget process is weak when it comes to monitoring,evaluation, and reporting. These weaknesses obviously limit the prospects of learningfrom past experience and reforming budget processes. Therefore, it is paramount thatappropriate measures are taken to improve these systems as a way of improving budgetprocesses and improving budget efficiency in addressing development programs. Thegovernment of Uganda has taken some small steps in the right direction. The challenge isto expedite the implementation of these reforms without undue delay.

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6. CHALLENGES FOR THE FUTURE: PUBLICEXPENDITURE MANAGEMENT IN ADECENTRALIZED ENVIRONMENT

A. INTRODUCTION

6.1 According to the 1995 Constitution, decentralization is a vital component of thestructure of governance in Uganda. The process of decentralization is at the heart ofimplementing the PEAP and is therefore expected to play a vital role in eradicatingabsolute poverty by 2017. In light of decentralization of responsibilities for serviceprovision to districts, the development of capable local-level institutions is key to theachievement of government objectives as articulated in the PEAP. To deliver theservices necessary for poverty eradication, the devolution of power has got to be matchedwith a corresponding fiscal decentralization and capacity building at the localgovernment level. Fiscal decentralization involves introduction of various levels ofgovernment, which makes coordination of activities, monitoring, and accountability ofcritical importance. Analysis of intergovernmental fiscal relationships is crucial for theidentification of options for supporting the output orientation of the MTEF. Such anapproach would be in line with the PRSC objective of supporting the government'sbudget and the MTEF with a program to improve service delivery through vigorousmonitoring of outputs as well as reform of critical public management systems

6.2 Management of public expenditures demands a robust intergovernmental fiscaland administrative system with an efficient and accountable relationship among theMFPED, line ministries, and districts, as well as between districts and their constituents.A relationship of this nature may be depicted in a triangular form, as is shown in figure6.1 below. The figure highlights the complex, three-way resource and information flowchannels. For example, the non-tax revenue collected by sector ministries, which can nolonger be appropriated at the collection level, would flow from the line ministries to theMFPED. Similarly, some of the local government taxes cannot be appropriated at thatlevel, which would imply that they too have to flow to the consolidated account/MFPED.The MFPED is in charge of coordinating and harmonizing the overall national plans andshould therefore receive plans from the sector ministries and local governments at thedistrict and lower levels and, in turn, release financial resources for implementation of theplans. Another set of flows involves performance and accountability reports andsupervision guidelines. The lines of reporting will also follow a similar trajectory.Finance will receive and provide reports on budgetary transactions and outcomes to lineministries and districts.

Figure 6.1: A Three-Way Accountability Relationship in Uganda's IntergovernmentalSystem-Resource and Information Flows

DISTRICTS

Ministry of Finance, Planning .... ......... Sector Ministries

and Economic Development ___

Key:

-..-..-... Information Flows

Resource Flows

6.3 Needless to say, there are some links in this triangular relationship that arestronger than others. The recent HIPC tracking study highlighted that in Uganda the linkbetween districts and central/sector ministries is the weakest in terms of all levels of thebudget process. These weaknesses obviously have implications for effective servicedelivery in an increasingly decentralized-fiscally and administratively-context

B. CURRENT CHALLENGES AND EFFORTS

6.4 Fiscal decentralization poses significant challenges for the government in terms ofplanning, budgeting, and implementation of the set policies. It requires building credibleinstitutions with adequate capacities at all levels of government, maintaining harmoniousrelationships between the different actors and stakeholders, and ensuring that local andnational plans coincide toward the same goals. Capacity problems include creatingincentives for frontline workers, improving payroll management, and enhancingaccountability in personnel and financial management. There is a need for buildingdistrict-level capacity in core public management skills and strengthening localgovernments' planning and budgeting frameworks. The lower levels of government, inparticular, have little involvement in decision making partly as a result of capacityproblems. In addition, fiscal decentralization has increased the number and diversity oftrarisfer mechanisms from central government and donors to the local governments. Yetmany of these mechanisms are not well adapted to the decentralized framework. Thelocal governments still have little power over much of the allocated resources given thatmost of the transfers are in the form of conditional grants.

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6.5 Weak linkages between the various levels of policymakers and implementers canresult in planning and budget execution failures as each level or set of governmentinstitutions pursues objectives that do not converge to the established nationaldevelopment goals. Yet the alternative of letting the center dictate what should be doneby and at all levels of government would not result in decentralized service delivery.According to the decentralized service delivery framework, priorities for nationaldevelopment should strongly reflect grassroots preferences determined throughcommunity participation in the planning process.

6.6 The challenge facing the Ugandan government, and where the PER should make acontribution, is in the area of how the ongoing and proposed public sector reforms-fiscal, budgetary, and administrative-can help to develop a tier of government andinstitutions that are responsive, adaptive, effective, and accountable in developing andimplementing strategies for poverty eradication. The current structure of government hasinherent weaknesses particularly with regard to planning and sharing of experiences.There are no clear linkages between a number of initiatives at the central government andthe districts, and even within the districts themselves. The government and itsdevelopment partners are working on a program to develop capacity and a conduciveworking environment both in the districts and the relevant line ministries (for example,the Capacity and Performance Enhancement Program (CAPEP) project).

Planning and Budgeting Issues

6.7 The planning and budgeting cycles between the different levels of governmentneed to be fully harmonized in a way that would offer mutual benefits. It is important toharmonize the local and national budget cycles, and make practical allowances for localgovernments' budget processes to make and receive feedback from the national budgetactivities. Similarly, lower government levels should be duly integrated into the districtplans, which will involve linking the process of the DDPs with the preparation of theLGBFPs. The similarities between both of these medium-term planning instruments andthe fact that they are implemented in parallel should be a cause for concern. The weaklinkage between the DDPs and the LGBFPs has resulted in no maximization of scarceresources. Moreover, the credibility of districts' medium-term plans largely depends on asound fiscal framework, based on both indicative planning figures issued by the centerand credible forecasting of own-resource revenues and donor financing. There areadditional challenges of ensuring that the entire planning process and budget cycles are inline with the provisions of the Budget Act 2001.

6.8 There is a need to continue with efforts aimed at strengthening the localgovernments' planning and budgeting framework at the district level. The LGBFP is thekey vehicle for developing and costing medium-term district plans, particularly in prioritysectors. However, the system of several conditional grants, instituted by line ministries,is likely to undermine the robustness of local planning and budgeting. For example,conditionalities on fiscal transfers may impose unnecessary restrictions on allocativechoices between wage and non-wage recurrent expenditures and between specific itemsof non-wage recurrent expenditures. Thus, although conditionalities limit the illegitimatetransfer of resources, they also tend to limit the flexibility of making legitimate changesin the mix of inputs to improve performance at the facility level. Moreover, the districts

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that face the conditionalities do not have a clear mechanism by which the specific

conditions-if found to be unworkable-can be negotiated. For their part, line ministrieshave faced difficulties in "disciplining" districts that fail to meet conditionalities since

mechanisms for enforcement are not clear.

6.9 On their part, district authorities have expressed support for continued conditionalgrants, albeit under more flexible terms. It is possible that greater flexibility in the use ofinputs can be attained along with more output monitoring. In this case, the failure to

meet performance benchmarks can then be followed by appropriate action, includingselected sanctions. The current weaknesses in monitoring performance at the local leveland the publication of the relevant data are being addressed through the PRSC. Thisshould be enhanced by the government's intention to move toward a results-orientedmanagement framework.

6.10 Strengthening local government planning and budgeting has been identified asanother aspect of decentralized delivery of services that is to be supported in the contextof the PRSC. Districts need to be equipped with better information and greater authorityto make trade-offs between wage, non-wage recurrent, and capital expenditures. In linewith this, the LGDP and the EFMPII operations are supporting efforts to make localgovernment budgets more comprehensive and contestable, within a framework thatsafeguards the government's fiduciary interests. Of particular interest is the

rationalization of the budget process in the districts. The MFPED has already conducteda number of training and review workshops to communicate a standardized approach to

LGBFPs in the district since these papers provide an important avenue for extending theMTEF to the districts. Given the limited capacity of many districts, there is a need tostreamline LGBFPs and DDPs into a single three-year rolling plan that can serve as a

useful instrument for local authorities.

Capacity and Human Resource Management Issues

6.11 In the area of personnel management, the key issues include developing andstrengthening incentives for frontline workers and finding appropriate ways to managethe payroll. Access and usage of a number of services is restricted by delays in payingfrontline workers and weak monitoring of performance. Multiple factors, includingbottlenecks at the center and in the districts, have prevented appointment staff fromaccessing the payroll. A big concern for the frontline staff is to be paid even after they

are in post. Moreover, real wage levels remain a critical issue for attracting andmaintaining competent managerial and technical staff. The government has alreadyexpressed concern about the potential deleterious impacts of capacity problems on sectorperformance, including access, usage, and quality.

6.12 There are concerns that weaknesses in the recruitment and personnel managementat the district level-specifically the functioning of district service commissions (DSCs)and staffing of personnel officers-have prevented deployment of qualified frontlineworkers in a number of sectors, especially education and health. The effectiveness oflocal governments in hiring, deploying, and managing personnel has been identified as

critical to short- to medium-term performance of service delivery systems. Districts andDSCs continue to suffer from a range of constraints, including a lack of resources to

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undertake basic functions such as advertising vacancies and interviewing candidates.There are also fears that the independence of DSCs may be compromised by politicalinterference and even direct participation by the district council members. As a result,the appointment of district staff lacks transparency, faces unjustified delays and, in somecases, has been undertaken without proper certification.

6.13 The aggregate established ceilings on recruitment of personnel have not beenfound to be a binding constraint in a number of sectors. Instead, the lack of qualifiedapplicants for vacant posts has been an outstanding problem. Thus, the main reasons forfailing to attract qualified staff include an inadequate number of qualified applicants andlow pay. Nevertheless, the district officials are concerned with the way in which theceilings are set as well as the frequency of adjustment. For example, the adjustments inthe education sector were too slow to reflect changes in enrollment. The process ofsetting ceilings is highly centralized, with central ministries exerting significant influenceover defining staffing norms, setting overall ceilings, and enforcing staffing requirementswithin districts. In some cases the district officials do not understand the concept of anestablished ceiling, often confusing it with staffing norms for individual facilities. Thus,the centralized process by which ceilings are set ought to be made more transparent. Inaddition, regular consultation should be conducted in order to make the ceilings morerealistic.

6.14 In some cases, the districts have been forced to hire supernumerary or unqualifiedstaff outside the ceiling, especially in the education and health sectors. These staff arepaid out of user fees, where applicable, as well as block grants. It may be necessary toconduct regular censuses to establish the size and qualifications of supernumerary staff atthe facility level, say through school mapping and headcount exercises in the case of theeducation sector. The "not very clear" terms under which such people work can result inhigh turnover rates. Consequently, the hiring processes, in case of high frequency, canprove to be costly if retention issues, even of other staff, are not addressed.

6.15 There is widespread recognition of the problem of the local level capacity toundertake routine human resource management functions, most notably the recruitmentof front-line personnel. This problem followed the devolution of authority to the districtsfor recruiting and managing such personnel. The ability of the DSCs to carry out theirbasic functions is being hindered by the failure to compensate commissioners given theresource constraints at the district level. As a result, several districts have developedbacklogs in screening and hiring of candidates, particularly teachers. Similar constraintscan be found impacting personnel officers, who are said to lack adequate administrativesupport, basic stationery, and record management facilities.

6.16 In response to the capacity problems associated with decentralized servicedelivery, studies have been carried out in connection with decentralized personnelmanagement. Issues considered critical for establishing an efficient decentralizedpersonnel management system include establishment control, pool of qualifiedapplicants, payroll management, and rights and obligations of frontline staff. It is hopedthat efforts to decentralize pay and personnel information systems to districts will reducethe processing cycle for accessing the payroll. The implementation of this policy will,however, take some time and will also require special incentives and facilitation of

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districts to appoint qualified personnel officers at the district level, improvements inoperations of the DSCs, and strengthening system-wide payroll monitoring. It may benecessary to fund DSCs as a line item in the central government budget to coveroperating costs and ensure independence from political interference. There is also a needto review the staffing and structure of district personnel officers to strengthen the humanresource management infrastructure within the district.

Issues of Multiple Funds Transfer Procedures and Actors

6.17 Management and financial accountability has problems arising from the profusionof different transfer systems and bank accounts. Line ministries are also faced withmajor problems in dealing with quarterly reporting from a growing number of conditionalgrants as well as the recent increase in the number of districts. Additionally, there isconcern about the different design and type of conditionalities under the Ministry ofLocal Government, LGDP, and the PAF conditional grant regulations, and about thebureaucratic load of multiple procedures, bank accounts, and lines of reporting.

6.18 Resources to the PAF areas are channeled to local governments in the form ofconditional grants. Conditional grants constitute resources for implementing PEAPprograms that are deemed to have a direct impact on reducing poverty. Other forms oftransferring funds to local governments include unconditional grants, equalization grants,and the LGDP. The unconditional grant refers to resources given to local governments torun decentralized services. The local governments are given autonomy to determineallocation of these resources according to locally perceived priorities. The LGDP isdesigned to effect devolution of the development budget resources to local governments.An equalization grant is given to the most needy districts/local governments, defined asthose whose expenditure needs are above average while their fiscal capacities are belowaverage.

6.19 A number of complaints have been raised about this structure of transfers,including the limitations it imposes on local governments in pursuing their locallyidentified priorities and the formula used in computing transfers such as equalizationgrants. For example, recent developments indicate that, given the poverty trends, thenorthern region requires revenue grant transfers of 29 percent as opposed to the current22 percent (see table 1.3). Thus, the formula, which partly takes into account populationsize, geographical area, and poverty levels (based on consumption), needs to be revisited.

6.20 The government has already taken note of these impediments, which tend to slowprogress toward poverty eradication. Plans are under way to examine how to streamlineand harmonize the present systems and processes of transferring resources to the localgovernments. However, it is worth noting that the problems with fiscal decentralizationalso include low capacity levels, facilitation, and ensuring fruitful community and civilsociety participation in planning and decision making. Such participation is critical if theplanning and budgeting for services under local governments is to be responsive to theneeds of the local communities and accountable to them as well.

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Local Revenues

6.21 The current state of revenue collection by the local governments does not offerenough incentives for greater action on the side of local governments. Local revenues areessential to the long-term sustainability of service delivery by the local governments.The recent big increases in transfers from the central government are believed to haveundermined local government revenue-raising efforts. However, part of the recentdecline in local revenue collections may be attributed to political interference associatedwith election campaigns. Recent studies and discussions indicate the need to strengthenpolitical commitment at the national and local government levels as critical for increasedlocal revenue collections.

6.22 Other problems associated with local revenue collections include thefragmentation of sources of revenue between the various levels of local government, aninadequate legal framework for local taxation, and a narrow tax base. Also, localgovernments have a poor tax administration capacity both in terms of personnel forassessment and enforcement, and the corresponding facilitation. The lack of systematicsensitization is reported to have resulted in poor public awareness of the role of taxes.This situation has been reinforced by the absence of clear linkages between taxation andservice delivery.

6.23 Unless some of these issues, which are largely external to the individual localgovernments, are fully addressed it may be unfair to impose penalties for low localrevenue collections in specific districts. Therefore, the targets for each district may haveto be set in a more thoughtful manner.

Monitoring and Reporting Problems

6.24 Budget reporting to the council and central government is fragmented andineffective. It also does not give comprehensive and accurate information on localgovernment revenue and expenditure performance during the financial year. As alreadynoted, line ministries are also faced with major problems in dealing with quarterlyreporting from a growing number of conditional grants, and to different stakeholders.Desk officers in ministries and at the districts are also overburdened with continuousvisits from multiple groups of evaluators and supervisors, resulting from uncoordinatedsystems between the various levels of government. As observed earlier, the educationsector has stopped imposing sanctions on districts that do not adhere to the UPEcapitation guidelines and is now focusing instead on applying sanctions on officials whoare responsible for such outcomes. This change has the benefit of not penalizing childrenfor the excesses of public officials and institutions.

C. CHALLENGES FOR THE FUTURE

Institutional Capacity Building

6.25 As noted above, a lot of effort has been made in the area of building institutionalcapacity both at the central and local government levels. Throughout the 1990s, theUganda government was seeking to advance and sustain the country's transformation

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through at least three long-term strategic initiatives: decentralization, civil service reform,and a national capacity building plan. As part of the fiscal adjustment program, whichcontinued through the early 1990s, the government succeeded in undertaking severalmeasures to halt the decline in standards and efficiency of public administration andcreating a well-motivated civil service for efficient and effective delivery of services.

6.26 Thus, the last decade offered a window of opportunity within which significantchanges were made in the formal structure of the state institutions. A capacity-buildingsecretariat in the MFPED was tasked with the policy and coordination role to guidecapacity-building efforts in the country. Several capacity-building priorities, whichemerged during the preparation of the plan, included legal and judicial systems, theaccountancy profession, local training institutions, staff planning, economic policyanalysis, and technical and vocational training. A number of these capacity-buildingpriorities have been taken up in EFMP and LGDP programs.

6.27 In spite of these efforts, there is still an outstanding need to advance the reformsin the civil service beyond the immediate fiscal concerns associated with wage billsustainability to longer-term issues of incentives and operational effectiveness. Thischallenge is more outstanding at the local government level where issues ofremuneration, improvements in payroll administration, restructuring in line withfunctional decentralization, and strengthening of personnel and ethics management arestill critical. Such a development is made even more critical by the realization thatdecentralization is a key driving force for state transformation. Thus, the efficacy of thereforms in the civil service will largely depend on the extent to which they responsivelysupport the development of local governments, especially in the area of institutionalcapacity and streamlining of procedures governing the intergovernmental relationships.

6.28 Unless capacity of institutions at the district level is strengthened, it may bedifficult to establish a planning and budgeting structure at the lower levels of governmentthat conforms with that at the center. Yet the local government budget process is a vitalcomponent of fiscal decentralization. To strengthen the planning and budgeting of localgovernments, one might expect establishment of a mechanism that involves the LocalGovernment Finance Commission , the Ministry of Local Government, Uganda LocalAuthorities Association, and line ministries. One of the tasks to be accomplished by sucha mechanism could be the collective review of the district frameworks for the preparationand harmonization of LGBFPs and DDPs. This would not be a substitute for district-level processes, but might enhance incentives for districts to improve the quality ofbudget plans and implementation record, both by raising their profile and enhancing acompetitive element. The mechanism might also offer an opportunity for exploringissues of coherence among national strategy, local budgets, and donor financing. Such amechanism might take on increasing value as a coordination instrument if the currentconditional financing, especially under PAF, is phased out.

Increasing Local Government Autonomy

6.29 Increasing the level of autonomy for the districts and other levels of governmentover planning, budgeting, and spending has potential for ensuring that delivery ofservices is tailored toward the specific needs of each district. However, this poses the

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challenge of proper assessment and management of the trade-offs between top-down andbottom-up planning systems. The current levels of institutional capacity at the districtsand the fragile accounting systems can lead to deviation of development efforts from thenational goal of poverty eradication. Without any conditionality, it is possible for a givenlocal government to pursue its own agenda, which may not be largely consistent with thedesired national goals. However, this is more a theoretical possibility and unwarrantedfear of the central government. In fact, cross-country experience on decentralization doesnot provide many examples of such excesses by local government.

Local Government Budget Execution

6.30 Another important challenge for the future with regard to the fiscaldecentralization strategy is to establish government processes with potential areas of riskor challenges with regard to budget execution at local government levels, which needfurther attention in order for the strategy to be successfully implemented. For example,the removal of protection currently being enjoyed by the PAF areas is bound to subjectsuch sectors to an uncertain future in terms of resource inflows. Moreover, theuncertainty imposed by budget cuts and wide deviations between annual budget releasesand indicative figures in the MTEF can be constraining future planning and budgeting.In such cases expenditures have to be cut more or less in an ad hoc manner because of thelack of a clear mechanism.

Local Government Revenue Collection

6.31 The observation that local governments do not have adequate incentives forgreater action on revenue collection needs to be clearly factored into future policyframeworks. Local revenues are essential to the long-term sustainability of servicedelivery by the local governments. It may be necessary to link local governmentspending to the realized local revenues in order to offer incentives for more local revenuecollection. Once again institutional capacity problems have to feature highly in thisregard. Most local governments still have a weak tax administration capacity for taxassessment and enforcement.

Reporting and Accountability

6.32 Budget monitoring, evaluation, and reporting are made even more important in afiscally decentralized environment. The government has decentralized administrative andfinancial management in order to reduce poverty through enhanced service delivery.Local governments play a central role in providing basic infrastructure and socialservices, thereby promoting local economic development and poverty eradication. Thegovernment is continuing to develop legal, administrative, and fiscal frameworks forempowering local governments to enable them to engage community and private-sectorparticipation in service delivery. Such a system is expected to yield an efficient andparticipatory resource allocation and utilization mechanism. In this context, asynchronized and mutually supportive budget cycle, with effective dialogue betweencentral and local governments, will require quality fiscal data and relevant indicators ofefficiency in resource utilization, outputs, and the likely outcomes and impacts.

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D. CONCLUSION

6.33 The above discussion clearly highlights the fact that Uganda's budget system canutilize public resources more efficiently and effectively only when it is embedded in arobust intergovernmental fiscal and administrative system. Such a system should beconsistent with the constitutional and legal reforms of the past decade, on which thedecentralization structure is derived. Although Uganda has a well-definedintergovernmental system, the challenges have been in implementing reforms thatsupport such a system. The government has been slow in implementing localgovernnent reforms, as reflected through its continued heavy reliance on sectoralconditional grants; its failure to develop strong administrative systems at the localgovernment level, which can handle payroll management and other tasks; and its failureto define well-developed systems of standards setting and M&E. In addition, thechallenges for the medium term will revolve around how to enable intergovernmentalrelations to influence the budget process and vice versa. It is important to explore howpublic-sector reforms-fiscal, budgetary, and administrative-will sequentially assist indeveloping an accountable local tier of government. Given the limited progress to date,these important issues should certainly occupy the budget reform agenda in the mediumterm.

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7. SUMMARY AND CONCLUSIONS

7.1 The annual PER report provides an important opportunity to review the budgetprocess as a whole and to identify both achievements and challenges. In the case ofUganda this process has the added advantage of addressing fiduciary concerns of budgetsupport for donors. These fiduciary concerns have increased the interest andparticipation of all stakeholders in the PER process - specifically budget workshops, theannual PER workshop, the PER report, and related studies. The challenge now is to usethis report as a basis for identifying improvements in the budget process, developing asequenced strategy for implementation, and supporting the strategies through appropriateinstruments (for example, PRSC, EFMP II, LGDP) and assistance from otherdevelopment partners.

A. MACROECONOMIC ASPECTS OF FISCAL CHALLENGES

7.2 Chapter 1 discussed the macro challenges Uganda faces and how these are linkedto fiscal considerations. We noted that for the past three years Uganda has not been ableto meet its growth targets of 7 percent per annum, which obviously raises concerns aboutUganda's ability to reduce absolute poverty by 2017. We highlighted the need to ensurethat all activities supported by the budget result in the desired outputs and outcomes suchthat the attained macroeconomic stability can be augmented with economic growth that isessential for poverty eradication. Otherwise, the focus on inputs, with little or noemphasis on impacts, has led to growth in public expenditures in quantitative terms,leaving several questions about the quality of outcomes.

7.3 Chapter 1 observed that the objective of macro stability has largely beenachieved, with inflation at less than 5 percent for the past three years and low exchange-rate volatility. All sectors display satisfactory growth rates that are higher than theprevious year. Because of the unprecedented terms of trade shock, however, totalreceipts from exports declined from 12.3 percent of GDP in 1999 to 10.7 percent in2001/02.

7.4 Foreign-exchange revenues have remained fragile in light of continueddeterioration in realizations from traditional exports. Foreign-exchange reserves droppedto an equivalent of four months of imports of goods and non-factor services, instead ofthe targeted five months. This situation must be addressed urgently.

7.5 These macro developments, combined with lower revenue collections, haveresulted in fiscal constraints. Revenue collection as a percentage of GDP has, over thepast few years, stagnated at a low level of less than 12 percent. Non-tax revenue, inparticular, has remained below 1 percent of GDP. Combined with the increases in totalgovernment expenditure over the past five years, this revenue decline has resulted in ahuge fiscal deficit, which has to be funded through external resources. Currently, around58 percent of the budget, equivalent to 12 percent of GDP, is externally funded.

7.6 Although the additional donor support has enabled the government of Uganda toaddress priority PEAP targets without delay, it cannot be a viable strategy in the longterm. Obviously, this reliance of the PEAP on external resources has raised concernsabout the adverse effects of excess external resource inflows on macroeconomic stability.Although currently there are no signs of adverse effects, the level of fiscal deficit is notsustainable in the long run. Uganda has to take appropriate measures to increase itsrevenue collections and reduce its expenditure targets to be in line with its macro targets.As noted, the government has taken heed of these issues and has begun putting in placemeasures to address the macro concerns related to these challenges, especially throughappropriate policy options aimed at increasing revenue collections and reducing the fiscaldeficit.

B. BUDGET PROCESS

7.7 Chapter. 2 noted the substantial progress Uganda has made in the past five years interms of deepening the budget preparation process and extending it to many stakeholders.This has improved the budget choices and assisted in budget execution. In phase I ofbudget preparation, SWGs are increasingly playing a positive role in identifying prioritiesand preparing BFPs, which are more output oriented. In phase 2 of review of the budgetchoices, this year there was an increasing level of interest and participation bydevelopment partners, civil society, and parliamentarians. Parliamentarians havedeveloped a keen interest in this review stage with the advent of the new Budget Act2001.

7.8 The challenges include ensuring that all stakeholders have adequate capacity tocontribute substantively to the budget process through these channels. Budgetpreparation needs to incorporate both contributions of resources and information or ideasof all stakeholders including donors, the private sector, civil society, and communities.Resources of donor-funded projects, which may be passed on directly to line ministries ordistricts, need to be incorporated in the budget process.

7.9 This chapter also noted that the transparency of the budget process has improvedthe quality of budget planning and choices and also has produced greater predictability ofthe budget. This achievement was partly made possible by most development partnersswitching to budget support, which has resulted in resource flows that are easier topredict compared with project aid. The increase in budget support to 7 percent of GDPmeans that the government is able to plan its medium-term expenditure with morereliable figures.

7.10 Although the current reforms in the URA are expected to boost domesticrevenues, it will be difficult to increase revenues in the medium term, so the governmenthas got to control expenditure pressures if it is to achieve its fiscal objectives. In linewith this observation, we noted the government's commitment to reducing the fiscaldeficit by ensuring that expenditures do not grow as fast as GDP over the medium term.The strategy involves ensuring that any expenditure increases are consistent with thepriorities agreed upon by the government and development partners. These areas includewage increases and areas where public spending will harness private participation inproduction, processing, and marketing of strategic exports. In this way the government

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intends to reduce its dependence on donor funds even if domestic revenue increases donot materialize.

7.11 Additional budget increases are expected in the health, education, and agriculturalsectors. In the case of agriculture, the challenge is to move swiftly in implementing theprograms to ensure that the priority areas rightly identified will benefit and contribute tothe much needed poverty reduction in rural and agrarian Uganda. The share of defense isexpected to increase by 0.8 percentage points next year because of the government'scommitment to keep defense spending at 2 percent of GDP in addition to the Ush. 10billion that was approved as one off expenditure for this and next year.

7.12 The allocation to the justice, law, and order sector is expected to increase by Ush.14 billion while the ceiling on the public administration sector is not expected to growbetween this and next year. In fact, over the medium term, this ceiling is expected todecline. The health sector has the largest percentage increase, and education has thelargest absolute increase, indicating the priority the budget gives to implementing thePEAP.

7.13 Among the future challenges, we observe a weak integration of project aid and thewage bill in the MTEF, and a lack of a substantial improvement in participation by thecivil society, mainly resulting from capacity constraints. The strengthening of M&E inthe context of budget performance, especially in the areas of monitoring of both outputsand outcomes, can become an important learning tool through which to improve futurebudget cycle processes.

C. BUDGET EFFICIENCY

7.14 Chapter 3 discussed budget efficiency issues. This year we treated budgetefficiency as a separate issue given its increasing importance in a fiscally constrainedenvironment. Over the medium term, the lack of extra resources to finance all identifiedactivities will force sectors to prioritize their interventions. Moreover, they also need toensure that resources are being allocated efficiently for various intrasectoral priorities andthat they are effectively used to confirmn operational efficiency. In addition, in line withPEAP objectives, it is important that publicly funded programs are equitably distributed,giving greater attention to the poor.

7.15 We noted that all the sectors analyzed-health, education, and water andsanitation-have made great progress in allocative efficiency but are experiencing majorchallenges in achieving operational efficiency. Sectors that have had SWAPs for a longtime, namely health and education, have made the most progress in these areas. In termsof equity, however, many challenges need to be considered in the medium term to enablelimited budget resources to address priority needs of the poor. Of the three sectorsdiscussed, we observed that the water sector has major challenges ahead in addressingefficiency and equity concerns. The ongoing value-for-money and tracking studies, inthe context of the forthcoming Water Sector Review, will provide an excellent platformto address these challenges over the medium term.

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7.16 The budget underperformance within the health sector was largely a result ofdelays in recruitment and payroll cleaning in addition to problems with procurement anddelayed tendering and implementation of civil works in the districts. In spite of theseproblems, utilization of health services by the poor increased by 2 percent between 1992and 2000 although both coverage and quality of health care services for the poor stillneed to improve if health outcomes are to improve. Progress needs to be madeimmediately to boost immunization coverage to arrest increases in infant mortality rates.

7.17 To meet the challenges in the health sector there is an urgent need for a strongpartnership between the MOH and PNFP to reduce duplication and wastage of alreadyscarce resources. This situation also calls for caution on the planned reforms for thePAF, because the health sector cannot afford shortfalls in its allocation. The flow ofresources to the health sector needs to be timely to enable the use of limited resources todeliver much-needed services expeditiously.

7.18 In the case of education, while the primary education sub sector is quite robust,the post-primary training and higher education sectors have displayed major imbalancesin terms of allocative and operational efficiency and equity. The increased pressure onlimited resources-teachers, classrooms, desks and books-from higher levels of primaryenrollment associated with UPE, need to be addressed if the anticipated improvededucation outcomes are to be realized.

7.19 We also highlighted some failures to take into consideration the budgetaryimplications of certain policy decisions in the education sector. The cases of abolishingcost sharing and increasing the number of government scholarships at the university aregood examples. It is essential to consider the fiscal sustainability of political objectivesof policy decisions.

7.20 We recognize a major concern in the water sector, namely that, despite recentreforms in the sector, which resulted in increased outlays, there has not been acommensurate increase in water points. This situation is partly explained by increases incommunity participation in water and sanitation services, which do not necessarily implyan increase in water points. Furthermore, additional resources were spent on humanresource development and training.

7.21 Despite this trend in addressing human resource capacity problems, there is stillneed to recruit water officers at the district level to provide better management andmonitoring services. Low value for money in the water sector is also attributed tointerference in tendering procedures by district tender boards and misuse of officeequipment by senior district officials. The national distribution of water resources is anarea that needs urgent attention in terms of efficiency and equity. In particular, weobserve that the water sector spends 50 percent of its budget at the center in spite of thefact that more than 90 percent of its beneficiaries live in rural areas.

D. BUDGET EXECUTION AND PROGRAM IMPLEMENTATION

7.22 Chapter 4 discussed problems related to budget execution. The budget executionprocess in Uganda experiences substantial problems and difficulties compared with the

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budget preparation process. Although the government has taken measures to address theproblems of arrears through the implementation of CCSs, there is still only a limitedcoverage of CCS at the central government. This system needs to be extended to the restof the central government and to the local government level, where the challenges areeven greater. A considerable amount of work needs to be undertaken to make progress inthis area.

7.23 Besides general budget execution problems we discussed two special topics inthis year's PER report. First, we discussed the issue of budget overruns in sectors such aspublic administration over the past five years and how it is undermining budgetcredibility. We noted that the government has undertaken a study to identify problemareas and hopes to prepare a cabinet brief to discuss how to streamline publicadministration activities. Second, we discussed how the PAF protection over the pastfive years, intended to protect core PEAP expenditures, has sometimes been done at theexpense of other important, interrelated areas, which therefore need some support in thefuture. Here again the government has initiated a study to identify the challenges andprovide possible suggestions for reform. A cautious and phased removal of the currentprotection offered by the PAF is likely to be an optimal strategy.

7.24 As was noted in the PER meeting, the PAF reform discussions cannot go far untiloverrun problems are addressed adequately. Overruns undermine the objective ofremoving the PAF protection, and any reforms in such an environment will bedetrimental to attaining PEAP targets. In particular, the trend of supplementaries bydefense and public administration result in budget cuts for other sectors and can be verydevastating to poverty eradication efforts. The chapter discussed the implications ofthese developments on the long-term credibility of the budget process and execution. Inthis regard, it is imperative to reduce or, better still, eliminate political interference inplanning and budgeting execution issues.

E. BUDGET MONITORING, EVALUATION, AND REPORTING

7.25 In Uganda, budget reporting, including M&E, needs extensive attention. We notethat, in the past few years, the internal budget reports have been submitted on time.There is concern, however, that this timeliness has been achieved somewhat at theexpense of quality of data received and the capacity to analyze and monitor such data.Thus, even though the threat of sanctions has enhanced timely reporting, it hasundermined quality improvements in budget reporting, which need some immediatesupplementary assistance.

7.26 Much as the PAF reporting has made progress in priority sectors, the capacity atthe local government level is still very limited and needs urgent attention. This may beseen in the case of audited final accounts, which are submitted within the statutory limitsfor central governments, but the same is not true of local government accounts. Thisdevelopment has already been identified as a major need under the fiscal decentralizationprogram and should be addressed as soon as possible.

7.27 Uganda has made great strides in using tracking studies to identify problems inflow of funds and has taken appropriate measures to address the challenges. However,

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these studies have played an important role only in the health and education sectors todate, and these sectors have registered fewer problems as a result. Other sectors too needto do tracking studies in order to improve flow of funds and enable efficient use oflimited resources. This trend is increasingly being recommended for adoption by othersectors and is being supported by development partners largely through technical andfinancial assistance. However, as noted in the budget efficiency chapter, there is a needto undertake benefit-incidence analysis to understand how the poor and needy arebenefiting from these programs, which are primarily intended to serve them.

F. INTERGOVERNMENTAL RELATIONS AND FISCAL DECENTRALIZATION

7.28 Chapter 6 discussed the growing challenges for budget preparation, execution,and monitoring at the local government level. In this regard Uganda has made progressat the central ministry level but still has great needs at the local government level. Weobserve that decentralization requires building credible institutions with adequatecapacities at all levels and maintaining harmonious relationships between the differentactors and stakeholders. One of the critical challenges facing the Uganda government isthe need to develop a tier of government and institutions that are responsive, adaptive,effective, and accountable in developing and implementing strategies for povertyeradication. Only then will the local and national priorities, and resultant policies,converge toward the set goals such as efficient service delivery, sustainable growth, andpoverty eradication.

7.29 With increased attention on decentralized service delivery, it is paramount that thegovernment takes measures to address capacity constraints at the local level. Otherwise,there is a danger that some of the gains made at the center will not be able to realize theirfull potential. In this regard, the LGDP and other donor programs are seeking to addressthe need for capacity building at the local government level. Rapid progress is needed,however, in order to realize the potential benefits of decentralized delivery of publicprograms.

7.30 The large number of actors and procedures for information and resource flowshave complicated planning, budgeting, monitoring, and reporting mechanisms,consequently increasing the burden on both central government line ministries and localgovernment or district staff. This situation has worsened the capacity problems ofimplementing the poverty-eradication programs.

7.31 The persistent low revenue collections by local governments need to beadequately addressed; otherwise it will likely result in an unsustainable position forservice delivery in the long term. The problems identified in this area include inadequatecapacities and facilitation both for assessment and collection, lack of a legal frameworkfor local revenue collections, and a generally low tax base. The report also highlightedthe effects of political commitment and interference and limited community awareness.

7.32 Caution is urged regarding the challenges posed by increased risks anduncertainties for the future, particularly in the sectors that are currently being protectedby the PAF. Specifically, the uncertainty imposed by budget cuts and the wide deviationsbetween annual budget releases and indicative figures in the MTEF are seen as

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constraining future planning and budgeting. Abrupt budget cuts by the centralgovernment are likely to result in ad hoc reductions at all levels of government due to theabsence of a clear mechanism for managing budget cuts.

G. CONCLUSION

7.33 This PER report has identified the major challenges in public expendituremanagement in Uganda in the advent of budget support. It is important for thegovernment and its development partners to develop a systematic program and asequenced approach to address identified concerns to allow Uganda to achieve macrostability, fiscal sustainability, and poverty reduction.

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ANNEXES

ANNEX 1: DEVELOPMENTS IN THE BUDGET PROCESS IN UGANDA 1997-2001

A1.1 Current developments in the budget process can best be understood byreviewing events over the past four years. In 1997/98, Uganda adopted a new approachtoward PER. This decision, which was made by the government and its developmentpartners, was to be an annual exercise bearing a close relationship to the governmentbudget cycle and hence giving support to reforms in the budget process. The PER was

divided into two phases. The first phase focused on the government's preparation of the

budget framework and strategy. The second phase focused on external evaluation of thestrategy, budgetary systems, and performance, in collaboration with domesticstakeholders. The main objectives of the PER process were:

* Opening of the budget process within the executive,

* Opening of the budget process to stakeholders beyond the executive,

* Integrating donor financing within the budget, and

* Technical support to the two phases of the process.

Opening the Process Within the Executive

A1.2 In the period before 1997/98 a three-year budget framework was used as theprimary instrument for defining budget strategy, including establishment of annualbudget allocations to ministries. Consultation within this process was limited to centralgovernment technocrats within ministries. The detailed process of resource allocationtherefore allowed little involvement of either the executive or representatives of variousstakeholder groups. Thus, the objective of the 1997/98 budget-cycle was to develop a

more open process of budget formulation and review, to build on the budget frameworkinstitutions that were already in place. There were two major dimensions to this

objective. First, there was a component of enhancing the process of internal consultation,

especially in the stages prior to submission of the BFP to the Cabinet. This effortincluded giving a greater role to line ministries in preparation of the paper, which hadhitherto been prepared largely by the MFPED after bilateral discussions with lineministries. Under the new system, initial sector contributions to the BFP were to beprepared by SWGs, comprising staff from line ministries with cross-cuttingresponsibilities, representation from MFPED, and from other stakeholders such asmembers of Parliament and local governments. The introduction of cross-sectorworkshops at key stages in the cycle introduced a multilateral approach to budgetconsultation, which had previously been exclusively bilateral.

A1.3 Openness in the budget process was in part a response to well-recognizedweaknesses in the existing budget performance. A more open and contestable process ofbudget preparation within the executive was seen as a step toward establishing a broaderand more stable consensus on budget strategy. This was expected to result in morebinding decisions and greater predictability in sector financing. In addition, the broaderbase for budget formulation and publication, and review of the framework in the secondphase of the process, could be expected to raise the political costs of budget deviation,and hence improve the context for establishing greater accountability of the executive.

Opening Up Beyond the Executive

A1.4 The objective of opening up the budget process to external review was aimed atinvolving both donors and local stakeholders. The involvement of donors was partlyaimed at integrating the donor finances in the budget strategy under the arrangement ofbudget support. As noted, the reforms of 1997/98 required an external review of thebudget framework/MTEF, after Cabinet resolution, and prior to presentation of thedetailed annual budget. In making a public commitment on medium-term expenditureplans, the government invited a similar degree of forward commitment by donors. In asituation where half, or more, of the public expenditure is financed externally, it wasnecessary to open up the budget process to allow the donors to participate fully in makingbinding decisions on budgetary allocations. Consultations with donors, within the annualbudget cycle, provided a base for donors to switch toward budget support, while alsoproviding a reference point for assessing the coherence of project financing with overallbudget strategy.

Technical Support to the Budget Process

Al.5 The PER had an explicit objective of providing technical support during the firstphase of formulating the budget framework and strategy, including specialist support forthe SWGs. The involvement of donors in the second phase also had an implicit objectiveof providing a catalyst for development of domestic capacity for budget analysis andfeedback outside the executive.

Review of Progress for 1997-2001

A1.6 This section looks at the progress made in implementing the aforementionedPER reforms over the past four years. While significant progress has been achieved inopening up the process to the executive and beyond, the strategy for pursuing theobjective of providing technical support had to be reformulated.

A1.7 With regard to opening up the budget process within the executive, the processof internal consultation on the framework has been fully institutionalized and is largelyfairly robust. Budget workshops have helped to encourage a more open dialogue onbudget strategy and performance. In addition, the workshops have developed a greaterunderstanding of the budget process by the line ministries. The SWGs have had to takeon an increasing role and formal responsibilities in the development of the sectorexpenditure plans.

A1.8 The opening up of the budget process beyond the executive can be looked atfrom two perspectives. First, there is participation by the donors, which, as noted above,was intended to ease the transition to budget support and provide technical support.Second, there was a component of participation by the local stakeholders including thelegislature, civil society, and research and academic institutions. Civil society, includingthe Private Sector Foundation (PSF), Uganda Manufacturers Association, and a host ofother NGOs, can participate at the stage of preparing the budget framework by gettinginvolved with SWGs and also during the annual PER consultations. In particular, amongthe NGOs, the Uganda Debt Network has had an active role in both SWGs and PER

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consultations. Such participation has offered a potential for educating and orrepresenting other interest groups, thereby reducing the transaction costs of broaderparticipation. Research institutions such as the Economic Policy Research Center havediversified their clientele recently with the Parliamentary Budget Office interest inutilizing such research outfits in commissioning budget analysis, and holding seminarswith selected budget committees.

Al.9 The legislature has made provision for strong participation by passing theBudget Act 2001, which allows Parliament to make. an early input in the budgetframework and annual budget proposals. Following this legal requirement, MFPED hadto revise the budget timetable in order to accommodate the consultation requirements ofthe Budget Act 2001. The Act made provision for establishment of a ParliamentaryBudget Office, which is playing an important role in enhancing understanding of thebudget process, and related constraints and choices. The budget office is supposed tohelp the legislature to develop its own oversight in budgetary issues. Such new mandateshave stimulated increased demand for reporting on budget performance, and bettercoverage of outputs and outcomes as a way of ensuring adequate value for money and theuse of powers of parliamentary committees to hold ministries accountable.

A1.10 The basis has been laid for the legislature to make the budget system functionmore effectively by taking a long-term view of the budget as well. Parliament can alsofocus on the oversight role, including allocations over a long-term horizon expressed inthe MTEF and the LTEF. The scope for influence over outcomes, which are medium- tolong-term phenomena, is arguably greater for any given sector at the intensive rather thanthe extensive margin. The intensive margin involves pressing for better performancereporting and a more effective use of a given resource envelope. The extensive margin,on the other hand, involves soliciting for additional resources within what may already bea tightly constrained budget aggregate.

A1. 1 On the aspects of integrating donor financing, the MTEF has been used by thegovernment as a core reference point for coordination of donor financing. Thecombination of the PER consultations and the CG meeting has helped to rationalize theprocess as well as make a clearer connection between donor financing and the budgetframework. The movement toward greater use of budget support, use of budgetframework as a coordinating instrument, and related budget reforms is expected toexpose any ambiguities in the underlying model for decision making in the budgetaryprocess. The implicit transparency in the process, when fully developed, should be ableto guide the process toward a desired convergence point.

A1.12 The objective of technical support to the budget strategy formnulation andexternal review was largely not retained. Although a large, multisectoral PER missionwas necessary to start the process, especially through offering initial technical assistanceto the SWGs, it was later observed that this would not be an ideal vehicle for offeringsuch support. It was preferred that such support be provided through periodic support byspecialists working in the sectors, over a longer horizon. The institutionalization of therole of SWGs should allow various donors and or other institutional arrangements toprovide the necessary technical support outside the PER umbrella.

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Challenges and Recommendations Arising from the Period 1997-2001

A1.13 It is evident from the past four years that there are several significant challengesto the PER process. These include the challenges of capacity, in terms of staff numbersand skills within the SWGs, and time constraints given the fact that the budget process issequential in nature. A delay at one stage is likely to impact negatively on the progressand degree of input by other participants. The submission of the BFP to the Cabinet hasquite often fallen behind schedule just like the initial workshop with representatives fromthe districts. Timing of the BFP has always been at risk of slippage, and later submissionshould be expected in view of the greatly expanded scope of the exercise. One of the keyimplications of such a late submission is that it makes it difficult to carry out significantchanges at this stage, at least for the immediate annual budget. There is, therefore, atendency for the submission to seek an implied endorsement of the document with scopefor marginal adjustments, rather than a presentation of strategic choices. In this way, theBFP becomes less of a decision making instrument, and more a presentational orprocedural device. Such a development could also contribute to concerns on thelegitimacy of sector ceilings, since the MFPED would have to carry the responsibility ofrevising ceilings without the authority deriving from a full review of the framework byboth the Cabinet and other stakeholders.

Al.14 At the beginning of 2001, some SWGs still had a loose match between thescope of the group and the underlying line ministry responsibilities. This challenge wasmost evident in sectors where the group had to develop sector expenditure plans acrossdisparate fields. However, it is worth noting that in some cases, the SWGs had evolvedmore pragmatically and developed a reasonable effective match between scope of thegroup and line ministry responsibilities. In addition, there were situations wherebySWGs had been redefined in order to get a better match. These developments wereexpected to ensure a proper approach to handling of cross-cutting issues within both theplanning and budgeting processes.

Al. 15 It should, however, be noted that SWGs had not yet made satisfactory progressin increasing the output orientation and reporting on output performance in sectorframework submissions. The annual PER consultations on the framework could bedeveloped to bring a bit of competitive pressure to bear on SWGs and ministries in thisarea.

Al.16 Some participants clearly harbored expectations of joint engagement in budgetdecisions through their participation. However, external participants in sector groupshave been relatively few and apparently fairly modest in any lobbying role. Over thecoming budget cycles, it might be necessary to formalize the terms of externalparticipation, clarifying the consultative role, and including commitments on informationsharing. Nevertheless, over the past four years, a good start has been made inencouraging external participation.

Al. 17 The process of identifying strategic policy choices within the budget may not beas easy in the current budgeting framework as was the case before the reforms. Moreareas of expenditure are now locked in to explicit sector commitments, often tied todonor financing, within the PAF. Thus, the identification of structured choices at thelevel of broad strategy impose more demands on the MFPED in terms of coordination

88

and analytic capacity. It is no longer a case of developing sector programs within fixedceilings and then listing expenditure options included within each sector. As anincreasing proportion of expenditure is driven by medium-term sector strategies, thechoice zone may have to shift to years in the medium term or even beyond the three-yearframe.

A1.18 A number of national policies, with significant budget implications, quite oftencontinue to be made outside the budget process. The budget process has no privilegedrole in determining policy. It would be possible to imagine circumstances in whichpolicy is determined and its fiscal implications analyzed through other processes withsufficient discipline that very few additional decisions are required in the budget process.Otherwise, the budget process remains with the task of reconciling policy with availableresources. Preferably, such reconciliation should be achieved in budget formulation elseit has to be achieved through budget cuts and reallocations during budget execution.

Al.19 With regard to civil society participation, there were expressions of skepticismabout the real impact of inputs on budget decisions or performance. There are still strongviews that MFPED has a dominating influence on the process and that the staff were toothinly spread to engage in real debate on options. The CSOs believed that there was lackof transparency on derivation of sector ceilings, and that key decisions were made, inseparate agreements with donors, before consultation. The PSF, in particular, believesthat the government is less responsive to formal PSF participation in the openconsultation process than traditional direct lobbying outside the process by the UgandaManufacturers Association. PSF believes that important budgetary implications of thecompetitive strategy have not been fully factored into the budget. The government needsto give more feedback on the outcome of consultation.

Al.20 Expectations still differ widely on the appropriate role of the legislature. Givensome evident uncertainty on the practical implications of the Budget Act, it may beparticularly important to establish a de facto interpretation of the new legislation. Thenew requirements of the legislature in the budget process have imposed an additionalburden on existing capacity in line ministries and especially on the MFPED. Priorityshould be given to minimizing overlap with other consultation demands. From thisperspective, it will be important to explore how the PER consultations can be useful tothe legislature. Over the medium term, it will be important to develop such consultationsas a public annual event designed primarily to meet the interests of civil society and thelegislature, and only secondarily the concerns of donors.

Al.21 Some concerns were expressed about the role of donors in the budget process.First, the sector programs are still developed to an advanced stage outside the budgetprocess with inadequate reference to budget constraints. This generates pressure toaccommodate prior agreements with donors in subsequent development of theframework. Second, budget support is often provided apparently as general support butwith an array of measures designed to influence allocations and demonstrate additionalityof the budget. For example, funding in the justice sector was operating through a holdingaccount whereby funds have to be returned to the donors if not utilized. The concept of"notional earmarking" is frequently employed, which seems to express strong informal

89

pressure from donors for particular allocations, without any transparent and predictableimplications that can be assessed by legitimate budget decision makers.

A1.22 Donor financing of projects and sector programs is sometimes decided jointly,between donors and sectors, through joint sector reviews or other processes outside thebudget process, and then entered into the medium-term framework as prior obligations.The Cabinet may formally endorse the framework, but the net effect of this approach maybe that its influence on the decision is no greater and conceivably may be less than ifdonors participated directly in Cabinet decisions. This approach tends to make theoverall transparency of the decision making process inferior. What seems to beincreasingly evident in the development of the budgetary system is the risk that lack oftransparency in the role of donors in budgetary decision making may also undermine thetransparency of other aspects of the system, particularly the external participation, whichis critical for long-term sustainability of budgetary reform.

A1.23 The PAF continues to operate as a shadow earmarking arrangement. Concernwas expressed that the PAF provides blanket protection and assured increases forexpenditure with a nominal association with poverty reduction, regardless ofinadequacies in execution and performance.

A1.24 Issues of technical support to the various participants and at different levels of thebudget process, which were not retained as earlier envisaged in the initial reform strategyin 1997/98, may need to be reconsidered. In view of MFPED concerns on capacity, itmight be helpful to think about technical support to MFPED in enhancing the analysis ofstrategic choices in the framework exercise. Development of capacity should also beconsidered among the various participants within the legislature, civil society, and privatesector. For example the Parliamentary Budget Office has expressed a need for additionalcapacity training for the staff.

A1.25 Finally, long-term domestic responsibility for the consultation process should bedeveloped gradually. Whereas joint leadership by government and donors may beinevitable in the near term, the role of donors should eventually be taken over bydomestic stakeholders. These could formally be led by the legislature or a coalition ofseveral key stakeholders.

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ANNEx 2: MEDIUM-TERM EXPENDITURE FRAMEWORK FIRST HALF PERFORMANCE FY2001/02

(Excluding Arrears and Taxes)2001/02 Approved Budget 2001M lst Half Rdeases ~~~~~~~~~2001/02 lst Half Performance2001102 Approved Budget 2001/021st Half Ealeanes I~~~~~~~Retive toPortaBdt

SECTOR/VOTE Total ecld Total Cad Total cadTotal in Ush. blIloos Noo.wage Domsestic Donor Non-wage Domestic Donor Non-wage Domestic Donor

wage -Recurrent 10e Project Wage Recurrent Dev Project Wage Recurrent 0ev ProjectSECURITY 001 ISO/ESO 9.84 8.06 0.53 18.43 4.84 3.44 0.20 8.47 98.4* 85.2% 74.1% 91.9%021 DecsedDs118.25 82.12 7.50 207.87 59.13 53.12 3.16 115.41 100.0* 129.4% 84.1% 111.0*321 Dees pesos(stattory) 2.94 2.94 0.916 0.96 65.3% 65.3%

SUBTOTAL SECURITY 128.09 93.12 81.03 229.24 63.97 57.52 3.35 124.84 99.9% 123.5% 83.5% 108.%ROADS AND WORKS016 Works, hsousing and conmmunications 2.21 22.03 121.09 145.33 0.88 10.16 45.36 56.40 79.8% 92.2% 74.9* 77.6*050 District roM ad snanutesce 20.91 20.91 3.24 13.24 126.6* 126.6%050 Urban road mosaoenne4.141 4.00 2.08 2.08 104.0* 104.0*

SUBTOTAL ROADS -2.21 46.93 121.09 170.24 0.82.84.6 71.72 79.8% 1081.6* 74.9% 84.%_AGRICULTURE010 Agriculturv, -an 1a Industry and fisheries 1.43 2.83 28.76 33.02 0.75 1.02 10.75 12.52 104.5% 72.1% 74.8* 75.8%043 NationalfResearch Orpgdanton (NARO) - 2.82 5.18 8.00 . 1.14 2.02 3.16 81.3* 77.9* 79.1*050 distirict Agricuttural extension 2.47 3.00 . 5.47 1.04 1.42 - 2.45 84.0* 94.6% 89.8%050 National agrmlcslt aadvisory services 7 257 2.57 - . 0.45 0.45 35.1% 35.1%

SUBTOTAL AGRICULTURtE 3.90 81.65 36.51 49.08 1.78 3.58 13.22 1839 91.S% 829% 72.4% 75.8%EDUCAITON036 Upanda Managment Insdtilte .0.44 . 0.44 . 0.22 . 0.22 99.1* 99.1*013 Educaton and Sports (Indprimneduc) 7.19 41.25 50.47 98.91 3.31 16.63 18.18 38.12 92.2* 80.6* 72.0* 77.1%024 MakereroUniversity - 29.08 0.27 29.35 . 14.84 0.08 14.92 102.1* 58.3% 101.7%042 MbaramaUniversity 2.83 1.79 0.43 5.04 1.30 0.87 0.13 2.30 92.2* 97.0* 58.3* 91.0%044 Institute of Teacbser Eduoabn (ITK) 2.43 0.74 0.16 1.22 0.37 0.13 100.0* 100.1* 159.8% 102.9%040 Education Service Conunlsston 0.324 0.61 0.15 0.125 0.05 77.4* 100.1* 61.7* 88.0*050 Disttct prhmary eoc hnd SFG 46.74 55.90 80.88 19.11 31.38 104.0* 81.8% 112.3% 101.8*850 District eamidary eduction 42.81 7.38 .23.37 3.69 . 109.2% 100.0* 107.8*050 District tertil aryIsitutions 9.81 - -3.81 . 77.7* 77.7%

050 DistrIc health uiraning schools - 1.93 - 0.97 99.8* 99.8%SUBTOTAL EDUCATION 22095 129.95 107.38 458.27 114.02 56.99 49.93 220.94 -103.2* 87.7* 93.0% 96.4%

HEALTH014 Health 3.50 29.92 10.10 43.52 1.32 14.51 4.25 20.01 75.3* 97.0* 84.1% 92.2*019 Bulabika Hospital 1.00 1.52 1.12 3.65 0.35 0.76 0.10 1.21 69.3* 99.8% 18.0* 66.3*02.3 Mulago Hospital Complex 7.76 9.72 2.09 19.57 3.43 3.83 0.47 7.73 88.5% 78.8% 44.6* 79.0*032 HealthiServlcComnsio 0.50.72 0.04 1.11 0.09 0.35 0.01 0.45 49.7* 98.8% 46.7% 81.3%301 Uganda AIDS Conunlstin 0.520 0.63 1.076 2.229 0.260 0.31 0.540 1.115 100.0* 99.5* 100.4* 100.1*050 . Dlstrct NGO Hesptalsfprhoary healthcare .11.59 - 11.59 .5.26 . 5.26 90.7% 90.7%050 District primary Healtticare 35.04 14.87 10.98 60.89 17.20 7.18 5.33 29.71 98.29. 96.5* 97.0* 917.6*050 District hospitals .8.87 - 8.87 - 4.43 - 4.43 100.0* 100.0*050 District referral hospItal (had otise ddeprted) 13.20 5.42 . 18.62 4.8 2.1754 73.2* 100.0* 8 1.0*

SUBTOTAL HEALTH 61.38 83.27 25.41 170.06 27.49 39.34 10.69 77.52 89.6* 94.5% 84.2% 91.2%WATER012 Water 0.44 0.44 27.78 28.68 0.22 0.17 11.54 11.94 101.8% 75.5* 83.1* 83.2%050 District .. tr rco oulid grants . 1.31 24.05 25.35 - 0.63 12.76 13.39 96.4* 106.1* 105.6%

SUBTOTAL WATER 0.44 1.76 51im 54.03 0.22 0.80 24.30 25.32 101.8% 91.0% 93.8% 93.7 %JUSTICE, LAW, AND ORtDER038 Uganda police (imd LDUa) 38.22 22.69 2.95 63.86 17.91 9.03 1.00 27.93 93.7% 79.6* 67.6* 87.5%039 Uganda prison 6.62 9.69 1.30 17.60 3.33 3.46 0.25 7.03 100.5% 71.3* 38.5% 79.9%022 Internal affalro 1.04 5.17 1.19 7.40 0.32 3.37 0.14 4.03 100.2* 130.3* 24.3% 109.D*045 DPP7 2.12 0.98 0.26 3.37 0.75 0.49 0.08 1.31 70.3* 99.6* 58.3% 77.9%307 Justice court awards (stattory) . 2.00 - 2.00 . - . . 0.0% 0.0%007 justice, attorney Geneal cxd conqmpeoaon 1.21 4.59 8.79 14.59 0.46 2.25 3.15 5.86 76.9% 97.9* 71.6* 80.3%

2001/02 Approved Budgm 2001/02 Ixt Half Rebases 2001/02 Ist Hair PerformanuSECTORNOTE Total exci Total e.d Relative to Pro-rats Budget ToW edTotal in UstL billions Non-wage Doomstic Donor Non-wage Domatic Donor Non-wklgt Domestic Donor

Wage Recumot D" pml-t w.g. Recurrent DCV Fpjcct t Dev Project007 J-Iice, attorney General -wmptantion - 2.00 - 2,00 0.88 - 0.88 WU% 88.0%311 Judiciary (natutory) 7.19 6.91 2.01 16.09 3.52 3.45 0.69 7.66 98.1% 100,01/6 68.71/6 95.21%048 Judicial Senim ComraisAon 0.44 0.27 O.D4 0.75 0.04 0.13 0.02 0.19 19.6% 96.49/6 77.21% 50.6%

337 Law Rcforw Commission 0.34 0.46 0.08 0.88 0.17 0.21 0.03 0.41 100.0% 90�61% 72.1% 92.61/.SUBTOTAL JUSTICEJAW, AND ORDER 57.17 5C76 16.62 123.55 26.70 23.26 5.35 55.31 93.4% 85.0% 64.4% 86.1%ACCOUNTABILITY

oot Ethia and integrity 0.04 0.39 O.D4 0.47 0.02 0.14 0�01 0.18 114.61/6 73.0% 58.3% 75.29/6008 bfFPED accountabiUty 0.44 1.51 1.95 O�20 0,66 - 0.86 92.21/6 87.5% 88.6%017 A"t 1.31 3.30 0.14 4,75 0.44 1.49 0.07 2,00 67.3% 90.0% 1 DO. 01/. 84.01/6331 tnspcctor Gencral of Government (statutory) 1.08 4.11 0.13 5.33 0-56 L97 0 09 102.8% 9 5.7% 132.1% 94.1%050 2.61

Diftflet ltmnt for monitoring and acco-otability 10.27 - 10.27 4.49 4,49 97.4% 87,4%SUBTOTAL ACCOUNTABELM 2.87 --- 1.22 9.74 0.17 10.13 85.1% 89.3% 108.1% $9.0%

ECONOMIC FUNCTIONS AND SOCLAL SERVICES029 Energy and adnersh inaturti resource!] exd W&S 0.62 2.13 5.79 8.54 0.30 0.82 1.69 2.8i 96.8% 77.2% 59.3% 65.81/6023 Touristn, trade and industry 0.43 2.44 5.30 8.17 0.21 1.16 2.29 3,66 97.3% 95.3% 86.5% 99.7%012 lAnds and wvimnmmt 1,53 4.43 9.56 15 53 0.77 1.44 2.96 5� 18 101.01% 65.1% 61.91% 66.71/.030 Gender, labor and sodal development 0.95 4.07 6.36 11.39 0.48 1.70 2.79 4.98 102.21/. 93.5% 87.8% 87.4%104 Office of the Prime fffinhur (development) 10.68 10.68 - 4.65 4.65 97.1% 87.1%108 Plansme, e4aning & econ dev (developcoent) 31.56 31.56 9.06 9.06 57.4% 57,4%125 LxxJ govemumat dev (exd roads) 0.73 0.73 - 0,14 0.14 3T41A 37.4%050 District equafindon grant 4.40 4.40 0.64 - 0.64 28.9% 28.91%050 Local government devdopment pmgmm (LGDP) 31.92 31.92 IS 37 1837 115.1% 1 1 S. 1%050 Nonsmomi concudonni grant 1.01 5.06 6.07 - - 0. W. 0.01/6 0.0%050 Dutch district devdopment gmnt - - 10.89 10.89 3.34 3.34 61.41/6 61.41/.

SUBTOTAL ECONOPMC FUNCnONS AND 4.54 22.54 112.79 139.86 1.77 5.76 45.30 S2,93 77.3% 51.2% 803% 75.5%SOCIAL SERVICFS

PUBUC ADMUqISTRAInON004 Office of the Prime Nfiuistcr (eld dev) 0.620 2.63 3.25 0.214 1.06 - 1.27 69.01% 80.8% 78.5%006 Foreign affairs 1.00 7.08 0.58 8.66 0.34 3.17 0.01 3.52 67.4% 89,5% 4.8% 91.3%OAO Missiout abroad 10.59 10,59 5�13 5 13 96 9% 96.91%003 NWED (czd URA, continpacy. acc. & dft) 1.16 10.10 - 11.26 0.53 5 57 6.10 92.0% 1103% 103.4%008 URA 4015 4.20 44�95 20.38 20.38 1 DO, 0% 0.01/6 90.71/6002 State House 1.11 20.47 17.40 38.99 0,57 13.93 7.50 22.00 103.81% 136,1% 96.21/. 112,9%005 Public semice 0.99 159 1�70 5.27 0.43 1.01 0.97 2.30 86.01/6 783% 101.81/6 $7.3%027 Public Service Commission 0.55 1.01 O�54 2.10 0.25 0.51 0.18 0.93 90.1% 1003% 66.3% 88.9%025 Local Swernment (exci dev) 0.45 2 09 2.53 0.21 1.07 1.28 91,21/6 102.9% 1 00. S%034 Man mobilixadon 2.11 3.37 0.93 6.41 0.76 1.31 0.26 2.33 72.2% 78,01% 55.3% 72,9%001 Office of the PreAdmi (eid ISOIEW, E&I) 3.58 6 57 3rl8 13.33 1.99 2.32 0.90 5.21 1 1 L3% 70,5% 56.6% 78.21%300 Spccilled offi"n -ularies (statutory) 0.29 - 0.29 0.13 - - 0 13 90.01% 90.0%305 Pubbc seMce pension/comp (statutory) 44.19 44.19 22.10 22,10 100,0% 100.0%315 Padiamentary Commission (statutory) 5.10 15.53 2.63 23.26 2.55 12.69 1.37 16.60 1 000% 163,4% 104.0% 142.9%033 LoW Govi Finmee Comm 0.13 010 0�01 1.14 0.17 0.39 0,00 0.55 101.1% 90% 58.3% 97,6%347 Upuda Human Righb Comm (statutory) 1.13 L35 O�04 2.52 0.46 0.67 0.00 1 14 91.1% I 00, 0% 11.71% 90A%349 Electoral Commildon (Statutory) 3.04 29.00 I 910 32.851 1.52 24.00 0.556 26.076 100.0% 171.4% 61.4% 158.91%050 Unwndidonal gmat (urban authorities) 4.66 - 4.66 - 2.33 - 2.33 1 DO. 05/6 100.01/6050 Uncondificami gnut distdct) 37.88 3119 69.06 18.94 15.53 34.47 100.01% 99,6% 99.81%

SUErTOTAL PUBLIC ADMINLTF'RATION 59.33 232.96 33.02 325.31 29.06 133.15 11.64 173.85 97.9% 114.3% 70.5% 106.9%UMREST PAYNFFA"�S DUE

Domestic lntemt 92,90 92 90 48.21 48.21 103.8% 103,8%Externali.terest 62.20 26.86 26.86 96,4% 86.4%

6120SUBTOTAL 155.10 155.10 75.07 75.07 %.S% 9 G. aTotal line ministries 229.2 414.7 371.5 1,015.4 107.9 204.6 134.4 "6.9 94.1% 98.7% 72.4% 88.0%Total district pmgmm 297.9 191.6 136.3 615.6 150.1 $3.7 71.6 305.4 100.8% 9L2% 105.1% ".2%LIKE MM + DISTRICT PROG 527.0 5%.3 507.3 1,631.0 257.9 288.3 206.0 752.3 97.9% %.7% 81.2% 92.2%Statutory inwmt - 155.1 155.1 - 75.1 - 75.1 96.8% 96.8%Stgtotory exel interest 13.7 106.1 7.8 132.6 9.2 "A 3.3 79.8 9&1% 125.1% $4.1% 118.9%GRAND T'OTAL 54&7 957.5 515.5 1,919.7 267.1 429.7 209.3 906.1 97.9% 100.2% 91,2% 94.5%

ANNEx 3: MEDIUm-TERm EXPENDiTuRE FRAMEWORK 2001/02-2004/052000/01 Appro,,ed Budget Esdmates Outtum 2000/01 2001/02 Approved Budget Estimates 2001/02 Pmvisional Outtum

Totid Total Total Total Total inci. Total excl.excl. inel. excl. excl.

SECTORfVOTE Non- Domestic Donor Donor Donor Non. Domestic Donor Non- Domestic Dortor Donor Dowr Non- Domestic DowrWage Wage Wage Wage

p,oect Praied Pi R-,,-, r1_ Priect W-, Recu 11- pmaea Pmoect p W-, Remnew n- P-i-SECLTRITY

00i ISO/ESO 8.74 634 0.50 15.59 15.58 9.74 03 0.35 17.12 9.84 9.06 0,53 18A3 18.43 9.27 7.56 0.36 17.20021 Defence exrA LDUs 113 .60 67.17 11,� I 91.3819 1.38 113 .5 J.73 5.2 188. 54 118.25 822.192 7.50 207.9974 2027.987 108.4! 85.84 4.1! 198.403'.I Defence Pensions (Staurt-) 2 So 190 180 2 79 ! 2 79 4 2 4 2 31 2 31

SUB-TOTAL SECURnY 122.34 76.31 11.10 209.75 209.75 122.31 80.55 5.59 208.45 128.09 93.12 8.03 229.24 229.24 117.68 95.71 4.56 217.95ROADS AND WORKS

016 WorkiL HmWne and CommurLicafions 1.87 18.49 99.68 176.94 120.04 296�98 1.56 17.05 91.86 110.47 2.21 22.03 121.09 71.00 145.33 216.33 1.65 19.11 95.56 116.32050 Distfict Road 18.00 18.00 Moo - 17 33 17 33 - 20 91 - 20-91 20.91 la.% - 19.96.1. Ub,, R,ad M,m,temm 4 00 4 00 - 3 go . 3 90

SUB-TOTAL ROADS 1.87 36.49 99.69 176.94 138.04 314�98 1.56 3 4._3 8 9116 127.90 2.21 46.93 121.09 71.00 170.24 241.24 1.65 41.88 95.56 139.09AGRICULTURE

010 AgFicultum Animal lndustrv and Fisheries 1.25 2.05 8.00 54.72 11.30 66.02 1.27 1.65 11.60 14.52 1.43 2.83 28.76 56.40 33.02 99.42 136 1.48 22.95 25.79043 National Resenth Omanisshon (NAP-0) - 2.62 3.79 23.58 6.42 30.00 2.09 2.76 4.85 2.82 5. 18 22.78 8.00 30.78 - 1.60 3.68 5.28050 Distiict Amiadhuai Eirtension 3.31 1.10 - - 4.41 4.41 1.18 1.10 - 2.29 2,47 3.00 - 5.47 5.47 1.95 2.90 - 4.85050 National ATicIWMI Advisory Sayi- - 2 00 - - 2.00 2 00 0 is - - 0 is -- - . -2.57 . 2 57 2 57 - - 2-42 2-42

SUB-TOTAL AGRICULTURE 4.56 7.79 11.80 78.30 24.13 102.44 2.44 4.99 14.37 21.79 3.90 9.65 36.51 79-18 49.05 128.24 3.31 5.98 29.05 38.34EDUCATION

036 Ummd, Maniaement Immure - 0.40 - - 0.40 0.40 - 0.40 0.40 - 0.44 - 0.44 0.44 - 0.40 - 0.400'3 Education and Soons fincl Pfim Edue) 5.91 42.75 43.08 35.66 91.74 127.40 5.89 36.06 38.78 80.74 7.19 41.25 50.47 45.96 98.91 144.87 5.28 32.62 38.27 76.18024 Makerere Universkv - 22.06 0.25 6.46 22.31 28.77 22.06 0.19 2124 - 26.65 0.27 5.52 26.92 32.44 - 24.50 0.17 26.90042 N(bararn UnivemW 2.41 1.6.5 0.41 4.47 4.47 2.41 1.65 0.29 4.35 2.83 1.79 0,43 5.04 5.04 2.45 1.59 0.27 4-31G44 hLsfitute ofTeachff Educauon (TIEK) 2.15 0.66 0.17 2.98 2.98 2.15 0.66 0.17 2.98 2.43 0.74 0.16 3.33 3.33 2.29 0.62 0.14 3.06040 Educadon Savice Commission 0.2,5 0.48 0.04 0.77 0.77 0.24 0.48 0.04 0.76 0.324 0.61 0.15 1.09 1.09 0.24 0,74 0-10 1.09046 Makeme Universitv Budnm Sdtool - - 143 - 2.43 2.43 - 2.23 -050 District Primarv Educ ind SFG 144.00 40.57 45.91 230.48 230.48 126.83 38.56 47.11 212.50 155.56 46.74 55.90 258.19 258.19 154.02 41A7 52.64 247.82050 DLstiict Secandwy Educadon 36.22 4.75 - 40.97 40.97 36.31 4.75 - 41'06 42.81 7.38 - 50.19 50.19 44.08 7.38 - 51.46

District Tafim Institutions 7.92 - 7.92 7.92 6.65 6.65 9,81 - 9.81 9.81 7.09 TD900,10, District Healjb Trainin, Schml, - 1 76 - 1,76 1.76 - 1 32 1 32 1 93 - 1 93 1 Ql - 1,9i 1 93

SUB-TOTAL EDUCATION 199.97 115.07 89.86 42.12 40339 445.92 190.48 105.94 96.56 372.99 220.95 129.95 107.38 51.48 459,27 509.76 215.44 113.19 91.60 420-24HEALTli

014 Health 2.98 22.29 9.57 123.85 34.84 158.69 3.06 20.95 9.97 32.98 3.50 29.92 10.10 112.78 43.52 156.31 2.96 24.72 8.30 35.99019 ButabBca HOSDIW 0.59 1.14 O�06 - 1-78 1.78 0.53 1.18 O�04 1.76 1.00 1.52 1.12 15.55 3.65 19.19 0.62 1.34 0.62 2.59023 Mulno Hosvital Coamlex 5.63 5.62 2.16 11.21 13.41 24.62 5.94 5.93 2.35 14.22 7.76 9.72 2.09 4.08 19.57 23.66 6.49 8.29 1.35 16-13032 Health Service Conunission 0.26 0.54 0.04 0.94 0.84 0.19 0.54 0.04 0.76 0.35 0.72 0.04 1.11 1.11 0.16 0.89 0.03 1.08395 URanda Aids Commisgon 0.50 0.42 0.08 0.992 0.99 0.50 0.55 0.09 1.13 0,520 0.63 1.08 2.23 2.23 0.48 0.69 0.72 1.88050 Distnct NGO HosmWs/NnuLrv Health Care - 6.72 - 6.72 6.72 1.82 6.54 - 8.37 - 11.59 - 11.59 11.59 - 11.59 11.58050 Dtstnct Pnmmv Health Care 9.62 8.82 9.96 28.39 28.39 5.16 8.80 10.01 23.97 35.04 14,87 10.98 60.89 60.99 32.92 1416 10.16 57.94050 District Howiub - 6.32 - 6.32 6.32 - 5.80 - 5.80 - 8.87 - 8.87 8.97 - 8.87 8.87000 Mstrict Refi�rml H-*ml, 7 Q6_ 1 79 - 11 71 11 75 A 77 __ 1 69 - 11 91 13 20 5 42 - M62 19 62 8 86 5 41 - 14 77

SUB-TOTAL HEALTH 36.70 55.66 21.87 135.05 114.23 249.29 34.60 53.98 21.50 110.07 61.38 83.27 25.41 132.41 170.06 302.47 52.49 76.66 21.19 150.33WATEP.

012 Water 0.39 0.44 13.37 97.48 14.20 111.68 0.39 0.44 13.37 14.20 0.44 0.46 27.78 53.3 1 28.68 81.99 0.38 0.27 20.02 20.68050 District Water Conditional r--t 1 19 21 00 - 22 19 22 19 - I 1( it on 22 19 1 31 24,05 - 25 35 2535 - --I 2-1 DAR 24.46

SUB-TOTAL WATER 0.39 1.63 34.37 97.48 36.39 133.97 0.39 1.63 34.37 36.39 0.44 1.76 51.83 53.31 54.03 107.34 0.38 1.54 43.20 45.13JUSTICE/LAW AND ORDER

038 Uganda Pohm (inci LDUs) 25.10 20.66 4.04 49.80 49.90 24.91 22.28 3.95 51.14 38.22 22.69 2.95 - 63.86 63.86 32.95 18.94 2.96 54.66039 U-nd, Prisons 4.55 8.07 0.33 12.95 12.95 4.01 9.61 0.57 14.20 6.62 9.69 1.30 17.60 17,60 6,47 6.93 0.85 14.26022 lntemal Affairs 0.72 1.95 1.13 3.81 3.81 0.85 4.20 0.79 5.94 1.04 5.17 1.19 7.40 T40 1.05 6.63 0.23 T91045 DPP 0.85 0.35 0.06 0.06 1.26 1.32 1.11 0.40 0.04 1,56 2.12 0.98 0.26 0.69 3.37 4.06 1.37 0.92 0.17 2.46307 Justice Court Awards (Stann ry) - 2.00 2.00 2.00 1.93 - 1.93 - 2.00 - 2.00 2.00 1.77 - 1.77007 Jusfim Attorwv General exel ComDensation 1.18 1.95 3.66 6�79 6.79 0.89 3.76 2,86 7.51 1.21 4.59 9.79 14.59 14.59 0.94 4.77 6.52 12.13007 Jusficm Attomey General -Comvensation - 2.00 2-00 2.00 2.00 2.00 2.00 1.08 - 1.08311 Judiciarv (StatLitorvi 7.03 5.91 1.91 4.64 14.859 19.50 6.79 5.91 1.82 14.52 7.18 6.91 2.01 4.63 16.09 20.72 6.02 5.53 1.30 12.85048 Judicial Service Commission 0.19 0.23 0.04 - 0.46 0.46 0.12 0.23 0.03 0.38 0.44 0.27 0.04 - 0.75 0.75 0.08 0.26 0.03 0.36337 LAw Refaffn Commission (Suftdorv) 0.12 034 0 08 . 0 54 0 54 0 13 OAQ 0 06 0 59 0 34 QA6 0 08 - 0 88 0 98 0.31 0 37 0,11 0.80

SUB-TOTAL JUSTICE/lAW AND ORDER 39.74 43.46 11.26 4.70 94.46 99.16 38,82 48.72 10.12 97.66 57.17 54.76 16.62 5.32 128.55 133.87 49.11 47.10 12.07 108.29

ACCOUNTABILrrY001 Ethics and fineem 0.04 0.37 0.04 0.23 0.45 0.68 0.04 0.37 0.04 0.45 0.04 0.39 O�04 0.47 0,47 0.04 0.19 0.03 0.25008 MFPED Accmnmbilitv 0.40 1.43 - 1.83 1.83 0.40 1.43 . L83 0.44 1.51 1.95 1.95 0.41 IA7 - 1.58017 Audit 0.87 2.52 0.12 - 3.51 3.51 0.91 2.52 0.12 3.44 131 3.30 0.14 4.75 4.75 0.80 3.08 0.10 3.98331 lnsDWor Cmmnl of Government (IGG) 0.65 3.04 0.11 0.88 3.798 4.67 0.74 3.17 0.11 4,02 1.08 4.11 0.13 0.83 533 6.16 1.01 3.85 0.12 4.99050 Di3trict Grant for Monitoriniz and - 7.51 - 7.51 7.51 6.56 - 6.56 - 10.27 . 10.27 10.27 - 9.12 - 9.12

RI TR.TOTAL ACCONTARFF.rrY I 95 14 RR 0 27 1 10 17 10 19 21 1 98 14 06 0 27 16 31 2 87 19 58 0 3 1 0 93 22 76 23 59 2 26 17 40 0,24 19 91

200D/01I An,roved Budient Esti-tles Outturn 2000/01 2001/02 Aonroyed Budiznt Eotim tesi. 2001/02 Provi.sional Qarturns

Total Total Total

enI imc. exce.

SECTOR/VOTE Non- Domestic Donor Donor Donor Non- Domestic Donor Non. Domestic Donor Donor Donor Non- Domestic Donor

Wae ea Decv Projec ProjecE Project W-a Rewfcure Dnv Pr4oect Wane Recurrent Dev Proiect Project Project Waae Recuffent Dev Projet

ECONOMIC FUNCT'IONS AND SOCIAL SERVICES029 Energyand MInemals 0.54 0.76 0.21 23.23 1.51 24.74 0.49 0.87 0.34 L70 0.62 2.13 5.79 26.79 0.54 35.32 0.56 L.34 2.29 4.10

028 Tourism, Trdecand lndustuy 0.38 2.13 3.52 20.47 6.03 34.50 0.35 2.44 3.23 6.03 0.43 2.44 5.30 11.65 8.17 20.02 0.40 2.66 4.16 7.21

012 Lands and Environnment 1.37 1.91 4.36 19.78 7.64 27.42 1.31 2.78 5.20 9.37 1.53 4.43 9.56 29.34 15.53 44.87 1.41 2.87 7.53 11.81

030 Gender, Labtour tal Social Development 0.84 3.73 3 17 9.55 7.74 17.29 0.79 2.97 3.88 7.64 0.95 4.07 6.36 5.31I 11.38 16.69 0.89 2.98 5.33 9.21

Ofriceofthe PrimncMIvinister (Development) - - 7.56 31.17 7.56 38.74 - 7.01 7.01 - - 10.68 24.63 10.68 35.30 -- 0.71 8.71

Finance, Planning &Eon Dev (Development) - - 20.76 74.23 20.76 94.99 - - 18.71 18.71 -- 31,56 49.39 31.56 00 95 -- 26.49 26.49

local Goverrmient Dcv (mclc Roads) - 070 36.08 0.70 36.78 - - 0.57 0.57 -- 0.73 29.08 0.73 29.81 -- 0.30 0.30

050 District Functional MAlt Literacy Grant - - - -- --- .---

050 District EqualisalionOract 4.00 - - 4.00 4.00 - 2085 - 2.85 - 4.40 - - 4.40 4.40 - 2.94 - 2.94

050 Local Government D,velopment Programme (LGDP) 26.10 - 26.10 26.10 - - 14.39 14.39 - - 31.92 16.25 31.92 48.17 - 26.86 26.86

050 Non-Sectoral Conditional Grant 2.20 4 50 - - 6.70 6.70 - 0.20 - 0.20 1.01 5.06 - - 6.07 6.0X 4.30 - 4.38

050 Dutch District Development Grant - - 6.63 - 6.63 6.63 - - 6.55 6.55 - - 10.89 - 10.89 10.89 -- 8.34 8.34

SUB-TOTAL ECONOMIC FUN4TOSAN S533 1.2 73.02 222.52 95.37 317.89 2.94 12.12 59.96 75.02 4.54 22.54 112.79 192.63 139.86 332.49 3.25 17.17 90.04 10.A66

PUBLIC ADMINISTRATION004 Ofrim of the Prime M[mister (excl Dev 0.51 2.93 - - 3.44 3.44 0.35 3.68 - 4.03 0.62 2.63 - - 3.25 3.25 0.40 2.15 - 2.55

006 Foreign Afritirs 0.82 12.33 0.08 - 13.23 13.23 0.58 15.14 0.06 15.77 1.00 7.08 0.58 5.91 8.66 14.57 0.64 6.71 0.02 7.37

MissiDm Abroad - - . - - - 10.59 - - 10.59 10.59 - 11.67 - 11.67

008 MIFPED (exclIURA, Contiaigency, Accountabiloy &Dev) 1.05 6.51 - - 7.56 7.56 0.98 7.40 8.38 1.16 10.10 - - 11.26 11.26 1.00 15.16 - 16.16

008 URA - 35.00 4.00 - 39 00 39.00 0. 18 35.00 4.00 39.18 - 40.75 4.20 - 44.95 44.95 - 37.36 4.20 41.56

002 State Hoase 0.95 19.35 8 70 - 29.00 29.00 0.91 30.04 7.73 38.68 1.11 20.47 17.40 - 38.98 38.98 1.11 26.82 11.63 39.56

005 Pablic Service 0.86 2.37 0.67 10.76 3.90 14.67 0.65 2 19 0.56 3.41 0.99 2.58 1.70 2.88 5.27 8.15 0.79 1.66 1.55 4.00

027 Public Service Cotuotosion 0.52 0.72 0.64 - 1.29 1.29 0.45 0.72 0.94 1.21 0.55 1L01 0.54 - 2 10 2.10 0.45 0.98 0.49 1.92

025 Local Goverrnment (eclflev) 0 41 1.86 - - 2.27 2.27 0.63 1.25 - 1.88 0.45 2.08 2.53 2.53 0.36 1.72 - 2.08

034 Mas Mobilisation 2.11 3.20 0.89 - 6.28 6.20 1.88 3.84 0.63 6.35 2.11 3.37 0.93 - 6 41 6 41 1.92 1.78 0.64 4.33

001 O*O'iceof thtePresident (ecllISOIESO andE&1) 3.05 4.20 1.40 - 8.65 8.65 2.46 3.81 1.67 7.94 3.58 6.57 3.18 1 1.71 13.33 25.03 3.80 4.07 2.20 10.07

300 Specified Ornicem -Salaries (Statutory) 0.29 - - - 0.29 0 29 0.11 - - 0.11 0.29 - - 0.29 0.29 0.26 -- 0.26

Public Service Pensioo/Cosp (Statutory) - 25.90 - - 25.90 25.90 1.22 27.29 - 28.50 - 44.19 - - 44.19 44.19 - 36.83 - 36.83

315 Parliamentary Commisoion (Statutory) 4.860 17.140 2.500 - 24.500 24.50 3.71 21.66 3.57 28.94 5.10 15.53 2.63 - 23.26 23.26 5.77 28.39 4.03 38.19

033 Local Govt Finance Comm 0.25 0.24 0.01 - 0.50o 0.50 0.45 0.25 0.01 0.70 0.33 0.80 0.01 - 1.14 1.14 0.30 0.73 0.01 1.04

Uganida Human Rigbts Consm (Statutory) 1.02 0.65 0.06 0.52 1.733 2.26 1.53 0.65 0.94 2 22 1.13 1.35 0.94 - 252 2.52 0.93 L.24 0.94 2.21

349 Electoral Comsmission (Stawwtoy) 3.04 20.99 1.72 - 25.75 25.75 3.04 37.20 1.72 42.05 3.04 28.00 1.81 - 32.85 32.85 2.79 37.07 0.81 40.67

050 Unoonditiol Gtant (UrbanAuthorities) - 4.16 - - 4.16 4.16 - 4.16 - 4.16 - 4.66 - - 4.66 4.66 - 4.66 - 4.66

050 UnoonditisoalGrant (District) 37.64 29.85 - - 67.49 67.49 37.64 30.50 68.14 37.88 31.18 - 69.06 69.06 34.92 3 1.23 66.15

SUB-TOTAL PUBLIC ADMINISTRATION 57.38 187.40 20.07 11.29 264.85 276.14 56.75 224.86 20.03 301.64 59.33 232.93 33.02 20.49 325.28 345.77 55.33 250.23 23.58 331.13

INTERLEST PAYNMENTS DUE050 Domfestic Interest - 44.90 - - 44.90 44.90 - 58.70 - 58.70 - 92 90 - - 92.90 92.90 - 83.68 - 83.68

050 Exteroallnterenst 62.20 - - 62.20 62.20 - 68.90 - 68.90 - 62.20 - - 62.20 62.20 - 56.10 - 56.10

SUB-TOTA INEETAMNS-107.10 - - 107.10 107.10 - 127.60 127.60 - 150.10 - - 155.10 155.10 - 139.70 139.78

CONTrINGENCY FUNDAUINALLOCATED 5.67 6.94 - 10.26 12.61 22.87 - - - - 4.78 8.91 2.55 - 16.24 16.24

Total Line Mfinistries 207.21 342.20 257.23 773.73 806.64 1,580.37 199.74 349,78 238.15 787.68 242.40 420.11 371.46 584.95 1,033.97 1,618.92 208.36 383.76 282.37 874.49

Total Local GovermuncratProgrammes 250.09 141.26 109.60 - 50094 500.94 224.77 129.82 99.06 453.64 284.56 176.16 136,30 16.25 597.02 613.27 274.90 165.06 123.61 563.64

Line Ministries +Loc. Govt Pnigrammes 457.30 483.46 366.82 773.73 1,307.58 2,081.32 424.51 479.60 337.21 1,241.32 526.96 596.27 507.76 601.20 1l63099 2,232.20 483.34 548.82 405.97 1,438.14

StatutryIntaemstPayments - 107.10 - - 107.10 107.10 - 127,60 - 127.60 IS15.10 - - 155.10 155.10 - 139.78 - 139.78

Statutory"exluding Intermt Paymsents 17 51 79.18 6.47 6.94 103.16 109.19 17 76 101.63 7.41 126.80 18.69 106.12 7.78 5 46 132.58 138.05 17.56 118.04 7.13 142.73

GRAND TOTAL 474.81 669.74 373.29 779.77 1,517.84 2,297.61 442.27 708.82 344.62 1,495.72 545.65 857.50 515.53 606.67 1,918.7 2,525.34 500.90 806.64 413.1 1,720.65

Memo:; PAF Expenditure Wage Non- Dcv. Total

Centra 1.31 30.60 132.42 164.33

Districts 194.07 122.14 136.30 452.51

Statutory 1.60 4.97 1.21 7.78

Total 194.98 157.71 269.92 624.61

7r65701 tS,,rr Psni-sino 70n314 Thma Pd as,s~ 71113410 t5,nle.o p-,ina-Total Total Total Total Total Totalexci. imd. excl. mci. MrCI. incL

SECTOR/VOTE Non-Wage Domestic Donor Donor Donor Non-Wage Domestic Donor Donor Donor Non,Wage Domestic Donor Donor DonorWage Recurrnt Dcv Project Project Project Wage Recurrent Dcv Project Project Projec Wage Recurrent Dcv Project Project Project

SECURITY001 ISO/ESO 12.31 9.53 1.49 23.33 23.33 12.31 9.88 0.54 - 22.72 22.72 12.31 9.84 0.56 - 22.70 22.70021 Defence excl LDUs 128.00 99.40 10.94 - 238.33 238.33 130.37 114.55 9.17 - 254.09 234.09 136.89 137.00 10.25 -284.14 294.14321 Defence Pensions (Statutrr - - - - - - - - - - - - -

SUB-TOTAL SECURrrY 140.31 108.93 12.43 - 261.66 261.66 142.68 124.43 9.71 276.81 276.81 149.20 146.84 10.81 -306.84 306.84ROADS AND WORKS

016 Workt.Housinstand Commnunications 2.72 20.18 104.28 166.18 127.18 293.36 2.72 21.47 111.217 172.83 135.46 308.29 2.72 22.38 115.81 179.74 140.91 320.65050 District Road Mainteanjce 18.81 - - 1881 18.81 - 20.18 20.18 20.18 - 21.05 - - 21.05 21.05050 Urban Road Maitenance - 4.48 - 4.48 4.48 - 4.59 - - 4.59 4.59 - 4.78 - - 4,78 4.78

SUB-TOTAL ROADS 2.72 43.47 194.28 166.18 150.47 316.65 2.72 46.24 111.27 172.83 160.22 333.05 2.72 48.21 115.81 179.74 166.74 346.48AGRICULTURE

010 Agarlclur. Animal Industry and Fisheries 2.07 3.19 22.04 66.99 27.30 88.29 2.07 2.89 26.20 63.43 31.17 94.60 2.07 3.0 23 29 65.97 28.38 94 34043 National Research Oraanisation (NARO) - 2.59 5.34 25.34 7.93 33.27 - 2.96 4.97 26.35 7.93 34.28 - 3.09 5.14 27.41 8.23 35.64050 District AxriculturExteenion 3.06 2.92 - - 5.98 5.98 3.06 3.03 - - 6.09 6.09 3.06 3.16 - - 6.23 6.23

050 National Axicultural Adviasrv Services - - 5.66 - 5.66 5.66 -- 4.66 4.66 4.66 - - 5.17 - 5.17 5.17SUB-TOTAL AGRICULTURE 5.13 8.69 33.04 86.33 46.87 133.20 5.13 8.89 35.83 89.78 49.85 139.63 5.13 9.27 33.60 93.37 48.00 141.38

EDUCATION036 Ueanda Mananetnent Institut - 0.40 - - 0.40 0.40 - 0.44 - - 0.44 0.44 - 0.46 - - 0.46 0.46013 Educationand Snorts(incl Prim Educic 7.41 46.26 47.04 39.82 100.72 140.4 9.47 45.60 54.87 41.41 109.94 151.35 9.940 47.57 57.28 43.07 114.79 157,86024 Makerere Universitv - 28.29 0.13 5.80 28.41 34.21 38.12 0.14 6.03 38.25 44.29 - 39.82 0.14 6.27 39.96 46.24042 Mbarara Univetntv 3.09 2.49 0.60 - 5.98 5.98 3.09 2.73 0.43 - 6.25 6.25 3.12 2.81 0.45 - 6.38 6.3804.4 Institute ofTeacher Education (ITEK) 2.50 0.66 0.18 3.34 3.34 2.55 0.77 0.19 - 3.51 3.51 2.68 0.80 0.20 3.68 3.68040 Education Sevice Commoission 0.45 1.07 0.12 - 1.63 1.63 0.45 1.15 0.05 - 1.64 1.64 0.45 0.88 0.05 - 1.37 1.37046 Makerere Univernity Business School - 2.91 - - 2.91 2.91 - 3.50 - - 3.50 3.50 - 3.65 - - 365 3.65050 District Primarv Educ incl SF

tG 185.07 41.53 53.88 - 280.49 280.49 190.38 47.76 60.73 - 298.86 298.86 192.38 52.18 67.98 312.53 312.53

050 District Secondary Education 58.25 7.73 - - 65.98 65.98 58.25 10.31 - - 68.56 68.56 58.25 10.75 - - 69.00 69.00050 District Tertiary Instaittions 13.42 - - 13.42 13.42 13.42 - - - 13.42 13.42 13.42 - - 13.42 13.42050 DistrirtHelsTrainin, Schools - 1 89 - - 19 1g-L89 - 205 2 - 05 205 - 2 14 - - 2 14 214

STIRTOTATAI Frstlr'ATIIOI 7701 7 113 74 tOt 74 45467 505 11 55079 777463 157 43 116 41 474 546 44 59l A00 Ft 780 141 04 176409 49314 541IR 616 13HEALTH

014 Henlth 3.56 31.18 21.08 101.14 55.83 156.97 3.68 38.69 24.10 105.19 66.47 171.66 3.86 47.00 25.13 109.39 75.99 185.39019 ButabikeaHospital 1.02 1.48 1.63 22.61 4.14 26.75 1.05 1.61 0.14 23.51 2.01 26.32 1.11 1.68 0.15 24.45 2.93 27.39

(A023 Mulaao Hospital Comvle, 7.96 9.80 1.95 - 19.71 19.71 8.15 11.06 2.11 - 21.33 21.33 8.56 11.49 2.20 - 22.2,5 22.25032 Health Service Commission 0.37 0.83 0.04 - 1.24 1.24 0.37 0.75 0.04 - 1.16 1.16 0.39 0.78 0.04 - 1.22 1.22395 Uaanda Aids Compissison 0.54 0.70 1. 18 18.21 2.42 20.63 0.60 0.77 1.24 1893 2.61 21.54 0.63 0.85 1.30 19.69 2.78 22.47050 District NGO HosoitalstPrimarv Health Cue - 16.61 - - 16.61 16.61 - 21.27 - - 21.27 21.27 - 26.40 - - 26.40 26.40050 District Primrv Health Care 43.86 19.67 7.58 - 71.10 71.10 45.31 22.16 12.14 - 79.61 79.61 49.88 24.21 17.01 - 91.10 91.10050 District Hospitals - 8.71 - .71 8.71 - 9.40 -9.40 9.40 - 9.80 - 9.80 9.80000 District Referral HOoseials 10 96 5 25 - - 1621 16 21 11 36 5 74 - - 17 10 17.10 12 06 5 99 - - 18 04 1804

91tISTAITTAIL4tRAIll 48t70 94 73 33 44 1419 q6 9597 117 93 70 S3 II3 11144 97 147431 771 75 349 39 76448 I? 179 45894 1535 1 50 51 40405iWATFR

012 Water 0.53 0.43 22.01 77.30 22.97 100.27 0.53 0.47 24.46 80.39 25.46 105.86 0.53 0.49 25.58 83.61 26.60 110.21050 Distric Water Conditional Grot - 1 29 24 49 - 25 78 25 78 - 1 45 25 82 - 27 27 27 27 - Isa8 26 85 - 28 44 28 44

51It5~~~~Tt3TAt WATtinR 053~~~~~i 1 71 45 710 48 75 17405 s53 I9 5071 go09 57 73 13317 0 53 2 07 57 43 83461 55 04 138 45SRJUSTICEFLAW AND ORDER

038 Ucanda Police(incl LDUs) 31.37 25.82 2.75 - 66.94 66.94 40.14 23.90 2.908 67.02 67.02 42.14 24.93 3.11 - 70.19 70.19039 Unanda Priwons 8.14 9.38 1.21 - 18.73 18.73 8.14 10.17 1.31 - 19.62 19.62 8.14 10.61 1.37 - 20.12 20.12022 Internal Affairs 1.12 4.60 1.11 - 6.83 6.83 1.~12 5.39 1.20 - 7.71 7.71 1.15 5.62 1.26 - 8.03 8.03045 DPP 2.18 0.95 0.25 0.44 3.30 3.82 2.23 1.03 0.27 0.46 3.53 3.98 2.34 1.08 0.28 0.48 3.69 4.17307 Justice Court Awards (Stanttry5 - 2.20 - - 2.20 2.20 - 2.31 - - 2.31 2.31 - 2.43 - - 2.43 2.43007 Justice. Attomey Generalexcl Conroensation 1.26 6.66 15.23 23.15 23.15 1.27 4.71 16.14 - 22.12 22.12 1.33 4.92 16.68 - 22.94 22.94007 Justice. AtOorneGeneral -ComDensation 1.95 - - 1.95 1.95 - 2.12 - - 2.12 2.12 - 2.21 - 2.21 2.21311 JudiciaLrv (Statutorv) 7.18 7.56 2.11 4.91 16.85 21.76 7.53 7.94 2.22 5.11 17.69 22.80 7.91 8.34 2.33 5.31 18.58 23.89048 Judicial Service Comminton 0.49 0.27 0.04 - 0.79 0.79 0.49 0.29 0.04 - 0.82 0.82 0.49 0.30 0.04 - 0.83 0.83337 1 - Rrf,,, C.onuind-ioe(StatutoryI 0 34 0~91 0 05 1 33 1 33 0 36 0353 0 09 - 0 98 0 98 0.38 0356 0 09 - 503 1 03

SITISOTTAI ITTlTrtlFAAWA4n nRlnrFR 590A7 4433 in 9771 53 is 47 IS 141S1 61 77 SR840 74 75 5 57 141397 149 49 618 AR 100O 75 14 579 15n0(4 155 R7ACCOUNTABILITY

001 Ethics and Integrity 0.05 0.37 0.04 - 0.45 0.45 0.05 0.40 0.04 - 0.49 0.49 0.05 0.42 0.04 - 0.51 0.5008 MfFPED Accountability 0.56 1.55 - - 2.11 2.11 0.56 1.89 - - 2.45 2.45 0.56 1.97 - - 2.53 2.53

017 Audit 1.52 3.38 0.14 - 5.04 5.04 1.52 3.63 0.15 - 5.30 5.30 1.90 3.93 0.15 - 5.99 5.9933 1 Inspector General ofGoveniment (IGG) (Sta.tutory) 1.08 5.58 0.14 0.67 6.80 7.47 1.19 5.72 0.14 0.69 7.06 7.75 1.31 6.18 0.15 0.72 7.64 8.36050 District Grmnnfor Monitoring nd Accountability - 12.24 - - 12.24 12.24 - 13.00 - - 13.00 13.00 - 14.12 - - 14.12 14.12

SUB- TOTAL ACCOUNTABILITY 3.22 23.12 0.31 0.67 26.64 27.31 3.33 24.64 0.33 0.69 28.30 28.99 3.83 26.62 0.35 0.72 30.79 31.51ECONOMIfC FUNCTIONS AND SOCIAL SERVICES

029 Energyand Minemals 1.22 2.07 1.53 5.63 4.82 10.45 1.22 2.14 2.27 5.86 5.63 11.48 1.22 2.24 2.52 6.09 5.98 12.06028 Tourism. Trade and Industry 0.56 2.52 4.65 29.60 7.73 37.42 0.56 2.55 5.29 30.88 8.40 39.27 0.56 2.66 5.49 32.11 8.70 40.82012 Lands and Environment 1.96 4.18 11.35 28.00 17.49 45.49 1.96 4.63 16.53 29.12 23.12 52.24 1.96 4.58 21.26 30.28 27.80 58.08

2002/03 Budget projections 2003/4 Budget Prjojctions 2004/05 Budget Projections

Tota] TOWs Total Total Tots] Total

excl. incL MCI. tac. "cxc. intcl.

SECTORNVOTE Non-Wage Domestic Donor Dontor Donor Non-Wage Domestic Donor Donor Donor Non-Wage Domes;tic Donor Donor Donor

Wage Recurrent Dcv Project Project Projec Wage Recurrent Dcv Project Project Project Wage Recurrent Dev Project Project Project

030 Gender,Labour and Social D"evopment 1.29 4.4854 6.09 4.32 11.86 16.18 1.29 4.28 8.14 4.49 13.71 18.20 1.29 4.47 10.16 4.67 15.91 20.58

104 Olffce of thePrimoeMlfnister (Developmenat) - - 10.26 43.85 10.26 54.11 - - 11.17 45.60 11.17 56.78 - - 9.39 47.43 9.39 56.82

108 Finance, Plarinrg & Econ De, (Development) - - 34.58 36.32 34.58 70.90 - 35.36 37.77 35.36 73.13 -- 36.74 39.28 36.74 76.02

125 Local Governmnent Dev(excl Roads) - - 0.90 39.82 0.00 40.72 - - 1.14 41.41 1.14 42.56 -- 1.19 43.07 1.19 44.26

050 District Functiomal Adult Literacy Grant - 1.42 - 1.42 1.42 - 1.99 - 1.99 1.99 -2.79 - 2.79 2.79

050 District Equalisaion Grant - 4.33 - 4 33 4.33 4.88 - - 4.88 4.88 -5.33 - - 5.33 5.33

050 Local Government Development Progrnrre(LGDP) - - 41.90 - 41.~90 41.90 - 47.71 - 47.71 47.71 - 49.74 49.74 49.74

050 Non-Sectoral Conditional Grantt 1.18 4.99 - - 6.17 6.17 1.42 5.38 - - 6.80 6.80 1.69 5.69 - - 7.38 7.38

050 Durtch District Development Grant - - 8.71 - 8.71 8.71 - - 9.17 - 9.17 9.17 -- 9.11 - 9.11 9.11

SUB-TOTAL ECONOMIC FtJNCTIONS AN4D SS 6.20 24.00 119.98 187.63 150.18 337.81 6.44 25.86 136.80 195.14 169.09 364.23 6.70 27.75 145.60 202.94 180.06 383.00

PUBLIC ADMINSTRATION004 Ofrice ofthsePrime Minister (xcrrcDev) 0.73 2.45 - - 3.19 3.19 0.73 2.68 - - 3.42 3.42 0.73 2.81 - - 3.54 3.54

006 Foreign Affais L.38 8.89 0.43 11.04 10.71 21.75 1.38 7.16 0.59 11.48 9.12 20.60 1.38 7.48 0.61 11,94 9.47 21.41

OAO Missions Abroad 1 6.06 0.50 - 16.56 16.56 15.29 0.50 - 15.79 15.79 - 15 07 0.50 - 15.57 15.57

098 NIPED (excl URA, Contingcrsy, Accoonrability & l.34 10.61 11l.95 11.95 1.34 16.63 - 17.97 17.97 1.34 16.93 - 18.27 18.27

008 UYRA - 62.74 - - 62.74 62.74 - 56.70 - - 56.70 56.70 - 59.28 - - 59.28 59.28

002 Stare House 1.50 20.82 20.23 - 42.55 42.55 1.50 22.25 16.98 40.73 40.73 1.50 23 20 17.45 - 42.16 42.16

005 Public Service 1.20 2.43 0.76 2.36 4.38 6 74 1 20 2.67 1.24 2.45 5.11 7.56 1.20 2.79 1.32 2.55 5.31 7.86

027 Public Service Commission 0.64 1.01 0.45 - 2.09 2.09 0.64 lOS5 0.55 - 2.24 2.24 0.64 1.10 0.57 - 2.31 2.31

025 LocalGovernroent (excl Dev) 0.55 2.17 - 2.72 2.72 0.55 2.10 - - 2.65 2.65 0.55 2.18 - - 2.73 2.73

034 Mass Mobilisation 2.38 3.44 0.59 - 6.41 6.41 2.48 3.53 0.67 - 6.68 6.68 2.59 3.68 0.71 - 6.90 6.99

001 Office of thtePresident (ecl ISOIESO aridE&l) 4.54 6.23 1.50 0.74 12.27 13.01 4.54 6.64 2.72 0.77 14.09 14.86 4.54 7.13 2.85 0.80 14 52 15.32

30-0 Specified Officers -Salaries (Statutory) 0.32 - - - 0.32 0.32 0.32 - - - 0.32 0.32 0.34 - - - 0.34 0.34

'C 305 Public Serice PensiornlConip (Statutory) - .51.84 - - 51.84 51.84 - 5.4- - 544 5.4 - 571-- 5.6 5.6

315 Parliamenetary Commsissiona(Stattrory) 6 82 24.90 1.58 - 33.30 33.30 6.82 24.90 1 76 - 33.49 33.49 6.87 24.90 2.84 - 34.61 34.61

033 Local Govt Finance Comm 0.41 0.81 00 -l 1 23 1.23 0.41 0.8.4 0.01 - 1.26 1 26 0.41 0.87 0.01 - 1.29 1.29

347 Uganda HumnaRights Comm (Statdrtoy) 1.15 1.48 0 04 5.54 2.68 8.22 1.21 1.56 0.04 5.76 2.81 8.57 1.27 1.64 0.05 5.99 2.95 8.94

349 Elcctoral Commnission (Statutr.oy) 4.04 l2.90 0.81 17.75 17.75 4.19 8.95 1.50 - 14.64 14. 64 4.35 8.95 1.60 - 14.90 14.90

050 Uncoadttional Grant (Urban Aurthorities) - 4.85 4.85 4.85 - 5.15 - - 5.15 5.15 - 5.37 - - 5.37 5.37

050 Uaconditiotral Grant (Distfict) 42.10 30.48 - - 72.58 72.58 42.10 31.44 - - 73.54 73.54 42.10 32.92 - 75.02 75.02

INTEREST PAYMENTS DUE950 DomesticInteret - 73.60 - - 73.60 73.60 - 100.80 - - 100.80 100.80 - 113.50 11l3.50 113.50

050 External Interest - 71.00 - 71.00 71.00 - 68.60 - - 68.60 68.60 - 69 50 - 69.50 69.50

SUB-TOTALINTERET PAYMENTS - 144.60 - 144.60 144.60 - 169.40 - - 169.40 169.40 183.00 1 83.00 183.00

Total Lirne Mfinistri es 259.30 473.82 353.26 701.39 1,086.38 1,787.77 274.98 509.88 391.38 729.45 1,176.23 1,905.6 288.32 554.08 407.98 758.63 1,250.3 2,005.36

Total ,ocA GovernmentrPrognrammes 346.95 181.96 142.22 671.13 671.13 353.94 204.02 160.23 - 718.19 718.19 360.78 222.26 175.86 - 758.90 758.90

Line hnIlistries + Loc. Gov't Progirammres 606.24 655.78 495.48 701.39 1,757.50 2,458.90 628.92 713.89 551.61 729.45 1,894.42 2,623.8 649.09 776.34 583.84 758.63 2,009.2 2,764.25

Stawutry Interest Payments - 144.60 - - 144.60 144.60 - I69.40 - 169.40 169.40 - 183.00 - - 183.00 183.00

Ststutory excluding Interest Paymnents 21.47 108.08 5.95 29.33 135.50 164.82 22 23 107.12 6 99 30.50 136.34 166.84 23.06 110.99 8.35 31 72 142.40 177.77

GRANDI3TOTAL 627.71 909.46 501.43 730.72 2,037.60 2,768.32 651.15 990.41 558.60 759.95 2,200.2 2,960. 1 672.15 1,070.34 592.20 790.34 2,334.6 3,125.02

Wage Non-Wage Dev. Tota Wage Non-Wage Dev. Total Wage Non-Wage Dcv. Total

Central 1.52 34.37 133.52 169.40 1.43 49.60 151.31 202.41 1.90 57.91 161.16 220.97

Districts 233.17 128.29 142.22 503.68 240.17 145.68 160.23 54.08 247.00 161.29 175.86 584.15

Statutry 1.62 5.42 1.32 8.37 1.79 5.65 1.39 8.82 1.94 6 19 1.45 9.58

Total 236.32 168.08 277.06 681.45 243.39 200.99 312.93 757.30 250.84 225.38 338.47 814.69

ANNEX 4: STATEMENT BY THE WORLD BANK ON BEHALF OF DEVELOPMENT

PARTNERS ON BUDGET STRATEGY AND BUDGET PERFORMANCE 2001/02

A4.1 We, on behalf of development partners present, would like to thank the HonMinister for his detailed presentation on the performance of the first three quarters of thecurrent year's budget and an exposition of how they met the challenges they faced. At atime when global economic trends have been unfavorable and terms of trade have hit a40-year low, one has to commend Uganda's budget and macroeconomic performanceover this year. The government needs to be commended on keeping the budget largelyon track despite pressures for supplements from all quarters through the course of theyear. However, the budget performance over the current year has highlighted a couple ofareas of concern.

A4.2 First, the revenue targets were not met again this year. Compared with last year'sUsh. 60 billion, we expect a shortfall of almost 80 billion, which accounts for a 6 percentshortfall. This continuing trend needs to be arrested, at a time of fiscal constraints, toensure that further shortfalls in revenue do not hinder allocation of resources to identifiedpriorities.

A4.3 The poor performance of revenues under URA despite reform measures continuesto be of concern. Although exchange rate effect has a role to play in this, it is still an areaof concern. For example, import duty, excise duty and VAT have all under performed inrelation to their targets and need further attention. However, it is worth noting thatincome tax returns have over performed.

A4.4 Despite over performance in some non-URA items (for example, passports (1.1billion or three times the estimate), Bank of Uganda (21.8 billion of which is in terms ofarrears from last year), because of shortfalls in other areas, such as revenues collected byministries and agencies, the overall target will not be met this year.

A4.5 Loan repayment reached less than 50 percent of its target because of nonpaymentfrom UEB and UDB. We know that the government has been drawing down on itsreserves for shortfalls in revenue and donor flows. However, we all know that thegovernment has not been able to keep its target of reserves of five months in the last twoyears and that it does not intend to in the medium term. This clearly shows the danger ofbeing complacent about the situation. Although we agree that the government's objectiveof reducing the fiscal deficit in the medium term is a welcome one, the weak revenueperformance does not enable the government to address this without risks.

A4.6 All these trends indicate the need to address revenue issues throughcomprehensive reforms and ensure that unprogrammed revenue shortfalls do notadversely affect the existing tight fiscal constraints.

A4.7 Second, this year we again experienced expenditure pressures cropping up at thelast minute in the budget process, mainly from two sources: the strategic exports initiativeand the Parliaments' emoluments and salary increases. The former was primarilyaccommodated through the reallocations and corrigenda, while the latter had to befinanced through supplementary expenditures. Naturally, these reallocations necessitate

further tightening of the fiscal envelope for other sectors and made it difficult to carry outtheir intended programs. This was especially the case in the justice, law, and ordersector, as well as some other sectors. On a related note, we would like to request the

government to do a technical audit that will provide additional information to understandwhat activities were funded by strategic export initiatives this year and what outputs wereachieved. This we believe is essential for ensuring transparency in the budget process

and ensuring value for money.

A4.8 Third, this year again last-minute reallocations and supplementaries providedadditional resources to certain sectors and votes-in fact, to the usual culprits-whichwas not contested. We believe this trend of overruns has to be arrested if the budgetprocess and MTEF ceilings are to become a credible way of ensuring budget disciplineamong sectors.

A4.9 Fourth, on the issue of resource flows, donor flows fell short by almost 10 percentbecause exchange-rate appreciation meant a shortfall on the order of 12 percent. This is

an area where further progress has to be made, and we are sure development partners areaware of this and are trying their best to improve predictability of the external flows.However, it is important to note that the government also needs to ensure that it meets theprior actions it agrees upon with development partners to reduce the uncertainty in donorflows.

A4. 10 Fifth, this year we have observed two sectors that have raised concerns because oftheir overruns since the first half. These sectors are defense and public administration,which were 3 and 9 percent, respectively, above pro-rata performance up to the thirdquarter. These overruns have become a problem for the overall budget management andneed to be addressed as a matter of urgency. If not, we risk losing budget discipline,which we have built up over the years. Also, this does not set a good example for all theother essential sectors, for example, justice, law, and order and health, which possiblyhave much less than what they deserve and need to be given priority first.

Some General Observations

A4. 11 Budget release performance on the whole has been satisfactory. Performance by

broad expenditure categories shows both wage and non-wage expenditures are abovetarget while development expenditures fell short by almost 10 percent. By votes, district

votes over performed central votes. Central vote performance was affected by the needto accommodate domestic revenue shortfall and supplementaries for other votes.

A4. 12 The PAF performance was satisfactory overall at 98 percent. PAF wage

expenditures were above target because of higher than envisioned expenditures in

primary teacher wages. The major area in which PAF under performed is in non-wageexpenditures, mainly because of the poor performance of equalization and non-sectoral

grants.

A4. 13 We also welcome government initiatives to follow up the discussions on

partnership principles in September 2001 with a study on PAF modalities and how over

the medium term these might be phased without losing the benefit they have provided for

98

budget discipline. We think that further work is required to understand how the studyfindings can help design a credible operational strategy for budget formulation andexecution consistent with HIPC and PEAP objectives. In this regard, if protection forPAF expenditures is to be reduced, protection should also be reduced for other sensitivesectors, for example, defense.

A4.14 Economic functions and social services was the lowest performing sector at 81percent of budget outturn at the end of third quarter. In terms of categories, wage, non-wage and development all fell below their pro rata in the first half. Some of the reasonsfor this need further attention, for example, poor performance of non-tax revenue inenergy and minerals, difficulties in implementation of lands and environment projects, aland tenure reform project, and noncompliance with the CCS.

A4.15 This fiscal year the government has to be commended on producing the budgetperformance reports-at half year and the end of the third quarter-and making themavailable to all stakeholders on request. We, however, believe that these reports need tobecome more output oriented than they currently are to ensure they are more usefulevaluations of budget impact and outcomes. This we believe will be the challenges forthe government in the medium term.

99

ANNEX 5: STATEMENT BY THE By THE WORLD BANK ON BEHALF OF DEVELOPMENT

PARTNERS ON MTEF 2002/02-2004/05

Macro Framework

A5.1 We would like to thank the Minister for his clear presentation on the MTEF andbudget for next year. We believe that it clearly articulates the macro scenarios andconstraints under which the government has to plan the fiscal program for the comingthree years. It also highlights the challenges the government faces in implementing thePEAP in addressing priority concerns in governance, increasing income of the poor, andimproving quality of service delivery for the poor. We would however, like tounderscore that the constraints might be even greater if we believe that the growth ratesand the revenue targets assumptions are optimistic. Although we believe that, throughfocusing on macro stability and prudent fiscal management, the current spending levelsare achievable, the potential for slippages resulting from external factors is not to beunderestimated. The inflation targets set out in the MTEF are clearly achievable if thegovernment sticks to fiscal discipline.

MTEF

A5.2 The budget process has improved predictability, with a large share of donor flowsbeing given in terms of budget support. The challenge is to include with more certaintyproject funds, so that MTEF ceilings can be realistic benchmarks with which sectors canwork. Integrating the external projects into the sector ceilings will help achieve macrostability with fiscal flexibility. It will also improve budgetary planning and help toensure that all expenditures within each sector, whether funded through the governmentbudget or through external project modalities, are fhlly consistent with sectoral prioritiesand with the overall fiscal constraints. However, we are concerned that certain sectors donot adhere to their ceilings and are given additional allocations without adequatejustification(for example, defense and public administration) at the expense of moredeserving sectors, which undermines the budget process. In this regard we welcome themeasures taken by the government in terms of the defense review and publicadministration study, which we believe should provide a basis for improving budgetefficiency in these sectors.

A5.3 Given the need to reduce the fiscal deficit and ensure macro stability thegovernment has highlighted the need to slow growth in nominal government expendituresover the next three years in the range of 7 percent per annum. This is lower than theexpected nominal GDP growth. However, this highlights the need to focus more onbudget efficiency issues and internal allocations as the principal means by which priorityactivities under each sector have the resources they need.

A5.4 We note that the spending increases for this year give due recognition to PAFareas. Of the projected overall increase of 124 billion, 55 billion or 45 percent goes toPAF. This is a very welcome move and ensures priority is given to PEAPimplementation. In fact this puts the PAF share of total government expenditures at 36percent, which is higher than last year's 34 percent and is consistent with the objective ofincreasing the share of PAF over the medium term.

A5.5 We also note that the largest increase compared with last year's allocation isgoing to health (15 percent). Over the medium term this sector will receive a greatershare. This is very much in line with our belief that health is a priority sector in themedium term and needs to be given preference. Similarly, increases next year foreducation are also welcome given its centrality in achieving the PEAP targets.

A5.6 However, we have a few concerns over the allocation pattern of next year'sbudget.

- First, a very large increase in next year's budget takes place in defense.Although we know this includes the one off expenditure of 10 billion forthis and next year, we still believe that defense expenditure is an area thatneeds to be closely monitored. As you know the allocation to defense ispegged to GDP, which is growing faster than government expenditures,implying that these expenditures grow as a share of the budget. In thecontext of competing priorities we may want to take a fresh look at thislimit. We would urge the government to hold discussions to address thisissue in the context of the defense review, which is currently under way.We also believe that there should be greater accountability for defenseexpenditures to the responsible authorities.

- Second, we are also concerned with the level of funding proposed for thejustice, law, and order sector. This sector prepared an extensive sectorstrategic plan but does not have resources to implement it. In fact thesector's total budget is not increasing at the rate at which overallgovernment expenditures are increasing, implying a falling share overtime. Furthermore, the sector is minimally protected by PAF and sufferscutbacks on an annual basis of more than 30 percent. The under fundedwork plan is also frequently influenced by aspects beyond the sector'scontrol to accommodate activities that were not envisaged in the sectorwork plan.

- We continue to be very concerned about the huge amounts of money thatare paid out by the government to settle claims for compensation, olddebts, purchase of property, etc. These payments divert resources frompriority expenditures, and the justification for these payments needs to beclosely examined.

- Third, on health, although there are increases programmed in the MTEF,given the weak performance of the health indicators and the need forimprovements in various interventions, it is useful to consider howadditional resources can be programmed for this sector. In this regard,development partners are willing to provide additional resources forjustice, law, and order and health and would like the government toconsider these deserving sectors for possible additional allocations in theevent that such additional resources are actually available.

- Fourth we would like to understand how the resources under the budgetallocated for strategic exports are utilized. We believe the lack oftransparency in funding these activities, especially at a time when there are

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important priorities that lack additional resources, need to be addressedsuch that all stakeholders will respect the budget process. We also believethese resources should not be used to provide unwanted and unjustifiablesubsidies to private enterprises as past evidence indicates. This year, likelast year, almost another 50 billion is being allocated to strategic exports,resources that have a high opportunity cost in terms of achieving otherpriority PEAP targets.

A5.7 We strongly support the government's objective of boosting exports but webelieve that expenditures in this area should be subject to the same scrutiny as in othersectors to ensure that they provide value for money. In this regard, there is a lack ofclarity with respect to what expenditures are actually affected under this heading, makingcareful analysis difficult. Accordingly, we would appreciate more detailed informationas to what specific expenditures are covered under this program. In addition, we believethat The government should set out clear principles to guide its interventions in the exportsector and that these interventions should be in the areas of public goods-agriculturalresearch and extension, disease control, etc. Well-planned interventions in these areascan provide very high returns, especially if directed to support agriculture and PMAbroadly. We do not believe that the government should hand out subsidies, such as cheaploans, tax breaks, and subsidized rail freight, on a selective basis to individual investorshowever superficially attractive their projects may appear. Such an approach inevitablycreates pressures from other investors for similar treatment and undermines thepredictability of government policies, which has been a strength of the Ugandanpolicymaking process.

A5.8 Finally, we would like to reiterate that if there were additional resources availableby increasing the fiscal envelope or by reallocation then we believe that priority shouldbe given to sectors such as health and justice, law, and order over defense and publicadministration in the MTEF. In this regard, the government needs to consider howresources from global funds such as health and education can be integrated in the currentceilings.

Other Issues

A5.9 We also believe that when the government of Uganda enters into agreements withdevelopment partners they should clearly indicate the constraints that they experience inthe context of the partnership principles discussed in September 2001. Although from afiscal point of view actually rolling over of funds does not seem feasible, it would beuseful to consider how this problem can be dealt with in cases where donors need suchassurances.

A5. 10 The assumptions in the MTEF that donor budget support flows decline over timemay need to be revisited as our discussions with development partners indicate that somebudget support donors are amenable to increasing their shares to address priorityactivities in certain sectors that are under funded in their view. Such additional flows arenot expected to be of sufficient magnitude to affect the government's objective, which weshare, of reducing donor dependency in the medium term as described in the MTEF. Wealso welcome the measures the government is taking to manage external debt prudently.

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Continuing these measures will be critical to ensure long-term debt sustainability. Wealso look forward to discussing with the government ongoing analytic work currentlyunder way to understand the impact of aid flows on the local economy.

A5.11 We commend the government's commitment to improve output orientation of thebudget and putting additional effort through SWGs to ensure this does happen. Wewould like to reiterate our commitment and support for this as we believe this is the wayto improve budget efficiency. We also believe that results-oriented management is animportant initiative and further attention needs to be given to internalize it with thebudget process.

A5.12 One of the important areas that needs MTEF/government focus is pay reformstrategy and its implementation. We appreciate that the next year's budget has madeprovisions for pay increases broadly to lower-rank workers as well as professional andtechnical personnel. However, we understand that this is inadequate to implement thestrategy proposed and would request that priority is given to this area given itsimportance in addressing improvements in service delivery and cost efficiency andreducing corruption. However, we would also like to note that the government needs toaddress constraints imposed by the overall size of the wage bill and proliferation ofsemiautonomous agencies-especially under public administration-having different paystructures, which makes the rationalization and implementation of a consistent paystrategy extremely difficult.

A5. 13 Similarly, we would like to commend the government on the progress it has madein finalizing its fiscal decentralization strategy and the plans for implementing it as a wayof improving service delivery and ensuring local ownership of government programs.We would like to reiterate our commitment to support these initiatives and request thatgovernment gives adequate priority to this issue through its MTEF allocations.

A5.14 We support the government's overall MTEF and budget for next year, subject tothese observations, and believe that as presented it provides an appropriate basis fordonor budget support. We would also like to emphasize that, in the execution of thebudget during the course of the year, these spending priorities are respected.

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BIBLIOGRAPHY

The word processed describes informally reproduced works that may not be commonlyavailable through libraries.

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World Bank. 2001. Public Expenditure Review: A Program for Supporting BudgetReforms. Concept Paper, November 2001.

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IMAGING

Report No.: 24882 UGType: ER