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                 PUBLIC                      EXPENDITURE                 R EV IEWA
Bangladesh
                Review
PublicExpenditure




                 i,.
                              Mison, Dhaka
                DivisiownRcsident
CountryOperations
County Department1,SouthAsia
The WorldBank
          D.C
Washington,
This Public Expenditure Review was co-task managed by Nadaraja
Ramachandran   and TercanBaysan.Contributing  to the report wereJianhai
Lin (IMF); John McIntire,ChrisanthaRatnayake,Jonathan Kamkwalala,
Regina Bendokat, Charles Draper, Syed Nizamuddin, Zahid Hussain,
Nuimuddin Chowdhury(Bank); Raja Mitra, BinayakSen and Mizamur
Shelley(Consultants).
                    This PERwas a collaborative exercisewith GOB and
valuablecontributions
                    werereceived  froma numberof GOB agencies   includ-
ing IMED;NBR;PlanningCommission's      Programming   Division,Energy&
IndustriesDivisionand Agriculture Division;Ministryof Food;Ministryof
Agricultureand BangladeshRailwayThe report was processed by Joan
Mongal.Ms.LoreneYap    and Mr. PierreLandell-Millsprovidedhelpfulguid-
ance duringthe preparationof the report.The peer reviewerswere Messrs.
ShantaDevarajanand RichardWestin.
Contents

Abbreviations         v

Bangladesh at a glance            vii

Executive Summary             I

Chapter I Budgetary Revenues,Expenditures and Fiscal Sustainability                          7

  Recent macroeconomic performance        7
  Issues in budgetary revenues, expenditures and finance          8
  Fiscal and external debt sustainability   9
  Changing role of the state     12

Chapter 2 Evaluation of Sectoral Expenditure Programs                       14

  Trends and issues       14
  Agriculture, water resources and rural development         15
  Manufacturing       18
  Physical infrastructure    18
  Energy     22
  Education     24
  Health and family planning     26

Chapter 3 Institutional Framework for Expenditure Management                           28

  Management of the aggregate resource envelope      28
  Towards a strengthened integrated framework     30
  Institutions, management, technology and skills   32
  Management of ADP       33

Notes       34

Appendixes

 1.   Issues in the Recurrent Budget    35
 2.   Sample of ADP projects with questionable merit or rationale/priority for public sector investment   40
 3.   Performance of SOEs and their contribution to public sector deficits    43
 4.   Public Expenditure Impact on Rural Income and Poverty       46
 5.   State Role in Industry: Promoting Not Playing   50
 6.   The Institutional Framework: Selected Issues   54

                                                         .
Statistical
          Annex      65

 Table1. Macroeconomic    indicators,FY8O-FY95 66
 Table2. Actualincomeandexpenditure      of the centralgovernment 67
 Table3. Revised budgetsummary 68
 Table4. Currentbudget-revised estimates 69
 Table5. Annualdevelopment     programme 70
 Table6. Bangladesh: Consolidated   accountsof non-financial  enterprises,1990/91-1995/96
                                                                                       71
 Table7. Fnancial profitperformance   of non-financial state-owned enterpries 72
 Table8. Medium-term    scenarios,1994/95-2002/03     73
 Table9. Indicatorsof fiscalsustainability(reformscenario) 74
 Table10. Bangladesh:  Fiscaland externaldebt sustainability  1996/97-2002/03  75
 TableI1. Bangladesh:  Indicatorsof fiscalsustainability
   (assistingSOEs and restructuringbanksthroughissue ofbonds) 76
 Chart 1. Selectedeconomic   indicators,1989/89-1995/96 77
 Chart 2 'Centralgovernment   operations,1983/84-1994/95 78
 Chart 3. Indicatorsof fiscalsustainability 79
 Chart 4. Indicatorsof externaldebt sustainability 80




                               BANGLADESH PUBLIC EXPENDITURE REVIEW
                                                 iv
Abbreviations

ADB     Asian Development Bank                          IRD     Internal Resources Division
ADP     Annual Development Program                      LGED    Local Government Engineering Department
BCIC    Bangladesh Chemical Industrial Corporation      MSTQ    Metrology, Standards, Testing, and Quality
BIDS    Bangladesh Development Institute                        Control
BIWTA   Bangladesh Inland Water Transport Authority      MT      Metric Ton
BIWTC   Bangladesh Inland Water Transport                NBR     National Bureau of Revenue
        Corporation                                      NCB     Nationalized Commercial Banks
BMRC    Budget Monitoring and Resource Committee         NCTI    Net Cash Taka Impact
BMRE    Balancing Modernization Replacement              NGO     Non-Governmental Orgarnizations
        Expansion                                        NPV     Net Present Value
BPDB    Bangladesh Power Development Board               NRFA    Net resource from the food account
BR      Bangladesh Railway                               O&M     Operations and Maintenance
BSCIC   Bangladesh Small and Cottage Industries          OC      Operating Companies
        Corporation                                      OCF     Operating Cash Flow
BWDP    Bangladesh Water Development Board               ODA     Overseas Development Authority
CAG     Comptroller & Auditor General                    OMS     Open Market Sales
DESA    Dhaka Electricity Supply Authority               PBS     Palli Bidyut Samity
DPEC    Departmental Project Evaluation Committee        PCP     Project Concept Paper
DWASA   Dhaka Water Supply and Sewerage Authority        PDU     Policy and Development Unit
ECNEC   Executive Committee of National Economic         PER     Public Expenditure Review
        Council                                          PHC     Primary Health Care
EPI     Expanded Program of Immunization                 PMED    Primary and Mass Education Division
ERD     Economic Relations Division                      PP      Project Program
FDI     Foreign Direct Investment                        PRMAC Public Resource Management Adjustment
FFE     Food-for-Education                                       Credit
FFW     Food-for-Work                                     PSBR   Public Sector Borrowing Requirement
FP      Family Planning                                   PSC    Production Sharing Contracts
FY      Fiscal Year (July 1-June 30)                      PSD    Private Sector Development
GDP      Gross Domestic Product                           RADP    Revised Annual Development Program
GFS      Government Financial Statistics                  RC      Resource Committee
GNP      Gross National Product                           REB     Rural Electrification Board
GR       Gratuitous Relief                                RIBEC   Reform in Budgeting and Expenditure
HSD      Housing and Settlements Directorate                      Control
IDA      International Development Assistance             SHSE    Secondary and Higher Secondary Education
IFPRI    International Food Policy Research Institute     SOE     State-Owned Enterprise
IMED     Implementation, Monitoring and Evaluation        STOL    Short-Take-Off Landing
         Division                                         TCBMRC Technical Committee Budget Monitoring and
 IMF     International Monetary Fund                              Resource Committee
 IOC     International Oil Companies                      TFR     Total Financing Requirement


                                                        v
THC        Thana Health Complexes                                 UNDP       United Nations Development Program
Tk         Taka                                                   UNICEF     United Nations Children'sFund
TR         TestRelief                                             VAT        ValueAddedTax
TYRIP      Three-Year RollingInvestmentProgram                    VGD        Vulnerable
                                                                                      Group Development




Currency equivalents

The externalvalueof the Bangladesh   Taka (Tk) is fixed in        Followinglocal convention,expendituresand revenuesare
relationto a basketof referencecurrencies,
                                         withthe US dol-          sometimesdenominatedin units of crore (abbreviatedCR),
lar serving as the intervention currency. The official            whichis equal to Th 10 million.
exchangerate onJuly 31, 1996wasTk 42.13per US dollar.
                                                                  In this report, USSis sometimesabbreviatedas S.
   US$1 = Tk42.13
  Tk 1 = US$0.024


Fiscal year (FY)

July 1-June 30




                                     BANGLADESH PUBLIC EXPENDITURE REVIEW
                                                             vi
                                                        Bangladesh
                                                                 at a glance
Poverty and social                                                                            South Low-
                                                                    Bangladesh                 Asia Income                     Development
                                                                                                                                        dianMond-
Population
         mid-1995  (millions)                                                  119.8            1.243      3,188
GNPpercapita 1995  (USS)                                                        240              350         460                                             W
GNP 1995         US$)
         (billions                                                              30.3             435       1,466
Averageannualgrowth, 1990-95i
Population
         (%)                                                                        1.6             1.9           1.8
    force(%)
Labor                                                                               2.7             2.4           1.9
                                                                                                                                   GNP                                        G
Most recentestimate
                  flatestyearavailable
                                    since1989),
Poverty:  headcount  index(%of population)                                           48                             .      |
                                                                                                                           I
Urban   population (%of totalpopulation)                                             20             26             28
Lifeexpectancy  at birth(years)                                                      58             61             63
Infant mortairty(per l.000livebirths)                                                77             73             68
Childmalnutrition(%ofchildrenunder5)                                                 67             62             38                                  Acessto
                                                                                                                                                            Weer
Access  to safewater  (%of population)                                               96             70             66
         (%of population
Illiteracy                aRe 15+)                                                   53             51             35
Gross  pnmary  enrollment  (% of school-ape
                                         population)                                Ii1             98            I05
    Male                                                                            128             110           112
    Female                                                                          105              87            98

Key economicratios and long-term trends
                                                                   1975         1985            1994        1995               Economic
                                                                                                                                     ratios'
GDP(biilonsUS3)                                                    14.3             15.7            25.8     29.1
    domestic
Gross         nvestment/GDP                                         6.1             12.9            15.4     16.6
Exports
      of goodsandnon-factorservices/GDP                             2.9              7.4            11.9     14.2                                  cess           e
Gross
    domestic savings/GDP                                            0.9              2.0             9.1      8.3
    national
Gross       savirgs/GDP                                             1.1              4.5            13.8     13.1
Current accountbalance/GDP                                         -7.0         -8.4             -1.6        -3.5
Interest
       payments/GDP                                                 0.1          0.6              0.7         0.5                  S           *        -
Totaldebt/GDP                                                      12.9         46.5             56.9        58.7
Totaldebtservice/exports                                           23.3         22.7             12.8         9.6
Presentvalueof debt/GDP                                               ..              ..         32.5
Presentvalueof debt/exports                                                           .         197.4              ..



                                           1975-84 1985-95                      1994            2995 1996-04
(cvcrcc- cnnucl irowth)                                                                                                                            _
GDP                                                  4.9            4.1             4.2              4.7          48
GNP per ca.-ta                                       2.3            2.1             2.8              26           2.5
Exports of goods and nfs                             6.8           10.2             4.1             30.1          8.4


Structure of the economy
                                                                   1975         1985            1994        1995               Growthrates of output andinvestment
(96cf 6CP)                                                                                                                     (%)
Agnculture                                                         62.0         41.8                29.7     30.9
IrCustn/                                                           11.6         16.0                17.7     17.6
  Manufactunrg                                                      7.0          9.9                 9.8      9.6
Seroces                                                            26.4         42.3                52.6     SI .5
Pnvateconsumption                                                  95.9         90.6                76.6      77.9                         ,o               *i   *       *3   9.   ;
Gereral govermmentconsumption                                       3.2          7.3                14.3      13.7
Imports
      of goodsandnon-factor
                          services                                  8.1             18.3            18.2     22.5                                       -GD01     -GOP

(cver,ceonnuolsirc'wth)                                    1975-84 1985-95                      1994        1995               Growth rates of exports andimports(%)
Indostry                                                            4.7             6.2              7.8          8.4          "

  Manufactunng                                                      3.1             5.5              7.8          8,6
Sernces                                                             6.5             5.0              5.8          6.9
PrTvate
      consumption                                                     .5.             .              5.1      14.2 ,.
Generalgovemment consumption                                          .               ..             8.3         o
                                                                                                               1.0
Gross
    domestic
           investment                                               9.5             3.4             16.7          3.1              |       *       \             ,2      *    *-       ,,

Imports of goods and non-factor services                            7.9             2.8             0.9      34.1.
Gross nationalproduct                                               4.8             4.2             4.7       4.5                                      -En,      - kV
N,xe 1995daia re ;rex-<ary eSUiret-
     ci~ds
 * The       sha iori key .,Ons n     th   ,y (n   bold) -,,n,ed   w th     .
                                                                            nr.pe          .3enge Sd Ure   itr.     Se d           Andbe   deOeS



                                                                                              vii
                                                                                                                                                              Bangladesh
 Prkes and govemnment
                   finance
                                         197S         1985           I"4      1995              lnfladon(%)
 Dones prices.
 (96rhane)
                                                                                                     _
 Cor6unerprices                          21.9         10.7            1.8       5.2
 ImpcitGDPdeator                            ,         11.1            4.3       9.7
 Government
 (%of
    GDP)
          france

 Currentrevenue                                ..      8.5           12.2     12.1
                                                                                                     L
 Currentbudget
             balarce                           ..      1.3            6.1      6.4          1
 OveralsurpWduefic                             ..     -9.1           -6 0     -6.8        |-GOPd--CPF
 Trade
 (mdlo USS)
 Total exports(fob)
                                                     1985        1994        1995               Expor1975     rt
                                                                                                      and import levels(mill. USS)
                                               ..     940        2,534       3.473        |000!
  Otheragncult.re                              ..      151          57
  Shrimp, fishandfroles                        ..       70         211         306        1           1



                                                                                                                             VF
  Manufactures                                 ..      506       1.737       2.356        |
 Totalimports (il)                                   2.647       4.191       5,834
  Food                                         *.      601         131         500
   Fuel
     anderergy                                         -
                                                       2:323                   407            3000            11                                 1
                                                      691        1,300 1,303                                   1                                                          00


 Expont
     priceindex
              (1987
                  = IOOJ                       ,       74            101            ..
 I-port pnceindex (1987=l(100)                                                                            .           _                  .    _..         l
                                               ..     104            101            .                                                0           3    0
 Terms of trade (1987=l00)                     ,,      71             99
                                                                       9                                                         n           Ql0lm.

 Balanceof payments
                                        1975          1985        1994   1995
 (milleons
        USS)                                         1985         1994   1995             |Currert              account balanceto GDP ratio (%)
 Exportsofgoodsandnon-factorservices     427         1,162       3.057 4.130                                                                                        -I-
 Importsof goods
               andnon-factor
                           services     1.459        2.864       4,693 6,545              i
 Resourcebalance                       -1,033       -1.702      -1.636 -2,415
 Net factorincome                         -6          -90          -30         -41
 Net current t-ansfers                    35          477        1,247       1,426
 Current
       account  balance,
  beforeoffical
              transfers                -1,003       -1,314       -420       -1,030
Finanngitems
           (ret)                        1.048        1,237       1.045      1,304
Changesin netreserves                    -45           77        -625        -274
Memo:
Reserves
       indudinRgold
                 (mill.USS)              148         356        2.852       3.070
Conversion
         rate
            (bcaWUSS)                    8.9         260         400         40 2
External debt and resourceflows

(MlionsUSS)                            1975         1985         1994       1995          Composition
                                                                                                    of total debt, 1994(mill. US$)
Totaldebtoutstanding
                  anddsbursed          1.841        7,278       16.569                                                       F            G
  IBRD                                   55           55             58                                                 250              1as 58
  IDA                                   295         2,021       5.378
Totaldebtservce                          104         360         653                                          /||                                             538
  IBRD                                    0            3           7
  IDA                                     2           22          71
Compostonof netresource  flows                                                                 6202
  OffW grants                           315          472         759
 OfFical
       ceditors                         576          603         730
       creditors
 Private                                 -3           -3         -11                                                                                          c
 Foreigndirectnvestrnert                  0            0          11            -/
 Portfoloequity                           0            0          47
WorldBankprogram|
                                                                                                                                     3828
 Commitnents                            205          398         597                      A
                                                                                          A .19R
                                                                                             -.                                                       E   9S
 Disbursements                           91          288         412                     | cIMFA                    D -o.c       :           S        G
                                                                                                                                                      F    5..
 Pnripal repayments                       0            6          36           ..         C|IMF
 Netfbws                                 91          282         376
 Interest
        payments                          1           20          42
 Net transfers                           90          262         333

                                                               vi.
Executive Summary

In Bangladesh,one of the world's poorest countries (1994           economy continued in a low growth mode, drastic cuts
GNP per capita $230) publicexpenditureshave had a piv-             wouldbe requiredin both currentexpendituresandin ADP
otal role in building up infrastructure and services.              if fiscalsustainabilityis to be attained, further dampening
Bangladesh'sinvestmentto GDP ratio is near 14 percent,             the prospectsfor economicgrowth.
divided almost equallybetween public and private invest-               The consolidated  public sectordeficitneeds to take into
ment. In targetingan investment  ratio of nearer 20 percent,       account the central government'sfinancialobligationsin
private investmentwillneed to take the lead role. But pub-         restructuring  the banks and state-ownedenterprises,provi-
lic investmentswillalso need to be kept up both in view of         sionally estimatedat someTk63 billion.The indicationsare
the laggedresponse of the privatesector and to providethe          that fiscal sustainability could be maintained under the
infrastructure needed for the private sector to grow.And           reformscenarioprovidedthe banks and SOEs are restruc-
periodicassessmentsand revisionof the publicexpenditure            tured or privatized, so that theydo not continueto be a bur-
programs are essentialto ensure the most efficient use of          den on central governmentfinances.As regards debt sus-
publicresourcesand maximizing   their developmentimpact.           tainabiity,our analysis  suggests that Bangladesh willbe able
The last Public ExpenditureReview(PER) in Bangladesh               to serviceits external debt obligationsover the medium-
was completedin 1989.                                              term. The declinein extemal assistancethat is projectedis
                                                                   expected to contribute to a decline in Bangladesh's
The resource envelope and fiscal                                   debt/GDP ratio.
sustainability                                                         ADP implementationhas improved in recent years.
                                                                   Renewedattentionto projectevaluationis howeverneeded,
With highlyconcessionalforeignfinancing,increased rev-             particularly in viewof the rapid increasein locallyfinanced
enue collections and restraint in current expenditures,            projects whichare subject to less rigorousevaluationthan
Bangladeshhas maintained,and to some extent improved               aidedprojects.The reportpresentsa list of 47 ADPprojects
fiscalsustainabilityin recent years.An overallfiscaldeficit        involving a totalinvestmentof someTk61 billionwith ques-
up to 6 percent of GDP (of which 4.5 percent is foreign            tionablemerit or priorityfor public investment.Alsocalling
financedand not more than 1.5percent is financeddomes-             for earlyremedialaction throughfiscaland monetarymea-
tically)has been consistentwith a stable macroeconomic             sures are the macroeconomic      imbalancesthat emergedin
environment. However, with foreign aid expected to                 FY96withinadequaterevenuecollections,       overrunof recur-
decline, the overallfiscaldeficitwillneed to declinecorre-         rent expenditures   andrise in the centralgovernment  deficit.
spondingly-we expectto below5 percent of GDP by2003.
The decliningforeign assistanceunderscoresthe need for             Evaluation of sectoral expenditure
sustained increase in the revenue collectionefforts,,con-          programs
tainingexpendituregrowthand forrigorousprioritization   of
the ADP GivenBangladesh'slow revenue/GDPratio, rev-                Progress has been made by GOB in shifting towards a
enue collections need to grow,raising the revenue/GDP              greater focuson socialsectors (education and health) and
ratio by 0.5 percent annuallyWith reforms supporting a             infrastructureinvestmentson roads, water and sanitation
highergrowthscenarioin place,fiscalsustainability could be         while there has been an appreciabledeclinein spendingon
maintained,and the resourceenvelopefor publicexpendi-              industry.This is in line with the GOB stated policyobjec-
ture could grow modestly from 16.2 percent of GDP in               tives to focus on areas with large public good component,
FY97to 17.1 percent of GDP in FY2002.If, however,the               with major socialbenefits,and in raisingincomeand reduc-

                                                               1
ing poverty. However,despiteprogress,the pattern of pub-             should be focusedon cost effective,industryfriendlypub-
lic expenditureremainsweak in terms of strategicprioriti-            lic expendituresin the areas of basic and vocationaleduca-
zationbetween and withinsectorsand amongprojects,and                 tion, physical infrastructureespeciallyfor export,judicial
in the technicalefficiencyin use of budget resources,i.e.            servicesfor business,and maintainingcivilorder.
achievingoutputs at the lowestpossiblecost. On the broad                 Infrastructure.While the Government and donors have
compositionof expenditures,our recommendationis a fur-               made concertedeffortsto improvethe qualityof infrastruc-
ther reduction in manufacturing,financialenterprisesand              ture, rapid populationgrowth in citiesand other areas has
agricultural outlayson markets,whilefocusing        on areaswith     led to massive  demandfor water supply,   transportand other
higherpublic goodscontent suchas infrastructure,research             services.Allocationsto the infrastructure sector claimed
and the social sectors.                                              about28 percentof theADP in FY96.Whilesomeprograms
    Agriculture.TheGOB statedpolicyobjectivesin agricul-             have been poorly planned and implementedthere is evi-
ture are to stimulate growth enough to raise income, to              dence that investmentsin this sector have significant      net
reduce poverty and to improvefood security.         The interme-     socialbenefits.The infrastructuresector facesmassive     con-
diate objectives are to develop rural institutions and to            straints resulting from inadequate service provisionand
improvetechnology      and skills. The strategyis implemented        funding,inefficientinstitutionalstructures,and weakpric-
through a broad liberalizationand deregulation,targeted              ingmechanisms.     Mostinvestmentprogramswillcontinueto
intervention for poverty alleviation,and technicalchange             require largeamounts of public fundingfor capitalexpen-
through researchand extension.Despite progress,the agri-             ditures. However,given the magnitude of the resources
cultural sector displaysa lack of efficiency      and cost-effec-    required and lack of capacityfor effectiveimplementation,
tivenessof publicspendingprograms.          The pattern of spend-    it is essentialto encourageprivatesector financing   in urban
ing appears to be inefficient    in providingdirect benefitsto       water supply and sanitation and ports, tourism and hotel
the poor and landless,whichsuggestsa need for better tar-            projectsand housingdevelopmentprojects.Moreover,the
geting.A significant  part of GOB's expenditureprogramsin            sectorsuffersfrom inadequatefundingfor recurrentexpen-
agricultureis characterized    bylowpublicgoodscontent and           ditures in some criticalsub-sectors,particularly   roads and
lackof implementation     capacity.  Muchof the market spend-        inlandwater sector.Until more resourcescan becomeavail-
ing shouldbe eliminated      as these inputs could be supplied       able for infrastructure,the sector strategyneeds to selec-
instead by the privatesector                                         tivelyfocus on investments that can provide the highest
    Manufacturing.   Manufacturinghas been a high priority           socialretums, includingrehabilitationand maintenanceof
 sectorfor publicspendingover the past 25 years,despitelit-          roads and maintenanceand dredgingof inlandwaterways.
tle evidenceof financialor social return. In recent years,           The strategyshould alsotake into account the potentialfor
however,public spendingon industryhas been cut signifi-              increasedfunding from the private sector.
cantly, creating more space for productive private enter-                Energy.As is the case with the infrastructuresector,
prise. At a broad policylevel pronouncementshave been                Bangladeshneeds major upgradingin energy.Deficiencies
made favoringprivate sector led development.However,                 in the energysector manifestlyimpede econornicgrowth.
 slowprogresson implementation        is illustratedby the failure   Unlikesocialsectors,energyinvestments       havethe potential
 so farto redirect the State's rolein industryfrom investment        of makingasignificant   positivecontributionboth to the cap-
 to support. The snail's pace of the privatizationprocessis          ital and revenuebudgets. However,the scopefor a positive
 paralleledby continuingcapital expenditures to upgrade              impactis obstructedbyinefficient    operationsandbylowtar-
 some existingunits and, more astonishingby a few new                iffs. In the power sector,reduction of lossesand improved
 investmentproposals.Support servicesare ad hoc. There               collectionscan provide additionalrevenuesof about Tk 8
 are three majorconcernswhichneeds be addressedbefore                billionper year.The energysector is alsocharacterized       by
 approving  the FY97and subsequentADPs:i) the privatiza-             investments   withlonglead times.and are substantially  inter-
 tion program shouldbe acceleratedin both manufacturing              dependent.Accordingly,    there is a need fora clearandcom-
 and finance;ii)meanwhile     SOEs shouldtake no new invest-         prehensiveinvestmentpolicyrather than ad hoc initiatives
 ment initiatives; and iii) the rangeof industrialsupportser-        for individual  projects.Moreover,whileinvestment     require-
vices should be rationalized.In addition, more attention             mentsin the energysectorwillcontinueto increase,      the effi-

                                                    PUBLICEXPENDITURE
                                           BANGLADESH               REVIEW
                                                          2
ciencycan be guaranteedonlyby allocating     someof them to            of publicexpenditurewithinthe healthsectorneeds to grad-
the private sector and recastingothers on the basis of an              uallyshift fromthe tertiaryleveland specialized       health care
overallsector reform program.Projects in new gas explo-                servicesto more emphasison preventivecare and the pri-
ration and production shouldbe left to the privatesector,as            mary level,leavingmost of the further expansionof higher
should some of the proposed power projects.Investments                 level curative servicesto be financedby private resources.
in both the gas and power sector shouldbe coordinatedin                Priority should be givento maternaland childcare includ-
the context of a comprehensive    energysectorreform strat-            ing emergency      obstetriccare.
egywith a long term planninghorizon.                                        In sum then, despite progress,the public expenditure
    Education. In recentyears,the GOB has demonstrateda                program displaysa lack of efficiency       and cost-effectiveness
strongcommitmentto education.In the primarysub sector,                 in all sectors.The past record showslimitedsocialbenefits
it launcheda universal   primaryand masseducationprogram               from public investmentsin areas such as manufacturing
in 1980and since then GOB has taken severalmeasuresto                  while there is some evidencethat investmentsin physical
increaseaccessand improvethe efficiency      of the education          infrastructuresuch as roads, water and sanitation,research,
 system. There is a strongpublicgoodprovision    argumentfor           education and health have significantpositive net social
 giving continued high priority to the sector. The                     benefits if managedproperly.      There is significant   scope for
 Government'seffortsin educationare nevertheless      beset by          improvingthe pattern of spendingin agricultureand social
 problemssuch as lowattendance and completion        rates, rel-        sectors so that it becomesmore efficientin providing       direct
 evanceandqualityof programs.    An analysis  of publicexpen-          benefits to the poor, implyinga need for better targeting.
 diture incidencein ruraleducationpointsto a highlyskewed               Spendingprogramsalsoneed to be more effectivein raising
 distributionof benefits which implies a need to re-orient              incomeslevels     whichsuggests   a need for changein the over-
 spendingto ensurebetter targetingon the needsof the rural              all pattern of public expenditure.All of this impliesa need
 poor. There is need to shift the compositionof spending                for a wide rangeof measuresto changethe pattern of expen-
 towardsless emphasison tertiarylevelssuch as universities              diture if it is to better servethe Government'sstated policy
 and subsidy schemes in primaryand secondaryeducation                   objectivesof growthand povertyalleviation.Specificmea-
 while givingthe highestpriorityto primaryeducationand                  sures to be consideredincludesthe need for:
 effectiveliteracyprograms.                                              * Formulating     comprehensive    medium-termpolicyframe-
     Health.The GOB has acknowledged       the need for giving          worksfor eachmajorsectorincludingstrategic         plansforcur-
 higher priority to the health and familyplanning sector.               rent and capital expenditure allocations and financing;
 Despite recent increasesin allocations,   the overalllevelof           assessmentof net socialbenefits and effects on the poor;
 expenditureon health and familyplaningremainslow on a                  and measures needed for cost-effective delivery and
 per capita basis and in terms of their share of GDP                    improvedquality.
  Notwithstanding   some degree of progressivity  in the distri-             Comprehensive     re-thinking and re-defining  of the roleof
 bution of benefits from public health expenditurethere is               the public sector  and  the private sector and/or NGOs    and to
  an urgent need for actions to improve the coverageand                  ensurethat theireffortscomplement        eachother.Whilethere
  qualityof public health intervention.There is a clear need             is  a need for   enhancing  the role  of the private sector and
  for increasedeffortsto improveaccessto publichealthcare                NGOs there is alsoa clearneed for continued,and in some
  services, including special programs for rural areas. The              caseincreased,    publicinvestment   in selectedareasof educa-
  Government should not aim at providingcomprehensive                    tion, research,  healthand family   planning, and infrastructure
  free health careto allindividuals            Ensuringequi-
                                   at alllevels.                         sub-sectorssuchas ruralroads,and waterand sanitation.
  table access to an essentialpackageof primarylevel, pre-               * Reprioritization     between and within sectors, including
  ventive and low cost curative health care services for all             further reduction of spendingon manufacturing,financial
  shouldbe the chiefconcern.In addition,communities,      local          enterprisesand agricultural    outlayson markets,whilefocus-
  self-governmentbodies, NGOs and the private sector                     ing on areas with higherpublic goodscontent such as infra-
  should be encouraged and supported in organizingand                    structure, researchand socialsectors.
  managingtheir own health services.To achievehigh cost-                  * Measuresto ensure appropriatebalance of ADP capital
  effectiveness and better targetingof the poor the allocation           expenditureand currentbudget allocations,        including  mea-

                                                       ExEcunVESuMMAw
                                                                   3
sures to ensure that sufficient
                              resourcesare availablefor 0               sector including strategic plans for current and capital
& M and rehabilitation  purposeswith high rates of return;              expenditure allocationsand financing;assessmentof net
and to achievemore cost-savings   and better cost recovery              social benefits and effects on the poor; and measures
acrossall sectors.                                                      needed for cost-effective  delivery.
* Wide ranging measures to improve the institutional                    * Strengthening  the systems of accounting,  audit, evaluation,
framework.                                                             and expenditure   control.This needs to include improved
                                                                        accountingpractices,strengtheningof the capacityto eval-
The institutional framework                                             uate prioritization and the output of expenditures,
                                                                        improvedquality and coverageof audit practicesincluding
The dichotomyin terms of ADP and the revenuebudget is                   performance   audit, andimproveddissemination       and expen-
 an importantdetrimentalfactorin effortsto improvePEM.                  diture controlmechanisms.
 One major issueis that recurrentbudget implications      of the        * Strengthening  of institutions,management,    technology  and
ADP are not being properlyassessed;othersinclude struc-                skills.The institutionalstructures,personnelmanagement,
tural weaknessin the institutionalsystemsuch as diffusion               staff skillsand technologystandards need to be strength-
of power with tall hierarchiesand duplicationof functions               ened and streamlines.  This impliesan urgent need for more
or responsibilitiesand therebyrelatedproceduralcomplex-                 training and manpowerdevelopment. Problems resulting
ities and delays.There are generalproblemssuch as waste                 from institutional complexitieswith multi-layeredproce-
 andabuse,deficiencies   in skills,personnelmanagement      and         dures and diffusionof responsibilities   callfor streamlining
officetechnology-all of whichcontributeto weaknesses          in        of functions and rationalization.Greater financial and
 audit,evaluation,planningand expenditurecontrol.While                  operational autonomy should be encouraged selectively
the budget systemso far has functionedreasonablywellin                  alongwith effectivecontrolsto minimize      risksof misuseof
terms of aggregate fiscal constraint, the Government                    funds.
acknowledges   major weaknesses     in terms of strategicprior-         * Strengthening themanagement    ofADP Thiswouldinclude:
itizationand technicalefficiency.    Line ministriesand other          a fundamentalreviewof the existing     administrative  arrange-
agenciesinvolvedlack strong incentivesfor consistentuse                mentswhichdichotomize       developmentand revenueexpen-
of objective criteria for prioritizationand evaluation of              diture programs;the dispersion    of responsibility  amongand
expenditures. Also,at the micro-level    incentives are weakto         within organizations;responsibilitiesand corresponding
ensureefficiency, cost-effectiveness   andqualityin the actual         authorityfor implementationof projects,and the scope of
deliveryof servicesto the public.The weaknessof the cur-               audit of developmentprojects.
rent PEM system points to need for reform includingthe                     In sum then, there is a paramountneed to improvethe
following  measures.                                                   quality, efficiencyand cost-effectiveness  of public expendi-
 * Strengthening the capacityto assess     total resource. This        ture and to re-examine  prioritiesbetweenand withinsectors
needsto includebetter monitoring,     estimationand planning           and amongprojects. Majorefforts are needed to improve
capacity of aggregatecapitaland recurrentexpenditure,tax               budgetarysystemsand process;to acceleratereformsin the
and non-taxrevenue,the fiscaldeficitand publicdebt. The                public enterprise sector; to fosterprivate and NGO initia-
problem of instillingaggregatefiscaldisciplinecan be miti-             tives and; to developthe capacityof technicalagenciesand
gated by the effective use of a medium-termmacroeco-                   local government and municipalities      to generate revenue
nomic framework    in the budget processand by establishing            and deliverexpenditure programs.       Also, special initiatives
formalconstraintson spendingand borrowing,includinga                   are needed to rationalize  and makethe centralgovernment
strong systemof parliamentary    controls.                             more effective. Changingincentives,including efforts to
 * Strengtheningand integrating   the overallbudgeting   frame-        build a moredecentralized    PEM framework      is essentialand
work. This may include programbudgeting, a multi-year                  willrequiremajor long-termeffortsof capacitybuilding.At
framework   forboth the ADPand revenuebudget and more                  the same time the centralgovernmentabilityto plan,mon-
comprehensive and consistent integrated systems of                     itor and controlspendingprograms      needs to improveso that
accountingand audit. This needs to be supported by com-                specific actioncan be taken to counterimmediateconcerns
prehensive medium-termpolicyframeworks          for eachmajor          regardingof waste and poor management.

                                         BANGLADESH PUBLIC EXPENDITURE REVIEW
                                                                   4
   Priority items to be considered for actionor implemen-    tion and to improve cost-recovery;(iii) to strengthenthe
tation in the very near future should include measures:(i)   Finance Divisionand sectoral Ministries capacityto plan
to firmly implement decisionsneeded to establish a con-      and control expenditureprograms; (iv) to reform and to
sistent and effective integrated budgetary framework         reduce the size of the state-owned enterprise sector and
includingallrevenueand expendituresand a medium-term         rationalize government staffing; and finally(v) to under-
macroeconomic framework; (ii) to implement specific          take rigorous scrutiny of existing and planned ADP
 actionsneeded to strengthenthe systemof tax administra-      projects.




                                                   ExEcuTvE SuMMARY
                                                             5
Chapter
      1
Budgetary Revenues, Expenditures
and Fiscal Sustainability
In Bangladesh,one of the world'spoorest countries(1994            with emergingissues such as integration of recurrentand
GNP per capita $230, population 117.8 million) public             capitalbudgets and institutionalizing the effectiveapplica-
expenditures have had a pivotal role in building up the           tion of project selectioncriteria. More recentlymacroeco-
country'spublic infrastructureand services to promote the         nomic imbalanceshave emerged, underscoringthe need
growthof the economy.    Bangladesh'scurrentinvestmentto          for reviewingthe priorities and programmingof public
GDP ratio is near 14 percent, divided almost equally              expenditures.
between public and private investment. In targeting an
investmentratio of nearer 20 percent, private investment          Recent macroeconomic performance
willneed to take the lead role. But publicinvestmentswill
alsoneed to be kept up both in viewof the laggedresponse          Building on the structural reform initiativesof the 1980s,
of the private sector and to provide the infrastructure           GOB launched a fairly comprehensiveeconomicreform
needed for the private sector to grow.And periodicassess-         programin the early 1990sto open up and establisha lib-
ments and revisionof the country'spublicexpenditurepro-           eralized, market-based, and private sector-drivenecono-
grams are essential in ensuring the most efficient use of         my.At the same time, GOB pursued prudent macroeco-
public resources and maximizing their development                 nomic policies and achieved a high degree of macroeco-
impact.                                                           nomic stability,successfullyintroduced VATand initiated
   The last Public Expenditure Review (PER) in                    steps to improve the quality/prioritization of public
Bangladeshwas completed in 1989. The present PER is               expenditures.
essentiallyforward-looking,   and focusedon the programs             Macroeconomic   stabilitywas not, however,matched by
for FY96 and FY97, and is a collaborativeexercisewith             a strong pick-up in economicgrowth,which remained in
GOB. In part, it is to be seen as a sequel to the PER of          the 4.0-4.5 percent range.This is wellbelowwhat is need-
 1989,reinforcingmany of its messagesand aimed at con-            ed to effectivelyaddress Bangladesh'sacute povertyprob-
solidating the gains under IDAs Public Resource                   lem. Strongexport performance,particularly    that of ready-
ManagementAdjustmentCredit (PRMAC)of 1992which                    made garments,contributedto a relatively   stronggrowthin
embodies many of the key recommendations        of the last       large scale manufacturing. This was, however, insuffi-
PER. Prominentamong these gainsis a doublingover the              cient-given that the latter still accounts for less than 10
last 4 years of the domestic contribution to the annual           percent of GDP-to offsetpoor performancein foodgrain
developmentprogram(ADP)to almost50 percent.In part                production two years in a row. AgriculturalGDP, which
this PER is focusedon new and emergingissuessuch as a             accounts for more than 30 percent of GDP,showednegli-
strategicvisionof a medium-termframework,     through a re-       gible growthin FY94and 1.2 percent contractionin FY95
examinationof Bangladesh'ssustainablefiscaldeficitin the          due to droughts/floods,thus adverselyaffectingthe overall
context of the decliningprospect for concessional   foreign       growthperformance.
 aid. Linked to this is a re-thinkingand re-definingof the           Economicperformance     has consequently  been mixed in
roles of the public and private and/or NGO sector in the          the 1990s (seeAnnex Table 1) During FY92-FY95,         while
 developmentof the country's economic as well as social           GI)P growth was modest, inflationwas contained in the
 infrastructure.Public spendingwill also need to be better        2-5.5 percent range, the budget deficit held below 6 per-
directed towards services with higher social retums and           cent of GDP,the extemalcurrent accountdeficitaveraged
whichare used by the poor.The institutional  framework  for       2.5 percent of GDP,and nationalsavingsrose fromthe 6-7
 expenditure management needs to be re-visited to deal            percent of GDP in the late 1980sto 12-13 percent.

                                                              7
Issues
     in budgetary
                revenues,
                        expenditures enues from excise taxes, and were later                                       shifted to raising
and financing                                                           revenues from more broad-based taxes, which were con-
                                                                        sidered superior to excise taxes as they were less distor-
More recently, macroeconomic performance has tended to                  tionary. The major structural improvement to the tax sys-
weaken. The central government budget deficit rose from                 tem was made in 1991 when a VAT was introduced. The
6 percent of GDP in FY94 to 6.7 percent in FY95 due to                  VATwas fixed at a rate of 15 percent, initially applying only
unbudgeted wage increases, rice marketing in the after-                 to the manufacturing and import stages. Starting 1994/95,
math of the drought, and a sizable increase in development              wholesalers and retailers were encouraged to register vol-
spending. A 24 percent increase in private sector credit                untarily for the VAT,although few have actually done so.
intensified demand pressures. The FY96budget added to                   Several sectors have been exempt from the VAT, including
the expansionary pressures. Despite recent downward                     power, textiles, and certain food and pharmaceutical prod-
adjustments in budgetary development expenditures, the                  ucts. As a result, collections from the VAT are concentrat-
adverse budgetary developments of the second half of                    ed on imports, construction, gas and tobacco. VAT now
FY96 might still lead to a large deficit and to undesirable             contributes almost one half of tax revenues.
expansion in domestic borrowing. Contributing to this has                  With the reform efforts, revenue growth has been
been the prolonged political impasse until the formation of             impressive, the revenue/GDP ratio rising from 9.3 percent
a Caretaker Government in April 1996 and associated dis-                of GDP in FY90 to almost 12 percent in FY95. This is still
ruptions in economic activity which is likely to weaken tax             considerably less than the revenue effort of other South
collections, reduce aid disbursements, increase current                 Asia countries where the revenue/GDP ratios are: 19.7 per-
spending. Also, a growing merchandise trade deficit has                 cent in Sri Lanka, 18.4 percent Pakistan, and 19.1 percent
remained a worrying development since July 1995, as gross               India. For Bangladeshit is essential that an annual revenue
official reserves fell sharply from $3.1 billion to $2.4 billion       growth of 0.5 percent of GDP be maintained. This has
within six months. This has demonstrated the economy's                  become all the more compelling with the expected decline
high degree of vulnerability to shocks and slippages in                 in aid financing. VAT has proved to have considerable
macro-management.                                                      potential. If exemptions are removed and if VAT is extend-
                                                                       ed to wholesale/retail stage, VAT collections could even
Revenues                                                               double. In import duties there should be greater compres-
                                                                       sion of the rates, with some of the 7.5 percent rates
The public finance structure in Bangladesh is a reflection of          (removed in the 1995/96 Budget) being restored. Non-tax
the country's highly centralized government. The central               revenues account for a significant share (23 percent) of the
government collects some 97 percent of the total revenues              revenues. But their share could rise further, and the non-
of the country, and is responsible for 93 percent of total             tax cell set up in the Ministry of Finance should be made
public spending. The revenue structure of the central gov-             fullyoperational. And to progress towards a more equitable
erinent was traditionally very weak in Bangladesh, charac-             tax system, contribution of direct taxes (now only 15 per-
terized by high and uneven import tariffs, various excise              cent) should rise, and here improved tax administration is
taxes, and narrowly-based corporate and personal income                key.
taxes. Total revenues averaged less than 9 percent of GDP                  Central government current expenditures have in recent
during the 1980s, with one half of tax revenues being                  years averaged 50 percent of total budgetary expenditures.
accounted for by customs duties, while sales and income                Current expenditures consist of wages and allowances (38
taxes contributed less than one third to total tax collec-             percent); purchase of goods and other services (26 per-
tions. The tax base was further weakened by numerous                   cent); interest payments (12 percent); transfer to local gov-
preferences and exemptions, applying in particular to agri-            emnmnents,  non-government organizations, the post office,
culture and cottage industries.                                        railways; and subsidies (24 percent). Current expenditures
   The reform efforts since the late 1980s have been aimed             averaged 7 percent of GDP during the 1980s and have
at diversifying the tax base through increases in domestic             under GOB's reform program remained stable at about 8
taxes. Measures were initially focused on increasing rev-              percent in recent years (Annex Chart 2), while real increas-

                                         BANGLADESH PUBLIC EXPENDITURE REVIEW
                                                                   8
es were effected for priority programs in primary educa-              in ADP budgets in the face of more constrainedproject aid
tion, primary health and family planning and for non-wage             inflows emphasizes the need for a rigorousprioritization of
 expenditures for operations and maintenance. The medi-               ADP projects. A sample of ADP projects with questionable
 um-term objectiveshould be to ensure an increasein real terms        merit or rationale/priority
                                                                                                for public sectorinvestmentsis given
for priority programin primary education,primary health and           in Appendix 2.
family planning and for non-wage expenditures    for operations
and maintenance. At the same time, given the constraints on           Financing
 public expenditure growth, the wage and salaries budget
 should be contained. GOB recently announced its inten-               The central government budgetary deficits have been
 tion to set up a Pay Commission to review the compensa-              financed mostly by foreign grants (mainly food and com-
 tion structure of governmnentemployees. More appropri-               modity aid) and highly concessional foreign borrowing in
 ate, however, may be a Pay and Public Service Commission             the form of project aid. Foreign financing has accounted
 which will have a broad mandate to review the efficiency,            for an average of 85 percent of total financing during the
 equity and incentive structure of compensation in the con-           past decade. Domestic borrowing has been from both the
 text of an assessment of the appropriate size, structure and         banking system and nonbank public. Between 1988/89-
 skill mix of the public service, and its evolving role, and a        1993/94, the Government made a net repayment to the
 budgetarily sustainable wage bill. A review of key issues in         banking system, while nonbank public borrowing increased
 the largest component of current expenditures-wages and              steadily (Annex Chart 2). In 1994/95, however, there was a
 salaries-and     of the food account, is presented in                net recourse to the banking system equivalent to about one
 Appendix 1.                                                          half percentage point of GDP Borrowing from the banking
     The major vehicle for public investment in Bangladesh is         system includes advances from Bangladesh Bank, short-
 the ADP Under a program of rationalization begun in 1990,            term treasury bills, and a variety of long-term treasury
 the annual ADP is set in the context of a three-year rolling         bonds. Borrowing from nonbank sources is through differ-
 investment plan that designates core projects to receive pri-        ent savings instruments, typically issued at above-market
 ority access to funds and establishes a ranking for other pro-       rates justified as a means to encourage household saving.
 jects. The ADP also incorporates capital investment projects         As of June 1995, total saving instruments outstanding
 of public enterprises financed through government contri-            amounted to Tk 63 billion, 5 1/2 percent of GDP
 butions, foreign aid, and their own resources. These self-
 financed projects have been relatively small and are not             Fiscaland external debt sustainability
 included in the measure of central government capital
 expenditure. Self-financing also includes the direct foreign         One of the tasks for this review is to form a medium-term
 financing of enterprises for project execution.                      view of the resource envelope for public expenditures,
     ADP expenditure declined steadily during the 1980s-              through estimating what may be the sustainable fiscal
 from about 10 percent of GDP at the beginning of the                 deficit over the medium term. The assessment needs to
 decade to near 6 percent by 1990/91, owing in part to local          take into account the need for macroeconomic stability,aid
 resource and implementation constraints. Since 1992/93,              estimates and the potential for raising revenues and for
 however, ADP expenditure relative to GDP increased sig-              increased domestic borrowing.
 nificantly,reaching 8 percent of GDP by 1994/95 (compare                The results of our analysis are presented in Annex Tables
 with India 6.6 percent and Pakistan 4.6 percent). The sec-           8-11, Charts 3-4 and in the summary Table 1. The major
 toral composition of ADP has also changed significantly              medium-term economic objectives are to achieve faster
 over time, with increases in the share of expenditures in the        growth, maintain low.inflation, and keep the external cur-
 social sectors, especially education and health, and a reduc-        rent account deficit at a manageable level. Towards these
 tion in industry. Foreign grants and concessional loans have         goas, fiscal policy would have a crucial role to play in rais-
 played a dominant role in financing ADP, although domes-             ing domestic savingsand providing necessary investment in
 tic resources have also become important in recent years             infrastructure to support private sector growth. Under the
 and now contribute almost 50 percent of the ADP The rise             medium-term reform scenario, it is envisaged that govem-

                             BUDGETARY REVENUES, EXPENDITURE AND FISCAL SUSTAINABILITY
                                                                  9
ment revenuesrelativeto GDP would increasesteadily        by          percent is foreignfinanced and not more than 1.5 percent
0.5 percent per year to 14 percent by FY2002.This would               in domestically financed) is consistent with a stable
facilitate a modest growth in the resource envelope for               macroeconomic environment in Bangladesh. However,
public expenditures. Government expenditures (current                 foreignaid is expected to decline(we project a decline to
plus ADP) could rise from 16.2 percent of GDP in FY97                 near 3.5 percent of GDP by FY2000 under the reform
to 17.1 percentby FY2002.The improvedrevenueperfor-                   scenarioand a sharper decline in the low growthscenario,
mance, togetherwith the eliminationof the food account                Annex Table 8) and the overall fiscaldeficit willneed to
deficit,would contribute to a steady declinein the overall            decline correspondingly.     The limited resource envelope
fiscaldeficit.It is expectedthat the bulk of the fiscaldeficit        underscoresthe importance of the troika of a good public
would continueto be financedthrough concessional       exter-         expenditure policy for Bangladesh:sustained increase in
nal financing.Takinginto account the projected extemal                the revenue collection effort; restraint on expenditure
financing,domesticfinancingof the deficitwould need to                growth; and rigorous prioritization of the ADP. In the
be kept smallto ensure that there would be an adequate                reform (highergrowth) scenario fiscalsustainability   could
supplyof credit to the private sector.                                be maintained with these reforms and so long as
    Our analysisshows that Bangladesh    hasmaintained,  and          Bangladesh is able to keep domestic financinglow and
to someexfentimproved,           sustainability
                         itsfiscal             in recentyears.         obtain extemal financing on concessionalterms. In the
This has been due primarilyto a very high grant elementin              low growth scenario, however, deep cuts would be
 external financingand to improvedprimaryfiscaldeficits                required both in current expenditures and ADP,if fiscal
 (overall fiscal deficit minus the interest component).                sustainability is to be attained, and these cuts would fur-
Although GDP growth rates averagedonly 41/2 percent                    ther dampen growth of the economy.
 per annum between 1988/89-1994/95,      the averageinterest              Fiscalreform has an importantrole in playin influenc-
 rate on foreignfinancingremainedvery low at 1.5percent.               ing investmentand GDP growthover the mediumterm. A
 Though domestic debt carries higher interest rates, it                reduced need for fiscal deficit financing will lower the
 accounted for only a fractionof total debt. As a result,the           potentialcrowdingout of private investmentboth through
 weightedeffectiveinterest rate on the foreignand domes-               the direct influences on interest ratesand byimprovingpri-
 tic debt combinedwas negativein real terms and waswell                vate sector assessmentof the longer-termsustainability   of
 below the averagereal GDP growth rate. Alsothere has                  the public  sector debt position. Moreover, restructuringof
 been a reductionin the primaryfiscaldeficit,owinglargely              the tax and expendituressystemwillyieldbetter signalsfor
 to increasesin tax resources.                                         resource allocation, improve incentives for savings and
     Experience in recent years has demonstrated that an               investment,and help channelresourcesinto the most pro-
 overall fiscaldeficit of 6 percent of GDP (of which 4.5               ductiveuses.
 TABLEI
                                     1988/89-1995/96
          Keyfiscalanddebt indicators,
 Bangladesh:
 (percentof GDP)
                                         1988/89    1989/90      1990/91      1991/92    1992,93   1993/94   1994/95 1995/96(est)
 Primaryfiscaldeficitof                    5.9        6.6             5.7       4.5        4.4       4.6        5.3       4.5
  the CentralGovemment
 Overallfiscaldeficit                      6.9        7.5             6.8       5.6        5.4       5.5        6.3       5.6
  Net foreignfinancing                     6.8        6.3             5.9       4.6        5.2       4.5        4.5       4.1
  Net domestic  financing                  0.1        1.2             0.9       1.0        0.2       1.0        1.8       1.5

 Foreigndebt                              46.2       44.6          47.0        48.5       47.9      55.9       50.9      48.5
 Domnesticdebt                              -         5.8           6.8         8.7       10.1      13.4       13.0      13.3
  Totaldebt                               46.2       50.4          53.8        57.2       58.0      69.3       63.9      61.8

 Real
    foreigninterestrate( percent)         -6.9       -2.0          -6.9        -3.1       -1.3      -2.7       -7.8      -4 7
 Realdomesticinterestrate(percent)        -1.8        2.9            2.9         3.7       3.2       0.4        -4.1     -1.6
  Weighted            rate( percent)
          real interest                   -6.9       -1.4          -5.6        -2.1       -0.5      -2.1       -7.0      -4.0
                            estumates.
       Mrtry of Fuwce ndstaff
 Source:



                                         BANGLADESH PUBLIC EXPENDITURE REVIEW
                                                                 10
External debt sustainability                                          external financing.       any debt revaluationcould add
                                                                                         Equally,
                                                                      to the burden of repayment.
External debt sustainability could be definedin terms of a
country's ability to meet its external obligationsin full             Impact on fiscalsustainabilityof financialsectorand
without recourseto debt rescheduling    or reliefof the accu-         public enterprise reforms
mulation of arrears, over the medium or long terms.
Reducingthe burden of current and future obligationsto                The analysishas so far been confined to examiningfiscal
sustainablelevels could also eliminatea possibledisincen-             and external debt sustainabilityof the central government
tive effect on investment and new capitalinflows.The key              and should be extendedto the consolidatedpublic sector,
indicators for assessingthis sustainability  include: (i) the         including the central government, costs associatedwith
ratio of debt serviceto exportsgoods and services;(ii) the            recapitalizationof nationalizedcommercialbanks (NCBs)
ratio of the net present value (NPV) of the debt to                   and private banks, and public enterprise reform. In this
exports; and (iii) any external financing gap, after allowing         context, the rising share of domestic debt in recent years
for projected inflowsin the forms of grant receipts, loan             should receiveparticularattention. In addition to the rela-
disbursements, any commercialcapital flows. The NPV                   tivelysmall amount of domestic financingof the central
approach is considered a useful indicator as it takes into            governmentdeficit, domesticdebt has been rising fast on
account the concessionality   of the debt stock.A country's           account of the NCBs and the assumptionof public enter-
external debt positionmay be considered sustainableover               prise debts. While the amounts assumed so far have not
the projection period if: (i) the debt serviceratio is pro-           changed the assessmentof the sustainability  of the central
jected to decline below 20-25 percent of exports and                  government'sfiscalposition, this issue will clearlyneed to
goods and services; (ii) the ratio of the NPV of                      be closelylooked at as the full magnitude of the central
debt/exports fall to below 200-250 percent; and (iii)                 government's financial obligations in restructuring the
financinggap is eliminated.                                           banks and public enterprises becomes clearer. Reforms
   For Bangladesh,under both reformand low-growth        sce-         must be implementedearlyto stem the lossesof the banks
narios, it is assumedthat all future foreignfinancing  willbe         and public enterpriseshaveso far that fallenon the central
provided by officialcreditors,with a high degree of con-              government,adding to its debt and debt-serviceburden.
cessionality;and the principalterms of the borrowingwill                 Given the lack of necessarydata, calculations contained
remain broadlyunchangedas in recentyears.The favorable                in this section are preliminaryand should be interpreted
terms would include a long maturity (38 years), a long                with caution. Based on available data, the capital and pro-
grace period (10 years), and a low interest rate (1.5 per-            visional shortfalls of NCBs and private banks as of end-
cent). Based on these assumptions, the grant element (in               1994 were estimated to be some Tk 25 billion (2 1/2 per-
percent) is estimated to be very high (47 percent). Using             cent of GDP) and Tk 23 billion (2 percent of GDP),
this calculated grant element to discount the stock of debt           respectively. Assuming that 80 percent of the shortfalls of
in the projection period, the NPV debt/exports ratio under            private banks were also to be covered by the central gov-
the reform scenario is projected to fall gradually from 197           ernment, the total cost of recapitalization that would need
percent in 1994/95 to about 92 percent by the end of the              to be borne by the central government could amount to Tk
decade, and that under the low-growth scenario to 100 per-            43 billion. On public enterprises the data provided by the
cent, all well below the suggested level of 200-250 percent.          Government indicate that the overall cash deficit in
Moreover, the debt service ratio is to remain very low                 1994/95 was about Tk 20 billion, financed by ADP afloca-
under both scenarios. The analysiswould indicatethat, under           tions, credit from NCBs and through accumulation of
either scenario, Bangladeshwill be able to serviceits external        arrears to both the Government and banks. The data also
debt obligation over the medium term (Chart 4). The decline           show that the cash deficit of public enterprises has declined
in extemal financing that is projected over the medium-               somewhat in recent years, owing mainly to the retrench-
term is expected to contribute to a decline in Bangladesh's           mentin several important sectors. Total arrears outstanding
debt/GDP ratio. Debt sustainability can, however, be                  to the banking system were estimated to have reached Tk
thrown in doubt should there be hardening in the terms of             20 billion by 1994/95, and those to the central government

                             BUDGETARY REVENUES, EXPENDITURE AND FISCAL SUSTAINABILITY
                                                                 11
couldbe muchlarger,althoughspecificfiguresare not              pavethewayfor increased        involvement    of NGOsandpri-
available. Tofacilitate analysisin thissection,  it is assumed vatesectoroperators     in the supply  and delivery    of services.
thatfinancial  assistanceof some  Tk 20billion  fromthecen-       In promoting    the privatesector,     the   Government       has
tral government   wouldbe requiredto makepublicenter-          made progressthroughreformsin trade, exchange                  rate,
prises financially  viable (i.e., with zero cash deficits).    and industrialpolicies,and         by  removing      most   foreign
Clearly, thisassumption  isveryarbitrary  andsubject           exchange
                                                         to revi-        and pricecontrols.      But thereis a lot to be done
sion when more complete data become available.                 for improving   the businessenvironment          in the areasof:
Furthermore,    othermeasures,   including  thosefocusing      infrastructure;
                                                              on               legalframework-laws          and thejudicial     sys-
restructuring  and privatization,  are criticalto raisingthe   temr-dealingwith propertyrights,companies,              contracts,
efficiency  and profitabilityof publicenterprises.    Basedon  bankruptcy,and competitionpolicy; and makingthe
the available  data,our analysis  suggests that theimpacton    bureaucracy   andpromotional      publicagencies     morerespon-
the centralgovernment     fiscal  position of recapitalization siveandefficient   in facilitating  business   activities.
 andpublic   enterprisereform  could be keptwithin     manage.    Reforming    or privatizing    Bangladesh's     inefficient  and
 ablelimits(Annex    Table11).Whileinterestcostswould          lossmaking    SOEs    would  be  vitally important    for eliminat-
 riseand the stockof domestic     debt of the centralgovem-    ingtheirsignificant   burdenon the budget.SOEinefficien-
 mentwou'ldalso increase.But fiscalsustainability              cyandresulting
                                                           could                 wastage   of scarce resources     haveremained
 stillbe maintained, provided  the keyassumptions              a barrierto highereconomic
                                                        (includ-                                  growth.SOE dominance            in
 ing concessional  external financing) underlying     the medi-certain sectorshasimpededfullscalemarketliberalization
 um-term   reform scenario hold.                               and privatesectorparticipation,       and poor qualityof their
                                                               services/products   alsoconstitutes    a drag on privatesector
Changingrole of the state                                      development.   Andtheloansgiven        to SOEshaveweakened
                                                               NCBsbysaddling       themwithsizable      non-performing      loans,
Redefining  the state's role and  making  the  public  sector  which  are often  assumed    by  the Government.
moreefficient   and effective in discharging  its core func-       In FY94,there were about 210 non-financial               public
tionshavebeenan important      objective of manyreforming enterprises       operated     by 39   autonomous      public   corpora-
countries. Consistent withthe pursuitof establishing    a lib- tions.Theirtotal investment        amountedto 2.2 percentof
eralized economy   that is driven by the privatesector,the GDP,while         grosslosses   reachedto $243million        (almost1
GOB too has long recognized      the need for reducing     the percentof GDP).Theselosses          weremorethanhalfof the
sizeof the publicsectorand strengthening     its govemance ADPspending          on allsocial  sectors  in thatyear.   Similar  loss-
capacity.Accordingly,  reforms wereinitiatedin manyareas es wererecorded           in FY95.SOEshavethusfaileddismally
of public sector management   (PSM).  Someof theseefforts in generating        adequateeconomic         retums for the sizable
wereintensified  in theearly1990s.  However,   in mostareas resources     channeled    to them.
of PSM,reform     progress to date has beenverylittle,and          Thedeficits  of non-financial   SOEshavecontributed          sig-
basically stalledduringthe last two   years due  to  the  pro-  nificantly to  the   public   sector   borrowing     requirement
longed political impasse.                                       (PSBR).  In FY94,the deficitof the 19 big corporations
   A characteristic of Bangladesh's  government   is its high- amountedto $350million(1.4 percent of GDP on an
ly centralized nature,withthecentralgovernment         assum- accrual   basis).However,      on a cash-flow      basis the latter
ingresponsibility forcollecting almost allthecountry's    rev- deficitwasevenlarger-$438          million  (1.7percent   ofGDP)
enuesand for some93 percentof total publicspending. (seeAppendix                onSOEfinances).      Afternettingoutthepay-
GOB has not madeany serious        effortto strengthen   local mentsof directtaxesand dividends           to the centralgovern-
elected bodiesand initiate  decentralization;a localgovem- ment,the net contribution            to the overallPSBRof these
ment reformbill has been awaitingthe parliamentary SOEs amounted                    to  0.8 percent   of GDP Deficits       of this
approval  since1992.Progress    in this areacouldimprove magnitude          havecontinued      intoFY95and FY96.        Financing
efficiency in theprovision  of publicservices  by enhancing these sizabledeficitsby borrowingand/orbuildingup
 financialaccountability,enabling the directparticipation   of arrears leadto additional    direct/indirect   burdenonthecen-
 the peoplein the what/how/for    whomdecisions,     and also tralgovemment       budget.

                                         BANGLADESHPUBLIC EXPENDITURE REVIEW
                                                                12
   A related dimensionof the non-financialSOE opera-               the Governmentannounced a list of 47 SOEs for the first
dons is the size of SOE debt, whichamountedto 39.3 per-            stage of privatizationin the 1990s,only 18 SOE privatiza-
cent of GDP in FY94,consistingof loans borrowed from               tions in the manufacturingsectorhave been finalized,  cov-
NCBs-3.3 percent of GDP at end-June-and the rest,                  ering just 6 percent of the total non-financialSOE assets
whichincludesgovernmentloans and governmentguaran-                 and 18 percent of operational losses. Similarly, there has
teed foreign loans, non-bank/non-government        domestic        been limitedprogressin reformingthe financialSOEs.The
debt, addingup to 36 percent of GDP Faced with persis-             impactof sector inefficiencies coupledwith the inabilityof
tently weak financial positions, most of these SOEs are            GOB to secure financingof the high capital investment
havingdifficulties  in servicingtheir debt to the NCBs and         requirements are particularlysignificantin the power, gas
the centralgovernment,postponingpaymentsof taxes and               and telecommunicationsectors. While some preliminary
ProvidentFund contributions,thereby also weakening     the         steps have been taken towards reform related activitiesin
financialSOEs as wellas the Government'sfiscalposition.            these sectors, progress is slow and insufficientto bring
Consequently, the central government budget remains                about the required turn around of performancein the near
under constant pressure because of the resulting need to           future. GOB's strategyshould focus on a clear commit-
assume SOE debt to the NCBs and to recapitalizethe                 ment towards sector reform based on the unbundling,
latter.                                                            commercialization   and corporatizationof the sector insti-
   Reforming and reducing the size of the SOE sector               tutionscoupledwith the introductionof private sector ser-
through commercialization, restructuring, competition,             vices. In order to encouragethe participationof strategic
and privatization are key elements of GOB's structural             investors and international capital resources, the reform
reform program towardsgreater relianceon markets and               policies should be appropriatelyarticulated, mechanisms
promotingthe private sector.So far the progresshas been            for their entry simplifiedand regulatoryinstitutionsestab-
.ery limited in all these areas. Since October 1991,when           lished to provide a stable transparentenvironment.




                           BUDGETARY REVENUES, EXPENDITURE AND FIscAL SUSTAINABILITY

                                                              13
Chapter
      2
Evaluation of Sectoral Expenditure
Programs
Progresshas been made in recent years shiftingtowardsa              recovery across all sectors. A greater role for the private
greater focuson social sectors (educationand health) and            sector in new investment and the provisionof servicesin
infrastructureinvestmentson roads and water and sanita-             manufacturing, telecommunication and energy and a
tion while there has been an appreciabledeclinein indus-            reduction of public spending on food subsidy programs,
try.However,despiteprogress,the pattern of publicexpen-             and the provision of inputs for agriculture,for example,
diture remains weak in terms of strategic prioritization            would help free public resources,hence enablingincrease
between and within sectors and among projects, and the              in the share of ADP and revenuebudget outlaysfor social
technicalefficiency in use of budget resources,i.e. achiev-         sectors (especiallyprimary education, basic health care
ing outputs at the lowest possiblecost. The Government              servicesand familyplanning),rural infrastructuresub-sec-
lacks comprehensiveand clear policy frameworksfor its               tors such as roads and water and sanitation,and for irriga-
expenditureprogramsin different sectors.There is a lack             tion, extension and research in agriculture,i.e. areas with
of clear criteria for evaluationof proposed expenditure             a high degree of public good content, and in whichthe pri-
programs and implementationis weak. Also, some public               vate sector is unlikelytake a leading role or be the prima-
spendingprogramsappear to limitrather than facilitatethe            ry catalystfor new projects.
 scope for the private sector and NGOs. Appendix2 pre-
sents a list of 47 questionable projects now in the ADP             Trends in the sectoral composition of ADP
Planned investment in these projects total some Tk61 bil-           (FY90-95)
lion, with disbursements spread over several years.
                                                                    Infrastructure and energy together have continued to be
Trends and issues                                                   the largestclaimants of ADP resources, Withtheir share ris-
                                                                    ing from 39 percent in FY90 to 45 percent in FY95 (Table
The analysis of sectors, as presented below, suggests that          2). Transport has accounted for 49 percent of this increase,
there is a need for a reassessment of the inter- and intra-         and power 36 percent. ADP spending has expanded most
sectoral composition of spending. This includes a func-             appreciably in the social sectors, with their combined
tional reprioritization with further reduction in manufac.          spending rising annually by 34 percent in nominal terms
turing, financial enterprises and agricultural outlays on           since FY90. Consequently, their share has risen sharply,
markets, while focusing on areas with higher public goods           from 10 percent in FY90 to 24 percent in FY95. Education
content such as infrastructure, research and social sec-            alone has accounted for 66 percent of the overall increase
tors.' The latter should be given high priority but there is        for social sectors.
a need for shift of emphasis from tertiary and curative                 The share of the production sectors-agriculture, rural
health care to primary and preventive health and family             development, water resources, and industry-has declined
planing, and from tertiary to primary education. The                noticeably, from 33 percent in FY90 to 20 percent in FY95
emphasis on infrastructure investments needs to be re-ori-          (Table 2). This has been largely due to an appreciable
ented towards projects with higher retums. In addition,             decline in spending by industry and, to some extent, the
there is a need to ensure appropriate balance of ADP cap-           water resources sector, despite an appreciable growth for
ital expenditure and current budget allocations, including          rural development spending, and modest growth for agri-
measures to ensure that sufficient resources are available          culture. The share of block allocations/spending by the
for 0 & M and rehabilitation purposes with high rates of            local government and "other sectors" has come down since
return; and to achieve more cost-savings and better cost            the early nineties.

                                                               14
TABLE
    2
AnnualDevelopment
                Program
(Takabillion)
                                 FY90                    FY93                     FY94                    FY95                    FY96                    FY97
Productionsector                 19.07                   14.28                   17.24                   20.10                   21.30                   2930
Agriculture                       3.26                    3.72                    5.21                    5.41                    5.28                    7.49
Ruraldevelopment                  1.78                    3.66                    4.80                    6.84                    7.27                    9.75
Waterresources                    9.77                    6.18                    5.66                    6.52                    7.48                   10.21
Industry                          4.27                    0.73                    1.57                     1.32                    1.27                   1.85
!nfrastructure/energy            22.08                   28.33                   39.36                   46.52                   45.91                   53.78
Power                             6.46                   10.07                   12.14                   15.26                   12.20                   13.08
Oil, gas and NR                   3.52                    4.76                    3.25                    2.42                    4.06                    4.80
Transport                         7.59                    9.68                   15.44                   19.49                   20.71                   24.40
Communications                    1.65                     1.45                   5.36                    4.52                    3.51                    3.93
Physicalplanning                  2.87                    2.37                    3.17                    4.83                    5.43                    7.58
Socialsector                      5.69                   10.48                   16.51                   24.05                   22.63                   29.58
Educaion                          2.26                    5.28                    9.20                   14.65                   13.89                   17.69
Health                            0.98                    2.06                    2.81                    3.70                    3.15                    6.12
Familyplanning                    2.20                    2.83                    4.08                    4.70                    4.50                    3.92
Socialwelfare                     0.26                    0.31                    0.42                    1.00                     1.09                   1.85
Localgovemment                    3.30                    5.38                    6.82                    4.10                    4.95                    5.36
Others                            7.02                    7.03                    9.91                    8.26                    9.68                    6.98
Total                            57.17                   65.50                   89.84                  103.03                  104.47                  125.00
a Local
      government  indudesblockalocation for distrct councls, districtand thanaInfrastructure,
                                                                                          devebppment
                                                                                                  assistance
                                                                                                           to thana and union parishad. development assistance
                                                                                                                                                             to
mun<ipalcorporatoios and pourashavas.
                                    and localgovemment bodies in Ctg.Hill-Tracts.
SourceIMED and PtanningCornmss,on.


The FY96 and FY97 Annual Development Program                                         in FY95 following the drought/flood in that year. Reasons
                                                                                     for slow growth in agriculture include; the narrow resource
The FY96 ADP budget target (Tk 121 bilLion)implied a                                 base, diminishing marginal retums to fertilizer and the Lit-
sizable 18 percent nominal increase over the realized FY95                           tle impact of research, extension, producer education and
ADP size. In the event, the FY96 ADP was scaled back to                              markets in promoting rapid growth. Notwithstanding the
Tk104 bilLion.Disruptions to project implementation due                              lack of a definitive strategy for the sector, GOB has stated
to the difficult poLitical
                         situation are likely to have affected                       that its main objectives are to stimulate growth enough to
the level of ADP realization. The FY97 ADP target is set at                          raise rural incomes, to cut poverty, and to improve food
Tk125 biLlion.Of this, infrastructure accounts for 28 per-                           security. Intermediate objectives are to develop rural insti-
cent, energy 14 percent, education 14 percent, health 5                              tutions, technology and skills. The strategy is implemented,
percent, family planning 3 percent, agriculture 5 percent,                           first, through a broad liberaLizationand deregulation. The
rural development 7 percent, water resources 9 percent,                              second effort is targeted intervention for poverty allevia-
and industry 1 percent.                                                              tion, such as food subsidies and directed credit. The third
                                                                                     is investment in human capital, physical infrastructure and
Agriculture, water resources,and rural                                               technical change through research and extension.
development                                                                              Since the mid-1980s, the GOB has progressed toward a
                                                                                     more rational expenditure program. Many regulations on
Economic growth sufficient to reLieve poverty requires                               domestic food trade have been eliminated; important input
higher agricultural productivity or a massive shift of labor                         subsidies have been cut; interventions in the water sector
from the rural into other sectors. Agriculture has made only                         have been checked; staff in extension have been reduced;
limnitedprogress toward such growth. It grew at 3.2 percent                          and the targeting of the food distribution system has
annuaLlyin the 1960s, at 2.5 percent from 1973-1987, at                              improved. Today there are few restrictions on trade in farm
2.1 percent from FY83-FY84, and contracted 1.2 percent                               goods and the domestic prices of most goods are dosely

                                                  EVALUATnON
                                                           OF SECTORALExPENDrrURE PROGRAMs
                                                                                15
aligned to world market prices. The GOB investmentpro-                     Waterresourcesoutlaysare by and largejustifiable     since
gram on rural infrastructure,irrigation,researchand exten-              much of it is for drainageand flood controlwith highpub-
sion does contribute importantlyas a source of economic                 lic goods content. However, many Bangladesh Water
growth. An analysisof the redistributive effects of the                 Development Board (BWDB) projects suffer from poor
aggregateruralspending pattem shows some degree of                      concept(i.e.,displaceprofitableprivate investments),    poor
progressiveness     in the incidence of expenditureas a per-            design,constructionand maintenanceand hence havepro-
centage of the income of a given class. But the spending                duced low or negativeretums. An analysis      of performance
pattem is regressive     in terms of the distributionof spend-          audit reportsfor fiveIDA-financedoperationsrevealedsig-
ing by class (these effectsvary amongdifferentprograms).                nificantproject delays,poor quality of construction,inade-
The distributionof spendingby class was: the landless,                  quate supervision,  littleor no cost recovery,and inadequate
12.3 percent; smallfarmers, 25.1 percent; large farmers,                allocations for 0 & M. These projects may also have
27.6 percent; urban poor, 19.7 percent; and urban rich,                 caused environmental problems, mainly by damaging
15.4 percent. A note on Public Expenditure Impact on                    floodplainsfisheries,and have often been managedwith-
Rural Incomeand Povertyis given in Appendix4.                           out adequate consultationwith local populations.
   Despite progress,the sector displaysdeficiencies       in the           Ruraldevelopmentinfrastructureconstitutesmore than
efficiencyand cost-effectiveness       of public spending. The          half of Local Government Engineering Department's
present pattem of spendingcould be improvedto better                    (LGED) spendingand ruralroads about a quarter.Project
target the needs of the poor and landless. Moreover,the                 aid is particularlyimportant to financing LGED invest-
spendingprogramsuffersfrom weaknesses           in planningand          ments for rural infrastructureand disaster relief.Virtually
implementationcapacity.        All of this implies a need for a         all construction is contracted to the private sector by
wide range of measuresto change the pattem of expendi-                  LGED through competitivebidding.A number of studies
ture if it is to better servestated policyobjectives  of growth         have shown positiveimpact of better rural infrastructure
and povertyalleviation.These could includebetter target-                such as: growthin agricultural   production,highertransport
ing, change in expenditurecomposition;strengtheningof                   volume,improved market efficiency,       job creation, higher
the institutionalframework      includingthe need to strength-          wagesand incomes,better health, and improvedwomen's
en the capacity of local governments; and measures                      participationin the economy
enabling the private sector and NGOs to play a greater                     There is significant  potential for cost savings,one prin-
role.                                                                   cipal area being in infrastructure and water resources.In
   Public expenditurefor the agricultural     sectoras a whole          the case of rural infrastructure,there is adequate contract-
in FYs95-97are about 21 percent of the ADP,7 percent of                 ing of constructionactivitiesto the private sector, so the
the revenuebudget,or 14 percent of the total expenditure                potentialfor cost savingsfrom private contractingis small.
resource envelope. Total expenditure for the agricultural               However,some 20 percent of BWDB's work is done by
sector were budgeted at Tk34,862millionfor FY96out of                   force account and savingscould probably be realizedby
whichagriculturalprograms(crops,fisheries,forestry,live-                cutting this share. In addition, cost recoveryis low.While
stock, food and other) constitute 45 percent, water                     data are availableonly for agriculture,livestock,fisheries,
resources 26 percent and rural development 29 percent                   forestry,and water resources (not rural infrastructure),
(Table3). Expenditure on agriculturalprograms (crops,                   cost recoveryfor all but the food account appears low.
fisheries,forestry,livestock,food and other) can be classi-             Projectedcostrecoveryfor FY96is Tk812 millionor about
fied by type: extension,research, markets, relief,adminis-               18 percent of the revenue budget. Recoveryof capital
tration, irrigation, and education. Markets is the major                costs is practicallyzero. Most of government'sspending
spending type.    2 High public
                                    goods content expenditure           for public goods is for research and extension for very
items such as research,extension, and education, consti-                poor farmers from whom it is unrealisticto expectsignifi-
tute less than half of agriculturaloutlays. Studies have                cant cost recovery.  Some cost recoverycould be obtained
shown that research is highly profitable;ex-post rates of               for research on commercialcrops (tea, cotton, sugarcane
return have been estimated at 149 percent for rice, 110                 and jute) through earmarked leviesor other means.More
percent for potato, and 131 percent for the crop sector.                can be done in cost recoveryfor rural infrastructureand in

                                          BANGLADES}IPUBLIC EXPENDITURE REVIEW
                                                                   16
  TABIE
      3
  Budgeted
         publicexpenditure
                         on agriculture,
                                       rural development
                                                       and waterresources
                            Tk million       Tk million                       Spending
                                                                                     by type: FY96-FY97(percent)
                              FY96             FY97              Markets         Research         Extension      Admin./other    Total
 Agr. ADP
   Crops                     3.043             2.894             13.6               12.8            11.3             6.3
   Fisheries                 1,106                                                                                               43.9
                                               1,220              7.6                9.8             0.7
   Forestry                                                                                                          0.5         18.7
                             1,220             1,308             10.0                0.4
   Livestodc                                                                                         6.6             0.2         17.2
                               593               820              7.1                1.8
   Foodandother                                                                                      0.7             0.8         10.5
                               630               689              5.8                1.5
   Total                                                                                             0.0             2.5          9.8
                             6,592             7,254             44.0               26.3
 Agri. Rev.Budget                                                                                   19.3            10.3        100.0
   Crops                     1,774               na               0.1                3.6           15.4              -
   Fishenes                    355                                                                                               19.1
                                                 na               0.2                               3.0
  Forestry                     272               na                                                                               3.1
                                                                  -                  0.5            2.9              1.1
  Livestock                    685                                                                                                4.5
                                                 na               2.2                0.5            5.4
  Foodandother                                                                                                       0.4          8.5
                             5,808               na              46.5                0.0
  Total                                                                                             3.4             14.8         64.7
                             8.996               na              51.3               15.5
 Waterresources                                                                                    26.6              6.6        100.0
  ADP                        7,811            8,585                na                na              na              na
  Revenue  budget            1,473                                                                                                na
                                                 na                na                na              na
  Total                      9,285                                                                                   na           na
                                                 na
 Ruraldevelopment
  ADP                        8,324            9.103               na                 na              na              na
  Revenue budget             1,765                                                                                                na
                                                 na               na                 na              na
  Total                                                                                                              na           na
                            10,089               na
 Grandtotal                 34,862           24,942               na                 na             na               na           na
 Source:
      GOB. Agncsurue
                   revenue
                         budgetspending
                                      by type:percentages
                                                        refers
                                                             to FY96ony.

  the water sector, but the emphasis has to be on better pro-                such as extension, research, education and information,
 ject selection.
                                                                             and to facilitate infrastructure development. The structure
      In sum, measures to change the composition of expendi-                 of incentives and the regulatory framework should not
  ture needs to include: a reprioritization by reduction of
                                                                             hamper private and NGO participation in investment in
 spending on markets while focusing on outlays with higher                   production and marketing of commodities and inputs, as
 public goods content and positive effect on growth and                     well as in research on cash crops, notably sugar cane and
 income, such as rural infrastructure, irrigation, research and             cotton; or in extension in some high-value commodities. In
 extension; measures to ensure appropriate balance of ADP                   many instances an increased role for the private sector and
 capital expenditure and current budget allocations,including               NGOs may prove to be cost-effective and also to invigo-
 0 & M. Also, GOB needs to consider options to achieve
                                                                            rate new ideas and local participation.
 more cost savingsand better cost recovery.Moreover there is
                                                                               A significant part of GOB's FY96 and FY97 expenditure
 a need for wide ranging measures to improve the institution-               programs is characterized by weak implementation. Much
 al framework to strengthen the capacity to design, implement
                                                                            of the market spending should be eliminated as these inputs
 and evaluate projects; to reduce ineffectiveinstitutional frag-
                                                                           could be supplied by the private sector. Example of market
 mentation; and to move away from excessive centralization
                                                                           interventions which clearly are inappropriate include: a
and to encourage more autonomy and local participation.
                                                                           dairy and a poultry farm, livestock rearing and hatchery ser-
     GOB has long recognized the scope for a greater role                  vices; a flour mill and possibly many cooperative activities.
for the private sector and NGOs, the general argument
                                                                           Other examples where there are grounds for considering
being that government should concentrate on areas with a
                                                                           policy change include: seed and fine rice projects; the pro-
strong public goods content and where it can act as a facil-
                                                                           ject for BMR (if the fl6ur/seed mill at Postogola should be
itator to private and NGO efforts. Accordinglygovernment                   dropped); projects in rubber cultivation, jute and textile
should move away from having a direct role in supply of                    products, goat rearing, milk and cattle farming-all of
commercial inputs and large commercial farming projects.                   which may inhibit a more active role for the private sector.
Instead it should concentrate on the supply of public goods                Also, the projects for building more food grain storage

                                          EVALUATION
                                                   OF SEcrORAL EXPENDITUREPROGRAcMS
                                                                    17
capacityshould be re-examinedin the context of govem-              $274millionfertilizerplant (Shahjalal)   and a CIB unit at its
ment's diminishingrolein food operations.                          Chittagong complex, its studies of jute-based paper and
                                                                   bagasse-basednewsprint, and the Steel and Engineering
Manufacturing                                                      Corporation's proposal for a cable and conductor plant.
                                                                   These plans should be reconsidered,and no further such
At a broad policylevel,Bangladesh     is set on an appropriate     initiatives shouldbe taken under public ownership.
road for achieving its goal of rapid industrialization.                The range of industrialsupportservicesis neither strate-
Pronouncementshave been made-and in several cases                  gic nor demand-driven.    The ADP containsa wide range of
                                                                   activities in thisarea,but theyshouldbe reconsidered      in the
initiatives taken-favoring private sectorled development,
                                                                   light of poor past performance     and  other  countries'  good
and there is a generalunderstandingof the reformsneed-
ed to create the necessary   enablingenvironment.    However,       experiencewith private entities or private managementof
                                     is illustrated by the cur-     publicfunds.In particular, provision of industrial estatefacil-
slow progresson implementation
rent year's public expenditure program which, though                ities,including export zones,shouldconcentrateon facilitat-
 modest(1 percent of ADP,Appendix5, Box 1), reflectsthe             ing privateinitiativesrather than expandingthe State's own
 failureso far to redirect the State's role in industry from        involvement.   BSCIC especially   should promote smalland
                                                                    cottageindustryby identifying   and alleviating policy and reg-
 investment to support. The sluggishprivatizationprocess
 has allowedcontinuingexpendituresto upgrade existing               ulatory problemsrather than operating commercialinfra-
 units and, more astonishing,   a few new investment   propos-       structure.The current investmentsof the Sericultureand
                        are diverse(Box2) but ad hoc. Before        HandloomBoardsshouldbe operatedon commercial               lines
 als. Supportservices
                                                                     andno furtherprojectsplanned.Similarly,    severalfacilities to
 approvingfuture ADPs,the newGovemmentshould reori-
                                                                     supportthe other textilesindustries  should   have far greater
  ent support for industry under a privatization-support-
                   program(Box3).
  security-utilities                                                 private involvementand should be coordinatedwithin an
      The privatization program is stalled and some                  agreed development strategy for this critical subsector.
  Corporations are still investing.The slow divestiture of           Future support in the areas of investmentand export pro-
                                                                     motion may be better directed to professionally      managed
  State-owned manufacturing enterprises leaves the
                                                                     matchinggrant facilities to assistnew  private  investors. This
  Governmentwith pastinvestmentsthat are low or non-per-
                                                                     leavesinitiativesto privatebusiness.Similarly,  an initiative to
  forming,the alreadycrippledbanking system with a large
                                                                     build aS100million   E(brldTrade   Center in Dhaka   should  be
  backlogof unrecoverableloans, public corporation man-
  agement teams continuingto plan new investmentswhich               left to the privatesector.On the other hand, little attention
  are unlikelyto occur,tariff reform impeded by conflicted           is evident in the ADP to manufacturers'need for higher
  public interests, and the privatebusinesscommunitycon-             qualitysupportin the areas of metrology,    standards,testing,
  fused about the Govemment'scommitmentto privatesec-                and qualitycontrol(hISTQ). Morepublic expendituremay
  tor led industrial development.NMoreover,      the ADP con-        be needed in these areas, but only under overall sectoral
   tainsinvestments  to upgradingpubliccement, TSP fertiliz-          strategyfor assistingtechnologydiffusion and developing
   er, glass,sugar and spinningfacilities,rather than leaving         intemationally recognized  accreditationprocesses.
   such decisions to future private owners. Privatization
   should have precededcommercialdecisionson rehabilita-             Physical infrastructure
   tion or modernization.  As a secondbest, theyshouldbe put
   on the market as soon as the present effortsare complete,         The infrastructuresector in Bangladeshconsistsof roads,
   and no further BMRE projects initiated with either                railways,ports, water supply and sanitation, and urban
   Governmentor Corporationfunds. Additionally,        consider-     infrastructuresubsectorsand is pivotal for the country's
   able further strengtheningof the Privatization Board's            economic growth. The sector faces massive constraints
   mandate and resourcesis essentialto managethe necessary           resulting from inadequate service provision and funding
    accelerationof the divestitureprocess.More strikingexam-         and weak institutionalstructuresand pricingmechanisms.
    ples of givingwrong signalsto the private sector are the         While the Government and donors have made concerted
    ChemicalIndustriesCorporation'sproposalto build a new            effortsto improvethe qualityof infrastructure-infrastruc-

                                                                   REVIEW
                                                   PUBLICEXPENDITURE
                                          BANGLADESH
                                                        18
  ture claimed29 percent of the FY96 ADP allocations-                 strategies exist that largely guide the governmentinvest-
  rapid population growth has led to massive demand for               ment programs.Government'stransport strategy       is intend-
  water supply,transport and other services.                          ed to support economicdevelopmentby encompassing          an
     The transport sub-sectorsuffersfrom major constraints            optimal transport network strategywith multi-modallink-
  resulting from a combination of physical (geographical),            ages that include a local transport network with extemal
  developmental(lowlevel of investments)and institutional             links, an internal transport developmentto support local
  factors.These include: (a) inter-ministerial  coordinationof        market integration,and an effectiveregulatoryand policy
  the sector, which has four separate ministries (Shipping,           frameworkto enhance the efficiency    of the sector.For rural
  Civil Aviation,Communication and Local Government)                  roads, the strategy is based on focusing developmental
  makingintegratedsector planningand policydevelopment,               resources on selected growth centers, based on socio-eco-
 in particular,investmentprioritization    very difficult;(b) the     nomic priority,with emphasis on road improvementand
  acute scarcity  of qualifiedand trained technicalgovernment         maintenance,rather than new roads.
  staff and, (c) the extremely poor performanceof most trans-            A strategy for the ports sector is not yet available.
 port sectorparastatals,most of whichgenerateconsiderable             However,a studyto preparesuch a strategyhas been agreed
 losses, with Bangladesh Railway(BR) being the leading               by the Government,taking into account the potential at
 deficitincurringparastatal.These constraintslead to lower           each port, includingmeasuresto address siltation    problems
 efficiency, higher transportcosts and transport unreliability,      at Mongla,and the potential for containertrafficgrowthat
 resultingin qualitydeterioration,and increasedmarketrisks           Dhaka/Narayanganj.     For urban transport, a strategyfor
 for sectors that depend on the transport system.                    Dhakaprepared recentlybv GOB focuseson an immediate
     As for the urban sector, Bangladesh has one of the              action plan on the most urgent infrastructureand institu-
 fastestgrowingurban population,estimatedto be around 4              tional and policyissues and a longer term strategy.GOB
 percent per annum. With such rapid growth,the deficien-             and IDA are developingan urban transport project for
 cies in urban serviceslikewater supply,sanitationand solid          Dhaka, whose focus would be on institutional improve-
 waste managementare severe.It is estimated that in urban            ments, and addressingkey infrastructure    bottlenecks.
 areas, onlyabout 42 percent of the populationhas accessto               Government's strateg, for the urban water and sanita-
 reasonablysafewater,while the urban sanitationcoverage              tion sector takes into account resource constraints and
 is about 42 percent (onlyDhakahas waterbomesewerage).               involvesdevelopmentof services that are affordableand
The Governmentrecognizesthe urgent need for improve-                sustainableto as many people as possible,whileimproving
 ment in basic services;however,its efforts are constrained         the efficiencyof sector institutions,emphasizingon reha-
by severalfactors:(a) lack of funds to support investments          bilitation of existing assets, and selective expansion of
in the urban sector;past investments    have onlybeen possi-        water systems,accompaniedby institutionalstrengthening,
ble with bilateraland donor financing,and little improve-           and policy reforms. For the urban municipalsector, cur-
ments in serviceprovisionhave been achieved;(b) inade-              rently,the Governmentdoes not have a clear strategyto
quate local resource mobilizationand cost recoveryand               deal with identified issues and constraints. With IDA's
poor financial performance of public sector agencies                assistance,a sector studyis being pndertaken to developa
responsible for service provision; (c) weak public sector           policyframeworkand strategyfor fiscalreform and decen-
institutionswith limited capacity to manage, operate and            tralization in the sector, including improvedinstitutional
maintain services;and (d) inadequate sector planningand             performance:
policy formulation,resulting in misplaced priorities and
uncoordinateddevelopment.                                           Public expenditures for infrastructure

                                                                    Transport
Government strategy                                                 In the 4980s, the levelof transport expendituresas a per-
                                                                    centage of total expendituresfluctuatedbetween7 percent
The infrastructuresectordoes not have a coordinatedstrat-           to 10 percent.Whileeffortswere made to increasethe level
egy linking its various sub-sectors. However, sub-sector            of expenditures(i.e., in FY93 transport expendituresrep-

                                       EVALUAnONOF SECTORALEXPENDITUREPROGRAMS
                                                              19
resented 12 percent of total expenditures), the overall                         of ADP projects
                                                                       Evaluation
transportexpenditurein real terrnshas declined (Table4).
                                                              Inland  water
Roods                                                         For inland water transport,the TYRIPand ADP represents
The total allocationfor the road sub-sector(induding the      priorityinvestmentsalready agreed with the Government
JarnunaBridge) is around 79 percent of the total allocation under the Third InlandWaterTransportProject,exceptfor
for the transport sector.This is consistentwith the overall the proposalto procure four additionalroll-onroll-offfer-
modal share of road transport,whichcarriesabout 75 per- riesby BIWTC,the public agencyresponsibleforwaterway
cent of the passenger transport and 60 percent of the         operations,for the Arichacrossing.The project does not
freight.The allocation   for the inlandwater transportsector seem to be justified,in view of the expected diversionof
is howeversmallerthan its modal share.This was 4.3 per- passenger and freight traffic from the Dhaka-Aricha-
cent in FY95,is estimatedto be 8.8 percent in FY96,and        Nargabaricrossingto Dhaka-Tangail-Sirajganj   as a result of
7.9 percent in FY97.Consideringthe importance of the          the construction of the Jamuna   Bridge.This project should
inlan{d  waterways   (whichcarry 13 percent of the passenger be based on a comprehensive      assessmentof traffic move-
and 32 percrentof freight),and since about 75 percent of      ment after the completionof     the Jamuna Bridge Project.
commercial    activitiesare locatedwithina distanceof 10 km    For the ports sector,the TYRIPincludesthe development
of an inland waterway,     the capital and recurrent expendi- of an inland container river port at Dhaka, to be donor
tures for inland water investments   deserveto be enhanced. financed.Given the need to coordinateinvestments        under
     Funding for the road sector consistsof the ADP,the        the port developmentstrategy,this investmentshould be
 maintenancebudget for regular and routine maintenance, deferred until the Port SystemsStudyhas been completed.
 and the establishment budget, for operating costs and         Assuming  the proposalis consistentwith the port develop-
 salariesof RHD and LGED. The total ADP allocation       has ment strategy,the Government may seek private sector
 increasedsubstantially  over the pastdecade,with the growth financing,  rather thanuse publicresources. Alsothe remain-
 rate averaging  over 20 percentper annum.Whilethe main- ing      Government    shipping companies  could be privatized.
 tenance budget has alsoincreased,it representsonly about
 15 percent of the total allocationfor RHD, confirming   the   Urbantronsport
 view that road maintenancewas not accordedthe highest Physical investments in urban transport infrastructure
 priority. Road maintenance expenditures need to be            shouldbe consistentwith the long-termstrategy,   as wellas
 increased.The road sector could also generate more rev- the investmentsunder the proposed project. The TYRIP
 enuesthroughroad user chargesto coverroad agencycosts. for FY95-FY97includes constructionof flv-overs            at vari-
                                                               ous locationsin the city of Dhaka to alleviatepedestrian
 TABLE 4                                                       congestion. Whilethese investments   mayprove to be justi-
 Transportation:      Inter-modal  comparison   of TYRIP       fied, they should be evaluated in the context of the pro-
 (FY95FY97)                                                    posed Dhaka Urban TransportProject,to ensurethat they
           inmillion
 (allocation       Taka)                                       are consistent with the long term urban transportstrategy.
Sector                 FY95             FY96            FY97
Road
   transpor           12.858.9         8,437.5         9.776.s            Air trcnsport
                   (82.1percent)    (76.6percent)   (78.3percent)         The FY95ADP and the TYRIPincludes severalprojects
 Railway         2,059.7       1.542.5       1,674.6                      that would need careful assessmentof the demand, eco-
              (13.1percent) (14.0percent) (13.4percent)                   nomic and financial viability and priority before going
WVatertransporth 684.4          969.2        979.2                        ahead. These includethe constructionof STOL airports at
                    (4.3percent)    (8.8 percent)    (7.9 percent)        Monglaand Bogra.In addition,the ADP includesthe con-
Aviation                78.9            67.3             53.6
                    (0.5percent)    (0.6 percent)    (0.4 percent)        struction of a three star hotel at Zia InternationalAirport,
 a. v-dfts aloca,n forthe ,anun Br4ge.                                    whichis clearlya privatesector activity. This project should
 b.ncWfs oon d Chagn andMon&Pom.                                          be dropped from the ADP,and privatesector financingbe
 Soxrce  ThNe YearPdir,g                                Cosion.
                                 PRvawme (FY1995-97),vang
                        Irwestnent
 November
       1995.                                                              sought for the hotel development.GOB mayalso explore

                                                                     REVIEW
                                                     PUBLICEXPENDITURE
                                            BANGLADESH
                                                                     20
the benefits of privatizing operations of Bangladesh                        rehabilitationof existingwater supplysystemsand selective
Biman.                                                                      developmentof newsystems.     The programalsoincludesthe
                                                                            constructionof a 100 rngd            near Singairto provide
                                                                                                        well-field
Water, sanitation   and urbansector                                         water to Dhaka City.  This investment shouldbe evaluatedin
Although the Government has declared its intention to                       the context of DWASAscurrentactivities     under the Fourth
improve serviceprovisionin the sector, investmentshave                      DWASA    Project,the proposedwaterresources    management
remained low due to funding constraints.The total outlay                    program to ensurethat the investmentrepresentsthe most
for the sector in the TYRIPis Taka 19.1 billion,represent-                  optimal solutionand is economically    viable,and takes into
ing 4.8 percent, 5.2 percent and 6.1 percent of the total                   account DWASAsfinancialand institutionalcapability.       In
expenditurein FY95,FY96, and FY97respectively(Table                         addition,the Governmentshouldactively     seekprivatesector
5). This is a marked improvementfrom the trend in the                       participationfor its funding.
early1990s(whenthe outlaysfor the sectordeclinedsharply
to about 2 percent of expenditures)and reflectsthe com-                     Urbandevelopment
mitmentto improveserviceprovisionfor water and sanita-                      The public expenditure outlays for urban development
tion, particularly in rural areas. Expenditureshowever,are                  haveincreased in recentyears,but remainunder 2 percent
still not adequate to meet serviceimprovement   targets.                    of total expenditures.These allocationsare inadequate to
                                                                            sustain services in the urban areas. The outlays do not
Water supply                                                                include block grants that municipalities receive annually
In the ADP for FY96,the allocationof Taka2.8 billionfor                     from GOB to finance recurrent expenditures and other
this sectorrepresentsabout 2.6percent of the total develop-                 investmentprograms.   The programsincludedin the TYRIP
ment expenditure(and 40 percent of the total expenditure                    and FY96 ADP appear to be consistentwith the overall
for the water supply,urban and housingsector),a marginal                    development objectiveof improvingserviceprovision in
improvement   fromFY94and FY95.In ruralareas,UNICEF                         urban areas and represent high priorityprojectswith high
has been involvedin financingmost water and sanitation                      socialreturns and a highpoverty impact.However,the sus-
programs.  UNICEF's assistance, whichhas beenveryinstru-                    tainabiity of the programsis questionablegiven the weak
mental in increasing the coverageof water supply in rural                   institutionalcapabilityof the municipalities
                                                                                                                       and other sup-
areas,is endingin FY96,and there are no provisions   in the                 port institutions.
FY97investmentprogram.Giventhe high net socialreturn
and povertyalleviation  impactof ruralwater supplyinvest-                   Housing andotherinfrostructure
ments,the Governmentshouldenhancepublicsectorinvest-                        The housing infrastructure investment programs in the
ment in this area,and increaseits effortsin mobilizingother                 TYRIPand the FY96ADP involvethe implementationof
sources of financing,either multilateral,bilateral or local                 various sites and services programs in urban areas of
sourcesto continuewith the programs.In the urban areas,                     Bangladesh, through the Housing and Settlements
the TYRIPis consistentwith the Government'sstrategyof                       Directorate (HSD). These programs are justifiablefrom a
                                                                            poverty standpoint, since they are targeted at low income
    s
TABLE                                                                       areas. However,it is not clear whether they are based on
Urban,water,sanitation
                     and housing
                               sector                                       some prioritizationand whether there has been any eco-
allocators                                                                  nomic evaluationof the investmentsto determinewhether
(Tk million)                                                                they represent an effective use of resources. The
                                                            Total           Governmentshould encouragethe participationof NGOs
                  FY95          FY96          FY97        FY95-97           in the planning, implementation and management of these
Urban             1,972         2.815         3,258        8.045            sites and services program to ensure sustainability and
Water             2.131         2.842         3,112        8,085            eff6ctive use of resources. The ADP also includes various
Housg             49877         1,073         7.400        198111           programs to build a total of 3,000 residential flats in the
Total             4,980         6,731      99397).40             1
                                                             19annng        Dhaka area for government     employees, and construction
      ThreeYear RolingInvestment
Source:                        Programme
                                       (FY1995-97),Ptanning comssion
November  1995.                                                             of circuit houses in 44 new district headquarters. Such

                                           EvALUATION
                                                    OF SECTORALEXPENDnURE PROGRAMS
                                                                       21
housingdevelopmentby the public sector cannot be justi-           particularly in power generation has slowed down the
                                                                                                                 3
fied from a resource use point of view or on equity               growth rate with adverse economicimpacts. If expected
grounds,and shouldbe left to the privatesector.It is there-       GDP growth rates of 6 percent to 8 percent are to be
forerecommendedthat these programsbe dropped from                 achievedthe pattern of high growth in gas and powerwill
the ADP and the TYRIP.                                            need to be restored. This however, will necessitatelarge
    Regarding the tourism infrastructure, the ADP and             investment requirements. In the power sector, capital
                                                                  expenditurerequirementswillincreasesubstantially       in the
TYRIP programs include the procurement of two water
 transportvehiclesand constructionof watchtowers    to pro-        future: from Tk. 13 billionp.a. at present to approximately
 mote tourism in the Sundarbans; constructionof holiday            20 billionp.a. during 1997-2000 and 30 billionp.a. after
 homesand hotels in variousparts of Bangladesh; and other          2000. The public sector, however,is not in a position to
 facilities, which are not public sector priorities. The           carry out such an ambitious developmentprogram and a
 Governrnentshould seek private sector financing  for these        substantial proportion of the new investment should be
 investments.                                                      channeledto the private sector.
                                                                       The production, transport and deliveryof most of the
Recurrentcostimplications    of the TYRIP  projects                commercialenergy in Bangladesh is carried out by five
                                                                                                 4 All operating companies
Among the sub-sectors,      the  roads  sub-sector  generates      publicly owned companies.
more revenuesthan expendituresfrom user charges.The                 (OCs) require approval from government agencies for
ports generate profits, and therefore do not need govem-            major investment, operating budgets, salary scales, staff
ment subsidiesto financeoperatingexpenditures.      OnlyBR,         recruitment and intemal procedures. Consequentlyman-
BIWTAand BIWTC incur deficits,         requiring  government        agement accountability  is undermined and performanceis
subsidies. Currently, BR is implementing a Railway                  far from the applicablecommercialnorms;tariffsare set far
RecoveryProgram,aimed at restoringits financial       viability     beloweconomiccosts,systemlossesin both powerand gas
and creatinga corporateenvironment       whichwillenablethe         distributionhave reached alarmingproportions,and large
rail to reduce its losses considerably.  BIWI'Aand BIWTC            amountsof receivables   are accumulated.Sincethe OCs do
are also implementing      financial restructuring  programs        not operate in a competitiveenvironmentthereis no incen-
under the Third InlandWaterTransport       Project.The impact       tive to improve performance. In the gas sector, GOB's
 of these programswillbe to    reduce the  need for budgetary        excessive levyof exciseduty has resultedin operatingmar-
 allocations,thus freeing up the Government'sbudgetary               gins that neither meet financial requirements nor reflect
 resourcesfor recurrentexpenditures    in the transportsector.       cost structures. High losses and poor collectionsare the
    In the water supply,sanitation and urban sub-sectors,            maincausesof BPDB's and DESAsweak financialperfor-
 the area with possiblesignificantrecurrent cost implica-            mance.While the REBsystemof ruralcooperatives       (PBSs)
 tions for the Governmentis the urban sector,in particular,          havemet with considerable   success in resolvingthe institu-
 blockgrantsto financeoperatingexpenditures.However,it               tional weaknessespresent in BPDB and DESA, the unvi-
 is difficultto determinethe extent of the impact of such            able consumermix and irrationalsupplyboundariesresult
 grants on the nationalbudget because they are not based             in substantialsubsidiesbeing drawn from GOB.
 on a predictable,transparent and sustainablesystem.The
 deficitsof urban based water supplysystems,      while a mat-         Sector strategy
 ter of concem, are not large   enough  to have any significant
  impacton the Government'srecurrentbudget.                            Gas sector
                                                                       The new petroleum policy(introducedin July 1993)signif-
  Energy                                                               icantly liberalized contractual terms for gas exploration
                                                                       resultingin significantinterest shownby Intemational Oil
  Relativelylow cost indigenousnatural gas and its applica-            Companies (IOCs). To date, four productionsharingcon-
  tions through power, fertilizerand industryhas been the              tracts (PSCs) have been signedand negotiationsfor other
  engine that has fueled high economicgrowth in recent                 explorationblocks are proceedingin eamest. This new pri-
  years.During the last fiveyears,however,supplyshortages              vate sector participationis alreadybearingresultswith new

                                          BANGLADESH PUBLIC EXPENDITURE REVIEW
                                                                  22
finds reported and considerable investor enthusiasm for        cent over the past three years.As PSC arrangementshas
private power proposals.These initiativesneed to be fol-       already been successfully negotiated for exploration/pro-
lowed up with the commerdalizatior/privatization     of the    duction we do not see any necessity for a new drilling
                                                                                                                    pro-
Petrobanglagroup. Current plans includethe flotationof a       ject costingTk 2.6 billionto commencein FY97.In addi-
portionof GOB shareholdings     in two OCs, lettingthe OCs     tion, a carefulreviewof two ongoingprojectsis needed; the
operate under private company law with adequate man-           Barapukuria Coal Development and Madhapara Hard
agerialautonomy,reforminggas tariffs,developingcompe-          Rock. Investment plans in the power sector have also
tition in the sector,and establishinga regulatoryframework     retained the second east-westinterconnector although it
(includingarrangementsto monitor performance,prevent           has now been establishedthat a gas pipe line over the
abuses of market power and promote competition).               Jamuna bridge is the preferred alternative.

Power  sector                                                  Powerinvestments-generation
In order to carry out the ambitiouspower sector develop-       Althoughthe most economical     and environmentally benign
ment program the existingloss making sector institutions       option is gas based combinedcycleplant a number of gas
need to be restructured under a major reform program           fired steam turbine plants and a two stage coal plant are
whichwillbe based on:                                          included in the ADP Whileno reversalof projectsunder
* Substituting private generation for most of the new          constructionis possible(GhorashalNo.6 and RauzanNo.2,
plant additions.                                               under constructionwith Russian and Chinese supplier's
* Unbundling and restructuringthe existing utilities to        credit) action should be taken if possible to replace
establishsuitable generationcompanies,a singletransmis-        Siddhirganj'and the oil firedsteam turbine plant at Khulna
sion companyand a number of distributionutilitiesall act-      with private sector based combined cycle plant. With
ing in an independentcommercialized    environment.            respectto the coal plant,a reviewof the currentstate of the
* Rationalizing  operatingboundariesof distributionunits       project should be carried out and decisionstaken on the
while utilizing the positive qualities of the REB/PBS          optimum capacity of associatedpower plant. The power
arrangementto redress distributionsystemweaknesses.            plant should howeverbe carried out on a BOO basis.If a
 * Establishing a regulatory structure to oversee sector       vigorousprogramof privateparticipation   in generationpro-
operations.                                                    jects is followedit would be possibleto removeabout 750
   In the context of the existingsituation in Bangladesh,      MW of plant totalingto an investmentof US$ 666 million
however,it is recognizedthat the processof development         (to be incurredbetween 1997to 2001) from GOB financ-
into a fully commercialized  environment will necessarily      ing. It is also now clear that nuclear generationis uneco-
take some time. WhileGOB has commenceda number of              nomic for Bangladeshin the foreseeablefuture and this
preparatoryactionsthe implementationprocessshould be           project shouldbe droppedfrom the investmentprogram.
expedited and the investmentprogramshould reflectcon-
templated institutionalchanges.In particular,there should      Powerinvestments-transmissiononddistribution
be substantialtransferof investment to the privatesectorin     The proposed east-westinterconnector,    still retained in the
generation, and the distribution investments should be         program, should be dropped since it has now been con-
coordinatedwith the restructuring/rationalizingexercise.A      firmedthat the gas lineover the hewJamunabridgeis more
number of upfront actions such as the transfer of lines to     economical.  Additionalinvestment(particularly     in distribu-
the REB systemshould alsobe carried out with immediate         tion) is not meaningfulin the context of continuinghigh
effect.                                                        losses and poor collections  as the benefitsare both distort-
                                                               ed and siphoned off. We do however,recognizethe need
Evaluation
         of ADP projects                                       for substantialinvestmentin the distributionsub-sectorto
                                                               meet the needs of both increasingdemand and network
Energysectorinvestments                                        expansion.The planneddevelopmentsshould be reformu-
The power and gas sector absorbs a sizeable share of           lated and optimizedin the context of two basic strategies:
GOB's total ADP expenditures-averaging abou     ,pr-           (i) rationalizationof the distributionnetworksbetween the

                                     EVALUAnON
                                             OF SEcroRALEXPENDrUTRE
                                                                 PROGRAMS
                                                          23
operatingutilities(withthe PBSstaking over the networks              The expansionof primay education in ruralareas is thus
within their overall boundaries),and (ii) coordinatingthe            seen to havea pro-poor orientation. A further shift within
developmentswith the unbundling and restructuring of                 public educationexpenditurestowards rural    primaryedu-
BPDB and DESA.                                                       cation should further strengthen this trend. At the same
                                                                     time, more attention needs to given to increasing accessof
Education                                                            the rural poor to secondaryeducation.Rapid expansion     in
                                                                     the primaryenrollment will entail high demand for sec-
The GOB commitment to education is evident by the                    ondary educationin the next five years which cannot be
increasein this sector's share of ADP allocations   from 8 to        met by the existingsupplyof secondaryschools.
14 percent between FY92to FY95.Whilethe GOB lacksa                       There is thus a goodpublic good provisionargument   for
comprehensive     sector strategyits general objectivesare to        givingcontinued high priorityto education. Even so, there
improve qualityand efficiency    and to promote equity and            is an urgent need to improve the cost effectivenessand
alleviatepoverty,which implies special efforts in primary            quality of existingpublic expenditureswhile, at the same
educationand targetedprogramsfor ruralpoor andwomen.                  time ensuring that sufficient funding is availableto this
More-recently   GOB has announceda target of eradication             high priorityactivity. The spending pattern at all levelsof
of illiteracyin 10 years;literacyis nowestimatedat 37 per-            educationneeds to be re-oriented to ensure better target-
cent. In the primarysub sector,the GOB launcheda uni-                 ing for the poor. The institutionalframeworkneeds to be
versal primaryand mass educationprogram in 1980 and                   strengthened to improve the capacity to evaluate and
since then it has taken severalmeasuresto increaseaccess              implementprojects.While the evaluationof the education
and improvequalityof the educationsystem.Primaryedu-                  sectorin this report concentrateson ADP projects,there is
cation was made compulsoryin 1990 and a Primary and                   need for a comprehensive sector strategic framework
MassEducationDivision(PMED)wascreated. Despitethe                     including all ADP and recurrent public expendituresas
GOB's efforts, educationis beset with a number of prob-              well as effortsby the privatesector and NGOs.
lems. Although general enrollment rate reported at the
Primary level is 92 percent, attendance and completion               Primary education
rates remainlowat about 66 percent and 61 percentrespec-
tively.Averageteacher pupil contact time at the primary              Primaryeducationconstitutes 52 percent of the education
level is 2-4 hours, one of the lowestin the world. In addi-          sector'sADP allocationfor FY96(Table6). However,ifthe
 tion, teachers are insufficiently trained, poorly motivated         Food for Education is excluded, the allocationto primary
and inadequately    supervised. Over the past ten yearsthere         educationis lower than last year and less than the budget
 has been a proliferationof Islamicand NGO/privatecor-               for Secondaryand Higher SecondaryEducation (SHSE).
poration schoolsto supplementthe government'sefforts.                Overall,the planned investmentin the primarysector do
 Governmenthas providedsalarysubventions       to nongovem-
 ment/privatecorporation schools and some ebtadyee; as               TABLE6
well as block grants for schoolrenovationsand facilities,                                       in education
                                                                                  ADP allocations
                                                                     Intra-sectoral
 inserviceteacher trainingand free textbooksfor students.            (b      )
 In addition,NGOs haveincreasingly      conductednonformal           Sub-sectors                          FY95                FY96
 primaryeducationprogramsalthoughtheir impactin terms                Pnmary,
                                                                           foodfor educabon                1.6                 2.9
 of numbersbeing educated is limited.Most of the NGOS                Other primary                         7.0                 5.4
 providingthe firstthree yearsof primaryeducationreceive                 pimarny
                                                                     Total                                 86                  8.3
 financial supportfrom donor agencies.                                Non-formah
                                                                                     secondar-y
                                                                      Seco4-dary/-igher
                                                                                                           0.3
                                                                                                           5.3
                                                                                                                               0°7
                                                                                                                               5.6
    An analysis  of expenditureincidenceby incomegroup in             Techncal                             0.2                 0.2
 rural education (i.e. public spendingon all levels of rural          Universeity                          0.3                 0.4
 education) points to a highlyskeweddistributionof bene-              Othe
                                                                        e.8                                                    0.8
fits. (see Appendix 4). But the distribution of benefits from            education
                                                                     Total                             15.5                   16.0
                                                                          Anuai
                                                                     Source                     for FY95
                                                                                        Programme
                                                                              Development              Ind FY96 ssued ty the Panning
primaryeducation alone appears to be fairlyprogressive.              cominson.

                                        BANGLADESH PUBLIC EXPENDITURE REVIEW
                                                                24
   not exactlysupport the objectiveof improvingqualityand         ed by NGOs and an argument can be made that they
   efficiency.First, the subsidy component, i.e. the Food for     should be the main providers in this subsector e.g. the
   Education program, which represents 32 percent of the          IDA/ADBNonformalEducation Project in which90 per-
  ADP allocation   to primaryeducation,needs to be reviewed       cent of the Credit is channeled through government to
  to examineits educationalimpact,economicsustainability          NGOs for servicedelivery.Thereis a case to be made for
  and cost effectivenessdeliveryas a subsidy mechanism.          government'srole in this subsector to be limited to man-
  Second,the GOB's rationale that more schoolsare needed         agers and NGOs, the main service delivery.GOB has,
  to accommodate the currently enrolled students and to          however, initiated some innovative approaches like the
  increase enrollmentto 100 percent within fiveyears is not      Total Literacy Movement- where adult literacyhas taken
  fullysubstantiated.There is, as yet, no dependable school      the form of a mass campaignwith active participationof
  mapping and cost effective criteria to ensure economic         the beneficiaries
                                                                                 and stakeholders.A further expansionof
  deploymentof existingphysicalinfrastructure and deter-         this programmaybe consideredawaitingthe resultsof the
 mining real needs. Also,merelyconcentratingresourceson          impact analysisbeing commissioned  byPMED.
 construction and maintenancewithout addressingquality
 and efficiencyissues will lead to continued high drop out       Secondary education
 and repetition rates. A major quality/equityissueis the sta-
 tus of teachers in the nongovernment/private     corporation      In secondaryeducationall juniorand 97 percent of the sec-
 and ebatadyee schoolswhich about 40 percent of primary            ondary schools are private or non government.The gov-
 schoolchildrenattend: these schoolsare subsidized    by gov-      ernment exercisesa major control, however,through the
 emnment   but teachers are untrained, poorly educated and         provisionof subventionsfor salaries,block grantsfor con-
 have few opportunities for career development. Schools            struction and maintenance and training provided at
 receivinggovernmentsubsidiesare in areas not served by           Teacher Training Institutes. The subvention constitutes
 governmentschoolsand most likelyto be servingthe poor-           about 75 percent of the recurrent budget of the
 er communitiesin rural areas.Third, a largenumber of the         Directorate of Secondaryand Higher Education. The sec-
 13 ongoingADP projects in primaryeducation for FY96              ondary sub sector suffers from low intemal and extemal
 are in their completionphase, while the remainingmainly          efficiency: the percentageof examineesand students pass-
 constitutesoutlaysfor constructionof schoolsand disaster         ing is 49 percent and 27 percent respectively
                                                                                                              and the atten-
shelters to be used as schoolbuildings,the emphasisbeing         dance rate is around 62 percent. The main areas of weak-
on physicalinfrastructurerather than quality.Many of the         ness are: centralizedmanagementleading to an inefficient
projects funded by Saudi Arabia, Islamic Development             subvention systemwhich is not linked to teacher perfor-
Bank and EEC, are emergencyor relief aid and the inclu-          manceand prescribedqualitystandardsfor students; weak
sion of these projectsin the ADP creates a somewhaterro-         supervisionowingprimarilyto an absenceof accountabili-
neous impressionof adequate resource allocationfor the           ty; and limitedinstitutionalcapacity. There are 23 ongoing
sector. More importantly,these projects tend to exert an         and 4 new projectslisted in this sub sector's ADP A large
added pressure on PMED's alreadylimited planning and             share of the current secondarybudget is allocatedto con-
implementationcapacity.                                          struction and maintenance of schools. Apart from the
                                                                national femalestipend program, which addresses equity
Nonformal education                                             and gender objectives and the ADB funded Higher
                                                                SecondaryEducationProject, there is very little allocation
Nonformal education accounts for 4 percent of the total         to projectsand programsaimed at improvementof quality
ADP allocations for education. While this is inadequate,        and efficiency.Furthermore, many of the projects for
given the large target numbers outside the formal system        SHSE are in areas where private initiativescould take the
(about 15 million by the year 2000), the "cautious              lead such as in constructionand maintenance of schools
approach" may be the right route to followgiven the uni-        and the establishmentof Computer Scienceand Business
versal experiencewith high failure rates in adult literacy.     Managementcoursesand Englishlanguageinstitutes.Also
The majorityof nonformaleducationprogramsare provid-            developmentof degree collegesmaynot be the best use of

                                    EVALUAnONOF SECORAL_EXPENDrrUREPROGRAMS

                                                          25
resources(17 percent of the total secondarybudget) since        demand. Extreme rural poor householdscurrentlyallocate
the qualityof educationin these collegesand their linkage       7-10 percent of their income to cover private health
to the MastersDegreecoursesofferedin the University   are       expenses.Third, the share of rural public health accessis
stillopen to question.Further,a major ADP supported ini-        still limited to only 12-13 percent with little variation
tiativeis the introductionof a nationwidestipendprogram         across socio-economic   groups. Accessto matemal care is
for girls, the Female SecondaryStipend Program. Given           dismally low.
GOB's limited resources there is a need to monitor this             The GOB has acknowledged      the need to givehigh pri-
programto ensureeffectivetargetingbasedon povertyand            ority to the health sector to alleviate poverty, develop
 academiccriteria.                                              human resources and enhance labor productivity.    "Health
                                                                for all by year 2000" has been the broad GOB objective.
Technical  and university education                             Familyplanning is also seen as a national priorityin order
                                                                to reduce the populationgrowth rate and to improvethe
Technicaland universityeducation have traditionally       been  qualityof life for mothers and their children.The share of
government funded. There is a need to better link this health and familyplanning (FP) in total public spending
types of educationto the private sector so that skills and      has gone up from 4.7 percent in FY86 to 6.9 percent in
coursesprovidedmatch labor market demands and reflect FY95(provision              for FY97is 8.0 percent)reflectingincreas-
users prefere'nces. The government has decided to make es both in the revenuebudget and ADP The private sector
substantial investment for the establishmentof 13 new oudays for health per household is 2.6 times more than
vocational training institutes and renovation of existing public outlays.The combined public and private expendi-
ones, indicatingan emphasison constructioncomponents ture on health and FP in 1990was only USS 7 per capita,
rather than re-structuring  of the existingvocational  training and thiswas only3.2 percentof GDP This comparespoor-
programs.The bulk of ADP allocation         for the  university  ly withother SouthAsiancountries.For example,per capi-
levelwent to the Open University     program.The need is to      ta expenditurefor health in India, Sri Lanka and Pakistan
improve the qualityof tertiaryeducationrather      than   rapid  in 1990was US$21, 18 and 12 respectively
expansion of the capacity of public institutions.Recently           The health sector's share of ADP is 4.9 percent under
the governmenthas adopted a policyof encouragingpri- the FY97ADP while that of FP is 3.1 percent. About half
vate universities. Given the high cost of universityeduca- of the outlaysin health havebeen donor financedwhilethe
 tion relative to primaryand secondary,this trend should share for FP was65 percent in FY96.Much of the expand-
 continue. More importantly,there is a need to revise the        ed developmentresourceshave been allocatedto Primary
 current fee structure at the universitiesso that partialcosts Health Care (PHC) in rural areas.The ExpandedProgram
 are recoveredand the subsidycomponentis reduced.                of Immunization(EPI) and the FP program have made
                                                                 progressin establishing essentialprimaryservices.Despite
 Health and family planning                                      somenotable successstoriessuch as EPI, and consequent
                                                                 reduction in infant and child mortality rates, progress
 A sharp fall in fertility rates and in infant mortality are     towardssome critical PHC objectiveshas been slow.For
 among Bangladesh'snotable achievementsover the past             example,poverty related diseasesare rampant, and mater-
 two decades. The health sector,nevertheless,is character- nal mortality and morbiditystill remain mostlyunabated.
 ized by major shortcomings.   An analysis of the utilizationof  An extensivenetworkof health and FP infrastructurehas
 public health facilities in rural areas (elaborated in          been built up in the rural area§,mainlyin the form of fixed
 Appendix4) shows that the highestbenefit is receivedby          care facilitiessuch as Thana Health Complexes (THCs)
 the middle income decile. Householdslocated at the top          and UnionHealth and FamilyWelfareCenters, but the uti-
 income decile receive slightlyhigher amount of benefits lizationof these facilitiesremain poor due to inadequate
 comparedwith the poorest incomedecile.Second, a com- quality of servicesand shortage of supplies. Fixed health
 parison of the relative proportion of public and private facilitiesservicesare provided virtuallyfree and the bed
 health expendituresindicatesthat benefitsthrough public utilizationrates at THC has never been much above 50
 health still cover only a small part of the health care          percent. Only about 15 percent of the rural patients ever

                                        BANGLADESH PUBLIC EXPENDITURE REVIEW
                                                             26
  seek treatmentin the government          facilities.
                                                     On the other        tialsuppliesfor diagnosis and treatmentof patients    in hos-
  hand,hospitals   at the secondary     and tertiary levels in larg-    pitalsand healthcenters,and alsofor repairand mainte-
  er townsandcitesarecrowded.         Aneffective   referral system     nanceof equipment's     andbuildings.  In futureit isessential
  between   the different  levels  ofhealthor hospital   carefacil-     to undertakesystematic     analysisof recurrentexpenditure
  itiesis yetto be developed.      PHC in the urbanareasneed            implications  wellbeforethe completion       of new projects,
  to be improved   on a priority    basisand focuson the needs          and the additional   amountneededshouldbe included          in
 of the poor.Secondary       leveldistrict  hospitals alsoneedto        the revenue budgetas soonas projects     arecompleted.
 be strengthened     to provideessential      referralservices   to         In sum,publicexpenditures     in healthand FP needto
 PHC facilities   both in urbanand ruralareas.Finally,        some      be augmented    to moveBangladesh     nearerits healthgoals.
 development     projectsare of lowpriority.      One example     is    Notwithstanding    somedegreeof progressivity      in the dis-
 theestablishment     of five newmedical     colleges and upgrad-       tributionofbenefitsfrompublichealthexpenditure           there
 ing of their attachedhospitals        when medicalgraduates            is an urgentneedfor actions   to improve    the coverage  and
 remain unemployed        and mucheffortsstillis needed to              qualityofpublichealthintervention.      Thereis a clearneed
 improvethe existing      eightcolleges.    Sirmilarly,
                                                      someof the        forincreased  effortsto improve  the access  to public health
 citybasedtertiarylevelspecialized        facilitiesshouldnot be        care services, including  specialprogramsfor ruralareas.
 considered   a highpriority    areafor publicspending.     Public      TheGovernment      shouldnot aimat providing     comprehen-
investment    in providing    costly hospital basedtertiary   level     sivefreehealthcareto allindividuals    at alllevels.Ensuring
careis not cost-effective.     Thisis an areawheretheprivate            equitableaccess   to an essentialpackageof primary      level,
 sectorcouldplaya moreeffective          role.                          preventive andlowcostcurative    healthcareservices    forall
     Recurrentallocations     for healthhaveincrease      but as a      shouldbe the chiefconcern.In addition,communities,
proportion    of the totalrevenue    budgettheyhaveremained            localself-government     bodies,NGOsand the commercial
around5 1/2percentoverthelastyears.Unlike              the FP side     private sectorshouldbe encouraged          and supportedin
wheremostexpenditure         is incurred  undertheADPa large           organizing  and managing     their own health services.     To
portion   of healthspending      is covered  bythe revenuebud-         achieve  highcost-effectiveness  and bettertargeting    of the
get. Expenditure    for pay and allowances      of personnel   has     poorthe allocation   of publicexpenditure   withinthehealth
gone up from51 percentof the healthrevenue              budgetin       sectorneedsto gradually    shiftfromtertiary    leveland spe-
FY82to nearly80 percent,whilethe share for drugsand                    cialized healthcare services  to moreemphasis      on preven-
othermedical     requisites hasgonedown       from28percentto          tive care and the primary    level,leavingmost of further
about15percent.     Theshortfall     in allocations for drugsand       expansion  of higherlevelcurative    services  to be financed
supplies' isof serious concern,    because  inthe absence   ofany      by private resources.High priorityshouldbe givento
effective  costsharing  mechanism     withbeneficiaries,  therev-      maternaland child care includingemergency            obstetric
enuebudgetremains       theonlysource      of fundsforallessen-        care.




                                                                           I




                                        EVALUATION
                                                OF SECTORAL
                                                          EXPENDIURE
                                                                   PROGRAMS
                                                                 27
      3
Chapter
The Institutional Framework for
Expenditure Management
A sound Public ExpenditureManagement(PEM) system                 uallyreduce or modifythe role for central governmentin
for Bangladeshneeds to: (i) instill aggregatefiscaldisci-        planningand controllingexpenditureprograms.Devolving
plineincluding   well-functioning  planingand controlinstru.     expenditure authorityto line ministriesor technicalagen-
ments (ii) facilitatesound strategicprioritizationof expen-      cies operating separate from the central government,e.g.
ditures between and within sectors and among projects,           holding them accountable for outputs, would reduce the
and (iii) ensurehigh levelsof technicalefficiency in the use     need to evaluate public expenditure programs within the
of budget resources,i.e. achieveoutputs at the lowestpos-        Ministry of Finance, the Planning Commission and
sible cost. Givenaggregatefiscaldiscipline,  the secondkey       IMED. Building a stronger decentralized institutional
challengeis how to prioritizecompetingclaimson scarce            framework   will howeverrequire a long time in viewof the
 resources, the underlyingproblem being tension among            generally weak institutional capacity and shortage of
 competingclaimsfrom individuals      and groups.                skilledprofessionalsin Bangladesh.Hence it is alsoneces-
     Key institutional arrangements and their associated         sary for the GOB to strengthen the central government's
 transparency and accountabilitymechanisms,which are             abilityto analyze,plan, monitor and control public spend-
 needed to facilitateprioritizationinclude: (i) an expendi-      ing programs including specificactions to counter imme-
 ture planningprocesslinked to the achievement    of afford-      diate concerns regardingobvious examplesof waste and
 able outcomes,includinga processto identifyand discuss           poor management.
 competingprioritiesat the Cabinet level; (ii) flexibilityfor
 line agenciesto make intrasectoralallocations;(iii) com-            Management of the aggregate resource
 prehensivenessof the budget; (iv) a process that allows             envelope
  feedbackfrom claimantsto informprioritysetting;and (v)
  the use of objectivecriteria.                                      Important measureshave been initiated in recentyears to
      Assuming a prioritization of expendituresemergesfrom           improvePEM in Bangladesh.Supported by IDN'sPublic
  the above arrangements,there still remainsthe principal            ResourceManagementAdjustmentCredit (PRMAC)the
  agent problemwithinthe governmenthierarchy.      The tech-         FinanceDivisionhas started the Reformin Budgetingand
  nical efficiencyin the use of budgeted resources will              Expenditure Control (RIBEC) programwith ODA assis-
  depend upon the relative autonomyof line agenciesand               tance. This program aims at upgrading the structure of
  the extent to whichthey can be held accountablefor per-            budgetingand accountingsystems,includingthe introduc-
  formance,the predictability  of resourceflowsinto ministe-         tion of modern data processing methods. The program
  rial budgets, the competence of line agencybureaucrats,            also includes a proposal to set up a single "Budget
  and the extent to which recruitment and promotion is               Committee"in each Ministry/Division    whichcouldhelp to
  based on merit.                                                    integrate recurrent    and   capital budgets.  The Asian
      Changingincentives,  includingchangesin the compen-            Development Bank supports technical assistance pro-
   sation system and efforts to build a more decentralized           grams including efforts to strengthen the Finance
   frameworkfor PEM, are essential and willrequire major              Division'scapacityto do policyanalysis  by means for eco-
   long-term efforts of institutional capacity building.              nomicmodelingincludingestimates     of major fiscalindica-
   Concerted effortsare needed to developlocalgovernment              tors such as the deficit,to improve the system for collec-
   and municipalitiescapacity to administer, initiate and             tion and monitoringof national accounts,and programsto
 implement public expenditure programs. Such efforts will            improve project implementation and ex-post project eval-
 requiremajor institutionalcapacitybuildingand maygrad-              uation by IMED.

                                        BANGLADESH PUBLIC EXPENDITURE REVIEW
                                                                28
 The capacityto estimateand monitor total                         should clearlystate the amount of deficit and the various
 resources                                                        methodsfor financing.  There is fundamentalneed to devel-
                                                                  op a solid framework for management of public debt,
  Althoughprogresshas been made there is aheed to further         includingstrengtheningof audit, accountingand planning
   strengthen the capacityto assess the total resource enve-      mechanisms.The Comptroller& Auditor General (CAG)
   lope,induding estimatesof allcapitaland recurrentexpen-        should cover public debt in annual audit which should
   diture, tax and non-tax revenue, the fiscaldefcit and pub-     receive specific attention from the Public Accounts
  lic debt. The Resource Committee (RC) headed by                 Committeeand the Parliament.
  Finance Secretary and assistedby a TechnicalCommittee              The TYRIPhas provideda much needed instrumentfor
   (TCRC)was responsiblefor estimatingthe total resources         three year rolling planning for ADP outlays. However,it
  for the annual budget, i.e. the Revenue Budget (including       needs to be strengthened and broadened in its coverage.
  the Food and Capital Budget) and the ADP,plus develop-         Ideally it should cover not only ADP but also the revenue
  ment aid. In 1990 the Govemment redesignated RC as             budget in full. In addition it is essentialfor the GOB to
  "Budget Monitoringand ResourceCommittee" (BMRC)                havea medium-term     macroeconomic   frameworkto be able
  and enlarged the Committee. The Finance Minister is            to assesshowaltemativeexpenditure,revenue, deficitand
  Chairman of BMRC and representation at the level of            public debt policieswillimpacton overall macroeconomic
  Secretary or Chairman from the followinginstitutions is        balancesand viceversa.Moreover,a realisticmedium-term
  includedin the Committee:Finance Division,ForeignAid           macroeconomic     frameworkfor fiscalpolicies can serve as
  and AccountsBranch (ERD), Internal ResourcesDivision           an importantinstrumentwhichthe Governmentcan use to
  (IRD), Ministry of Agriculture, Ministryof Commerce,           disciplineactorswith disparateclaimson the budget.
  Mtinistryof Industry, Ministry of Food, Governor of               The problem of instillingaggregatefiscaldisciplinein
  Bangladesh Bank, Mlember      (Programming)of Planning         Bangladesh   can be mitigatedby the effectiveuse of a medi-
  Commission,TariffCommission,      and AdditionalSecretary      um-term macroeconomic     frameworkin budget processes,
  of FinanceDivisionin chargeof budget whois Secretaryto         and by establishingformal constraints on spending and
 BMRC. The TechnicalCommittee (TCBMRC)is headed                  borrowing, including a strong system for parliamentary
 by the Additional Secretary in charge of budget and             controls.Mechanismswhich could help to enforce better
 Finance Divisionhas also been enlargedwith representa-          accountability and transparencyand thus impose political
 tion from the same agencies.Though the terms of refer-         costs on politiciansand bureaucratsfor violatingthe rules
 enceof BMIRChave been expanded, in practice it has             of fiscaldiscipline. These mechanismscould include:rec-
 remainedrestricted to the narrow budget management             onciiation between ex-ante and ex-post aggregatespend-
 issues and continues to act on an ad hoc basis. During         ing and deficits; sanctionsagainst overspending;publica-
 FY93-96it met only once. TCBMRCmet more often but              tion and disseminationof the results to the public; and
 it still lacks any formal methodologyand an institutional      integration of all expendituresand financing   components
 focus, its personnelbeing drawn from severalinstitutions.      within the budget, including off-budget outlays such as
 The initial estimatesof revenueby TCBMRCand BMRC               state enterprisesborrowingfrom private banks.
 have often been too ambitious.Strengtheningthe capacity
 for estimatingand monitoringof the total resource enve-        Revenueand developmentbudget dichotomy
lope willdemand concertedeffortsto train and recruitpro-
fessionaland experiencedstaff and to rationalizethe insti-      The divisionof public expenditure into two budgets, the
tutional set-up.                                                revenueand the developmentbudget, raisesseveralgener-
    There is a basic need forimprovedassessmentand man-         ic PEM issuesimpactingon the quality,efficiency
                                                                                                              and cost-
agement of the fiscal deficit and public debt. The              effectiveness-and their associated accountability and
Governmentshould adopt the most comprehensive         defini-   transparencymechanisms  in outlaysand outputs. Revenue
tion of deficit and debt and install a unit in the Finance      expenditure and development expenditure are prepared
Division,preferably combinedwith TCBMRC, to collect             respectively by the Finance Division and Planning
data and monitor debt. The financingplan of the budget          Commission.Within a ministry also the responsibility is

                              TiIEINSTnUnONAL
                                            FRAMEWORK
                                                   FOREXPENDITURE
                                                               MANAGEMENT
                                                           29
divided:the generaladministrative      section prepares the         Integrated PEMframework with programand multi-
revenuebudget and Planning Cells preparesthe develop-               year budgeting
ment budget.This divisionexistswithinthe technicalagen-
ciesalso. Moreover, the revenueand the development     bud-         An integratedprogrambudgetingframework         covering both
get do not use the same accounting framework which                  the revenueand development      budgetsis muchneeded.The
makes it difficultto aggregatethe allocationsof the two             governmentought to move towardsa fullyintegratedpro-
budgets by sectors or agenciesand examinethe economic               gram approachin planningits activities  and budgetwithina
characterof outlays.For instance,familywelfareprogram               giventime frame.Pendingfullimplementation       of a program
has a large component of wage paid from development                 budgetsystem,it maydevelopa notionalprogram        approach:
project; salary for school teachers is paid from revenue            each departmentand ministrycould defineits set of major
budget.Both expendituresfall withinthe same categoryin              programsand dividethem into sub-programs      to be financed
accounting and economic senses (wage and human                      from the revenue and developmentbudgets respectively.
resource development)but draw differentjudgments:the                Secondly,   in the departmentsas wellas ministriesbifurcation
former is developmentwhile the latter is current expendi-           of planning developmentprojectsand revenuesupported
ture. This dichotomyweakensproperassessmentand mon-                 activities shoulddiscontinue;the sameset of personsshould
itoringof expenditures.                                             be given responsibilityfor planning total activitiesand
    The revenue budget includes all recurrent outlays,              expenditureprogramswhileimplementation       maybe remain
though there is a small element of capital expenditure.             dividedbetween planningcellsand the generaladministra-
Items included are: pay of officersand establishment(i.e.           tive staff.Also,bunchingof expendituretowardsthe end of
clerical grades and support staff), allowances,   contingen-        the year from both development and revenue budgets
 cies,worksand grants-in-aid.  0 & M appearsas an item in           shouldbe avoidedby better programming       of expenditures.
 caseof some organizations  but is stillto be recognizedas a        This requiressimplification   of proceduresas wellas decen-
 distinct item. AUocation for 0 & M is done in an ad hoc            tralization                               powers.
                                                                                 of financialand administrative
 manner.There is a particular need for satisfactory  mecha-            A strong multi-yearbudgetingframework       is needed for
 nisms to establishingthe linkages between development              planningand control.This would implymulti-year        budget
 projectsand their implications for revenuebudget,so that           procedures integrating all revenue and development
 essentialcurrent expenditurescan be anticipatedand bud-            expenditure. Correspondingwith acceptanceof projects,
 geted for.                                                         each technical agencyand ministryshould include in its
                                                                    budget forecastmore precise estimate of incrementalrev-
Toward a strengthened integrated                                    enue expenditureand how the additionalresourcewillbe
framework                                                           generated or made available-unlike the rather cursory
                                                                    mention now in practice. The budget forecastshould be
The weaknessof the current PEM system points to need                revised everyyear correspondingwith projectscompleted
for reform in several specific areas. (i) measures to                and the new projects accepted. Second, while the
strengthen the capacity to assess and plan the aggregate            Parliament should approve the budget for one fiscalyear,
resource envelopeas mentioned above; (ii) measures to                as is the practice now,the Governmentshouldplace every
develop a stronger and more integrated PEM framework;               year a forecast for the next period, say, three years corre-
(iii) measures to strengthen the systems of accounting,             sponding with TYRIP. Each year while submitting the esti-
audit, evaluation, dissemination and expenditure control;           mates to the Parliament, theGovernment will indicate the
(iv) measures to strengthen institutions, management,               deviations from the forecast and update the forecast for the
technology and skills; (v) measures to improve the man-             next period showing estimates for each year separately
agement of the ADP; and (vi) specific measures to improve
the management of public enterprises and financial institu-         Improving the accounting system
tions. (This chapter sums up key issues and recommenda-
tions; a presentation of selected issues is given in the            Systems for accounting, audit, evaluation, dissemination
Appendix: The Institutional Framework: Selected Issues.)            and control of outlays suffers from basic weakness in cov-

                                       BANGLADESH PUBLIC EXPENDITURE REVIEW
                                                               30
erage and quality. Concertedefforts are needed to improve     developmentbudget. Third, revenuebudget includesonly
systemsfor accountingand audit to enablebetter monitor-       the repetitive and mostlyobligatorytypes of expenditure,
ing and assessing of budgetary progress resulting in          e.g. wage,office contingency, pension and retirementben-
improvedaccountability   and transparency.                    efits.Fourth, decisionsin revenuebudget are based on the
    Deficiencies in the systems for fiscal and national       incrementalprincipleapplicableto obligatory    expenditures
accounts needs to be tackled as soon as possible.             mainly.Fifth, the budget specifiesthe cost of input; the
Concerted efforts are needed to improve the systemsfor        output or benefit from the outlay is never specified.
collectionand monitoringof fiscalaccountsincludingpub-            The system of evaluating expenditure is weak. For
lic expenditure,tax and non-tax revenueand estimatesof        example, there is no consistent use of objective criteria
deficits and public debt and the finances of SOEs.            based on economicrationale for determiningprioritization
Significant improvements  in accountingsystemsis a funda-     of expenditureallocationsbetween and within sectors and
mental precondition in order to improve budgetaryplan-        among projects. Moreover,in the present budget systems
ning processesand the standardsof audit and evaluation  of    the expenditure(input)considerationis the majorprinciple
expenditureprograms.Introduction of automatedsystems          for guiding,managingand evaluatingexpenditures,while
for collectionand monitoringof fiscalindicators can free      there is hardlyanycapacityto evaluatethe policyobjective
staff from manual data work and result in significant         (outcomes) and the specificservices (outputs) that agen-
improvementsin terms of the timelinessand qualityof fis-      cies or projectscan deliver.Efforts to shift towardsa more
cal indicators.A common system of economicand func-           outcome and output oriented PEM systemin the long run
tional classification
                    of public expendituresprimarilybased      could offer severaladvantagessuch as improvedaccount-
on IMF's GFS-based accountingsystemshould be adopt-           ability more concretepolicydeliberationsand better scope
ed as early as possiblethereby makingit possibleto estab-     for evaluatingwhether specificoutputs or servicesshould
lish a consistentintegrated budgetaryframeworkcovering        be providedby private or public institutions.
both the developmentand revenuebudget. 0 & M should               The systemof auditingof revenueexpenditurehas tra-
be recognizedas a distinct categoryof expenditure.The         ditionallybeen of the regularitytype.This has impliedthat
Government should establish a clear principle to ensure       it cannot be used properlyto examineefficiency,   economy
adequate allocationfor 0 & M and define a methodology         and effectivenessof expenditure because these are not
for estimating amounts needed for 0 & M. The GFS-             specifiedin budget nor is the audit organizationexplicitly
based system needs to be supplementedwith a consistent        mandated and equippedto carry out comprehensive      audit.
SNA-basednational account system for monitoring and           The Public AccountsCommittee and the Parliament,the
analysis of the macroeconomic  context of fiscalpolicies.     main institutions for accountability, also have been rela-
                                                              tively ineffectivein enforcing standards of responsibility
Improving the systems for audit and evaluation                and efficiencyin public spending.
                                                                  The need for improvementsin audit standards requires
The systemof audit and evaluationof expendituresuffers        concerted efforts to strengthen both internal and audit
from major weaknessboth in terms of the revenuebudget         functions.Also,it is essentialthat GOB's decisionto sepa-
and ADP.No explicitobjectivecriteriabased on economic         rate audit and accountingfunctionsis fullyimplemented   as
rationale is applied to expenditure from revenue budget.      early as possible.The system of audit or evaluationand
Over the years, however, certain conventionsor rules of       outlaysand outcomesmaybe further improvedby consid-
thumb have emergedwhich guide preparationof the rev-          ering specificmeasuressuch as: (i) a move towardsmore of
enue budget in Bangladesh.First, a smallrevenue budget        performance oriented (value-for-money)      audit methods;
and largedevelopmentbudget havebeen consideredgood,           (ii) a gradual introductionof a program budgetingsystem
regardlessof inadequacyof certain categoriesof expendi-       whichwould indicatenot only expenditurebut alsooutput
ture from revenue budget and the quality of projects          or benefit to be generatedfrom that expenditure;and (iii)
included in developmentprograms.Second, new services,         a gradual adoption of resource accountingmethod, begin-
expansionof existingservices,virtuallyall capital expendi-    ning with the quasi-enterprises and non-commercial
tures regardlessof the purpose and size are included in       autonomousbodies. For the developmentprogram,it may

                              TIfE
                                 INSTMrONAL    FRAMEWORK FOR EXPENDnURE MANAGENMENT
                                                         31
be worthwhileto make a statementspecifying        the standard enterprisesaccomplishedunder the PRMACmust now be
                                                                                                                         could
criteriaincludingthe minimumbenefit-costratio for accep- made fullyfunctional so that the Finance Division
                                                                              monitor the repaymentof external    debt  service
tance of projects,averagebenefit-costratio for varioussec- effectively
tors, projects which fall below the criteria but were still      obligations  by state enterprises on a regular basis.Other
                                                                                                                           only
accepted, alongwith the reasonsfor departuresfrom stan- needs for improvedPEM would includereformsnot
                                                                                          Ministries/Divisions  but   also  the
dard criteria, and projectsin respect of which the criteria among the various
were suspended. Moreover, budget policies need to be             ProgrammingDivisionof the Planning Commission,the
 placedin medium-termprogramperspectives:          eachbudget    ProgrammingCommittee responsible for reviewingADP
 statement should makeprojectionsfor the future and com- proposals and the role of the TYRIP Issues involved
 pare actual outcome with the projections. Consistency include:better integrationof recurrentand capitalbudgets
 between policies and expenditures and achievementsof            and institutionalizing    the effective applicationof project
 goals (self- and pre-determined)should be an indicatorof        selectioncriteria.
 efficiencyand performance.                                            The functionsand staffingrequirementsof the Planning
                                                                  Commission versus the Finance Division and Sectoral
                                                                  Ministries  needs to be re-examined.  Establishing a stronger
 Improvingexpenditurecontrol anddissemination
 mechanisms                                                       and more integrated multi-year budgetary framework
                                                                  includingboth the ADP and the revenuebudget impliesa
                                                                                                                       one spe-
  One important componentof improvedexpenditurecon- urgent need to strengthenthe FinanceDivision;
  trol would be to strivefor better disseminationand public cificneed being          to establisha permanent  unit for resource
  participationin PEM processes.A specific      measure would estimationin the FinanceDivision.There is alsoan appar-
  be to enhance the role of the parliament.The government ent need to strengthenthe governmentscash management
  mayplacebefore the parliamenta budget statementsetting as handledby the Ways& Means Sectionin the Ministry                  of
                                                                                                                     system   of
  out economic and budgetary data along with technical Finance to rationalize and improve the weak
  analysisas distinguished  from mere opinion and subjective public debt management;and to strengthentax adminis-
  judgments.                                                       tration. Moreover,the sectoral ministriescapacityto plan
                                                                   and control sectoral programs and projects needs to be
   Institutions, management, technology, and                       strengthened.
   skills                                                              The GOB may consider to re-constitutethe Planning
                                                                   Commissionand re-formulateits duties so that its primary
   Strengthening of institutions, personnel management, function becomes that of a think tank for development
   incentives,technologyand skillsis much needed through- problemsand policiesand related issuesof strategicprior-
   out. For example,the FinanceDivisionneeds to developa            itizationbetween and within sectors and amongprojects.
   stronger capacityin estimatingand monitoringkey fiscal This may imply transfers of some of the Planning
   indicators. Further efforts are needed for effectiveopera- Commission'sexpertiseto the Finance Divisionand the
   tion of key aspectsof the PEM in addition to ODA, ADB sectoral Ministries which at present suffer from serious
    and UNDP technicalassistanceeffortsto improvebudget- deficiencies            in their capacityto carry out budgetarymoni-
    ing, planning and accounting practices. This includes toring,policyanalysisand planning.A greater role for the
    improvingthe abilityof the Finance Divisionto evaluate planingcells in the sectoral Ministriesimplies a need to
    demands and proposals from other Ministries.Also, the           strengthen their capacity to provide inputs for the ADP
    DevelopmentWing of the Finance Divisionneeds to be              and to carryout expanded project analysis   activities.
    strengthenedfor it to perform its task of releasingfunds for        In addition to structural  and procedural  complexities,
    the ADP. The capacity and quality of skills in the              such as time-consuming and multi-layered decision
    AutonomousBodiesWing needs to be improvedif it is to             processes,there are alsomajor general deficiencies   in per-
    become more effective in providing informationon the             sonnelmanagement,skillslevels and use of modem com-
     performance and current financialposition of state-owed puter aided techniqueshinderingthe PEM systemto func-
     enterprises.The up-datingof the debt registersof the state      tion effectively.In short, the institutional framework,

                                           BANGLADESH PUBLIC EXPENDITURE REVIEW
                                                                32
including personnel management and training needs be             responsibility and power to implement a project subject to
rationalized and strengthened along with the efforts to          well established accountability procedures and sanctions
build an integrated budgeting framework with effective           and incentives.
delivery mechanisms. There is critical shortage of certain          The mandate of the Planning Commission should be
skills and the personnel system does not seem to address         examined and professional needs should be redefined as
adequately the need for professionalism required for effec-      per changes in functions. The Programming Division of the
tive PEM. This implies an urgent need for specific training      Planning Commission has to be given appropriate support
programs and manpower development.                               in its task of formulating strategy priorities for major sec-
                                                                 tors, preparing guidelines for inclusion of projects in the
Management of the ADP                                            ADP and up-dating the TYRIP on a timelyand regular
                                                                  basis. The guidelines adopted by the Programming
 At present the process of preparation, approval and imple-       Committee, which is responsible for the reviewing of the
 mentation of development projects suffer from deficien-          merits of proposals for ADP funding, need to be improved,
 cies in methodology and technical expertise. Also, most          making them as transparent as possible and institutionaliz-
 projects experience cost over-runs and require extensive         ing their effective application. While TYRIP has con-
 revision. The responsibility for scrutiny and appraisal of       tributed to improved investment programming, their oper-
 projects is diffused among several agencies such as IMED,        ational usefulness has been somewhat limited as they are
 Sector Divisions of the Planning Commission, ECNEC,             not firmly linked with the ADP.
 and Departmental Project Evaluation Committee                       The Govemment may consider to gradually transfer
 (DPEC). Technical criteria for appraisal of projects are not    responsibilities for project preparation and approval and
 applied with much rigor except for aided projects. The          project approval up to certain limits (subject to some cen-
responsibility and power to implement projects too are dif-      tral oversight) to the line ministries. A greater role for the
fuse: contracts are approved at different levels of the          planning cells in sectoral Mlinistries implies a need for
administrative hierarchy, the highest being the ministerial      strengthening their capacity so that the will be able to pro-
committee on purchases and procurement for the largest           vide timely inputs for investment programming and to
amounts; fund release or expenditure is subject to control       carry out expanded project analysis activities.
of administrative ministries, the Planning Commission and            IMNEDis officially mandated to carry out monitoring
Finance Division under a variety of circumstances. These         and evaluation of projects but the capacity to carry out its
controls are not in the interest of expeditious execution of     functions have been limited. The mandate of IMIEDneeds
projects nor do they effectively eliminate misjudgment or        be reviewed in order to determine whether it should con-
corruption for which they are installed. MIore effective         tinue to emphasize monitoring or shift its attention more to
audit and appropriate sanctions against mala fide abuse of       evaluation. The Government may consider benefits of
power can address most of these concerns. The                    enhancing INIED's capacity to monitor the implementation
Government may consider implementation of projects in a          projects concentrating on a few large projects of national
,managerial context': the project agency is given the            importance.




                               TItE INSTTrIONAL FR&MEWORK FOR EXPENDnURE MANAGEMENT

                                                            33
Notes

1. Publicgoods are those whichoncecreated, are available        accounts for 51 percent of the revenue budget (mostly
to allconsumersand cannot be withheldfrom one individ-          food programs).
ual without withholdingit from all, i.e., goods which are       3. GDP elasticityfor power is of the order of 2 to 2.5
non-exclusive and non-rivalin consumption.                      4. Petrobangla (a holding company with eight sub-
2. Expenditures  are classified as "markets" if they are        sidiaries), Bangladesh Petroleum Corporation (BPC),
assigned to: input supply; the Bangladesh Agriculture           BangladeshPower Development Board (BPDB), Dhaka
Development,Corporation (BADC); area development                Electricity Supply Authority (DESA), and Rural
                     labeled as research or extension;the
projectsnot explicitly                                                        Board (REB);all of whichoperate under the
                                                                Electrification
Directorate of Food; reforestation; and fisheries,forestry,     direction and control of the Ministry of Energy and
or livestockproduction.Marketsconstitutes44 percent of          MineralResources(MEMR).
ADP agriculturalprograms or nearly as much as research          5. Supplier's credit terms have been negotiated for Sid-
and extensioncombined in FYs96-97.Moreover,markets              dhirganj but constructioncontractshavenot been finalized.




                                                              34
 Appendix1
 Issues in the Recurrent Budget

 The recurrent budget has in recent yearsaveraged50 per-       sures, a reductionof redundant manpowerthroughVSSor
 cent of total budgetary expenditures,and also expanded        retrenchment, and the recruitment of personnel witl
 rapidly,by more than nominalGDP growth.Selected here         required skills.It would mean a selectiveor generaldown-
 for revieware: a) the largest componentof the recurrent      sizing of the manpowerof many agencies.In some cases,
 budget-wages and salaries(38 percent), and b) the food       mergerof ministries/divisions  or departmentsis warranted,
 account, whichhas not been scrutinizedfor some time.         following  whichseparationof redundant manpowerwould
                                                              be necessary. Also,there are agencieswhosecontinuationis
 Wages and salaries                                           no longer justified and would therefore need to be abol-
                                                              ished. And such rationalizationwould have to be rein-
  Trends in the levelofgovemment    manpower                  forced by systemic,procedural and technological/logistic
  Total manpower in the ministries, departments and           improvements within the context of a broader public
  autonomous/semi-autonomous bodies-but excluding             administration reform. These are not referred to in the
  employeesworkingunder the ADP,nationalizedfinancial         PER, since these are spelled out in some detail in the
  sector, defense and temporary employees, based on           Bank's public administration  reformstudy
  "approved" positions, is currentlyestimated at 1.04 mil-
 lion-of which 8 thousand are in various ministries,745 Addressing        the need for adequacy   ofcompensation
 thousand in government    departments,and 289 thousandin    The wagebillhas increasedappreciably-14 percent annu-
 autonomous and semi-autonomous        bodies. However,the   allyin nominalterms-since FY90.In addition,its share in
 actual manpower is less, in FY92 estimated at about 658     the revenuebudget has grownfrom 31 percent in FY90to
 thousand. Overmanningclearlyexistsin many GOB insti- 42 percent in FY96.
                                                                                    There are also indicationsthat non-
 tutions, particularlyin ClassIII and IV wherethe skillmis- wage inputs in the recurrent budget
                                                                                                     are inadequate in a
 match is alsogreater.At the same time, understaffinghand-   number of areas, notably operations and maintenance.
 icaps selected activitiessuch as the judicial system and    Hence the expansionof the wage billshould be controlled
 income tax. Education is the single largest employer, so that vital non-wage
                                                                                    inputswhichare necessary  for main-
 accounting for 28 percent of total employment,with pri-     tainingpublicassets and the provisionof publicservices
 mary teachers accounting for the bulk of employment. not unduly squeezed.                                           are
                                                                                    As a ratio of GDP,too, the wagebill
 Whilemore primaryteachersuill be needed in the future,      has been increasingnoticeably.   However,there are indica-
 there is the policy question of whether it would not be     tions that the "absolute"levelsof compensationhavebeen
 desirable for the expansion to come from more privately generallyinadequate
                                                                                   to meet the needs of the employees,
 managedprimaryschools.                                     which is likelvto have affected their morale and motiva-
                                                            tion. Giventhe highshare of compensationcostin the bud-
 Rationalization of manpower  skill-mix                     get, the over-manning   and skill-mismatch  in many govem-
The current structure of Governmentstaffingneeds to be      ment institutions,and the changingrole of the State, this
rationalizedto help contain current expenditures,and to     issuecan be addressedonly in the context of a broader and
meet the changing   skillrequirementsto matchthe new and    bapsicreformof the public administration,  whichcould lead
streamlinedgovernmentfunctions,in line with the chang- to a leaner
                                                                          but more efficient government.With such a
ing role of the State, and the need for a more efficient, restructuring
                                                                            and downsizingof manpower,and conse-
streamlined and cost effective public servicedeliverysys- quent productivity
                                                                                 gains, a higher level of compensation
tem. In manycases, this would require, amongother mea- could be warranted
                                                                                  and sustainable.Alsoin line with the

                                                         35
avowed  policyof a more focused Stateinterventionin areas     additionalbudgetarycost. In addition, in the case of cer-
where governmentinvolvementis warranted,many activi-          tainbenefits such as governmenthousing which are pro-
ties could be privatized.Such rationalizationwould lead       vided to a smallproportion of employees,monetizationof
greater cost effectivenessand while ensuringbetter quality    housingis justifiedon groundsof equity,forensuringequal
of servicedelivery. An example of such an activityis "sta-    compensation for the same work. Government housing
tionery and printing (Head 131"),where the govemment          should be providedonly selectively,   based on specialcrite-
has an establishment, but the scopefor greater cost effec-    ria, such as housing for distant or local level positions
tivenessthrough privatization is considerable.Government      where altemativehousingfacilitiesare not easilyavailable
recentlydecided to set up a Pay Commission reviewthe
                                              to               or for vital functionariesor essentialservices.
compensationstructureof governmentemployees        and pro-
 pose a new pay structure.What maybe more appropriate,         Consolidation of compensation
 howeveris a Pay and Public ServiceCommission,       which     Consolidationof basic salary and the various allowances
 willhave a broad mandate to reviewthe efficiency,   equity    should be adopted. The existingsystemof compensation
 and incentivestructure of compensation   in the context of    whichincludes many allowances    paid in addition to basic
 an assessmentof the appropriate size,structure and skill-     pay, is a sub-continental heritage, whose continuation
 mix of the pu'blicservice,and its evolvingrole, and a bud-    seems unnecessary.Consolidationof pay is expected to
 getarilysustainablewagebill.                                  lead to efficiencygainsin terms of ease of benefitsadmin-
                                                               istration,and minimizing  the paperworkinvolved,and will
Addressing  compression  of compensation    structure          alsocontribute to greatertransparency. Whilepensionsare
While average compensation for government employees currentlylinked to basic pay,consolidation            of pay,if adopt-
has risen in real terms since FY90,there has been signifi- ed, wouldmerelymeanthat pension         would  haveto be fixed
cant compression of "cash" compensationbetween the             at a lowerpercentageof total compensation.
lower and higher grades, with adverse implicationsfor
incentives and motivation for higher skill categories. The food account
Anotherfeature is that basic pay accountsfor a smallper-
centage of total compensation, with non-pay benefits Recent            trendsin PFDS   operations
accountingfor 43 percent of total compensation.                The level of public foodgrain distribution has declined
     The compressionin the "cash" compensationstructure since the earlynineties,with a changein its compositionin
needs to be reducedas much as possible,so that wage dif- favorof targeted distribution(TableAl.1). MIonetized          dis-
 ferentialsreflectthe differentialsin skillsand qualifications tributiondeclinedappreciably   from FY93  onwards,   follow-
 required for variousjobs. While the politicaleconomyof         ing the abolition and phasing out of some sales channels.
 such a reform is perceivedto be difficultin Bangladesh,as Targeted distribution, on the other hand, has increased
                                                                                                                         of
 elsewherein the sub-continent,this is nonethelessneces- somewhatin recentyears,largelydue to the introduction
 sary for the credibility,efficiencyand equity of the com- the food-for-education(FFE) program in FY94              and  its
 pensationsystem.Improvementsin the efficiency,      account- subsequentexpansionas wellas expansionof some GOB-
                                                                                                                       dig-
 abilityand qualityof the public servicescannot be consid- supported non-monetizedchannels (GR, TR, canal
 ered without addressingthis basic issue.                       ging,clustervillage,etc). The volumeof foodgrainsdistrib-
                                                                uted under the main safety net programs,the VGD and
 Monetization   of in-kindbenefits                               FFW havehoweverbeen lowe'rthan in the earlynineties.
 Allin-kindbenefitsshould be monetizedas much as possi-             Whileaid-financedfoodgrainimports havebeen declin-
 ble over a period of time. This is vital for budgetaryeffi- ing, total imports have increased on account of sizable
 ciencyand cost effectiveness,   as wellas for optimizingthe     commercialimportsby GOB in FY95and FY96(Table1).
  benefitsto employees.For some types of in-kindbenefits, GOB imports have been used to support higher levelsof
                                                                                                                     build-
  it mightevenbe possibleto enhancebenefitsto employees reliefdistributionand market sales,and some stock
                                                                 up, following successive  crop  shortfalls. The  declining
  while achievinga budgetary saving.This will alsohelp to
  reduce the compression in cash compensation         with no    trend in food aid reflects an apparent crunch in global

                                                                 REVIEW
                                                 PUBLICEXPENDITURE
                                        BANGLADESH
                                                              36
TABLEI
PFDSoperations
(million M.T)
                          FY90            FY91           FY92               FY93            FY94           FY95           FY96
OpeningStock              0.96            1.15            1.04               1.22           1.07           0.54           0.77
Imports                   1.53            1.58           1.56               0.83            0.65           1.56           1.82
 Aid                      0.95            1.54           1.41               0.74            0.65           0.94           0.83
 Commercial               0.58            0.04           0.15               0.09            0.00           0.62           0.98
 Procurement              0.96            0.78           1.04               0.23            0.17           0.28           0.20
 Availability             3.45            3.51           3.64               2.28            1.89           2.38           2.79
Distribution              2.17            2.37           2.35               1.07            1.38           1.57           1.90
 Monetized                1.37            1.57           1.42               0.46            0.53           0.51           0.76
 Targeted                 0.79            0.80           0.93               0.62            0.85           1.07           1.14
Losses                    0.09            0.10           0.07               0.08            0.02           0.03           0.04
Source:FoodMinistryAWF?


availability of food aid but also a response to some progress             The budgetary implications of PFDS operations in
in domestic foodgrain production, notwithstanding the                  recent years are summarized in Table 2. While NRFA is an
recent crop shortfalls. Domestic procurement has been                 inadequate measure of the budgetary impact of the PFDS,
declining from the high levels of the early nineties but there         an alternative concept is 'net cash taka impact" (NCTI)
has been a revival recently, with sizable procurement of the          which measures the net cash outflow/inflow as a result of
boro crop.                                                            PFDS operations. The NCTI reflects the combined effect
                                                                      of a number of components-cash subsidy on sales, free
Budgetaryimpihcotons     of PFDSoperaotons                            distribution under non-monetized channels, stock build-
The earmarking of counterpart funds as sales proceeds                 up/drawdown, operational losses and pilferage and
from food aid in the food budget seems to suggest that the            deferred payments. Estimates of NCTI suggest that the
PFDS should be a source of budgetary savings to finance               budgetary burden of the food account has in fact been
the ADP or at least that these operations should be self-             quite sizable for most years since FY90, and this has been
financing. In practice, however, PFDS operations have                 much higher than implied by GOB's budgetary food
been a major drain on the budget, contributing significant-           account deficit. In addition, this burden has increased
ly to the domestic deficit financing requirements. This is            appreciably since FY94 with the rise in commercial food-
not readily apparent from the food account which is pre-              grain imports and in targeted distribution. The NCTI was
sented in a complicated manner in GOB's budget, which                 Th 8.7 billion in FY95, and is now projected to rise to fur-
makes its true budgetary implications difficult to evaluate.          ther to Tk 11.5 billion in FY96. This implies that as high as
The problems and inefficiencies underlying a large deficit            31 percent of the "revenue surplus", which would other-
have been reviewed but many of the required improve-                  wise be available for ADP financing, could be pre-empted
ments have not been implemented. Under the present                    by the food account deficit in FY96.
practice, budgetary food subsidy, VGD, test relief and gra-               The current practice of estimating "economic price" of
tuitous relief are included under revenue expenditure. The            foodgrains should be improved-with regular updating
FFE program is included under the ADP The FFW pro-                    and objective estimation-and used as a basis for timely
gram is included neither in the ADP nor under revenue                 revisions in the administered sales price so as to bring down
expenditure. The resource envelope for the ADP includes               the current large cash subsidies on food, as long as some
part of the "counterpart funds generated by food aid"                 monetized channels exist. Cash subsidies ought to be cal-
required under donor agreements, and "net resource from               culated on the basis of cash costs of all acquisition involv-
the food account" (NRFA). The NRFA has been consid-                   ing budgetary resources-domestic procurement and com-
ered to represent the budgetary impact of the PFDS.                   mercial purchase-and cash receipts from sales. Given the
However, it is only a partial measure as it understates the           large cash subsidies in FY95 and levels projected for FY96,
food account deficit or overstates the surplus.                       the adrninistered off take price for the monetized channels

                                             ISSUES IN THE RECURRENT BUDGET
                                                                 37
TARE2
        Implicadonsof PFDSoperations
Budgetary
(rk biW.on)
                                 FY90                FY91            FY92               FY93           FY94            FY95            FY96

GrosscashoutLay                  19.00              16.90            13.65              11.95           3.74            12.01          15.91
Aid                                                                   8.81              4.65            3.37             6.07           6.47
            outay
Grossfnrancal                                                        22.46              16.60           7.11            18.08          22.38
    rvenue
Sales                             9.91              12.27            10.82              2.97            3.81             3.34           4.38

Net cashtakaimpact               9.09                4.63             2.83               8.99          -0.07            8.67           11.53
Bdgetary subsdyW                 6.49                3.90             3.62               1.71            1.67           2.73            2.69
Pevenueepernditure              67.40               73.10            79.00              85.10          91.50          103.30          110.70
Revenue       (R5)
        surplus                  0.38                5.12            16.17              25.50          31.30           39.10           36.89
GCO/RE(percent)                  0.28                0.23             0.17               0.14             04            0.12            0.14

NCTI/RS(percent)                 23.92                0.90            0.18               0.35           -0.2            0.22            0.31
SaleslGCO(percent)                 52                   73              79                 25            102              28              28
a. Rev5ed b~iget estrraaesfr al years and budget estimates r Fo96.


should be revised soon, particularly in view of the recent                        area, leaving it up to the private dealers rather than at
increases in intemational foodgrain prices, in order to con-                      administered/subsidized prices.
tain these subsidies.
                                                                                  Maximizing  poverty             impactof non-mon
                                                                                                     and development            7
Rationalizationof PFDS distribution                                               etizeddistribution
                                                                                  A careful assessment should be made to evaluate the
      outof monetized
Phasing             distribution                                                  poverty and development impact and rationale/efficiency
In line with the appropriate role of the government and the                       of all non-monetized programs/channels which are com-
need for relying on the private sector for foodgrain trading                      peting for the limited food resources. Based on this assess-
and marketing, both domestic and extemal, a policy should                         ment, the food allocations to the various channels need to
be adopted for phasing away the monetized channels of the                         be prioritized in order to maximize their poverty and
PFDS, and involving the government only for targeted dis-                         development impact.
tribution. OMS of wheat/rice, sales of wheat to flour                                 Based on evaluations carried out so far, primarily by the
mills/chakkis or sales of flour, and foodgrain sales to large                     IFPRI, it would seem desirable to expand the coverage of
employers may be phased out since the private sector could                        the VGD and cash wage based RMP-type programs consid-
carry out this marketing function. In line with the new pol-                      erably in order to target the most vulnerable sections of the
icy,the Govenmment flour and feed mill ought to be priva-                         rural poor. As long as food aid is tied to FFW-type programs,
tized since public sector involvement in such business                            an effort should continue to diversify the coverage of the
 activities is hardly justified. The responsibility for procuring                 FFW program across sub-sectors and for innovative projects
 the food requirements of the essential priority groups                           with high development and poverty impact but reasonable
 (together with the associated budgetary accounting) could                        transfer cost, in line with the SIFAD guidelines. But given
 be transferred from the Food Ministry to the relevant                            the somewhat higher transfer cost of any commodity-based
 Ministry/agencies.                                                               program like the FFW program, it would also be desirable
                                                                                   to switch to more easily supernised but "worthwhile" activi-
            offoodaid
 Monetization                                                                      ties which reduce the associated leakages and transfer costs
 As long as Bangladesh receives food aid which is required                         and enhances their net benefits. Related to the earlier rec-
 to be monetized as part of the donor agreement, such as                           ommendation about disposal of "monetizable" food aid, as
 the Canadian food aid which is monetized to finance the                           long as such food aid is available, their sales proceeds could
 RMP it would seem desirable to sell such food through                             be used for cash income-based programs which are the most
 market-oriented methods, such as auctioning, to private                           efficient in terms of their transfer cost.
 dealers rather than at administered prices. It would be pru-                          The new Food for Education (FFE) program accounts
 dent and economical to conduct such sales around the port                         for some 20 percent of food distribution under non-mone-

                                                      BANGLADESH PUBLIC EXPENDITURE REVIEW
                                                                             38
tized channels.The FFE programneeds to be judged in the            and in preventionof drop-outsin FY94in the schoolscov-
context of the constraintsplaced on other safetynet pro-           ered by the FFE program,whichwasreportedlyfound to be
grams such as VGD and FFW which are considered more                greater than the declinein these indicatorsin the non-FFE
efficientas incometransfermechanisms.    Anotherimportant          schools.However,there are still questions about how sig-
factor is the decliningtrend in food aid, with prospectsfor        nificantthe "net" improvementwas in FY94,and to what
litle m support forthe programlookinguncertain.Besides,            extentthese havebeen sustainedsinceFY94.
the FFE program accounts for 35 percent of the ADP                    GOB supports sizable food distributionunder a num-
resources allocatedfor primaryeducation,while its cover-           ber of channels-gratuitous relief,test relief,canaldigging,
age of childrenis only5%.The issueis whetherthere arenot           cluster village,as well as distribution under the Prime
more efficient and cost effective ways of using these              Minister'scommitment-which account for 21 percent of
resources for promotingenrollmentand attendance,while              non-monetized   distribution.The povertyand development
improvingthe qualityof primaryeducation.An earlyassess-            impactand the relativepriority of these programsneed to
ment of the FFE programby IFPRI found that there was a             be assessedin the context of the competingclaimsfrom
noticeable improvementin enrollment, schoolattendance              other targeted programson availableresources.




                                           ISSUES IN THE RECURRENT BUDGET
                                                              39
Appendix2
Sample of ADP Projects with
Questionable Merit or Rationale/
Priority for Public Sector Investment
                                         Project cost, status of approvaland
Name of project                          executingagency                     Comments

Agricultureandwater resources
                                                       unapproved.
                                             2175miDion,         BADC                   The privatesectoralreadyaccountsfor a verylargeshare
                 Project
I. SeedDevelopment                       Taka
                                                                                        of the marketandcouldcontributeto greaterproduction
                                                                                        of improvedseeds with properpolicies.

                                Area                                                                        which shouldbe left to the pri-
                                                                                                     activity
                                         Taka17million,PPapproved,BarindMultipurpose Thisis a business
            of FineRice
2. Production          in Barind
                                         DevebpmentProject                           vatesector.

                                         Taka                      FoodDirectorate
                                             388 million,unapproved,                                    activitywhich shouldbeleft to the pri-
                                                                                         Thisisa business
3. BMREof FlourandAnimalFeedMillat
                                                                                         vatesector.
Postogoba

                                                                  FoodDirectorate        Thisshouldbe reexamined  in view of the largeexcess
4. Constructionof New FoodGodownsin      Taka110million.unapproved.
                                                                                         publicstorage       and dedining
                                                                                                      capacity             GOB role in food-
        Locations
Strategic                         Food
                  for Strengthening
                                                                                         grainoperabons. The privatesectorshouldinvest  if there
Security
                                                                                                    gap.
                                                                                         isa capacity

                 of ConcreteSibowith                               FoodDirectorate
                                         Taka1053million,unapproved,                     Sameasabove.
S. Construction
                  at MonglaPort
AncillaryFarilities

                            Unit in      Taka94 million,revised          Livestock
                                                               unapproved,                                      which shouldbe leftto the pn-
                                                                                                         activity
                                                                                         Thisis a business
              of Goat Rearing
6. Establishment
eachDMsion                               Directorate                                     vate sector.

                and Conversionof Dairy                                   Directorate
                                         Taka100million,approved,Livestock               Sameasabove.
7. Modemizabon
Farms         Raishahi
     in Sylhet.       and Faridpurinto
BreedingFarms

                                         Taka           revised
                                             9850 minion,                BWDB
                                                               unapproved,               In view of the potentalfor minor imgabon based on
               Project
         Barrage
 8. Teesta
                                                                                         groundwater in the commandarea.the projectshouldbe
                                                                                         discontnued  so thatno additional            canbe
                                                                                                                           expenditures
                                                                                         incurred.


 Industry
                                                                                          In linewith GOB'spolicyof privatzation,the publicsector
 9. Shahjalal       CompanyLimited
           Fertilizer                     Taka10627million,approved,BCIC
                                                                                          shouldnot undertake  new investment in manufacturng. If
                                                                                          there is a need'or greater       the investment
                                                                                                                   capacity,              could
                                                                                          be undertaken  by the pnvatesector.

        of ChhatakCementFactory                                     BCIC
                                          Taka1433milion, unapproved,                     Much of thework hasalreadybeendone. andaddibonal
 10.BMRE
                                                                                          expenditure                                 to pri-
                                                                                                     shouldbe limitedto whatis necessary
                                                                                          vabzethisenterprise.

               Mils (1500TCD)
           Sugar                          Taka844 million,approved,BSFIC                  Sameasabove.
  I I. Pabna

                of a World TradeCentre    Taka                      ExportPromotion
                                              4000milion. unapproved,                     Thisinvestment   projectwasindudedin the FY95-97
 12.Construction
                                          Bureau                                          Three-Year RollingInvestment     Program.  The FY97ADP
        in Dhaka
 Building
                                                                                          indudesa feasibilitystudyfor this project.Nf suchaninvest-
                                                                                           mentisactually jusified, it could be undertaken   by the
                                                                                                        asin the case
                                                                                           privatesector,                of a similarprojectin
                                                                                           Chittagong.


                                                                      40
                                            Projectcost,status          and
                                                              of approval
   of project
aame                                        executingagency                 Comments
                                                                                                     Given                        oeated by BSCIChas
                                                                                                          that much of the capacity
                     Estates
            Industrial
DistrictBased                               Taka911 million,
                                                          revised          BSOC
                                                                 unapproved,
                                                                                                             seriousiy
                                                                                                     nernained        undenrtlized,           sectorshould
                                                                                                                                    the private
                                                                                                     be encouragedto buildsuchestates.


               Estate                       Taka                     bSCIC
                                                49 million,unapproved,                               Sameasabove.
MaizdiIndustrial

                                                                                                     Someof the wok hasalreadybeendoneandincrrentl
 Establishment            in 10
            of New Spindles                 Taka164 million,approved,BTMC
                                                                                                                should
                                                                                                     expenditures     be minimizedandtheseenterprises
Is underBTMC
                                                                                                     pnvatized.

                                                                                                                        support
                                                                              Handloom The NGOs couldprovidethe necessary
        Palli
 Benarashi                                  Taka198 million,approved,Bangladesh
                                            Board

                                                                      BJMC                                                           andthe BMRE
                                                                                                                   shouldbe privatized
                                                                                                     The enterprises                            could
 BMREof GulfraHabibjute Mill                 Taka38 million,unapproved,
                                                                                                     be undertakenby the new owners.

                                                269 million,revised
                                             Taka                           BSEC
                                                                  unapproved,                                                     policythe publicsectorshould
                                                                                                     In line with its privatization
 HighVoltageCableandConductor
                                                                                                     not undertake new investment in manufacturing.
inufacturing Plant

lurism
                                             Taka 100 million, unapproved, Civil Aviation authori-    This is a business activty which should be left to the pn-
 . Construction of an Intemational Three-
                                             ty of Bangladesh(CAAB)                                   vate sector.
ir Hotel at ZIA Internatonal Airport

                                             Taka 10 million, unapproved. BangladeshPariatan          Same as above.
   Hotel and Fast Food Restaurantat
itjdee                                       Corporation

                                             Taka 22 million, unapproved, BangladeshParjatan          Sarne as above.
  Low Cost Hotel in Cox's Bazar
                                             Corporation


ower
                                              Taka 2130 million, unapproved, BPDB                     The project should be reappraised carefully.
2. Power Distribution Project (East Zone)

                                              Taka 2842 million, unapproved, BPDB                     Same as above.
3. Power Distribution (West Zone)

                                              Taka6550 million, unapproved, BPDB                      The investment should be opened to private independent
4. 210 MW KhulnaThernnal Power Plant
                                                                                                      power producers (IPPs).


nansport
                                              Taka 1878 million, PCP approved, Roads and               A decision on this project should be defenred and taken in
5. Flyovers at Mahakhali. Maghbazarand
                                              Highways Department                                      the context of a comprehensive assessment,possiblywith
.traban-Sayedabad
                                                                                                       IDA assistance.


                                   Vessels Taka 457 million, approved. BIVTC                           These vessels should be privatzed, leavingthe rehabiita-
6. Rehabilitation of Selected BNWTC
                                                                                                       tion to new owners.


                             Vesselsof        Taka 127 million, approved, BIWTC                        Same as above.
7. Modification of 3 Passenger
~,WTC
                                               Taka659 million, unapproved, 8NAWTC                     This project should be dropped sincethe public sector
 3. Procurement of 2 New Passenger
                                                                                                       should not be involved in this businessactMity.
.essels for Chittagong-Bansal Route

                             Vessels           Taka217 million, unapproved. BIWTC                       Same as above.
 9. Procurement of 3 Passenger

                                               Taka 100 million, unapproved, BangladeshRailways         Provision of pubGchousing in this case is neither cost
OC.Housing Complex for Employees of
                                                                                                        effective nor justified on equity grounds.
3angladeshRailways

Physical planning, housing and water supply
                                          Taka 843 million, PCP approved, PublicWorks                   Provision of pubk housing in this case is neither cost
 31. Construction of 1000 ResidentialFats
                                          Department                                                    effective nor jufied on equity grounds.
;or Govemment Employees in Dhaka City

                                               Taka 1517 million, PCP approved, Public Works            Same as above.
32. Construction of 2000 Residential Flats
'or Govemment Employees in Dhaka City.         Department




                                                                           FOR PUBUC SECTOR INVESTMENT
             SAMPLEOF ADP PROJECTSWITH QUESiONABLE MERITOR RAnONALERIORrrY
                                                                               41
                                                                       and
                                                             of approval
                                            Projectcost,status
Name of project                             executingagency                Comments
               of 100Flats(1800 sq.feet) Taka
33. Construction                                                        Works
                                                                   Public
                                             200 million,unapproved,                            Sameasabove.
for Govemment  Employees in DhakaCity    Department

34. Construction           Quarters
               of Residential     at                               Perobangla
                                            Taka50 mnilln, approved,                            Same as above.
Bananifor Employeesof Petrobangla

            of TCBHeadOfficeBuilding Taka
35. Expansion                                                TCB
                                         76 million,unapproved,                                                                               in
                                                                                                Giventhat the publi sectorshouldnot be involved
in Dhaka                                                                                                                      seemsunnecessary.
                                                                                                                 this expansion
                                                                                                tradingactivities,

            of TCB Building
36. Expansion             in Khulna         Taka                    TCB
                                                6 milion, unapproved,                           Sameasabove.

                         Building
37. Constuctionof Chancery      in          Taka350 million,unapproved                                                          andothercost effec-
                                                                                                This projectshouldbe reconsidered
Washngtonand Delhi                                                                                                      shouldbe explored.
                                                                                                tive optionssuchasleasing

Education
38. Foodfor Education                       Taka                      Directorate
                                                3600milion, unapproved,          of                                                                  of
                                                                                                It is not at alldear that thisisthe mostefficientmeans
                                            PrimaryEducation                                    promoing enrollmentandqualityof primaryeducation.

39.Renovation              of
             and Development                Taka2895migion,revised          Directorate The concemisthat publicassistance
                                                                  unapproved,                                           maybe substituting
       Registered
Selected         Non-Govemment                                           Education
                                                       and HigherSecondary
                                            of Secondary                                for community           that would otherwise
                                                                                                     contribution                   be avail-
SecondaryHigi Schools                                                                   able,andmay not be linkedto anyperformance critena.

              of 350 Private
40. Development            Colleges                       revised
                                            Taka1128migion,      unapproved                     Sameasabove.




                 of 13 New VTlsand
 41. Establishment                              733 million,unapproved
                                             Taka                                                               of VTI-based
                                                                                                The effectiveness                   trainingshouldbe
                                                                                                                            technical
 Renovation and Development of I VTI                                                            evaluated        privateschemes
                                                                                                         vis-a-vis                            more.
                                                                                                                               before investing

42. Establishment         Language
                 of English                 Taka                                                                  providingsuchservices.
                                                                     Ministryof Educaion The privatesectorisalready
                                                           unapproved,
                                                255 million,
       Institute
Training

 43. Establishmentof a Home Economics        Taka                   Directorate
                                                 81 million,approved,                                 to be a low priorityfor publicsectorinvolve-
                                                                               of Secondary Thisappears
 College in Chittagong                       and HigherSecondary Educaion                   mentand couldbe set up by the privatesectorif demand
                                                                                            exists.

 44. Establishment        Management Taka
                of Business                                    Ministryof Educaion Same
                                         296 million,unapproved.                       asabove.
 Courseat HSCLevelin PrivateInstitutons

                 of a Girls'sCadetCollege Taka
  45. Establishment                          368 million,unapproved,       Army
                                                                   Bangeadesh                       Thisappears                   proposition
                                                                                                                 to be an expensrve          andalsocan-
 in Feni                                  Headquarters                                              not bejustifiedon equitygrounds.

 Health
                of 200 BedGeneral
 46. Construction                            Taka287 million,unapproved                                                           (per bed)is highandin
                                                                                                    The unit costof suchinvestrnent
        in Mirpur
 Hospital                                                                                           additiontheseservices canbe providedby the private
                                                                                                    sector.

                of Bangladesh-China
 47. Construction                               970 million,unapproved
                                             Taka                                                   Sameasabove.
          GeneralHospital
 Friendship              (250 Bed)
 Note Mostof the projectsn this listwererckded in theFY96
                                                        ADP and havebeencarnedover to the FY97ADP




                                                  BANGLADESH PUBLIC EXPENDITURE REVIEW
                                                                           42
Appendix
       3
Performance of SOEs and their
Contribution to Public Sector
Deficits in Bangladesh
Most state owned enterprises(SOE) in Bangladeshcame           been used to build nearly 3,500 new primaryschoolsor
nto existencesoon after independencepartly by design,as       about 100 new health centers at the than a level.In FY95,
he post-Liberation    Government implementedits socialist     the gross lossesamounted to Tk 8.5 bil]ion.
igenda, and partly by default, as the Governmenthad to        * SOE deficitsdeclined from FY91,but rose againfrom
 akeover many enterprises abandoned by their Pakistani        Tkl4 billion in FY94 to Tk22 billion in FY95, and are
)wners. At present, SOE presenceis importantin shipping,      expectedto reachTk23 billionin FY96.
rankingand insuranceservicesand in variousmanufactur-         * The net financing requirement of the non-financial
ng activitiessuch as textiles, newsprint,power, cement,       SOEs  3 in FY96
                                                                              is expected to remain very high at Tk 18.6
 teel and fertilizer.                                         billion(constituting1.5 percent of projected GDP).
                                                                 The total SOE debt are expectedto be Tk 459 billionat
-erformance of SOEs'                                          the end of the current fiscalyear,amountingto 37.9 per-
                                                              cent of the projectedGDP.Almosthalf of the total debt is
GOEscontinue to use a significantamount of the econo-         short-term.
ny's scarce resources, but fail to generate commensurate
eturns.                                                       SOE deficits on a cash basis
   SOE gross investment in operating fixed assets aver-
 ged 2.4 percent of GDP in FY95.                              The deficits above are based on the internationalpractice
   SOEs now employsome 261,000persons.                        of using accrualbased accountingprocedures.An alterna-
   SOE contribution to GDP in FY95 was 2.9 percent,           tive estimate of deficitsof SOEs could be done on a cash
!ecliningfrom 4 percent in FY94,and is expected to be         basis. Several adjustments have to be made to accrual-
.round 3 percent in FY96. The largest contribution to         based accounts to estimate the financingneed during a
 alue added, as shownin Annex-B    Table1, comesfrom the      year on a cash basis. Mlaking  these adjustments,the oper-
nanufacturingsector enterprisesfollowedby electricity,gas     ating cash flow (OCF) and Total FinancingRequirement
 nd water sectors. However,SOEs are dominant in the           (TFR) levels were computed for eleven sector corpora-
 lectricity,
           gas and water sector.2
                                                              tions, two Boards(WDB and REB) and sevenAuthorities
   The financial return on total assets was a meager 1.9      (BCAA,   DESA,BEPZADhakaWASA,ChittagongWASA,
.ercent in FY94,0.8 percent in FY95and is expectedto be       Chittagong Port Authority and Mongla Port Authority),
,nly 1.3 percent in FY96.                                     coveringthe period FY94-96, based on financialdata pro-
   The SOEs have been performing poorly with persis-          vided in the Autonomous    Bodies BudgetVolume   published
ent losses and increasingburden on the budget and the         by the MonitoringCell of the Ministryof Finance. These
-conomy.                                                      20 non-financial entities together accounted for more than
   Operating income of SOEs has been consistently   low.      88 percent of the value added, 87 percent of employment
   The gross lossesof SOEs in FY94 amounted to Tk. 9.7        and 73 percent of fixed assets (at their book value) in the
zillion,representinga Littleover 11 percent of that year's    non-financial public enterprise sector in FY944.The cash
 ODP, 9.4 percent of current spendingand 32 percentof the     flowsummaryby SOEs (Table2 in Annex-B)presents the
ducation budget. This money could have altematively           TFRs and the sources of financing.

                                                         43
   Cash based analysis  confirmthat the level of SOE con-            TAE I
tribution to public sector deficit has been verylarge.In                                        of non-finandal
                                                                             and financalposition
                                                                     Operating
FY94,excludingthe jute sector enterprises,' the combined             SOEs
overall deficit"of the remaining 19 amounted to Tk 17.5                i               FY94'      FY95b     FY96c
                                                                                                    40.67           33.9S            39.2
billion(Table2). The contributionof these SOEs to public             VA&added'
                                                                                                                    (2.9)            (3.2)
sector borrowingrequirementwas Tk 8.2 billion (or 0.8                                                (4.0)
                                                                                                    143.5            158.4           173.8
percent of GDP). If the jute sector enterprises are includ-          Opeating revenues
                                                                                                    (14.0)          (13.5)          (14.3)
                                                                                                     132.3           153.5           165.1
ed, the SOE contribution of 21 SOEs to PSBR rises to Tk              Operating evensee'
                                                                                                    (12.8)          (13.1)          (13.6)
12.3 billion (1.2 percent of GDP) in FY94.                                                                           -2.07           1.5
                borrowing (including postponed paymen)
                Short-term                                                     beforetax
                                                                      Net income                     4.42
                                                                                                     (0.43)         (-0.18)         (0.12)
   Short-term borrowing (including postponed payments)
                                                                            income                                   -4.1           -0.48
has been a major source of financing SOE deficits. As                 Net        aftertaxi           -1.1
                                                                                                     (4-0.)         (-0.4)          (&0.04)
shown in Table 2, short-term borrowing constitutes the
                                                                                                     (0 9)           (0.7)           (0.4)
largest source of financing in all of the three years. Of the
                                                                             rate of return           1.86           0.77               1.30
total financing needed, it accounted for 83 percent in                Firancial
                                                                              svngs'                  8.8             7.8               11.9
FY94, 44 percent in FY95 and is expected to account for               Gr
                                                                                                     (0.9)           (0.7)           (1.0)
37 percent -of the financing needed in the current fiscal
                                                                                                      14.0           22.2               23.1
year. Equity injections have also been significantly large            SOE deficit
                                                                                                      4.9             1.13              5.2
while the net long-term borrowing have been relatively                Net long-term borrowingk

small.                                                                                               (0.5)           (0.1)              (0.4)
                                                                      , .      . Equity
                                                                              injection'              9.1             12.5              10.2
                                                                                                      (0.9)          (1. 1)             (0.8)
    It appears that postponement of loan repayments is a
                                                                                                      3.6              18               18.6
 major item in "short-term borrowing". This is evident from           Net contribuion of
                                                                                  SOEsto PSBRc (0.4)                  (I.S)             (1.5)
 the fact that total increase in debt service liability of all the     nonfinancial
                                                                      Invesenert'              22.86                 29.95              35.0
                                                                                                      (2.2)           (2.6)             (2.9)
 non-financial SOEs in FY95 was Tk 32.9 billion (2.8 per-
                                                                                                      603             634               670
 cent of GDP). Of this only Tk 9 billion was actually paid.           Totalassets
                                                                                                     (58.5)          (54.2)          (55.3)
 The rest were added to arrears and are most likelylumped                     debt
                                                                      Long-term                       249             250               255
                                                                                                     (24.0)          (21.4)          (21.1)
 under short term borrowing. Another major item appears
                                                                      Short-term debt                  156             180              204
 to be postponement of income tax payments.                                                          (15.1)          (15.4)             (16.8)
                                                                      Equity                          198             203                211
                                                                                                     (19.4)          (17.4)             (17.4)
 Notes                                                                 NetfC(ed
                                                                              assets                 255.6           250.8              248.5
                                                                                                     (24.8)          (21.4)             (20.5)
                                                                                                      259.4          269.1              260.9
 1. The SOEs covered in this analysis include the 210 non-                Personnel
 financial public enterprises operated under the 39                       (thousands of persons)

 autonomous sector corporations/authorities. It does not                ote:Figuresinparenthesis             of GDPat currentmarket
                                                                                               are percentages                   prices.
                                                                                   actuals.
                                                                       a. Prov,isional
 include Bangladesh Railways,Post Office and T&T, which                b. Revisedbudgetestimates.
                                                                                                              pus operatn surplu.
 are Government Departments financed directly through                         ersnpoeecnsat.on plus
                                                                       d. Equals                   deprecaoon
                                                                                                                                   and
                                                                                                                       corpensalion,
 the central Governmentbudget, the four NCBs, the two                         the sun
                                                                       e Equais              ofgoodsandservices,
                                                                                    ofpurchase                 employee

 insurance companies and the six DFIs.                                      dep ends.
                                                                          $u1i

 2. Value added by SOEs in the electricity, gas and water                                          totakiansttis.
                                                                          ghSOpmera ithglussdividedobs

                        about 55 percent      of the total value                          deprecation.
                                                                          i. aned incomepIs                     n
  sectors constituted                                                                                                                 sang.
                                                                                                                         assetmiu gross
                                                                                                    facedand other bngtemm
                                                                                          inoperating
                                                                                 irvesenert
                                                                          j. Tbtal
  added in these sectors in FY94.                                         k.Long                loan
                                                                                   borroving ncrsw
                                                                               terrn                repayrents.

  3. The accrual based net additional financing burden gen-                Fresh t
                                                                          m.         wp" neei
                                                                                           ds t       axes   s dgvrmends
                                                                                                         minra

  erated by the SOEs covered by the Monitoring Cell. There                          inoperating
                                                                          n.Inrestment
                                                                                    on data
                                                                                Based
                                                                                              fixedand
                                                                                                  from
                                                                                          obtain~ed
                                                                                                      otherlongtermassets.
                                                                                                                   Cel, finance
                                                                                                       the Monitoring         Divson.
                                                                          So,.ce:
  are others such as the DFIs and the NCBs not included in
  our analysis here.                                                      5. As part of the restructuring and reform program that
  4. The choice of these 20 SOEs were based mainly on                     was initiated in FY94, a sizable financial restructuring-
  availabilityof cash flow data.                                          involving about Tk 17.5 billion-in the two large jute cor-

                                                                      REVIEW
                                                      PUBLICEXPENDITURE
                                             BANGLADESH
                                                                     44
TABLE2                                                                                      TABLE3
Cashbaseddeficitandits financing
                               by non-financial                                                                  of valueaddedbySOEs
                                                                                                       composition
                                                                                            The sectoral
SOEs                                                                                        (Percentage of total value addedby SOEs)
(Taktinbillion)
                                  FY94'              Fy95b              FY96'               Sectors                       FY94'            Fy95b             FY96'
Defce                             17.5'               15.4              22.9                Manufacturing                 29.5             39.4              38.2
Less: taxes and dividends          9.35                3-90              3-97               Electicity, gasand water      27.8             31.4              36.3
Net contribution to                8.15               11.5              18.93               Transportandccncmunicatbn     11.4             13.2              12.2
 public sector deficit                                                                      Service                        6.2              6.4               6.15
Financing                                                                                   Othersd                         25.1              9.6             7.15
 Net long-termnborrowing'          4.61                0.25              4.61                          actuals,
                                                                                            a Provisional
 Short-terrn borrowing            14.43                6.74              8.56               b Fivsed budget etimrates.
 Equity inflow                     3.06                5.06              6.48               c Budgetestimates.
 Others'                            1.09               0.24              0.16               d Include                                and comrne.roa
                                                                                                     conqsibon, agricutureand r*heries            sectors.
Changes in cash'                  (5.67)               3.13              3.07               Source:Based on data prrded by the Montonng CeN.FinanceDMsion.

a Pfi sionalactuals                                                                         6. Sincethe TFR indudes changesin receivables
                                                                                                                                        and other
c. Budgetestirnates.                                                                        current assets which consists of, among others, intercorpo-
d. Totajfinanc,ng requirement fromoutside   sources.
e. Exciuding Mutesectorenterprses.                                                          ration transactions, this simple summation could be over-
f Equals new longterm debt mntsdebt amortization      payrnents.                                                                           SOE sector.The
                                                                                                                        of the non-financial
g. No clearexplanation about the components of ths category of finanong could be            estimating the deficit
obtained.It is possiblethat postponements   of due payments-.e. debt serviong.taxes,        inter-corporation financial transactions should cancel each
socal security contributons.accounts   payable-arelumpedhere.Aso note that the
accounts of PDB are .,ckdmed  rnthis table on an accrual bass.                              other     in the process      of aggregation.         In other    words,
 h. Parenthesisindcates ncreasen cash   and bankbalace.                                     changes in receivables between corporations must exactly
                                                                                            offset the changes in payables between corporations. The
porations took place. In August, 1993 BJC was liquidated                                    Autonomous Bodies Budget Volumes do not provide
and the NCBs wrote off Tk 13.974 billion BJC's debt. This                                   enough data on receivables and payables between corpora-
was shown in BJC's FY94 Profit & Loss account as "adjust-                                   tions. As a result, the offsetting does not occur in the aggre-
ment from previous year". NCBs themselves absorbed 30                                       gation of the TFR. Since changes in receivables are includ-
percent of this debt write-off as bad debt and charged the                                  ed in the TFR calculation, while changes in payables are
loss to their Profit and Loss Account. GOB issued bonds to                                  treated as a financing item, the total TFR of the 21 SOEs
compensate the NCBs for the remaining 70 percent. In                                        is likely to be over or understated depending on whether
order to avoid the distorting impact of this operation on                                   total receivables between these SOEs increased (thus over-
the financial picture of the SOE sector, these two corpora-                                 stating total TFR) or decreased (understating total TFR).
tions were excluded from FY94 calculation. At the same                                      This bias is likely to be important, particularly in figures
time, because of its importance, the accrual based deficit of                               including PDB. The latter is likely to have sizable receiv-
PDB was included in deriving this figure.                                                   ables from the other 20 SOEs.




                                  OF SOEs AND THEIRCONTRIBUTION
                        PERFORMANCE                           TO PUBLIC SECTORDEFICrrS IN BANGLADESH
                                                                                       45
Appendix4
Public Expenditure Impact on Rural
Income and Poverty
Public expenditure can influence poverty indirectly                      Second, the model results also point to another poten-
through promoting more rapid economic growth. It can                tiallyimportant link between public spendingand poverty
also influencedirectlyvia social sector allocations(educa-          i.e. impactof education.Developmentof human capitalof
tion, health) havingbearingon the poor's earning capabil-           the poor via public education exerts positiveinfluenceon
ity,or in mitigatingthe severityof povertyvia socialsafety          ruralpoor's incomeand hence helpsto alleviate      poverty.  At
net schemes. An analysiswe have done of the effect of               the averagehouseholdlevel,householdswith educationup
rural public expenditure within a partial equilibrium               to primarylevelearn about 13 percent higher incomethan
frameworkindicatethe following         broad conclusions.'The       those without exposureto formal education. For the poor
 results are not surprisingbut their implicationsare worth          households,the matcheddifferenceis 10 percent,whichis
 re-emphasizing.                                                     significantstatistically.The impact of education is higher
     First, public expenditurescan positively   impacton rural       for secondaryand higher attainment levels.The impact of
 poor's income, and hence, poverty,      through fosteringeco-       differentlevelsof educationon poor and nonpoor remains
 nomic growth.Accordingto       the   1989/90 BIDS household         sensitive to the choice of income/consumption       data. For
 survey,the proportion of rural population in Bangladesh             the poor, incomedata    suggests  an important  role of prima-
 livingin povertyis estimatedat 56 percent in villages    with-      ry and higher education,while consumptiondata tend to
 out electricity,compared to 45 percent in villageswith              favor the high school certificate level. According to the
  accessto it. Data for villageswithout and with good trans-         both sources,highereducationis positiveand significant       in
  port showa similarpattern. Not allof these differencesare,         case of the nonpoor,though incomedata also       points  to the
  however,attributableto the independenteffectof the pres-            relevanceof secondary   education.The impactof education
  ence of infrastructure.There may be considerablediffer-             wouldbe higherif combinedwith accessto capitalwhichis
  ences amonghouseholdslocatedin two groupsof villages                a limitingfactor in realizingfullrange of povertyalleviating
  in terms of initialresource endowment at the household              potentialsassociatedwith public expenditureson physical
  level as well as other unobservedvillagelevel characteris-          infrastructuresand human capital development.
  tics. Controllingfor the variationin initialresourceendow-              Third, the presenceof physicalinfrastructureand inter-
  ment of the household(suchas land, non-landcapital,and              ventions aimed at developinghuman capital is important
  labor) and after makingsome allowancefor the potential              for economicgrouth. The effectivenessof these interven-
  factorsthat affectproductivity    as wellas the choiceof eco-       tions,however,  seemsto rest on the poor's abilityto tap the
  nomic activities,  one can still discerna significantpositive       full advantageof the changinginfrastructural    environment.
   incomeeffectof publicspendingon infrastructures       such as      A majorlacunain this area is the limitedcoverage(ranging
   allweatherroads and electrification.   The resultsof a multi-       from a quarter to 30 percent) of the poor householdsby
   variable  regressionmodel show    that poor householdsresid-        the excitingcredit programsoperatedunder the auspices       of
   ing in infrastructurallydeveloped (defined as havingelec-           the government or NGOs. Access to credit, along with
   tricityand  good transportaccess)villages   have, on balance,       training and technology,  will facilitatethe poor's entry to
   9 percent higherincome than their counterpartsin under-             nonfarm self-employment     and raise their productivityin
   developedvillages.The independentimpact of infrastruc-              these occupations.The model results indicate that poor
   tures on rural poor's consumptionis still higher: poor              householdswho manageto participatein non-farmsectors
   householdslivingin developedvillagesenjoy,on average,               have, on average,34 percent higher income (and 15 per-
    16 percent higher consumption than those residing in               cent higher consumption) than those engaged in farm
   underdevelopedvillages.                                             occupations.Not aLlpoor householdscan operate at that

                                                                   46
level,but the resultshowsthe richpotentialfor poverty                  However, thedistribution   ofbenefitsfromprimary     edu-
alleviationassociated  with the effectivecombination      of       cationalonedisplays    a progressive   pattem.The shareof
              humancapital,
infrastructure,                and micronon-farm    credit.        benefits accruing  to households   at differentincomelevels
   In short,the partialequilibrium  analysisshowa positive         roughly correspond   to theirsharein overall  household   dis-
correlationbetween   spending  on ruralroads,electrification       tribution.Forinstance,   thebottom20 percentreceive      19.4
and education  and the riseof the ruralpoor'sincomeand             percent of benefitsfrom primary       education  expenditure
hencereductionin poverty.   It is however  essential to also       compared,  withonly6 percentrecorded       forsecondary  edu-
analyze aspectsof distribution.  Inequality in the access  to      cationexpenditure.   On the otherend of thespectrum,      the
humancapitalmayemerge        as a  constraintto  future eco-       top 20 percentreceive    about21 percentof benefits     from
nomicgrowth.   Toevaluate  howeffective   the public expen-        primary  education, compared    with35percentobserved      for
 ditureprogram  is in helping to achieve the  GOB's   stated       secondary  education  expenditure.   Theexpansion   ofprima-
 policyobjectivesof higher growth   and reducepoverty,   it is     ryeducation  in ruralareas  isthus seento havepro-poor    ori-
         to analyze
 essential          theallocation  of publicexpenditure   by       entation. A further  shift within public  education expendi-
 incomegroupor classin differentsectors.                           turestowards   ruralprimary   education willfurther strength-
                                                                   en this healthy trend.
Education:Expenditure incidenceby                                      Second, the analysis  of whatproportion   of eachdecile's
income group                                                        incomewhichis derivedfrom publicspending          on educa-
                                                                    tionsuggests a progressive  pattern.Theshareof benefits    as
An analysis  of publicexpenditure     incidencein ruraleduca-       proportion of per capitaincomein the poorer income
tion,basedon thispartial     equilibrium  analysisshows   a sig-    decilesis monotonically   higherthanthe corresponding     fig-
nificant redistributive effecton ruralincome.    It alsopoints      uresobtainedforthe richerincomedeciles.
to disturbing   featuresin termsof thehighly    skewed   distri-              an analysis
                                                                       Finally,           of longertermdevelopments       reveals
butionofbenefits,     whichimplies   a needto re-orient spend-      significantchangesin the redistributive     effect of public
ing to ensure better targeting     on the needsof the rural         expenditure  on education.    Historical data revealsa very
poor.                                                               highdegree  of regressiveness  in the distributionof benefits
   First, the analysis   of how much of the total public            asproportion  of household   incomein the 1980s.  Thetrend
expenditure    is received byeachincomedecileshowsthat              towardsa gradually   moreprogressive    patternhasbecome
the distribution   of benefits frompublicspending     at alllev-    apparentin the 1990s.   Thisis in linewiththe GOBefforts
els of ruraleducation    is ratherregressive.  The  bottom    20    to restructure publicexpenditure,    withincreased  focuson
percent of households      haveonly 13.8percentof public            socialsector allocations  sincethe mid 1980s.
spendingon ruraleducation.        In contrast,the top 20 per-
cent have 28.8 percentof such expenditures.          The poor       Health: Expenditure incidenceby income
 households   (about52 percentof the total in 1994)claim            group
 only40 percentpublicspending          on ruraleducation;    the
 share of nonpoorhouseholds        in such expenditures    is as    Theobservations   of expenditure incidence  analysis  in edu-
 highas 60 percent.Thepatternof regressivity      in respect  of    cation broadlycharacterize   the distributionof benefits
 total rural education  spending    is mainlythe resultof the       frompublichealthexpenditures    aswell,but the analysis    as
 inequity in the allocation  of expenditures at secondary   and     appliedto ruralpublic healthreveals it's ownspecial    issues.
 higherlevels.   The patternof distribution   of benefits  from     Notwithstanding   somedegreeof progressivity    in thedistri-
 highereducation     remains  highly skewed: poor   households      butionof benefits  frompublichealthexpenditure        thereis
 receive only 15percentof publicspending        on higheredu-       an urgentneed for actionsto improvethe coverage           and
 cation,the rest 85 percentbeingallocated      to the nonpoor       qualityof public health intervention.There   is a clear  need
 households.   The shareof the bottom 20 percent(corre-             for increasedeffortsto improve  the access  to public  health
 sponding to the extremerural poor) is very limited,                careservices, includingspecialprograms    for rural areas.
 accounting   for less than 1 percent of highereducation               First,as per the currentpatternof utilization    of public
 spending  and 6 percentof secondary      education.                healthfacilityin ruralareas,the highest  benefit  is received

                                                  I.MPACT
                                  PUBLIcEXPENDrruRE     ON RuRAL     ANDPOVEKrY
                                                                INCOME
                                                               47
by the middle income decile. Householdslocated at the               Publicsafety net programs:Expenditure
top income decile receiveslightlyhigher amount of bene-             incidenceby income group
fits compared with the poorest income decile. However,
the emerging pattern is generallypro-poor.The share of              Public safety net programs such as Food-for-Work     (FFW)
rural poor in the total stream of benefits from public              and VulnerableGroup Development (VGD) are largely
health spendingis about 57 percent whichis much higher              self-targeted:only people with genuine need and distress
than the matched figure observed for public education               willwant to come under these programs.Whilethese pro-
 spending (i.e., 40 percent). Second, the importance of             grams are more successfulin reaching the extreme poor
public health accessis particularlyrevealingfor the poor-           population, two aspects of targeting remain inadequately
 est income decile.This group accountsfor only 2 percent            addressed. The first relates to the issue whether public
 of rural (private) income, but has 13 percent of total             safety net programs reach the poorest during the leanest
 health benefits.                                                   season. The second focuses on whether such programs
     Third, a comparison   of the relativeproportionof public       reach the poorest in the poor area.The resultsof the study
 and private health expenditures indicates that benefits            suggestthat programssuch as FFW do not target the poor
 through public health stil cover only a small part of the          duringthe time of acute distress.The most intensifiedsea-
 health care demand.This is true even forthose whoare vir-          son of distress, September-October (widely known as
 tually cut off from the qualifiedprivatehealth care facility       Mara Kartik, a term associated with acute distress and
 such as those providedby the trained doctors and private           famine syndrome), claimed only 5 percent of FFW
 health clinics.  The publiccomponentvariesfrom 8 percent           resourcesin 1994/95.It is clearthat the current pattern of
 to 36 percent of private health expenses for different             distribution of FFW favoring the Januarv-March period
 groupsof the ruralpoor.This alsoshowsthe potentialben-             fails to address the problems of slack season unemploy-
  efits associatedwith effective expansionof public health          ment. Besides,the findingsindicatethat the implementa-
  programsin ruralareas.The extremepoor householdscur-              tion period of FFW projectsare in potential conflictwith
  rently allocate7-10 percent of their income to cover pri-          crop productionactivities.  With the spreadof new technol-
  vate health expenseswhichis a sizableburden by anyreck-            ogyin agricultureduringthe winterseason,the importance
  oning. If this burden can be relieved throughgreater tar-          of the January-May period as slack season has greatly
  geting and provision   of public health care,this would have       dirninshedover time and can no longerbe consideredthe
  substantialpovertyalleviating   effects.                           principaltarget period for the operationof FFW typepro-
      Fourth, as with the incidenceof rural public education         grams.Alreadythere is some evidencethat FFW is increas-
  spending, certain progressivityis revealed in the distri-          ingly competing with agriculturalactivities, aggravating
  bution of rural public health care. Benefit from this              peak seasonlabor shortagesand exertingupward pressure
  source, as proportion of per capita income,is highest for          on the wagerate.
  the poorest.                                                          If povertyalleviation is the policyobjectiveof safetynet
      These findings should not detract, however, from               measures,the poor areas should be target on a priority
  observingthe most disturbing aspect of the public health           basis.The evidencedoes not supportthat this is what hap-
  intervention in rural areas. The share of public health            pened in practice.The poor in the economically   poor areas
   accessis still limitedto only 12-13 percent with little vari-     stiDldo not get preferentialaccessto these programscom-
   ation across socio-economic    groups. The proportion has         pared to areas locatedin more favorablesettings.  Thus, the
  remainedremarkablystable over the years,at least during            share of poor area is limitedto only a quarter of total flow
   the period since mid eighties.Accessto maternal care is           of resourcesallocatedthrough FFW andVGD programs.          A
   dismaly low.Indeed, if any thing, the share of core rural         significantvariationcan be noted in respect of areas cov-
   health expenditureson curativecare has possiblydeclined           ered by differenttypes of FFW programs.For some pro-
   over time. This is partlyexpressedin the decliningshare of        grams, such as FFW for fisheryschemes,the coverageis
   upazilla hospital expenditures in total current health            limited to only 14-30 percent of the poor areas. It is well-
   spending-from 47 percent in FY87 to 38 percent in                 known that the FFW activitiesfor road schemesconnect-
   FY94.                                                              ing growth centres are very effectivemeans of infrastruc-

                                          BANGLADESH PUBLIC EXPENDITURE REVIEW
                                                                   48
ture development.The disadvantagedposition of the poor        poor, 19.7 percent; and urban rich, 15.4percent.When we
areas becomes more revealing     when FFW-LGED schemes consider the percentage shares of household income
are considered:only 22 percent of the regionally  poor areas derived from GOB's rural expenditures,we see that these
have been covered by the LGED-executed FFW pro-               are largerfor the landlessand urban poor and richthan for
 grams.Only afforestationschemesseem to better target to      small and large farmers. The large shares for the urban
 the poor areas, but these are schemes which have little      classesresult from spendingon water resources and rural
 linkgageeffects in terms of employmentand incomecom- development.The analysis             thus shows some degreeof pro-
 pared to others such as the fishery or all weather road      gressiveness  in terms of the incidenceof rural expenditure
 schemes.                                                     as a percentageof the income of a givenclass,but regres-
      Nevertheless,the overallimpactof target safetynet pro-  sivenessin terms of the distributionof spendingby class
 gramson the poor is favorable.   The incidenceand depth of    (theseeffects are likelyto varyamongdifferentprogramsin
 poverty is considerablylowerfor the beneficiariesthan for     the agricultural sector). This pattern of redistributive
 nonbeneficiaries. The proportion of extreme poor, for         effects is also reflected in GOB's expenditure on health
  instance, is assessed at 63 percent for FFW beneficaries and educationas earlierdescribed.
  compared with 72 percent for the non-beneficiaries.
  Similarobservationsapply to the VGD program.The par-         Note
                                                    the non-
  ticipants also displayhigher asset access vis-a-vis
  participants.                                                 1. The objectiveof the analysiswas to evaluate the extent
                                                               to which public expenditures on education, health and
  Agriculture: Expenditure incidenceby class socialsafety nets benefit poorer groupsin rural areas. The
                                                               assessment is based on a public expenditure incidence
  A partial equilibriumanalysisof aggregaterural spending analysis      on a per capita basisprimarilybased on household
                                                                                                              urban areas is
   (ADP and revenue budget outlaysfor the agriculturalsec- survey data for 1993/94.The exclusionof
                                                                                                  survey  data capturingthe
   tor as a whole) showsthat the present pattern of spending due to the lack of representative
                            in providingdirect benefitsto the   household"use" of public educationand health facilities     in
   appears to be inefficient
                                                                urban areas. A comprehensivereviewof        the  benefit inci-
   poor and landless and not very effective in raisingrural
                                                                                                                simultaneous
   incomes levels,which suggestsa need for better targeting dence requires an analysisthat consider the
   and for changes in the overallspendingstrategy.              determination of the entire tax and expenditure system,
                                                                                                                  health and
       The distribution of aggregate public rural spending employingthe govermentaggregatesubsidy to
                                                                                                             of the system.
    showsthat a rather smallshare is receivedbylandlesswhile education as one of the parameters
                                                                However, data is   not  readily availableto support   such an
    a largeshare is allocatedto smalland largefarmers;urban
    classes also have significant shares. The distribution of   analysis.Hence, the followinganalysis is limited to the
                                                                                                                   in a partial
    spending by class was: the landless, 12.3 percent; small redistributeimpactof governmentexpenditures
    farmers, 25.1 percent; large farmers, 27.6 percent; urban   equilibriumframework.




                                                                  ANDPOVmE
                                                             INCOME
                                                      ON RURAL
                                                 IMPACT
                                        EXPENDITURE
                                   PUBLIC
                                                               49
Appendix5
State's Role in Industry:
Promoting, Not Playing
Bangladesh governments have poured huge public                 public capital now tied up in manufacturingand financial
resourcesinto industryover the past 25 years,usuallywith       enterpriseshould be redirected to these purposes;(b) on
little financialor socialreturn. Fortunately,the faucet has    the revenuesideof the Budget, import tariffand corporate
been turned down in recent years,creatingspace for more        tax reformsthat are needed to provide a neutral incentive
                                                               structure; (c) complementary  non-expenditurepolicymea-
productiveprivate enterprise. The share of public invest-
ment allocatedto manufacturingin FY96has been one of           sures that should be taken to ensure a market friendly
                                                               frameworkof procedures (especially    in Customs),regula-
the smallest(see 1% Box 1). That is appropriate,since all
 new investment within this sector should be private and       tions, laws,and institutionsaffectinginvestment,produc-
 most public expenditureto assistindustryfallswithinother      tion, and trade; and (d) acceleratingthe slowprogressthat
 sectors covering infrastructure and commerce.                  is being made in financialsector reform.
 Manufacturinggrowth needs policy reform rather than                Within the industryportfolioitself,there are two major
 public expenditurewithinthe sector.                            concerns which the new Government should address
     More attention needs to be focussedon: (a) cost effec-     before approvingthe FY97and subsequentADPs:
 tive and industryfriendlypublic expendituresin the areas
 of basic and vocationaleducation, physicalinfrastructure       The privatization program is barely moving
 especiallyfor export, judicial services for business, and      in manufacturing
 maintaining civil order; as improvementsare needed in
 each of these areas to better serve their general economic     The divestitureof State-ownedmanufacturingenterprises
  and socialobjectivesas wellas industryspecificpurposes,       in jute, textiles, steel, chemical, fertilizer, paper, sugar,

   BOX I
   FY96 ADP industryportfolio-Summary statistics of 65 listed projects
                                                                                        investments
                                                                                 ofpublic
                                                                           Sources
                                          value
                                      Total   of              Reimbursable     Government          Self-financed
                                      listed
                                           projects           projectaid            investment             bycorporations

                                      $274million                million
                                                              $191                                         $83million
   BCIC ShahjalalFertilizer
                                      $7million               $5million                                    $2million
   BSEC  cable/conductor
                    other             $15 million                                                          $15million
   Fourjuteandfour
                projects
    self-financed
   Two otherBCIC,  Pabna Sugar,       $151million             $59million            $92million
                                                                                            d
    and 16BSCIC   investments
   OtherI  5 investmentprojects       $70million                                    $70million
   21technical asstceprojects         $30 million             $29million            $1 million
                                      $547million             $284million           $163million            $100 million
   Total65projects
                                                                           Shares            period
                                                                                 byexpenditure
                                                              ToFY95            InFY96              Future
                                          million
                                       $274                   $0.3million       $2.5million         $271million
    BCIC       Ferilizer
        Shahjalal
                                       $273million                 million
                                                              $140.1            $39.0million        $94million
    Other64projects


                                                              50
Smaller,unjustified projects include the BSEC's proposed                  tions that other countries have found to be better under-
$7 million HV cable and conductor plant.                                  taken by private entities or at least with largelyprivate man-
                                                                          agement of public funds. In particular:

The rangeof industrial             is
                     supportservices                                      * Estates. Continuing large investments by the Small and
neitherstrategicnor demand-driven                                         Cottage Industries Corporation-and even those by the
                                                                          more efficient Export Processing Zone Authority-are to
The second concern is the ADP's rather weak provisions in                 be questioned in view of the sorry record of BSCIC and of
one area of capital expenditure where Governments can                     faster growing countries' good experience with private
play an effective role in supplant eficient private industri-             investment in industrial areas including export zones.
al investments and operations. Though perhaps less signif-                Interest is already evident among potential Bangladeshi
icant than indirect support (i.e., deregulation policy, neutral           and foreign investors, and Government efforts should be
incentives, and public expenditures on education, infra-                  concentrated on facilitating private initiatives rather than
structure and securityindustrial development-i.e. com-                    expanding its own involvement. BSCIC should promote
mon facilities that support rather than), interventions in the             smallindustry by identifying and alleviating policy and reg-
 form of promotional, technological, training, and export                  ulatory problems rather than operating comrmercial infra-
 marketing support can be both cheap and highly effective.                structure.
The ADP contains a wide range of activities in this area                   * Promotion. The assistance from bilateral donors and

 (Box 2), but past performance raises important doubts                    UNDP for promotion efforts by the Zone Authority, the
 about both their design and the likelihood of effective                  Export Promotion Bureau, and the Board of Investment
 implementation. Moreover, several of them involve func-                  have served useful purposes, but future support in this area



   BOX3
   Proposed public support for industrial takeoff
                            program                                                                                 to emphasize
                                                                                                               Boards
                                                                                           andof theirassociated
                                                                           CommerceMinistnes,
   Complete the privatization
   * Strengthen the Privatzaton Board's professionalresources and          their own and donors' support for private commercial and NGO
   revise its formal mandate to accelerate the divestment process,                               infrastructure,promotion, and assistancepro-
                                                                                     in industrial
                                                                           initiatives
   schedule specificoutcomes, and complete the process in no more          grams-including through matching grant schemes-rather than
   than three annualphases:                                                                                               and
                                                                           investment in and operaton of public facilities:
   * Make legaland financial  provisionsfor overcomingobstaclesand          * Increase the resources, professional status, apolitcal authority,
   providingsocialsafety net support; and                                  and private participationin management of agencies intended to
    * Instruct corporations to prepare for rapid prrvanzafon of their      promote prrvate investment,to develop and manage competition
                           pre-sale investment in BMRE.to abandon
   units without significant                                                policy,and to coordinate and implement TDVT/MSTQservices-
                                                                            potentiallythe BOI for promotion, the BTC for efficiency,   and a
   all plans for new investment projects, especiallyShahjalal.and to
                                       and feasibilitystudies available     revamped    Technology   Ministry or  a new industrial technology
   make publiclyfunded pre-feasibility
    to any potental investors.                                             agency for technical support and certficaton.

    Reorient industrial support services                                   Ensure security and other public functions
    * Commission, debate, and endorse a national-i.e. public/pri-          * Enhance and sharpen the mandate and increase resources of
    vate consensus on-technology development and vocationaltrain-          the key public services required by private producers and traders
    ing (TDVT) program, consistent with a private sector led, jobs         in a competitive environment, ;otably the courts for enforcing
    focussed. and export oriented industrializabonstrategy:                contracts and the policefor ensurng law and order: and
     * Restructure allexistingand any proposed industrialsupport pro-       * Give agencies such as the port authorities, shippingcorpora-
    grams and instiutions to conform with the TDVT strategy,and            tion, BIMAN,railways, inland water transport, PDB, etc.-and
    place much greater emphasis of certificationand accreditation in       their work forces-just one year to demonstrate their under-
    the areas of metrology,standards,     testing and quality control       standingthat their public statusdependswholly on their dis-
                                                                            chargingtheir primary socialresponsibility  of delivenngefficient,
    (MSTQ)services;
     * Reducethe resourcesand revise the mandatesof BSCIC,                  public-good services that facilitate private production and
    BEPZA, EPB. of the Industries, Textiles, Jute, Labor, and               commerce.



                                                                        REVIEW
                                                        PUBLICEXPENDITURE
                                               BANGLADESH
                                                             52
etc.-a program whose good intentions have never been                     to rehabilitateor modernizethe facilities.  As a secondbest,
reflected in rapid implementation-has slowedto a snail's                 they should be put on the market as soon as the present
pace. This leaves the Governmentwith past investments                    efforts are complete,and no further BMRE projectsiniti-
that are low or non-performing,  the alreadycrippledbank-                ated with either the Government'sor the variouscorpora-
ing system with a large backlogof unrecoverableloans,                    tions' own funds.
public corporationmanagementteams continuingto plan                         Doubts about commitmentto PSD led industrialization
new investmentswhichare unlikelyto occur, tariff reform                  may be exacerbatedalsoby plans for public investmentin
impeded by conflicted public interests, and the private                  new productioncapacity.   Though modestin number by his-
business community confused about the Government's                       toric standards, these run counter to declared policyand
commitmentto private sector led industrial development.                  hence implyunfocussedgovemance.The strikingexample
The Privatization Board requires considerable further                    of givingwrongsignals   to the private sector is BCIC's pro-
strengtheningof both mandate and resourcesto manage                      posal to build a new $274millionfertilizer  plant (Shahjalal).
the necessaryaccelerationof the divestitureprocess.                      Financingis unidentified,   but is expectedto consistlargely
   Moreover,some of the SOEs are continuingto investin                   of suppliers'credit rather than following the KAFCOmodel
upgradingtheir facilitiesrather than leavingsuch decisions               of organized FDI or, preferably,leaving any investment
to future private owners. In particular,BCIC is moving                   decision entirelyto privateforeignand domesticinterests.
toward completion of a $36million BMIREprogram at                        This wouldrequirerationalization    of gas supplyand pricing,
Chhatak cement, it is alsoundertakingBMREat Usmania                      to enablepurelycommercial     decisionsto be made about its
Glass and the TSP Complex; the Sugar and Food                            utilization. BCIC is also continuing to implement a Japan-
Industries Corporation is continuing work on an $18 mil-                 financed CIB unit at its Chittagong complex. No further
lion program at the Pabna Sugar mills; and the Textile                   initiatives along such lines should be taken under public
Manufacturing Corporation is replacing spindles in 10                    ownership, and if BCIC's current studies of jute-based
mills. In all of these and other cases, privatization should             paper and bagasse-based newsprint indicate feasibility for
have preceded commercial decisions about where and how                   such ventures, they should be left for private follow up.

  BOX 2
  Industrial support activitiesin the FY96 ADP

   * The Export ProcessingZone Authority's$27millioninvestment             * Continuationof the Textile Ministry'sstrategicmanagement unit
  program ($2.6 millionin FY96).                                          (Ford).
   * Smaller BEPZA projects: Dhaka workshop $2.5 million and               d Jute worker training/retrainingprojects (IDA)totalling$5.6 mil-
  Monglafeasibility (self-financed),
                                   and foreigninvestment promotion        lion($ i millionin FY96).
  (UNDP).                                                                  - Commencement of a $1.5 million    IndustrialTechnicalAssistance
   * BCIC-sponsored studies on jute based paper GICA) and                Center at Khulna.
  bagasse based newsprint.                                                * Three investment promotion projects under the BOI,totalling
   e Almost completed Department of Textilestraining/technology          $3.5 million.comprisingan infrastructureunit (ADB),a promoton
  projects ($ 1 3 millionin FY96)and TextileTraining,Research and        fund (Belgium)  and a Chittagongstudy (JICA).
  Design Center ($2 millionin FY96).                                      A The ED3's almost completed export promotion project totalling
  * Two ongoing investment projects of the Serculture Board              over $3 million(UNDP).
  totalling$ 15 million(almost complete, with capitalrevenue ratios       * A $2.6 millionsmallscaleenterprise credit program with Agrani
  of 1:2); and four such projects of the Handloom Boardtotalling         Bank(NORAD).
  $ 11 million.                                                           * TAfor agencies: $2.5 millionfor the Prnvatization   Board (IDA)
  * Sixteen investment projects of the Smalland Cottage Industries       with 40 percent spent earlier and another third scheduled for
 Corporation totalling$77 millionwith a 2:1 K/Rration and about          FY96;  about S i.8 millioneach for the TariffCommission(IDA)and
 40 percentspentprior to FY96($8 millionin FY96).                        the Ministryof lndustnes'   policy implementation  advisory group
  e Two ongoingTA projects     of BSCIC   totalling$6 million,includ-    (USAID),both well advanced:    andabouthalfthat levelfor eachof
 ing the largest  TA item in the ADP: the destitute  women project       the National ProductivityOrganization(unidentified)and the
 (NetheHands).                                                           DhakaChamberof Commerce          (GTZ).



                                        STATE's RoLEIN INDUSMTPROMOTING, NOT PLAYING
                                                                    51
maybe better directedto professionally   managedmatching       ious forms of public support for the other textiles indus-
 grant facilites that leave initiativesto private business.    tries, includingthree almost complete training and tech-
 Similarly,a Ministry of Commerce/Export Promotion             nology projects, should have far greater private involve-
Board initiativeto build a $100millionWorldTrade Center        ment and be coordinatedwithin an agreed development
in Dhaka should be left for mainlyprivate investment,like      strategyfor this criticalsubsector.
the parallel private initiative that is occurring in            * Tecbnology. Little attention is evident in the ADP to the
Chittagong.                                                    manufacturingsector's need for higher quality support in
 * Silk and textiles. The investment projects of the           the areas of metrology,  standards, testing,and qualitycon-
Sericultureand Handloom Boards alsobear close scrutiny         trol (MSTQ) services.Beforefurther expenditureis com-
since some of these entities' past efforts have hampered       mitted to overhauling   the Standards and TestingInstitute
rather helped the developmentof industrieswhich should         and other certifying,technologyinformation,and advisory
prosper in Bangladeshwith an appropriatemix of compe-          agencies, however, the Government should develop an
tition and common facilities.The current initiatives,which     overall and sectoral strategiesfor assistingtechnologydif-
are almost complete, should be operated on commercial          fusionand developingintemationally     recognizedaccredita-
lines andno furtherinvestments   planned. Similarly,
                                                   the var-    tion processes.




                                  STTE's RoLEIN INDUSThT PROMOTING,NOTPLAYING
                                                          53
Appendix 6
The Institutional Framework:
Selected Issues
Three issues related to the institutional framework are      GOB to tackle the problem of institutionalinternalization
selectedhere for review:(i) deficienciesin the accounting    of the skillsand knowledge    generated;the existingperson-
system; (ii) weakness in institutions, human  capital and    nel policydoes not provideopportunityfor the levelof spe-
technology;and (iii) the management  of the ADP.             cialization required by these projects.
                                                                The Government may consider a number of concrete
Deficienciesin the accountingsystem                          measuresto improvethe systemof accounting,audit and
                                                             evaluationpractices,disseminationof resultsand expendi-
Weakness in accounting, monitoring, audit and                ture controlto: (i) instillaggregatefiscaldiscipline including
evaluation                                                   well-functioning planning   and  control instruments  (ii) facil-
                                                             itate sound strategicprioritization  of expenditures  between
The system of accountingand thereby relatedmonitoring,       and withinsectors   and  among   projects,and (iii)ensure   high
audit and evaluatingsystemsand budgetaryprocessessuf-        levelsof technicalefficiency   in the use of budgetresources,
fers from a number of deficiencies.The accountingsystem      i.e. achieveoutputs at the lowestpossiblecost.
has improved but is still characterizedby inconsistencies,
weak coverageand variationin generalquality.  There is no  The fiscalaccounting system
consistentuse of objectivecriteriabased in economic ratio-
nale for determiningprioritizationof expenditure alloca- Monitoring   expenditure
tions between and within sectors and among projects. At present       there are majordeficiencies   in the terms of con-
Moreover,there is no systemfor proper evaluationof the     sistency,coverageand overallqualityin the accountingsys-
outputs or outcomes of specificservicesthat agenciesor     tems used in the publicsector.There are significant    differ-
projectscan deliver.                                       ences in the accountingsystem typicallyused in the rev-
    The Governmenthas alreadystarted addressingissues enue budget and ADP Adoptinga common and consistent
related to improvement of budgeting, accounting and GFS-based accounting           system for fiscalindicators,includ-
expenditure control. A process was initiated by a          ing all expenditures,all tax and not-taxrevenues,the fiscal
 Governmentappointed committee (CORBEC), followed deficitand public debt could help significantly             to improve
by the technicalassistanceproject RIBEC 1 supported by     transparencyand accountability.
 ODA-UK.A follow-uptechnical assistanceproject sup-           The classificationschemeused in public sectoraccount-
 ported by the BritishODA, RIBEC 2 is currently being ing and budgetingin Bangladeshdiffersin economicclas-
 implemented.The project has been re-phasedso that it is   sification-and quite often the economiccontentof expen-
 better focused on more immediateimplementationpriori- diture is not clear from their budgetary description.The
 ties. The Governmentmay resume discussionwith ODA budget summary statements include one statement
 for expansionand accelerationof the project for address- (Statement DA) which recasts budget classification         into
 ing the wider issuesof budgeting,accounting,expenditure economic      categories-a   difficult task depending    on  the
 control and audit.The ADB is supportingtechnicalassis- competenceand ingenuityof the officialsengaged in the
 tance programsto improvethe systemof collection,moni- task, especiallythe budget examiners.For instance, the
 toring and analysesof nationalaccounts and the develop- detailedbudget does not include 0 & M as a distinctcat-
 ment of general equilibriummodel for policy simulation egory uniformly,     but the summarystatement shows total
 and forecasting.The successof technical assistancepro-     budgetary allocation for 0 & M, which informationis
 grams willrequire a continuedfirm commitmentfrom the       extractedfrom other itemsof expenditure.

                                                            54
     Though allocationfor 0 & M has increased over the              and public sector,changesin domesticand extemal debt.
  years, it is difficult to say that it is adequate. Prolonged      The method used by the governmenttends to under-esti-
  neglect of maintenanceand proper operation show up as             mate the deficitand changesin public debt, partly due to
  'rehabilitation' projects in the developmentprogram; the          treating domestic borrowingas a resource rather than a
  number of such projects along with allocation appears to          financingitem. Moreover,debt seemsto be managedwith-
 have increased over the years,though in combinationwith            out a plan or deliberatemethod.Whilepresentingthe bud-
  upgradation and modernization.The government should               get, the governmentdoesnot specifythe amountof debt to
  establishsome explicitcriterialinkingdevelopmentexpen-           be raised and the types of instrumentsto be used. Audit
 diture---especially  creationof fixedassets and expansionof       and accountability  proceduresof public debt alsoseem less
 capacityfor rendering services-with 0 & M expenditure.            rigorous.
     Pressures remain strong for expenditureon wage to go              Conventionally,  surplus is measured by adding to the
 up further,giventhe largesize of governmentbureaucracy            revenue surplusthe net amount on capital account, out-
 and periodicalupward adjustment of compensation and               come of food outlay,surplusof the Public Accountof the
 retirement benefits. The program of redundancy adjust-            Republic, etc. This method is deficient in several ways.
 ment maycontain futurewage expenditureto some extent.             Foreignaid is shownas a receiptfor financing    the develop-
 However, it increases the expenditure currently being             ment programbut the loan componentin aid is not includ-
 incurred on account of separation benefits. The                   ed in public debt. Foreignpublic debt willbe smallerthan
 Governmentis alsofinancingthe costof redundancyelim-              the amountof foreign-financed    deficitbecauseof the grant
 ination of the public sector corporations.Allthese expen-         componentin it. The surplusof the Public Accountof the
 dituresare shownas capitalexpenditureunder the head of            Republicitself includes non-bank borrowingsuch as sale
 account 'extra-ordinarycharges'.If these expendituresare          proceeds of savinginstruments,provident fund, deposits
included in wages, the share of the particularitem willbe         with government,etc. Accountingtreatment of bonds for
 higherthan shownin the budget.                                    investmentin telecommunications,     bonds issued forrecap-
     When using the GFS-basedsystem,0 & M should be               italizationof nationalizedbanks, bonds issued to replace
recognized as a distinct category of expenditure and              non-performing loans of the sector corporations, is
included in the list of major and minor heads of account;         ambiguous.Telecornmunication      bonds are borrowingfrom
the terms shouldbe definedclearly.      Expenditureon capital     the financial institutions and form part of public debt.
formation in revenue should be shown separately from              Bonds issued to banks for non-performingor bad loans
other contingencieswhich should include only consum-              replace old short term debts by longer term debt instru-
ables for running an office. Moreover the government              ments. Recapitalization   bonds are 'contingent' in nature in
should strive to establisha clearprinciplefor ensuringade-        that the governmentwillhave to make payment in cash if
quate allocationfor 0 & M and define a methodologyfor             ever necessary.Promissorynotes to multilateralfinancial
estimatingthe optimumamountof 0 & M allocation.A set              institutions includedin the capital account are different
of minimalcriteriashould include the valueof fixed assets         from other capitalaccountitems: Govemmentcannotcon-
and the type of serviceperformedby the agency.                   vert them to real resourcewhen canceled;when there is a
                                                                 call, governmentpays money but the outlay is offset by
 Monitoring deficitanddebt                                       increasein the valueof shares; since theydo not enter the
It is widelyacknowledged  that there is a need for improve-      stream of expenditureimmediately,       they do not have the
ment in the assessment and management of the fiscal              expansionary fiscalor economic impact associated with
deficit and public debt. According to the current practice,      public expenditure.
governmentcomputesbudgetarysurplusor deficitin rela-                  Quasi-fiscal deficitof the central bank is not yet recog-
tion to revenueexpenditureonly.Ideally,    surplusor deficit     nized as part of public deficit;it is importantthat note be
should be computed on total public expenditure, and              taken of such deficits-for theyhave implications     for mon-
methods for financingdeficit should be clearlyidentified         etary policy stances. The nationalizedcommercialbanks
since each method of financinghas differentimplications          (NCBs) and the developmentfinance institutionsowned
for moneysupply,distributionof credit betweenthe private         by the government are still obliged to implementcredit

                                   THE INSTITUTIONAL
                                                   FRAMEWORK:
                                                            SELECTEDISSUES
                                                            55
programsor targets as advisedby government     policy.They     attention from the Public Accounts Committee and the
do not recoverenough of the outstandingloans or receive        Parliament.
depositswhichenablethem to expandtheir loan portfolio.
The BangladeshBank,under adviceor 'moral pressure' of                      implications
                                                               Institutional
the government,reschedulethe loans givenearlierby the          Improvingthe capacityfor estimatingand monitoringout-
centralbank and make new advancesso that they can lend         laysby means of an improved and consistentaccounting
more. The BangladeshBank provides counter-guarantee            systemwill haveseveralinstitutionalimplications.It is nec-
for foreignloanstaken by the governmentfor publicsector        essary to strengthen the capacity for resource estimation
corporationsand has often assumedresponsibility     for pay-   and monitoringof the total resource envelope.The gov-
ment when the corporationor the governmentfailed to            ermnentshould considerto installa unit for resourceesti-
meet the obligation. These are among the reasons for           mation in the Finance Divisionwhich should be staffed
quasi-fiscal  deficitof the central bank.                      fully by professionallytrained and experienced persons.
     Public debt seems to be managed without a plan or         The unit should report directly to the Finance Secretary
deliberate method. While overall budget deficit remained       and it should be smalland avoid the general tendencyof
 at 6-7 percent of GDP, the Governmentused less foreign        having tall hierarchy. The External Finance Wing of
 financing(decliningfrom 6 percent in FY91to 4 percent         Finance Division has lost much of its relevance since
 projectedfor FY96and increaseddomesticfinancing(ris-          preparation of a foreign exchangebudget has been dis-
 ing from 1 percent or less in FY 91-93 to 1.8 percent of      pensed with. Again,the ExpenditureControl Wmg exam-
 GDP in FY96). Besides,non-bank borrowingrose (from            ines admissibilityof demand for additionalor new expen-
 0.7 percent in FY91 to 1.3 percent in FY94-95). Such a        ditureswhichcan be better done bythe BudgetWingitself.
 strategyof borrowingsubstitutes high cost funds for low
 cost funds and divertsfinancialassetsfrom the private sec-     Weaknessin institutions,human capital,
 tor and capitalmarket to the public sector.The amount of       and technology
 foreign aid including concessionalloan is determined in
 consultationwith donors; but the governmenthas greater         Institutional weakness
 freedom in raising domestic debt. While presenting the
 budget, the government does not specifythe amount of           The key institutionsinvolved in public expenditureman-
 debt to be raised and the types of instrumentsto be used;      agement are the Ministryof Finance and the Ministryof
 audit and accountabilityprocedures of public debt also         Planning,both of which have quite a few Divisions(each
 seem less rigorousthan the usual regularityaudit and other     under one Secretary) and over-lappingjurisdiction and
 annual financial  reports by the supremeaudit institutions.    functionallinkages,entailing a complextask of co-ordina-
     Measuresneeded to improve the assessmentand man-           tion within the Division, among Divisions within one
 agementof the deficitand publicdebt includethe follow-         Ministryand with other ministriesand technicalagencies.
 ing: The government should adopt the most comprehen-           Structural,procedural and personnelfactors stand in the
 sivedefinitionof deficit and public debt and installa unit     way of achievingall these without someextra efforts.
 in the FinanceDivision,preferablycombinedwith TCBM-               Programming Division of the Planning Commission
 RC, to collectdata and monitorpublic debt. The financing       effectssome degree of co-ordination  withinthe context of
 plan of the budget should clearly state the amount of          allocationresource for sectors as wellas projects. But this
 deficit and the variousmethods for financing.  The budget      tends to be contextuallytoo specificand narrow: it does
  statement should spell out the reasons for the deficit and    not address broader issues of policy and overallresource
  the implications of the various methods for financing.        management.  The GeneralEconomicsDivisionis involved
  There is fundamentalneed to develop a solid framework         in policy formulationand analysis;but its associationis
  for managementof public debt, includingstrengtheningof        somewhat academic in the sense that the ministries-
  audit, accounting and planning mechanisms. The                whichare the principalagenciesfor policyformulationand
  Comptroller& AuditorGeneral (CAG) shouldcover pub.            implementation-need not and generallydo not followits
  lic debt in the annual audit which should receivespecific     policyadvice.The FinanceDivisionperhaps has the widest

                                       BANGLADESH PUBLIC EXPENDITURE REVIEW
                                                           56
   and deepest influence on government policies. It is                hoc basis and/or is deficient in its coverage, scope and qual-
   involved virtually in all decisions entailing public expendi-      ity. This points to the need for a permanent strong resource
   ture and have to conduct co-ordination with the line min-          estimation and/or policy analysis unit within the Ministry of
   istries as well as the Planning Commission and other               Finance staffed by fully professionally trained and experi-
   Divisions of the Ministry of Finance almost on a day-to-day        enced persons. Moreover, there is a need to examnine
   basis. For instance, it interacts with the Bangladesh Bank in      options to rationalize and improve efficiency within the
   respect of deficit financing, exchange rates, money supply,        Finance Division. For example, the Government may con-
   etc.; with IRD/NBR in respect of revenues; with ERD in             sider the merits of not having a separate Banking Division
  respect of aid; and the Planning Commission in respect of          but to merge it with the Finance Division. NBR, however,
  development program. ERD is in the fore-front in dealing            should continue to administer the major taxation system.
  with the donors and thus gets involved in all conditionali-        Should the decision be in favor of retaining four separate
   ties of policy-based lending. ERD, however, cannot take           divisions in Finance NMinistry,  the Government may consid-
  decisions on any of these matters; if it can influence any         er enhancing coordination capacity at the civil service level
  decision, it is because of the intellectual persuasiveness of      by creating a post of Principal Finance Secretary who will
  the officers concemed and the feeling that aid will not be         deal with policies and shall not be engrossed with routine
  available.                                                         administration as the Secretaries are now. There is a need
      The decision-making process is complex, time-consum-           to establish a policy analysis and planning unit at NBR.
  ing and multi-layered. \X'ithineach ministry elaborate notes       Also, there is an urgent need to strenghten the capacity of
  are written and passed up the tall hierarchv from Assistant        the Ways& MIeansSection in the Ministry of Finance in the
  Secretary (through four stages roughly) to Secretary and           managing government cash and to rationalize and improve
  MIinister.Within the Mfinistry,   the tendency to refer matters    weak systems of public debt management.
  to higher levels for decision has been getting stronger. At
  senior levels also collegial decisions are preferred to deci-      Personnel policy, technology, skills and training
  sions by individuals; the large number of inter-ministerial
  meetings is an evidence of this tendency NMulti-layered             Significantprogress has been made in terms of the manage-
 notes within a ministry and inter-ministerial meetings              ment and skills capacity of the central government. Also,
 derive from the same set of psychological conditions: the           there is a clear awareness of the need for further improve-
 officials tend to avoid individual responsibility and so dif-       ments. There is a need for additional training efforts and
 fuse the responsibility as w\idely as possible. Decisions at        personnel policy can be enhanced to improve the utilization
 the level of ministers also have increased-partly due to            of existing professional and technical skills at decision mak-
 this 'feel-safe' attitude of officials and partly due to insis-     ing and senior levels in the civil service. The positions in the
 tence by ministers to control decision-making on a wider            secretariat-which is the center for decision making-are
 spectrum. There is generally a tendency to overlook dis-            held mostly by officers of 'generalist' cadres (i.e. those who
 tinction between technical decisions, regulatory/adminis-          join service on the basis of competitive examination without
 trative decisions and policy decisions. If these distinctions       any particular professional or technical preparation). When
 were observed, many decisions could be taken at relatively          technical cadre officers are brought into secretariat, their
junior officers level and more expeditiouslv.                        assignment needs to correspond better with their technical
     The capacity of the MNinistry   of Finance to carry out and    qualification or experience.
coordinate fiscal policy formulation and annual budgetary               The Planning Commission and the Planning Cells are
processes needs to be strenghtened. Establishing a stronger         different in that these positions are filled up by the plan-
and more integrated multi-year budgetary framework                  ning cadre officers most of whom have specialization in
including both the ADP and the revenue budget implies a             economics and a few in other branches of social science.
need to strengthen the Finance Division. The Finance                There are some with technical or liberal science back-
Division needs to augment its capacity for resource estima-         gr6'und also. However, they spend most of their time on
tion, evaluation and control of budgets and macroeconom-            project scrutiny which focus on cost control or minimiza-
ic analysis. At present some of this work is done on an ad          tion rather than more professional appraisal using econom-

                                     TiIE INSTITUTIONAL FRAMIEWORK:
                                                                  SELECTED ISSUES
                                                               57
                                                                                                   vocal groups.Thisrequires
ic techniques.The planning cadre officers are also inade- relativeto less organized and
quately prepared or motivatedfor the task of medium-or            that the governmentgivesmore attention to enhancement
long-termeconomicpolicyplanning.                                  of institutionalcapacity.
     The governmentmay consider the followingmeasures                 The weaknessesof training programsare due to struc-
                                                                                               bottlenecks.The civil serviceis
 relating to the PlanningCommission:(i) a lateral recruit- tural as well as procedural
                                                                  stilldominated by 'generalist'tradition; professional      skills
 ment of professionalsinto Planning Commission(as into
                                                                                              after training, it is common   prac-
 other departments) for specified periods. Planning are less in demand. Even
                                                                                             assignedto jobswhich requirethe
 Commissionmay alternativelyuse consultants while con- tice that officersare not
                                                                                                      for distributionof training
 taining the size of the cadre. (ii) As project relatedrespon- skillsacquired.The procedures
                                                                                               candidates are excessively     com-
  sibilitiesare shiftedmore to the sector ministries,Planning facilitiesand selectionof
                                                                                           communication     with   donors is done
  Commissionofficialsconversant with project processing plex and round about:
  maybe transferredto the ministries     and technicalagencies. throughERD; distributionof the facilitiesis done through
  (iii) Co-ordinationwithin PlanningCommissionand with the Mlinistry             of Establishment;committeesin departments
  the ministriesmaybe strengthenedby creatinga positionof          and ministries select candidateswhichis approvedby min-
                                                                                              Council has to issue no-objection
  Deputy Chairman,which position may be offeredto well isters;National Training
                                                                                        long processleads to low utilizationof
  qualified ecbnomistswith some exposure to administra- to the training.The
                                                                                            Finally,these facilitiesare Limited
  tion; membersfrom civil serviceshall be qualifiedonly if the facilitiesavailable.
  they are professionally     trained and have had adequate onlyto governmentofficials.
   experiencein economicpolicy analysisand management.                 Managementinformationsystemneeds to be used more
   Moreover,the planningsystemshouldbe organizedso that             extensively as an important tool for improvingefficiency.
                                                                                                    officialsis not measured by
   it is consistantwith budgetarysystemsused by the Ministry Performanceof government
   of Finance.                                                      the resultsthey produce; the soft budget line exempts the
                                                              of    public corporations from seeking efficiency.       Besides,the
       The need to strenghtenand rationalizethe Mlinistry
                                                              of    decision-making   chainis so long that the    managers  cannot
   Finance impliesa need for a reviewof its requirements
   professional  skillsin financialadministration  and settingup    respondin timely fashionto signalsgiven by the informa-
    a specialized                                    of Mvlinistry. tion system. For similar reasons, there is little effort to
                  pool of officersfor allthe divisions
                                                                                          servicesprovided by governmentand
   A substantialproportion of posts in these rninistries/divi- improvedeliveryof
    sions willbe reservedfor the pool officers;but some posts the public sector.
    at mid-level(Deputy and Joint Secretary)maybe open to               In sum then, (i) the observedhardwarebias is embed-
                                                                                                       serviceby governmentand
    other officersalso who have prescribedacademictraining ded in supplyof infrastructure
                                                                                              of continuinggovernmentmonop-
    (e.g. economics,statistics,accounting,management,busi- policyinertia in respect
    ness administration)   and some related experience.              olyor operationin certainsectors (e.g. telecommunication,
                                                                     energy,shipping) which can be transferred to the private
    Biastowards hardwareversussoftware                               sector. Fundamental policy change can reduce the hard-
                                                                     ware bias to some extent but not entirely.(ii) Procedures
                                                                                                    should be simplifiedand the
    The relative bias towards hardware vis-a-vissoftware for nominationfor training
     derivesfrom the nature of developmentprograms.      The fol- responsibilitytransferred to the ministries administering
                                                                                                     Clearancefrom NTC should
     lowing are the reasons for the high weight of hardware: particularcivil servicecadres.
                                                                                                   NTC, set up to draw up plans
     investmentin infrastructurefor provisionof public goods be dispensedwith. Further,
                                                                     for human resource   development,     has failedin performing
     and merit goods not provided or adequatelyprovidedby
                                                                                                             (iii) Trainingfacilities
     market; financingof the bulk of developmentexpenditure this task and should be abolished.
                                                               of     should be opened to    institutions  outside   the government
     by aid for import of capital goods; technicalefficiency
     agenciesand convenience     of implementation  of importand      and public sector while retainingthe necessaryresources
                                                                                                     (iv) Introductionof program
     capital intensive projects relative to projects requiring for the governmentofficials.
                                                                                                  with specificationof expected
      interfacewith human beingsand socialgroups;and finaLly, oriented budget coupled
                                                                                                    linkage of performance with
      the intensityof demand by better organizedsocial groups output, hard budget line,

                                             BANGLADESII PUBLIC EXPENDITURE REVIEW
                                                                  58
     reward willencourage use of management   information   sys- detailsrequired     at eachstagesuggest    thatthe objective  has
     tem and deliverysystem.(v) Adequatecomputer        literacy not been fullyachieved.
     should be made part of civil service training;  given the          Projectsare prepared   on the basisof information     and
     enlargeddomain of government/public     sectoroperation, assessment        of needsby the technical    agencies  whichaccu-
     management   controlwithoutaidof computers     seems pos- mulatedataandjudgment            aspartof theiroperations    in the
     sibleno longer.
                                                                     sectorconcerned.  The dataandjudgments        are oftengen-
                                                                    erated in the process of operation and at other times
     Management of the ADP                                          through specific preparatoryand feasibility   studies.By and
                                                                    large, projects aided by donors-which account for the
    Appraisal of ADPprojects
                                                                    bulk of developmentprogram-are appraisedwith greater
                                                                    rigor and on the basis of formal methodologies.       On the
    Preparation and approval of projects go through a fairly
                                                                    other hand, projectswhich are financedexclusively      by the
    long process under control of a tall hierarchyof diffused
                                                                    government are often prepared and appraised with less
    authoritv. The technical agencies of government (i.e.
                                                                    technicalrigor. It is not uncommon that the selection of
   department, directorate, statutory corporation, statutory
                                                                   such projectsis influencedby non-economiccriteria.
   authority,etc.)-which have the necessarytechnicalexper-
                                                                       The technicalagenciesand line ministriesgenerallydo
   tise-are mainly responsible for preparation and imple-
                                                                   not haveassessment   of sectoralneedsand sectoral   strategies.
   mentationof projects. The PlanningCellsin the ministries
                                                                   There are some exceptions,such as the energysector and
   examine the projects. NIMED's     responsibilities include water resourcessectorwhichhave
   implementation, monitoring and evaluation of projects.                                              preparedsectoralassess-
                                                                   ment and strategies.NX'here   such sectoral strategiesexist,
   The sector divisionsof the PlanningCommissionexamine
                                                                   they proxide a frameworkfor choice of projects:in their
   the projects in terms of their compatibility with the Five absence,choiceof projectsis drivento a
  Year Plan or the T'RIP, cost, technicalquality,economic                                                     largeextent by ad
                                                                  hocismand politicalpreferences.An impedimentto prepa-
  viability etc. The views of the sector divisionsof the
                                                                  ration of sectoral strategies is the pre-occupationof the
  PlanningCommissionare formulatedin an inter-ministeri-
                                                                  PlanningCommission      withprojectscrutiny;  the Commission
  al meeting-Pre-ECNEC-wvhich formthe basisof its rec-
                                                                  shouldgivemore attention to sectoralstrategies     in coopera-
  ommendationto ECNEC. The projectsare often reformu-
                                                                  tion vith the ministries and technicalagencies.
  lated by the technicalagencieson the basis of cost as ratio-
                                                                      The instructions issued by the Planning Commission
  nalizedby IMED or as advisedat Pre-ECNEC meetings.
                                                                  prescribeprocedures,hierarchyof authority and time limit
  By and large,ECNEC accepts projectsin the light of rec-
                                                                  for taking specificsteps; they have hardly anythingto say
  ommendationsof Pre-ECNEC meetings,though at times
                                                                 about application of project appraisal methodology.
  ECNEC also suggestschanges.
                                                                 Projectswhichearn returns on investmentare subjectedto
      A distinction is now maintained between Project
                                                                 benefit-costanalysis;infrastructure and social sector pro-
 Concept Paper iPCP) and Project Program PP): the for-
                                                                 jects whichare justifiedon the basisof positiveexternalities
 mer laysout the basicconceptand viability   of a project and    usuallyare not subject to the same appraisalmethodology
 the later givesdetails; IMED, Pre-ECNEC and ECNEC
                                                                 nor is there anyclear indicationof how to assessthe value
 deal with PCP while the PP is approvedby Departmental
                                                                 of the externalities. Technical criteria are hardlyapplied to
Project Evaluation Committee (DPEC) chaired by the
                                                                the new concernssuch as sustainability,    gender issues,envi-
 Secretaryof the Ministryconcerned and havingrepresen-
                                                                ronment, etc.; most projectsdo with qualitative     statements.
tation of the Planning Commission, IMED, Finance
                                                                Aided projects, however,apply specificcriteria.As public
Division,etc. PCP is prepared at an earlystage and forms
                                                                investment in directly productive activitiesreduce, and
basis for negotiation with donors. PCP was intended to
                                                                emphasis shifts to infrastructure and social sectors, the
establishsimplerproceduresformore expeditiousapproval
                                                                appraisal methodologygets more complex. Governments
of projects; the large number of unapprovedprojects in
                                                                netd to pay serious attention to this aspect in order to
ADP,the long time taken in processingprojects,the sever-
                                                                reduce the pressure to chose projects on predominantly
al stages of scrutiny (e.g. IMED, Pre-ECNEC) and the
                                                                subjective(personal)or politicaljudgments.

                                    Ti[E INSTITUTIONAL FRAMEWORK: SELECTED ISSUES
                                                             59
    The Governmentintroduced the practice of cost ratio-         the economyshouldprogressively      increase.Its relationship
nalizationby IMED on the ground that the project agen-           with projects should be mainly in assessingcompatibility
cies inflate cost and include components which are not           with sectoral goals and strategies as well as methodology
essential. IMED has been carrying out its task without           for project selectionand appraisal.
clearlydefining the meaningand practicalimplicationsof           * Second, with increased responsibility     for the ministries
cost rationalization.It followsfour methods, all of which        with respect to projects, sectoral      strategy  and polices
are subject to criticism.First, it reduces unit price or cost    requirethat their capacitybe enhanced.The PlanningCells
but does not hold quality constant; besides, it does not         of the ministriesmaybe upgraded into units for policyand
have adequate information about price for which it               strategic planning and redesignated as Policy and
depends mostlyon the technicalagencies.Rationalization           Development     Unit (PDU). The PDU's shallbe mannedby
on the basis of unit price adjustment can work mainlyfor         professional  staff representingthe required skillmix-such
commonlyused items and projectsof repetitive nature-             as the technicalskills in the substantive fields,economic
e.g. construction, purchaseof vehicles.Secondly,it refor-        and financial  analysis,policvanalysis, socialscienceanalysis
mulates projects by eliminatingsome components alto-             skills,etc. The ministrieswith largedevelopmentportfolio
gether or reducing their quantity in the project. Thirdly,        mayhave their units under the supervisionof an officerof
LMED disallowsor keeps at too low levels physical and             the level of AdditionalSecretaryor Divisional     Chief . The
price contingencies which require more frequent and               likely candidates for upgraded PDU's are Ministry of
extensive revision of projects. Finally,it includes in cost      Agriculture (preferably with Ministry of Fisheries &
only those components for which actual payments are               Livestock merged), Ministry of Energ, and Mineral
made; this understates cost in the sense that the full cost       Resources, Ministry of Water Resources, Ministry of
of all the real resourcesis not included. For instance, if a      Communication(preferablywith Shippingmerged in the
project uses land alreadyowned by government,the price            same ministry) and Ministryof Education (with Primary
of land may not be included even if the cost of land is a         Education Divisionmergedwith it).
 substantial portion of the total cost of the project. Such           Third, IMED may concentratemore of its resourceson
 method of cost estimationdoes not reflect fullyuse of real       monitoringthe implementation     of selectedlargeprojectsof
 resource and impairs proper appraisal of viability of            national importance.Also, IMED needs to strenghtenits
 projects.                                                        focuson developingeffectivemethodologiesfor monitor-
     MIostprojects experience cost over-runs and require          ing and audit of projects.More importantlyit should con-
 extensive revision. In a few cases revision affects the          centrateon high qualityevaluationof projects;the lessons
 design of projects substantially;in most other cases, the        learnt from projects already implemented help improve
 changes in cost are due to some essential work which             designand qualitv of new projects.The applicationof the
 could not be fully anticipated when the project was              concept of cost rationalization-which is a vague notion,
 designed and changes in price, especially of imported            lacks anyreliablemethodology    and the minimuminforma-
 items subjectto changesin cross-exchange     rates. The se-c-    tion required-needs to be developed.The alternativeof
 ond categoryof changesmaynot need        re-writing  the pro-    building up adequate price information and analytical
 jects: sufficient allowancesfor physical and price contin-        capacityis too costly to be economically    justified.Finally,
 gencies and filingof varianceanalysismay be substituted           thereis a need for measuresto improveskillsto ensurethat
  for revision.                                                    IMED is in a better position to retain much needed quali-
     In sum, the Government may consider a number of               fied staff members.
  measuresto improvethe appraisalof projects.                      * Fourth, ECNEC should'focus on sectoral assessment,
  * First, the mandate of the PlanningCommissionshould             strategyand periodicreviewof implementation       of develop-
  be examined and professionalneeds redefined consistent           ment programs and sectoral policy strategies. It should
  with changed organizationalmission. Its involvementin            exerciseits power through veto-i.e. instead of approving
  project processingshould graduallybe phased out, and             everyproject, it should reject projectswhich fail to meet
  involvementin developmentpolicyplanning,development              sectoral policies and goals with specific instructions to
  of methodologies   for project appraisal,and monitoringof        removethe deficiencies.

                                         BANGLADESII PUBLIC EXPENDITURE REVIEW
                                                             60
 * Fifth, the authority to implement projects should be             diture and revenue expenditure to the disadvantage of
decentralized to the agendes including procurement and             the former.
appointment of consultants.Control over process of pro-                Approvalfromboth PlanningCommissionand Finance
ject implementationshould graduallybe replacedby more              Divisionfor unapprovedprojects for each quarter seems
effective audit and evaluation supplemented by strong              unnecessary.  The developmentbudget is approvedby the
sanction againstmala fide failures.                                Parliament for the whole year; however,as the detailsof
                                                                   the project are not yet known or approved, Planning
 Implementation issues                                             Commissionmayhave to satisfyitself on these details.But
                                                                   approval of FinanceDivisionseems unnecessary.      Further,
  Release of fund to autonomousbodiesand authorizationof           break-up of expendituremay be submitted for the whole
  expenditureby govemmentdepartments or ministriesare              year instead of on quarterlybasis exceptwhen the project
  amongthe causesof slowutilizationof resourcesallocated           entity cannot do it for the wholeyear.
  in developmentexpenditure.The Finance Divisionissues                 The FinancialRulesseem to have granted wider finan-
  everyyear a new circulardescribingthe procedure.The cir-         cialpowersand responsibility   to headsof departments.The
  cularis not availableuntil a few months into the fiscalyear.     administrative orders havereduced those powersand arro-
  There is no major change from year to year,yet standard          gated them to ministries.The followingare the provisions
  procedureshave not been established.The line ministries          in the FinancialRules: "ControllingOfficermeans a head
  can release funds to autonomousbodiesfor approvedpro-            of department or other departmentalofficerwhois entrust-
 jects for the first three quarters, one quarter at a time;        ed with the responsibility of controllingrecurrentexpendi-
  releaseof two or more quarters at a time and any release         ture and/or the responsibilityof controllingcollectionof
 during the last quarter need approval of the Planning             revenue by the authoritysubordinate to the department."
 Commission and the Finance Division. For unapproved               "Secretariesto Government(are heads of departments)in
 projects approval of both Finance Divisionand Planning            respect of officerswho are not subordinateto any of the
 Commission is required for each quarter. The Finance              other Heads of Departments."
 Divisioninsists on recovery(or forced recoverv)of debts              The heads of departmentsexercise above powerswith
 from the state owned corporationsby short release,even if         regard to the revenuebudget but not developmentexpen-
 the corporationsare financially   too weak to meet the debt       diture. The distinctionbetween developmentexpenditure
 obligations.This delays release and quite often results in        and revenueexpenditurein respect of financialpowersof
 actual expenditure on projects being shorter than the             the heads of departmentsdoes not appear to have a war-
 amount nominallyreleased.                                         rant in law or financialrules. Its removalwill help decen-
     The circular of the Finance Division uses the term           tralization and more efficient expenditurefrom develop-
 'release' also in case of projects implemented bv govern-        ment budget.
 ment departments. including approved projects. Release               M\teasureswhichthe Governmentmayconsiderin terms
 in this context is interpreted as the maximumamount that         of implementationof projects include: (i) government
can be spent during a quarter and subject to further              should issue permanent rules/proceduresfor release of
 authorization by the administrative ministrv in case of          funds fordevelopmentprojectsexecutedby corporateenti-
 approvedprojects and by both the PlanningCommission              ties and governmentagenciesincludingministries,depart-
and the Finance Divisionin case of unapprovedprojects.            ments and directorates. Confusion between quarterly
The departments submit bills on the basis of actual               release to corporate entities and expenditure by govern-
expenditure to Accounts Office which makes paymentsif             ment departmentsup to the amount of budgetaryappro-
the bills are acceptable. Thus, government departments            priation maybe removed.(ii) Applicationof financialrules
are subject to two constraints on incurring expenditure           regarding powers of heads of departments/directorates
from the developmentbudget. In case of revenuebudget,             declared as controlling  authoritybe examinedand, if there
government departments can spend up to the budget                 is no legal and constitutionalbar, the same powers be
levelwithout any periodicalceiling.Apparently,     a distinc-     grahted for developmentprojects. (iii) Releaseof funds to
tion is made between procedure for developmentexpen-              corporate entitiesand expendituresbygovernmentdepart-

                                    TIIE INSTITUTIONAL FRA.xMWORK: SELECTED ISSUES
                                                             61
ments/directorates for unapproved and revised unap- ADP and RADP
proved projects may be made with approval of the
Planning Commissiononly; approvalof Finance Division The Planning Commission sends out instructions every
may be dispensed with except in cases of supplementary yearfor submission             of projectsfor inclusionin ADP for the
and excess grants. (iv) Break-up of expenditures be             comingfiscalyear and similarinstructions are issued for
approved only once for the whole year except where the          inclusion of projects in RADP (Revised Annual
spendingagencyis unable to do this; in all such cases the       DevelopmentProgram) or revisedallocationfor on-going
spending agencies should be encouraged to determine projects.New projectsare includedin ADP on the condi-
break-upfor the wholeyear.(v)Releaseof ADP funds may tion that they are alsoincludedin TYRIP;the two process-
                                                                                                                      No new
not be adjusted with debt serviceobligationsof corporate es may-and generallydo-move simultaneously.
entities exceptwhere the Finance Divisionis satisfiedthat        projectsare generallyincludedin RADPHowever,excep-
 the corporateentitiesare willful  defaulters.The debt oblig- tions are made for inclusion in ADP or RADP projects
 ations of the corporate entities be treated separatelyand whichhave high nationalimportance,relate to high priori-
 their underlying  real weaknesses  be addressed.                ty sectors, and for which aid has been arranged. Further,
                                                                 high national priorityis too often a euphemismfor politi-
 Monitoring and evaluation                                       callymandatedprojectswhichare includedin development
                                                                 programs without proper technical preparation and
 IMED is responsiblefor monitoringand evaluation.It car- appraisal.The size of ADP as well as RADP is driven pri-
  ries out monitoringthrough a systemof elaborate reports marilyby availability         of resourceand the politicaldynamics
  submitted periodically   by the project implementingagen- of public resource allocation,especiallyfor projectswhich
  cies, supplementedto some extent by inspectionof pro-           are fullyfinanced from local currency resource including
  jects. LMED'smonitoringtracks reasonablywellexpendi- government               revenue and domesticpublicdebt. Large pro-
  ture and to a lesser extent executionof 'physical imple- ject portfolioproposedby technicalagenciesand line min-
  mentation' in comparisonwith the time path laid for the         istries are frequentlyused for bargainingfor larger alloca-
  projects;however, it has too limited a role in improving tion-especially in the of absence of even a reasonably
  implementation by removing bottlenecks or suggesting strict application of appraisal methodologyand test of
  revision of design of projects if necessary.  IMED has not      financialand technicalperformance.
   paid much attention to evaluationof projectswhich could            The Government may consider: (i) GOB/Planning
   help improve design and implementationof subsequent Commissionshouldadopt practiceof notifyingin advance
   projects.Virtually,only aided projects are evaluatedat the     the resources availablefor particular sectors, sub-sectors
   initiativeof donors. It mightbe better to consider morni- and/or institutions.      (ii) The resourceenvelopeand the pro-
   toringas part of project management    task and giverespon- ject portfolio shall correspond with the period of plan-
   sibilityto the project entitieswhileLMEDconcentrateson          ning/programming which GOB/Planning Commission
   evaluation and audit of monitoringdone by the project adopts (e.g. five year correspondingwith five year plan,
   entitiesthemselves.                                             three yearcorrespondingwithTYRIP).
       Lookingahead, the mandate and professionalskillsof
   IMED needs be reviewedin order to determinewhether it           Three-Year RollingInvestment Program
   shouldcontinue to emphasizemonitoringor shift its atten-
   tion more to evaluation. It may be more effective in The TYRIPhas been in forse since FY91-93. So far, the
   improvingprojectimplementation      if monitoringis integrat- Government has prepared four TYRIPs,each covering
    ed with management function within project agencies. three yearperiod and the terminalyear coinciding               withthe
    LvIEDmayconcentratemainlyon evaluationof projectsso            firstyear of a new TYRIP.    It was expected that the shorter
    that quality of next generation of projects can improve. period would           enable  better  estimation of the resource
    Consistentwith the revisedmandate of IMED, a program available            and thus establishclosercorrespondence   between
    for appropriatestaffing and trainingfor skilldevelopment resourceenvelopeand             the size of ADP,which  would  elim-
    needs to be undertaken.                                         inate the need for 'pruning' (i.e. retrenchingprojects or

                                                                    REVIEW
                                                    PUBLICEXPENDITURE
                                           BANGLADESH
                                                                62
componentsof projectsin ADP) from time to time and the              involved:collectionof bench-markdata and descriptionof
large number of projectswhich 'spill-over'from one plan             initial conditions; specificationof technical details and
period to another. In practice, TYRIP    has acted only as a        implementation methods; specification of objectives of
'soft tool' of planning:it has not been able to preventinclu-       projects and benefits expected; appraisalusing cost-bene-
sion of projects beyond financialcapacityof the govem-              fits analysistechniques.Projects whichare fullyfinancedby
ment nor 'spill-over'to new planningperiods.The reasons             the govemmentdo not followthis processclosely:project
for weakness are absenceof well defined sectoralstrategy,           appraisalmethodologyis either applied too looselyor not
absence of multi-yearresource forecast and inclusionof              at all;generally,benefit-costanalysis is not appliedto infra-
new projectsincluding'politically    mandated' ones without         structure projects.Some projectsare identifiedby political
consideringtheir impact on resource allocation.                     leadersalsoon the basis of their felt needs and localimpor-
   Looking ahead the government may consider: (i) to                tance-the so-calledhigh priority or politicallymandated
develop sectoral need assessment, sectoral strategiesand            projects.The technicalpreparation and appraisalof these
sectoral programs matching with planning/programming                projectsare too weak.
period; for this purpose two or more overlappingprogram-                Looking ahead the government may consider the fol-
ming periods may also be used. (ii) Methodology for                 lowingmeasures:(i) to develop appropriate methodology
appraisalof projectsshould be improvedand appliedwith               for appraisalof infrastructureand socialsectorprojectsand
greater rigor and consistency,  especiallyto projectsjustified      establish the rule that no projects be taken up without a
on grounds of socialbenefitsand positiveexternalities.    (iii)     proper appraisal using those methodologies. (ii) Bench
Choice of the so-called'politicallymandated projects' or            mark data and evaluationof projects be carried out to
'nationallyimportant projects' should be subjected to the           determinethe outcomeof projectscomparedwith expect-
same appraisaldisciplineas all other projects. (iv) Finally         ed benefits. Full-fledged evaluationmaybe carried out on
the scope of TYRIPneeds to be broadened to include not              a selective basis for projects which are large and which
only ADP but also the related revenuebudget.                        would lead to better design of future projects. (iii) The
                                                                    terms infrastructure,social sectors, human resource, etc.
Methodology and database
                       for choiceof projects                        are used rather loosely;it is necessarythat for the purpose
                                                                    of public expenditurethe govemrment       adopts some clear
Most projects originatefrom perceivedneeds of the agen-             definitionconsistentwith the meaningof these terms in the
cies which operate in a particular sector. The technical            technical and economic literature. (iv) To develop and
agenciescarryout analysis   and work out detailsof projects;        implement training programs for impartingthe appraisal
in case of aided projects, the donors activelyparticipatein         skills to the concemed officialsin the technicalagencies,
preparation of projects. Usually,the followingstages are            ministriesand the PlanningCommission.




                                    THlE INSTITUTIONAL FRAMEWORK: SELECTED ISSUES
                                                               63
Statistical Annex




                    lo'
    I
TABLE
                                                                                                        - -
Macroeconomic Indicators,FY80-FY9S
                                                                             FY90             FY91             FY92            FY93            FY94             FY95
                                          FY80-84         FY85-89
                                                                                                                                                            (    ionaJ)
                                          (Average)       (Average)

In percentages
                                                                              6.6             3.4               4.2             4.5             4.2               4.4
 GDP growth rate                             3.1              3.4
                                                                                            213               213             214             230               253
 GNP per cpita (in US dollars)             145              174             208

Percent of GDP                                                                                                                                                    8.3
                                                              2.9              2.7             4.2               6.0             7.6              9.1
Dornestc saving                               1.6
                                                                                               7.4               9.7            11.7             13.8            13.1
National saving                               4.4             5.8              5.8

                                                                                               11.5             12.1            14.3             15.4            16.6
Gross investment                             14.3             12.4            12.8
                                                                               6.4              5.7              5.5             6.4              7.6             7.2
 Public                                       6.2              6.2
                                                                               6.4              5.8              6.6             7.9              7.8             9.4
 Private                                      8.1              6.2

Budget                                                                                                                                                           12.1
                                                               9.0              9.3             9.6             10.9            12.0             12.2
 Total revenue                                8.9
                                                                                7.8             7.8              8.8             9.6              9.3             9.6
 Tax revenue                                  7.2              7.2

                                                                               17.2            16.8              16.8           17.8             18.1            18.9
Total expenditure                             18.4            16.6
                                                                                8.8             8.7               8.3            8.9              8.9             8.8
Current expenditurel                           6.4             7.7

                                                                               -7.9            -7.2             -5.9            -5.9             -6.0            -6.8
 Overall budget deficit'                     -9.3             -7.5

 Balance of payments
                                                                                6.8             7.3               8.4             9.8             9.8            11.9
  Exports'                                     5.4             6.0
                                                                               16.9            15.0              14.8            16.8            16.3            20.0
  Imports '                                   18.3            15.8

                                                                               -7.0            -4.2              -2.4           -2.6             -1.6            -3.5
 Current account balance                      -9.9            -6.7

 In percentages                                                                                                                                                   10.0
                                                               14.1            13.7             12.5             11.5            10.2             11.5
 Debt service rato'                               9.7
                                                                                            12867.0           13203.0        14106.0         15713.0               n.a.
 Extemal debt' (millions of US dollars)       -               -            12289.0

                                                                                 9.3             8.9              5.1             1.3              1.8             5.2
 Rateofinfiation'                              13.4            10.1

 BB gross reserves
                                                                              585.0           966.0            1709 0         2227.0           2852.0           3070.0
  Millions of US dollars)                     -                -
                                                                                1.9             3.3               5.8            6.6              8.2              6.3
  Months of imports                           -                -
                                                                                                35.7             38.2            39.2             40.0            40.2
  Excharge rate (TK/US$)                      20.1             30.0            32.9

                                                          n net actor ,ncomne Percaprta  GNP s caiciatedusng the sa-neyear's perod averageexchangerate.
  a. In calc.atngGNP workers'renitta-icesare .ncluded
  b. xcludtes  food subs.des.                                                                                                                                      andest-
                                                          and revenue/CDP   ratos. furtrher      'or a resdualamountto reftec.
                                                                                          acjusted                            the drrerencebetweenthe fiscalaccounts
  c Defied as the dRference     between  expenciture/GDP
  -rates of total fnaricingof theGovernment.
  d Exports.mpiy    merch.andise  exportsonly
  e Importsimplymerchandse        importsonly
                                                                 earnings'ron export of goocsa-d on-factor  servces.piusw,crers rerttances Debt servceincludesntereston
  f Represents   the rato of debt serviceto toal 'oregn exchange
                                    of publicM&LT debt, total MFtransactons  (net)and IMFservice charges.
  pub c M&LTdebt. amortization
   EndDecember n eachfiscalyear.
  gB
  h Basedon DhakaMiddleCassConsumers   PnceIndex(C?:).
                                                            Accounting                                                               Bank
                                                                                                                            Bangladesh
                                                                                                              (EPB),Bangeadesh;
                                                                                    -92. ExportProrotion Bureau
                                                                                 1971
                                                                     of Bang!adesh                                                      (BB),
                 Buredu
  SourceBangladesh                     TwentyYears
                                  (BBS).
                       of Statstics               of National
        of Fnance.
  Mnestry




                                                          BANGLADESH PUBLIC EXPENDITURE REVIEW
                                                                                       66
TABLE2
Actualincomeand expenditure
                          of the centralgovernment
(Takain billion)

                                     FY87       FY88        FY89            FY90      FY91      FY92        FY93        FY94       FY95
Totalrevenue                         48.00      53.29       60.00           68.90     80.00     98.90      113.59      125.33     141.82
Tax                                  38.77      42.63       48.90           57.30     65.20     79.50      91.20        96.29     111.90
Non-tax                               9.23      10.66       11.10           11.60     14.80     19.40       22.39       29.04     29.92
Totalexpendriture                   -93.03     -95.90     -107.33         -127.00   -139.90   -152.35     -169.16     -186.82    -221.52
Cunnent expenditure'                -41.59     -48.19      -56.70          -64.70    -72.30    -75.60      -84.56      -91.23    -103.13
Foodaccount  surplus                  -0.13     -5.64       -3.93           -8.80     -7.40     -5.75       -6.47        4.47      -7.00
AnnualDevelopnentProgram    (ADP)   -46.30     -37.98      -42.20          -47.20    -52.00    -57.00      -67.49      -87.05    -100.86
Other capitalexpenditureand          -5.01      -4.09       -5.20           -5.20     -5.30     -5.40       -8.49      -12.53     -11.96
 net lending
Residual'                                                    0.7            -1.10     -2.90     -8.60       -2.15       -0.48       1.43
Overall
      budgetdefcit                  -45.03     -42.61      -47.33          -58.10    -59.90    -53.45      -55.57      -61.49     -79.70
Net foreignfinancingd                40.36      41.43       46.68           48.60     51.90     44.12       52.88       50.43      57.53
'nroject
       aid                           29.63      25.01       27.20           35.50    35.20      36.37       39.60       38.87     49.65
Commodityaid                          I1.i3      14.07       15.50          13.50     16.30      6.35        17.20       18.20     13.40
 -soodaid                             6.94       7.64        7.30            6.23      9.70      8.81         4.65       4.80       5.51
 -ommercal food borrowing            -2.94       0.10         1.28          -0.8     -0.50      -0.75       -0.73       -0.44      0.00
Debtamortization                     -4.40      -5.39       -4.60           -5.80    -8.80      -6.66       -7.84      -11.00    -11.03
Netdomesticfrnarnong                  4.67       1.18        0.65            9.50      8.00      9.33        2.69       11.06     22.17
3ankingsystem                         3.37      -0.68       -2.50            6.50     1.70      -2.90     -10.3         -5.36       5.18
 )therdomestic                        1.31        1.87       3.10            1.90     3.50       9.20       13.0        16.42      16.99
Annualpercencage  change
 otal revenue                        13.5       11.0        12.6            14.8      16.1      23.6        14.9       10.3        13.2
-otal expenditure                    20.1        3.1        11.9            18.3      10.2       8.9        11.0       10.4        18.6
 Currentexpendrturel                 18.9       15.9        17.7            14.1      11.7       4.6        11.9        5.6        16.2
AOP                                  26.8     -18.0         11.1            I 1.8     10.2       9.6        18.4       29.0        15.9
As percent of GDP
 -ctalrevenue                         8.9        8.9        9.1              9.3      9.6       10.9        12.0        12.2       12.1
  Taxrevenue                          7.2        7.1        7.4              7.8      7.8        8.8         9.6         9.3       9.6
  Non-taxrevenue                      1.7         1.8        1.7             1.6      1.8        2.1         2.4         2.8        2.6
  otalexpenditure                    17.3       16.1       16.3             17.2     16.8       16.8        17.8        18.1       18.9
  C-rrert expendture"                 7.7        8.1        8.6              8.8      8.7        8.3         8.9         8.9        8.3
  ADP                                 8.6        6.4        6.4             6.4       6.2       6.3         7.1          8.4       86
 Dverallbudgetdefcst                  8.4        7.1        7.2             7.9       7.2       5.9         5.9          6.0       6.8
'4et foreignfinancing                7.5         6.9        7.1             6.6       6.2       4.9         5.6         4.9        4.9
  let domestcfinancing               0.9         0.2        0.1              1.3      1.0        1.0        0.3          1.1        1.9
  Bankirg system                     0.6        -0.1       -0.4             0.9      0.2       -0.3        -1.1        -0.5        0.4
  Otherdomestic                      0.2         0.3        0.5             0.3      0.4         1.0         1.4         1.6        1.5
-DP Mkt. Pnces                      539.2     597.1       659.6           737.6     834.4     906.5       948.1      1030.4      1170.3
  Excludes
         food subsdce. wh.chareincudedc                   deficit.
                                      underthe food account
  Comppnses-o,,-ADPproject expenditure.
                                     theFood forWork  program.
                                                             misceLaneous
                                                                      investment
                                                                              (non-development)
                                                                                           andnetloanand
                                                                                                       advances.
                                                                                                             A maorpartof gross
                                                                                                                              lending
                                                                                                                                    by
,overnment.s indudedwitt,-n
                          the ADP
 Representsthed'eren.ce oetween thebalance
                                         of revenue
                                                  andexpenditure
                                                              fromthefiscal
                                                                          accounts
                                                                                andtotalfinancing
                                                                                               estimates
                                                                                                      of thecentral
                                                                                                                 Govemment.
         foregn
 Including      grants.
             of F,na-ce
,urce M,nistry         and IMFand BBS




                                                         STATISTICAL ANNEX
                                                                     67
    3
TABLE
Revised budget summary
(Taka
    in Crre)
                                                                                                             1993/94 1994/95
                            1984R85 1985/86 1986/87          1987188 1988/89 1989/90 1990/91 1991/92 1992/93
                                                                                 38     513   1617    2550    3130     3910
                           547           652        760        416    -348
Reventuesurplus                                                                               9517    11060  12280     14210
                                        4073       4716       5146    5822     6778   7823
 Receipts                 3477                                                                               -9150   -10300
                                                             -4730   -6170    -6740  -7310   -7900   -8510
 Expenditues             -2930         -3421      -3956
                                                                               5545    6103   6039     6365   6487      6994
                          3307          4018       4372       5086    4885
Foreignflows
Net domesticcapital                                                                              -539    -815    -1530    -1225
                                         -252      -173        -400      -521    -499    -557
 Domestc bans andadvances-248                                                              549     677     830     1608     1627
                            148            160       160         183      223      260
 Net pubbc accounts                                                                                138      15       78      402
                                           -92       -13       -217      -298    -239       -8
                 capital -100
 Totalnet domestic                                                                                         260      196     887'
                                             5     -166         355        955     882     383     362
Extra-budgetaryresourcesand479
       financing
 deficit                                                                                 6991    8156    9190     9891    12193
                                         4583       4953       5640       5194   6226
Totalresourcesavailable 4233
 Use of resources                                                                                7150    8121     9600    11150
                                         4096       4513       4651       4595   5103    6121
 ADP                          3508                                                                                  119      89
                                                                 70         98    106     125     138     117
 Non-ADPprojects               207        144         92
                                                                                 1018     744     868     924       141     954
                               518        344        349        919        501
 Foodaccount                                                                              510     564     418      547      690
                               216        348        326        400        526    471
   Food-for-work                                                                                  304     506     -406      264
                                           -4         23        519        -25    547     234
          csutay
   Net food                    302                                                                                            0
                                                                             0      0       0       0      28        31
                                 0          0          0          0
 Others
          the T&rs bond issue                                od
                            of Tk 235cores and a bankborrowing Tk 470 crores.
 a Inckides
 SourceMinistryof Finance.




                                                   BANGLADESH PUBLIC EXPENDITURE REVIEW
                                                                            68
   TABLE
       4
   Currentbudget-revisedestimates
   (Takain Crore)

                                     1984/85 1985/86 1986/87               1987/88 1988/89 1989/90 1990/91 1991/92                         1992/93 1993/94 1994/95
   Revenue
   Taxrevenue                          2852        3242         3790         4307          4833       5712         6313        7661         8934
    Production,consumption            2400                                                                                                               9760        10955
                                                   2710         3156         3505          3950       4610         5086        6166         6962         7725         9080
     and distribution taxes
     Customnduties                     1120         1338        1550         1618          1820       2167        2328         2820         2835
     Salestaxes                        410                                                                                                               3070        3670
                                                    461          550          525           540        531         823
     Excise
          duties                                                                                                                  0            0           0            0
                                       750          772         900          1172          1400       1700        1713         1360          320          175         180
     Value  added tax                     0             0           0            0            0           0           0        1675         2500
     Stamptaxes                                                                                                                                         2775         3275
                                        110          125          140          170          170         177         187          251         312          355
     Motorvehidetaxes                    10                                                                                                                           420
                                                       14          16           20           20          35
     Supplementary tax                    0
                                                                                                                     35           40              50        60         85
                                                        0           0            0            0           0           0           20         945         1290        1450
  Taxeson incone                       390          460          550          664          750         875         1071
  Land revenue tax                                                                                                             1300         1720         1735        1560
                                        40            51           56           89           85        114           60           85          100
  Othertaxes and dutiesb                22            21
                                                                                                                                                           120         150
                                                                   28           49          48         113           96
  Non-tax revenue                                                                                                                110          152         180          165
                                       670          831          929          839          989         527         905         1239         1470        2520
  Nationalized sector                  283                                                                                                                           3255
                                                    362          349          215          255         178
   Industries                                                                                                      439          701          789          833         881
                                        60           85          92            80            70         50
   Banks                                                                                                           276          381          360         415          227
                                       223          277         257           135           185        128
    Other public sector,
                                                                                                                   163          320          429         418          654
                                         0            0           0            0             0           0           0            0            0           0
  Interest receipts                    140          233                                                                                                                 0
                                                                200          225           220         345         300
  Registration fees                                                                                                             300          350         350          475
                                        40           43           65          60            63          70          70           80           96         120
  Forest                                 36          S0           51                                                                                                  130
                                                                              50            60         20          25           30           40
  Railways                             -30                                                                                                                 43          -
                                                    -53        -104         -149          -150       -139        -149
 Post office and T&T (net)                                                                                                    -126         -100          -95          -90
                                        8             0           9           37            78         53          220          254          295         431
 Other`                               193           196                                                                                                              607
                                                                359          401           463         -            -            -            -          838        1252
 Total cunrent revenue               3522         4073         4719         5146          5822       6239        7218         8900        10404        12280       14210
 Expenditures
 General services                    1108         1367         1722        2003           2241       2592        2583
  General administration                                                                                                     2935         3546         3844         4342
                                      382          4C4          567         692            694        826         914         1081         1263         1379
  Justice and police                  220                                                                                                                            1780
                                                   348          302         348            378        451         451          509          740          777
  Defense                             493          596          829
                                                                                                                                                                      614
                                                                             934          1139       1279        1180         1301         1494
  Scientific
           departments                 13                                                                                                              1634         1887
                                                    19           24           29            30         36         38
 Socialservices                                                                                                                44            49          54           62
                                      904          923         1414         1705          2079      2084        2241         2390         2830         3036
  Education                           493                                                                                                                           3436
                                                   600          747          820           949       1094        1182
  Healthandpopulationplanning                                                                                                1382          1674        1756         2008
                                      160          113         275          305           321        367          387         431          516          607          685
  Socialweifare                       251          210         392          580           809        623          672
 Economic services                                                                                                            577          640          673          743
                                      199          247         304          357           411        460          493         570          674          768
  Agnculture                          109                                                                                                                            843
                                                    95          174          196          234         256         283
  Manufactunng  and construction
                                                                                                                              300          346          393          451
                                            8       64           20          22            23          28          26          29           33           36
  Transport and communication          SI                                                                                                                             43
                                                    55           64          86            98         113
  Others                                                                                                          118         167          209          242          245
                                       31          33           46           53            56         63          66
 Debtservice                                                                                                                   74           86           97          104
                                      318         428          445          590           733        662
 Domestic
                                                                                                                 854         1107         1025         1068         1206
                                                                                                                 417          634          550          519         606
 Extemal
Food subsidy,                                                                                                    437          473          475          549         600
                                     250           141          50            0           627        631
Other subsidy'                                                                                                   373          344          153          149         273
                                       I5           0           19          65          79           310        397          245           134           93         182
Contngency                           136          315            2          10           0              1       370
Total current expenditures'                                                                                                  308          146           192          18
                                    2930         3421        3956         4730        6170              6740   7311         7899         8508          9150       10300
 a. Tax evied on Land holdngs.It ,as vrtuaily abolished   n FY74together with the mposition of the Agnculture ,cone tax but reinstated
 b. Includeselectncrty duties,
                             estatedutyon agricultural                                                                                 ,n 1976/77.
                                                         land,taxeson immonable  property gift taxes.capnalgainstax.tool taxes,betterment
 otherkvies                                                                                                                               tax on com-nercal estab&ishments
                                                                                                                                                                       and
 c. Includesreceiptsfrom nationalized ,nsurance,  other ,ndustrtal
                                                                 operationsanddisinvestment  of industnatunrts.
d. Receipts of various government   departinents, especally undergeneral adminstratoon. social economicagncuhture  and otherservices
e. Therehasbeen a change     in the defirntion                                                                                       etc.
                                              of subsidy, especially
                                                                   duringFY93.FY93  figurestherefore.are not fulli comparable
fGGovernment's budgetary    definition.Thisisdifferent'rom the defintion usedin AnnexTable                                    to the previousyears'figures.
Source:  Ministryof Finance.
                                                                                             5.3, which i basedon a defrntionusedby IMF
                                                                                                      4




                                                                        STATISTICALANNEX
                                                                                     69
TALE S
                Program
AnnualDevelopment
(Tak n aore)

                     FY84      FY85      FY86     FY87      FY88      FY90     FY9I      FY92      FY93      FY94      FY95     FY96      FY97'
                      R/A        R/A      R/A      R/A       R/A       R/A      R/A       RIA       R/A       RIA       R/A       R      Bdge

Agncue               476/471   3141287 193/204 252/191 3331262 384/326 425/307 469/423 489/372 591/521 6073541                 251          350
PA" devebprnent      106174    110/92   114Y99   14*4/108 138/91    257/178 286/222 392s319 518/366 525/480 768/684            410          415
Watrrescurc          470/389   515/393 477/413 442/461 560/449 676/977 703/679 740/536 808/618 621/566 711/652                 375          430
lnduWtrY             333/234   240/141 591/537 667/697 421/431 263/427 103/96 119/119 78/73              172/157 135/132         75          110
Power                5781520   573/565 726/703 849/951 799/767 625/46        644/365 851/740 1251/10071151/1214 1286/1526 674.              770
O,1.gasandNR         217/160   256/289 211/238 191/195 2211207 229/352 495/380 516/325 560/476 308/325 2021242                 212.         240
Transport            286/245   2271269 266/256 435/441 469/466 540/759 630/630 857/837 1146/968 1583/15442295/1949 1012-                   1100
Cnuricatiorl           SS/50     61/71   49/44    44/37     96/97   165/165 92/114 183/164 168/145 5421536 501/452             323 *        400
PlPysaPbW            147/164   108/114 103/114 158/139 198/167 190/287 2511231 361/315 3401237 385/317 538/483                 377          460
E&dabon              133/128    129/125 1821128 215/198 2511213 3041226 307/173 492/299 5921328 955/920 1520/1465 932                      1170
Heaf1h                 80/71     99/93   73/66    80/73     87/83   128/98   165/141 178/137 2621206 304/281 395/370            141         280
Frrplng               107/86    111/102 128/88   142/10S 170/141 296/220 295/310 339/271 3461283 446/408 512/470                162         200
Socialwefare           16/14     18/16   15/13    22/20     20/16    28/26    38/31    37/29     53/31    72/42   130/100        83          155
Locagovernrnerent    343/320 432/405 437/173 355/342 400/410 241/330 159/147 332/311 5101538 684/682 410/410                   495          536
Others               239/80    3051207 533/352 516/482 488/350 777/702 1531/14421284/1200 1001/703 1261/991 1140/826          4923         5884
Total             3584.75/30063498/31684096/34294513/4439 4651/41505103/57176126/52707150/6024 8121/65509600/898411150/10303 10447        12500

Note:FY89 ftres arenotaailableyet. Ris rvsed budget:A atual.
a FY97frt.es are from The1ndeperxeistJune 17, 1 96.
       Gemmert ndxs Boc alotion for
b. Local                                                                                              to Thanaand UnionPanishad,
                                                                                              assstance
                                                                                    Development
                                            Dstnct Couils, Dstrnt and Thau wastnucture,                                                assistance
                                                                                                                              Develpment
to MuIopal CVPW=os and Porashavas,     and Local overnment bodiesinCtg. HIl-Tracts.
      IMED and Plarisig CornrnEsion.
Source:




                                          /      s.             1 5 2-




                             q




                                                BANGLADESH PUBLIC EXPENDITURE REVIEW
                                                                       70
   TABLE
       6
   Bangladesh:         Consolidated
                                  accounts
                                         of non-financial
                                                       publicenterprises,
   (In billions of taka)                                                1990/91-1995/96

                                                        1990/91              1991192             1992193              1993194
  Operating revenue'                                                                                                                     1994195
                                                                                                                                               (R)           1995/96
                                                                                                                                                                   (B)
                                                         105.2                123.5
   Of which: subsidies                                                                             144.6                143.5
 Operatingexpenditure                                       0.2                                                                             158.5                173.8
   Wages and salaries
                                                          97.0                117.0               138.9                132.4
                                                          11.8                 12.9                                                        153.5                165.1
   Purchaseof goodand services                                                                     15.2                 14.6
                                                          74.4                 92.5                                                         15.0                 15.9
  Deprecation                                                                                     111.4                102.9
                                                          10.8                 11.6                                                        124.5                134.6
 Operatng surplus                                                                                  12.3                 14.9'
 Nonoperating                                              8.2                  6.5                                                         14.0                 14.6
               income                                                                               5.7                 11.1
                                                           1.0                -2.3                                                           5.0                  8.7
 Interest                                                                                         -2.3                   1.0
                                                          10.8                 11.0                                                          1.9                  1.9
 Incomebefore taxes                                                                               12.1                  7.7
                                                         -1.6                 -6.8                                                           8.9                 9.0
 Profnt
      distnbutions                                                                                -8.7                  4.4
                                                          2.6                  3.6                                                         -2.0                   1.6
  Dividends                                                                                        4.1                  4.9
                                                          2.5                  3.5                                                          2.2                  2.2
  Prort sharing                                                                                    4.0
                                                           0.1                                                          4.9                 2.2
Incometax                                                                      0.1                  0.1                                                          2.2
Aftertax retainedincome                                    3.9                  5.3                 4.9                  5.5
                                                         -8.1               -15.7                                                            2.0                 2.0
Grosssavings"                                                                                    -17.7                 -6.0
                                                          2.7                 -4.1                                                         -6.2                 -2.6
Fixedcapitalformation(gross)                                                                      -5.4                  8.9
                                                        41.3                  31.8                                                          7.8                 12.0
Financing                                                                                         27.6                 22.9
                                                        38.6                 35.9                                                          30.0                 34.8
 Net cashborrow-ing                                                                               33.0                 14.0
                                                         11.1                 18.3                                                         22.2                 22.8
  Dravings                                                                                         7.1                  4.9
                                                         17.8                27.4                                                           1.1                  5.1
  Repayments                                                                                      18.7                 15.9
                                                        -6.7                 -9.1                                                          13.6                 17.8
 Equity                                                                                         -11.6                -11.0
                                                         4.6                   4.1                                                       -12.5                -12.7
 Assumed short term credit'                                                                        6.3
                                                        22.9                                                            9.1                12.5
Memorandum items                                                             13.5                 19.6                                                          10.2
                                                                                                                        0.0                 8.6
 Totalassets                                                                                                                                                    7.5
                                                      418.3                497.7
  Equity                                                                                       528.3                602.8
                                                       98.5                128.5                                                        633.9                670.1
  Debt                                                                                         117.6                197.8
                                                      319.8                369.2                                                        203.5                210.9
 Employment  (thousands)                                                                       410.7                405.0
                                                      321.9                313.3                                                        430.4                459.2
 Profrtability(in percent)                                                                     292.5                269.0               259.4                260.9
 Operatng surplus/optg.
                      revenue
Dperating                                               7.8                  5.3
        surplus/assets                                                                            3.9                 7.7
-terest due to central Govemment4                       2.0                  1.3                                                           3.2                 5.0
                                                                                                  1.1                 1.8                  0.8                 1.3
-terest arrears to central Govemment'                                                           10.8
 ote: R is revisedbudget                                                                         8.3
                         estrnates;B s budget estmates.
  Does rot ncludechanges    m nventones.
  Defoed asafter-taxretained   micome piusdepreciation.
  ;cludces arrearsto Govern-nerit and changesin domnestic
                                                        bankdebt(indudingarrears).
  Based  on budgetary  docunentsof the Ministry
   n.e                                         of Fnanceunderbudgetaryheading
      Goernmrent.                                                            24 wthichis the interestcomponent
                                                                                                                of Debt Serice Laibiltiesowed by
 Estimated   asinterestobligations                                                                                                               the non-firial SOEs
                                 d autornoousbodesunder budgetary
,rce. Mtnistryof Finance.  AutornomusBodesWig and Finance          heading24 minusthe estimated  realizedinterest
                                                                                                                receiptsrefectedin Ministryo Fnance
                                                             Dvison.                                                                                budget  docurnents.




                                                                  STATiSTcALANNEX
                                                                              71
    7
TABLE
                  of state-owned enterprises
Profit performfance
(Takain Million)
                                                                                                                       1994/95
Corporaione            1982J83 1983J84 1984J85 1985J86 1986J87 1987/88 1988J89 1989/90 1990/91 1991/92 1992/93 1993/94 Revised
Manufaruing
 BSEC                 -273         -202        -135           85           -49     -62        -78        -365         -861    -1078    -1292       -903     -484
 BSFIC                  218          189       -234         -336         -315     -125       -237          170        -121     -722     -862       -150      293
 BCIC                    158         121         131          1Os          -86      198       374          455        -343     -554      206         255    -329
 BTMC                     23         112          42        -566         -245     -354        -22        -188         -584     -434    -1355      -1539    -1142
 BJMC                    184       -310       -1462        -1583         -420    -1431      -1882       -3709        -2473    -3175    -5233       -640     -156
 5ubtota                310         -90       -1657        -2466       -IlIS     -1773      -1845       -3636        -4382    -5963    -8536      -2978    -1818
Utilities
 BPC                    597        2000        1835          1044       1410       840        1236        387         2488     3512     3800       4600      1017
 BOGMC                    72        122          89           -27       -155        100      -159        -265           288     510      709        986      931
 BSC                      24          4            6         -117       -101         37      -244        -245         -527     -542     -172       -158        77
 BIMAN                   123        163         -23           -57       -352      -266          33         117        -249      348      679        714       500
 PDB                    417         453          199         -285         172      -89       -363       -3375        -2802    -7482    -4262      -3892    -4082
 Subtotal               1233       2742        2106           558        975       623         503      -3381          -802   -3654      754       2250    -1557
Other
 BRTC                  -126         -123       -143           -174      -183     -214         -235        -259        -246     -221      -241       -113    -109
 DWA5A                   -11          -20           0          -10          20       14           19          16         -4         5       11         36    -54
 CWASA                    -3             6          5            -2           6     -2          -31         -63        -64       -57      -38        -27        6
 MPA                     -18          -36         67             74       118      216           191         197        193      230      220         154     114
 CPA                     239          132        242           207        366      431          392         468        508       486      441        484     402
 BJC                   -271         -148       -444         -1623       -118 -1841          -1477       -1324         -142    -1675    -2038         -75     -42
 BFoDC                      2           -2       -25            -27         -I     -18          -26         -11         -20        -9      -11         -I    -33
 TCB                       18           28         11            24         47      41            45          34           7       22     -94         179      28
 BFFWT                      2            5          6            -S       -11      -28            20          24         35         5       -8            1      3
 DESA                       0            0           0             0          0       0             0          0           0   -853      -988     -1851 -1818
  BADC                   -34        -130       -113           -439      -525        78           152         133         78     -105     -112       -129    -2C6
  BFIDC                    33           34         48            28          10    -16            17        -39         -62     -142     -132       -113       67
  BFDC(FILM)                2            2            1            2           2       2            2            1      -20      -16         10         17      19
  BIWTC                  -20            -5       - 11           -45       -55      -53          -73         -37         -37      -69       -30        -25     -74
  EPZA                      0            0         -9           -10         -8          1           3       -12          -2        -I       23         29       11
  BSCIC                    -4           -3         -S              0           0       0            0            1          1      -6      -41        -34     -10
  CDA                        I           2           4            -4        28       42           89          53         49        20        19        31      30
  RAJUK                    48           78         78             92       134      110          126          79          75      138       143       200      155
  KDA                        8            7        20              2           4     -I            IS          11         13         7        6        20      68
  BIWTA                  -11           -13          19          -52        -48       -5           -I         -21        -31          1       -6       -SI     -18
  REB                        0            0          0             0         -3    -26           -35          31          79       84       175        166     196
  BPRC                       I            3         19            16         -5      13            13          13         10         9       19        113     101
  BSB                        0            0        -I             -2         -2        0          -I          -I          -2       -2        -2       -14     -14
  BHB                        0            0           0            9           2       0            0           0         -4       -3         0           2      3
  Subtotal              -144         -182       -231         -1940       -224 -1255            -796        -707         415 -2153       -2675      -1001 -1175
Totalnet profrt         1399         2470         218        -3847       -365 -2405          -2138       -7725       -4769 -11770 -10457           -1729 -4550
 Totalexduding
  petroleum(BPC)          802         470      -1617        -4891       -1775    -3245      -3374       -8112        -7257    -15282   -14257     -6329    -5567
 Mermotems
  Grandtotalof net profrtf na          na          na            na         na        na         na           na         na       na        na    -1111    -4102
  Grandtotal, exd. BPC na              na          na            na         ra        na         na           na         na       na        na    -5711    -5119
  Grosslosses,              na         na          na            na         na        na         na           na         na       na        na      9700     8400

             tax.
         after
 Note Prot
 a Thi tablencuces 34 out of the 39 non-firancal corporations.                              nciude
                                                              Note alsothat ths tabledoes wot               profr/os of Head Officeof the corporatons.
                                                                                                 the finanoal
 b. Totalof aflthe 39 corporatbons.
        kisses
 c. Total       of the losngcorporatons.
 SourceMontorsg Ceil.Autonorous BodesWng. Mtinstry      of Finance.




                                                          BANGLADESH PUBLIC EXPENDITURE REVIEW
                                                                                   72
    8
TABLE
Bangladeshmedium-term scenarios,1994/95-2002/03
                      otherwise
(Percent of GDP. unless       specified)

                                            Estimated Projected     Projected   Projected   Projected Projected Projected Projected Projected
                                             1994195 1995/96        1996/97      1997/98    1998/99 1990/2000 2000/2001 2001/2002 2002/2003

Low-growth   scenarno
Realsector
 RealGDP (annual   percentage change)          4.1        5.2           5.0        5.0         5.0       5.0       5.1      5.1         5.2
 GDP per capita(in U.S.doUars)               265.0      291.0        307.0      324.0        342.0    360.0      380.0    400.0      422.0
 CPI(annual  percentage  change)               8.9        9.0           9.0        9.0         9.0       9.0       9.0      9.0         9.0
 Grossinvestment                              14.6       14.9          15.0       15.2        15.3      15.4      15.5     15.6        15.7
  Private                                      7.6        7.7           7.8        8.0         8.1       8.2       8.3      8.4         8.5
  Publk                                        7.0        7.2           7.2        7.2         7.2       7.2       7.2      7.2         7.2
 National saving                              11.3        9.8          10.6       11.0        11.4      11.9      12.3     12.7        13.0
  Private and publicenterprises               11.6        9.6          10.1       10.4        10.6      11.0      11.3     11.6        11.8
  Generalgovernment                           -0.3        0.1           0.5        0.7         0.8       0.9       1.0       1.1         1.2
Centralgovemmentoperations
 Totalrevenue                                 11.2        10.9        11.2         11.3       11.4      11.5      11.7       11.8     12.0
 Current expenditure                           8.2         7.7         8.2          8.3        8.3      8.4        8.5        8.5      8.6
 Foodaccountbalance    (+ deficit)             0.6         0.6         0.2          0.2        0.2      0.2        0.2        0.2      0.1
 AnnualDevelopmentProgram                       8.0        8.3         8.3          8.3        8.3      8.3        8.3        8.3      8.3
 Overallbalance                               -6.3        -6.5        -6.3        -6.3        -6.2     -6.2       -6.1      -6.0      -5.9
 Extemal  fnanong(net)                         4.5         3.9         3.9          3.7        3.5       3.2       3.1        2.8      2.6
 Domesticfinanong   (net)                       1.8        2.5         2.4          2.6        2.7      3.0        3.0        3.2      3.2
Extemal sector
 Current account balance                      -3.3        -5.1        -4.4        -4.2        -3.9     -3.5       -3.2      -2.9      -2.7
 Grossof'icialreserves (monthsof imports)       5.6        3.0         2.4          1.8         1.4      1.2        1.1       1.0      0.9
Reformscenario
Realsector
 RealGDP (annual  percentage change)            4.1        5.2         5.7         6.0         6.3       6.6       7.0       7.3       7.6
 GDP per capita(in U.S.dollars)              265.0      283.0        301.0       321.0       343.0    367.0      394.0     425.0     459.0
 CPI(annual  percentage charge)                 8.9        6.0         4.0         4.0         4.0       4.0       4.0       4.0       4.0
 Grossinvestment                               14.6      15.0         15.3        15.7        16.3     17.0       17.8      18.3      19.5
  Private                                       7.6        8.5         8.5         8.7         9.2       9.8      10.5      10.9      12.1
  Public                                        7.0        6.5         6.8         7.0         7.1       7.2       7.3       7.4       7.4
 Natonal saving                                11.3       10.2        11.9        12,5        13.3      14.1      14.9      15.5      16.8
  Privateandpublicenterpnses                   11.6       10.0        10.9        11.0        I 1.1     11.3      11.6      11.5      12.3
  Generalgovernment                           -0.3         0.2         1.0         1.5         2.1       2.7       3.4       4.0       4.6
Centralgovemmentoperations
 Totalrevenue                                  11.2       11.2        116          12.0       12.5     13.0       13.5       14.0     14.5
 Current expenditure                            8.2        7.9         8.4          8.5        8.5      8.6        8.6        8.7      8.7
 Food accountbalance  (+ defct)                0.6         0.6         0.0         0.0         0.0      0.0        0.0       0.0       0.0
 AnnualDevelopment   Program                    8.0        7.4         7.8          8.0        8.2      8.3        8.3        8.4      8.5
 Overallbalance                               -6.3        -5.6        -5.4        -5.3        -5C      -4.7       -4.3      -3.9      -3.6
 Extemal financing(net)                         4.5        4.1         4.1          3.9        3.7      3.4        3.2       3.1       2.9
 Domesticfnarcing (net)                         1.8         1.5         1.3         1.4         1.3      1.3        1.1      0.8       0.7
Externalsector
 Current accountbalance                       -3.3        -4.8        -3.4        -3.2        -3.0     -2.9       -2.9      -2.8      -2.7
 Grossofioal reserves (monthsof imports)        5.6        4.0         3.9          3.8        3.8      3.7        3.7       3.7        3.6
SourceData proveed by the Bargoadesh        and sta'estimates
                                  authortoes;               and propec5ons.




                                                                  STATISTICAL ANNEX-
                                                                          73
TABLE9
                                      (reformscenario)
                          sustainability
                  of fiscal
         Indicators
Bangladesh:
                                                                                           1996/97 1997/98 1998/99 1999,00 2000101 2001.02 2002/03
                           1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96

                            46.2     44.6    47.0    48.5    47.9    55.9    50.9     48.5
Fobeen debt(% d GDP)
                                     5.8      6.8     8.7    10.1    13.4     13.0    13.3
        debt(% d GDP)
Darnestic                     -
                             46.2    50.4    53.8    57.2    58.0    69.3    63.9     61.8
 Totaldebt(%aoGDP)(b)
                                                                                      (4.7)   (3.6)   (2.6)   (2.6)   (2.5)   (2.5)    (2.5)   (2.5)
                             (6.9)   (2.0)   (6.9)   (31.)   (1.3)   (2.7)   (7.8)
ReW      interestrate
   foreign                                                                                                                              30      3.0
                                                                      0.4    (4.1)    (1.6)    1.2     2.8     2.9     3.0     3.0
                                      2.9     2.9     3.7     3.2
ReaJdormesticinterestrate (1.8)                                                                                       (1.1)   (1.0)    (1.0)   (1.0)
                                                     (2.1)   (0.5)   (2.1)   (7.0)    (4.0)   (25)    (1.3)   (1.2)
 Weghtedrealiniterestrate(r) (6.9)   (1.4)   (5.7)
                                                                                       5.2     5.7     60     63       66      7.0      7.3     7.6
                             3.3      6.7     3.6     4.6     50      4.6     4.1
Reai GDPgrowth(g)                                                                                                             (8. 1)   (8.3)   (8.6)
                                                             (S5)    (6.7)   (11.1)   (9.2)   (82)    (7.3)   (7.5)   (7.7)
 Weghtedaverage             (10.2)   (8.1)   (9.3)   (6.7)
  'grh   factor' (r-g)
                                                                                       1.2     12      1.2     1.2     1.2     1.2      1.2     1.2
                              1.3     1.1     1.3     1.2     1.1     1.1     1.3
 Seitgorage%otGDPXs)
                                                                                       4.5     3.9     3.7     35      3.1     2.8      2.4     2.0
                              5.9     6.6     5.7     4.5     4.4     4.6     53
 Pnry fscaldefict
  (% of GDP) (p)
                                                                                       69      61      54      53      5.2     52       52      S.I
                              6.0     5.2     63      5.0     43      5.7     84
          pnmarydeficit
 SvgajnabLe
                                                                                       56      54      53      5       4 9     48       47      4.7
                                      7.5     68      56      54      55      63
 CmraAfiscaldefict(% of GOP) 6.9                                                                                                                3.2
                                                                              4.5      4.1     39      38      36      34      3.3      32
                             6.8      6.3     5.9     4.6     5.2     4.5
  Net foregnfi rxing
   (% of GDP)                                                                                                           1.5    15       15      15
                                                       10     02       10      1.S       .
                                                                                        1.5      S      IS       5
             financing
  Net domestic                0.1      1.2    0.9
   (9 of GDP)




                                                     BANGLADESH PUBLIC EXPENDITURE REVIEW
                                                                             74
  TABLE10
  Bangladesh:
            Fiscaland external debt sustainability,1996/97-2002/03
  (in percent of GDP)

                                      1996/97               1997198                1998/99             1999/2000       2000/01       2001,l02
                                     Projected                                                                                                       2002,03
                                                           Projected              Projected             Projected      Projected     Projected       Projected
  F;scalsustainability
   Primary fiscal
                deficit                 -3.9                  -3.7                  -3.5                  -3.1          -2.8
    (reform scenario)                                                                                                                 -2.4            -2.0
  SPDY                                  -6.1                  -5.4                  -5.3                  -5.2          -5.2
  SPDb                                  -5.4                                                                                          -5.2            -5.1
                                                              -4.5                  -4.4                  -4.1
  SPD'                                                                                                                  -4.0          -3.8            -3.7
                                   -4.9                      -3.8                  -3.5                   -3.2          -2.9          -2.6
  Primary fiscaldefceta            -7.8                                                                                                               -2.4
                                                             -3.6                  -3.4                   -3.3
  SPD'                                                                                                                  -3.2          -3.2            -3.1
                                   -5.9                      -5.2                  -5.2                   -5.2          -5.2          -5.3
  Extemal debt sustainabifty                                                                                                                          -5.2
   Reform scenario (in percent)'
     Debt/exports ratio          299.0                      262.0                 229.0                  199.0         173.0
     Debt service ratio                                                                                                              151.0           132.0
                                   I 1.1                      10.0                  9.0                    8.1
     NPVofdebt/exportsrato                                                                                               7.2           6.1             6.0
                                  158.0                     139.0                 121.0                  106.0          92.0          80.0
   Low-growth scenano (in percent)a                                                                                                                   70.0
    Debt/exports ratio           313.0                      2870                  260.0                 233.0          208.0
    Debt service ratio                                                                                                               186.0           166.0
                                   11.3                      10.4                   9.6                   8.9            8.1           7.0
    NPVofdebt/exports rato       168.0                                                                                                                 6.3
                                                            152.0                 138.0                 123.0          110.0          99.0            88.0
  a. S.starnablep,nmary    deficitunderthe reform scenario.
  b. Sustanable pnrnarydeficitwith owerGDPgrowthrate of 4 1/2Percent            durlrg tie p,o.ec,onpenod.
  c. Susta,naoieprimarydefc,tiwith a lower GDP growthrate andhigneriiteresi
                                                                                    ratecur,-g !te pro ec:oi period.
  d. Primary f5cai deficit wih recaptalizatron of barks and fnianca
                                                                     aassistance
                                                                               to pkblC entero'seS.
  e Sustainable pnriary deficitwith recaptalization  of banks  andf nancajassistance  to pu5ic enterprises.
 f Co-sttent with assumnptions     in the mec.um-tern reformn   scenaro
 g Consistent   wih assumptions     in the -nedoum-erirlow grow't s.ce-ano

  One way to determine the potential impact of fiscal reform
                                                                                                 ing debt at the current interest rate without increasing the
  is to assess fiscal sustainability through analyzing the
                                                                                                 debt to GDP ratio.
  dynamics of public debt and the burden of future debt ser-
                                                                                                    The analysis can also be extended to the examination of
  vicing. Fiscal sustainability can be assessed by relating the
                                                                                                fiscal sustainability over the medium term. It suggest that
  sources of deficit financing and their costs to real GDP
                                                                                                medium-term fiscal sustainability could be achieved under
 growth, using the equation:
                                                                                                the reform scenario.The criticalassumptions here are (i) that
      Ab = (r - g)b + (p -s)
                                                                                                the real GDP growth rate would increase steadily to about 7
 Where Ab is the change in the ratio of government debt to
                                                                                                percent by the end of the decade; and (ii) that interest rates
 GDP; r is the effective real interest rate on the debt; g is the
                                                                                                on foreign financing would remain low, implying that the
 is the real GDP growth rate; b is the ratio of public debt to
                                                                                                share of foreign grants in total foreign financing should
 GDP; p is the central government primary fiscal deficit; and
                                                                                               remain. Any changes to either (i), (ii), or (i) and (ii) com-
 s is the seigniorage revenue as a share to GDP
                                                                                               bined could significantlyaffect the level of sustainability.For
     The key factor is whether the effective real interest paid
                                                                                               instance, assuming that the average real GDP growth rate
 on government debt is higher or lower than real GDP
                                                                                               were to remain at 4 1/2 percent per annum-well below the
growth rate-the so called "growth factor" (r - g). If it
                                                               is                              projected path-over the medium term, the calculated sus-
higher, the debt ratio xill tend to grow by feeding on itself
                                                                                               tainable primary-fiscaldeficits would move close to project-
as the government borrows to service the debt. In this sit-
                                                                                               ed primary deficits (Chart 3). There would be a similarout-
uation, even a modest primary fiscal deficit could result in
                                                                                              come if interest rates on foreign financing were to increase
an ever-growing debt to GDP ratio, which eventually
                                                                                              steadily to, say, 5 1/2 percent in nominal terms by year
would bring the long-term solvency of the public sector
                                                                                              2002/2003 (still lower than projected LIBOR). With both
into question. If the effective real interest rate is less than
                                                                                              lower GDP growth and higher foreign interest rates, howev-
growth rate of GDP there would be no long-term solvency
                                                                                              er, fisicalpolicy would appear to become barely sustainable
constraint-at least in the sense that the debt would not
                                                                                              starting year 1997/1998, implyingthat further fiscal measures
grow forever. This is because the receipt from issuing new
                                                                                              would be required thereafter to keep primary deficits within
debt would always be more than sufficient to service exist-
                                                                                              the sustainable range, or the debt/GDP ratio would increase.

                                                                           STATISTICAL ANNEX
                                                                                        75
TA81E I I
          Indicatorsof fical sustainability
Bangladesh:
         publicenterprisesand estructuringbanksthrough cashoeans,fer)
(Assisting
                             1988/89 1989/90 1990/91 2002           19921931993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999,00 2000,01 2001,02 2002103

                              46.2      44.6      47.0     48.5      47.9      55.9     50.9      48.5     46.0      43.7      41.4     39.1      36.9      34.8     32.8
foreigndebt(% o(GDP)
                                0.0       5.8      6.8      8.7      10.1      13.4      13.0     13.3      17.9     18.2       18.4     18.8     19.0      19.3     19.6
Domesbcdebt(%ofGDP)
                                          5.8      6.8      8.7      10.1      13.4      13.0     13.3      13.3     13.5       13.5     13.5     13.2      12.7     12.0
 Doneszicdebt(baseire)
 Bankreapitakir                           4.6      4.7      4.9       5.3       5.8       6.6      7.6
                               46.2      50.4     53.8     57.2      58.0      69.3     63.9      61.8      63.9     61.9      59.8      57.9     55.9      54.1     52.4
 Totaldebt(%ofGDP)(b)

                               (6.9)    (2.0)     (6.9)    (3.1)     (1.3)     (2.7)    (7.8)     (4.7)    (3.6)     (2.6)     (2.6)     (2.5)    (2.5)     (2.5)    (2.5)
Realforeigninterestrate
                               (1.8)     2.9       2.9      3.7       3.2       0.4     (4.1)     (1.6)      3.8      4.7       4.6       4.4      4.3       4.2      4.0
Realdonesbcinterestrate'
          real interestrate(r) (6.1)    (1.4)     (5.6)    (2.1)     (0.5)     (2.1)    (7.0)     (4.1)    (1.6)     (0.5)     (0.4)     (0.3)    (0.2)     (0.2)    (0.1)
 weAghted

                                3.3       6.7       3.6      4.6       5.0      46          4.1    5.2       5.7       6.0      6.3       6.6       7.0      7.3       7.6
RealGDP growth(g)

 Weghtedaverage                (9.4)     (8.1)    (9.2)    (6.7)     (5.5)     (6.7)   (I 1.1)    (9.3)     (7.3)     (6.5)    (6.7)     (6.9)    (7.2)     (7.5)     (7.7)
  'gnowthfactor'(r-g)

                                 1.3      1.1       1.3       1.2      1.1       1.1        1.3     1.2      1.2       1.2       1.2      1.2       1.2       1.2      1.2
Segniorage(%doGDP)(p)

Pnmary      deficit
       fiscal                   5.9       6.6       5.7      4.5       4.4      4.6         5.3     45       7.8       3.6      3.4       3.3       3.2       3.2      3.1
 (% of GDP)tp)

         pnmall/ deficit        5.6       5.2       6.2      5.0       4.3       5.7        8.4     6.9      5.9       5.2       5.2      5.2       5.2       5.3      52
Sustainable

                                          7.5       6.8      5.6       5.4       5.5        63      5.6      95        5.6       5.4      5.2       5.0       4.9      49
Overallfiscaldefiot (% of GDP) 6.9
 Net foreignfinancing          6.8        6.3       5.9      4.6       5.2       4.5        4.5     4.1      3.9       3.8       3.6      3.4       3.3       3.2      3.2
  (% of GDP)
 Net domestic  financing       0.1         1.2      0.9       1.0      02        10         1.8     1.5      5.6        1.8      1.8       1.8      1.7       1.7       1.7
  (% of GDP)

a. Assuming  that the centralgovemment        will providecasetransfers of Tk 43 bilhonto banks                to publicenterpnses.
                                                                                                andTk 20 bdllion                   As aresuh.net domesticfinanongwll increase
                                                                                                                                                                            by
Tk 63 bllicon in the first year(I1996/97)  and interest  payment  wil icrease in subsequent years.
b. Includesfinancial  assistance to publicenterpnses.
c. Assuming  that aflcash   transferswill be financed  through issues of domestic bondsso that domesticinterestratesmayIncrease in iitia years.




                                                          BANGLADESH         PUBLiC     EXPENDITURE          REVIEW

                                                                                       76
                                                                                                   CHART 1

                                                                                         BANGLIES.I
                          SELECTED
                                 ECONOMIC   INDICATORS,
                                                     1988/89-1995/96 1/
                                     (In percent,                                              unless otherwise specified)
                           7.0                                                                     ~~~~~~~
         GDP GROWTH                                                                                   12   ~~~7.0                                                                          12
                                                                                                   6.           L CONSUIM PRICERiNUTION
        6z                                                                                                                                                                                 11
                                                                                                    6-5 10 (Annual rates of chan,Le)
  6.0                                                                                                                                                                                    11
                                                                                                   6.0          9
                                                                                                                                                                                       .9
  5.5
                                                                                                   5.5
                                                                                                                7                          \7
                          5.0
                                                                                                ~~~~~~~~~~~~~~~5.0
                                                                                                    a
  4.5
                                                                                                   4.5          5
  4.0
                                                                                                                                                                                       4
                                                                                                   4.0          3.
                                                                                                                                                                                       3




                                                                                                   20          25
        ;CENTRAL GOVER-LT                       FINANCES                                                                                                                               25
       is(Inpe:t               of CDP)
                                                                                                                     MXONEY
                                                                                                                         ANDCREDIT
                                                                                                   ld                (bxnual    raets of grwh
                      Ex dlture;d             act lending                                                    20
                                                                                                                                                                                       20

                                                                                                             15
  14                                                                                                                                                                                   15
                                                                                                14
  12                                                                                                         10                                     Dmsc10
                                                                                                12                                                   cei
 10                                                         uc10


        58/S9     t9/90        90191 91/92          92/93   93/94    94/95     95/90                              528          999/i9/>f/39/49/S95/Ma

                                                                                               8         tS
     EXTgR.SIALSE=OR                                                                                                                                                                  8S
                                                                                                                  AD DISBURS1   T 4/
      O~f1d r>c~
      B               2/                                       \                               6               .0 (ln pnt oc CDP)
  4.    (In months a'                                                                                                                                                                 8.0
          21
                                                                                           4
                     Lmpats)
                                                                                                         75 -
                                                                                                                                                                                     7S5
  2i                 \     01                                                              0            ~~~~~~~~~~~~~~~~~7.0.
                                                                                                         70
                                                                                                                                                                                     7
                                                                                                                                                                                     7.0
                                                     I~~~~LiL                              -             8j.
                                                                                                                                                                                  8.
                                          Cu-zlmt     acount

                 l    iL
                      U
                                             ba.lance 3/
                                         (In p.tenL of GDP)
                                                                                           -4
                                                                                           _
                                                                                                          .06


                                                                                                        SSS
                                                                                                                                                                                  8.0




              9
              u/9s
                es/sa              1soXso
                                     9193      C92793 93/            94/95
                                                                    .4        95/N                      5
                                                                                                        SO               89/90      0/91   91/92    92./293/"4     94/959 g5/g    5.0
 18
  I
  SAVTNGAINDDi'ET-T ENT
                                                                                       |
                                                                                           18             a
                                                                                                                PUBLIC SAVYLGLINDINVZSTMENT
                                                                                                                                                                   -

4 (In pscent of CDP)
1                                                                                          14                   (  m     cf CTP)
                                                                                                                             It
LI.       Z               n.ut                                                             12                                           lnvestment


                                                a /N^tional
                                                         sa'i=                       |                   22
                                                                                                                                                                                 2
                                                                                                                                                     Sa.'nt 5/
                          6.                 ~~~~~~~~~~~~~~~~~~~00
  US/89         89/90     90/91     91/92     Q2/93     9Z3/;.4 94/95        95/9      4                -219150
                                                                        2//8    In/udc 90/91                                                    and29/9                          -2
                                                                                                                                                           9./94   49595
       Sources     Data pro-rided by thLe Bamgladeshauthoriti=s
        I/                                                           aLnd etaff estimates.
             19915/98 data an-3 staff oetimates    with poIic7 meaeure.
       2/   Includes good.A and *a-rices.
       3/   Exrludes oflidel    granta.
       4/   lncludes official Cranta.
       5/   Rar     to general gvernmcnt      saving.

                                                                        STATISTICAL ANNEX

                                                                                         77
                                                              2
                                                          CEART

                                                       BANGIADESE
                                   1988/89-1994/95
                          OPERATIONS,
                  GOVERNMENT
            CENTRAL
                                                   (In percent of GDP)

5                                                                                                                5
     Tax revenue                               _                            Value added
                                                                          cmCustoms
4                                                                           Other                                4


3                                                                                                                3


2                                                                                                                2




0
       1988 89         1989 90         1990        1      1991 92                1992 93     1993 94   1994 95


9                                                                                                                9
     IExpenditure                                  Cirn
8L                                            co                     aD                                          8
748                                                                                                              7
6                                                                                                                6
5                                                                                                                5
4                                                                                                                4
3                                                                                                                3
                              2                                                                                  ~~~~~~~~~~~~


       1988/89         1989/90         1990 91         -1991/92                  1992/93     1993/94   1994/95




    7-FinanciLng                                                          oeii                                   6


                              5.                                                                                 ~~~~~~~~~~~~
4-                                                                                                               4

3                                                                                                                3

                              2                                                                                  ~~~~~~~~~~~~


       198 8/-89            90T-
                        -1989          1990/91            1991/92                1992/93     1993/94   1994/95

     Soutocr. DataL prcwided by the Bangladesh autiorItti          and sftaffes~timates.




                                   BANGLADEShI PUBLIc EXPENDITURE                   REVIEW

                                                              78
                                                                                  CHAwrr3

                                                                               BANCGAD)
                                                                                     ESII
                                INDICATORS
                                         OF FISCAL SUSTAINABILITY,
                                                                 1988/89-2002/03
-1
         (In percent of GDP)                                                                                                                                 -1

-.2
                                                                                                                      Prinary fiscal deficit                 -2

-3
                                                                                                                                                          -3




-5
                                                                                                                                                         -5

-G
                                                                                                                                                         -
-7
                                                                                                                                                         -7
                                                                                                     Primary fiscal deficit 4/

                                         -8
                                                                                                                                                         ~~~~~~~~~~~~~~~~~~~

_9      I                        I            i.....1               I                                   I            I       f      ,
                                                                                                                                    I          ,9
  19O8/89              1990/91                1992/93               1994/95              1996/97             1998/99         2000/01           2002/03
      Sourxces: Dta provided by the     Bangladeah autHloriles; and staff eatinates.
       I/ Sustilnable primary deficiL    under reform scenario.
      2/ Sustainable primary deficit     with lower CDP growth rate of 4 1/2 percent.
      3/ Surtainable primary deficit     with a Iwcr CDP Trowth rate and higher
      4/ Primary fiscal deficit wiLh                                                 interest   rate.
                                        recspitallxation of bank. and financial sarstance
      to public enterprise.
      5/ Sustainable prlmary deficit    with recapitalIzation   of banks and financial   esoltance
      to public enterprises.
                                                                 CEART 4

                                                            BANGIADEM

  INDICATORS
           OF EXTERNALDEBT SUSTAINABILITY,
                                         1988/89-2002/03

600                                                                                                                     22
                                         Reform Scenario              (in percent)        1/

500                                                        r .Debt/export ratio (left scale)
                                                           -Debt   service ratio(right     scale)                           18
                400                                         =~~~~~~~~rNPV
                                                                  of debt/export     ratio(left   scale)



                                                                                                                            13

300



200 40000                                                            Jl'SXi                                             9


                                                                                                                        4
1004




      1988/89         1990/91         1992/93          1994/95        1996/97        1998/99        2000/01   2002/03


600.                                                                                                                    22
                                        Low-growth Scenario                   (in percent)     2/
                                                   \                                                                    ~~~~~~~~~~~~~~~~~~20
500                    _                                   r Debt/export ratio (left scale)                             18
                                _ I                        -Debt   service ratio (right xcale)
                                                           4NYV of debt/export       ratio(left scale)                  12

400
                                                                                                                        14

                                                                                                                        12
300
                                                                                                                        10


200                                                                                                                     8
                                                                                                                        6

1004



  0
   1988/89            1990/91         1992/93          1994/95       1996/97        1998/99         2000/01   2002/03

       Sourter. Data prorided by Bangladesh authoriUer and utatf estiates.
       1/ CoaDct.Dt with am-ptioas    in the =edium-term  reform snaro.
       2/ Coniitent with assumptions in the medium-tem lw-gwth                  gnario.




                                                BANGLADESHPUBLIC EXPENDITURE REVIEW
                                                                      80