Report No. 29377-UG The Republic of Uganda Country Integrated Fiduciary Assessment 2004 (In Five Volumes) Volume I: Main Report (CIFA) August 2004 Poverty Reduction and Economic Management 2 Country Department of Uganda Africa Region Document of the World Bank VC I E PRESIDENT: CALLISTO MADAVO COUNTRY DIRECTOR:JUDY M. O’CONNOR COUNTRYMANAGER: GRACE M. YABRUDY SECTOR MANAGER: KATHIE L. KRUMM TASKTEAM LEADER: SUDHARSHAN CANAGARAJAH TABLE OF CONTENTS PREFACE................................................................................................................................................... V EXECUTIVE SUMMARY................................................................................................................... vi11 1. INTRODUCTION............................................................................................................................... 1 A. OBJECTIVES...................................................................................................................................... 1 B. SCOPE OF THE REPORT ..................................................................................................................... 2 c. STRUCTURE OF THE REPORT ............................................................................................................ 2 2 . STATUS OF ONGOING AND PLANNED GOVERNMENT REFORMS .................. 3 A. ECONOMIC AND LEGISLATIVE REFORMS ......................................................................................... 3 B. THE PUBLIC SECTOR AND PAYREF0RM .......................................................................................... 5 C. DECENTRALIZATION ........................................................................................................................ 6 3 . HIGH-LEVEL FISCAL RISKS AND FIDUCIARY CONCERNS .............................................. 18 A BUDGETDEFICIT............................................................................................................................ 18 B. BUDGETREALISM .......................................................................................................................... 19 c. CORRUPTION AND POOR VALUE FOR MONEY ............................................................................... 24 D. HUMAN RESOURCE ISSUES ............................................................................................................ 26 E. KEYCHALLENGES.......................................................................................................................... 27 4 . LINKING POLICIES AND PLANS TO THE BUDGET ............................................................. 29 A. MEDIUM-TERMRESOURCE ENVELOPE .......................................................................................... 29 B. RESOURCEALLOCATION................................................................................................................ 29 C. BUDGETFORMULATION ................................................................................................................. 32 D. KEYCHALLENGES.......................................................................................................................... 35 5 . RAISING REVENUES, DEPLOYING RESOURCES, AND UNDERTAKING ACTIVITIES ... ............................................................................................................................................................. 36 A. RAISING REVENUE ......................................................................................................................... 36 B. DEPLOYING RESOURCES ................................................................................................................ 38 C. UNDERTAKING ACT I V T I IE S ............................................................................................................ 44 D. KEY CHALLENGES.......................................................................................................................... 44 6 . REPORTING ON THE USE OF RESOURCES AND ACHIEVEMENT OF RESULTS .........46 A. ACCOUNTING AND RECORD KEEPING ............................................................................................ 46 B. SYSTEMS FOR ACCOUNTING. FINANCIAL REPORTING. AND INTERNAL CONTROL ........................ 47 C. REPORTING..................................................................................................................................... 50 D. INTERNAL AUDIT AND OTHERMONITORING MECHANISMS .......................................................... 52 E. KEY CHALLENGES .......................................................................................................................... 55 7 . HOLDING GOVERNMENT TO ACCOUNT FOR ITS PERFORMANCE ............... 56 A. ACCOUNTABILITY .......................................................................................................................... 56 B. OVERSIGHT BODIES ....................................................................................................................... 57 c. ACCESS TO AND AVAILABILITY OF FINANCIAL MANAGEMENT INFORMATION ............................ 63 D. KEY CHALLENGES .......................................................................................................................... 64 8 . LESSONS LEARNED AND PROPOSED ACTION PLAN ......................................................... 65 A. ....................................................................................................................... THECIFA PROCESS 65 B. BENEFITS........................................................................................................................................ 65 C . LESSONS FOR THE FUTURE ............................................................................................................. 66 D. KEY CONCLUSIONS AND CHALLENGES .......................................................................................... 66 E. THE PROPOSED ACTIONPLAN........................................................................................................ 67 F. IMPLEMENTATION ARRANGEMENTS .............................................................................................. 68 G. MONITORING AND EVALUATION MECHANISMS ............................................................................ 69 H. NEXT STEPS .................................................................................................................................... 69 ANNEXES .................................................................................................................................................. 71 ANNEXA . FIDUCIARYRISK ANALYSIS................................................................................................... 71 ANNEX B. STATUS MATRIX OF THE 200 1 CFAA AND CPAR ACTIONPLAN......................................... 76 ANNEXc . PROPOSED ACTIONPLAN....................................................................................................... 85 BIBLIOGRAPHY ..................................................................................................................................... 99 LIST OF TABLES TABLE1. ONGOING AND PLANNED INITIATIVES I NLOCAL GOVERNMENT FINANCIAL MANAGEMENT., .... 6 TABLE2. AVERAGE BUDGET DEVIATIONS ................................................................................................. 19 TABLE3 . REVENUE PERFORMANCE 41-43, FISCAL 2003/04 (USH BILLIONS) ......................................... 21 TABLE4 . EXPENDITURE PERFORMANCE (USH BILLIONS) .......................................................................... 21 TABLE5 . KEY FISCALPERFORMANCE INDICATORS FOR 2002/03 FOR SAMPLE LGS ................................. 22 TABLE6 . NUMBER OF DAYS INVOLVED IN TRANSFERS FROM THE CONSOLIDATED FUNDTO SPENDING AGENCIES ............................................................................................................................................ 23 TABLE7 . BUDGET PROVISION FOR THE CLEARANCE OF DOMESTIC ARREARS AND OUTTURN (USH BILLIONS) ............................................................................................................................................ 24 TABLE8 . STOCK OF NONWAGE RECURRENT AND DEVELOPMENT SPENDING ARREARS (USH BILLIONS) 24 TABLE9 . UGANDA’S RANKING IN THE T I CORRUPTION PERCEPTION INDEX ............................................ 25 TABLE10. SECTORAL SHARES OF EXPENDITURE OVER THE MEDIUM TERM(PERCENT) ........................... 3 1 TABLE11. PLANNED SCHEDULE FOR THE ROLLOUT OF THE IFMS............................................................ 48 TABLE12. STATUS OF REPORTS ON CENTRAL GOVERNMENT A C C O ~................................................. TS 60 LIST OF FIGURES FIGURE1. FOREIGN ASSISTANCE INFLOWS ................................................................................................ 37 FIGURE2 . PROPOSED IMPLEMENTATION ARRANGEMENTS FOR LG COMPONENTS ................................... 70 .iv . PREFACE The Country Integrated Fiduciary Assessment (CIFA) process The effective management o f a government’s financial resources consists o f a number o f separate but related processes, involving a variety o f different stakeholders and levels o f government. The CIFA in Uganda i s one o f the first exercises by development partners (DPs) and government to adopt an integrated and holistic approach to the assessment o f public financial management (PFM). A detailed review o f the lessons learnt and challenges for future CIFA assignments i s provided in Section 9. In Uganda, it has involved coordinating and consolidating four separate Bank diagnostic processes: the Country Procurement Assessment Report (CPAR); the Country Financial Accountability Assessment (CFAA); the Local Government IntegratedFiduciary Assessment (LGIFA); and the Public Expenditure Review (PER). These diagnostic exercises were supplemented by two additional assessments, the annual Tracking Poverty Reducing Spending Assessment, conducted by the World Bank and International Monetary Fund (IMF); and the Fiduciary Risk Assessment, recently conducted by the Department for International Development (DFID) o f the United Kingdom. The overall CIFA process has spanned a nine-month period, with each o f the individual assessments being conducted over a two- to three-month period and the PER process carried out over the entire financial year. We launched the CIFA process in October 2003 with an identificatiodpreparation mission. The mission held discussions on each o f the components o f the assessment with the main stakeholders: the Ministry o f Finance, Planning and Economic Development (MoFPED) Budget Department, Accountant General’s Office (AGO), the Public Procurement and Disposal o f Assets Authority (PPDA), and the Ministry o f Local Government (MoLG). During the wrap-up meeting with the permanent secretaryhecretary to the treasury (PSIST) o f MoFPED, the program for the CIFA work was defined and agreed. Financial support to the LGIFA and the CIFA report and action plan was provided by the European Union’s Public Expenditure and Financial Accountability (PEFA) Trust Fund and World Bank (WB) budgetary resources. The Bank funded the PER exercise fully, while the Royal Netherlands Government supported the release study, which was carried out in fiscal 2003/04. The CPAR was funded by the Bank, the Danish International Development Agency (DANIDA), and the Royal Netherlands Government. The CFAA was funded by the Bank with additional support from the DFID, the African Development Bank, and the Swedish InternationalDevelopment Cooperation Agency. Building on this experience, we propose that future exercises should consider the following: -v- 0 moving the exercise to an earlier point in the government’s budget process (ideally between October and February), so that its recommendations can be more readily incorporated into the budget process; committing more time to an in-depth analysis at the local government (LG) level; 0 carrying out a detailed assessment of PFM issues affecting statutory authorities, state enterprises, and other semi-autonomous agencies; and 0 the feasibility o f focusing on particular areas of concern, such as pay and payroll management. Next steps As it seeks to develop i t s own action plan and to clarify the coordination and monitoring arrangements, the Government o f Uganda (GoU) has proposed that it carry out the following actions: 0 review the proposed action plan in detail, set out tasks, prioritize and sequence the necessary activities, and assign responsibilities as appropriate; 0 review the mandate and composition o f the Public Expenditure Management Committee (PEMCOM); 0 review and define PEMCOM’s relationship with the coordinating and integrated monitoring and evaluation mechanisms approved by cabinet for oversight o f the Poverty Eradication Action Plan (PEAP); and 0 determine what, if any, financial or technical assistance i s necessary to carry out or oversee the action plan. PEMCOM will complete this initial work on the action plan before October 2004, to ensure that i t s financial repercussions can be incorporated into the budget process. The plan will be discussed with DPs and other stakeholders before the national budget workshop. We propose that the PFM reform be monitored annually using the PFM Performance Measurement Framework. This framework, which i s based on 25 indicators o f GoU performance and two DP indicators, i s being developed by the PEFA program and i s being tested on the basis of the CIFA report. Over time, we anticipate that the framework will replace the need for separate assessments such as the Tracking Poverty, Reducing Spending Assessment and the Fiscal Transparency Report on the Observancy of Standards and Codes. This will reduce transaction costs by reducing the number o f separate action plans and specific monitoring arrangements. Acknowledgements The authors would like to express their sincere gratitude for the assistance and courtesies extended by a l l parties that participated in this analysis. We are grateful to PEMCOM, through which various government departments, participating LGs, state enterprises, private companies, and nongovernmental and professional organizations, assisted us with documents, data, and field visits. Without their support this report could not have been produced. In particular we would like to thank Mr. C.M. Kassami (Permanent Secretary, Ministry o f Finance, Planning, and Economic Development (MoFPED)), Mrs. M.C. Muduuli - vi - (Deputy Secretary to the Treasury), Ms. Florence Kuteesa (Director, Budget), Mr. G.O.L. Bwoch (Accountant General), Mr. Robert Muwanga (PEMCOM coordinator), Mr E. Agaba (Acting Executive Director, PPDA), Mr.V. Ssekono (Permanent Secretary, Ministry of Local Government (MoLG), and Mr T. Nkayarwa (Commissioner, Local Government Inspectorate Department, MoLG). We would also like to thank a l l DPs for their contributions and for the various peer reviewers for their invaluable comments. The CIFA report and action plan was produced with the able leadership o f Carole Pretorius, who tirelessly worked to ensure that the report was consistent with not only the PER, CFAA, and CPAR carried out this year, but with all other work that has been carried out in the recent past by government and donors. Uganda CIFA Team Uganda Country Director:.Judy M. O’Connor Uganda Country Manager: Grace M. Yabrudy PREM Sector Manager: Kathie Krumm Financial Management Manager: Anthony M. Hegarty Procurement Adviser: Bernard Abeille CIFAPEWLGIFA Task Manager: Sudharshan Canagarajah CFAA Task Manager: Marius Koen CPAR Task Manager: Rogati Kayani CIFA Lead Consultant: Carole Pretorius LGIFA Lead Consultant: Tim Williamson CPAR Lead Consultants: Ramboll Management, Denmark CIFA Peer Reviewers: Nicola Smithers (WB), Allister Moon (WB), Tim Williams (DFID) - vii - EXECUTIVE SUMMARY Objectives The Uganda Country Integrated Fiduciary Assessment (CIFA) consolidates the results and recommendations of various diagnostic processes, including the Public Expenditure Review (PER), the Country Financial Accountability Assessment (CFAA), the Country Procurement Assessment report (CPAR), the Tracking Poverty, Reducing Spending Assessment, and the Local Government Integrated Fiduciary Assessment (LGIFA). This integrated approach i s designed to address comprehensively the budgetary, financial accountability, and transparency challenges that Uganda i s facing. CIFA marks a first step toward adopting a single standard assessment o f Uganda’s public financial management (PFM) systems for a l l levels o f government. The report provides the Government o f Uganda (GoU), its development partners (DPs), and other stakeholders with a candid review of the public sector challenges and an assessment o f the key fiduciary risks and opportunities for corrupt practices. Fiduciary risk i s defined as the risk that expenditure i s not properly accounted for, that it i s not used for its intended purposes, and that it does not represent value for money (VFM). Past assessments o f fiduciary risk have been linked with the provision o f budget support by DPs, but it i s now widely recognized that sound PFM i s of critical importance to all stakeholders, including taxpayers, members of parliament, councillors, the private sector, and beneficiaries o f services. It i s critical additionally to central government itself, in relation to the transfers that it makes to local government. Overall assessment A brief overview o f the various diagnostic processes i s set out in the following four paragraphs. This i s followed by a more detailed description o f specific findings and challenges, Assessment o f the fiduciary risk for central government operations, based on 18 assessment benchmarks that follow agreed guidelines set out by the Development Assistance Committee o f the Organisation for Economic Co-operation and Development (OECD-DAC), i s provided in Annex A. In summary, the assessment shows that in the last four years the GoU has made significant progress in strengthening and updating the legal framework and regulatory environment for PFM, thus reducing the risk associated with a lack o f clear rules and regulations.In addition, the GoU has reduced the fiduciary risks associated with poor budget formulation and preparation through the PER process. The quality o f information provided in the annual accounts also has improved. Implementing new rules and ways o f working takes time, however, as it requires a combination o f attitudinal changes, improved capacity, political willingness, and widespread demand for greater - viii - -accountability. There remains high fiduciary risk, associated with: the enforcement o f procurement and payroll rules and procedures; the incompleteness o f data on debt and contingent liabilities; weak independent oversight; and the timeliness and effectiveness o f legislative and public scrutiny. While the progress made in raising public awareness o f anticorruption activities i s commendable, the cost o f corruption to the economy remains significant. The legislative framework for integrity i s s t i l l being developed and there are significant legal, institutional, and capacity constraints on the ability o f the integrity bodies-the Inspectorate o f Government, the Directorate o f Ethics and Integrity, the police, and the Director o f Public Prosecutions-to carry out their functions, both in public education and in investigating, detecting, and prosecuting offenders. M o r e than 70 percent of total budgeted expenditure i s channeled through the procurement process at the central or local government level. Though the CPAR now assesses the legal and regulatory environment to be essentially sound, the G o U readily acknowledges that i t s public procurement system remains weak. In particular, the enforcement o f rules and regulations must be strengthened, and the procurement institutions must be given sufficient ability and authority to become effective tools in managing public funds efficiently and transparently. The decentralization o f activities to the LG level over the last 10 years means that 40 percent o f the total budgeted expenditure for spending agencies i s now spent at the LG level. Seventy-five percent o f Poverty Action Fund monies also i s channeled through LGs. Sound PFM at the LG level i s therefore o f paramount importance in ensuring that public funds are spent and accounted for correctly and efficiently. The LGIFA benchmarking exercise used a sample o f four districts and one municipality (Apac, Tororo, Jinja, and Kabale districts and Masaka municipality), together with the results o f a financial management study commissioned in 2003, to make an assessment o f the state o f P F M at the LG level. The LGIFA highlights the considerable progress made over the last decade in providing services at the local level; from this base, however, it notes with concern that the budgeting and planning processes at LGs are poor at articulating specific local needs within overall national objectives and policies. The assessment also raises concerns over the ability, desire, and willingness o f local residents and politicians to hold their administrations to account for their performance. High-level fiscal risks and fiduciary concerns During the 1990s Uganda experienced high rates o f growth. Poverty levels dropped from 56 percent in 1992 to 34 percent in 2000. However, the 2003 data show inequality increasing, and poverty rising to 38 percent. The situation i s exacerbated by high levels o f population growth. The budget deficit has for the last five years exceeded 10 percent, excluding grants, and large external aid inflows have presented the G o U with a number of management challenges, as it seeks to ensure macroeconomic stability and to sustain an environment that i s conducive to private sector investment. In particular, the government has had to mop up excess liquidity through a combination o f Treasury Bill sales and foreign exchange sales, adversely effecting interest rates and exchange rates, respectively. Higher interest payments have also reduced the availability o f resources for service provision, and have crowded out the private sector. - ix - Falling international coffee prices additionally have exposed the vulnerability o f the Ugandan economy to exogenous price shocks and have underscored the need for continued diversification. On the basis o f current predictions, Uganda i s likely to achieve some but not all o f the Millennium Development Goals (MDGs). The goals for completion o f primary education, for gender equality in secondary education, and for child and maternal mortality, are unlikely to be met. T o ensure that the goals set out in the Poverty Eradication Action Plan (PEAP) are attainable and sustainable and that the benefits o f growth are more evenly distributed, the G o U must overcome a number o f important macroeconomic, political, and institutional challenges. Specifically, Uganda must: maintain macroeconomic stability and keep inflation below 5 percent; progressively raise the tax:GDP ratio; improve the efficiency o f resource allocation; reverse the deteriorating trend in Uganda’s net present value (NPV) o f debt:exports ratio (the support o f the international community will be required if Uganda i s to achieve a more sustainable position); make more effective use o f existing aid resources; restore and improve the integrity o f the budget process; improve the predictability o f the flow o f funds; and improve information on stocks o f arrears and contingent liabilities (this would help the Ministry o f Justice defend claims about contingent liabilities, and thus could help reduce the compensation amounts provided in court awards). T o meet the PEAP and MDG goals, and the anticipated increase in demand for social services, the G o U additionally must make a concerted effort to improve efficiency in providing public services. There i s a critical need to review the public sector comprehensively, to identify core activities, eliminate duplication, and focus on work that specifically targets promoting growth or reducing poverty. The current pension obligation exceeds USh276 billion and i s unsustainable, and implementation o f the proposed pension reform i s urgently required. Corruption also i s a severe problem. T o improve the efficiency o f resource allocation and obtain more value for money, corruption needs to be tackled from all angles: the government must reduce the acceptability o f bribery and corruption, and must work to achieve more effective detection, investigation, and prosecution o f offenders. Corruption i s evident in many areas, including procurement, the financing o f politics, revenue collection, and generally in the financial sector. It manifests itself in many forms, such as in the proliferation o f “ghost” employees. The cost o f corruption to the economy i s not known (the proposed procurement indicators are intended to establish some initial figures), but with 70 percent o f expenditure channeled through procurement and 23 percent o f funds paid through the payroll, significant sums are likely to be lost. The Transparency International Index places Uganda in the top 15 percent o f most corrupt countries. -x- Good progress has been made in developing the accounting and auditing profession, and in developing skills and staffing levels in the accounting and auditing cadre o f the public sector. The government needs more capacity, both technical and managerial, at all levels in finance and procurement. Attracting and retaining appropriately qualified personnel will require greater flexibility in the pay structure. However, the Budget Committee and some stakeholders have expressed concern over the value o f existing capacity- building initiatives, so the question o f how best to improve the capability and effectiveness o f the public sector needs to be closely examined. The GoU and its DPs also must take into account the range o f capacity and needs o f the individual LGs and procurement entities when determining the most effective form o f training and assistance. Budget realism at the LG level i s also a concern. As shown by the Release Tracking Study and Public Expenditure Tracking Studies, the predictability o f fund flows to all levels o f government remains an impediment to the effective use o f funds, particularly given the current cash budgeting system. Linking policies and plans to budgets Uganda has made significant steps in improving the transparency and adequacy o f its budget formulation process, but the GoU still needs to improve the integrity o f the budget process, minimize overruns, and ensure that agreed allocations are supported. Failure to adhere to this regime could result in some DPs applying pressure for a return to project funding. From the DP perspective, it i s important to ensure that the predictability of DP funds i s improved; that optimal aid effectiveness i s achieved; that project funds are effectively incorporated into projections; and that disbursements are recorded. Budget Framework Papers (BFP) need to be made more realistic, and estimates o f planned activities must be achievable and more closely aligned to the PEAP and sector plans. The implementation by some ministries o f output- oriented budgeting has faltered; its success depends on the successful implementation o f results-oriented management, which i s stalled. It also requires the full incorporationo f salaries and wages into the budget framework. Although the LGs often have the appropriate technical expertise in planning and budgeting, weak political engagement and a poorly sequenced process undermine their efforts in this area. District development plans will be unrealistic so long as they fail to take into account the availability o f resources, and are not sufficiently linked to the BFP and budget. If the plans are not implemented in full, local communities will become cynical about the process, and the objectives o f the LG are unlikely to be achieved. Without greater local political participation, aided by user-friendly budgets and work plans, activities at the local level furthermore will continue to be driven by national demands rather than local needs. - xi - Raising revenues, deploying resources, and undertaking activities Expanding the revenue base and improving tax administration are essential to improving Uganda’s fiscal position (but it should be noted that new tax measures will be difficult to introduce in the run-up to the 2006 elections). The situation i s being aggravated by continuing discussions about the possible removal of the graduated tax, the main source o f revenue at LG level. Also, joining the East African Community Customs Union i s expected to incur significant revenue losses. The 1971 Customs Act additionally i s outdated and inadequately supports sanctions against corrupt or fraudulent practices. Given this narrow, unpredictable local revenue base and an environment in which politicians are able to undermine tax revenues with impunity, all stakeholders view the accountability o f LGs to their citizens as a serious cause for concern. In the government’s pursuit o f improved value for money (VFM) from public expenditures, the major challenge i s to ensure that procurement processes are transparent, efficient, and effective in providing high-quality goods and services at the’right time and in the right place. They also must represent good VFM. Certain provisions in the regulations, such as access to local preference, undermine the procurement process and need to be addressed, as does the lack o f a clear policy direction on the part o f the Ministry o f Finance, Planning, and Economic Development (MoFPED). Lack o f capacity and o f a general understanding o f procurement processes i s a serious cause o f concern, and capacity-building strategies have been proposed to address this issue (the development o f clear, straightforward LG procurement regulations i s an action within Poverty Reduction Support Credit [PRSC] 4, for example). Improving the integrity o f the payroll, which accounts for approximately 23 percent o f total budgeted expenditure, i s urgent. Finally, cash management at the central and local levels must be improved so that implementing managers can execute their work plans more effectively. This i s a complex task and one that cannot be easily achieved. Information on debt obligations and contingent liabilities i s incomplete, and this needs to be addressed to assist the budget formulation process and to help the Ministry o f Justice defend questionable claims. The Budget Committee also has expressed concern at the level of arrears and the pace at which arrears are being settled. This situation places a significant burden on suppliers, many o f whom are likely to be small or medium-sized enterprises. The inability o f the existing commitment control system to record accurately or to check the growth o f arrears also i s a problem. To some extent this will be eased by introducing the integrated financial management system (IFMS), but in many instances the growth o f arrears will require better budget discipline on the part o f the accounting officers (AOs), and the sanctioning of those officers who contravene the regulations. - xii - Reporting on the use of resources and achievement of results The procurement o f the IFMS has been concluded, but its management, roll out, further development, and funding pose significant challenges to the GoU. From an accounting and financial reporting perspective, the key challenges relate to the sustainability, functionality, and extension o f the system, including the following: 0 ensuring the availability o f sustainable staff capacity and necessary maintenance budgets; 0 progressively extending and deepening the functionality and utilization of the system; 0 completing the rollout and ensuring that the system provides the necessary coverage for the whole o f government; and 0 securing the additional funding necessary to complete implementation. A great deal o f time, money, and effort has been spent on introducing new legislation and regulations to support the IFMS. There are concerns that this will be wasted if the proposed restructuring o f the Accountant General’s Office (AGO) i s not implemented. It has therefore been proposed that this be an action for PRSC 4. The quality o f in-year reporting must be improved so that it reflects outputs or results rather than merely fund releases; however, this will require implementing results-oriented management, which as noted above has stalled. In terms o f internal audit and monitoring, the challenge at the central and local government levels will be to implement the new (or proposed) institutional arrangements and to mitigate any resistance to changes in working methods that may come from the auditors themselves and from accounting officers and accounting personnel at the line ministries and LGs. This may require changes in the methods o f remuneration. From an LG perspective, the biggest accounting challenge i s to reverse the emphasis on upward reporting, and to instead emphasize horizontal and downward functions of reporting and monitoring, in a format that i s understood by and that stimulates interest from all parties. This in particular should reinforce local accountability. The budget implementation guidelines, included in the fiscal decentralization strategy, state that reports required by central government should also be presented to the executive and to councils for decision-making purposes. While central government reporting facilitates the release o f funds, however, at this level the reports should primarily be for information purposes rather than decision- making. Holding government to account The major challenges for all oversight bodies are to improve their credibility as government watchdogs and to ensure that rules are enforced. This requires a willingness at all levels o f government to enforce the rules. Unless the rules are enforced, the government and the Ugandan people will continue to obtain poor value for money from public funds. - X ... lll - If the Office o f the Auditor General i s to operate as a Supreme Audit Institution, it must have greater independence. It must be clearly separated from the finance and public service ministries. The Public Procurement and Disposal o f Assets Authority (PPDA) must improve i t s ability to act as a credible regulatory and monitoring body, and parliamentary and council committees need a better understanding o f the key roles that they play in ensuring financial accountability and high levels o f service delivery. The greatest challenge that faces government, however, i s to uphold the public interest by ensuring that the authority and capacity o f the anticorruption authorities to pursue their mandate i s not compromised. The government also must develop a culture that i s less accepting o f poor service, nontransparent practices, and lack o f information. Next steps The proposed action plan i s set out in Annex C. The plan captures ongoing or already identified activities (60 percent o f the total) and new activities that require clarification or initiation by the government (40 percent). The 60 percent ongoing and identified activities break down into 29 percent ongoing, o f which 10 percent are activities that require refinement or expansion, and 31 percent on which the GoU has merely indicated an intention to act. These activities are all included in the action plan, to ensure that stakeholders have a comprehensive picture o f the issues that need to be addressed. Their inclusion furthermore highlights issues, such as public service, pay, and anticorruption, that may not be traditionally found in PFM plans, but for which improvement i s fundamental to the success o f PFM reforms. The Public Expenditure Management Committee (PEMCOM) has proposed that by October 2004 it will review with government stakeholders and seek agreement on i t s relationship with the coordinating and integrated monitoring and evaluation mechanisms approved by cabinet for oversight o f the PEAP. The committee also intends to review i t s own mandate and composition, to ensure that it i s able to take the action plan forward. The GoU has indicated that it intends, through PEMCOM, to review the action plan in detail, set out tasks, prioritize and sequence activities (taking relevant note o f dependencies and capacity), and assign responsibilities. In those cases where financial assistance may be required, PEMCOM will also estimate costs. This initial work on the action plan will be done in time to ensure that any financial repercussions can be incorporated into the annual budget process. - xiv - 1. INTRODUCTION A. OBJECTIVES 1.1 The Country IntegratedFiduciary Assessment (CIFA) for Uganda represents a major opportunity for government, donors, and stakeholders to address the fiduciary risk issues facing the country. For government, the CIFA addresses the challenges o f budgetary and financial accountability and transparency, and i s a first step toward establishing, for a l l levels o f government, a standard for assessing public financial management (PFM) systems. The CIFA also sets benchmarks by which government can seek to ensure that the fiduciary arrangements are in place to meet the requirements o f prospective and existing donors. These benchmarks are established by consolidating the results and recommendations of various diagnostic processes, including the Public Expenditure Review (PER); the Country Financial Accountability Assessment (CFAA); the Country Procurement Assessment Review (CPAR); the Tracking Poverty Reducing Spending Assessment; and the Local Government Integrated Fiduciary Assessment (LGIFA). 1.2 Previous evaluations of PFM and accountability systems in Uganda' have helped focus the efforts to improve these systems. In particular, a new legislative framework for budget, procurement, and financial management has been developed that i s expected to strengthen progressively the standards, systems, and institutional arrangements o f the PFM framework. Underpinning this progress h as been the implementationby the Ministry of Finance, Planning, and Economic Development, with World Bank and bilateral support, of a second Economic and Financial Management Program (EFMP-11), and a complementary Financial Accountability Program (FAP) funded by the UK Department for International Development (DFID). A number o f development partners (DPs) are also supporting PFM programs in the health, education, and local government sectors, and are assisting organizations such as the Office o f the Auditor General, the Public Accounts Committee, the Inspector General o f Government, the Directorate o f Ethics and Integrity, and the Ministry o f Public Service, in payroll and personnel management. A Public Expenditure Management Committee i s seeking to coordinate these development activities. 1.3 This report assesses current practices and institutional and legal arrangements, highlights recent progress, and sets out the agreed key PFM priorities for the Government of Uganda (GoU). It seeks to provide the GoU, its development partners, and other interested stakeholders with a candid review of the challenges facing the public sector and an assessment o f the main fiduciary risks and opportunities for corrupt practices. Fiduciary risk i s defined as the risk that expenditure (a) i s not properly accounted for; (b) i s not used for i t s intended purposes; and (c) does not represent value for money. While assessment o f fiduciary risk has been linked in the past with the provision o f budget support by DPs, it i s now widely recognized that sound PFM i s o f critical importance to all stakeholders, including taxpayers, members o f parliament, councillors, the private sector, beneficiaries o f public services, and central government itself (in relation to the transfers made to local government). The assessment o f fiduciary risk for central government operations, based on 18 assessment benchmarks that follow agreed guidelines drawn up by the Development Assistance Committee o f the Organisation for Economic Co-operation and Development (OECD-DAC), i s provided in Annex A. 1.4 The first two pillars o f the Poverty EradicationAction Plan (PEAP) emphasize the importance o f strong PFM and good governance to any effort to improve public service delivery. A key component o f ' EFMPII design studies (1998/99), CFANCPAR (2001), HIPC Tracking Study (2001/2), Review o f Local Govt. PFM (2003) and annual PERs. -1- this report, therefore, i s the roadmap that it provides o f short- and medium-term actions on which the G o U should focus as it seeks to achieve i t s goal o f improved public services. The consolidated action plan presented here must above all be realistic and achievable, however, and as such takes fully into account the constraints o f limited human resource capacity in Uganda, particularly in key disciplines such as procurement, the need to minimize the negative consequences o f political interference, and the need to change attitudes. The report also underlines the importance o f closer DP collaboration. 1.5 The CIFA i s being undertaken at a time when the G o U i s finalizing the third PEAP and DPs are revising their Country Assistance Strategies (CASs). Unlike the second PEAP, the third PEAP has sections on the public expenditure that w i l l be included by the PEAP and on monitoring and evaluation. 1.6 We anticipate that the CIFA and i t s more detailed subcomponent processes will help the G o U and its DPs in preparing, revising, and implementingthe PEAP and CASs. CIFA should be an important input to ongoing reform programs, including the preparation o f DP budget support and Poverty Reduction Support Credit. On 22 June 2004, a workshop brought together a wide range o f stakeholders to discuss the report, and in particular to discuss the action plan and the modalities for its implementation, monitoring, and evaluation. The G o U has proposed that it direct the Public Expenditure Management Committee to review and prioritize the action plan and to set out the modalities for working within its agreed coordination, monitoring, and evaluation mechanisms. B. SCOPE OF THE REPORT 1.7 The CIFA report addresses national and subnational government and, to a lesser degree, state enterprises. In terms o f local government (LG) coverage, a sample o f four districts and one municipality was agreed, to comprise Apac, Tororo, Jinja, and Kabale Districts and Masaka Municipality. These LGs represent a spectrum o f capacities, geographical locations, and involvement in new P F M initiatives. The report also refers to the role o f nongovernmental organizations in providing services, and to the roles o f the accountancy and procurement professions in raising standards o f professionalism within the public sector and in enhancing financial accountability. c. STRUCTURE OF THE REPORT 1.8 The report i s set out as follows. Section 3 provides a brief overview o f the status o f ongoing and planned government reforms, highlighting the changes that have taken place since the previous procurement and financial accountability reviews in 2001. Section 4 addresses some broad fiscal and cross-cutting issues and service delivery constraints, including the fiscal deficit, the realism o f the budget, the predictability o f fund flows, the value for money achieved from government expenditure, and human resource capacity constraints. Sections 5 through 8 assess the budget cycle o f the various levels o f government, examining the linkages between policy, plans, and the budget; the raising o f revenue, use o f resources, and reporting and monitoring o f results; and the accountability o f government for i t s performance. Section 9 sets out the lessons from this CIFA exercise and goes on to present the proposed short-term and medium-termaction plans and monitoring and evaluation mechanisms. -2- 2. STATUS OF ONGOING AND PLANNED GOVERNMENT REFORMS A. ECONOMICAND LEGISLATIVE REFORMS Economic reforms 2.1 Uganda has since the early 1990s been pursuing economic reforms aimed at maintaining macroeconomic stability and high rates o f economic growth. Above all, however, these reforms are aimed at reducing poverty, as set out in the country’s Poverty Eradication Action Plan (PEAP). The country also i s committed to meeting the Millennium Development Goals (MDGs) by 2015. At the center o f the reforms i s the liberalization o f markets in all sectors o f the economy and the decision that the private sector should lead the economic growth process. 2.2 Uganda registered high rates o f economic growth during the 1990s, reducing poverty from 56 percent in 1992 to 34 percent in 2000. Household survey data for 2003 indicates a reversal o f this progress, however, with headcount poverty rising to 38 percent and inequality increasing to 0.43 from the 2000 level o f 0.40. Real gross domestic product (GDP) growth has averaged 6.5 percent each year since fiscal 1990191, although it f e l l back slightly from an average o f 6.8 percent in 1990/91 through 1997/98, when it was boosted by economic reforms and a coffee price boom, to an average o f 6.1 percent in the period 1998/99-2002103. Growth in 2003104 i s estimated to be 6 percent, a slight improvement on the 2002103 figure o f 5.4 percent. Population growth i s high, however, at 3.4 percent annually, with the result that GDP per capita has risen only by an average 2.7 percent over each o f the last five years. 2.3 A critical challenge o f the reforms i s to ensure a more even distribution o f the benefits o f growth. Agricultural growth and greater productivity are key components o f a pro-poor growth strategy. Falling international coffee prices have exposed the vulnerability o f the Ugandan economy to exogenous price shocks and have underscored the need for diversification o f the export base. Efforts to boost the export o f fish and cut flowers and to increase tourism in particular need strengthening. Legislative reforms 2.4 The Government o f Uganda (GoU) has since the most recent assessment enacted a number o f significant pieces o f legislation to improve the public financial management (PFM) framework. 2.5 The 2001 Budget Act has provided a legal platform for the budget formulation process. The act stipulates first and foremost the content and timing o f the budget process, requiring that the government present to Parliament a macroeconomic plan, fiscal and monetary programs for economic and social development for a three-year period, and estimates o f revenue and expenditure for a one-year period (the new financial year) and for a three-year horizon (the medium-term planning period). 2.6 The 2003 Public Finance and Accountability Act (PFAA) and related Public Finance and Accountability Regulations (PFAR) came into force on 1 July 2003. This legislation makes significant improvements in the framework for accounting and financial reporting, addressing a number o f the recommendations made in the 200 1 Country Financial Accountability Assessment (CFAA), including that: 0 supplementary appropriations require prior parliamentary approval before any commitment i s made; 0 accounting officers be requiredto report failure to achieve value for money; 0 the Auditor General (AudGen) i s entitled to full access to information on classifiedexpenditures; 0 accounts must include flow of funds statements and broader coverage o f government expenditure; and 0 specific offences are identified and penalties or procedures for recovery o f losses put in place. 2.7 A cabinet memorandum was prepared in 1999 to enable the preparation o f legislation to enhance the independence of the Office o f the Auditor General (OAG). The Ministry of Finance, Planning, and Economic Development incorporated the recommendations into an Audit Bill; however, the AudGen expressed his concerns about the adequacy o f the draft legislation, and in response to perceived constitutionalcontradictions concerning, for example, the release o f human resource management (HRM) authority to the AudGen, it was agreed that new legislation should await the findings of the Constitutional Review Commission (CRC). I t i s understood that cabinet recommendations to the CRC do not include these provisions. (The status of the 2001 CFAA and Country Procurement Assessment Report [CPAR] recommendations i s included in Annex B.). 2.8 Since the 2001 CPAR, the GoU has taken several important steps to improve public sector procurement practices. These include the introduction o f the 2003 Public Procurement and Disposal of Public Assets (PPDAA) Act and the establishment o f the Public Procurement and Disposal o f Assets Authority (PPDA). The PPDAA Act applies to all public procurement and disposal activities undertaken by public institutions, including SEs and defense establishments, and provides a legal framework of public procurement which embodies the principles o f efficiency, accountability, and value for money. Procurement regulations have been developed for central government, but the Local Government Procurement Regulations developed in 2001 were put on hold because they were not in line with either the PFAA or the PPDAA Act. 2.9 In July 2000 the President launched the “Government Strategy and Plan o f Action to Fight Corruption and Rebuild Ethics and Integrity in Public Office: Fiscal Years 2000/01-2002/03.” Stakeholders are now reviewing a draft version o f the second three-year plan. In the intervening period a number o f acts have been updated and changes in legislation proposed. The two most significant pieces o f legislation were the 2002 Inspectorate o f Government (IG) Act and the 2002 Leadership Code Act. The I G Act grants to the inspectorate the powers and procedures that it requires to fight corruption, including the mandate to (a) supervise enforcement o f the Leadership Code; (b) promote and foster strict adherence to the rule o f law; and (c) direct public awareness programs and investigations. The Leadership Code additionally calls for full disclosure o f the assets held by public leaders. 2.10 A draft Prevention of Corruption Bill has been prepared but not yet submitted to cabinet. The purpose of the bill i s to provide a more effective legal framework for combating corruption and the misappropriation o f public resources. It seeks to consolidate the existing legislation but also to identify and fill gaps in that legislation. In particular, the revised act i s intended to strengthen enforcement and to provide for the confiscation, freezing, and seizure o f assets. It also will address other issues such as conflict of interest. -4- 2.1 1 Public consultations are planned on proposed Whistleblower ProtectiodQui Tam legislation. There are practical difficulties to implementing such legislation in Uganda, but providing protection i s considered necessary to encourage members o f the public to come forward with information. The principles o f the whistleblower legislation are to be presented to cabinet in 2004. Anti-money laundering legislation has also reached draft form and i s due to go to cabinet in 2004. In December 2003 the G o U furthermore signed the United Nations Convention against Corruption, and a memorandum for the ratification o f this convention and o f the African Union Convention on Combating Corruption has been submitted to cabinet for decision. 2.12 An Access to Information Bill, sponsored by the Ministry o f Information, was presented to parliament in April 2004. On 2 March 2004 the heads o f state o f the East African Community (EAC, comprising Kenya, Tanzania, and Uganda) signed a Customs Union Protocol to transform the present preferential trade area into a customs union (CU). The target date for the inauguration o f the union i s the second half o f 2004, but this date may slip unless the three countries and the E A C Secretariat speedily conclude their preparatory efforts, including ratification o f the protocol by all three parliaments. 2.13 The legal and regulatory framework governing the operation o f NGOs (nongovernmental organizations) i s being reformed, but there are serious concerns that the 2001 NGOs Amendment Bill, if passed in i t s present form, will severely restrict NGO operations. Despite the liberalization o f the Ugandan economy, laws pertaining to the private sector, including the 1964 Companies A c t and the 1971 Customs Act, have not yet been revised. The 2002 Competition Bill, for example, which would establish the Competition Commission o f Uganda and make illegal the current widespread use o f cartels, has not yet been enacted by parliament. Some regulatory institutions, such as the commercial court, the Center for Dispute Resolution, and the Tax Appeal Tribunal, are operating, but others, such as the Registrar o f Companies, are in urgent need o f improvement. The modernization o f the Uganda Revenue Authority (URA), including i t s restructuring and proposals for the procurement and implementation o f an integrated tax administration system, i s ongoing. B. THEPUBLIC SECTOR AND P A Y REFORM 2.14 In 2001 the G o U launched a 10-year public sector and pay reform initiative. Some notable achievements have already been made, including the reduction o f pay differentials between higher-level and middle-level civil servants. In addition, parliament recently has been presented with a new Public Service Bill that i s consistent with changes put forward by the Constitutional Review Commission. The bill includes a number o f other proposed changes in the field o f human resource management, including its devolvement to local government. Many significant challenges nonetheless remain, and the progress o f reform has for a variety o f reasons slowed down. There i s growing concern specifically about the size and inefficiency o f the public sector and the obstacle that this presents to the achievement o f the goals set out in the Poverty Eradication Action Plan. In response to these concerns, Poverty Reduction Support Credit (PRSC) 4 w i l l require the Ministry o f Public Service, together with other ministries, to establish service delivery standards based on the national service delivery survey results, and conduct beneficiary assessments. 2.15 The size o f the Public Administration (PA) and the true costz o f labor in the provision o f services are areas o f concern to all stakeholders. The Ministry o f Public Service and the Ministry o f Finance, Planning, and Economic Development have, as required under PRSC 3, prepared a draft policy paper on issues, measures, and modalities to control the size o f PA, but neither this paper nor the recommendations o f various other studies on reducing P A costs have yet been debated by the cabinet. ’ True cost o f labor includes salary, benefits, and access to preferential loans and advances. -5- C. DECENTRALIZATION 2.16 The decentralization o f public service delivery in Uganda, as in many countries, was implemented on the premise that it would increase the efficiency and effectiveness o f public expenditure and the responsiveness o f services to the needs o f local populations. The 1995 constitution established a system by which local government (LG) would assume responsibility for the delivery o f key basic public services. N e w structures for LG accordingly have been proposed, but they have not yet been implemented. A review o f the decentralization policy i s due to start in October 2004. The review will examine (a) the relationship between LG administration and deconcentrated central government technical support units; (b) the legal framework for LG; and (c) institutional reforms, such as that which set up a water supply board in Kampala, to ensure that they are compatible with the policy and principles o f decentralization. 2.17 The primary laws governing the financial management o f LG are the Local Government A c t (LGA), Cap 243,3 and the 1998 Local Government Financial and Accounting Regulations (LGFAR). These set out an elaborate and comprehensive legal framework for development planning, budgeting, revenue collection, expenditure management, and accounting and audit. In response to growing concerns over the limited autonomy o f LGs and the need to streamline the systems o f government transfer to LGs, a Fiscal Decentralization Strategy (FDS) also was developed and finalized in 2002. Under the F D S the number o f central grants i s being reduced significantly, and LGs have been given the flexibility to reallocate recurrent conditional grants within and between sectors. The LGFAR are due t o be revised this year to bring them into line with the 2003 Public Finance and Accountability Act, the F D S provisions, and other initiatives. A summary of the various initiatives is set out in Table 1. Ongoing Initiatives Planned Initiatives FDS budget formulation guidelines Harmonizing central and local government Local Government Information and Communications procurement regulations System (LOGICS) Roll out o f harmonized participatory Local Government Compliance Inspection System planning guidelines Integrated Financial Management System (IFMS) Revision o f district development planning Local Government Financial Information and Analysis guidelines System (LoGFIAS) Revision o f the LGFAR Local Government Financial Management Training FDS budget implementation guidelines Materials Review and revision o f L G revenue Harmonized participatory planning guidelines legislation EFMP-I1activities, including training o f accounts 2.18 This upgrading o f capacity has been underpinned by the first and second Local Government Development Programs (LGDPs) and the W o r l d Bank’s Second Economic and Financial Management Project (EFMP-11), but the multiplicity o f initiatives designed to improve financial management capacity at the LG level presents a major challenge to a l l stakeholders. There i s a clear need for effective and efficient coordination and communication mechanisms to ensure that these initiatives reinforce rather than undermine each other. In this report all acts promulgated prior to 2000 are referenced according to the chapter of the Laws of Uganda, Revised Edition, 2000. The volume number i s shown in the bibliography list o f Appendix 2 o f the CFAA. -6- 3. HIGH-LEVEL FISCAL RISKS AND FIDUCIARY CONCERNS A DEFICIT BUDGET 3.1 For the last five years the GoU has been running a budget deficit, excluding grants, in excess o f 10 percent. The deficit in fiscal year 2002/03 was 11.2 percent (in fact marking a decline), a figure that was established as a target and that was expected to be achieved again in 2003/04. The deficit after grants i s much lower. Grants doubled from slightly more than 6 percent o f GDP in 1997/98 to more than 12 percent in 2001/02, primarily through Highly Indebted Poor Countries (HIPC) debt r e l i e f and higher aid inflows, with the result that the budget deficit after grants for 2003/04 i s expected to be below the target o f 3.2 percent o f GDP. While government expenditure rose from 16.1 percent o f GDP in 1997/98 to 25.3 percent o f GDP in 2002/03, in the last five years government revenue has only risen to about 12.9 percent o f GDP (the average for Sub-Saharan countries i s 18 percent). Since 2001, budget support has become the preferred form o f external assistance. 3.2 The large external aid inflows o f the last five years have created the need to mop up excess liquidity, through a combination o f Treasury Bill sales and foreign exchange sales. Both measures have had the adverse effects o f driving up interest rates and causing exchange rate appreciation. The trend o f large inflows has not been easy to manage, and has posed a number o f macroeconomic management challenges, including: High cost o f private sector borrowing. Bank o f Uganda (BoU) sales o f Treasury Bills for sterilization purposes have pushed up interest rates (the stock o f government securities has increased fivefold in five years). The proportion o f commercial bank lending going to the private sector has fallen from 55 percent in 1999 to 40 percent in 2003. High domestic interest costs. Interest payments have risen from USh21 billion in 1998/99 to a projected UShl90 billion (8 percent o f GoU expenditure) in 2003/04. Interest payments now exceed the budgets for the health sector, the justice, law, and order sector, and roads (excluding projects). Overvalued exchange rate. BoU sales o f foreign exchange, executed for sterilization purposes, have risen tenfold in the last five years, causing an overvaluation o f the exchange rate. Vulnerability of the budget to possible cuts in donor aid. The amount of GoU expenditures and external debt repayments that could be funded from domestic resources improved from 60 percent in 2001/02 to 66 percent in 2002/03; any temporary loss in donor aid additionally could be absorbed through a limited rundown in the BoU’s foreign exchange reserves. The GoU nonetheless remains concerned that a sustained cutback would force it to make severe budget cuts. Rising external debt burden. Uganda has borrowed US$1.5 billion from multilateral donors since the HIPC completion point. Combined with lower export growth projections and lower world interest rates, this has seen the net present value o f debt to exports ratio more than double, to 325 percent. -7- 0 Rising domestic debt burden. The stock o f domestic debt has risen from less than 1 percent in the mid-1990s to 10 percent in 2003/04. Ninety-five percent o f domestic debt has maturities o f one year or less. 0 Political economy concerns. Uganda’s excessive dependency on aid has given rise to concerns that the GoU’s sovereignty i s being undermined, particularly in terms o f the constraints that are being placed on its economic and budgetary choices. 3.3 There i s a consensus among stakeholders that the fiscal deficit should be reduced, but there i s concern also that a strategy focusedexcessively on deficit reduction could deter the offer or use of aid resources, This in turn could result in productive public expenditures not being pursued, even where they could enhance Uganda’s growth potential. Given the imperatives also to ensure that the Millennium Development Goals are pursued and that the growth prospects o f the private sector are not undermined, the question o f how to reduce the fiscal deficit, therefore, i s s t i l l under debate. The fiscal deficit could be reduced by cutting government spending and/or by mobilizing more domestic revenues. Improvements in tax administration and the introduction o f new tax policy measures to widen the tax base and reduce inefficiencies, such as those due to corruption, could increase domestic revenues, for example. The report on corruption in the Uganda Revenue Authority recommended changes that, if effected, could significantly improve tax administration. However, legal complications have delayed their implementation. 3.4 Reduced government spending cannot be allowed to jeopardize the economic growth and poverty reduction objectives set out in the Poverty Eradication Action Plan (PEAP). Public administration (PA), which in 2002/03 accounted for about 17.6 percent o f total government expenditure, clearly i s one area in which reductions could safely be made, but there are also a number o f other areas in which the efficiency o f resource use could be improved. The importance to the achievement o f the government’s fiscal objectives of a comprehensive reform o f public service and pay cannot be overstated. 3.5 A thorough analysis of contingent liabilities-for example, o f pension liabilities for state enterprise employees and o f loans that are guaranteed by government, through the Bank of Uganda, for private enterprises-would enable the GoU to plan more effectively for future demands on government resources. Providing more comprehensive data could further assist the Ministry o f Justice in defending claims against the government. B. REALISM BUDGET 3.6 The budget discrepancy has declined from double figures in the early 1990s to less than 6 percent in fiscal 2002/03. The discrepancy index, a weighted average across budget sectors of the absolute percentage deviation between budget and outturns, demonstrates this progress (see Table 2). (It should be noted, however, that this achievement o f low deviation may not be reflectedat the sub-vote level.) Table 2. Average Budget Deviations I 1998199 I 1999/00 I 2000/01 I 2001/02 I 2002/03 Discrepancy index I 9.8% 1 4.9% I 7.6% I 5.8% I 5.5% 3.7 The central government continues to face pressure to approve supplementary allocations. During the previous three fiscal years (200 1/02 through 2003/04) the authorities released supplementary expenditures o f about 5 percent of the total budgeted expenditure (excluding donor project^).^ This was in The Budget Act requires supplementary spending to be below 3 percent o f total expenditure, inclusive o f budgeted donor projects. -8- addition to technical supplementaries used to reassign spending across votes and sub-votes. The supplementaries reflected budget overruns in some votes, especially PA; and the underbudgeting o f spending in areas such as domestic interest payments, subsidies for state enterprises, and pensions. Supplementary appropriations require prior parliamentary approval before any commitment i s made. 3.8 Supplementary allocations during the first half o f fiscal 2003/04 amounted to USh86 billion. A further supplement for USh41 billion was presented late in the third quarter and approved, raising total supplementaries to UShl27 billion. The approval o f these supplementaries has resulted in differences in the composition of the executed budget relative to its appropriation. When calculated at the vote level for aggregate primary expenditure, the discrepancy between budget outturns and appropriation (excluding donor projects) reached an average o f 13 percent between 2000/01 and 2002/03. The variability o f vote shares to total expenditure relative to the approved budget shares during the same period averaged about 14 percent. These data clearly indicate that the problem o f budget variability i s still out there. 3.9 Nontax revenues continue to underperform, returning only 74 percent outturn for the first three quarters o f 2003/04, but overall revenue projections have improved. The overperformance o f budget support grants specifically has offset the shortfall in domestic resources. During the period the total budget resources were 2.6 percent higher than projected; adjusted for resource outflows, the total resources available for financing the budget were 18 percent above projection. Domestic resources amounted to USh1,248.5 billion, or 99.8 percent o f the total. In contrast to 2002/03, when budget support on a pro rata basis underperformed by 10 percent because o f differences arising from additional defense spending, budget support during the period under review overperformed by 11.7 percent. The overperformance o f budget support i s attributable in main to money carried over from the previous fiscal year and to unprogrammed releases from DPs. Revenue performance for the first three quarters o f 2003/04 i s shown in Table 3. \ -9- Table 3. Revenue Performance Ql-Q3, Fiscal 2003/04 (USh billions) Annual First-half performance Performance for the 1st 3 budget quarters program YOpro rata program YOpro rata Inflows A. Domestic resources 1,719.4 828.2 98.5% 1,25 1.O 99.8% Uganda Revenue Authority (URA) 1,655.2 805.4 98.7% 1,203.0 98.3% Non-URA 35.7 14.8 77.7% 24.8 73.6% Loan repayments 28.5 8.0 114.4% 23.3 206.9% B. Budget support 696.3 295.0 117.5% 391.1 111.7% Grants 496.4 291.9 1 18.7% 387.9 111.9% Loans 199.9 3.2 0.0% 3.2 84.5% C. Total resource inflows 2,457.1 1,123.2 103.5% 1,642.1 102.6% D. External debt repayment 135.6 66.5 78.8 97.0 98.9% E. Domestic financing 62.1 142.7 234.9 199.7 7.2% F. Arrears repayments 45.0 16.6 67.5 26.9 68.9% G. Total resources available 2,173.0 897.4 130.8Yo 1,381.5 118.0 for the medium-term expenditure framework 3.10 Expenditure performance in the first three quarters o f fiscal 2003/04 i s shown in Table 4. Local government (LG) development expenditure performance was 73.8 percent, compared to 84.5 percent for central government votes. With the inclusion o f wage expenditure, LG performance rises to 100.1 percent, compared to the central government performance o f 90.5 percent. Nonwage expenditure was below programmed levels at both central government and LG levels. Table 4. Expenditure Performance (USh billions) Approved Bt get Pro rata Annual H1+43 Performance release Wage 673.37 504.92 99.98% Nonwage 843.77 641 101.29% Statutory 130.55 96.42 103 -76% PAF 177.29 113.44 85.29% Other 535.93 431.14 105.96% Development* 586.55 312.15 73.2% PAF 337.77 197.23 78.08% Other 232.41 114.92 66.12% ~ Total (excluding interest) 2,085.69 1,458.07 93.21% Interest payments 227.80 188.80 110.51% TOTAL 2,313.49 1,646.87 94.91% 3.1 1 The Poverty Action Fund (PAF) consistently underperforms, while the security and P A sectors tend to overperform. Absorption capacity i s often cited to explain PAF underperformance, but the overperformance o f security and P A points to a pattern o f priority setting that i s not fully in line with PEAP objectives. Lower-than-programmed PAF spending means that services such as health, education, water, roads, and extension cannot be delivered on time and that quality i s likely to be compromised. -10- 3.12 The pension vote i s the fastest-growing expenditure within the PA sector, rising from 5 percent o f PA expenditure in 1997/98 to 14 percent in 2002/03. Containing growth in pensions i s essential to containing the PA sector as a whole. The public service and armed forces have accumulated pension obligations in excess o f USh276 billion-an unsustainable budgetary commitment. The management, administrative costs, and investment choices and returns o f the National Social Security Fund (NSSF) demand close scrutiny. The Social Security Transition Group has produced a report entitled “The Challenges and Financing o f Social Security and Pension Reform in Uganda: The Tripartite Consultative Process, Policy Recommendations, and the Way Forward”; progress toward pension reform however has been delayed by the decision to hold wider stakeholder consultations. 3.13 Overall, local government budgets appear unrealistic, with outturns deviating significantly from budgeted amounts. On the basis o f the benchmarked LG average, aggregate expenditures, at 87 percent, are well below projections (see Table 5). Aggregate revenues, at 91 percent, are slightly better, but local revenue collection i s well below budget, averaging just 76 percent o f the projected amount. Table 5. Key Fiscal Performance Indicators for 2002/03 for Sample LGs Average Poorest percentage Best outturn outturn outturn . performance performance Masaka Total expenditure, as a percentage o f budgeted expenditure 87% 97% Jinja 67% MC Masaka Total revenue received, as a percentage o f budgeted revenue 91% 99% Jinja 83% MC Local revenue received, as a percentage o f budgeted local revenue 76% 88% Masaka 68% Kabale Local revenue received, as a percentage o f total revenue collected5 2.5%6 3.3% Jinja 2.0% Tororo Department expenditure deviation from budget (average percentage) 25% 10% Kabale 50% Apac Average level o f arrears, as a percentage o f total Masaka exoenditure 7% 1% ADac 13% M C 3.14 On the basis o f the sample, deviations between the budgeted and actual amounts are most significant at the departmental level. While most sector departments underspend against budget, the situation i s chronic for those departments that rely on locally generated revenues. It i s important to note, however, that budget reliability differs across LGs: Jinja and Kabale districts appear t o be in control o f their aggregate revenues and expenditures, and most sectors spend generally in accordance with their budgets. Due to their reliance on central transfers, districts such as Kabale are able to deliver services as planned, even if they are unable to collect local revenues. Masaka municipality, in contrast, i s more reliant o n local revenues and appears unable either to collect local revenues as planned or to control expenditures. Despite severe underspending against sector budgets, it has accumulated significant arrears in areas that are not supported by conditional grants. Where there i s a lack o f realism in LG budgets, it typically results from a combination o f factors that vary from one LG to the next. There nonetheless tends to be a common, largely political incentive to overinflate local revenue projections. Excludes subcounty and divisional revenues. These LGs retain 65 percent and 50 percent respectively o f the revenues collected in their jurisdictions. Excluding Masaka municipality, which had local revenues o f 24 percent o f total revenues. Urban authorities in general have higher tax collections than do districts. - 11 - Predictability 3.15 While budget releases have been improving, there continues to be an irregular flow o f funds. This lack o f predictability impacts negatively on procurement practices, and the delayed arrival o f funds at sectoral or LG level can distort project implementation. In 2003/04 the irregular flow o f funds appears to have been aggravated by the frontloading o f sectors such as defense and PA at the expense o f other areas, such as PAF (although some ministries attribute delays to the nonavailability o f cash). Administrative delays, including the failure by LGs to open bank accounts at the start o f the year, the failure to adhere to reporting requirements, and delays in processing the vote o f account at the start of the year, have also contributed to the problem. A recent Ministry o f Finance, Planning, and Economic Development (MoFPED)~ study showed that on the basis o f a simple average the time taken for funds to be transferred from the Consolidated Fund to spending agencies was less than a month, but the transfer o f some development funds took more than four months (see Table 6). Disbursement from LGs to spending agencies i s particularly problematic. In the water sector, for example, releases from the chief administrative officer took as much as 84 days to reach the district and urban water authorities. One o f the reasons provided for this delay i s that information on the purpose o f release i s not issued on a timely basis by the treasury to the LG authority. To LG To ministries Min Max Average Min Max Average Wage 7 50 18 6 23 12 Nonwage 6 84 32 5 72 23 Development 7 103 27 5 135 43 3.16 Provided that they adhere to reporting requirements, LGs typically receive their full grant allocation from central government. For most LGs, the funds arrive late in the fiscal year, however. Because a cash budgeting system i s used, at the beginning of the year agencies tend to have time but no money, and at the end o f the year they have money but no time-and compliance with the law obliges them to return unspent funds to the treasury. Arrears 3.17 Realism in budgeting i s improving, but the existence o f a large and growing stock of arrears-the result o f underbudgeting, irregular cash flows, and noncompliance with commitment controls-is a serious problem. Since fiscal 2000/01 annual budgets have allocated resources to reduce the stock o f expenditure arrears, but there has been no assessment o f the type or age profile o f arrears settled (see Table 7). Anecdotal evidence suggests that accounting officers are permitted to use their own discretion when selecting arrears to be cleared, and do not systematically clear old arrears first. I n 2003/04 little progress was made in tackling this problem. 'Release Tracking Study, May 2004 - 12- Table 7. Budget Provision for the Clearance of Domestic Arrears and Outturn (USh billions) Outturn 2000101 108.3 130.2 200 1102 131.7 115.2 2002/03 2003104 45.0 45.0 Source: MoFPED, July 2004. 3.18 Information from the Accountant General (AccGen) indicates that the stock o f nonwage recurrent and development spending arrears now amounts to nearly UShlSO billion (Table 8). While the AccGen maintains a record o f the individual items o f arrears cleared, his office does not record when each item i s cleared. This makes it difficult to monitor the progressive clearance o f arrears. Internally audited accounts as Incurred in o f 30 June 1997/98 or Incurred in Incurred in Incurred in Incurred in Incurred in 2003 before 1998199 1999/2000 2000/01 2001102 2002103 Total 19.74 41.07 24.56 22.73 21.26 20.21 149.56 3.19 The available data o n the magnitude and age profile o f wage, pension, and utility arrears are neither consistent nor reliable.* Tentative estimates indicate that at end-June 2003 these arrears amounted to USh8.9 billion (wages), USh276 billion (pensions), and USh2O billion (utilities). The addition o f these estimates to the arrears compiled by the AccGen produces a total stock o f identified expenditure arrears in excess o f 5 percent o f the budgeted outlay for each year. 3.20 Most, if not all, LGs have stocks o f arrears and few, if any, have plans t o clear them. Many believe that central government will help them clear their arrears, particularly o f salaries and pensions. However, the Local Government A c t and Local Government Financial and Accounting, Regulations are silent on the subject; there i s a need for a clear policy statement o n the treatment o f arrears and a requirement for budget priority in their clearance, if and when they are incurred. c. CORRUPTION AND P O O R V A L U E FOR MONEY 3.21 The level o f corruption in Uganda i s a cause for serious concern for a l l stakeholders. The Inspector General o f Government (IGG), the World Bank, the media, NGOs, and others have identified corrupt or fraudulent practices in a wide range o f areas, including: 0 the financing o f politics; 0 personnel management (the prevalence on personnel lists o f nonexistent ‘ghost’ workers, soldiers, teachers, and students/pupils i s a particular problem); 0 the justice, law, and order sector (in particular, in the making o f court awards); 0 revenue collection; 0 the financial sector; and The AudGen o f Uganda does not audit or report expenditure arrears. - 13 - 0 the procurement and disposal o f public goods, services, and assets. 3.22 Public procurement accounts for about 70 percent o f annual expenditure, and 70-90 percent o f the complaints received annually by the IGG relate to corruption in public procurement. The Auditor General (AudGen) has estimated that some 20 percent o f the value o f public procurement i s lost through corrupt practices, with a concomitant effect on the cost, quantity, and quality o f public services and thus o n the attainment o f national poverty reduction and other policy objectives. Transparency International (TI) reports that corruption in Uganda i s perceived as high (see Table 9); although the country’s rating improved slightly between 2002 and 2003, Uganda i s s t i l l rated among the 15 percent o f countries most badly affected by corruption. The International Country Risk Guide also gives Uganda a l o w rating (2 out o f a possible 6) with respect to corruption. Table 9. Uganda’s Ranking in the T I Corruption Perception Index Ranking fro Year Position bottom’ 1998 73 85 8th 1999 87 99 12th 2000 80 90 loth 2001 88 91 3rd 2002 93 102 9th 2003 113 133 17th Source: Transparency International, Global Corruption Report, 2004. aThe ranking from the bottom shows the actual position from the bottom in terms o f scores, and ignores the fact that there i s sometimes more than one country with the same score 3.23 According to the IGG’s Second National Integrity Survey, conducted in 2003, Uganda has made some progress in combating corruption. The report (which it should be noted uses a small sample size), found that the reported percentage level o f bribery has declined since the initial survey in 1998. It also notes that corruption remains a significant problem, however, adversely affecting the poor in a number o f ways. A large proportion o f users o f what purportedly are free health and education services continue to be forced t o pay for these services, for example; there also have been several allegations o f corruption in relation t o the construction o f new classrooms and health centers, and o f embezzlement o f universal primary education funds by head teacher^.^ 3 -24 A number o f high-profile corruption cases within public procurement additionally remain unaddressed, and key legislative improvements, such as the draft Prevention o f Corruption Bill, the Access to Information Bill, and the Whistleblower Protection and Qui Tam legislation remain to be enacted and/or implemented. Along with the legislative improvement, the monitoring and controlling o f corruption in public procurement needs to be improved through annual surveys and the use o f procurement indicators. 3.25 All stakeholders recognize that over the last 14 years there have been considerable improvements in providing core services in the education, health, and water and sanitation sectors. Tracking studies describe numerous success stories, indicating, for example, that primary school enrolment has increased from about 2.2 million pupils in 1986 to more than 7 m i l l i o n in 2003. The number o f primary schools also i s shown to have increased, from 7,351 to 13,332. These figures do not necessarily t e l l the whole story, however. A value-for-money study o f universal primary education, carried out by the Office o f the Auditor General (OAG) in 2002/03 in conjunction with an African Organisation o f Supreme Audit Uganda Debt Network study o f Katakwi district. - 14 - Institutions initiative, showed that significant losses had been incurred in the sector.'OThe report was presented to the Speaker o f the House in mid-2003, but as yet has not been reviewed by the Public Accounts Committee. The enactment o f the Public Procurement and Disposal o f Public Assets (PPDPA) A c t legislation gives government a much stronger mandate to deal with corruption in the areas o f public procurement and the disposal o f public assets. Again, however, the political willingness to enforce the regulations remains an unknown factor. D. RESOURCE HUMAN ISSUES Political environment 3.26 Lack o f technical capacity i s frequently cited as the main reason behind poor standards o f public financial management (PFM). The Local Government Integrated Fiduciary Assessment (LGIFA) benchmarking exercise makes clear that, despite LG authorities having similar technical capacities, there i s a wide variation in the quality o f PFM. 3.27 It i s extremely difficult to measure P F M quantitatively. From a qualitative perspective, however, the key distinguishing feature between Tororo and Kabale districts, the worst- and best-performing districts in the sample, i s the political and managerial environment. In Tororo there was found to be constant tension between politicians and technocrats, with the council showing little or no interest in the administration's performance. In Kabale, the most transparent and accountable o f the benchmarked LGs, there i s a constructive and trusting relationship between the administration and politicians. The chief administrative officer and chief finance officer (CFO) in particular exhibit strong leadership, the CFO delegating responsibility to his staff, holding them responsible for their performance, and sanctioning those who do not adhere to guidelines. Staffing levels and training needs 3.28 At the central government level, the staffing situation at the Accountant General's Office (AGO) and the OAG has improved since the 2001 Country Financial Accountability Assessment (CFAA). The number o f vacancies i s lower and there are more qualified staff at both offices. This situation i s due to reform initiatives such as the Second Economic and Financial Management Project (EFMP-11), which has supported the training o f almost 2,000 accounting and auditing staff in local and central government, and to wider economic conditions. However, the large number o f unqualified senior staff, especially at the OAG, continues to constitute a fiduciary risk. The lack o f independence o f the AudGen with respect to human resource (HR) issues increases this risk further. 3.29 Similar HR constraints may be found in the ethics and integrity bodies. The Directorate o f Ethics and Integrity has a professional staff o f just three people, and the position o f permanent secretary has been vacant for more than a year. The Inspectorate o f Government also has serious staffing problems, and a lack o f experience across the directorate, meaning that it reportedly i s unable to deal effectively with some o f the more complicated issues and higher-level cases. The ability o f both institutions to retain qualified and experienced staff i s limited by pay and by terms and conditions o f service, which, contrary to the practice o f other countries, are comparable with those o f other public sector employees. loA second VFM study on UPE was conducted by private sector auditors. This report showed even greater losses as a different valuation methodology was used. - 15 - 3.30 Throughout the GoU there i s a general lack o f understanding o f public procurement principles, and at the LG level there i s a significant lack o f capacity and skilled personnel. This i s a key impediment to sound public procurement. With decentralization and the creation o f Procurement and Disposal Units in each Procuring and Disposing Entity (PDE), the demand for skilled procurement staff has risen sharply. A recent capacity building strategy prepared by the Public Procurement and Disposal o f Assets Authority (PPDA) estimates the minimum number o f staff required to deal with procurement issues at more than 5,400.” 3.3 1 The Public Procurement and Disposal o f Public Assets Act called for the establishment o f a new procurement cadre to undertake procurement for both central and local government. This cadre has not yet been introduced at the LG level, and at the central level recruits to procurement have been drawn primarily from the private sector, necessitating additional training in public sector finance. Compounding the problem, the new recruits face considerable resistance from within government and from the now- redundant supply officers. 3.32 Since the introduction o f the procurement reform agenda, a number o f capacity building initiatives, supported through the Poverty Reduction Support Credit program and the second Local Government Development Program (LGDP-11), have taken place. These have involved both international and national organizations. Between May and November 2003, 2,135 people received workshop-based training, focusing mainly on the legal framework for procurement rather than procurement principles. A more demand-driven approach i s being adopted that will be better aligned to the specific needs o f each PDE. The lack o f procurement professionals i s a problem not only for the PDEs, but also for the universities and private training institutes that must recruit qualified lecturers and trainers. The Netherlands Embassy has since October 2003 sought to ease this problem by working with Kyambogo University and Makerere University Business School to develop a capacity-buildingproject. The embassy plan will include a twinning element with one or more universities from the Netherlands. 3.33 A problem identified in the LGIFA (but which i s equally relevant to central government) i s the lack o f understanding among vote controllers and senior management o f financial management issues. Recent training provided to the parliamentary Public Accounts Committee members has improved their ability to carry out their roles and responsibilities. The LGIFA also highlightedthe inappropriate nature o f workshop training programs, preferring on-the-job assistance provided through the integrated financial management system (IFMS). Again, while the LGIFA finding refers specifically to the LG situation it i s likely to be equally relevant at line ministries. The Budget Committee also has questioned the value o f current capacity building initiatives, and i t s concerns will need to be reflected in the action plan, particularly with respect to the initiatives that are ongoing under EFMP-I1and LGDP-11. E. KEYCHALLENGES 3.34 The GoU faces a number o f important macroeconomic, political, and institutional challenges as it seeks to ensure that the goals set out in the Poverty EradicationAction Plan are attainable and sustainable. These include in particular the needs to: 0 improve revenue collection; 0 maintain macroeconomic stability and keep inflation below 5 percent; 0 progressively raise the tax: GDP ratio; ” “Capacity Building Strategy for the Public Procurement Sector for the Period 1 July 2003 to 30 June 2006,” issued August 2003. - 16- 0 improve the efficiency o f resource allocation; 0 reverse the deterioratingtrend in Uganda’s net present value o f debt: exports ratio; 0 make more effective use o f existing aid resources; 0 restore and improve the integrity o f the budget process; 0 improve predictability o f the flow o f funds; 0 resolve the tension between macroeconomic targets and the availability o f additional resources, including global funds, to meet the Millennium Development Goals; and 0 improve information on the stocks o f arrears and contingent liabilities. 3.35 The need to eliminate low-priority, unproductive elements o f government expenditure to make space for higher-priority, more productive expenditure i s a major political and administrative challenge. It must be achieved in combination with pension reform, as pension obligations are running at unsustainable levels. To improve the efficiency o f resource allocation and obtain better value for money, the government also must win i t s fight against corruption; it must address all issues that help create an environment that tolerates and enables corruption; it must reduce the acceptability o f bribery and corruption; and it must achieve more effective detection, investigation, and prosecution o f corruption. 3.36 There i s a need at all levels o f government to develop capacity in financial and procurement. The pay structure must be amended to attract and retain technical and managerial staff qualified to meet the needs o f government operations. The value o f existing capacity building initiatives has been questioned by the Budget Committee and stakeholders, and a more appropriate way forward must be identified. Given the introduction o f new budget guidelines and new information technology (IT) system, the GoU and its development partners must determine what i s the most effective form o f training and assistance. The capacity required by different LG authorities and procurement entities varies, and the assistance given to these entities must be based more on needs. 3.37 There have been considerable improvements at the LG level, and basic goods and services are now being provided, but the need for more effective political participation (and less political interference) remains to be addressed. Local government budgets must be made more realistic if they are to effectively translate LG priorities and objectives into appropriate resource allocations. -17- 4. LINKING POLICIES AND PLANS TO THE BUDGET A. MEDIUM-TERM RESOURCE ENVELOPE 4.1 The introduction o f the medium-term expenditure framework (MTEF) has made it possible for the Government o f Uganda (GoU) to formulate a resource envelope for medium-term planning that i s consistent with projected macroeconomic development. Most important, the MTEF also makes it possible for the Ministry o f Finance, Planning, and Economic Development (MoFPED) to project the size o f different budget components (for example, wage, nonwage, or development) in different scenarios on an aggregate level. In this respect the MTEF i s an important stabilizing fiscal factor. 4.2 Budget coverage generally i s considered to be improving. Those resources not explicitly included in government budgeting primarily are linked either to the diminishing number of development partner (DP) projects that are directly funded outside the budget framework (estimated to be around 25 percent o f total budgeted central government expenditure) or to non-tax-revenue-financedexpenditure exempt from transfer to the Consolidated Fund (estimated to be about 2.25 percent of total budgeted expenditure). (Concerns over defense spending, however, are increasing the pressure on some DPs to return to project funding.) The quality of information on DP project financing i s poor; better forecasts o f revenue and DP financing, as shown in the 2002/03 Annual Budget Performance Report, would stabilize medium-term forecasts and improve the credibility o f the MTEF process. 4.3 A mandatory requirement that government ministries include all projects in their budget submissions i s being introduced for fiscal 2004/05. This new system o f budget formulation will require the inclusion o f mechanisms for incorporating cross-cutting reforms, will require greater clarity of the financing o f technical assistance, and will require the introduction o f mechanisms to manage project resource shortfall. It also will require line ministries and local government (LG) entities to state expected donor project disbursements, maintain close interaction with donors, and report to the center on donor projects during the fiscal year. (The authorities have not yet established mechanisms to ensure the ex post integration o f donor projects into expenditure reports.) The proposal entails the amendment o f Public Finance and Accountability Act regulations to invest the Accountant General with the authority to require reporting on expenditure on all projects executed by line ministries. There are no plans as yet to seek reports from LGs on project implementation. Finally, incorporation into the budget of in-kind project aid would require donors to report the monetary value of such aid as it i s disbursed-information that i s not readily available. B. ALLOCATION RESOURCE 4.4 On the basis o f current predictions, Uganda i s likely to achieve some but not all of the Millennium Development Goals (MDGs). Specifically, the goals for primary education completion, secondary gender equality, and child and maternal mortality rates are unlikely to be met. If the country i s to meet the Poverty Eradication Action Plan (PEAP) and MDG goals and the anticipated increase in demand for social services, the GoU must make a concerted effort to improve efficiency and resource saving. Public expenditures must be both better targeted, to ensure that the available resources are used to benefit those most in need, and better used, to ensure the best possible results per unit o f expenditure. -18- 4.5 The key to the efficient and effective allocation o f resources i s a strong link between policies, plans, and budget.’* In theory, the PEAP and long-term sector development plans are linked to the budget through the MTEF, with sector budget strategies set out in Budget Framework Papers (BFPs). The process o f determining MTEF ceilings i s a consultative process initiated by MoFPED, and involves stakeholders from central government, the donor ~ommunity,’~ parliament, local government, and civil society. The extent to which the MTEF addresses PEAP priorities i s weak, however. Although the GoU i s committed to linking the MTEF and PEAP, it i s doing so through the PEAP revision process rather than through any systematic means. The need for a consensus on priorities and for all parties to respect this consensus throughout the budget process cannot be overemphasized. In addition, appropriate analysis o f payroll costs and o f the implications o f pay reform strategies need to be incorporated at an early stage into the MTEF process. The link between local and national priorities also i s not well formulated, although the introduction for the 2005/06 budget process o f a joint annual review o f decentralization i s intended to ensure that local priorities are incorporated more effectively into the national budget process. The intention i s that this review will be held in October, prior to the national budget workshop. 4.6 The budget in Uganda i s divided between areas protected under the Poverty Action Fund (PAF), and non-PAF areas. Poverty-reducingexpenditures within the existing classifications are identified during budget preparation, and the priority poverty-reducing expenditure i s ring-fenced for tracking purposes under the PAF. PAF activities are routinely reported to parliament and are included in the documentation submitted for the annual budget. The PAF has been particularly successful in attracting budget support from donors, since it provides a degree o f assurance that funds will reach targeted poverty-reducingareas. 4.7 However the PAF does not comprehensively cover all poverty-reducing expenditures envisaged under the PEAP. Whether the PEAP prioritization o f social sector spending as a vehicle for poverty reduction i s the most sustainable solution to the problem i s under debate. There are also concerns that the distorting effects o f the PAF might cause efficiency losses in the government’s budget formulation process, because budget cuts impact disproportionately on non-PAF areas that support the performance and effectiveness o f PAF resources. The planned shift toward a more integrated and dynamic resource allocation system would better support plans for a performance-based budget process and reduce the risk o f distortion and efficiency but until overruns on public administration (PA) and security are curtailed, a move away from PAF mechanisms i s unlikely to occur. 4.8 Proposed allocations over the medium term are shown in Table 10. Budgetary allocations to the different sectors show little change. The share allocated to security i s programmed to decline from 10.9 percent in 2004/05 to 10.5 percent in 2006/07. The share for PA i s set to rise from 12.5 percent in 2004/05 to 13.2 percent in 2005/06, before returning to 12.5 percent in 2006/07. Agriculture i s programmed to increase from 3.4 percent in 2004/05 to 4.0 percent in 2006/07. The shares for education and health are programmed to remain almost constant, at approximately 18 percent and 21 percent respectively.Education will continue to take the largest share o f budgetary resources in the medium term. (It should be emphasized that, based on past experience, the reliability o f forward projections- particularly with respect to PA and security-is not good.). The role o f the NPA in the overall planning process is still evolving and therefore i s unclear, given the participatory development o f PEAP and sector plans. l3 The GoU has indicated that the PER process i s the only channel by which DPs may comment on allocations. l4This issue i s discussed in detail in Williamson and Canagarajah, July 2003, Development Policy Review paper. - 19- Table 10. Sectoral Shares of Expenditure over the M e d i u m T e r m (percent) 2000101 00 1102 2002103 2003104 200415 2005106 2006107 Outturn Outturn Outturn Approved Projected Projected Projected Security 13.94 12.55 14.08 11.09 10.9 10.9 10.5 Roads and works 8.54 8.27 7.35 10.91 12.3 13.2 13.2 Agriculture 1.46 2.24 2.33 3.32 3.4 3.6 4.0 Education 24.94 24.05 23.031 19.85 18.1 17.9 18.1 Health 7.36 8.60 9.00 12.08 11.2 11.4 11.1 Water 2.43 2.59 2.62 3.14 3.3 2.6 2.6 Justice, law, and order 6.53 6.72 6.91 5.42 5.0 4.7 4.7 Accountability 1.09 1.13 1.24 5.70 5.8 3.5 3.6 EF and SS" 5 -02 6.46 7.20 8.42 9.4 9.7 9.9 Public administration 20.17 19.30 17.40 12.44 12.5 13.2 12.5 Interest payments 8.53 8.09 8.57 7.63 7.6 8.9 9.2 Total 100 100 100 100 100 100 100 Source: MoFPED, July 2004 a Economic functions and social services 4.9 The overall budget i s scheduled to increase by USh405 billion for 2004/05. The roads sector i s programmed to receive the highest increase, o f USh91 billion, primarily due t o DP project funding. Accountability i s the only sector programmed to receive less funds (this due to the reduction in MoFPED projects), although over the medium-term planning period the allocations to ethics and integrity and external audit are also due to decrease. The increase for the security sector and P A appears to contradict the government commitment to reduce expenditure on security and reform the PA vote. 4.10 At the local government level, the weakest element o f the budget cycle appears to be the effort to link policies and plans to the budget. In particular, the linkage between District Development Plans (DDPs) and Budget Framework Papers (BFPs) i s weak. The development plans are in some cases thorough, present coherent objectives and strategies, and are backed up by sound analysis, but unless they are properly costed and resource-constrained (as was the case in the sample only o f Apac and Kabale) they are likely to prove unrealistic. The sequence o f the budget cycle furthermore obstructs the effective linkage o f policies and budget, as it requires that DDPs be prepared and approved at the same time as are the BFPs. The need for two separate medium-term planning and budgeting tools also i s questionable, and the fact that two are used would seem to suggest that the role o f the BFP, in linking plans to the budget, i s poorly understood. 4.1 1 A secondary problem, but one that compounds the poor sequencing o f events in the process, i s the lack o f contestability of resource allocations by LGs. For resources to be allocated efficiently, different policy proposals must be evaluated against each other so that choices can be made o n how best to spend the money, both within and across sectors. This means that LGs must have the autonomy to allocate their funds based on the merit o f the budget proposals put forward by different activities. 4.12 The current lack o f autonomy i s due to sector ministries increasingly using conditional grants t o ensure that central policies and plans are implemented at the local level. The allocation formulae for grants have evolved arbitrarily, and have not necessarily been equitable. The situation has been confused further by a lack o f coordination between LG budget formulation processes and the provision o f funding allocations and guidelines. This has culminated in the center setting conflicting and confusing budget ceilings and formats and disseminating inconsistent information regarding plans and budgets. - 20 - 4.13 Furthermore, allocation choices are not clearly presented to councilors in the budget process. This, combined with their l o w level o f autonomy, undermines the ability o f councilors to make choices beyond the location o f different services. Ensuring that local prioritization i s recognized in the consultative process could mitigate the apparent tension between the achievement o f national targets and local priorities. Budgets otherwise are unlikely to reflect adequately a local council’s true priorities; lack o f political ownership o f those budgets additionally means they are less likely to be realistic and implemented as planned. 4.14 The G o U has acknowledged the need to move away from the control o f inputs and toward agreement on common policies and objectives. I t also has agreed that LGs must be given greater autonomy. Efforts, led by the Local Government Budget Committee (LGBC), established under the Fiscal Decentralization Strategy (FDS), are underway to redress the situation. The LGBC, which i s chaired by the Local Government Finance Commission (LGFC), has overseen major negotiations between LGs and sector ministries that, if followed through, should result in significant improvements. The negotiations have seen agreement on the need to reduce the number o f conditional grants to one recurrent and development grant per sector, on the development o f allocation formulae for these grants, and on agreement o f sector policies, conditions, budget lines, and output indicators for budgeting and reporting purposes. 4.15 The new allocation formulae represent significant progress toward the equitable distribution o f resources across the country, and toward grant allocations that are more transparent and comprehensible. The new formulae would create winners and losers, however; to ensure that no LG w i l l lose out it has been agreed that the formulae should be introduced gradually over a three- to five-year period. 4.16 In addition, the F D S mandates that LGs be given 10 percent flexibility, rising t o 20 percent from fiscal 2004/05, to reallocate recurrent grant allocations within and across sectors. This means that spending departments in future will be required to justify their budget allocations. Councilors will have the opportunity at the budget conference to decide how to use this extra flexibility. Although it was available to all LGs this fiscal year, there was little evidence o f this debate having taken place in the sample LGs. While some districts, such as Mubende and Bushenyi, have made innovative use o f the new flexibility, it appears that the unpredictability o f grant ceilings set by central government continues to undermine the local process. 4.17 Concerns also remain that the extra flexibility in the allocation o f recurrent grants will not be applied to development grants, and that the issue o f the proliferation o f sector planning guidelines and formats will not be addressed fully. Integration of sector planning modalities with lower-level development planning, and complete flexibility in the allocation o f sector development grants, are key to ensuring the adequate contestability o f resources. The revision o f the LG development planning guides represents an important opportunity t o introduce real contestability o f development resources. C. FORMULATION BUDGET 4.18 In general, the Ugandan budget formulation process works well, and has improved in the last decade. Legislation and supporting circulars are comprehensive and relevant (although it would be difficult for the government to comply with all stated requirements), and recent changes in legislation have strengthened the budget planning process. However, although there are many regulations supporting the primary legislation, confusion persists in the area o f roles and responsibilities regarding the enforcement o f compliance (for example, in budgeting for the payment o f arrears). The regulations furthermore place a heavy workload o n MoFPED, which i s required to intervene or act o n many o f the instructions, guidelines, and other regulations. This situation could constitute a fiduciary risk if the volume o f detailed requirements makes it difficult for MoFPED t o follow up on key financial control -21 - mechanisms, such as the comprehensiveness o f registered commitments or the submission o f nontax revenue (NTR) by sector ministries, and to impose the necessary sanctions on noncompliance. 4.19 According to MoFPED, BFPs are gradually improving and becoming less o f an academic exercise. In many cases they s t i l l lack realism, however; that is, they do not realistically reflect what can be achieved given the available capacity in a sector. BFPs are primarily concerned with nonwage and development issues; additional staffing and pay increases are the concern of the Ministry o f Public Service and are not incorporated and analyzed at an early stage o f the budget process. Sector working groups also are not realistic in their budget formulation process and typically include planned undertakings that are inconsistent both with budget ceilings and with the capacity o f the sector to utilize funds. Underbudgetingfor certain items also i s commonplace, and lack of counterpart funding threatens the successful implementationo f numerous projects. 4.20 Budget Framework Papers should be based on a set o f costed activities that support the objectives o f the sector programs. This presupposes access to accurate and appropriately classified financial data, but would support a more balanced budget dialogue, and if practiced, should result in the formulation o f more realistic sector ceilings. These would then enable sector ministries to expand use o f the MTEF beyond its application merely to the annual budget process. 4.21 Under the new FDS modalities, LGs were supposed to use the new structure o f the BFP as set out in the 2003 Budget Guidelines. This was not done adequately, so the Local Government Finance Commission i s reviewing the BFPs submitted and providing feedback. This review i s finding that many LGs are not taking advantage o f the flexibility available to them. I t confirms also the benchmarking findings that there i s almost universally no link between DDPs and BFPs and that there i s a general lack of understanding o f the cross-sectoral nature o f LG activities. 4.22 There i s a similar lack o f a clear link between BFPs and annual budget estimates at the LG level. Local government budget estimates vary in quality, and many comprise simply a set o f tables o f calculations that are unexplained and that lack clear justifications. Many LGs prepare their work plans according to funding source, with the objective o f fulfilling central requirements such as those for Poverty Action Fund conditional grants, or for departmental administrative purposes for the chief administrative officer. The work plans are seldom used as a means o f presenting to council the intended activities and results from budgeted expenditure, and typically are not discussed by council. 4.23 The use o f output-oriented budgeting i s being introduced as a legal requirement o f the Public Finance and Accountability Act (PFAA), with effect from July 2004, to improve the link between policy objectives and resource allocation. To date, the different sectors have used the BFP process to identify appropriate performance indicators. Some progress has been made in moving away from purely quantitative targets, such as the number of exercise books, to contextual targets such as the ratio o f text books to pupils, but even these new targets ultimately are input-oriented. Defined outputs are a more appropriate monitoringbenchmark of budget implementation, but the Ministry o f Defense (MOD) and the public administration have had difficulty in determining appropriate outputs. The indicators used tend also to focus on service delivery and LGs, and not on central agencies. For example, health sector indicators are dominated by LG service delivery levels and outcomes, despite the fact that more than 50 percent o f the budget i s spent by the Ministry o f Health. 4.24 Meaningful implementation of output-oriented budgeting i s also being delayed by the slow implementationo f results-orientedmanagement (ROM). Under the PFAA, a l l votes are requiredto ensure that their budgets are output- and outcome-oriented. This provides an opportunity to legally require agencies to prepare ROM annual performance plans, and to require that these be linked to the resource allocation process. To effectively prepare and implement such plans, managers must be able to manage - 22 - their own resources. However, under the existing public service regulations, departmental heads cannot hire and fire based on staff performance. Consequently, no government line ministry or department has made noticeable progress in implementing ROM. Wages also are not integrated into the manager’s budget, which in a service-oriented environment puts a severe constraint on the methods available by which to achieve specified outputs or outcomes. Procurement planning 4.25 The procurement regulation^'^ require every procuring entity (user department) to prepare “a multi-annual rolling work plan for procurement, based on the approved budget.” The regulations provide extensive guidance on the process. The team witnessed very few work plans actually being prepared, and most o f these were in the ministries and in state enterprises that have large procurement budgets. The general impression at central and local government level i s that procurements are launched either when funds are available or on an annual basis, regardless o f how this corresponds with current needs. 4.26 The consequences o f this practice are that procurement i s failing to meet the actual needs o f user departments; opportunities to realize advantages o f scale and bulk purchasing are lost; and the possibilities o f improving value for money through the use o f different packaging and timing are missed. Participation 4.27 Civil society participation in the budget process has increased, as demonstrated by the participation of civil society organizations in the national and regional budget workshops o f October through December 2003. Members o f Parliament (MPs) participate in the budget process at almost all levels, either as members of specific finance-related committees or as individuals. They have participated in various sector working group workshops, the national workshop, and in the regional workshops for LGs. Development partners also participated in the October workshop, the May Public Expenditure Review (PER), and at regular PER working group meetings. Cabinet approves the MTEF ceilings and the draft national BFP and submits it to parliament for comments. After parliament has commented on the preliminary indicative budget and macro and social plan, the cabinet makes required revisions. The president presents the budget to parliament in June. Budget classification 4.28 The GoU recently adopted the Government Financial Statistics system and the Classification o f the Functions o f Government (COFOG). The latter will be adjusted to match the structure o f the new PEAP. The new classifications include fund and funding source, administrative (vote and cost centers), project, Medium Term Budget Framework (sector), MTEF (objective, output, and activity), and account (class, item, and sub-item) codes. Spare segments within the COFOG provide flexibility for future requirements. 4.29 The budget for 2004105 i s being prepared using a new chart o f accounts, and the COFOG functional classification i s being defined by use o f the reporting capability o f the integrated financial management system. The chart o f accounts provides a framework for better budget management and the progressive adoption o f the elements o f accrual accounting, including the eventual recognition of nonfinancial assets and liabilities such as depreciation. It also should facilitate multiple forms o f budget and accounts reporting and expenditure, and revenue tracking at all levels o f government. As a result it should produce information, such as data on the use o f resources, that i s better able to support decision- making, and should enable more transparent financial reporting. ” Division I1o f the Procurement Regulations; specifically Section 96. - 23 - 4.30 At the LG level, there are concerns that the new chart o f accounts includes prescribed codes only for directorates, and not for departments. As reporting in the future i s to be based on performance against budget rather than by conditional grant, it i s imperative that the GoU come to an agreement on a standardized budget structure that incorporates the new establishment structures (not yet implemented) for different types o f LGs. D. KEYCHALLENGES 4.31 As indicated in Section 5.3, much work must be done to restore and improve the integrity o f the budget process, to minimize overruns, and to ensure that agreed allocations are supported. Failure to adhere to this regime may result in additional pressure from some development partners (DPs) for a return to project funding, and could threaten the relationships that have been built up over the last few years. From the DP perspective, there i s a need also to improve the predictability o f funding and to ensure that DP project disbursements are incorporated into projections. Budget Framework Papers need t o be made more realistic, and achievable estimates o f planned activities and the implications o f staffing and pay increases need to be incorporated into the budget process at an earlier stage. The effective implementation o f output-oriented budgeting hinges o n successfully implementing ROM, and effectively incorporating salaries and wages (including contestability) into the budget framework. 4.32 The success o f the new classification framework will depend on the integrity o f accounting systems and on the availability o f critical skills and data. Personnel at all levels must be trained to understand the potential o f the system, in conjunction with the integrated financial management system, to support monitoring, decision-making, and reporting requirements. 4.33 There exists within local government the technical expertise to accomplish the necessary planning and budgeting changes, but this expertise i s undermined by weak political engagement and a poorly sequenced process. If they fail t o take into account the availability o f resources, and if they are insufficiently linked to the BFP and budget, District Development Plans will continue to be unrealistic. In consequence, they will not be fully implemented, local communities will become cynical about the process, and local government objectives are unlikely to be achieved. Absent greater local political participation, aided by user-friendly budgets and work plans, activities at the local level will continue to be driven by national demands rather than by local needs. - 24 - 5. RAISING REVENUES, DEPLOYING RESOURCES, AND UNDERTAKINGACTIVITIES A. RAISING REVENUE Domestic revenue 5.1 Uganda faces the challenge o f increasing domestic revenue, which has stagnated at about 12 percent o f GDP for the last five years. Trade taxes in the first half o f fiscal 2003/04 provided 53.5 percent o f this domestic revenue, but entry into the East African Community Customs Union i s expected to result in a tax loss o f USh86 billion. Furthermore, the options for widening the tax base in the medium term are limited: although some increase in domestic revenue could be registered through improvements in tax administration, particularly in the areas o f excise duties and VAT (value-added tax) on local goods, the increases in revenue in the short term would be marginal. 5.2 Changes in tax policy therefore are necessary if Uganda i s to increase the contribution made to GDP by domestic revenue. The GoU needs to quickly identify the most efficient, equitable, and administratively simple ways o f increasing tax revenue (and should review the issue o f tax holidays that are eroding the tax base). It needs also to begin to implement the findings o f the Ssebutinde report into corruption at the Uganda Revenue Authority (URA) and to modernize and enhance administrative efficiency. Computerizing customs procedures, in particular fully implementing the new ASYCUDA++ system, could potentially contribute significantly to efficiency. 5.3 Customs practices have improved and efficiency i s rising, but the valuation o f goods continues to be unsophisticated, and there are plenty of opportunities for corruption. A 2003 survey o f administrative barriers to investment in Uganda identified customs as one o f the five biggest obstructions: the 1971 Customs Act i s outdated; flaws are numerous, and provisions that hinder sanctions against fraud and corruption need urgently to be removed. Forwarding and clearing agents also have limited professional skills, resulting in delays, under- and overinvoicing, and proceduralirregularities and corruption. 5.4 Nontax revenue (NTR) includes revenue from ministries and departments; URA collections on behalf o f the ministries; and property income, in the form o f interest on project accounts, dividends, and the rent o f institutionalhouses. As in previous years, NTR underperformed in the first half o f 2003/04 due to the nonpayment of dividends by enterprises and agencies in which government has an interest. I n addition, nontax receipts from central government ministries and agencies were below the targeted level (in 2002/03, collections were about 80 percent o f total projections). Appropriation in Aid was abolished two years ago, but evaluations by the Accountant General (AccGen) suggest that this underperformance may be due to the unreported retention o f NTR. External aid 5.5 According to information from the Aid Liaison Department (ALD), foreign,assistance finance in fiscal 2002/03 accounted for 13.9 percent o f GDP. This figure i s expected to increase marginally to 14.0 percent in 2003/04. These figures are slightly higher than those based on the aggregates presented in the budget, of 13.1 percent and 11.2 percent respectively. The Government’s aid policy i s that a l l foreign - 25 - developmental assistance to Uganda, including loans, grants, and technical assistance (TA), should be made within the framework o f the Poverty Eradication Action Plan (PEAP). The government i s committed to taking a lead role in Uganda’s developmental process, and through consultations with its development partners (DPs), has agreed a set o f partnership principles. These principles are intended to enhance the management o f external aid resources through the budget framework, with emphasis moving from projects toward programs under a sector-wide approach (SWAP). Formal coordination mechanisms linking aid policies and programs to the PEAP have been clearly established, with the aim o f achieving the optimal use o f foreign assistance in poverty alleviation initiatives. 5.6 A major concern o f the GoU i s the high proportion o f foreign assistance funds channeled through investment projects, rather than through budget support or programs under SWAps. This i s contrary to the agreed partnership principles. The foreign assistance inflow to Uganda in fiscal 2002/03 amounted to US$789 million, o f which US$330 million (42 percent) was received through investment projects (see Figure 1). (Equally, there i s a trend that budget i s greater than project support.) The projections for 2003/04 and 2004/05 suggest that this trend will change, with investment project financing exceeding budget support/SWAps financing in 2004/05, but these projections should be regarded with caution. Figure 1. Foreign Assistance Inflows FORBGN ASSISTANCE INFLOWS 900 aoo 3 700 5 600 YI v) 500 400 Z 300 C a 200 E 100 u o Financial Year Source: Macroeconomic Policy Department, MoFPED, July 2004 5.7 The level o f budget support financing has steadily increased in the past five years, however, and there i s strong support from DPs for a move toward SWAps in key sectors. Such a move would be expected to promote common management and implementation arrangements and significantly reduce the transaction costs incurred by government in coordinating and managing foreign assistance. 5.8 The bypassing o f MoFPED in the process o f recording the actual disbursement o f project hnds- and in a few cases the channeling o f grants directly to line ministries-means that MoFPED i s unable to keep its aid database up to date. As a result the development budget estimates and debt records are incomplete. Projects executed by nongovernmental organizations (NGOs) also are not recorded, so these activities cannot be taken into account in assessing the optimal allocation of the government’s own resources, both within and across sectors. Direct payments by DPs to the providers o f goods and services are also difficult to capture. Together, these factors undermine the ability o f MoFPED to plan the budget based on a comprehensive understanding o f all resources available; they also jeopardize the efficacy o f - 26 - public expenditures. MoFPED has advised all government units that from fiscal 2004/05 all DP-funded projects (loans and grants) will be part o f the total budgetary resource envelope. Local government revenue 5.9 Local government revenues in recent years have been undermined by political interference from both the central and local government levels. During the presidential and parliamentary election campaign in 2001, payment o f graduated tax (GTax) was discouraged. Council elections in 2001 further reduced the payment and collection o f GTax. This year there has again been high-level talk that GTax may be abolished, effective 2005/06, a fact that i s likely to further undermine collection (whether or not abolition goes through). Since 1998 there additionally have been large increases in the size o f the grants flowing from the center to LGs, with the result that LGs have found that they can deliver key services without being too rigorous about collecting taxes. The lack o f a social contract (in the form o f local taxes) between residents and their local councils severely undermines the accountability process, reducing local interest in ensuring that funds are used appropriately. 5.10 The LGs have been overoptimistic when projecting local revenue collections, with the result that those spending departments that rely on local revenues have not received their full budget allocation. Local revenues nonetheless comprise a significant proportion o f LG income, especially for the lower- level LGs that benefit least from conditional grants from the center. 5.1 1 Both local and central governments are beginning to understand the importance o f local revenue, however, and on the administrative side the situation i s improving. The Local Government Finance Commission (LGFC) has carried out studies o f revenue generation and has produced best practice guidelines, and the Ministry o f Local Government (MoLG) has supported this move by developing a local revenue module for the new capacity-building curriculum. The second LG Development Program (LGDP2) also has a component devoted to enhancing revenue collection, making improvements in revenue a more prominent criterion in the annual assessment process. 5.12 The LGFC and LG Budget Commission (LGBC) have agreed that GTax deductions for salaried employees should be made in 12 equal installments, from the next fiscal year. This should make it easier for LGs to manage cash flows relating to local revenue. The M o L G and M o F P E D are commissioning a study to identify and analyze sources o f revenue that potentially might replace GTax, and the M o L G has tabled a Local Government (Rating) Bill that would enable LGs t o collect property tax from commercial and industrial properties in rural areas. If GTax were to be abolished, however, property tax may provide the only viable revenue alternative for LGs. The impact on private sector investment o f ‘a new property tax naturally would need to be closely assessed. 5.13 With the exception o f Tororo, all the LGs studied in the benchmarking exercise had made significant efforts to improve tax administration (although many o f these initiatives were recent and had not always proven successful). Absent the identification o f a viable alternative, however, the continued discussion o f the abolition o f GTax i s likely to undermine any progress made. B. RESOURCES DEPLOYING Procurement and contract management 5.14 The Procurement Act, which broadly describes the methods for public procurement, has greatly helped to clarify the legal framework and eliminate exemptions. The act applies t o “all public procurement and disposal activities” undertaken by public institutions, including state enterprises (SEs), - 27 - statutory authorities, and the military. In addition, the act covers procurement carried out by any nonpublic entities that benefit from public funds. 5.15 The inclusion o f non-security-related procurement constitutes a significant change from the previous regulations, which exempted all Ministry o f Defense (MOD) procurement from the general rules for public procurement. Section 42 o f the new act requires that the MOD separate its procurement into an “openyy and a “restricted” list. Procurement o f items on the restricted list must follow specific rules as laid out in the act, but procurement o f items on the open list must comply fully with the act. 5.16 At the time o f the Country Procurement Assessment Report (CPAR) in February 2004, the MOD had not formed a contracts committee. This was a requirement even in the old regulations, and was reiterated by the new Procurement Act. (A committee finally was established in June 2004.) The MOD itself defines which items are open and which are restricted. The Public Procurement and Disposal o f Assets Authority (PPDA) i s not involved in this process, and as a result the PPDA has not been able to carry out its mandate with respect to the monitoring and enforcement o f MODprocurement. It i s reasonable to assume that the MODsuffers to at least some extent from malpractice. The MODand the Uganda People’s Defense Force (UPDF) are estimated to account for up to 25 percent o f the total procurement volume in Uganda, and are among the largest buyers o f foodstuffs, clothes, and many other ordinary items. The lack o f monitoring and enforcement o f procurement regulations as a consequence i s a serious concern. Regulations on the financial audit o f classified expenditure only became effective from 2003/04, and procurement audits o f the restricted list can only take place once agreement on the list itself i s reached by the PPDA and the MOD. 5.17 The new procurement regulations are characterized by several weaknesses. Most important, the regulations seem too bulky and complex to be practically adaptable to the Ugandan procurement environment. At a total o f 958 pages, including scores o f forms and appendixes, the regulations are poorly adapted to an audience in a decentralized procurement system. Their size and complexity may in fact be the greatest obstacle to their proper dissemination and implementation. 5.18 A number o f weaknesses also are observable in the implementation o f the legal framework. Even at the central level, this study found that most entities were unaware o f specific regulations, and gross violations o f the stipulated procedures were widespread. While the procurement cycle may follow the accepted path, actual practice i s characterized by a number o f malpractices. The budgeting o f procurement i s weak, and the procurement selection methods described in guidelines issued by the PPDA are often circumvented, by the splitting o f tenders, for example, the use o f micro procurement, and, in particular, through use o f the restricted bidding method. The study also found several instances of missing or incomplete files and o f otherwise faulty filing systems. This makes enforcement extremely difficult and allows corruption to spread. 5.19 Section 126 o f the regulations provides for the use of prequalification (or registration) lists. Registration lists are widely used, are often based on generic criteria, and are rarely verified. The preferred procurement method i s restricted bidding based on shortlists developed from these lists, with the result that it i s a general rule that, to do business with the public, a supplier must be on the list.16This naturally creates a situation that i s susceptible to corruption, but it i s the next step, selection of the supplier from the list, that appears most uneven and prone to corruption. The regulations require the bidders to be rotated on the shortlists, but this study found no evidence of such rotation. The perception o f the private sector i s that decentralizationhas increased the use o f these lists; that the lists are administered l6 The team met with private companies forced to maintain and resubmit requests for inclusion on registration lists at more than 40 different entities. - 28 - unevenly and in contradiction with the principles of transparency and equality; and that their use i s costly, as substantial fees are required to maintain a position on the lists. 5.20 Sections 219 and 220 o f the regulations permit the use in certain circumstances o f precontract negotiations. I t was observed by the CPAR team that negotiations in the award process are in fact common, to the extent that they tend to be the rule rather than the exception, even in competitive bidding. This situation i s considered natural by the procuring entities. 5.21 The perception o f the private sector (a perception confirmed by the CPAR and LG Integrated Fiduciary Assessment (LGIFA) teams and by the Auditor General reports) i s that contract management i s poor, leading to poor value for money (VFM). The main reasons for this are threefold: (1) poor specifications leading to excessive need for variations; (2) lack o f knowledge o f simple contract law and standard terms o f contract; and (3) lack o f qualified professionals to perform quality assurance. 5.22 The institutional framework stipulated by the Procurement Act has produced a number o f improvements since the 2001 CPAR, including the full decentralizationo f procurement to procuring and disposing entities (PDEs) in central and local government. According to Article 24 o f the Procurement Act, the PDEs shall be composed of an accounting officer, a contracts committee (for LGs, a tender board), a procurement and disposal unit (PDU), a user department, and an evaluation committee. The act also requires the replacement o f the Central Tender Board as regulatory and monitoring body by the PPDA. The GoU should be congratulated for its achievements so far, but some unresolved areas remain. MoFPED, for example, seemingly has not actively pursued the policymaking role that the Procurement Act mandates for it. And while the PPDA oversees the regulatory and monitoring functions, it i s s t i l l in a constituting phase and will need to be further strengthened if it i s to serve as a center o f excellence and expertise in the area o f public procurement. 5.23 The Procurement Act also covers public procurement at the LG level. While a few LGs use the draft Local Government Tender Regulations of 200 1, most continue to apply the 1998 LG Financial and Accounting Regulations (LGFAR). The MoLG, aided by the PPDA, has taken action in this area by initiating the drafting of a set of LG procurement regulations," but the CPAR team i s concerned that the adaptation o f local regulations to the specific needs o f LGs"-and specifically, ensuring that they are simple and easy to apply-may be inadequate. That said, successfully implementing similar regulations at both levels could deliver huge gains in capacity building and complaints handling. 5.24 In practice, the Procurement Act appears to not yet have made any impact at the local level. The general impression o f the CPAR study i s that procurement at the LG level i s nontransparent and not econ~mic'~ (it should be noted, however, that there have been significant improvements over the last two or three years, including the formation o f tender boards in a l l districts and the publicationo f tenders). One reason for the current weaknesses i s the way in which tender board members are nominated and appointed. The LGA requires the chairman o f the district council to nominate tender board members, who are then appointed by the district council executive. The appointment o f these members i s done mainly on the basis o f political patronage, and procurement decisions are consequently tainted by political and local interests. A tangible result i s the widespread use o f local preference in the awarding o f contracts: in many " The tender for a consultant to draft the local regulations was underway in March 2004, but ground to a halt as the PPDA investigatedallegations o f misprocurement. It i s understood that these problems have now been settled. The terms of reference for this consultancy were made available to the team. Unfortunately, the terms do not mention the simplification and adaptation to the local procurement environment, but appear to focus on transforming the existing central regulations.The set time period of two months appears too short. This i s corroborated by a recent study (Assessment of procurement capacities and systems in LGs in Uganda, 2003) undertaken under USAID financing. - 29 - cases, the CPAR team found that local tender boards appeared more interested in keeping business within their own district than in achievingVFM. 5.25 The LGIFA noted that LG procurement i s unlikely ever to be completely free from politicking or from conflict o f interest. The wealthier, better-educated community within most districts (including councilors, civil society, and the business elite) tends to be small. Everyone knows each other, and many are related to each other. Councilors and administrative staff tend therefore be close to or part o f the local business community. Whether appointed by council or not, conflicts o f interest in procurement are bound to arise between tender boards, LG officials, and the local business community. Therefore, technical procedures must be carefully enforced, to ensure that they meet the requirements for transparency, and contracts must be carefully monitored and executed. All are weak at the LG level. 5.26 Another major weakness o f the LG Financial and Accounting Regulations i s a provision that denies suppliers and contractors from outside the council area the right to participate in providing goods and services. The CPAR team’ was informed that this provision i s intended to build local capacity; in practice, however, it reduces competition, encourages the formation o f cartels, and does not build capacity. Commitment control systems 5.27 A commitment control system (CCS) has been in operation since 1998 to track payment arrears in nonwage recurrent and development spending. The CCS does not cover arrears of wages, pensions, court awards, or utilities; nor does it deal with the stock o f arrears, which in a cash-based accounting framework escape recording. Fiscal reports compiled by the AccGen do not report stocks and flows o f expenditure arrears-this information i s separately and unsystematically compiled, data for wage and pension arrears being collated from line ministries by the Ministry o f Public Service (MOPS), and for utility arrears by the Parastatal Monitoring Unit (PMU). 5.28 Implementation o f the CCS suffers from weaknesses that undermine the reliability of data on payment arrears. The Budget Committee has expressed its concern over arrears and the pace at which stock levels are being reduced and additional arrears are being incurred. Reports by the Treasury Inspectorate Department (TID) o f the Accountant General’s Office (AGO) note that “AOs [accounting officers] have continued to conceal information by withholding invoices after exhausting quarterly commitment limits until such time when funds are available. This has led to overcommitments towards the end o f the fiscal year and eventually arrears [unfunded outstanding commitments] at the end o f the fiscal year.”20Reports o f the Internal Audit Department (IAD) o f the AGO additionally identify types o f noncompliance by the AOs, including purchases made without a local purchase order (LPO), post-dating of LPOs, the absence o f an invoice register, the use o f duplicate vouchers, and the nonrecording of commitments until they are paid. Service providers should be concerned that the CCS adversely affects service delivery. 5.29 At the local level, there also i s no consolidated information on the stocks and flows o f arrears. Evidence from selected districts suggests that expenditure arrears, especially in the areas of salaries and pensions, are widespread. Recent World Bank reports indicate that some districts may be holding stocks o f arrears o f up to 20 percent o f their budgeted expenditures.” In the LGIFA benchmarking exercise it was discovered that Tororo district had accumulated significant utility bills arrears and that, due to poor debt management, Masaka municipality had been unable to meet its salary bills. Jinja district authorities Annual Consolidated Report on Performance o f CCS prepared by the TID o f the AGO (August 2003). ’’ See the Public Expenditure Review, November 2003. - 30 - estimated payment arrears (mostly pensions and gratuity) in excess o f USh400 million. And in Kayunga district, which was created only in 2001, the stock o f nonwage arrears was already reported to be USh60 million. Cash Management 5.30 Cash i s a valuable resource. It needs to be managed effectively and efficiently to ensure that money does not lie idle or have to be raised through costly loans. The government payment system and banking arrangements use multiple bank accounts operated by a variety o f budget entities. This arrangement runs counter to the need for an effective cash management system centralized at the treasury, and can result in a suboptimal use o f government cash. 5.3 1 The government i s trying to resolve this situation by rationalizing the number o f bank accounts. Ministries, departments, and agencies (MDAs) are now required to submit quarterly action plans and monthly commitment monitoring reports as a basis for MoFPED quarterly expenditure approvals and monthly cash releases. Releases in the form o f warrants are issued by the AccGen to MDA and LG bank accounts at the Bank o f Uganda or direct to operational project accounts at commercial banks. Commitments are not permitted unless there i s sufficient cash cover in MDA bank accounts, and failure to make CCS returns results in the delay or cancellation o f releases by MoFPED. The capacity within line ministries to monitor and approve action plans for the release o f conditional transfers to LGs, however, i s weak. 5.32 This system has improved cash control and has helped to reduce arrears to government suppliers. However, the system also has caused delays in procurement due to the nonavailability o f cash, has left balances lying idle in MDA accounts, and has caused significant operational inefficiencies. Additionally, depending on the aggregate government cash position, MDAs report that monthly cash releases may fall short o f quarterly approvals and that non-Poverty Action Fund-related expenditure may be subject to severe cuts. (In contrast, P A F expenditure i s protected under various aid arrangements.) MDAs also report that the system has a tendency to increase the incentive to generate arrears, particularly in relation to noncontrollable expenditure items such as utilities, and to undermine both P A F and non-PAF activities, which often are mutually interdependent. 5.33 Proper cash planning involves projecting the timing o f the collection o f revenues during the fiscal year, and planning the timing o f expenditures accordingly. The majorityof LGs do not plan their disbursements, but merely wait for cash to arrive, and then choose how t o spend it. Conditional grants usually are transferred promptly t o the appropriate sectoral account; unconditional grants are used to pay salaries. Any cash received from local revenue collection i s disbursed as soon as it i s received, typically in an ad hoc manner. (In Apac district this cash was disbursed in proportion to departmental budget allocations for local revenues. In Jinja, in contrast, the chief financial officer had a pile o f approved payments in a drawer from which he selected a recipient for the cash as and when it arrived.) Most districts hold regular meetings to discuss priorities for payment; the budget, however, seldom provides the basis o f these discussions. 5.34 Kabale has developed i t s o w n system o f cash management, o n i t s o w n initiative. The district has a cash flow budget that sets out the expected timing o f inflows from different revenue sources and the department expenditure ceilings, over a two-month period. These statements are endorsed by the executive. The district also keeps quarterly cash projections and schedules for disbursement to the spending departments. Kabale i s the exception rather than the rule, however. Within the vast majority o f LGs there i s an absence o f proper cash management. -31 - Debt management 5.35 Transaction processing, accounting, and debt reporting are undertaken centrally by the Accountant General, in cooperation with the Aid Liaison Department (ALD) and the Bank o f Uganda (BoU). A debt management and financial analysis system (DMFAS) i s installed with the AccGen and BoU, and the AccGen’s system has recently been upgraded with the assistance o f United Nations Cpnference on Trade and Development-staff have been trained, procedures developed, and reports and manuals designed. Data have been captured from the BoU system, and a comprehensive data validation and cleaning exercise, including a review o f domestic debt obligations and contingent liabilities, i s underway. Monthly debt reporting i s available from the system and a coordination committee involving stakeholders has been established. 5.36 In theory, the law allowing LGs to take out loans appears fair, limiting the size o f the loan to 25 percent o f local revenues, and requiring the prior approval o f the minister. It also states that the executive should provide “a guarantee to the effect that repayment o f the loan shall not adversely affect the operations o f the LG council; and in particular meeting the statutory obligations including salaries” (LGA Schedule 5 , para. 20). In practice, without the development and presentation o f an annual cash flow budget, incorporating loan repayments, for the forthcoming fiscal year, the irregularity o f local revenue inflows and the obligation to make loan repayments has meant that Masaka municipality has been unable to meet i t s salary bill. Generally, information i s incomplete on outstanding debt obligations at both the local and central government levels, and may lead to unknown contingent liabilities. Payroll management 5.37 There are serious doubts over the integrity o f the payroll system, which i s maintained centrally by the Ministry o f Public Service (MoPS). A recent consultancy reportz2 undertaken by crown agents identified multiple risks at each stage o f the payroll/pensionsand HR processing system, including invalid or unauthorized payments, delays in making payments, errors in payments, incomplete data, and unauthorized access to the system. The reintroduction o f various benefits and allowances i s further obstructing the effective management o f payroll costs-and compounding these problems i s the well- publicized issue o f the existence on the public payroll o f thousands o f nonexistent “ghost” workers. 5.38 All health, education, and most other service delivery staff are on the centrally administered payroll. However, through their District Service Commissions, LGs have control over the appointment, promotion, and disciplining o f staff. It i s known that some LGs do not update their establishment registers or maintain salary arrears registers, and reports from the Inspector General o f Government indicate that corruption exists in the payment o f arrears to teachers. All o f these factors compromise the integrity o f payroll information. The MoPS additionally has been the source o f delays in processing LG appointments, although this particular situation has improved. 5.39 Studies for a new integrated personnel and payroll system (IPPS) and human resource management system have been undertaken, but there i s as yet no funding available to implement these systems. Uganda Computer Services (UCS) provides information system support for payroll and pensions, the general ledger, and check production, but has access only to obsolete application software that i s difficult to maintain and upgrade. A lack o f funding has in the past been cited as the main reason for a lack o f progress in payroll management, but a number o f improvements could be readily made by instituting greater compliance with rules and procedures, auditing the system, and developing a clear pay reform strategy. 22 Review of Business Processes o f the Payroll and Pensions System o f Central Government o f Uganda December 2003 - Crown Agents - 32 - C. ACTIVITIES UNDERTAKING 5.40 Central government agencies have failed to systematically link work plans to budgets. Results- oriented management (ROM) annual performance plans that are not linked to resource allocations carry little meaningful weight and lack legal standing in budget implementation. Central agencies therefore have been required only to adhere to their budgets, and not to activities identified in the work plan. Article 17 of the Public Finance and Accountability Act (PFAA), requires agencies to make a statement o f objectives alongside their budget, and redefines overexpenditure as occurring where money i s expended “for a purpose for which no monies have been voted and appropriated.” This potentially provides the legal basis for ensuring that annual performance plans are adhered to and that activities are implemented as planned. 5.41 For local government, the focus has been primarily on service delivery indicators. Annual work plans have become more common within LGs, because o f the requirements of PAF conditional grants, and revisions o f work plans are required to be approved. Nevertheless, it appears that LG administrations/executivemembers may be able to alter work plans without redress. The credibility o f the planning and budgeting process as a means o f identifying local council objectives and priorities i s undermined when the planned location o f a water point, classroom, or road can be changed without the approval o f the council. Until work plans are approved by the full council, alongside the budget, there i s little prospect o f local councils ensuring that they are implemented as planned. D. KEYCHALLENGES 5.42 Expanding the revenue base and improving tax administration are acknowledged by most stakeholders to be essential steps toward improving the country’s fiscal position. I t will be difficult to introduce any new tax measures in the run-up to 2006 elections, however, and the situation could be further complicated by continuing discussions about the possible removal o f the GTax, the main source o f revenue at LG level. Revenue losses incurred through Uganda’s membership o f the East African Community Customs Union will further exacerbate this problem, and the outdated 1971 Customs Act elsewhere makes difficult the sanctioning o f corrupt or fraudulent practices. Given that the local revenue base i s narrow and unpredictable, and that politicians are able to undermine tax revenues with impunity, stakeholders naturally regard it essential to improve the accountability o f LGs to their citizens. 5.43 The major challenge for government i s to ensure that public procurement processes are transparent, efficient, and effective in providing high-quality, high VFM goods and services at the right time and in the right place. Certain provisions in the regulations, such as access to local preference, are undermining the procurement process and need to be addressed. The lack o f clear policy direction from MoFPED needs to be tackled. The lack o f capacity and o f understanding of procurement processes also i s a serious cause o f concern. Proposed capacity-building strategies are intended to address this issue: the development o f clear, straightforwardLG procurement regulations i s an action within the fourth Poverty Reduction Support Credit (PRSC 4), for example. 5.44 Another key task i s to improve the integrity of public payrolls, which account for approximately 23 percent o f total budgeted expenditure. There also i s a need to improve cash management at both the central level and the local level, to enable implementing managers to more effectively execute their work plans. 5.45 Complete information on debt obligations and contingent liabilities i s not available. This i s a problem that must be resolved, to both assist the budget formulation process and to support the Ministry o f Justice when defending questionable claims. In addition, the Budget Committee has noted with concern the level o f arrears and the pace at which arrears are being settled. This i s placing a significant burden on - 33 - suppliers, many o f which are small or medium-size enterprises. The inability o f the commitment control system to record accurately or check the growth o f arrears finally also i s a concern. This issue t o some extent will be addressed by the introduction o f the integrated financial management system, but in many instances it will require also better budget discipline on the part o f accounting officers and the sanctioning o f those officers who contravene regulations. - 34 - 6. REPORTINGON THE USE OF RESOURCESAND ACHIEVEMENT OF RESULTS A. ACCOUNTING AND RECORD KEEPING Accounting framework 6.1 Since the previous Country Financial Accountability Assessment, the Public Finance and Accountability A c t (PFAA) and corresponding regulations have been enacted. However, although new Treasury Accounting Instructions were drafted in June 2003, the 1991 instructions remain operational. These do not reflect the contents either o f the new legislation or o f other public financial management (PFM) improvements implemented in the intervening years. The 2003 instructions unfortunately also are based o n manual systems that are in the process o f being superseded by the new integrated financial management system (IFMS). The Accountant General accordingly proposes to incorporate the new internal control and accounting requirements o f the I F M S into the latest Treasury Accounting Instructions; this i s expected to be completed during the pilot operation o f the I F M S that was scheduled to end in June 2004. 6.2 Three sections within the Accountant General’s Office (AGO)-the Treasury Office Accounts, the Treasury Inspectorate Department (TID), and the Internal Audit Department (IAD)-are responsible for the overall management and supervision o f the accounting framework; the consolidated fund; internal audit and inspection; statutory reporting; and central processing for public debt, payroll and pensions, and foreign aid transactions. Ministry, department, and agency (MDA) accounting and internal audit units are primarily responsible for internal control, pre-audit, the payment o f creditors, receipting, accounting, bank reconciliation, and financial/budgetary control reporting. 6.3 The Ministry o f Finance, Planning, and Economic Development (MoFPED) has finalized a study o n the restructuring o f the AGO.23Based o n previous experience, the progress o f the proposed restructuring through the necessary approvals procedure with MoFPED, the Ministry o f Public Service (MOPS), and the Public Accounts Committee (PAC), i s expected t o be slow. It i s clear, however, that if the benefits o f the investments made in the PFAA, in training, and in the I F M S are to be realized, the restructuring proposals must be expedited through finalization, approval, and implementation. The rapid transition o f the proposals into reality would also serve to ensure sustainability and to maximize the opportunity for skills transfer while consultants to the W o r l d Bank’s Economic and Financial Management Project (EFMP) and to the UK-sponsored Financial Accountability Program (FAP) are s t i l l present. A similar review o f staffing requirements also needs to be implemented for the accounting units at MDAs that will progressively be affected by the I F M S and the new requirements o f the PFAA. 23Ministry o f Finance, Planning and Economic Development FAP /01/02 - Organisational Review o f the Directorate o f Accounts Draft Final Report - October 2003 - 35 - B. SYSTEMS FOR ACCOUNTING,FINANCIAL REPORTING, AND INTERNAL CONTROL Current systems 6.4 Uganda’s basic transaction, processing, internal control, and accounting systems are either manual (receipting, payment vouchers, cash books, vote control registers, reconciliation processes) or standalone, partially computerized systems. Nontax revenue (NTR) and Uganda Revenue Authority (URA) tax i s transferred from ministry, department, and agency (MDA)/URA collection accounts monthly to the consolidated fund. The Auditor General’s 2001/02 report cites numerous cases o f fraud, waste, and poor documentation in relation to revenue collection and recurrent and development expenditure and revenue. 6.5 The Accountant General i s o f the view that the trend i s significantly downward, however, and that the materiality o f such leakages i s decreasing. The Education, Health, and Agriculture and Works Ministries also claim that the basic framework o f accounting (record keeping, maintenance and reconciliation o f ledgers, production o f monthly and annual accounts, and bank reconciliation) i s operating more efficiently, and that their accounts are consequently being produced with greater levels o f accuracy, timeliness, and reconciliation. There are no objective indicators to verify these claims, but as internal auditing becomes more system-oriented it should become easier to compile and maintain the relevant data. 6.6 The G o U attributes i t s claimed improvements to a number o f factors, including stricter implementation o f the commitment control system (CCS), which now requires submission o f expenditure and NTR reports to secure the release o f further funds; closer monitoring o f contingent liabilities; increasing levels o f computerization; data conversion preparations for the implementation o f the IFMS; and improved skills on the part o f accounting personnel, as a result o f the EFMP-IIiFAP training programs. However, a review o f the status o f CCS and monthly and quarterly reporting suggests that gaps continue to exist in the regularity and quality o f accounting and financial reporting. While some improvements clearly have been made, the ability o f internal control and financial reporting systems to support proper documentation, and the completeness, accuracy, and timeliness o f reporting and reconciliation, remains weak.. Integrated financial management system 6.7 The G o U recognizes that i t s existing systems do not provide a sound basis for accounting and financial reporting. In consequence, G o U i s implementing a major reform program through the EFMP-I1 and FAP projects. An important element o f this program i s implementing the IFMS, which i s intended to provide the framework to redress many o f the system weaknesses identified earlier. The new IFMS system i s operating on a pilot basis in MoFPED, five sector ministries, and four LGs, but will also facilitate the capture o f transactions and balances from other nonpilot MDAs and LGs through the use o f journals. As a result it w i l l generate the consolidated year-end financial statements for these entities. 6.8 The IFMS i s based o n the core modules o f Oracle Financials (budget management, purchase order, accounts payable, accounts receivable, cash management, general ledger, and financial reporting), a product o f Oracle Consulting, and i s fundamentally an accrual-based package. I t therefore enables as a standard feature the capture on an accrual basis o f revenue/expenditure transactions and, where available, balances o f accounts payable, accounts receivable, and financial assets and liabilities. Hewlett Packard and their subcontractor, Oracle, have additionally provided a facility to allow the generation o f cash-based year-end financial statements to meet the cash-based accounting requirement. The IFMS also provides for -36 - the capture and consolidation o f MDA budgets, the release o f budgets and warrants t o MDAs, commitment control and reporting, in-year cash flow management, and extensive reporting. An interfacing capacity additionally permits the capture o f payroll, public debt, check and URA tax revenue data. 6.9 During early system mapping it emerged that the budget formulation and cash flow forecasting modules did not fully meet the requirements o f the original specification. Significant customization o f the system was found necessary; the contractor Hewlett Packard has agreed to facilitate this customization but these functions will not become operational until the commencement o f the 2005/06 budget cycle in October 2004. The full I F M S i s timetabled to r o l l out according to the schedule shown in Table 11. Table 11. Planned Schedule for the Rollout o f the IFMS February 2004 (exists) 2 12 sector ministries and six districts 1 July 2004 to EFMP-I1 30 June 2005 (exists) 3 37 districts, 13 municipalities, 28 agencies, and 1 July2005 to does not exist 26 embassies 30 June 2007 4 Fixed-assets module (all entities) 1 July2005 to does not exist 1 30June2007 6.11 In this context the most important actors are MoFPED (specifically the Budget, Aid Coordination, and Macroeconomic Policy Departments) and other ministry planning and budget units. The Ministry o f Local Government (MoLG) has an important role t o play in facilitating LG implementation, and a specialist revenue module for LGs i s being piloted by Kampala City Council. This implementation has been held back, however, by the limited availability and capability o f counterpart staff, reliance on the AGO t o provide transitional/project management capacity, and the weak participation o f the M o L G . 6.12 The I F M S i s highly complex, sophisticated, and expensive. Having chosen this route, the G o U must overcome a number o f major challenges to fully realize the benefits o f the system, while ensuring that security i s not compromised. From an accounting and financial reporting perspective, failure to address specific issues relating t o the sustainability, functionality, and extension o f the system are liable to result in higher rather than lower levels o f fiduciary risk. In particular there i s a need to ensure that: 0 either internally or externally there i s sufficient capacity to manage the ongoing implementation process; 0 funds are available for the maintenance o f the system; 0 government can retain staff at all levels who have the capacity t o utilize the system effectively; 0 the coverage o f the system i s comprehensive; and - 37 - 0 funding i s available to facilitate any future rollout. 6.13 The introduction o f the I F M S also poses significant challenges for the OAG, whose staff must acquire the specialized skills required for conducting audits in a complex I T environment. Because information technology systems are vulnerable t o technical failure, unauthorized access, and computer fraud, the OAG will need to develop the capacity to review the integrity, security, and availability o f the IFMS. The OAG, supported by a specialist advisor funded under EFMP-11, has secured an online audit facility to the I F M S that provides access to all G o U transactions and enables it to activate an audit trail. The OAG has also participated in user acceptance testing, and has recommended developing a number o f user controls. Records management 6.14 The legal framework for records management i s provided by the 2001 National Records and Archives Act. The act also has provided for the transformation o f the Records Management Department o f the MOPS into the Records Management and Information Technology Agency. Draft regulations have been prepared. In addition, the procurement regulations include detailed instructions o n the contents o f a proper procurement file. The CPAR team identified two serious problems: missing or incomplete files, the result o f carelessness or malpractice; and faulty filing systems, in which documents have been grouped with similar documentsz4instead o f in a single complete file. Improper filing o f this nature has been recorded in every audit report on procurement in Uganda.25 6.15 Assistance has been provided in the past by the UK Department for International Development (DFID) and the Danish International Development Agency (DANIDA), but records management remains severely underresourced-the temporary arrangements for the central storage o f records are inadequate and the facilities available within MDAs limited. Most record keeping i s done manually, and there i s significant duplication o f data across the GoU. Records management staff have been appointed to most MDAs and LGs and some training has been provided, but in general staff lack the training, storage space, and equipment to deliver anything other than a l o w level o f service to their respective institutions. The perception among staff i s that records management becomes a priority only when a specific issue needs to be addressed and the relevant records are found to be missing. 6.16 This situation presents a number o f fiduciary risks in terms o f the potential loss o f important documentation through inadequate storage, natural causes (fire, water penetration, and so forth), theft, or poor records management. The lack o f policy and procedural advice on how to handle documentation i s a major contributing factor to this risk. In addition, the efficiency o f record keeping i s poor due to the manual nature o f the system, as evidenced in the duplication o f records and the difficulties o f finding, tracking, or cross-referencing documents-a situation furthermore that creates an environment that i s conducive to fraud and corruption. The AudGen refers in many o f his audit queries t o the inability to produce supporting documentation. 24 For example, it i s common for all advertisements or all bids received in a year to be filed together without reference to the rest o f the procurement file. *’ I n the latest draft audit reports seen by the team, missing or incomplete files were an issue in more than 80 percent o f cases audited. - 38 - C. REPORTING I n t e r n a l reporting 6.17 Concerns have been expressed about the integrity, timeliness, and usefulness for budget reporting and decision-making o f the monthly and quarterly financial reports. Only at year-end, when comprehensive information i s required for the production o f the consolidated annual financial statement, do most MDAs make any significant effort to generate useful accounting data. Preparation o f the MoFPED budget performance reports must rely on multiple data sources (the GoU, for example, presents a semiannual and an Annual Budget Performance Review to parliament to report cash releases made in relation to the budget). 6.18 As the medium-term expenditure framework (MTEF) objective, output, and activity coding has not yet been implemented at the transaction level, the Accountant General’s Office (AGO) does not produce accounting reports in terms o f the MTEF format. Instead, it submits accounts to the Budget Directorate, which then prepares in-year MTEF reports. This raises concerns about the accuracy and reliability o f the in-year MTEF reports and about awareness o f these formats at the line ministry and LG levels. 6.19 All central ministries, self-financing agencies, and district-level LGs are required to provide monthly fiscal reports to MoFPED within 20 days o f the end o f the month (it should be noted that reporting on defense activities i s almost nonexistent). I n practice, the status of reporting i s as follows: a Line ministries submit monthly reports within four weeks o f the end of the month. These reports are not accompanied by bank reconciliation statements, but (with the exception o f donor-financed projects) the fiscal information provided i s complete. a Self-financingbudget agencies such as hospitals and universities submit a detailed monthly return o f revenues collected and retained. This report does not provide information on spending from these receipts. A comprehensive fiscal report on all revenues and spending i s made annually. a District-level LGs render a monthly report on expenditures out of conditional and other central transfers, and a separate monthly report on local revenues that they themselves collect. Expenditures from these local revenues are not included in the report. a Subcounties render monthly accounts directly to the Auditor General, who furnishes one copy to the district administration. Fiscal operations o f the subcounties are not made available to MoFPED. a N o reports are prepared on fiscal operations at the parish and village levels. 6.20 The Bank o f Uganda remits a monthly statement o f accounts on inflows into and outflows out o f the bank account holding the consolidated fund (CF). This information i s used to cross-check changes in the bank accounts maintained by line ministries and other reporting entities. Line ministries and districts are not required to (and do not) report on funding and expenditure linked to project aid (which i s not remitted to the CF, but usually i s kept in commercial bank accounts); furthermore, reconciliation statements on these resources are not submitted. Reporting on projects i s purely financial in nature and does not make reference to outputs or results. 6.21 In-year reporting by LGs i s improving, and in most districts i s becoming a relatively routine exercise. However, this reporting has been largely realized through centrally mandated requirements on - 39 - funding, rather than as result o f management or political demands from within the LG. For example, it took a 200 1 presidential directive-a response to concerns about accountability that had been expressed by education donors-to force LGs to start submitting monthly accountability statements. The reporting requirements introduced by the Poverty Action Fund (PAF) have placed a substantial administrative burden on LGs, which, in addition to monthly accountability statements, are required to submit quarterly reports for every PAF grant they receive. While the LGs may comply with these requirements, however, the reports submitted rarely serve a management or local accountability function. 6.22 In accordance with the fiscal decentralization strategy (FDS), from fiscal 2004/05 the existing requirement for a multiplicity o f reports will be replaced by the requirement to submit a single, consolidated monthly report. This will comprise a financial statement; reporting on revenues, commitments, and expenditure against the budget in aggregate; and performance against key performance indicators in each sector. The FDS emphasizes also that this report should be more user-friendly, for local consumption, and that it should contain narrative as well as quantitative data. 6.23 Different sectors operate different systems o f internal reporting. The best system i s that used by the health sector, for which all health units prepare a monthly return using the health management information system. In contrast, the education sector has no regular system o f financial reporting. (Given the widespread reporting o f the misuse o f funds allocated to universal primary education, resolution of this situation requires priority action: head teachers should be required to present simple monthly or quarterly financial returns, verifiable by internal auditors or schools inspectors, to the district education officer and to the subcounty and school management committee.) In many LGs there i s regular, usually monthly, reporting from subcounties to the chief administrative officer (CAO) on local revenue collections and expenditures. In some LGs there also i s regular reporting from sector departments to the CAO or town clerk. External reporting 6.24 The GoU has presented an annual report, including audited financial statements, to parliament within the statutory period for each o f the last six fiscal years. Local government audits are increasingly also being delivered on schedule. The late submission o f accounts for audit has in the past caused all audits to be delivered late, but 46 percent o f district and urban authority accounts for fiscal 2001/02 were audited within the statutory period and it i s anticipated that all 2002/03 audits would be completed on schedule, by June 2004. This i s an indication o f much improved capacity and bookkeeping at the local level, and i s a notable achievement given the lack o f computerized systems. 6.25 Comprehensive annual performance reports are not yet being prepared, however, either by sectors or by LGs as a whole. The lack o f comprehensive annual work plans i s a problem in this regard, with the only real analysis o f performance being carried out within the context o f the Budget Framework Papers (BFPs). The new FDS guidelines require LGs to prepare annual performance reports, thus bringing them into line with the requirements o f the Public Finance and Accountability Act. 6.26 The Parastatal Monitoring Unit (PMU) o f MoFPED, in liaison with the relevant line ministry, i s responsible for the strategic economic monitoring o f state enterprises (SEs). This role involves reviewing operational plans before implementation, and monitoring performance against those plans. To guide and facilitate the unit’s operations, the government categorized SEs into five different classes. The PMU has a good working relationship-ranging from representation on the board to participation in key management decisions, especially with regard to impending privatization-with most enterprises in Classes 1 1, IV, and V. There are no longer any Class I11enterprises. However, the unit has not been accepted by most Class I - 40 - enterprises,26which maintain that legally they have reporting responsibility only to their line ministry. The PMU therefore has been unable to fully exercise its monitoring role on behalf o f MoFPED, and most o f these enterprises submit their annual audited financial statements to the PMU late. This i s o f particular concern as several of these enterprises are not self-financing, but draw upon government for most o f their funding. 6.27 It i s understood that the accounts for a number o f statutory authorities and SEs, o f which there are approximately 71, are not up to date. The responsible ministers and the PMU need to follow up and ensure compliance with the relevant legislation. From 1 July 2005 the PFAA will require that the government report on the net worth o f SEs, by which time a l l accounts clearly must be up to date. 6.28 There are about 4,800 registered nongovernmental organizations (NGOs) in Uganda. Most are small, and most are almost entirely dependent on public funding for their activities. The NGO RegistrationAct and Regulations makes no requirement that NGOs prepare annual audited accounts, nor does it require that they submit accounts or associated management letters to the National Board o f NGOs. The National Board o f NGOs in fact receives no data on the annual monetary value of NGO revenue (grant receipts). This absence o f information on income and expenditure represents a potentially high fiduciary risk that public funds are not being used for their intended purposes. From a macroeconomic perspective, the information available to the BoU on the value o f money flowing through these channels i s insufficientto permit the BoU to manage the economy, However, NGOs are required to provide information on estimated income and expenditure to district development committees, and are required to submit proposed work plans to the ministry responsible for planning and economic development. In theory this means that it should be feasible to assess the overall contribution o f the NGO sector, but in practice this i s likely to be difficult. D. INTERNAL AUDIT AND OTHER MONITORING MECHANISMS Internal audit 6.29 The internal audit function has undergone significant development since the 2001 Country Financial Accountability Assessment. The enactment of the Public Finance and Accountability Act (PFAA) in particular has given the Accountant General the power to “ensure that the internal audit function within each government ministry, department, fund, agency, or other reporting unit i s appropriate to the needs o f the organization concerned.” The act also brings the AccGen into line with internationally recognized standards in respect o f his status and procedures. 6.30 The recently completed study on the reorganization of the Accountant General’s Office sets out the need to devolve the internal audit function to ministries, departments, and agencies (MDAs). In support o f this process, a number o f key documents have been drafted. These include Government Internal Auditing Guidelines, Ethical Guidelines for Internal Auditors in Government, and a detailed internal audit manual. The PFAA also provides for the introduction o f audit committees (from July 2004) to enhance the independence o f the function. Internal auditors for each ministry will now be responsible to the accounting officer (AO) for the ministry as well as to the audit committee for that ministry, established to assist the AO. The duties and responsibilities o f the audit committees are specified in the 26 Class Icomprises SEs in which the state i s required to retain a 100 percent shareholding. Included in this class are the Uganda Wildlife Authority, Civil Aviation Authority, Cotton Development Organization, National Social Security Fund, Uganda Tea Authority, Uganda Tourism Board, Uganda Coffee Development Authority, and all regulatory agencies formed as a result o f sectoral reform. -41 - public finance and accountability regulations, as well as in the draft Charter for Audit Committees and the additional Charter for Internal Audit in Government. 6.3 1 The legal framework i s therefore in place, but the necessary changes in institutional arrangements and working methods are not yet complete. The internal audit function within government i s not sufficiently independent, headed as it i s by a MoFPED commissioner and staffed by personnel who are seconded to ministries. Within the ministries themselves, internal audit staff report to the A 0 of their particular ministry, copying their reports also to the MoFPED commissioner. The support available from the MoFPED commissioner i s limited, as he i s too low in the government hierarchy to be able to effectively advise somebody at permanent secretary level. The importance o f having an effective Internal Audit Department (IAD), capable o f ensuring sound public financial management throughout government, cannot be overemphasized. 6.32 Although there has been some movement toward a review o f the internal control system and other advisory services, the IAD’s duties still contain a large pre-audit component. The department does not perform any technical or value-for-money (VFM) audits as it does not have the necessary skills to do so. In the longer term, strategies must be put in place to coordinate the system’s audit work with the work carried out by the Public Procurement and Disposal o f Assets Authority (PPDA). 6.33 At the LG level, most o f the IAD’s time i s spent on pre-audit work, although the department i s also required to serve the executive with quarterly audit reports on district, municipality, and lower levels o f local government. The independence of the internal audit function i s compromised by the IAD’s involvement in pre-audit, by the proximity o f internal audit personnel to their colleagues at the district level, by a lack o f transport facilities, and by the IAD’s reliance on local revenues. Its potential effectiveness has been demonstrated by its work at the lower levels o f local government, however; for example, in enforcing proper accounting for local revenue in the subcounties o f Jinja district. 6.34 The effectiveness o f statutory authority and state enterprise IADs has been limited by capacity (in most instances these departments are manned by three people or fewer), competence (insufficient professionally trained auditors), and lack o f independence (most audit departments report to the head o f finance). Since the advent of the PFAA the situation at a number o f enterprises appears to have been placed under review, with efforts being made to upgrade the post o f head of internal audit to full managerial grade, reporting directly to the chief executive. Audit committees may also be introduced, as required by the PFAA. Finally, the role o f the internal audit i s also being developed from a predominantly pre-audit level to an approach that i s focused more on the financial management system itself and on the achievement o f value for money (VFM). Public expenditure tracking studies 6.35 Since 1999, public expenditure tracking studies (PETS) have been carried out in the education, health, and water and sanitation sectors. The assessments have addressed: the status o f the universal primary education (UPE) system (two studies); teacher recruitment, deployment, and payroll management; the VFM realized for the school facilities grant; funds under the primary healthcare conditional grant (200 1); drugs (2002); a conditional grant for shared services (2003); and - 42 - the cost-effectiveness and efficiency o f education spending (for which the terms o f reference are being prepared). 6.36 An action plan i s formulated at the conclusion o f each PETS. In theory, its implementation i s ensured by integrating it into the relevant sector policy agenda. However, a number o f stakeholders have voiced their concerns that there i s no effective follow-up o f the recommendations made. 6.37 From a local perspective, PETS are useful exercises for assessing issues o f central concern to LGs with respect to the achievement of national objectives. The fact that they are carried out o n a sample basis, and therefore cannot be seen as a mechanism for identifying individual LG problems, unfortunately means that they can do no more than complement the system o f monitoring and assessing individual LG performance. 6.38 The tracking o f P A F expenditure at the LG level i s facilitated by the fact that a large share o f it i s financed through tied grants transferred to LGs. However, the fiscal decentralization strategy (FDS) envisages a move toward making a higher proportion o f block grants to LGs. This would make the monitoring o f specific P A F expenditures more difficult, but it should enable the evolution o f more comprehensive monitoring systems o f sector performance. O t h e r inspections and monitoring exercises 6.39 Throughout government, there i s little use o f contract monitoring to improve the procurement process. At the LG level, a common concern that has emerged over the years i s the proliferation o f institutions monitoring and inspecting LGs in a disjointed, uncoordinated manner. The Treasury Inspectorate Department, Inspectorate o f Government, sector ministries, and LG inspectors all carry out separate monitoring activities, and there i s serious doubt about the value o f these exercises, particularly where there i s l i t t l e or no analysis o f the information collected. 6.40 The monitoring by LGs o f service provision i s also weak and unsystematic, and there i s little use o f grassroots accountability systems. With the exception o f Kabale, the sample group study found little use o f user committees such as school and health management committees, although the Uganda Debt Network has tried to set up some district and community-based monitoring committees. The potential o f the subcounty t o monitor and supervise the finances o f service providers has not been exploited. 6.41 The preponderance o f monitoring and evaluation systems i s a recognized problem for the GoU, which has recently developed a National Integrated Monitoring and Evaluation Strategy (NIMES) to address this issue. A new compliance inspection system, developed by the Inspectorate Department o f the Ministry o f Local Government, i s another important innovation. LG inspectors are now using an inspection manual to guide the collection of data on all aspects o f the administrative performance o f LGs. These data may be analyzed and used as the basis for targeting support and follow-up. Over time the compliance inspection system i s intended to replace the LG Development Program (LGDP) assessment. 6.42 Some commentators argue that routine sector monitoring should be replaced by a more structured system o f annual sector performance measurement or benchmarking, along the lines o f the current assessments used under the LGDP. This system could then be followed up with technical support targeted specifically at those LGs that are performing poorly. This would reduce the transaction costs between central and local government, and improve the mentoring value o f monitoring by central government. As an additional measure, publishing league tables o f performance i s a proven way o f encouraging better performance by public authorities and o f igniting local demands for accountability. - 43 - 6.43 Cross-sector monitoring i s particularly weak. Discussions at technical planning committee meetings tend to focus on administrative issues, and not on the analysis o f financial or performance reports. The Local Government Information and Communications System (LOGICS) and Financial Information and Analysis System (LoGFIAS) have been designed, like the Health Management Information System, to enable LGs to analyze and use financial and performance data to make better decisions within and across the various sectors. E. KEYCHALLENGES 6.44 From an accounting and financial reporting perspective, the key challenges relate to the sustainability, functionality, and extension o f the integrated financial management They include: 0 ensuring the availability o f a sustainable staff capacity and necessary maintenance budgets; 0 progressively extending and deepening the functionality and utilization o f the system; 0 completion o f the rollout to ensure the system provides the necessary coverage for the whole o f government; and 0 securing the additional funding necessary to complete implementation. 6.45 The quality o f in-year reporting needs to be improved, so that it reflects outputs or results rather than merely fund releases; however, this will require the implementation o f results-oriented management, which has stalled. In terms o f internal audit and monitoring, the challenge at the central and local government level will be to implement the new (or proposed) institutional arrangements and to mitigate any resistance to changes in working methods o n the part o f the auditors, accounting officers, and accounting personnel at line ministries or LGs. Resistance to change in the monitoring arrangements at LGs will also be difficult to overcome without an associated change in remuneration. 6.46 From an LG perspective, the biggest challenge in terms o f accounting and reporting i s t o change the emphasis on upward reporting to one that focuses o n the horizontal and downward functions o f reporting and monitoring. The format that i s ultimately chosen for this must be understood by and stimulate the interest o f all parties, and must in particular reinforce local accountability. The budget implementation guidelines o f the fiscal decentralization strategy emphasize that all reports required by central government should also be presented t o the executive and council, for decision-making purposes. While central government reporting facilitates the release o f funds, it should use the reports primarily for information purposes, rather than for decision-making. 27 Should the IFMS fail, there i s no backup at the moment other than the continued use o f existing systems in parallel. The implementation methodology requires that transfer to the new system occur in stages. Full transfer to the new system will not occur until the new system has become fully operational, at which time parallel arrangements will be discontinued. Backup/disaster recovery arrangements exist in the event o f partial/catastrophic hardwarehetwork failure. - 44 - 7. HOLDING GOVERNMENT TO ACCOUNT FOR ITS PERFORMANCE A. ACCOUNTABILITY Overview 7.1 A number o f organizations, including the Office o f the Auditor General (OAG), the Inspectorate o f Government (IG), the Public Procurement and Disposal o f Assets Authority (PPDA), and parliament, councils, and their committees, have legal and institutional responsibility for ensuring the financial and performance accountability o f government officials. The public has a critical role to play also in overseeing the activities o f these government bodies, and in the private sector, professional accounting and procurement bodies must ensure the integrity o f their members. 7.2 The ability of oversight bodies to carry out their functions clearly depends on the ability o f their staff to carry out their duties in a professional and independent manner. The government-commissioned Skills Gap Study in Public Service that was completed in August 2003 documents the extent to which the GoU has proven unable to recruit and retain adequate numbers o f personnel with the appropriate technical, professional, and managerial skills. Skills gaps undermine the capacity and performance o f the public sector, and are particularly damaging to the oversight bodies. 7.3 In part to address this skills gap, the fifth Poverty Reduction and Support Credit (PRSC 5) includes as a trigger a commitment to a medium-term pay reform strategy. Equally important to the effectiveness o f oversight bodies i s the reinvigoration o f the public service agenda. An integrated approach will be necessary to establish effective institutionaland human resources practices and to avoid the overlap and duplication o f efforts. 7.4 At the local level, the existing mechanisms for holding government to account for i t s performance are nearly as weak as the planning and budgeting system. The strongest accountability mechanisms are vertical: between sector departments, sector committees, and central sector ministries. The public rarely demands accountability from its LGs, and councils are inactive and therefore ineffective at holding their administrations to account for performance. Enforcement and follow-up mechanisms 7.5 The credibility o f the various oversight bodies will ultimately be determined by their ability to enforce compliance with regulations and by their readiness to impose sanctions (or refer to the relevant prosecuting body) on those institutions and individuals that do not comply. Some Uganda Revenue Authority (URA) personnel have been sanctioned on corruption charges, but the approach used has been unsystematic. The prosecution of grand corruption cases can be both difficult and dangerous, and the achievement o f compliance will depend largely on the political will at the central and local government levels to tackle corruption and ensure that rules are enforced. 7.6 The follow-up and enforcement o f audit and inspection findings varies from one organization to the next, but it i s widely acknowledged that for the follow-up to succeed the organizations concerned - 45 - must work together. For example, the Auditor General may in the course o f his work uncover financial mismanagement, misprocurement, or other kinds o f wrongdoing. In instances where public funds have been wasted or lost, it i s the Public Accounts Committee (PAC) that decides on the appropriate course o f action. The imposition o f sanctions, however, would be the responsibility o f the Ministry o f Finance, Planning, and Economic Development (MoFPED). 7.7 Recent legal challenges with respect to the leadership code have diminished the powers o f the Inspector General of Government (IGG). Cabinet proposals to the Constitutional Review Commission (CRC)-including removal o f the power to prosecute and to dismiss personnel, and suspension o f the possibility o f receiving complaints in the tendering process-are considered by some stakeholders also to dilute the powers o f the Inspectorate o f Government (IG). There are legitimate concerns about the overlapping o f duties, but rather than suspending or removing this authority it would seem more appropriate to first clarify the respective roles and responsibilities of the parties involved, thereby ensuring that the appropriate checks and balances remain in force. The IG has also had difficulty in enforcing the implementation o f decisions at the local level, as a result of the autonomy that the constitution has granted to local government. There i s a danger o f reversing the gains made if the proposed amendment to the constitutionregardingthe power o f the IGG were to be approved. 7.8 There are some encouraging signs at the lower level, nonetheless. The district service commissions, for example, are becoming more active in disciplining staff there have been many instances o f head teachers being disciplined for misappropriating universal primary education (UPE) funds, and o f subcounty staff being disciplined for embezzling tax revenues. 7.9 Enforcement o f procurement rules i s difficult. The PPDA has carried out only two audits, rarely acts on complaints, and makes few unannounced inspections. Enforcement i s even more rudimentary at the LG level: the CPAR team witnessed the use o f ad hoc procedures, a lack o f advertisements, the nonpublicationo f awards criteria, and more. 7.10 The inability o f the PPDA to enforce the rules i s further illustrated by the following examples: 0 The Uganda Wildlife Authority publicly denounced the PPDA, and declared that it would not comply with the provisions o f the Procurement Act unless it were assured that its board could participate in the procurement process 0 At the time o f the CPAR, the Ministry o f Defense (MOD) and the Uganda People’s Defense Force had yet to form the contracts committees required by the Procurement Act. In addition, the MOD has assumed full responsibility for deciding the division between classified and other procurements. Legally, it must share this responsibility with the PPDA. 7.1 1 Costly commissions o f inquiry, such as one into the purchase o f unreconditionedhelicopters, are becoming commonplace. The findings o f these inquiries are rarely acted upon, raising serious concerns about both the value for money that they represent and their usefulness. B. OVERSIGHTBODIES Office of the Auditor General 7.12 Under the constitution, the Public Finance and Accountability Act (PFAA), and other enabling legislation, the Auditor General has the statutory responsibility to report to parliament on the propriety and regularity o f the way in which government monies have been spent. In accordance with the constitution, the AudGen i s required to conduct both financial and value-for-money (VFM) audits. New - 46 - Public Finance and Accountability (Classified Expenditure) Regulations came into force on 1 July 2003. These regulations require the Office o f the Auditor General (OAG) to examine and inquire into all classified expenditure, and give the OAG full access to a l l relevant records. The OAG i s a member o f the International Organization o f Supreme Audit Institutions (INTOSAI) and its African counterpart, AFROSAI. As a member o f INTOSAI, the OAG i s expected to apply all auditing standards promulgated by that body. 7.13 The lack o f independence, and limited control over its own financial and human resources, are seriously compromising the ability o f the OAG to fulfill i t s mandate. Consequently there are significant concerns about the accountability o f public funds, fiduciary risk i s high, and the ability o f the AudGen to carry out his role as public watchdog i s severely restricted. These facts diminish the ability o f the AudGen to perform an active and effective role in the fight against corruption and thereby threaten the long-term sustainability of current support initiatives. 7.14 As noted in the report o f the INTOSAI task force on the independence o f Supreme Audit Institutions (SAIs), “in these days o f privatization, decentralization, public sector reforms, and the fight against corruption, ensuring that SAIs have the independence, competence, and resources needed to fulfill their mandates i s more important than ever.” PRSC 5 accordingly includes the trigger that MoFPED must draft a revised audit bill to ensure adequate operational independence o f the AudGen. The revised bill must also mandate that the OAG have its budget approved by parliament, in accordance with the recommendations o f a professional and independent audit board, and that the OAG have management autonomy over human resources. 7.15 Despite these operational constraints, the central government has for the last six fiscal years produced i t s annual reports to parliament within the specified nine-month period (by 31 March). It i s anticipated that all 2002/03 district and urban authority audits also would be completed on time (by June 2004). The AudGen has set out his strategy for carrying out subcounty audits and i s to receive funding through the World Bank. The effective audit o f LG accounts at all levels remains a significant problem, however, due to the inadequacy o f manpower, physical infrastructure, communications, and facilities o f the regional audit offices. The materiality o f local expenditure cannot be ignored, as 40 percent o f the national budget (excluding projects) assigned to spending agencies i s sent directly to LGs, and approximately 75 percent o f Poverty Action Fund (PAF) expenditure i s made at the local level. Risk i s high and i s exacerbated by the fact that there i s also weak local oversight. 7.16 The GoU, through voted expenditures by parliament, funds the OAG. The OAG’s budget i s approved by parliament via an annual appropriation act, and MoFPED controls the release o f funds. Most o f the OAG’s budget i s part o f the PAF program and thus i s largely protected from cuts to released funds, but the OAG must seek the permission o f MoFPED to reallocate funds according to its identified priorities. Despite a significant increase in workload and an increased emphasis on accountability, funding for the OAG in real terms has not increased significantly over the last seven years, with i t s percentage share o f the national budget remaining fairly constant at 0.18 percent. The cost per audit report has fallen, but not as a result o f the better use o f audit resources. Audit risk continues to rise. 7.17 The implementation o f many o f the initiatives to improve the work o f the OAG and to enhance the effectiveness o f training furthermore i s constrained by the inability o f the AudGen to motivate staff through pay, promotion, or other incentives. In contravention o f SA1 principles, he also has no authority to discipline or remove staff. A lack o f accommodation and outdated auditing techniques additionally mean that external auditors are placed with the line ministries on a permanent basis for two to three years, a practice that has in the past compromised the independence o f the auditor. - 47 - 7,18 The AudGen recognizes that the quality o f audits i s low, thanks to poor f i l e documentation, a lack of standard audit programs, and inadequate supervision, A technical advisor, funded under the Bank’s second Economic and Financial Management Project (EFMP-11), i s working with the OAG to update audit methodologies and to implement new financial audit manuals, and a second advisor i s assisting the OAG in the area o f information technology (IT). Contracting processes also have been reviewed, raising the standard o f work done by private sector audit firms on behalf o f the OAG. (There nonetheless remain some concerns about the quality o f subcontracted work, and strict quality control measures need to be applied.) 7.19 The AudGen and the IGG have a good working relationship, but there i s still a lack o f clarity concerning the roles and reporting mechanisms between the AudGen and the PPDA on the issue o f procurement audits. There seems to be room for mutual cooperation, without compromising the constitutional mandate o f the AudGen. Adopting a collaborative strategic approach to the monitoring, audit, and oversight actions associated with the procurement and disposal function at central and local government level should improve accountability. Parliamentary and council committees 7.20 There are 12 standing parliamentary and council committees, o f which five are directly concerned with financial matters. These are: 0 the Committee on Budget; 0 the Public Accounts Committee (PAC); 0 the Committee on Commissions, Statutory Authorities, and State Enterprises (COSASE); 0 the Local Government Accounts Committee (LGAC); and 0 the Committee on the National Economy, which deals, among other issues, with the approval o f loan agreements. 7.21 There are also 10 sessional committees, including one for finance, planning, and economic development. The Sessional Committee on Legal and Parliamentary Affairs reviews the report o f the Inspectorate o f Government, among others. These committees are open to the media and members o f the public (although the public generally are unaware o f this provision). A strategic investment plan has been drawn up to improve the ability o f parliament and its supporting committees and technical personnel to understand and carry out their general functions. 7.22 The PAC has eliminated a considerable amount o f the backlog o f reports (see Table 12). However, the Business Committee has not given parliament sufficient time to debate the outcomes o f the reports. The failure to allocate sufficient time to study o f the reports undermines the scrutiny process and the whole cycle o f accountability. - 48 - Table 12. Status o f Reports on Central Government Accounts a. Refers to the year o f the accounts b. Work in progress 7.23 Following submission o f the PAC findings to parliament, a treasury memorandum (TM) i s issued by MoFPED to inform parliament o f the action taken on each recommendation. Only when the PAC reports have been tabled to parliament do they become publicly available. As presentation o f the PAC reports i s behind schedule, the TMs also are behind schedule, and the effectiveness o f the process thus i s severely constrained. 7.24 COSASE has two major problems: the information on the status o f the entities within i t s remit i s incomplete, and it has a significant backlog o f work. According to the AudGen’s records, which are reasonably comprehensive, COSASE oversees 71 entities, each of which must submit a report to the committee. The obligation to review these reports and to undertake special reviews as requested by parliament represents a large workload. Unlike PAC members, COSASE members have received no special training, and few members have expertise in financial management. 7.25 LGAC members have been active in reviewing the reports o f the Local Government Public Accounts Committees (LGPACs) and associated audited accounts, and LGAC investigations have resulted in some prosecutions, demotions, and recommendations for withdrawal o f the status o f accounting officers (AOs). There i s some debate, however, as to the relevant authority o f the LGAC with respect to the Local Government Pubic Accounts Committees (LGPACs). 7.26 Members of LGPACs are appointees o f council, rather than councilors, and within their limited remit function relatively well. They are mandated to examine internal and external audit reports and recommend follow-up actions. Audit reports are o f variable quality, however, and LGPAC reports as a result tend to focus on the recommendation o f disciplinary action against individuals rather than on underlying systems improvement. LGPACs have limited ability or power to make effective decisions, and their recommendations are rarely acted upon. There i s an almost total absence o f council scrutiny o f accounts, PAC reports, or LG performance, thus underminingthe local accountability process. Public Procurement and Disposal o f Public Assets Authority 7.27 The Public Procurement and Disposal o f Public Assets Authority (PPDA) consists o f four main departments: 0 Training and Capacity Building Department; 0 Legal and Compliance Department; 0 Procurement Audit, Inspection, and InvestigationsDepartment; 0 Finance and Administration. - 49 - 7.28 The main functions o f the PPDA include: 0 advising government on public procurement matters; 0 monitoring procurement performance; 0 developingtraining and certification standards for the procurement cadre, and maintaining links with professionalassociations; 0 issuing standard bidding documents and guidelines; and 0 conducting periodic inspections and procurement audits. 7.29 The PPDA, in the exercise o f its regulatory functions, may commission or undertake investigations, and conduct audits, o f any public procurement or disposal transactions. Since i t s formation it has carried out just two audits, neither o f which has been released to the public, and only a handful o f random inspections. Persons or entities that have committed a corrupt act under the Procurement Act may be fined or imprisoned. The responsibility for prosecution rests with either the Inspector General o f Government (IGG) or the Director of Public Prosecutions (DPP). 7.30 Both the Procurement Act and the regulations stipulate procedures for handling complaints at the procuring entity, and as a second level o f complaint, at the PPDA. The CPAR team found that the procuring entities were largely unaware o f their responsibilities in this respect. Most entities are unsystematic in their handling o f complaints, and the PPDA i s yet to assert itself as a credible channel for complaint. The vast majority o f complaints in which the complainer i s not satisfied by the official finding are pursued at the IGG, by the Auditor General, or handled through informal contacts with the procuring entity. 7.3 1 The few cases that have been handled by the PPDA appear to have received a comprehensive and qualified treatment, but the perception o f the bidders clearly i s that the PPDA will not provide them with justice. The team suspects that this problem i s related to the lack o f ability o f the PPDA to enforce the regulations in situations where political influence i s strong. The same lack o f authority also hinders the PPDA in performing its role as a complaints authority. The PPDA, by virtue o f its mandate, i s independent o f procurement operations, but has been approached for advice in a number o f cases, a fact that undermines the perception of the authority as an unbiased entity. Complaints in cases where the PPDA has given advice should be handled by the IGG, and to handle such complaints the IGG should, where he deems appropriate, appoint a specialist procurement agency with the necessary expertise. This would, however, conflict with the Constitutional Review Commission proposals that recommend the removal o f the IGG from tendering issues. Directorate o f Ethics and Integrity and Inspectorate o f Government 7.32 Observers generally recognize that core government functions-particularly in the areas o f remuneration, human resource management, procurement, and financial management-must work well if the government i s to be capable of curbing corruption. They also acknowledge that detection, investigation, and prosecution of corruption cases must be improved. 7.33 The Directorate o f Ethics and Integrity (DEI) falls under the Office of the President, and i s headed by the Minister o f State for Ethics and Integrity. It represents the political voice o f anticorruption action in Uganda, and i s charged with: 0 responsibility for developing policies and legislation to fight corruption; - 50 - 0 coordinating the activities o f the anticorruption agencies; 0 monitoring and reporting on the implementation o f anticorruption programs; and establishing ethical codes o f conduct for public sector employees. 7.34 Despite staffing constraints, the DEI has advanced the approval process for new legislation, including anticorruption legislation and whistleblower protection. 7.35 The DEI also arranges an interagency forum” on a monthly basis. This i s designed to help improve working relationships, but there i s some debate both within and outside the forum on the respective roles o f some o f the agencies involved and on the lack o f clarity on some issues, including mandates. A key concern relates to the extent to which forum members can work together without compromising their constitutional independence. There also i s considerable concern as to how effective MoFPED can be in carrying out both oversight and implementation activities. 7.36 The functions o f the Inspectorate o f Government (IG) include: 0 supervision o f the enforcement o f the leadership code; 0 promotion and fostering o f strict adherence to the rule o f law; 0 public awareness programs; and 0 investigations. 7.37 Supported by the Danish International Development Agency (DANIDA), the IG’s leadership directorate has completed analysis o f the 65 asset declarations received from government ministers and has commenced the verification process for this group. 7.38 The twice-yearly IG reports outline the type o f work that the inspectorate perform and detail the volume o f complaints and investigations. Between 1996 and 2001, the inspectorate has obtained 10 convictions and 189 prosecutions. The number o f new cases opened in this period exceeded 16,000, but many o f the IG’s investigations are carried out in conjunction with the police and the DPP and are not included in calculations o f the IG’s o w n results. 7.39 The IG also runs a public awareness program that has been effective in raising the profile o f the organization and in advising the public on how to complain about corrupt practices. However, as noted by the National Integrity Survey, there i s growing public acceptance o f bribery and corruption. This suggests that the actual and opportunity cost o f corrupt activities needs to be conveyed more effectively to the public. Professional bodies 7.40 The main functions o f the Institute o f Certified Public Accountants o f Uganda (ICPAU) are regulating and maintaining the standards o f accountancy and prescribing and regulating the conduct o f professional accountants. In 1997 the institute also developed a code o f ethics for i t s members. 7.41 The accountancy profession in Uganda plays an important role in enhancing accountability in the management o f public funds, not only through i t s members who are employed in the public sector,but also through those who provide audit services to institutions entrusted with public funds. However, there i s no quality control or peer assessment program to monitor local auditing f i r m s t o ensure that they Membership o f this forum includes representatives from the DEI, OAG, IG, police (criminal investigationdepartment), DPP, PAC, and MoFPED. -51 - comply with minimum standards and maintain the high technical standards prescribed by the ICPAU; nor does the institute itself have the capacity and resources to monitor and enforce compliance. There therefore i s an obvious fiduciary risk related to the inadequate regulation and compliance mechanisms o f the profession. The Eastern, Central, and Southern Africa Federation o f Accountants i s working to address this issue, but i s limited by financial resources. 7.42 There are two associations for procurement and purchasing professionals in Uganda: the Chartered Institute o f Purchasing and Supplies (CIPS) and the Procurement and Logistic Management Association (PALMA). CIPS i s a locally registered group o f individuals who have passed the UK CIPS course, and PALMA i s a Uganda-based organization that for some years was supported by the International Trade Center o f the United Nations. Both organizations are weak, and neither focuses explicitly on public procurement. There i s a clear need to establish a strong professional association for procurement specialists; this, together with the PPDA, could promote the profession, provide a professional code o f conduct, and assist with capacity-building measures. The ethical dimension i s particularly important because the existing ethical framework i s weak and self-regulation i s virtually nonexistent. Neither o f the two existing organizations could provide examples o f members having been excluded on ethical grounds, despite numerous examples o f misconduct. c. ACCESS TO AND AVAILABILITY OF FINANCIALMANAGEMENT INFORMATION 7.43 In international human rights legislation, freedom o f information i s part of the fundamental right o f freedom o f expression. Uganda, in line with other democratic societies, has made some progress toward ensuring that the public has access to financial information. The constitution guarantees that the budget estimates and audited annual accounts o f government come to the public domain through parliament, which sits in public. The deliberations o f the Public Accounts Committee (PAC) also are open to the public, although this right i s not widely used. The approved budget reports, the government’s annual accounts and the Auditor General’s report on those accounts, and the reports o f the PAC are available in public libraries. Civil society i s engaged in the public sector budget preparation process through workshops that are conducted at all levels o f government (although the budget documentation i s perhaps insufficiently transparent to facilitate meaningful dialogue). 7.44 The Access to Information Bill, No. 7 o f 2004, i s currently before parliament, but there are provisions in law (such as the Official Secrets Act, Cap. 302; the Public Service Act, Cap. 288; the Penal Code, Cap. 120; and the 2002 Antiterrorism Act) that could, if applied inappropriately, restrict access to public information. Subsidiary laws regulating the operations o f the press and other media (the Press and Journalist Act, Cap. 105, and the Electronic Media Act) similarly set limits on the information that may be published. For example, Section 4 of the Press and Journalist Act allows “access to official information subject to any law in force relating to national security, secrecy, or confidentiality o f information.” 7.45 The procurement regulations call for all tenders to be made available to the public through posting on a notice board and through advertisement in “at least one newspaper” of wide circulation, and this provision i s generally followed. The PPDA does not maintain a current list o f all bidding opportunities on i t s website, however. Such a listing would solve the problem o f high advertisement costs that the team found in some instances had been the only reason that an open tender method was not applied. However, real progress in improving the overall transparency o f the public procurement process in Uganda lies not in systems o f publication, but in increasing the volume o f procurement carried out through open tender. - 52 - 7.46 Section 126 o f the procurement regulations provides for the use o f prequalification lists, or “registration lists.” Perhaps the most worrisome practice surrounding the registration lists i s the way potential bidders are selected. The regulations require the bidders to be rotated on the shortlists, but the C P A R team found evidence that the rotation was flawed and in no circumstances did the team find the necessary and required public disclosure o f a rotation system. Public awareness o f the activities o f the PPDA generally i s limited, but there are plans to conduct a publicity campaign to address this issue. 7.47 Information maintained at the Registrar o f Companies i s unreliable, incomplete, and often difficult to find, as the filing system i s paper-based and incorrectly maintained. This unreliability o f the registrar i s unfortunate, as investors and joint-venture partners need independent verification o f the soundness o f companies with which they propose doing business; the public also should have access to the names o f directors o f companies that are awarded public contracts. Significantly, a 2003 survey o f private enterprises in Uganda identified the Registrar o f Companies as one o f the five greatest administrative barriers to investment in the country. 7.48 While most LGs are not open, transparent, or accountable, they are also not closed nor secretive. In cases where there i s corruption at a high level, there logically will also be a lack o f enthusiasm for openness and transparency, but the main reasons for lack o f transparency are in practice a combination o f not knowing how to be transparent and a lack o f priority given to becoming transparent. The information that i s displayed typically i s not user-friendly and i s often out o f date, and information officers have little expertise in public relations and communication. The one notable exception in the sample group was again Kabale, where the LG publishes newspapers and local councilors regularly appear o n a local radio station. 7.49 Effective mechanisms for local transparency and accountability are key t o ensuring the efficient use o f resources at the level of the service unit. The effect o f publishing universal primary education (UPE) receipts o n school notice boards, ensuring that the vast majority o f UPE funds reached schools, has been widely quoted outside Uganda.29However, there i s l i t t l e accountability regarding the actual use o f those funds and the resulting outputs, and this i s a serious cause o f concern for many stakeholders. D. KEYCHALLENGES 7.50 The major challenge for all oversight bodies i s to improve their capacity and credibility as watchdogs o f government activities. They must ensure that the rules are enforced. In order for them to fulfill their functions, there must be willingness at all levels o f government to comply with the rules: unless rules are enforced, the government and the Ugandan people will continue to obtain poor value for money from the expenditure o f public funds. 7.51 For the Office o f the Auditor General t o operate as a Supreme Audit Institution, it must have greater independence, and clear separation from the finance and public service ministries. The Public Procurement and Disposal o f Assets Authority must improve i t s credibility as a regulatory and monitoring body, and parliamentary and council committees must have a better understanding o f the roles that they play in ensuring financial accountability and high levels o f service delivery. 7.52 The most difficult challenge that faces government, however, i s to ensure that the public interest i s upheld and that the authority and capacity o f the anticorruption authorities i s not compromised. The government must at the same time seek to develop a culture that i s less accepting o f poor service, nontransparent practices, and lack o f information. 29 MacKinnon and Reinikka - 53 - LESSONS LEARNER AND PROPOSED ACTION PLAN A. THE CIFA PROCESS 8.1 This chapter outlines the lessons learned from the Country Integrated Fiduciary Assessment (CIFA) exercise and outlines the way forward. 8.2 The effective management o f a government’s financial resources consists of a number of separate but related processes, involving a variety o f different stakeholders and levels of government. The CIFA aims to provide a means by which the government can comprehensively address the fiduciary risk issues relating to budgetary and financial accountability at all levels o f government. The assessment will help government to meet the demands of i t s citizens and development partners for an integrated and holistic approach to assessing public financial management (PFM) and associated risk. 8.3 In Uganda, preparing the CIFA has involved the coordination and consolidation o f four separate Bank diagnostic processes: the Country Procurement Assessment report (CPAR), the Country Financial Accountability Assessment (CFAA), the Local Government Integrated Fiduciary Assessment (LGIFA), and the Public Expenditure Review (PER). These exercises were supplemented by two additional assessments: the Tracking Poverty, Reducing Spending Assessment, conducted by the Bank and the International Monetary Fund (IMF); and the Fiduciary Risk Assessment, conducted by the UK Department for International Development (DFID). I t i s important to ensure that the maximum benefits are derived from these exercises and that the lessons learned are used to shape future reforms. It i s also important that the CIFA itself provides tangible additional value-specifically, that it helps the GoU to prioritize i t s actions and to recognize the interdependencies within the PFM framework and between different reform initiatives. 8.4 The overall CIFA process has spanned a nine-month period, with each o f the individual assessments being conducted over a two- to three-month period and the PER process being carried out over the entire nine months. The CIFA has benefited from strong coordination o f the various components and from lengthy and continuous consultation with key stakeholders. A good working relationship with the GoU and other major non-governmental stakeholders and the excellent coordination o f development partners played an important part in the process. B. BENEFITS 8.5 The integration o f the different components o f the study highlighted the l i n k s between the diagnostic processes and enabled a greater degree o f harmonization of these processes. I t also helped to improve the GoU’s and other stakeholders’ comprehension o f PFM issues, by providing a comprehensive overview of the situation. The CIFA similarly highlighted the dependencies within the PFM framework, and the clear links to other reform programs. 8.6 The integrated proposed action plan and assessment o f fiduciary risk i s designed to provide the GoU with a sound basis from which to improve PFM in Uganda. The plan and assessment also provide a means to ensure that the various diagnostic assessments relay a consistent message on prioritization to mitigate risk. - 54 - 8.7 Including a specific local government component should be effective in the decentralized service delivery environment that prevails in Uganda. Uganda’s CIFA at the LG level i s the first o f i t s kind in the new generation o f public expenditure and financial accountability (PEFA) LGIFA’s use o f a quantitative benchmarking exercise has proved beneficial in enabling a comparative assessment o f different LGs, and should also prove a useful method o f comparing trends over time. The use o f “yes-no” benchmarks also mitigates the subjectivity o f the assessment. Clearly, given the large number o f LGs, the size o f the sample and the degree to which the LGs chosen are representative i s an important issue. Although the sample used i s small, it i s considered to be representative. c. LESSONS FOR THE FUTURE 8.8 The CIFA takes the CFAA and PER a step further, by including an executive summary and developing an action plan that incorporates the two diagnostics. The CIFA exercise emphasized both the commonality o f problems between the different levels o f government and the differences. In retrospect, a more probing analysis at the LG level might have produced a clearer understanding o f the causes o f the problems, rather than merely the symptoms. Including a procurement specialist in the LGIFA (or better coordination with the CPAR) also could have helped produce a closer understanding o f the problems surrounding procurement at the local level. 8.9 Future exercises will try to improve the consistency o f the PER and CIFA reports and reduce overlaps between them. The next PER and CIFA also will aim to provide a more dynamic analysis o f the budget process and allocations while reducing the normative expectations. We propose that budget formulation issues in future be removed from the CFAA and left to the PER. 8.10 The experience o f this exercise will also help to better coordinate future financial management analysis o f the central and local government finance functions, enabling it more effectively to address pertinent issues at the sector level, both in the finance and service departments. Future exercises also should address the wide variety and diversity o f statutory authorities, state enterprises, and other semi- autonomous organizations, and should more closely address any specific PFM concerns that may not have been adequately tackled here. 8.11 Finally, future diagnostic exercises (should be more closely aligned with the GoU’s budget process, so that any recommendations made can be more rapidly incorporated into the process. Shorter, periodic reviews o f progress that can be aligned with the budget process are needed; the more comprehensive analyses should be conducted less frequently. Annual exercises should use as their basis the public expenditure and financial accountability (PEFA) PFM performance measurement framework. This uses 25 government indicators and two development partner indicators to assess the state o f PFM in Uganda, and thus to monitor the progress o f the GoU’s action plan. D. KEYCONCLUSIONS AND CHALLENGES 8.12 The GoU and stakeholders have gained considerable knowledge and experience through performing this exercise. The CIFA provides significant tangible benefits to the GoU, including an integrated action plan, the potential for reducing transaction costs, a robust platform on which to build sustainable budget support, and a broad assessment of fiduciary risk. A number o f issues and challenges remain, however, regarding the future format o f such exercises and how the DP technical groups should 30 The PEFA program i s jointly financed by the World Bank’s DevelopmentGrant Facility (DGF), the European Commission (EC), the UK’s Department for International Development (DFID), the Swiss State Secretariat for Economic Affairs (SECO), the Royal Norwegian Ministry o f Foreign Affairs, and the French Ministry of Foreign Affairs. The InternationalMonetary Fund (IMF) and the Strategic Partnership with Africa (SPA) are also partners. - 55 - evolve their traditional ways o f working. Key issues to be agreed both intemally and with the GoU and other stakeholders include: e the frequency and content o f such comprehensive exercises - every three years has been proposed; e the relationship between the CPAR, PER, CFAA, CIFA, and the emerging PFM performance measurement framework being developed through the PEFA program; e the relationship o f the CIFA action plan to other reform initiatives, in particular the Poverty Reduction Support Credit (PRSC), the Economic and Financial Management Project (EFMP), the Financial Accountability Program (FAP), and the Capacity and Performance Enhancement Project (CAPEP); e the extent to which the Public Expenditure Management Committee (PEMCOM) can or should take the lead in taking the process forward; e the role o f other stakeholders, including line ministries, nongovernmental organizations, and development partners; e the changes to make to the process and to the substance of the process when repeating the exercise; and e the balance between ensuring that the action plan addresses comprehensively the key issues facing the government, and ensuring that its scope does not render it self-defeating. 8.13 PEMCOM has been entrusted with the responsibility of discussing and making recommendations on these issues. E. ACTION PLAN THEPROPOSED 8.14 I t i s clear from the assessment that the GoU has made considerable progress in pursuing an improved legislative framework, greater technical capacity, and more appropriate institutional arrangements. However, if the time, money, and effort invested in these activities are to be rewarded, two recurring themes o f this assessment must be urgently addressed. First, if the government’s fiduciary risk i s to be reduced, and in particular poor value for money mitigated, it i s essential that technical improvements be combined with a comprehensive review of the public sector, to identify core activities and eliminate duplication. Second, there must be willingness at all levels o f government to enforce the rules. Unless the rules are enforced, the government and the Ugandan people will continue to obtain poor VFM from public funds. 8.15 Annex C sets out the proposed action plan. This plan captures both ongoing or already identified activities (60 percent of the total) and new activities that require clarification or initiation by the government (40 percent). The 60 percent ongoing and identified activities break down into 29 percent ongoing, o f which 10 percent are activities that require refinement or expansion, and 3 1 percent on which the GoU has merely indicated an intention to act. These activities are all included in the action plan to ensure that stakeholders have a comprehensive picture of the issues that need to be addressed. Their inclusion furthermore highlights issues, such as public service, pay, and anticorruption, that may not be traditionally found in PFM plans, but for which improvement i s fundamental to the success of PFM reforms. 8.16 The plan identifies short-term and medium-term actions, identifying the responsible person or institution and the desired outcome. As noted in Section 8.4, the GoU has indicated that it intends, - 56 - through PEMCOM, to review the proposals in detail and to rationalize and phase in the implementation according t o sector capacity and recognized need. F, ARRANGEMENTS IMPLEMENTATION Coordination and management 8.17 The effective coordination and management o f the reforms i s critical to ensure that expenditure represents good VFM; to improve public service delivery; and to recognize the linkages and dependencies between different government activities and institutions. Uganda h as been running a plethora o f reform initiatives, associated action plans, and internal and external monitoring and evaluation systems. In the last 12 months, all stakeholders have made a concerted effort to rationalize the situation. 8.18 The cabinet recently has approved an institutional framework t o coordinate and streamline the implementation o f government policies and programs. This framework i s a four-tier coordination mechanism, including: 0 a cabinet subcommittee on policy coordination, comprising the ministers o f the coordinating ministries and chaired by the prime minister; 0 the Implementation Coordination Steering Committee (ICSC), comprising all permanent secretaries and chaired by the head o f public servicehecretary to the cabinet; 0 a technical implementation coordination committee-a multisectoral technical committee that w i l l be chaired by the permanent secretary o f the Office o f the Prime Minister (OPM); and 0 sector working groups (SWGs), representing all sectoral stakeholders. 8.19 This mechanism i s designed to facilitate intrasectoral coordination, to help realizesector targets and goals. 8.20 The ICSC reviews the progress made in the area o f the Poverty Reduction Support Credit (PRSC) reforms and processes, and i s supported by a secretariat in the OPM. I t i s required to ensure the consistency and harmony o f all government policies and programs. To fulfill this mandate the ICSC must ensure that programs such as public service reform and anticorruption plans follow agreed timetables; it also must ensure that there i s due recognition o f inter- and intra-program linkages and sequencing implications. For instance, local governments need to liaise closely with the National Capacity Building Policy program, which i s coordinated by the Ministry o f Local Government (MoLG). Specific donor projects in the LG environment historically have been targeted to specific geographical areas, but again there i s a need for liaison with any countrywide policy initiatives, to ensure their consistency and compliance with the national agenda. 8.21 P E M C O M i s mandated to provide a framework for improved awareness, coordination, harmonization, and resourcing and monitoring o f central and local government activities, pertaining to public financial management within the context o f the PEAP and the PRSC. Membership o f the committee includes the permanent secretaries from the health, education, public service, local government, and agriculture and works ministries; the Public Procurement and Disposal o f Assets Authority (PPDA); the Office o f the Auditor General (OAG); the Accountant General’s Office (AGO); the Director, Budget; and three development partners. The committee i s chaired by the permanent secretaryhecretary to the treasury. PEMCOM’s central role in coordinating, monitoring, and reporting on the progress o f the C I F A action plan needs to be clearly articulated. The support provided through EFMP2 and FAP should be viewed as a resource for achieving the desired improvements in PFM. - 57 - 8.22 Responsibility for managing the various activities i s assigned either to the responsible department or, as highlighted in Figure 2 in the LG context, to one o f the three main committees working on different aspects o f LG financial management. These are the Local Government Budget Committee, the Local Government Releases and Operations Committee, and the Local Revenue Enhancement Committee. These are all government committees, but it i s nonetheless important that donor initiatives be coordinated with these efforts. We therefore recommend that a representative o f the donor subgroup on decentralizationbe co-opted onto the relevant committee. G. AND EVALUATION MONITORING MECHANISMS 8.23 There i s a multiplicity o f monitoringand evaluation (M&E) mechanisms in place in Uganda. This results in the creation o f poor quality information, duplication o f effort, and diversion o f resources from service delivery. The National Integrated Monitoring and Evaluation Strategy (NIMES) accordingly has been set up as a first step toward rationalizing M&E. The agreed Poverty EradicationAction Plan (PEAP) results and monitoring mechanism provide a high-level basis on which to assess performance in the various PEAP initiatives. The proposed action plan supports the weaknesses, highlighted by NIMES, on information collection. The GoU has indicated that it will decide the exact modalities for coordination, monitoring, and evaluationby October 2004, in consultation with stakeholders. 8.24 The progress o f PFM reforms additionally will be assessed on an annual basis using the PFM Performance Measurement Framework, which i s being developed and piloted as a test case on the basis o f the CIFA report. Over time, we anticipate that the need for separate assessments such as the Tracking Poverty, Reducing Spending Assessment and the IMF’s Fiscal Transparency Report on Observance o f Standards and Codes will be gradually eliminated. H. NEXTSTEPS 8.25 PEMCOM has proposed that before October 2004 it will review and agree with the relevant government stakeholders its relationship with the coordinating and integrated monitoring and evaluation mechanisms approved by Cabinet for the oversight o f the PEAP. I t also intends to review its own mandate and composition to ensure that it i s able to take the action plan forward. 8.26 To take the CIFA forward, and in particular to take forward the action plan, the GoU has indicated that it intends, through PEMCOM, to review the action plan in detail, set out tasks, and prioritize and sequence the necessary activities. I t also will assign responsibilities, to take account o f specific dependencies and capacities. In those cases where financial assistance may be required, PEMCOM will also estimate costs. This initial work on the action plan will be done before October 2004 to ensure that any financial repercussions can be incorporated into the budget process. 8.27 From the perspective o f the development partners, the intention i s to monitor progress on an annual basis using the PFM Performance Monitoring Framework. Once any revisions have been made, the assessment will form the basis for future work. Over time, the need for other assessments should be gradually eliminated. PEMCOM may also request that more detailed work on high-risk areas such as pay and procurement be carried out. - 58 - Figure 2. Proposed ImplementationArrangements for LG Components - f Joint Annual ' - e .I Decentralization E I Review M \ 1 t e .I z1 s 1 .I 5 PEMCOM : .I a d 7 e 0 .I c) LG Releases LG Revenue iz Committee & Operations Committee Committee - 59 - b ,z E II n 8 .- L c M a € 8 e! E, E d e p e p u e p u I 3 \o I U U n a n n a a U U n a n n L, a B .- A e, r a W a n I 3 I I 3 I I v) \o I I vi .- 3 0 e, f %& U 0 m e, e, i E I E, W d W 8 I e e I e, c) 9 a 0 5 x 2 Y m =E! € s e B a cd U 0 8 Y 8 3 e, I cc W I cj m v; N N N I 0 F I a 3 3 L 4i m i i d $ - 0 E * 3 e U 3 e OD E e, 9 E 2 5 g - V 'Z 2 'B i-) 5 Y 8 E Y C 3 2 3 5 n n V 3 3 $1 U c I 3 3 I m t- I 4 ’2: 2 3 G G v W v 3 3 4 0 4 s e h h h 3 v I 7 I e s e 4 h h h 3 d e e n A A - n n h v & E . W W s U .s 5 e, 00 3 3 i3 r2 .- .- v e s e h n h n 0 n d h v W W I I e .e 4 I 3 3. 4 v L Q. ;2 3 h h h h m v v v W e h h h 4 h 4 v v W m N 0 -0 N N =' d I 3 ? ? h h h v v v I I h v 00 c s N u 3 3 c1 s, n W I 0 ec I E N C N > 4 3 oa, 3 4 c e c e n h h A h W I 3 00 I n W e h - 4 e n m V b Y 4 = v 3 O a, h n Q v v Q h v e n 0 n v e, Lc n 00 c m m I m OQ e e h n T h v d I I I% Y m eq 3 4 3 W W 3 v 4 4 ; t ? 2.4, 4 z e z e z e h h h h h h h v .- A s I rl 00 I e e e h h h h h h h v v v v m d 0 $ 4 e o z e L e h h h h h td v I e e h h ‘4 h h v 0 4 W d e, 00 2 d d 3 0 2 % 3 e h h h v - - a e h W h W h v e h '3 * Y BIBLIOGRAPHY Ablo, E. and R. Reinikka. 1998. “Do Budgets Really Matter? Evidence from Public Spending on Education and Health in Uganda.” World Bank Research Paper No. 1926. Washington, D.C.: World Bank. Appleton, S. and S. 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