ADB Grant 0133-CAM: Public Financial Management in Rural Development

Ministries (Component 1)

Linking Strategic Plans with BudgetsJanuary 27, 2010

Linking the strategic budget plan to the annual budget

Session 1: Day 3

Top-down and bottom-up planning

TOP DOWN - MEF

Three-year forecast of resources

BOTTOM UP - MINISTRIES

Three-year budget strategic plans

Annual budget resource forecast Annual budget

Long term sector strategiesLong term resources strategy

Strategic allocation of resources

Annual budget allocations

Timetable for budget preparation

• As stated in the Law of the Public Finance System (May 2008), budget preparation now takes place in three phases:

Phase 1 Preparation of Strategic Budget Plan (SBP)

March to May

Phase 2 Preparation of the Annual Budget

June to September

Phase 3 Budget Approval October to December

Phase 1: Strategic Budget Plan

• SBP has been required by MEF since 2008. The aims of the SBP are: – to link budget planning to the Rectangular Strategy,

the National Socioeconomic Development Plan 2006-2010 and other sector specific development plans;

– to consolidate recurrent and capital expenditures of the national budget and incorporate donor funded projects

• MEF has asked that representatives from project management units be included in the budget preparation process to facilitate the last point).

SBP timetable

First week of March

MEF prepares medium term macroeconomic framework (MTMF), medium term expenditure framework (MTEF), and a mid-term public finance policy for the approval of RGC.

First week of April

MEF issues Budget Circular 1 (BCC-1), signed by the Minister of Finance, governing the strategic phase of budget preparation requesting line ministries to complete the BSP template covering a three-year horizon.

May 15 Deadline for the submission of SBP.

Contents of the SBP

The SBP consists of :(i)Ministry Policy Framework (policies, targets,

programs, strategies, for three years); and (ii)Three-year budgets for revenue, recurrent

expenditure, and capital expenditure by programs and sections

Phase 2: Preparation of the Annual Budget

• The timetable is:First week of June

MEF prepares Budget Circular 2 (BCC-2) signed by the Prime Minister. It contains the templates for detailed budget submissions and guidance

July 15 Deadline for all Ministers, provincial governors, to submit their detailed revenue and expenditure plans to MEF.

July and August

MEF compiles plans and discusses them with ministries and provinces.

Septem-ber

MEF finalizes revenue and expenditure budget and prepares draft annual budget law.

Phase 3: Approval of the Annual Budget

• The timetable is:

First week of October

MEF sends draft law to Council of Ministers for review and approval

November Budget law sent to National Assembly for adoption

First week of December

Budget law to Senate for adoption and final approval by the King before December 25.

Conditions for Strategic Budget Plan to Link to Annual Budget

1. SBP and Budget should be prepared using the same budget classification– Preferably this should have dimensions for

economic items, administration structure, programme structure, function and funding

2. Annual budget must link directly to the first year of the SBP

3. SBP should be a rolling three year plan.. – Work each year should focus on forecasts for year 3

and minor changes for years 1 and 2, NOT a complete rewrite of the plan

Conditions for Strategic Budget Plan to Link to Annual Budget

4. SBP should be a ‘living plan’, not just something that is prepared in April-May– Agreed annual budget should be immediately

reflected in the SBP5. SBP must show future changes in recurrent

costs that result from capital investment now 6. Estimates in the SBP should be backed up by

good costing records.7. SBP should distinguish ongoing committed

plans, existing plans not yet started, and new plans.

1. Budget classification /chart of accounts

• A uniform comprehensive budget classification /chart of accounts (BC&COA) assists planning, budget preparation, budget execution, budgetary control, accounting and reporting.

• Further development of the BC&COA is therefore a priority of PFMRP.

Dimensions of the budget classification

Economic items Salaries, purchases, expenses, etcAdministration MAFF, Kampot Province,

Department of Accounting and Finance , etc

Function Water supply, waste water, agriculture, etc

Program Improving fertility of farm lands, Drinking water supply in rural areas, etc

Funding World Bank, ADB, Government funds, etc

More on these principles

• Covered in the course on Budget Classification and Chart of Accounts

• (March 8, 2010)

2. Annual budget must link directly to the first year of the SBP

2012 20132011 Strategic Budget Plan

2011 AnnualBudget

2011

2011

3. SBP should be a rolling plan

2013 20142012 Strategic Budget Plan

2012 AnnualBudget

2012

2012

New forecast

Ideally only small changes

Easier to prepare

4. SPB should be a living plan

Example: • Agreed 2011 SBP for Ministry X contains

expenditure for sub-program 002:2011: 150 million2012: 80 million

2013: 80 million

• In the annual budget for 2011, overall funds available for Ministry X are reduced, and sub-program 002 is postponed to 2012.

• When should you reflect this change in the SBP?

5. SBP must show future changes in recurrent costs that result from capital investment now

• All capital investments result in changes to recurrent costs (increases, or savings) and sometimes changes to revenues

Example: • An investment in 2011 results in recurrent

cost increases in 2011, 2012, 2013 and beyond.

• These additional recurrent costs should be protected in future annual budgets.

6. Estimates in the SBP should be backed up by good costing records.

XYZ Program

Original 5-year cost projections

Original 3-year projections for

2011 BSP

Agreed amount included in

budget 2011

Actual amount spent in 2011

UPDATE and RE-FORECAST

7. SBP should distinguish ongoing committed plans, existing plans not yet started, and new plans

Year 2011 2012 2013P2 S1 Maintenance of roads Activity 1 Ongoing 45 Activity 2 Ongoing 35 50 Activity 3 Already planned 58 45 Activity 3 New additions to plan 12 8 Activity 4 New plan 70Total 80 120 123 Ongoing operations 80 50 Existing plans 58 45New plans 12 78Total 80 120 123

Advantages of using program budgeting

• Focuses on sector goals, needs and capabilities

• Links inputs to outputs and outcomes• Hence improves transparency of budget• Ensures that all initiatives are properly costed

over a suitable timeframe • Enables the most cost-effective solutions to

be chosen• Assists direction of resources to the most

effective uses

Difficulties with using program budgeting

• Program budgets are unusable if they are too optimistic concerning available resources.

• Program budgeting is ineffective if the basis for resource allocation between sectors ignores it.

• Establishing missions, goals and objectives of programs is lengthy

• Costing of programs is lengthy and detailed and continuous revisions are necessary. Reallocations of indirect costs is time-consuming.

• Effectiveness of program budgeting is undermined if accountability for programs is unclear – program structure needs to be integrated with organisation structure.

Advantages of effective linkage between program plans, SBP and annual budget

1. Making three-year SBP estimates reduces the need to set over-optimistic annual budgets.

2. Annual budgets are easier to set, because planning has already taken place for the program and SBP.

3. The annual budget is linked to strategic plans, not made on an ‘incremental basis’.

4. Hence sectors and ministries can plan to progressively improve their operations and achieve longer term objectives.

5. MEF can plan to allocate resources to sectors targeted in national strategic plans.

Difficulties of linkingprogram plans, SBP and annual budget

1. The master copies of three-year plans are often held at ministries, and are often significantly rewritten from year to year, which should be unnecessary.

2. Finance Ministry should hold master copy of agreed three-year plans. Submissions from ministries should focus on changes to this plan

3. Ongoing plans can be ignored if arbitrary budget cuts are made.