The World Bank
notes
MARCH
PREM
2006
NUMBER 108
PREM POVERTY SECTOR
Pro-Poor Public Spending Reform—
Uganda’s Virtual Poverty Fund
Can governments and donors ensure that the World Bank, which concluded that 15 out of
resources are effectively targeted to poverty re- 24 HIPC countries needed substantial upgrad-
ducing programs? The question raises difficult ing of public expenditure management (PEM)
issues both regarding the anticipated effect of systems. Typically such countries demonstrate:
a specific spending policy on poverty and the • An inability to identify Poverty Reduction
quality of budget management. The Heavily Strategy Paper (PRSP) priorities within the
Indebted Poor Countries (HIPCs) program at- existing budget classification system
tempted to earmark resources released by debt • Budget allocations and out-turns that do
relief to programs that would benefit the poor. not reflect PRSP priority programs
Various developing countries with weak public • Unpredictability in budget allocation/ Donors want
expenditure management systems—such as implementation processes and the inability
Tanzania, Ghana, Chad, Honduras, and Zam- to track expenditures during budget imple- to ensure that
bia—have established special poverty funds, mentation. debt relief is
along the lines or similar to Uganda’s Poverty There was, therefore, an inherent conflict
Action Fund. There are, however, key lessons between the capabilities of recipient budget
used to benefit
from Uganda’s experience, both regarding the systems and the expectation of HIPC donors. the poor in
design of Virtual Poverty Funds (VPFs) and the Given such problems, the temptation to ad- recipient
definition of pro-poor programs, that deserve dress the immediate pressure from donors to
careful consideration in similar initiatives else- account for the use of HIPC resources was to countries.
where. The issue assumes particular significance introduce a dedicated poverty fund with special
in light of the recent decision of the G-8 to ex- implementation and reporting arrangements.
pand the scope of debt relief significantly. But such a short-term remedy would create a
parallel financial arrangement that would divert
Introduction scarce capacity and undermine the integrity of
The provision of debt relief to HIPCs commenc- the overall budget management system.
ing in the late 1990s, and the growing interest The alternative was to create a VPF as a
among donors in providing direct budget sup- bridging mechanism for tracking pro-poor
port, increased donor focus on national budget expenditures in the budget, whilst budget-
systems. Given that debt relief and aid resources wide mechanisms were being established and
are fungible, donors were concerned that such strengthened (call out for Box 1 here). A well
debt relief be verifiably used to benefit the poor designed VPF would, in principle, allow for:
in the recipient country. In effect, the World Bank • Maintaining the integrity of budget man-
and the International Monetary Fund (IMF), act- agement and systemic reforms
ing on behalf of donors, asked that HIPC govern- • Adapting the existing budget classification
ments put in place systems to track the use of re- system to “tag” pro-poor programs (hence
sources freed up by debt relief and show that these “virtual” poverty fund)
were in fact used to finance pro-poor programs. • Linking specific (e.g., HIPC) resources to
This required governments to have the capacity to these budget allocations
identify policies and programs that would benefit • Protecting budget disbursements to these
the poor and to effectively channel and track programs
resources to such programs. • Monitoring of performance of these expen-
Budget systems are notoriously weak in ditures.
most low income countries. Just how weak was This note considers the Uganda VPF to un-
made evident by the 2002 HIPC assessment of derstand how well it served to allocate resources
budget systems conducted jointly by the IMF and
FROM THE DEVELOPMENT ECONOMICS VICE PRESIDENCY AND POVERTY REDUCTION AND ECONOMIC MANAGEMENT NETWORK
to pro-poor programs and what weaknesses were local governments. Expenditures on PAF pro-
observed that may need to be corrected as other grams grew from 19 percent to 36 percent of a
countries employ mechanisms similar to the VPF. rapidly expanding government budget between
1997/8 and 2002/3 (see table 1).
The Poverty Action Fund—Uganda’s VPF Mobilizing donor resources and harmo-
Uganda was the first country to benefit from nizing conditions: Over time, the PAF has also
debt relief under the original HIPC and en- contributed to the mobilization of sector-spe-
hanced HIPC initiatives. In 1997, prior to receiv- cific donor resources through budget support,
ing HIPC, the Government of Uganda (GOU) which increased from $20 million in 1998/9 to
developed its own comprehensive strategy to more than $130 million in 2001/2. By providing
tackle poverty, the Poverty Eradication Action donors with a level of comfort in terms of alloca-
Plan (PEAP). Subsequently, the government in- tion, implementation, and transparency, the PAF
troduced the Poverty Action Fund (PAF) in 1998 enabled the donors’ shift from project to budget
to reorient government expenditures towards and sectorwide approach (SWAP) support. More
implementing its PEAP as well as to account for recently as governance concerns have emerged
HIPC resource use (see box 2). in Uganda, the PAF has proved important in
Successes of the PAF justifying continued provision of budget support
Over time the scope of the PAF budget in- by demonstrating orientation of the budget to
creased. Explicit criteria for programs to qualify for pro-poor expenditures.
inclusion were developed. The focus of attention Improved budget predictability, transpar-
moved to the actual performance of PAF programs. ency, and accountability: The government guar-
Although the predictability of disbursements anteed that all budgeted resources would be
facilitated better performance, the guarantee was made available in full for disbursement to PAF
qualified, that is, only those programs account- programs, regardless of resource shortfalls. The
ing for funds and performing satisfactorily were PAF provided a platform for establishment of an
guaranteed funding. Unless the performance of open and transparent process of budget report-
programs was put under scrutiny, it was felt that ing and review, and improved the focus on the
there would be little incentive to perform. results of government’s programs. A system of
Reorienting budget allocations towards pro- activity-based budget reporting was introduced
poor service delivery and demonstrating the ad- in local government for PAF conditional grants.
ditionality of debt relief: The PAF ensured that Five percent of all PAF resources were set aside
additional HIPC debt relief and donor direct for oversight institutions and local government
budget support were channeled into specific to improve monitoring and accountability.
PEAP priority programs, helped reorient allo- While a number of the achievements can
cations within sectors towards pro-poor expen- be directly attributed to the PAF, it must be em-
ditures, and increased the funds channeled to phasized that broader reform initiatives such as the
medium term expenditure framework (MTEF),
Box 1: Tracking Pro-Poor Spending SWAPs, and the PRSP combined with a supportive
The performance of a country’s public financial management (PFM) political, institutional, and policy environment
system in terms of its ability to allocate and execute budgets and to have played a major part. But equally, by maintain-
track and report on poverty reducing spending is monitored annually ing the integrity of the budget whilst channeling
as part of oversight of the HIPC Initiative. One of the indicators re- HIPC resources, the VPF contributed to the suc-
lates to the existence of effective pro-poor tracking mechanisms for cess of the PRSP and budget reforms.
the HIPC funds channeled through the budget. The definition of what
Negative Aspects of the PAF
qualifies as a poverty reducing expenditure is determined by country
Some aspects of the PAF are problematic and
authorities and varies from country to country, but generally includes
could potentially be undermining the achieve-
social sector spending, sometimes water, and in a few cases other
ment of Uganda’s poverty reduction goals:
infrastructure needs.
Unbalanced budget allocations: The PAF may
Of the 27 HIPC countries that were monitored in 2004, only 14 (Cam- have skewed budget allocations too far towards
eroon, Democratic Republic of Congo, Ethiopia, The Gambia, Gha- the direct provision of basic social services to the
na, Guyana, Honduras, Malawi, Mali, Niger, Rwanda, Sierra Leone, poor, illustrated by the movement from point A
Tanzania, and Uganda) had satisfactory tracking mechanisms for to point C in figure 1. This reflects the difficulty
pro-poor spending. Of these, Honduras, Sierra Leone, and Uganda of predicting the ex-ante impact of a chosen
have established a virtual fund and protected them against budget budget allocation. Government’s commitment
cuts. Rwanda and Tanzania have resorted to mechanisms similar to to the size of the PAF and donor preference
a virtual fund. The remaining countries used existing budget classi- for the social sectors has limited the ability to
fications to identify pro-poor expenditures, but have no mechanisms reallocate away from established PAF sectors.
to protect these expenditures from budget cuts. Thus more than 70 percent of additional PAF
PREMNOTE MARCH 2006
Table 1: PAF Reorienting National and
Box 2: The Key Elements of the Uganda Poverty Action Fund
Sector Allocations towards the PEAP
The PAF identifies and gives special treatment to specific pro-poor sec-
1997/8 1998/9 2002/3 tors/subsectors/programs in the budget.
(pre-PAF)
• PAF criteria—PAF programs are defined as only those that are in the
PAF Programs as % of National Budget PEAP or PRSP, are directly poverty reducing, delivering a service
(excluding interest) to the poor, and have a well developed plan. The five major areas
Social Services1 17 21 27 are primary education, primary healthcare, water and sanitation,
Productive Sectors2 1 2 4 rural roads, and agriculture extension.
Others 1 2 5 • Matching resources to expenditures—A PAF table matches specific
Total 19 25 36 resources from HIPC, donors, and the government to the budget
allocations for PAF programs.
PAF Expenditures 163 267 692
• Additionality of resources—PAF resources were shown as additional
(Uganda shillings 2002/03 prices) to the government’s own budget allocations to PAF programs in the
1
Primary education, primary healthcare, and water. 1997/8 budget. Since 2000, the GOU has made a commitment that
2
Agriculture, rural roads, and strategic exports. PAF will consistently grow as a proportion of the overall budget.
resources were spent on basic social services • Protection of disbursements—Government guarantees that PAF
between 1998/9 and 2002/3, despite the budget programs are protected from budget cuts during implementation,
already being oriented towards those services. provided that performance is on track.
It can be argued, retrospectively, that there has • Reporting and transparency—There are specific requirements for lo-
been underinvestment in areas such as roads, cal governments (LGs) and other government departments to report
rural electricity, and agriculture that may have disbursements on PAF programs, and progress in implementation.
had a larger impact on income poverty. Con- Reports are made public and discussed in open quarterly meetings,
ceptually, a budget allocation such as B rather where civil society, the press, and donors are present.
than C may have had a greater positive impact • Monitoring—Five percent of PAF funds are earmarked for enhanced
on the poor. This has been compounded by the monitoring and accountability.
difficulty government encountered in develop-
spending had a similar social sector bias (see
ing appropriate public sector programs that
figure 2).
promote the private sector, exports, and more
Biased budget implementation: The bias
generally economic growth. What is required
in budget allocation has been magnified by
is a more balanced approach so as to provide
a similar bias in budget execution. With the
greater flexibility within the budget to allocate
growth of the PAF, other sectors have borne
resources to pro-poor issues. The Tanzanian
the brunt of budget adjustments to resource
model has some useful features that provide
shortfalls. The protection of disbursements
greater budget flexibility in future, (see box 3),
under PAF is required only because the major
although early approaches to poverty reducing
causes of underdisbursement, such as the serial
overspending of some govern-
Figure 1: Earmarking HIPC and Budget Support ment institutions, have not been
to the PAF May Actually Distort Budget addressed to date.
Allocations Partial monitoring and evalu-
ation: The PAF added a layer
of monitoring and evaluation
(M&E) and external verification
processes that has diverted atten-
tion away from the overall budget
and led to unbalanced scrutiny
of government expenditures. Al-
though initially an improvement,
currently these systems have not
been mainstreamed into govern-
ment systems, and the coverage of
the budget M&E improvements
remains partial.
No exit strategy: While the
Ministry of Finance has expressed
a desire to phase out PAF, govern-
ment agencies within priority
sectors and donors supporting
PREMNOTE MARCH 2006
Figure 2: Social Service Bias in Uganda and Tanzania Priority Poverty Reducing
Expenditures (total public expenditure excluding interest)
those sectors want the preferential PAF treat- not solely the meeting of VPF commitments.
ment continued, making it politically difficult Protection of VPF budgets may be necessary, but
to remove PAF protection, especially given it would be important to control overspending
that it was not clearly designed as a temporary in other parts of the budget to limit the shocks
mechanism with a sunset clause at the outset. to unprotected sectors.
A VPF does not bypass the need to have
Key Lessons a PRSP and an effective budget process that
Given weak initial PEM capabilities, VPFs al- identify priority pro-poor expenditures to be
low priority poverty reduction programs to be included in the VPF as part of a broader policy
implemented without undermining reform framework for growth and poverty reduction.
of public expenditure management systems This represents the greater challenge in the
(PEMs). To be effective, a VPF should be simple context of countries with weak policy, planning,
and limited to the identification of PRSP prior- and budgeting processes. The danger of a VPF
ity expenditures in the budget classification sys- is that it can create incentives for development
tem. A VPF should be introduced in a way that partners to predominantly fund social sectors
supports rather than replaces the implementa- that can distort the implementation of more bal-
tion of such comprehensive improvements in anced and appropriate strategies for improving
budget preparation and implementation. Do- poverty outcomes.
nor dialogue and conditions should be based This note was written by Sudharshan Canaga-
on achievement of such improvements, and rajah (scanagarajah@worldbank.org) of the World
Bank and Tim Williamson (t.williamson@odi.org.uk)
Box 3: Tanzania—Different Approaches to Pro-Poor Spending of the Overseas Development Institute, London.
Tanzania originally adopted a more flexible approach for allocating
expenditures to priority PRSP areas by including all spending on the Key Reading
seven broad priority sectors. A system of reporting on pro-poor prior- Williamson, Tim, and Sudharshan Canagarajah.
ity expenditures was also introduced. The broader definition allowed 2003. Is There a Place for Virtual Poverty
greater flexibility in budget formulation and execution, whilst neither Funds in Pro-Poor Public Spending Re-
creating an artificial enclave nor undermining the flexibility necessary form? Lessons from Uganda’s PAF. Develop-
to complement priority expenditures with other activities. However, ment Policy Review Volume 21: 4, July.
the disadvantage was that it treated all lines of expenditures within IMF (International Monetary Fund) and IDA
a priority sector as equally important. Since the 2004/05 budget, the (International Development Association).
priority sectors have been replaced by an allocation system that aims 2002. Actions to Strengthen the Tracking of
to make a more comprehensive link between the second PRSP and Poverty Reducing Expenditures in Heavily
budget allocations by requiring all spending agencies to identify how Indebted Poor Countries. Washington DC:
their expenditures are contributing to PRSP objectives. IMF and IDA, March.
This note series is intended to summarize good practices and key policy findings on PREM-related
topics. The views expressed in the notes are those of the authors and do not necessarily reflect
those of the World Bank. PREMnotes are widely distributed to Bank staff and are also available on
the PREM Web site (http://prem). If you are interested in writing a PREMnote, email your idea
to Madjiguene Seck. For additional copies of this PREMnote please contact the PREM Advisory
Service at x87736. This PREMnote was edited and laid out by Grammarians, Inc.
Prepared for World Bank staff