21255 The World Bank April PREMnotes 1999 number 20 Public Sector Public expenditure reviews: progress and potential How can the Bank use public expenditure reviews to assist its clients in ensuring that the best use is made of a country's resources? The World Bank routinely undertakes eco- and economic sectors often merely substi- nomic and sector work—including eco- tutes for spending that recipient govern- nomic memorandums, poverty assessments, ments would have undertaken anyway. and reports on specific topics such as decen- Public expenditure reviews will likely tralization and the environment. A public become more important as the Bank imple- expenditure review analyzes public sector ments the Comprehensive Development A Bank-supported issues in general and the public budget in Framework and moves toward budget sup- particular. This note looks at the role of pub- port operations (such as the proposed pub- review of public lic expenditure reviews in advancing the lic expenditure reform loans). For these development agenda in client countries, lending instruments, a public expenditure spending often examines experiences with these reviews, review would be the most important loan and sets out a three-pronged approach for appraisal document. provides the only improving these reviews. What do we know? objective analysis Actual and potential roles Public expenditure reviews typically analyze Few developing countries take a compre- and project tax revenue, determine the level of a country’s public hensive and systematic approach to their and composition of public spending, assess budget process. Public resource allocation intersectoral and intrasectoral allocations spending issues decisions rarely reflect sound economic pol- (agriculture, education, health, roads), and icy, and fiscally irresponsible subsidies often review financial and nonfinancial public account for a significant part of the pub- enterprises, the structure of governance, lic budget. In such cases a Bank-supported and the functioning of public institutions. review of public spending often provides In the past 10 years studies of public the only objective analysis of a country’s expenditure reviews have suggested that, public spending issues. Moreover, the Bank although their coverage has been com- cares about its lending program—and prehensive, the quality of analysis has been because its lending supplements public uneven. Findings include: spending in the borrower country, a pub- • Most public expenditure reviews define lic expenditure review provides valuable the public sector deficit as the central input to the country assistance strategy. government deficit. The deficit of the A public expenditure review can be used consolidated general government to assess the Bank’s overall lending pro- (including contingent liabilities), a more gram. Funds are fungible, so Bank pro- relevant macroeconomic variable, has jects may end up financing undesirable been ignored. components of a country’s public spend- • Most public expenditure reviews do not ing program. Indeed, aid intended for social examine the rationale for public inter- f ro m t h e devel opm ent economics vice p res idency a nd pove r t y re d u ct i o n a nd e co no mi c ma na ge me nt n e t w o r k vention. Basic public economics concepts opment of performance indicators, and so of market failure and public goods and on. A public expenditure review could also externalities are seldom used to analyze the be justified if it is timed to provide input to efficiency of the public budget allocation. the Bank’s country assistance strategy. Finally, • Most public expenditure reviews do not a public expenditure review could be impor- integrate capital and recurrent expen- tant for donors before they pledge aid. ditures, and so sidestep the issue of future If a public expenditure review was done recurrent cost implications of the capital in the past, what impact did it have? Bank budget. More important, this introduces country teams should evaluate the impact uncertainty regarding the sustainability of previous public expenditure reviews Reform proposals of policies and projects. Such a segmented before commissioning new ones. Most pub- analysis reinforces capital-led budgeting, lic expenditure reviews recapitulate the rec- in a public which distorts public spending in favor ommendations made in earlier reports, but of capital spending. very few discuss whether the recommen- expenditure review • Less than a quarter of recent public dations made were actually implemented. expenditure reviews adequately focused cannot be imposed on institutional issues such as budget man- Focus on process agement or incentives in the public sec- The next step is to focus on the process of on the client tor. Attention was restricted to incomplete the review. How can country ownership be (and often superficial) economic analy- ensured? What topics should be covered? What country sis of public expenditures. should be done when data are poor? How should the findings of the report be dissem- Making better reviews inated? How can we build our clients’ capac- Public expenditure reviews can be made ity to undertake public expenditure reviews? more effective through a three-pronged Reform proposals in a public expenditure strategy. First, a few basic questions should review cannot be imposed on the client coun- be asked before undertaking a review. Sec- try. Fostering the participation of those who ond, attention should be paid to the process wield power in politics and in the civil ser- of the review. Third, reviewers should adopt vice will likely enhance the chances for suc- a framework that guides policy analysis and cess of the proposed reforms. Follow-up focuses on building institutions. training or seminars on public expenditure issues can be helpful in breaking any impasse. Ask questions Size and coverage are important issues Key stakeholders—including the government, for public expenditure reviews. A short, the Bank’s country team, other donors, and focused report is difficult but desirable. The nongovernmental organizations (NGOs)— most relevant and pressing public sector need to be convinced that a review of public issues—even if unconventional or contro- expenditures will add value in understand- versial (for example, military spending)— ing budget problems and proposing solutions. should be given priority. Next, topics covered Thus a few basic questions should be asked in past public expenditure reviews and other before initiating a public expenditure review. reports (including those done by other agen- Why perform a review now? What will it accom- cies) should be reviewed. In deciding which plish? Who should participate in the review? sectors to cover in detail, a good rule of thumb A public expenditure review is justified if is to include those—agriculture, education, a client country asks the Bank for help in eval- health, infrastructure—that account for the uating its budget. Based on need, the review bulk of the budget. Finally, coverage depends could coincide with the annual budget cycle on the resources—the Bank’s as well as those and be a vital input to the budget process. of other donors—available for the review. Alternatively, it could address medium- to Doing a public expenditure review is long-term strategic issues—such as reform of much more difficult when the quantity or budget and financial management, devel- quality of data are poor. A proper evalua- P R E Mnote 20 tion of public expenditures requires focus- expenditure reviews. Preliminary evidence ing on outputs and outcomes rather than indicates that this approach has worked well. inputs. But in most developing countries data are sketchy and incomplete. Few devel- Develop a framework oping countries have well-functioning pub- The primary objective of analyzing public lic accounts systems, and information on expenditures in a client country should be actual spending (as opposed to the budgeted to help establish a transparent budget mech- amount) is available only after a consider- anism that allocates, executes, and manages able lag. Inadequate and outdated data pre- public resources to promote private sec- clude a rigorous analysis of links between tor–led growth and reduce poverty. This public spending and outputs and outcomes. analysis should be based on two comple- Analysis should In most cases a reasonable amount of mentary themes: getting policies right and information on intermediate inputs is avail- building well-functioning institutions. be based on two able. This information should be supple- The best practice in public sector budget mented with information obtained from a reform starts by identifying three areas where complementary few onsite project inspections. When mak- governments can improve their performance: ing judgments based on such anecdotal evi- macroeconomic discipline, strategic prior- themes: getting dence, due qualifications need to be made. ity setting, and efficient public service deliv- One possible solution to the data scarcity ery. Reforms in these areas involve principles policies right and problem is to undertake field surveys to find of political economy, public economics, bud- out which public resources actually reach the getary and financial management, and other building well- intended facilities and beneficiaries. But this institutional and regulatory reforms. These approach has limitations: because of its lim- principles, along with lessons of experience functioning ited coverage, it cannot be a substitute for from public expenditure reviews, provide a the country’s public accounts system. framework for public expenditure analysis. institutions Once public expenditure reviews are To ensure macroeconomic stability, pub- approved for publication, the public officials lic spending should be kept at a level con- (and private participants) who spent con- sistent with the country’s long-run financing siderable time and energy providing infor- ability. Where appropriate, the cost of pub- mation to the public expenditure review team lic services should be recovered by levying often never hear again about the review. To user charges. make the public expenditure review process Strategic priority setting requires a tech- complete, informative, and transparent, an nocratic approach that gives policymakers the effective dissemination strategy is needed— information they need—such as the tradeoffs along with a budget to support it. The main between competing claims on the budget— findings of public expenditure reviews—if to make informed decisions. Expenditures they can be made public—should be shared should first be evaluated in terms of the ratio- with all stakeholders if possible. nale for public intervention in a particular Finally, the Bank cannot continue to have activity. This involves asking two questions. client governments merely provide infor- First, if market-generated allocation of mation for public expenditure reviews. Gov- resources leads to efficiency losses, would pub- ernments need to do their own public sector lic sector intervention enhance efficiency? analysis and the Bank needs to help them Second, could the public sector activity be jus- do it. In cases where there is little or no capac- tified because it contributes to a more desir- ity to undertake such analysis, the wait will able distribution of income? If the answer be long and the work likely difficult. In other to these questions is no, the public sector activ- cases a bit of knowledge sharing, supple- ity should be carefully reviewed or, failing ade- mented with technical assistance, could do quate justification, be cut. the job. Encouraged by the Bank, a few mem- In practice there is no optimal allocation ber countries—Argentina, Ghana, Viet- of public resources. Beyond the core pub- nam—have conducted their own public lic sector activities, the design and imple- Ap ri l 1 9 9 9 mentation of public expenditure priori- cies, law enforcement agencies, regulatory ties require detailed assessment and careful bodies, accounting and auditing units—lack- tailoring country by country. A comparison ing proper incentives (low pay, unfair recruit- of expected outputs and outcomes result- ment and promotion) often become a ing from different budgetary allocations breeding ground for corruption and low could provide useful tradeoffs. morale, eroding the effectiveness of public While a balanced aggregate sectoral allo- institutions. The oft-prescribed technocratic cation of resources is necessary, it is equally approach of capacity building may not be an important that there are no egregious biases adequate solution to deep-rooted problems in the composition of intrasectoral expendi- such as lack of incentives and bad governance. tures. Governments in developing countries The key to achieving efficient delivery of Achieving efficiency tend to undertake new (mostly donor-funded) public services is to reform the incentives in investment projects without adequately con- the public sector. Examples of such reforms— in the delivery sidering their future stream of recurrent costs. initiated by New Zealand and emulated by The underfunding of recurrent expenses— other industrial countries—include perfor- of public services mainly nonwage operations and mainte- mance-based budgeting and client surveys. nance—leads to inefficient service provision But reforming public institutions takes time requires well- and the often premature death of public assets. and depends on a country’s initial conditions— In other cases a perpetually rising wage bill including capacity and political readiness. functioning crowds out nonwage operations and main- tenance and even investment spending to the Further reading institutions point of seriously reducing the effectiveness Pradhan, Sanjay. 1996. Evaluating Public of public programs. An integrated analysis Spending: A Framework for Public Expendi- of capital and recurrent expenditures serves ture Reviews. World Bank Discussion Paper as a check on distortionary and ineffective 323. Washington, D.C. intrasectoral expenditure composition. Swaroop, Vinaya. 1998. “Experience with Redefining the role of the state from public Public Expenditure Reviews.” World provider to regulator in certain infrastructure Bank, Development Research Group, areas (such as electricity, telecommunications) Washington, D.C. requires expanding the opportunity and World Bank. 1998a. “The Impact of Public capacity of the private sector. Moreover, Expenditure Reviews: An Evaluation.” improvements in property rights and private Report 18573. Operations Evaluation contracts, efficient and impartial regulation, Department, Washington, D.C. and other public activities are necessary— ———. 1998b. “Public Expenditure Man- though not sufficient—for the private sec- agement Handbook.” PREM Network, tor to serve as the engine of growth. Washington, D.C. Having the right budget allocation is essen- tial for meaningful public expenditure reform. This note was written by Vinaya Swaroop (Senior But focusing on allocative policies alone will Economist, Development Research Group and do little unless such policies are efficiently exe- Public Sector Group, PREM). cuted and effectively managed. Achieving effi- If you are interested in similar topics, consider ciency in the delivery of public services requires joining the Public Expenditure Thematic Group. well-functioning institutions—more of an Contact Malcolm Holmes (x37189) or Vinaya Swa- exception than a rule in developing countries. roop (x37688), or click on Thematic Groups on Public institutions—tax collection agen- PREMnet. This note series is intended to summarize good practice and key policy findings on PREM-related topics. PREMnotes are distributed widely to Bank staff and are also available on the PREM website (http://prem). If you are interested in writing a PREMnote, email your idea to Sarah Nedolast. For additional copies of this PREM- note please contact the PREM Advisory Service at x87736. Prepared for World Bank staff The original had problem with text extraction. pdftotext Unable to extract text.