Yemen: budget integration

Yemen: budget integration

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  YEMEN: THE ISSUEOF BUDGET INTEGRATION Jean-Marc Lepain EU PFM Advisor The lack of integration between the different components of the General Budget has emerged as of one of the main reasons for the budget's lack of credibility. The disconnection between the operating budget and the investment budget is a typical problem of countries that separate economic planning from fiscal management. In such countries the Investment Budget is prepared independently from the operating budget resulting in a mismatch between investment in infrastructures and their operational and maintenance costs. In the case of Yemen, the issue goes beyond dual budgeting. The budget is comprised of four components which are developed independently: the operational budget, the subsidy budget, the investment budget, and the economic entities budget. The Subsidies Budget is seen as a macroeconomic constraint since the budget volume does not depend on the country’s fiscal capacity but on the price fluctuations of exported oil and imported gasoline. When prices go up, the Government must adjust its subsidies. With energy subsidies absorbing 30% of budget resources in a context of declining oil revenues, the burden is becoming unbearable and is one of the main reasons for the lack of sustainability of the country’s fiscal position. So far, the Transitional Government has resisted all international pressure to phase out oil subsidies due to the unpopularity of this measure. Beside the fact that energy subsidies primarily benefit gasoline importers and the middle class, the policy is perceived by the population as pro- poor and there is no doubt that the removal of these subsidies would impact the cost of food transport and agricultural products since a great part of Yemeni agriculture requires diesel powered water pumps for irrigation. This subject is strongly linked to a possible bail-out package by the IMF. Until financial pressure on the budget becomes unbearable, no change in the policy can be expected in the immediate future. In any case, the phasing out of energy subsidies will require several years and will not improve fiscal space immediately as a social safety net would first have to be put in place. The Investment Budget is prepared on the basis of multi-year Public Investment Plans (PIP) with the consequence that the budget is burdened with on-going projects which are neither properly documented nor monitored. Some projects cannot go beyond the conceptual phase because of the lack of a feasibility study, imprecise technical requirements, an unrealistic budget, etc. Some new projects have unrealistic procurement schedules. Other projects have started but are either under spending or over spending. In the absence on an Investment Management System it is difficult to assess the state of advancement of Public Investment Programmes and to forecast their financing needs. Additionally, PIPs are prepared without consideration of MOF’s MTFF, MOPIC macro-fiscal
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  2 model which isdriven by macroeconomic considerations rather than considerations of fiscal constraints. The Economic Entities Budget is a supposedly auto-financed budget. The concept of Economic Entities is vague and not in line with the principles of modern budgeting. It groups State Owned Enterprises with a number of budget entities that have a significant volume of own-source revenue. Problems raised by economic entities are highly specific, and we will come back to them after discussing other aspects of budget integration. Budget integration and the Harmonisation Project In the recent years, both MOF and MOPIC have become more conscious of the issue of budget integration. They have established a joint committee to look into it and to identify solutions. They have come up with a reform plan called “The Harmonisation Project” that aims at addressing the lack of integration between Public Investment Programmes and the General Budget. The Harmonisation Project is a very interesting new development as it is the first time that MOF and MOPIC demonstrate their willingness to work together and to overcome their conflicting views. Reasons for the lack of integration of Public Investment Programmes in the General Budget have been identified as follows:  PIPs are not prepared on the basis of a fiscal envelope and their total budget is unrealistic and not commensurate with the country's fiscal resources;  Macroeconomic assumptions under which PIPs are prepared are different from the assumptions underpinning the budget which are generally more optimistic in terms of revenue collection;  The Investment Budget does not take operational costs associated with project implementation, availability of manpower and skilled resources, or operational and maintenance costs after project completion into account;  Adoption by the budget of the investment budget is done without sufficient documentation and analysis to evaluate project feasibility and prepare a cash plan. Often procurement plans are unrealistic resulting in a commitment of funds that cannot be disbursed; and  Dead projects are kept on budget indefinitely even if they are not spending.
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  3 The consequences areas follows:  The investment budget tends to be overestimated because many projects are not able to start within the said fiscal year;  Projects in their implementation phase have a tendency to exceed their allocation because their initial cost has not been properly estimated and delays in implementation result in rising costs;  Funds are committed to non-spending projects; and  Projects get delayed because of the non-availability of funds. The first stage of the Harmonisation Project was a seminar in charge of producing an implementation matrix based on a well defined set of national priorities by sector within a reasonable budget (but with no fiscal envelope as yet). The idea is to establish precise criteria for projects to qualify for financing. The second phase starts with an inventory of existing projects to assess their implementation status. Non performing projects or projects that do not meet the priority criteria will be removed from the budget. The second set of measures recommended by the Committee is related to the necessary convergence between MOF’s MTFF and MOPIC macro-fiscal model. The two ministries are in the process of agreeing on one single set of indicators. They are also working on linking the MTFF to the investment budget. However, over time the Harmonisation Project which initially had some simple objectives has grown in complexity and probably has become too ambitious and at the same time too fragmented. The ambition is to undertake a complete reorganisation of the planning and budgeting process from fiscal policy and economic planning through to budget execution. If this task has to be undertaken it must be done for the whole budget and not just for the investment budget. Trying to reform the investment budget without aiming at overall budget integration, without considering the issue of budget credibility and fiscal sustainability, and without reforming the operational budget formulation as well as of other budgets, would not produce good results. Many of the activities considered in the Harmonisation Project should be undertaken under the wider umbrella of the PFM Reform Action Plan after being reformulated. For the moment the Action Plan has only integrated the Harmonisation Project as one of its components while many tasks should be considered in a wider context. However, reaching that level of integration would require an understanding of PFM processes and a level of strategic thinking that exist neither in MOF nor in MOPIC. Another concern is the cost of the Harmonisation Project and its need for technical assistance. The Planning Committee put the cost of the Harmonisation Project at $971.600. But the cost of international technical assistance has been systematically underestimated and the real cost is probably in the range of $1.5M. If we consider all the other financial needs expressed in the new PFM Reform Action Plan this is probably too much considering the limited scope of the project.
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  4 Actions considered bothin the Harmonisation Project and in the PFM Reform Action Plan need to be prioritised based on the availability of donor funds. At the same time, requests for technical assistance in the Harmonisation Project appear very fragmented. It is necessary to group all considered action under broader objectives which might overlap with other actions considered in the PFM Reform Action Plan in order to reduce the number of consultants required. Integration of the Economic Unit Budget into the General Budget As described earlier the concept of an “economic unit” is ill-defined yet appears as an expansion of state owned enterprises to include budget users with significant internally generated revenue, mainly hospitals. The size of the economic unit budget is of itself frightening. The 2012 total budget for Economic Units is of 4.552 billion riyals, equivalent to 21.2 billion USD but can be easily explained by the fact that the budget includes all operational expenditures of economic entities plus their investments. The implication of integrating the operational expenditure of state-owned enterprises into the State Budget is that the State extends its guaranties to all state-owned enterprises. The budget is largely fictitious. Each economic unit must present a balanced budget. This implies that the Economic Unit Budget will be balanced as whole. Of course this is not what happens during the fiscal year (one cannot speak of budget execution because the budget is an accounting fiction). Some enterprises will generate a surplus (the profit) while others will have a deficit. The surplus of profit-making enterprises will be paid as a dividend to the state and used to cover losses made by other enterprises or the deficits of budget-users considered as economic units. In practice there is little chance for the Economic Unit budget to be balanced, and deficit financing decisions are made by so many centres that it has become impossible to disentangle the different flows of funds. Some state-owned enterprises have part or the totality of their staff paid by the State as part of the civil service budget. They might also benefit from subsidies from the subsidy budget (enterprises benefiting from such subsidies are not, however, identified by name in the subsidy budget). Other transfers are made for investment or through contractual commercial agreements. Most of the enterprises are burdened by unpaid payment arrears from the State that create cash flow problems which in their turn are translated into payment arrears for the purchase of goods and services. Often this does not appear as such in their financial statements, but inter-enterprise credit and commercial loans might represent another hidden source of fiscal risk with a number of state owned enterprises building up a substantial amount of payment in arrears and incurring debts that the general budget may have to absorb at a later stage. To complicate the situation even further, it seems that some state-owned enterprises are not even part of the Economic Unit Budget but nevertheless the same rules apply to them. In practice there are regular bailouts by the Government forcing it to use the general budget to subsidise some state-owned enterprises. This generally happens unexpectedly and put the budget in disarray, especially when the State is called upon to pay for shipments of oil (gasoline) used for electricity production.
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  5 The solution tothis problem is the transformation of the Economic Unit Budget into an SOE Department. Economic Units should be split into two categories: budget users that should be reintegrated into the general budget and state-owned enterprises that should be managed like commercial companies responsible for their balance sheets. Not only is there no need to consolidate the balance sheets or the profit and loss accounts, but the very idea of aggregating their cash flow creates a systemic risk by which the failure of one company can trigger the failure of the whole system. The consequence is that the State is bearing the responsibility for a huge amount of contingent liability that exceeds its financial capacity. December 2013