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Category: Budget Policy and reform directorate

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Introduction

In the past years, the budget preparation in Afghanistan has been highly centralized. Budget requests are being prepared by central line ministries and submitted to the Ministry of Finance, in most cases without consulting provincial departments. Budget appropriations are made by ministry/agency, object code and project, but not taking into account provincial breakdown of the budget. Most provincial departments are not either consulted in the budget preparation or involved in the procurement process. The centralized planning and budget formulation practices contribute to substantial problems in preparingoperating and development budgets, resulting in low execution rates and limitations in service delivery at the provincial level.

To address these issues, five years ago, Ministry of finance initiated two reforms: program budgeting and provincial budgeting reform. The objective is to move toward a more participatory approach where provincial authorities are involved in planning and budgeting processes, resulting in greater integration of the provincial needs in the national budget.

To ensure integration of specific provincial needs and requirements in the national budget, the Provincial Budget Unit has been established within Budget Department of the Ministry of Finance. The tasks of the unit include: (i) analysis of specific capacity development needs at provincial level, (ii) planning, designing and delivery of capacity development pogramme at the provincial level, (iii) ensuring budget preparation and implementation guidelines and instructions include requirements for integration of provincial needs, (iv) facilitate communication between central line ministries and their provincial departments and (v) supporting provincial departments in preparation of the budget submission, as per line ministries’ and Ministry of finance’ requirements.

In addition, the Provincial Budget Unit regularly works with technical staff at the Independent Directorate of Local Governance (IDLG) to develop guidance and instructions on implementing the subnational financial management policy.

 Provincial Budgeting UnitTeam:

The Provincial Budgeting Unit is led by Mr.  Abdul Mansoor,  who has several years experience in subnational planning, finance and budgeting.

Other team members include:

• Mr. Abdul rahim Fazly, Provincial Budget and Reporting Officer
• Mr.  EsmailAhady, Provincial Budget and Reporting Officer
• Mr. FahimEbady, Provincial Budget and Reporting Officer
• Mr. QasimShimwary, Provincial Budget and Reporting Officer

Work done so far

The Provincial Budgeting Unit has made considerable gains in improving the integration of provincial directorates with the national budgeting system.  The intensive capacity building trainings improved provincial directors’ understanding of their roles and responsibilities in managing their budgets to provide services and economic opportunities to the people.  This capacity development effort has ranged from provincial-based trainings in 34 provinces during 1387-89.

The Unit has developed and implemented new provincial budget approach for file key service delivery ministries (Ministry of Education, Ministry of Public Health, Ministry of Rural Rehabilitation and Development and Ministry of Agriculture, as well as Independent directorate for Local Governance) and their respective provincial directorates. The objective of the reform is to involve provincial directorates of these five ministries in the 1391 budget preparation process. The Unit coordinated organization and delivery of a national provincial budget symposium to explain to provincial officials 1390 budget and share of each province in it, as well as 1391 budget preparation process, including the new provincial budget policy.  

The national advisors have also provided a wide range of support to the international advisors in the provinces.  This support includes consultations and technical assistance to individual PRTs, the regional commands, as well as developing general guidance materials.  Through their efforts, incoming advisors are receiving basic familiarization training in the Afghan systems before their deployment to Afghanistan.

Strategy - going forward

The Provincial Budgeting Unit will continue its work to strengthen the capacity of provincial directorates to participate in the national budget process and to manage their budgetary resources. 

Its work will be extended to include participating in policy discussions on improving provincial input into planning, resource allocation, and implementing other reforms at the provincial level.  In addition to its work with provincial directorates, the Unit will support the central ministries to improve their capabilities to incorporate provincial inputs into their national planning and budgeting efforts.

The Provincial Budget Unit will also continue to provide technical advice to the PRTs and the larger international community to improve alignment of their off-budget programs with Afghan systems. 

New provincial budget approach

PURPOSE

Purpose of this policy proposal is to set a mechanism for better integration of the provincial priorities into national budget and facilitate communication between central line ministries and their provincial departments.

BACKGROUND

In the past years, the budget preparation in Afghanistan has been highly centralized. Budget requests are being prepared by central line ministries and submitted to the Ministry of Finance, in most cases without consulting provincial departments. Budget appropriations are made by ministry/agency, object code and project, but not taking into account provincial breakdown of the budget. Most provincial departments are not aware of the extent of their budget until they receive (often delayed) allotment for the quarter. In addition, analysis of the per capita budget spending by province show discrepancies up to a factor of ten times

To address these issues, five years ago, Ministry of finance initiated two reforms: program budgeting and provincial budgeting reform. Program budget reform was aimed at linking policies with the budget at the central ministries' level, by developing policy based programs, sub-programs and activities and translating them into budget. Provincial budget reform was seen as a step following program budget reforms, where these programs would be rolled out to provinces and provinces requested to develop and cost activities supporting centrally developed programs, addressing their specific needs. While program budget reforms has been rolled out to all budgetary units in 1389, provincial budget reform so far has been mostly focused on building basic PFM capacity in the provinces. The training needs assessment was undertaken, and the comprehensive training package developed, including a wide number of PFM related modules. The intensive training phase which has covered 33provinces since proved to be a success. It is time now to take the reform to the next phase.

ISSUE

There are number of issues that have caused delays in the provincial budget reform implementation:

Communication

• Poor communication between central line ministry and provincial departments on any budget related issue; provincial departments lack information on the overall budget structure of the central ministry, programs implemented by the line ministry, budget policies behind it, and/or budget allocation for their province.
• Information on the extent to which the provincial priorities are being funded through the external budget is not regularly or systematically provided by donors through Donor Assistance Database to Ministry of Finance - to base analysis of the funding gap and required funding through the core budget on; In addition, provincial departments do not have access/do not use the information on external budget funding that is available in Donor Assistance Database to base their request for core budget funding on.
• Lack of discretionary funding that would allow flexibility to central line ministries to make decision on allocation of funding to the provinces.

BUDGET RULES AND PROCEDURES

• Time available in the budget calendar for preparation of budget submissions is not sufficient to allow communication between central ministry and its provincial departments.
• Centralized approach to budget preparation by central ministries, where in most cases provincial departments are not involved at all in the budget submission or allotment preparation process.
• Lack of scrutiny by Ministry of finance of the inclusion of provincial needs in the line ministries’ budget submissions - during the budget submission analysis, budget hearings and budget decision making process.
• Strict procurement rules according to which any procurement above USD 200,000 is to be managed centrally.
• Ambiguous role of the provincial governors in the budget preparation and execution process, where in a number of provinces governors are required to sign every invoice, causing considerable delays in the budget process.

Capacity of the provincial departments

• Lack of capacity within provincial departments to develop and cost projects/operating activities that would be integrated in the budget.
• Provincial departments do not use sufficiently DAD website to download information on external budget funding specific for their sector and province
• Donors located in the provinces are not providing sufficient direct support to provincial departments in building their capacity for budget formulation and execution.

RECOMMENDATIONS

Now that program budget reform has been rolled out to all budgetary units at the central level, with programs and objectives defined and links with result based frameworks established through program outcome and output indicators and targets, Ministry of finance should roll out the reform further, to the provincial departments. Provincial departments should be requested to define activities within overall program objectives, required in order to address specific needs for goods or services at the provincial level.

Similar to program budget reform, this reform should be implemented on a pilot basis, selecting each year a number of line ministries/agencies to implement required steps in all their provincial departments.

The recommendations for the new approach to provincial budgeting in Afghanistan are elaborated in more details below:

Policy Changes

1. Integrate provincial needs into budget submissions of line ministries:

During 1389 programs and overall policy objectives have been defined at the central level. In 1390 provincial departments of the pilot ministries/agencies should be required to develop specific activities within these programs, which will support program objectives, as well as meet specific provincial needs. Active role of the provincial departments in the next year's budget development should be ensured the provincial needs funding requests are integrated into the Budget Circular no 1 and Budget Circular no 2 submissions of the line ministries/agencies.

Budget calendar

• Ministry of Finance shouldrevise Budget Calendar to allow sufficient time for the provincial inputs to be developed and integrated into ministries/agencies' budget submissions.

Budget Circular No 1

• Ministry of Finance should revise existing BC1 instructions and forms to ensure they reflect and requirement for and facilitate provincial departments’ inputs.
• Budget Circular no 1 (BC1) would aim to: (i) assess current programs and conduct internal re-prioritization, as well as (ii) candidate new priority spending initiatives to address provincial needs and overall policy targets, as defined in the result based frameworks. Pilot ministries will be requested to submit additional request for the new spending initiative within their main service delivery program(s), containing provincial breakdown and reflecting specific provincial needs, within a given ceiling for each provincial department.
• Pilot line ministries should be required to communicate BC1 requirements, deadlines and the ceilings to their provincial departments.
• During the preparation of BC1 submissions, donors should work closely with pilot central ministries and provincial departments (where applicable) to ensure submissions contain all the details they would require to make a decision on funding specific priorities.
• Pilot ministries/agencies should submit theirBC1 budget request, integrating specific provincial priorities, to the Ministry of Finance.
• BC1 submissions would then form the basis for approaching donors and requesting them to realign their funding with the specific Government priorities, reflecting provincial needs.
• Upon securing commitment from the donors, Ministry of finance should issue budget ceilings, containing funds for new priorities at the provincial level (within selected programs).

Budget Circular No 2

• Ministry of Finance should also revise existing BC2 instructions and forms to ensure they reflect and requirement for and facilitate provincial departments’ inputs.
• Budget Circular no 2 (BC2) would aim to: (i) provide detailed costing of the approved program activities and (ii) ensure projects are well designed and fully developed.
• Upon receipt of the BC2 from the Ministry of Finance, pilot line ministries/agencies should communicate to their provincial departmentsapproved priorities, ceilings and requirements for costing of those priorities and development of project documents.
• During the period of submission preparation, direct technical support from the central ministry/agency, as well as the donors, should be provided to the provincial departments.
• Upon receipt of provincial departments’ inputs, pilot central ministries/agencies should integrate these inputs and submit to the Ministry of Finance their budget submission specifying budget breakdown by provinces.
• Ministry of Finance should assess budget submissions, scrutinizing inclusion of provincial needs and request line ministries/agencies to provide justification for the provincial distribution of funds during the budget hearings. Only properly costed programs and the projects with the well developed technical appraisal documents would be approved.
• Upon approval of the budget by Cabinet and Parliament, pilot ministries/agencies should communicate approved program budget, including related performance targets, broken down by provinces to their provincial departments.

Capacity development

1. Ensure efficient and transparent implementation of 1390 budget

Ministry of finance should organize workshop for all provincial directors to provide overview of the 1390 budget and explain1391 budget preparation process and intergovernmental agreement on approach to provincial budgeting;

All line ministries/agencies, including pilot ones, should provide training for their provincial departments to:

• Explain to provincial departments the new chart of accounts (CoA) for the ministry and CoA codes for the new programs structure, as well as new forms required for budget expenditure recording;
• Involve provincial departments in the preparation of the financial plans and allotment requests;
• Timely communicate the annual/quarterly allotments by programs for the province.

Provincial departments should ensure that information of budget allocation for the province is made publicly available.

1. Ensure provinces understand Government policies and programs defined at the central ministry/agency level

During 1389, all line ministries/agencies have developed their overall policy objectives and corresponding program budgets. At the beginning of 1390, selected pilot line ministries/agencies should organize workshops with the provincial departments to:

• Educate provincial departments on the ministry/agency's result based framework, program objectives, program structures and performance targets;
• Explain to provincial departments existing program budget allocations across provinces.

1. Provide technical support to the provincial departments

In order to enable provincial departments to respond to budget circulars and prepare good quality submissions, substantial support and capacity building should be provided:

• The technical capacity of central line ministries and provincial departments should be partly supported centrally, from the Ministry of Finance, Provincial Budget Unit. However, this support will be mostly based on the provision of the training at the regional level, through the existing channels.
• For a greater impact, the individual provincial department should have stable, on-the-job support, provided throughout the year by the donor located in the specific province.

Donor Funding

1. Ensure availability of donor funding for financing provincial needs

Important precondition to provide provincial ceilings is for the Ministry of Finance and central ministries/agencies to be given more flexibility in funds allocation. This can only be achieved by:

• Donors providing more development budget funding for the specific programs delivering services at the provincial level, rather than non-discretionary funding for specific projects; this would allow central ministries more flexibility to channel funds to highest priority programs, as well as to the provinces implementing the activities design to address the specific provincial needs.
• In a case of non-discretionary funding, donors working directly with central line ministriesand their provincial departments (where applicable) during the preparation of the budget submissions and commit their funds for specific provincial requests.

Long-term approach to provincial ceilings

Being able to set budget ceilings for provinces is a crucial precondition for introducing equality in delivering basic services to all provinces. However, before mechanism (formula) for ceilings setting can be designed, it is necessary to:

1. Conduct functional assignment of services to be delivered by the provinces and the services to be delivered by the centre;
2. Conduct analysis of existing level of services delivered by the provinces;
3. Set the standard level of basic services to be delivered by the provinces;
4. Collect relevant statistical information, including the number of beneficiaries, general population, number of schools, number of hospitals, km or roads, etc. – by the province;
5. Calculate average cost of service delivery by the province;
6. Develop criteria, norms and formula for budget allocation.

The provincial budget ceilings will, however, achieve its full effect only in the environment of:

• Operating budget funding the actual services (school or hospital running cost, social security benefits), rather than these costs being funded through external budget (NGOs);
• Development budget is discretionary, i.e. at discretion of Ministry of finance and line ministries to direct it where most needed.

Although formula based funding of provinces can only be achieved in the next 3-5 years period, Ministry of finance should start with the first steps toward its implementation as of 1390.