AUDIT REPORT ON THE IMPLEMENTATION OF THE NATIONAL BUDGET BY THE MINISTRY OF FINANCE, PLANNING AND ECONOMIC DEVELOPMENT

Transcription

1 T H E R E P U B L I C O F U G A N D A OFFICE OF THE AUDITOR GENERAL info@oag.go.ug AUDIT REPORT ON THE IMPLEMENTATION OF THE NATIONAL BUDGET BY THE MINISTRY OF FINANCE, PLANNING AND ECONOMIC DEVELOPMENT A REPORT BY THE AUDITOR GENERAL M A R C AND H ECONOMIC, 2 DEVELOPMENT A REPORT BY THE AUDITOR GENERAL 1

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3 THE REPUBLIC OF UGANDA OFFICE OF THE AUDITOR GENERAL AUDIT REPORT ON THE IMPLEMENTATION OF THE NATIONAL BUDGET BY THE MINISTRY OF FINANCE, PLANNING AND ECONOMIC DEVELOPMENT A REPORT BY THE AUDITOR GENERAL MARCH, 2013

4 OFFICE OF THE AUDITOR GENERAL

5 AUDITOR GENERAL AUDITOR GENERAL S MESSAGE 12 th June, 2013 The Rt. Hon. Speaker of Parliament Parliament of Uganda In accordance with Article 163 (3) of the Constitution, I have undertaken an audit on the implementation of the National Budget by the Ministry of Finance, Planning and Economic Development and hereby submit this report. My office intends to carry out a follow up at an appropriate time regarding actions taken in relation to the recommendations in this report. I would like to thank my staff: The Director, Mr Stephen Kateregga and Assistant Director Liz Nambuya; and team Bob Monday Senior Principal Auditor, Paul Rwabutara Principal Auditor, Raymond Oguluka-Senior Auditor, and the two auditors: Liz Adukule and Manasseh Kwihangana who undertook this audit. I would also like to thank the staff of the Ministry of Finance, Planning and Economic Development for the assistance offered to my staff during the period of the audit. John F. S. Muwanga AUDITOR GENERAL

6 6 TABLE OF CONTENTS OFCONTENTS

7 TABLE OF CONTENTS List of tables:... ii List of figures:... iii List of pictures:... iii List of abbreviations... iv Executive summary... vi CHAPTER ONE INTRODUCTION Background Motivation Description of the audit area General description Legal Framework/mandate: Vision, Mission and Organization Structure Budget Goals and Objectives GOU Budget Allocations Audit Objectives Audit Scope... 7 CHAPTER TWO AUDIT METHODOLOGY Sampling Data collection Document review Interviews Observation/field inspections Data analysis... 9 CHAPTER THREE SYSTEMS AND PROCESS DESCRRIPTION Roles and Responsibilities of Key Players Process Description CHAPTER 4 FINDINGS, CONCLUSIONS AND RECOMMENDATIONS 4.1 Alignment of the National Budget with the NDP Management of cash limits Disparities in macro and cash limit allocations Delays in the issuance and receipt of cash limits Criteria for determination of cash limits Release of budgeted funds: Upload of approved budgets onto the ifms Release warrants Release performance Delays in release of funds i

8 4.3.5 Supplementary expenditure Control over cash and bank accounts Unspent balances The Output budgeting tool (obt) Budget monitoring and supervision Implementation of selected key government sector priorities Accountability sector, mofped Value addition-soroti fruit factory Value addition-luweero fruit drying factory Agricultural credit facility (acf) Agriculture sector, maaif Vaccination of cattle and poultry Distribution of cotton seed Unfunded priorities Diversion of funds/mischarge of expenditures-maaif 2011/ GLOSSARY OF TERMS: APPENDICES Appendix i: MOFPED organization structure: Appendix ii: Sector funding for fy 2009/ / Appendix iii: Documents reviewed Appendix iv: Interviews conducted Appendix v: Quarterly cash limit process Appendix vi: Quarterly cash release process Appendix vii: Analysis of quarterly workplans and cashlimits Appendix vii: Sector approved budget and releases...69 Appendix ix: Priorities for MOFPED and MAAIF Appendix x: Mischarge of MAAIF expenditure 2011/ LIST OF TABLES Table 1: Total National budget funding for the period 2009/ / Table 2: NDP priority investment areas for FY 2010/11 and 2011/ Table 3: NDP and MoFPED MTEFs in Billion Shillings in the FYs 2010/11 and 2011/ Table 4: Approved Budgets and the Macro cash limits for the period 2009/ / Table 5: Macro and Micro cash limits for FY 2009/10 to 2011/ Table 6: Dates of communication of the quarterly macro and micro cash limits...23 Table 7: Dates and amounts of additional cash limits authorized in Financial Year 2010/ Table 8: Comparison of approved re-current budgets for selected ministries for F/Y 2011/12 as per Appropriation Act and IFMS data...26 Table 9: Treasury requisitions, AG s warrants, Minister s warrants and Releases for FYs 2009/ /12 in Billion Shillings...27 Table 10: Approved Budgets and Actual Releases for the period 2009/ /12 in billion shillings...28 Table 11: Average delay in release of funds to Spending entities...30 ii

9 Table 12: Expected and actual dates of release of funds to Spending entities...31 Table 13: Approved Budgets and Supplementary Expenditure...31 Table 14: Supplementary Expenditure of selected Entities Table 15: Supplementary Expenditure as per Accountant General s Schedules and the Supplementary Appropriation Acts in billion shillings...33 Table 16: GoU Funding for the Soroti Fruit Factory-UDC figures...41 Table 17: Planned activities and implementation status for the Soroti Fruit Factory for the period 2009/ / Table 18: GoU Funding for the Luweero Fruit Processing Facility- UDC figures...45 Table 19: Planned activities and implementation status for the Value addition-luweero Fruit Drying Factory for the period 2009/ / Table 20: Expected GoU and PFI contributions to ACF...49 Table 21: Disbursements to PFIs by GoU Table 22: Funding for vaccination activities from MAAIF...51 Table 23: Planned and actual nos. of cows and poultry vaccinated Table 24: Funding for vaccination activities from MoFPED...52 Table 25: Planned and actual nos. of cows and poultry vaccinated...52 Table 26: Quantities of cotton seed to be procured and distributed...54 Table 27: Value of cotton lost in the period 2009/ / Table 28: Funding for Cotton seed procurement and distribution...54 LIST OF FIGURES Figure 1: Cumulative MoFPED and MAAIF work plans and Cash limits...24 Figure 2: Annual Budget release performance...29 Figure 3: Budget release performance...29 Figure 4: Allocation of approved supplementary Budgets...33 Figure 5: MDA unspent balances...35 Figure 6: Funds release performance of Soroti Fruit Factory...43 Figure 7: Funds release performance of the Luweero Fruit processing Factory for the period 2009/ / LIST OF PICTURES Picture 1: Soroti Industrial and Business Park...42 Picture 2: Showing fuzzy and delinted cotton seeds...55 iii

10 LIST OF ABBREVIATIONS ADB ADF BFP BMAU BoU BTTB CAO CCS CDS CG CSOs EAC FINMAP F/Y GDP GoU IFMS IMF IPFs LG LTEF MAAIF MALGs MDAs MDGs M&E MEMD MoES MoFPED MoH MoLG MoWT MPS MTEF African Development Bank African Development Fund Budget Framework Paper Budget Monitoring and Accountability Unit Bank of Uganda Background to the Budget Chief Administrative Officer Commitment Control system Central Depository System Central Government Civil Society Organisations East African Community Financial Management & Accountability Programme Financial Year Gross Domestic Product Government of Uganda Integrated Financial Management System International Monetary Fund Indicative Planning figures Local Government Long Term Expenditure Framework Ministry of Agriculture, Animal Industry and Fisheries Ministries, Agencies and Local Governments Ministries, Departments and Agencies Millennium Development Goals Monitoring and Evaluation Ministry of Energy and Mineral Development Ministry of Education and Sports Ministry of Finance, Planning and Economic Development Ministry of Health Ministry of Local Government Ministry of Works & Transport Ministerial Policy Statements Medium Term Expenditure Framework iv

11 NAADS NBFP NDP NPA NTR OAG OBT OPM PEAP PFAA PIP PMA PSA PSC TMOs UBoS UCS URA National Agricultural Advisory Services National Budget Framework Paper National Development Plan National Planning Authority Non Tax Revenue Office of the Auditor General Output Budgeting Tool Office of the Prime Minister Poverty Eradication Action Plan Public Finance & Accountability Act Public Investment Plan Plan for Modernisation of Agriculture Production sharing Agreements Public Service Commission Technical Monitoring Officers Uganda Bureau of Statistics Uganda Computer Services Uganda Revenue Authority UEPB Uganda Export Promotions Board UIA UMA VAT VFM VOA Uganda Investment Authority Uganda Manufacturers Association Value Added Tax Value for Money Vote on Account v

12 EXECUTIVE SUMMARY The National Budget is a statement of a nation s annual planned priorities. It is governed by the Constitution and its attendant legislation and is the key instrument through which Government implements its policies. The budget deals with how the government plans to collect its revenues and meet its expenses among competing national priorities 1. In order to achieve the required levels of growth and service delivery, Government needs to strategically allocate resources to pro-growth and pro-poor interventions; ensure operational efficiency to minimize wasteful spending and maintain high levels of transparency in the budgeting process. The Government of Uganda (GOU) budget is currently funded 80% by Government while the development partners contribute 20%. MOTIVATION The Government of Uganda is committed to restoring and maintaining macroeconomic stability in order to provide a basis for the structural reforms that will deliver sustainable economic growth and poverty reduction as set out in the National Development Plan (NDP). 2 This is evident in its consistent budget themes, such as: Enhancing strategic interventions to improve business climate and revitalize production to achieve prosperity for all; Strategic priorities to accelerate growth, employment and socio economic transformation for prosperity; Promoting economic growth, job creation and improving service delivery; Priorities for renewed economic growth and development 3. 1 AFROSAI-E Budget Audit-Guidelines, Background to the Budget Budget speeches 2009/ /13 In order to achieve its strategic objectives under the above themes, government appropriated a total of Shs 25 trillion to Ministries, Agencies and Local Governments (MALGs) over the three years under review. 4 Despite these government commitments and substantial funds appropriated, Uganda s per capita GDP growth rate remained constant at an average of 2% over the three years under review. In terms of real GDP growth, the country registered a slight improvement in growth of only 1.2% that is, from 5.5% in 2009/10 to 6.7% in 2010/11 then dropped to 3.2% in 2011/12 representing a decline of 3.5%. 5 Compared to the rest of the East African countries, Uganda s growth rate in 2011/12 was the lowest 6. Kenya, Tanzania and Rwanda registered GDP growth rates of 4.5%, 6.4% and 7.7%, respectively while Uganda attained a meagre 3.2% rate of growth. In addition, about 67.4% of Ugandans (approx million) still remain poor. 7 Parliament continues to raise concerns over the high expenditure on public administration; budget allocations which are not aligned with NDP priorities; high supplementary expenditure; and unfavourable donor conditionalities. 8 The Auditor General s report, 2009/10, cites cases of excess expenditure; inadequate budget monitoring; low funds absorption by Ministries, Departments and Agencies (MDAs); incomplete budget reports; delays in implementation of government projects; 4 Approved annual budgets 2009/ /12 5 UBOS Statistical Abstracts 2009/ /12 6 Deloitte & Touche 2012 budget analysis 7 MoFPED Poverty status report, May, OAG annual report 2009/10 vi

13 funds releases not in line with approved budgets and lack of consultation between Ministry of Finance, Planning and Economic Development (MoFPED) and spending entities during budget cuts. It is against this background that the Office of the Auditor General decided to undertake an independent assessment of the implementation of the National Budget in order to ascertain whether the planned budget objectives were being achieved in an economic, efficient and effective manner. KEY FINDINGS: MoFPED did not follow the NDP guidelines in determining sector MTEFs and this affected the allocation of resources to the national priorities envisaged by the NDP. This puts to waste the resources injected into the NDP. Additionally, the determination of MTEF allocations by two different government institutions amounts to duplication of efforts. There are gaps in the cash management process. The budget and cash releases follow cash rationing practices and lack predictability. This has led to delayed release of funds; disbursement of insufficient funds, unpredictability of budgetary funding through unprecedented budgetary cuts, among others. These, in turn, have hindered progress in the implementation of approved budget activities. At the time of the audit, the Treasury had no database of government operated bank accounts. This renders determination of the aggregate cash position of government at any one time difficult and negatively impacts on cash flow planning and management. It also makes it difficult to efficiently control and monitor funds allocated to various government agencies; and to facilitate better coordination with monetary policy implementation Whereas there is a general appreciation for the Output Budgeting Tool s rationale and potential towards improving the budget process, the tool is characterized by numerous functionality setbacks, which have constrained effective budget implementation. These include: inadequate training, software capacity challenges due to increased number of users. The current monitoring and supervision function is not effectively supporting the implementation of government programmes. The current M&E arrangements in government are weak and inadequate. Monitoring and supervision is characterized by fragmentation, duplication, weak coordination and lacks a clear results chain. There is inadequate tracking and reporting of performance results as well as feedback and sharing of results. There are no common guidelines and standards, hence, the use of different formats and approaches. 9 This may lead to non-attainment of the major budget objective of economic growth and continued failure to deliver critical services to the public. Based on the assessment of some key planned priorities selected from the Agriculture and Accountability sectors, this study has observed that, generally, the implementation of government priorities was mostly hampered by inadequate planning, monitoring and supervision, limited expertise and failure by government to adhere to its funding obligations towards those activities. There were also cases of diversion of the funds released and lack of accurate management information for decision making and control. Key audit findings in each of the selected sector priority activities are summarized in the table below: 9 vii

14 Sector Priority Activities ACCOUNTABILITY SECTOR, MoFPED: Soroti Fruit Factory Summary Audit Finding All planned activities had not been achieved by the time of audit despite government expenditure of Shs.4.4 billion towards the project. Luweero Fruit Drying Factory The project reached its closure date without achieving tangible outputs in spite of government disbursements of Shs 0.34 billion into the project. Agricultural Credit Facility (ACF) The scheme is characterized by a number of challenges, such as: Shortfalls in government funding of 46%, low absorption, for example Shs 6.2 billion had not been disbursed to PFIs, low loan recovery rates at different PFIs, high transaction costs and limited publicity. AGRICULTURE SECTOR, MAAIF: Vaccination of cattle and poultry Distribution of cotton seeds Unfunded priorities- Establishment of a Commercialization Challenge fund, Provision of Rice Hullers and Maize mills; and Restocking of Northern and North Eastern Uganda MAAIF did not vaccinate all the cattle and poultry as planned despite receiving Shs 9.0 billion representing 94% of the budget allocation for the activity. Besides, the performance reports exhibited extensive inconsistencies in the number of cattle vaccinated. The activity was not carried out according to the initial plan as some of the funds were reallocated to financing another related project. Further, the activity was not carried out with due regard to economy and, as a result, a loss of Shs.2.6 billion in value of seeds was registered which amounted to wasteful expenditure. These activities were neither funded nor implemented inspite of their mention in the Budget speech. It is important to note that the budget speeches read out annually raise high public expectations, which are shattered when the promised activities are not eventually funded and implemented. KEY RECOMMENDATIONS: MoFPED should, in future, endeavour to align the financing of the national budget with the national investment priorities as set out in the country s long term National Development Plan (NDP). MoFPED should revisit its fiscal forecasts and the underlying economic assumptions and models so as to come up with relatively realistic revenue forecasts to enhance budget transparency and credibility. Government should broaden the revenue base to capture all prospective or potential tax payers, especially those in the informal sector and other revenue sources. This will enable government to increase the country s Revenue-to-GDP ratio, obtain adequate resources to finance its budgets and ensure a steady increase in the rate of real economic growth. MOFPED should undertake a comprehensive review of the current cash management procedures to address the current gaps in the management of the cash limits in order to ensure timely release of funds to facilitate execution of planned budget activities. viii

15 MoFPED should consider reviewing the functionality of the Output Budgeting Tool (OBT) with a view of enhancing its functionality, connectivity, data security, back up and protection against malware. Monitoring and supervision of budget implementation should be enhanced through improved resourcing and facilitation of Budget Monitoring and Accountability Unit (BMAU) to make it more effective. For future projects, implementing ministries should carry out feasibility studies in order to ascertain project risks and sustainability before implementation. ix

16 1 CHAPTER ONE CHAPTER ONE

17 CHAPTER ONE 1.1 BACKGROUND The National Budget is a statement of a nation s annual planned priorities. It is governed by the Constitution and its attendant legislation and is the key instrument through which Government implements its policies. It deals with how the government plans to collect its revenues and meet its expenses among competing national priorities 10. It is thus not just a macro-economic instrument but an expression of intended implementation of Government priorities and a framework for service delivery that is aimed at enhancing growth and eradicating poverty. In order to achieve the required levels of growth and service delivery, Government needs to strategically allocate resources to pro-growth and pro-poor interventions; ensure operational efficiency to minimize wasteful spending and maintain high levels of transparency in the budgeting process. This can be attained through robust and open dialogue or consultations between the Ministry of Finance, Planning and Economic Development (MoFPED) and Ministries, Departments and Agencies (MDAs); involvement of all stakeholders in setting priorities, estimating, allocating and monitoring the achievement of planned outcomes as well as equipping the MDAs with the tools necessary to achieve the intended results. This helps spending entities to know the expected results of their expenditures as well as to own their budgets. The GoU budget is currently funded 80% by Government while the development partners contribute 20%. 1.2 MOTIVATION The Government of Uganda is committed to restoring and maintaining macroeconomic stability in order to provide a basis for the structural reforms that will deliver sustainable economic growth and poverty reduction as set out in the National Development Plan (NDP). 11 This is evident in its consistent budget themes such as Enhancing strategic interventions to improve business climate and revitalize production to achieve prosperity for all; Strategic priorities to accelerate growth, employment and socio economic transformation for prosperity; Promoting economic growth, job creation and improving service delivery; Priorities for renewed economic growth and development 12. In order to achieve its strategic objectives under the above themes, government appropriated a total of Shs 25 trillion to Ministries, Agencies and Local Governments (MALGs) over the three years under review. 13 Despite these government commitments and substantial funds appropriated, Uganda s per capita 10 African Organisation of English Speaking Supreme Audit Institutions (AFROSAI-E) Budget Audit-Guidelines, Background to the Budget Budget speeches 2009/ /13 13 Approved annual budgets 2009/ /12 2

18 GDP growth rate remained constant at an average of 2% over the three years under review. In terms of real GDP growth, the country registered a slight improvement in growth of only 1.2% that is, from 5.5% in 2009/10 to 6.7% in 2010/11 then dropped to 3.2% in 2011/12 representing a decline of 3.5%. 14 Compared to the rest of the East African countries, Uganda s growth rate in 2011/12 was the lowest 15. Kenya, Tanzania and Rwanda registered GDP growth rates of 4.5%, 6.4% and 7.7% respectively while Uganda attained a meagre 3.2% rate of growth. In addition, about 67.4% of Ugandans (approx million) still remain poor. 16 Parliament continues to raise concerns over the high expenditure on public administration; budget allocations which are not aligned with NDP priorities; high supplementary expenditure; and unfavourable donor conditionalities. 17 Further, there are persistent press reports and public outcry 18 about inadequate delivery of services; off-budget spending, low funds transfers to local governments; heavy/unrealistic investor incentives; late releases of funds to MDAs; and low performance of MDAs (50.7% of target on average) 19. The Auditor General s report 2009/10 cites cases of excess expenditure; inadequate budget monitoring; low funds absorption by MDAs; incomplete budget reports; delays in implementation of government projects; funds releases not in line with approved budgets and lack of consultation between MoFPED and spending entities during budget cuts. It is against this background that the Office of the Auditor General decided to undertake an independent assessment of the implementation of the national budget in order to ascertain whether the planned budget objectives were being achieved in an economic and efficient manner. 1.3 DESCRIPTION OF THE AUDIT AREA General description A national budget is an annual statement of a country s expected revenue and expenditure. It is the most important tool that Government uses to translate the development aspirations of the nation into reality 20. The cardinal objective of budgeting in Uganda is to enhance growth and socio-economic transformation. The budget process is divided into four major stages, namely: formulation, approval, implementation and monitoring & evaluation. Traditionally, budgeting in Uganda was limited to ensuring that funds are spent as planned without much focus on the outputs of the plans. However, due to the need to foster poverty reduction 14 UBOS Statistical Abstracts 2009/ /12 15 Deloitte & Touche 2012 budget analysis 16 MoFPED Poverty status report, May, OAG annual report 2009/10 18 Civil society position paper on the NBFP 2011/ /16 19 Government annual performance report 2010/11 20 National Budget Analysis Report (Zambia), May

19 and ultimately boost national development, reforms have been undertaken in public financial management with a main objective of transforming the budgeting process from a spending orientation to a result focused one. The reforms were targeted at improving efficiency in resource allocation for effective service delivery as well as promoting accountability and transparency in the utilisation of public resources. The reforms included, among others: the introduction of the Integrated Financial Management System (IFMS) to enhance budgeting planning, execution and financial reporting in Government; the Medium Term Expenditure Framework to create a better link in the implementation of policies and strategies; a shift from incremental budgeting to integrated planning at all levels; allocation of resources to government strategic priorities in line with the NDP and delegation of budgeting functions to sector working groups (sector wide approach). Integral to these reforms was the strengthening of the performance orientation of Government processes through the introduction of Results Oriented Management (ROM) in This reinforced the link between resource allocation, activities and intended results. ROM was later complimented with the introduction of Output Oriented Budgeting (OOB) with the primary objective of incorporating outputs/results into the budgeting process. In order to achieve the objectives of the OOB, MoFPED took an initiative to develop an in-house Ms. Access data base software, the Output Budgeting Tool (OBT). The OBT is a financial management software designed to match public expenditure with the desired outputs within the constraints of the available resources. It places emphasis on attainment of results as well as improving the link between budget expenditure and outputs. The tool also enables stakeholders to ascertain progress in the delivery of key results pertaining to sector and national objectives. The tool is therefore instrumental in aiding budget preparation and implementation as well as facilitating reporting, monitoring and review of programme implementation. The national budget is financed by GoU and development partners through loans and Grants. Budget implementation is a responsibility of the executive as well as MDAs Legal Framework/ mandate: The Constitution of the Republic of Uganda together with the attendant legislation enacted by Parliament provides the legal framework for planning and budgeting. Chapter 9 Articles of the constitution provides for planning and budgeting as well as financing for local governments. The Public Finance and Accountability Act, 2003 provides for the development of fiscal policy framework, regulation of public financial management and prescribes responsibilities for budget execution. The budget Act, 2001 prescribes the budget procedures and provides for the budget calendar. The Appropriation Act enacts the budget into a Law and hence authorises Government to spend funds in accordance with set appropriations. The NRM manifesto provides the ruling party s priorities for incorporation into the budget. It is important to note that Government has come up with the Public Finance Bill, 2012 to address identified gaps in the Budget Act, 2001 and the Public Finance and Accountability Act, 4

20 2003. The draft Bill is before Parliament for debate and subsequent approval. It is hoped that the Bill, if passed in its current state, will greatly improve the management of the budgeting processes. Section 4 (1) (a) of the PFAA (2003) requires the Minister responsible for Finance to put in place systems throughout government for planning allocating and budgeting for the use of Government resources in order to improve the economy, efficiency and effectiveness of Government Vision, Mission and Organization Structure MoFPED vision and mission are: Vision A most effective and efficient Ministry of Finance, Planning and Economic Development that is capable of achieving the fastest rate of economic transformation among the emerging economies. Mission To formulate sound economic policies, maximise revenue mobilization, ensure efficient allocation and accountability for public resources so as to achieve the most rapid and sustainable economic growth and development. Organizational Structure MoFPED commands a unique organisational structure with a Minister as the institutional head. The minister is assisted by five (5) Ministers of State who are responsible for General Duties, Planning, Investment, Privatization, Micro Finance and Enterprise Development. Under the Ministers of state is a Permanent Secretary (PS) who is the chief executive and doubles as the Secretary to the Treasury. The PS is deputised by the Deputy Secretary to the Treasury and an Undersecretary who doubles as the head of the Finance and Administration (F&A) department as well as the Accounting officer for the Ministry. The entity is divided into three (3) Directorates, namely; Budget, Economic Affairs, and Accountant General s Office all of which are headed by Directors and each directorate is composed of Departments supervised by Commissioners. Details of the Organization Structure are in Appendix I Budget Goals and Objectives Budget Goals These are mainly national or government ambitions translated into themes. Over the period under review, the budget goals were as follows: 1. Enhancing strategic interventions to improve business climate and revitalize production to achieve prosperity for all (F/Y 2009/10). 2. Strategic priorities to accelerate growth, employment and socio economic transformation for prosperity (F/Y 2010/11). 3. Promoting economic growth, job creation and improving service delivery (F/Y 2011/12). Main Budget objective The main Budget objective is to promote rapid, broad-based and sustainable private sector-led economic growth as a prerequisite for poverty eradication. Specific Budget objectives/ Budget priorities: The specific Budget objectives are summarised below:- F/Y 2009/10 1. To increase Agricultural production and value addition. 5

21 2. To develop the Transport infrastructure. 3. To develop the Energy infrastructure. 4. To increase investment in Human resource development. 5. To enhance Peace, security and good Governance. F/Y 2010/11 1. To develop infrastructure, roads and Energy. 2. To promote science, technology and innovation in order to facilitate value addition and employment creation. 3. To enhance agricultural production and productivity. 4. To develop the private sector. 5. To improve public service delivery. F/Y 2011/12 1. To develop infrastructure in roads, railways and energy 2. To enhance agricultural production and productivity 3. To create employment for youth, women and in small and medium enterprises 4. To develop the human resource 5. To improve Public Service Delivery GOU Budget Allocations During the period under review, the national budget was on average approximately 80.28% and 19.72% funded by the Government of Uganda (GoU) and Development partners (donor community), respectively (see Table 1). The government contribution was mainly through tax and non-tax revenue collections. Table 1: Total National budget funding for the period 2009/ /12 YEAR DONOR BN Shs GOU BN Shs NTR BN Shs TOTAL BN Shs DONOR % GOU % 2009/10 1, , , /11 1, , , /12 1, , , TOTAL 4, , , MEAN 1, , , *Source: Approved budget estimates 2009/ /12 (Excl. Taxes, arrears) Total budget allocations by sector over the three years amounted to UGX 25 trillion as shown in Appendix II. 6

22 1.4 AUDIT OBJECTIVES The overall audit objective was to assess the adequacy of the current budget implementation procedures in delivering the intended outputs. The specific objectives were: i. To assess whether budget priorities are in line with NDP priorities. ii. To establish whether the annual approved budgets are in line with the MTEF. iii. To evaluate the management of cash limits by MoFPED. iv. To evaluate the process of release of funds by MoFPED. v. To assess the effectiveness of the OBT in the implementation of the budget. vi. To evaluate the budget monitoring and supervision function during budget implementation. vii. To assess the implementation of selected key Government sector priorities. 1.5 AUDIT SCOPE The audit was conducted at MoFPED headquarters in Kampala with a focus on the budget implementation processes which are to a large extent undertaken by the Directorate of Budget. This was aimed at assessing the extent to which the processes impacted on service delivery and economic growth. Key government priorities were selected for review in the ministries of Agriculture, Animal Industry & Fisheries (MAAIF) and Finance, Planning and Economic Development (MoFPED). The study also covered fourteen (14) selected district local governments, namely: Wakiso, Mubende, Luweero, Rakai (central),tororo, Kumi, Soroti (Eastern), Lira, Kitgum, Oyam, Adjumani (Northern), Kabale, Bushenyi and Bundibugyo (Western). This was intended to ascertain the status of implementation of the above activities. The audit covered three financial years, namely: 2009/2010 and 2010/2011 and 2011/12. 7

23 2 CHAPTER TWO CHAPTER TWO 8

24 CHAPTER TWO AUDIT METHODOLOGY The audit was conducted in accordance with the International Organization of Supreme Audit Institutions (INTOSAI) Performance Auditing Standards and the Performance Auditing guidelines prescribed in the Office of the Auditor General (OAG) VFM audit manual. The standards require that the audit be planned in a manner which ensures that an audit of high quality is carried out in an economic, efficient and effective way and in a timely manner. 2.1 Sampling The districts visited were identified using stratified random sampling method where the Country was stratified into four (4) main regions namely, Eastern, Central, Western and Northern. Using the RAND function of MS Excel, districts in each stratum were assigned random numbers and subjected to a custom sort from largest to smallest. Samples were chosen from the first three largest random numbers. The additional districts were selected on the basis of programmes implemented in line with the chosen sectors. Selection of approved budget activities for the study was majorly based on government identified priority activities, level of funding and perceived impact on society/public. 2.2 Data collection The following data collection methods were used to gather audit evidence: Document review Appendix III provides details of documents reviewed in order to obtain an in-depth understanding of the audited entity and specifically the area of study Interviews A total of 80 interviews were conducted with MoFPED, Ministry of Agriculture, Animal Industry and Fisheries (MAAIF) and Ministry of Education and Sports (MoES) officials in Kampala as well as officials and beneficiaries from the selected districts as detailed in Appendix IV. This was done to corroborate information obtained from other data collection methods Observation/field inspections Field inspections (physical observations) were carried out in order to establish the status of implementation of key government sector priority activities. 2.3 DATA ANALYSIS Collected field data was analyzed to establish performance trends in the implementation of priority government activities over the period under study as well as determine variations between planned and actual budget outputs. The analysis was also intended to check compliance with the established budget procedures, laws and regulations. 9

25 3 CHAPTER THREE CHAPTER THREE 10

26 SYSTEM AND PROCESS DESCRRIPTION 3.1 ROLES AND RESPONSIBILITIES OF KEY PLAYERS Cabinet CHAPTER THREE This is the highest policy making organ of the executive chaired by H.E. the President that provides policy guidance and direction for budget implementation. Article 111(2) of the Constitution empowers cabinet to determine, formulate and implement government policies. It therefore makes key policy, financial and resource decisions of government which are submitted to Parliament through its memoranda and policy proposals. Cabinet submissions articulate clearly how new policies, programs and services will be delivered in order to meet government expectations. Parliament This is the second arm of government-the legislature. It is responsible for approving the national budget and overseeing its implementation. Development Partners These play a key role of providing financial support in form of loans and grants to specific projects and the National Budget as a whole. MoFPED MoFPED is the main ministry responsible for managing the national treasury and coordinating the entire budget process. It receives sector budgets, consolidates them for approval of the legislature and aids budget implementation through release of funds to approved budget activities and monitoring of budget implementation. The ministry comprises three directorates as follows: Directorate of Economic Affairs This Directorate is concerned with effective management of resource inflows; stable macroeconomic framework, and economic development planning. It is comprised of four departments, namely: Macroeconomic Policy, Tax Policy, Aid liaison and Economic Development Policy & Research. Directorate of Budget This Directorate is responsible for the initiation, formulation, co-ordination, implementation, monitoring, and evaluation of budgetary policies and procedures. It ensures that Government Ministries, Departments, and Agencies are allocated the financial resources necessary for the execution of their programs. The budget Directorate consists of three departments, namely; Budget Policy and Evaluation, Infrastructure and Social Services, and Public Administration. Accountant General s Office This Office is responsible for initiating, formulating, and coordinating policy for management of public funds, assets, and debt. It provides guidelines and procedures for management of public funds. The Accountant General s office comprises five departments, namely: Technical and Advisory Services; Treasury Services; Financial Management Services; Inspectorate & Internal Audit and Uganda Computer Services. 11

27 Budget Monitoring and accountability/ analysis Unit (BMAU) This is an independent unit in the MoFPED established in 2008/09 F/Y in line with articles 3 & 6 of the Public Finance and Accountability Act (PFAA), It is responsible for producing budget monitoring and evaluation reports used to improve budget implementation. Bank of Uganda (BoU) It is responsible for ensuring macro-economic stability through management of the monetary policy. It also maintains the consolidated fund and is responsible for transfer of funds to spending entities for implementation of budgeted activities. Office of the Auditor General This is an independent Supreme Audit Institution of Uganda mandated to issue grants of credit 21 on the consolidated fund to the Minister responsible for finance. The grants of credit authorise the minster to withdraw funds from the consolidated fund in order to finance approved budget activities. The Office of the Auditor General is also mandated to scrutinize accounts and financial statements of government in order to determine whether the budget is implemented as passed by the legislature. Ministries, Departments and spending Agencies The MDAs translate government policy into actions by developing and implementing the budget. They initiate policies for the consideration of Cabinet and they also manage the budget consultative process with all stakeholders at every stage. They are therefore in position to leverage resources towards government priority programmes as long as such programmes are reflected in the medium-term and long-term plans. 21 PFAA, 2003 S.12 and 13 Other Stakeholders: The Civil Society, NGOs, the business community, the media and the general public provide budget proposals through their participation in Sector Working Groups (SWGs) and also through provision of comments/ observations on the National budget framework Paper. They also provide useful information on the budget to government and the communities through media reports, independent research and public debates carried out. 3.2 Process Description Budget implementation The national budget is implemented over a twelve months period beginning from July to June each year. It commences right after approval of the vote on account (VOA). Vote on Account (By 30 th June) In line with Article 154 (4) of the Constitution of the Republic of Uganda, once the Budget Speech has been read (by 15 th June), MoFPED is required to prepare the Vote on Account (VOA) equivalent to one third (1/3) of the draft annual budget. This is done before 30th June each year and is meant to enable government implement its planned activities for the first four months of the financial year pending the approval of draft annual national budget or coming into force of the Appropriation Act. After preparation of the VOA, the Minister for Finance tables a motion before parliament for its approval. The approval is communicated to the minister and copied to the OAG under seal by the clerk to parliament. The OAG provides a grant of credit which authorises the Minister to spend the VOA as per the MDA quarterly work plans and cash projections. Grant of Credit by Auditor General The approval of the annual budget by 12

28 parliament (by 30 th September) provides the legal authority for spending agencies to spend and for the MoFPED to make releases to spending agencies. Once Parliamentary authority to spend has been obtained, the Auditor General is requested (by letter) by the Minister for Finance, with advice from the Accountant General, to issue grants of credit on the Consolidated Fund to enable releases to be effected. The Auditor General issues a block grant of credit to cover expenditure for the whole budget and also issues grants of credit on any supplementary estimates and special requisitions. Minister s Warrant Upon receipt of the grant of credit from the Auditor General, the minister for Finance issues a warrant (by letter/memo) to the Accountant General as authority for withdrawal of money from the consolidated fund. The warrant is issued only when the grant of credit is sufficient to cover the intended expenditure. Quarterly cash limits The Directorate of Economic Affairs at MoFPED is charged with the duty of forecasting the total national resource envelope for each F/Y and hence determining the Macro Cash limit. Once the macro cash limit has been determined, the Directorate of Budget takes over the responsibility of apportioning it to the spending units by setting the micro/sectoral or vote cash limits. The sectoral cash limits are determined/ allocated quarterly to spending entities through quarterly cash limits. According to MoFPED guidelines, allocation of the quarterly cash limits is based on the available resource envelope and MDA cash flow plans (work plans and expenditure projections).the quarterly cash limits are required to be communicated to MDAs at the end of the third month of each quarter for expenditure in the forthcoming quarter. The process of determining the quarterly cash limits is summarised in the flow diagram in Appendix V Accounting Warrant by Accountant General On the basis of the Minister s warrant and the quarterly cash limit set for each MDA by the Director, Budget, the Accountant General issues quarterly accounting warrants to Accounting Officers authorizing them to incur expenditure up to the limits specified in the accounting warrant and subject to the conditions contained in the warrant. The accounting warrants trigger the process of entering into commitments by the Accounting Officers since they provide assurance that funds will be availed (confirmation of availability of funding). Cash requisitions/release requests Based on the Accountant General s warrant, the Accounting Officers prepare quarterly cash requisitions indicating how the quarterly cash limit will be utilized for each of the three months of the quarter. These requisitions, which must be based on the approved estimates and work plans, are then submitted to the Director Budget for scrutiny (by the 10th day of the first month of the quarter). Release of funds Release of funds by Director, Budget Release of funds to spending agencies is done on a quarterly cash flow planning horizon. MoFPED guidelines require that this is done by the 15th day of the 1st month of each quarter. The guidelines also stipulate that only one release will be made for each quarter and that the releases ought to be reliable and timely. The funds release process is as follows: After scrutinizing the quarterly cash requisitions received from the Accounting 13

29 Officers, the Director, Budget issues budget release letters to the Accounting Officers advising how much money has been programmed to each item, programme and vote. Budget release letters are the basis for the Accountant General to advise BOU to transfer funds to the respective agency Treasury General accounts at BoU or to corresponding commercial banks (Stanbic Bank) for the case of local governments. When funds are transferred to the Accountant General by the Director, Budget he issues a cash release warrant to cover the funds as credited to the MDA accounts. Release of Cash by Bank of Uganda Once funds have been transferred by BoU to Treasury general accounts or to Stanbic bank, the Commissioner/Treasury officer of accounts processes and issues a cash release warrant. The cash release warrant is a confirmation to Accounting Officers that funds have been transferred to their respective accounts with BoU. The accounting officers then approve supplier invoices or payment requisitions and process payments via the Integrated Financial Management System (IFMS). Based on the release requests, the system automatically effects cash releases to MDAs up to the maximum cash limit provided, that is, individual beneficiary accounts are credited using Electronic Funds Transfer (EFT) System. EFT payment transactions by Uganda Computer Services (UCS) For the case of MDAs not yet on the IFMS, the Accounting Officers prepare payment batches from duly authorized payment vouchers on the basis of the cash release warrant. The batches are sent to the Treasury Office of Accounts for approval. The approved batches are then forwarded to Uganda Computer Services (UCS) as input data for processing of EFT transaction payments. The transaction payments are bundled in the standard EFT format and are transmitted to Bank of Uganda for final processing and crediting of funds to the accounts of beneficiary MDAs. It is important to note that MoFPED releases funds to MDAs in phases starting with CGs followed by Missions and lastly LGs. Releases are also effected in two ways, namely: the Straight Through Process (STP) and the interbank system. Under the STP method (direct releases), the Accountant General issues release instructions to BoU indicating lists of beneficiaries and amounts. Funds are then remitted directly to the beneficiary accounts. For the interbank system, the AG receives a release circular from the Director, Budget which he verifies and advises BoU to honour. BoU then advises commercial banks which in turn advise their branches. Local Government Releases Whereas CGs releases are made on the basis of their cash requisitions, MoFPED guidelines do not require LGs to prepare cash requisitions. According to the guidelines, LG funds are released in four equal instalments (25%) per quarter. Every quarter the Director, Budget advises the Accountant General of the releases to the Local Governments (LGs) and issues release letters to the LG Accounting Officers detailing the amounts released. The Accountant General then advises Bank of Uganda to transfer the funds to the LG accounts. After the funds have been transferred, the LGs are informed about the actual amounts transferred to their respective bank accounts for each grant. Separate cash releases are made for each grant, for instance, salaries, automatic non PAF releases, development activities and recurrent non-wage PAF grants. The release letters and cash release forms are collected by the Chief Finance Officers (CFOs) or their representatives physically from the Accountant General s Office. 14

30 Reallocations/Virements Spending Agencies may re-allocate or vire funds within the budget lines within the same expenditure category or across expenditure categories. Reallocations within the same category of expenditure such as non-wage recurrent can be done administratively with the approval of the accounting officer and Secretary to Treasury before the issue of the accounting and cash release warrant. However, reallocations within different expenditure categories such as recurrent and development need the authority of the Secretary to the Treasury. Furthermore, reallocation from wage requires endorsement from the Ministry of Public Service. Section 12 (3) of the budget Act, 2001, however, stipulates that any reallocation of funds shall be made in consultation with all the affected Ministries, Departments, Institutions or organizations. Supplementary Budgets Section 16 of the Public Finance and Accountability Act, 2003 stipulates that where the amount of funds appropriated by the Appropriations Act for a given F/Y are found to be insufficient, or that a need has arisen for expenditure for a purpose for which no funds were appropriated by Parliament, a supplementary estimate, showing the amount required shall be laid before Parliament and that the expenditure votes shall be included in a Supplementary Appropriations Bill for Parliament to provide for their appropriation. Section 12(1) of the Budget Act, 2001 on the other hand requires that the total supplementary expenditure that requires additional resources over and above what is appropriated by Parliament should not exceed 3% of the total approved budget for that FY without prior approval by Parliament. Subsection (2) states that where supplementary expenditure is incurred; supplementary estimates must be laid before Parliament within four months after the money is spent. Sources of supplementary funding include suppression of the expenditure on other votes or provision of additional resources. Output budgeting After the budget is approved, it is uploaded onto the OBT and locked to avoid unauthorised alterations of targets. The revised quarterly work plans, performance contracts, quarterly cash projections and final cash limits issued are also uploaded on the OBT in order to relate projected expenditure to expected outputs. As implementation progresses during the course of the F/Y, the accounting officers are required to prepare quarterly budget performance reports using the OBT. These reports capture the outputs attained, location of implementation and status of work in progress. The quarterly budget performance reports and the automated checklists generated on the OBT are then used to monitor MDA performance. They are reviewed by MoFPED, OPM, Head of Public Service and line ministries for the case of local governments. According to MoFPED guidelines, the review comments should be communicated to the respective CG votes by the end of the second month of the quarter and by the end of the second month after the close of the quarter for LGs. Budget monitoring and Evaluation (M&E) Budget monitoring involves tracking the implementation of selected government programs or projects to observe changes in the different physical and financial values against set performance indicators, goals, targets and actual outcomes of government interventions over time. It is undertaken by OPM, MoFPED (BMAU) and line ministries through detailed scrutiny of government policy documents, financial statements, work 15

31 plans, performance contracts, progress reports and Budget Framework papers (BFPs) which are then compared with the physical verification results at both the Central and local government levels. OPM undertakes regular monitoring of government performance and reports every six months to cabinet on the basis of quarterly submissions of all sectors. It also produces the government annual performance report. BMAU on the other hand, carries out quarterly monitoring of key service delivery sectors on a sample basis. Each quarter BMAU picks samples of programmes from the selected sectors, entities and districts for monitoring. The samples are picked based on the significance of their budgetary allocations. BMAU produces three quarterly and one annual monitoring report. The first month of the quarter is set aside for document review and bilateral discussions with stakeholders (implementing entities); the second month is for field data collection and analysis and the third/last month is dedicated to report writing and production. The reports include quarterly budget monitoring reports, annual budget monitoring report, budget policy briefs and budget related research reports. 16

32 4 CHAPTER FOUR CHAPTER FOUR 17

33 CHAPTER FOUR FINDINGS, CONCLUSIONS AND RECOMMENDATIONS This chapter presents findings, conclusions and recommendations on:- 4.1 ALIGNMENT OF THE NATIONAL BUDGET WITH THE NDP Section 129 of the National Development Plan (NDP), 2010/ /15, provides that the NDP should be used as a guide for any future planning. Accordingly, all MDAs, autonomous and semiautonomous entities, are required to align their development priorities with the NDP. Section 984 also requires budget funding to be aligned to the NDP priorities and adequate funding to be provided to support the performance of selected programmes as well as the realization of specific objectives in line with the NDP sector Medium Term Expenditure Framework (MTEF). Account should also be taken of the MTEF shares for sectors as provided in the NDP. Section 985 further requires the government MTEF and annual budgets to reflect the NDP. A review of the Budget speeches and the ministerial policy statements of the selected sectors for the period under review revealed that the MDA Development priorities were in line with the NDP. However, the financing of the budget was not aligned to the NDP priorities as some development priorities were either underfunded or not funded at all. Table 2 shows the core investment priorities, which according to the NDP, were supposed to take the first call on budget resources and whose implementation was to commence in year 1 of the NDP (2010/11) but have either delayed to start or not commenced at all. Table 2: NDP priority investment areas for FY 2010/11 and 2011/12 S/N CORE PROJECT 2010/11 Shs. Bn 2011/12 Shs Bn Responsible Entity Status as at 2012/13 Cause(s) 1 Construction of five Irrigation schemes MAAIF Delayed Delayed funding and implementation 2 Construction of Karuma HEP (700MW) MEMD Not commenced Procurement delays 3 Construction of Isimba HEP project (130MW) MEMD Not commenced Delayed preliminary works 4 Improvement of transport infrastructure, connectivity, transport systems and safety for greater metropolitan Kampala MoWT Delayed Delayed funding 18

34 5 Rehabilitation of existing railway lines MoWT Not commenced Not funded 6 Construction of a standard railway gauge from Malaba to Kampala MoWT Not commenced Not funded 7 Improvement of water transport on lake Victoria MoWT Delayed Delayed funding 8 Construction of Information Technology business parks ICT Not commenced Not funded 9 Construction and development of a phosphate industry in Tororo MTTI Not commenced Delayed funding and Noncompensation of bonafide occupants of the proposed mining project land 10 Development and production of iron ore ingots MTTI Delayed Not funded 11 Development of a National non - formal skills program MGLSD Not commenced Not funded 12 Construction and development of 4 regional science parks and Technology incubation centres (SPTIC) STI Not commenced Not funded * Source: Uganda NDP 2010/ /15. In addition, the government MTEF, as set by MoFPED in the annual approved estimates of revenue and expenditure, did not fully reflect the NDP. Analysis of the MTEFs for 2010/11 and 2011/12 revealed that the MoFPED MTEFs were not in line with the NDP MTEFs and were much lower than the NDP MTEFs as shown in Table 3. For instance, whereas the NDP provided for Shs 7,948 billion and Shs 9,293 billion as MTEF allocations for all the sectors in the FY 2010/11 and FY 2011/12, respectively, MoFPED allocated only Shs 7,336 billion and 7,532 billion representing compliance levels of 92% and 81%, which translated into total deviation of Shs 612 billion and Shs 1,761 billion, respectively. At an individual sector level, the differences were more significant. Some sectors, such as: ICT, Tourism and Trade, and Social Development had MTEF allocations which were far below that recommended in the NDP. Some sectors, such as: Public Administration, Energy and Mineral development, Security, Accountability, Legislature and Public Sector management continued to receive allocations much higher than those recommended by the NDP. Details of sector performance for the two years are shown in Table 3 below: 19

35 Table 3: NDP and MoFPED MTEFs in Billion Shillings in the FYs 2010/11 and 2011/12 YEAR 2010/ /12 S/N SECTOR NDP MTEF FIN MTEF DEVIATION % COMPL NDP MTEF FIN MTEF DEVIATION % COMPL 1 Agriculture Land Housing And Urban Devt Energy And Mineral Devt Works And Transport , , , , , , Ict Tourism Trade And Industry Education 1, , , , Health 1, , Water And Environment Social Devt Security Jlos Public Sector Management Accountability Legislature Public Adminstration Total 7, , , , , *Source: Approved Estimates of Revenue and Expenditure 2009/10 & 2010/11 and National Development Plan 2010/ /15 Non-alignment of financing of the annual budget to the NDP priorities showed lack of serious commitment by government to the NDP and is partly attributed to inadequate consultation and coordination between MoFPED and NPA. The non-alignment of the NDP investment priority areas with the budget has led to delayed or non-implementation of vital investment projects set out in the NDP that are critical for the attainment of the national vision of Growth, Employment and socio economic transformation for prosperity within 30 years. This may impact on the government efforts to achieve the projected 20

36 average annual GDP growth rate of 7.2% over the NDP period. Conclusion MoFPED did not follow the NDP requirements in determining sector MTEFs and this affected the allocation of resources to the national priorities envisaged by the NDP. This puts to waste the resources injected into the preparation of the NDP. Additionally, the determination of MTEF allocations by two different government institutions amounts to duplication of efforts. Management response: The NDP provides an overall framework that guides the planning and resource allocation over the NDP period and the cost of investments in a given financial year, which are not resource constrained. Allocations under the MoFPED MTEFs were not in tandem with the NDP annual allocations due to resource constraints and the consideration of the ruling party manifesto priorities. NDP MTEF shares for sectors were not used due to a change from incremental budgeting to output oriented budgeting. There is a need for the review of the NDP. Auditor s Comment: Audit notes that the ruling party manifesto priorities were taken into account during the formulation of the NDP as provided in section 255 of the NDP. The failure by MoFPED to follow the NDP requirements in the budgeting process renders the NDP irrelevant. There should be improved coordination and consultation between NPA and MOFED in the process of priority setting and budget formulation. The MoFPED should in consultation with other key stakeholders ensure that the NDP is monitored, evaluated and reviewed to strengthen its relevancy in the budgeting process. 4.2 MANAGEMENT OF CASH LIMITS Disparities in Macro and Cash limit allocations According to current procedures, the approved budgets should be in line with the macro cash limits and the annual Micro cash limits should in turn be in line with the Macro Cash limits. At the macro level, the analysis of both the Macro cash limit schedules together with the annual approved budgets for the years under review revealed disparities between the macro cash limits and the approved budgets. The approved budgets exceeded the macro cash limits by an average of Shs billion as shown in Table 4. The FY 2009/10 (Shs billion) had the largest variation followed by FY 2010/11(Shs billion) and FY 2011/12 (Shs billion). Recommendations: MoFPED should, in future, endeavour to align the financing of the budget with the national investment priorities as set out in the country s long term development plan. 21

37 Table 4: Approved Budgets and the Macro cash limits for the period 2009/ /12. Financial Year 2009/10 UGX BN 2010/11 UGX BN 2011/12 UGX BN Approved Budget 5, , , Macro cash limit (Incl. Wage etc.) 5, , , Variance Average *Source: Approved Estimates of Revenue and Expenditure (MTEF + Domestic arrears External financing) Directorate of Budget, MoFPED At the micro level, the analysis revealed that the annual sum of the quarterly micro cash limits was also lower than the annual macro cash limits set by MoFPED by Shs 934 billion on average as analyzed in Table 5. Table 5: Macro and Micro cash limits for FY 2009/10 to 2011/12. (Exclusive of wages and other Memorandum items) Financial Year 2009/10 UGX BN 2010/11 UGX BN 2011/12 UGX BN Macro cash limit 3, , , Micro cash limit 2, , , Variance , Average *Source: Directorate of Budget, MoFPED Delays in the issuance and receipt of Cash limits According to Section D(7) of the MoFPED reporting guidelines, the Directorate of Budget is supposed to issue cash limits to central and local government votes at the end of the third month of each quarter to guide releases for the forthcoming quarter. Cash limits should also be allocated to MDAs based on the available resources (for LG votes) and their cash flow plans (for central votes). It was established that there were delays by the Directorate of Budget to issue cash limits to MDAs. There was on average seven days delay in the issuance of the cash limits to MDAs and a further seven days delay in the actual receipt of the cash limits by the MDAs resulting into an overall delay of 14 days as shown in Table 6. The delay in issue of cash limits to MDAs was attributed to delayed communication of the macro cash limits by the Directorate of Economic Affairs. 22

38 The delay to issue cash limits leads to delays in release of funds to MDAs and consequently undermines the budget execution processes. Table 6: Dates of communication of the quarterly macro and micro cash limits. FINANCIAL YEAR QUARTER BEGINNING MACRO CASH LIMIT MICRO CASH LIMIT DELAY IN MICRO CASH LIMIT (DAYS) RECEIPT OF CASH LIMITS BY MAAIF. MAAIF DELAY (DAYS) July 3 rd July 7 th July 7 14 th July /10 October - 6 th October 6 12 th October 12 January 7 th January 15 th January th January 19 April 6 th April 16 th April st April 21 July 1 st July 7 th July 7 13 th July /11 October 5 th October 8 th October 8 28 th October 28 January 10 th January 12 th January th January 18 April 25 th March 29 th March 0 7 th April 7 July 7 th July 11 th July th July /12 October 29 th September 5 th October 5 20 th October 20 January 29 th December 4 th January 4 10 th January 10 April 2 nd April(revised) 29 th March 0 3 rd April 03 AVERAGE DELAY *Source: Directorate of Budget, MoFPED Cash limit report, MAAIF Management response: The macro cash limits exclude the external component of the development budget and the disbursement of funds of the foreign funded projects is directly effected onto the project accounts. Therefore, the approved budget figures (which include external component of the development budget) are not comparable to the macro cash limits. The timing of issuance of cash limits to spending agencies has had to be revised to the 10 th day of the first month of the quarter. The delays in the issuance of cash limits are sometimes out of MoFPED s control. The process of setting cash limits is facilitated by several in-puts from various stakeholders. Delays by any of the stakeholders in submitting information will inevitably affect the timeliness of the Macro cash limits, which will have a knock on effect on the micro cash limits. Auditor s Comment: After considering the external component of the development budget, still discrepancies existed between the approved budgets and macro cash limits. The current MoFPED reporting guidelines (Section D paragraph 7) are silent about the revision in the timing of issuance of cash limits from the end of the third month of each quarter to the 10 th day of the first month of the quarter. 23

39 4.2.3 Criteria for determination of Cash Limits Determination of cash limits should be based on MDA work plans and available resources. However, it was noted that the stipulated criteria for the allocation of cash limits to MDAs were not observed. For instance, MoFPED and MAAIF work plans for F/Y 2010/11 and 2011/12 were not in line with the micro cash limits allocated to them during the same period as shown in Figure 1. *Source: MoFPED and MAAIF Quarterly work plans and Cash limits The graph shows that in F/Y 2010/11, whereas the MoFPED cumulative work plans amounted to Shs billion, the cumulative cash limits issued amounted to Shs billion, resulting into a deviation of Shs billion. Similarly, the MAAIF cumulative work plans for the same year amounted to Shs.47.6 billion against the cumulative cash limit of Shs.46.5 billion, a deviation of Shs.1.1 billion. The analysis of MAAIF and MoFPED quarterly work plans and cash limits is shown in Appendix VII. Additional cash limits are often issued when the original cash limits are insufficient However, the criteria for the allocation of Shs billion in additional cash limits authorized by MoFPED for F/Y 2010/11 as shown in Table 7 could not be established. Table 7: Dates and amounts of additional cash limits authorized in Financial Year 2010/11 DATE of Authorization 23-May BENIFICIARY MDAs DPP, State House, MEMD, MGLSD, EAC, Prisons, President s Office, Cabinet Secretariat, Parliament, UBoS, MoFPED, Police, UNRA, Busitema University, OAG, MoLG, MTTI, UAC, OPM AMOUNT (Billion) Apr DPP, State House, MEMD, MGLSD, EAC Affairs Apr Utilities, Rent, President s Office, Police, OPM, Prisons, ESO, MIA, IFMS, MoFPED, MoPs, MoFA, Parliament, MWE, MoES, MTTI, PSC Mar MoFPED, MoFA, UTB, LGFC, NEMA, ULC 2 06-Dec Police 6.88 TOTAL *Source: commissioner PAD file, MoFPED 24

40 The mismatch between the approved budget, macro and micro cash limits, undermines the credibility of the budgeting process. It was attributed to unrealistic budgetary planning and fiscal forecasts by MoFPED. 22 The withholding of large amounts of Macro contingency as well as the slow growth in tax revenue also contributed to the disparities in question. Uganda s current tax revenue to GDP ratio stands at 13% which is the lowest in the East African region. The unrealistic revenue forecasts have led to large discrepancies between expected and actual revenues which has in turn distorted planning and execution of activities by spending entities 23. Conclusion Gaps in the management of cash limits affect the credibility of the budget. This therefore calls for concerted efforts for the review and improvement of the entire cash limit management process. Management response: A major economic management objective of Government is to maintain macroeconomic stability as this provides a conducive environment for economic growth. This objective imposes a limit on the amount of spending that can be incurred in a given year. If new expenditure pressures emerge during the financial year, in the absence of surplus revenues, such pressures are accommodated by redistribution of resources across votes. The mismatch is largely attributed to supplementary budgets. Better tracking of potential tax payers in the informal sector is expected once the National Identification Project is implemented. The non-tax revenue rates are currently being revised and will be updated to reflect realistic charges. 22 MoFPED report on MDA Absorptive Capacity Constraints, August Absorptive Capacity Constraints, the causes and implications for budget execution, August 2011 Auditor s Comment: The stated macroeconomic objective of economic stability is already taken into account during the determination of the Macro cash limits, which in turn impact on the determination of micro cash limits. Recommendations: The Directorate of Economic Affairs in MoFPED should revisit its fiscal forecasts and the underlying economic assumptions and models so as to come up with relatively realistic revenue forecasts to enhance budget transparency and credibility. Government, through MoFPED, should broaden the tax base to capture all prospective or potential tax payers, especially those in the informal sector. It should also pay particular attention to non-tax revenue collections in an effort to broaden the revenue base. This will enable government to increase the country s Revenue-to-GDP ratio, obtain adequate resources to finance its budgets and ensure a steady increase in the rate of real economic growth. The Directorate of Budget should comply with the available MoFPED cash limit management guidelines in order to ensure timely release of funds and hence execution of planned budget activities. 4.3 RELEASE OF BUDGETED FUNDS: Upload of Approved Budgets onto the IFMS Article 154 Sec (1) (a) and (b) of the 1995 Constitution of the Republic of Uganda stipulates that no monies shall be withdrawn from the Consolidated Fund except to meet expenditure charged on the fund by the Constitution or by an Act of Parliament; or where the issue of those monies has been authorized by an Appropriation Act. 25

41 It was noted that as part of MoFPED budget execution processes, once the National budget is approved by parliament by way of an Appropriation Act, it is uploaded on the IFMS which is the government software used for budget execution. However, a review of the Appropriation Act and statutory budget, and the approved budget uploaded on the IFMS for 22 selected ministries in the F/Y 2011/12 revealed a variance of Shs.54 billion as shown in Table 8. Table 8: Comparison of approved re-current budgets for selected ministries for F/Y 2011/12 as per Appropriation Act and IFMS data. Vote Code Vote Name Appropriated Statutory Budget Total Budget IFMS Approved Budget Variance 001: Office of The President : State House : Office of The Prime Minister : Ministry of Defence : Ministry of Public Service : Ministry of Foreign Affairs : Min. of Justice & Const Affairs : Ministry of Finance, Planning & Eco : Ministry of Internal Affairs : Min. of Agric. Animal Industry & Fisheries : Ministry of Local Gov t : Ministry of Lands, Water & Environment : Ministry of Education & Sports : Ministry of Health : Ministry of Trade and Industry : Ministry of Works, H & C : Ministry of Energy & Minerals : Ministry of Gender, L & S.D : Ministry of Water & Environ : Min of Information & Communication Tech : Min of E. A Community Affairs : Min of Tourism and Wildlife TOTAL 1, , , *source: Approved Estimates, Appropriation Act and IFMS Data, 2011/12. Audit could not establish the justification for the upload of more funds on the IFMS than the amounts authorized under the Appropriation Act or the statutory budget. The upload onto the IFMS of more funds than approved is a violation of the provisions of Article 154 of the Constitution of the Republic of Uganda and can result into unauthorized issue of funds from the consolidated fund. 26

42 Conclusion MoFPED uploaded more funds on the IFMS than authorized by Parliament in disregard to the provisions of Article 154 of the Constitution. This can lead to Unauthorized expenditure. Management response: The IFMS approved Budget differs from appropriation Act due to the fact that the IFMS figures represent both the recurrent and Statutory budget figures. However, statutory budget is not appropriated as they are a charge on the Consolidated Fund. Auditor s Comment: After considering adjustments for the statutory expenditure there were still discrepancies between the amount appropriated and uploaded on the IFMS as shown in the table above. Recommendation: MoFPED should provide justification for Shs. 54billion uploaded on the IFMS over and above the amounts authorised by Parliament in F/Y 2011/ Release Warrants The Grant of credit on the consolidated fund is issued by the Auditor General in accordance with the Minister s requests for grant of credit (treasury requisition). The Minister s warrants to the Accountant General (general warrant) and the actual funds released to MDA s should be in line with the grants of credit issued. Discrepancies were, however, observed with the warrants approved at various stages of the release of funds process. For example, the Minister s requests for grants of credit (treasury requisition) to the Auditor General are supposed to be based on the technical advice of the Accountant General. However, it was established that in F/Y 2011/12, the Minister s requests were more than the figures advised by the Accountant General by Shs. 26 billion. Further analysis of the funds released showed that the funds released by the Treasury were more than the warrants issued by the Auditor General. In the period under review, a total of Shs. 685 billion, of which 59% (Shs. 402 billion) was released in FY 2011/12 alone, was not authorized by the AG. The details of funds authorized and released are shown in Table 9 below: Table 9: Treasury requisitions, AG s warrants, Minister s warrants and Releases for FYs 2009/ /12 in Billion Shillings F/Y ACCT. GENERAL MIN. REQUEST AUD. GENERAL MIN. WARRANT RELEASE 2009/10 6,459 6,459 6,427 6,427 6, /11 9,823 9,823 9,823 9,823 9, /12 9,473 9,499 9,499 9,476 9,901 TOTAL 25,755 25,781 25,749 25,726 26,434 *Source: Accountant General s warrant Files 27

43 Audit attributes the disparities between the treasury requisitions, AG grants of credit, Minister s warrants and funds released to weaknesses in controls over the release of funds, inability by MOFPED to track donor funding in development projects and lack of proper reconciliation between the Accountant General s Office and Directorate of Budget. 24 Management response: In the review period, no grants were issued in respect of approved donor funds and this may account for the differences between the total grants of credits issued and released. However, effective FY , Grants of Credit are issued for donor funds appropriated by Parliament as a control. Auditor s remarks: Management did not present figures of approved donor funds to enable us reconcile the difference Release Performance Funds should be released to MDAs in line with the approved annual budgets and the Appropriation Acts. 25 A review of the approved government estimates of revenue and expenditure, Appropriation Acts and Schedules of funds released revealed large discrepancies between the approved budgets and actual amounts released. For instance, for the period under review, the funds released were lower than the approved budgets by Shs.2, 245 billion (FY2009/10) and Shs.2, 303 billion (FY2011/12). In FY 2010/11 the amounts released exceeded the approved budget by Shs.119 billion. Overall, the budget performance averaged at 84%. Details of annual budget performance are shown in Table 10 and Figure 2 below. Appendix VIII shows the sectoral budget performance. Table 10: Approved Budgets and Actual Releases for the period 2009/ /12 in billion shillings FY APPROVED BUDGET ACTUAL RELEASE VARIANCE BUDGET PERFORMANCE 2009/10 7,769 5,524 2,245 71% 20010/11 8,113 8,232 (119) 102% 2011/12 10,616 8,313 2,303 78% TOTAL 26,498 22,069 4,429 Average=84% *Source: Approved Estimates of revenue and Expenditure and Directorate of Budget, MoFPED *Approved Budget and Actual releases include Recurrent, Development and Statutory Expenditure. 24 Agreed actions at the November 2012 Cabinet Retreat. 25 Article 154 of the 1995 Constitution 28

44 Figure 2: Annual Budget release performance. Figure 2: Showing Annual budget release performance for the period 2009/ / /12 FINANCIAL YEAR 2010/ /10 APPROVED BUDGET 0 5,000 10,000 15,000 FUNDING Shs Bn *Source: Approved Estimates of revenue and Expenditure and Directorate of Budget, MoFPED Figure 2 shows a relatively good budget release performance in F/Y 2010/11 due to the effect of the outliers such as the security and Public Administration sectors where releases were in excess of approved budgets. However, Figure 3 illustrates the absolute sectoral budget release performance for the same F/Y. 3 *Source: Approved Estimates of revenue and Expenditure and Directorate of Budget, MoFPED 29

45 The graph above shows that most of the sectors registered low funds release performance with the exception of security and public administration sectors which had releases above the initial approved budgets. MoFPED attributes the gaps in alignment of releases with the approved budgets to the inability by government (URA) to meet its revenue targets (mobilize adequate revenue to finance its budget) and the expenditure pressures arising from persistent requests for supplementary appropriations by some entities. In addition, the poor release performance of some entities was also attributed to budgetary cuts used to mobilize resources to finance the supplementary Budgets. The non-alignment of releases with the approved budgets has led to the release of insufficient funds to MDAs (underfunding) which has greatly affected the implementation of planned activities. MDAs are forced to roll over their current year activities to the subsequent periods due to inadequate funding. This implies that new activities could not commence until the rolled over activities were disposed of. Management response: Release Performance is attributed to the unforeseen expenditures usually financed through supplementary budgets and the fact that government operates a cash budget which is dependent upon revenues realized by URA Delays in Release of Funds S.D (7.1) of the MoFPED guidelines also stipulates that the funds for the approved budget should be released to the spending entities once every quarter and in any case not later than the 15 th day of the first month of each quarter, that is, 15 th July, 15th Oct, 15 th Jan and 15 th April of each year. S.D (7.4) states that funds will be released to local governments in four equal installments (25% of approved budgets) in each financial year and this would be done within the first five working days of the first month of each quarter. It was noted that there was a delay in release of funds with an average delay of 19 (nineteen) days in central government entities over the three year period as shown in Table 11. Table 11: Average delay in release of funds to Spending entities QUARTER 2009/10 (DAYS) 2010/11 (DAYS) 2011/12 (DAYS) Q Q Q Q AVERAGE *Source: UCF Schedule of Releases In some instances, funds would delay for over one month as shown in Table 12. For instance in F/Y 2009/10 releases to MAAIF for all quarters were delayed by over one month. Similarly, MoES releases for the 3 rd and 4 th quarters of the same F/Y were delayed by one month. 30

46 Table 12: Expected and actual dates of release of funds to Spending entities QTR Expected release date 2009/ / /12 MoFPED MAAIF MoES MoFPED MAAIF MoES MoFPED MAAIF MoES Q1 15 th Jul 30-Jul 20-Aug 06-Aug 21-Jul 03-Aug Q2 15 th Oct 02-Nov 26-Nov 13-Nov 10-Nov 10-Nov Q3 15 th Jan 08-Feb 22-Feb 15-Feb 07-Feb 07-Feb Q4 15 th Apr 30-Apr 21-May 21-May 27-Apr 28-Apr *Source: UCF Schedule of Releases 27-Jul 01-Aug 28-Jul 26-Oct 19-Jan 23-Apr 31-Oct 24-Jan 23-Apr 05- Aug 11- Nov 07- Feb 28- Apr 25- Oct 30- Jan 18- Apr We could not establish the time lags and amounts of funds released to local governments (districts) as efforts to obtain the relevant information from MoFPED were futile. The delay in release of funds was attributed to late issuance of the quarterly cash limits to MDAs, late submission of performance reports by MDAs, late receipt of release instructions from the Budget Directorate, delayed request for releases by MDAs and sometimes delayed advice by MDAs on change of bank account numbers. In addition, IFMS network break downs/occasional slow network transmission, clearing delays by Bank of Uganda and delays by commercial banks to process payments were some of the factors that contributed to late release of funds Supplementary Expenditure S.16 (1) of the PFAA, 2003 stipulates that where in respect of any F/Y the amount appropriated by an appropriation Act is found insufficient, or that a need has arisen for expenditure for a purpose for which no funds were appropriated by that Act, a supplementary estimate showing the required amount shall be laid before parliament to provide for their appropriation 26. The sources of supplementary funding include: suppression of expenditure on other votes (budget cuts), additional resources, budgetary savings and reallocations. According to S.12 (3) of the Budget Act, 2003, any reallocation of funds shall be made in consultation with all the affected Ministries, Departments, Institutions or Organizations. It was noted that the supplementary expenditure appropriated ranged from 6% to 27% during the period under review. For F/Y 2010/11, the supplementary expenditure totaled to Shs. 2, billion, representing 27% of the approved budget for that year as shown in Table 13. Table 13: Approved Budgets and Supplementary Expenditure. YEAR APPROVED BUDGET BN Shs SUPPLEMENTARY EXPENDITURE BN Shs SUP vs APP 2009/10 7, % 2010/11 8, , % 2011/12 10, % *Source: Accountant General s Office 26 S.16 PFAA,

47 Entities with the highest supplementary expenditures included: Ministry of Defence in the security sector; State House in the Public Administration sector and Uganda Police in the Justice Law and Order Sector as shown in Table 14. Table 14: Supplementary Expenditure of selected Entities. 2009/ / /12 VOTE ENTITY SUP APPVD APPVD SUP APPVD BN % BN % BN Shs BN Shs BN Shs Shs Shs 004 Defence State House SUP BN Shs , Public Service Uganda Police MoJCA Electoral Commission 63 Parliamentary Commission MoFPED MEMD , UNRA MoLG Internal Affairs OPM NARO Foreign Affairs Makerere University President s office 152 NAADS *Source: Approved Estimates of Revenue and Expenditure (Grand total Inc. NTR, Taxes and Arrears) Supplementary schedules, Accountant General s Office % To finance the supplementary budgets, MoFPED authorized a number of budget cuts and reallocations without consulting the affected Ministries, Departments, Institutions or Organizations as required. As a result, there is lack of predictability on the availability of resources to entities. The high Supplementary expenditure is attributed to gaps in the PFAA Act, 2003 where a clear ceiling or the maximum amount of supplementary expenditure allowed to a given entity in a given F/Y was not specified. This has resulted into regular unplanned supplementary appropriations which have in-turn led to regular adjustments of the budget thus undermining budget credibility. Supplementary expenditure distorts the original approved budget resources leading to delayed completion of planned activities and/or non-attainment of the affected approved budget outputs and hence undermines budget implementation. It was observed that the budget had experienced allocative inefficiencies. For instance in F/Y 2009/10 the largest component of supplementary expenditure was incurred on recurrent activities as opposed to development activities as shown in Figure 4 below. The figure also shows that in F/Y 2010/11, 70% 32

48 of the total supplementary budget was allocated and spent by the Ministry of Defence alone leaving only 30% to be shared by the rest of the sectors or entities for both recurrent and development expenditure. Figure 4: Allocation of approved supplementary Budgets *Source: Supplementary appropriation Acts, 2009/10 and 2010/11 Further, disparities were observed in the supplementary schedules used at the Treasury and the Supplementary Appropriation Acts. For instance, the supplementary Appropriation schedules from the Accountant General s Office indicated that Shs. 2,701.6 billion was authorized as supplementary expenditure for the period 2009/ /11. However, the Supplementary Appropriation Acts for the same period reflected authorized expenditure of only Shs. 2,314.5 billion.the deviation of UGX billion amounts to unauthorized expenditure as shown in Table 15. Table 15: Supplementary Expenditure as per Accountant General s Schedules and the Supplementary Appropriation Acts in billion shillings F/Y ACCOUNTANT GENERAL SUPPLEMENTARY ACT DEVIATION 2009/ /11 2, , TOTALS 2, , *Source: Accountant General s Office & Supplementary Appropriation Acts Government, through the MoFPED, is already aware of some of the challenges associated with supplementary allocations and is making efforts to address them. For example, the proposed Finance Bill, 2012 contains some of the Government efforts in this direction. In order to address the issue of budget credibility and discipline, the PFAA, 2003 is being amended to create a contingency fund. Section 21(3) of the Finance bill, 2012 requires supplementary budgets to be financed from the contingency fund in order to avoid insufficient allocations to sectors. However, the Bill does not address the challenge of allocative inefficiencies. 33

49 Management Response: Disparities arise out of the statutory supplementary expenditures, which are not appropriated. However, they form part of the total supplementary expenditure requirement submitted to Parliament under the schedules Control over cash and Bank Accounts S.40 of the Public Finance and Accountability Act, 2003 states that a public or official account shall not be opened in any bank without the prior authority of Accountant General in writing; and the continued operation of that account shall be subject to the terms and conditions the Accountant General may, from time to time, determine. According to S.7 of the PFAR, 2003, the Accountant General may give directions as to the terms and conditions under which any bank account may operate; and close or suspend the operation of a Bank Account at any time. A review of the IMF report and a list of government operated Bank accounts obtained from the Accountant General s Office revealed that there was a very large number of government bank accounts (estimated at 1,600 accounts) mostly at BoU 27. Whereas the Accountant General is mandated to authorize the opening and closure of government bank accounts, there was no database maintained or up-to-date records kept of government operated bank accounts by the Accountant General to enable tracking of the total number of bank accounts that are operational. Management explained that the Accountant General depended on BoU as the government banker for the provision of information relating to the government bank accounts being operated. 27 IMF Concept Paper for the Treasury Single Account and Cash management improvement March, 2013 In the absence of effective cash management and a database for government operated accounts, it is not possible to determine the actual aggregate cash position available to government at any one time from the records maintained at the Treasury. Data on the government aggregate cash position would assist in making informed decisions in the management of the budget. Conclusion At the time of the audit, the Treasury had no database of government operated bank accounts. This renders determination of the aggregate cash position of government at any one time difficult and negatively impacts on cash flow planning and management. It also makes it difficult to efficiently control and monitor funds allocated to various government agencies; and facilitate better coordination with monetary policy implementation. Management response: The Accountant General s office maintains a list of government Bank accounts and keeps files of account opening letters. A MoU is signed with BoU to ensure that accounts that are not active for six months are blocked and those that do not transact for 24 months are closed.. Starting with FY , Cash boards of survey will undertake 100% coverage of all bank accounts for central government ministries and agencies in order to establish the net cash position and also identify idle and unnecessary bank accounts that should be closed. Auditor s Comment: The list of bank accounts and the manual files of account opening letters are inadequate to allow a proper cash flow planning and management system as well as the proper tracking and update of government operated bank accounts. 34

50 Recommendations: MoFPED Should: Undertake a comprehensive review of the cash management and banking arrangements with a view of rationalizing all the bank accounts and putting in place a more effective cash management system. Ensure that the Accountant General s Office creates a database for all government operated bank accounts which should be regularly updated to reflect accounts opened, closed and operational. Such a system should allow tracking of government cash position on a regular basis. Ensure proper reconciliation between BOU and the Treasury Unspent Balances According to S 19 (1) of the PFAA, 2003, every appropriation by Parliament of public moneys for the service of a financial year, and every warrant or other authority issued under this Act in respect of a financial year, shall lapse and cease to have any effect at the close of that financial year and the unexpended balance of any moneys withdrawn from the consolidated fund shall be repaid to the consolidated fund. It was noted that during the period 2009/ /12, funds to the tune of Shs billion were returned to the consolidated fund (UCF) as unexpended balances as shown in Figure 5. The figure shows that unspent balances were highest in F/Y 2010/11 for Central Government votes to the tune of Shs billion while for local government votes and salary accounts the balances amounted to Shs 29 billion and Shs 5.5 billion, respectively in F/Y 2011/12. The high unspent balances were attributed to late release of funds to spending entities thereby making them unable to absorb in time all the funds released. On the other hand, the increase in unspent balances returned to treasury in Local Government votes and salary accounts in the F/Y 2011/12 was attributed to the Accountant General s directive to MDAs to return all unspent balances to the Treasury disregarding committed funds contrary to previous practice where the MDAs would seek the Accountant General s permission to retain and utilize the committed portion of the unspent balances. Figure 5: MDA unspent balances. Figure 5: Showing MDA unspent Balances for FY 2009/ /12. 60,000,000,000 50,000,000,000 UNSPENT BALANCE UGX 40,000,000,000 30,000,000,000 20,000,000,000 10,000,000, / / /12 Central Government 48,320,681,524 52,551,173,072 31,796,581,550 Local Government 3,623,536,543 3,465,842,948 29,075,127,859 Salary 0 0 5,574,295,349 *Source: Accountant General s Office, MoFPED 35

51 The large amounts of unspent balances imply that planned activities were not implemented by the affected entities. Conclusion There are gaps in the cash management process. The budget and cash releases follow cash rationing practices and lack predictability. This has led to delayed release of funds; disbursement of insufficient funds; unpredictability of budgetary funding through unprecedented budgetary cuts; among others. These, in turn have hindered progress in the implementation of approved budget activities. Recommendations: MoFPED should: Set realistic Macro cash limits and revenue targets for URA to ensure proper planning forecasts. Revisit its fiscal policy with a view to broadening the tax base in order to ensure adequate budget financing. Exercise greater control over supplementary expenditure. A cap on the supplementary expenditure available to an Entity could be introduced as a control measure. Advise MDAs to prioritize productive expenditure and reduce wasteful consumptive/ recurrent expenditure which accounts for a large percentage of supplementary expenditure. Advise entities to identify activities that are prone or susceptible to supplementary expenditure in time and budget for them adequately within the available resources. Review the funds release process with a view of shortening some procedures so as to minimize on the processing time in the release of funds. 4.4 THE OUTPUT BUDGETING TOOL (OBT) All MDAs are required to use the OBT in budget preparation, implementation and reporting. 28 They are required to use the tool to produce the mandatory budget reports, such as: Budget Performance contracts, Budget Performance Reports, Annual and quarterly Work plans, Budget Framework Papers, Budget Estimates, Ministerial Policy Statements and the Public Investment Plan. 29 These documents are supposed to be used to track budget performance and guide the application of rewards/sanctions for satisfactory and unsatisfactory performance, respectively. It was noted that although all institutions were using the OBT, they did not have adequate trained staff to effectively use the tool in all the requisite user departments. The interviews conducted revealed that in some cases users had to apply to be trained at the cost of their respective institutions. MoFPED s OBT user training efforts were mostly targeted at planners and procurement officers. In MAAIF, for example, only one operational staff per vote function was trained. In Oyam, Adjumani, Soroti, Mubende and Bundibugyo districts, only planners were trained. It was further noted that although the tool produced the stated mandatory documents which were duly submitted to MoFPED budget desk officers, some of the progress reports produced were inaccurate. For instance, cases of misreporting were cited in the Education Sector, quarterly progress reports for F/Y 2011/12, where outputs under project 0943: Emergency Construction and Rehabilitation of Primary schools were reportedly achieved, whereas not, despite the sector receiving 94.4% funding of its budget allocation. 28 S.9 of MoFPED reporting Guidelines 29 MoFPED submission on the OBT 15/10/

52 Similarly, the construction of 19 primary schools was reported to have been funded whereas not. Furthermore, MoES under project code 0897: Development of Secondary Education, reported to have constructed teachers houses in five schools (output ), which it did not. 30 Inadequate training is attributed to lack of capacity in the dedicated OBT training unit at MoFPED. The unit is currently managed by only five staff and these are meant to train and offer technical guidance to all MDAs using the software. There was no evidence that rewards/sanctions had been applied to any accounting officer for satisfactory or unsatisfactory performance, as required, despite the fact that government annual performance reports and the BMAU budget monitoring reports reflect attainment and non-attainment of targets as per MDA performance contracts. In addition, it was observed that the tool had a number of constraints, which included the following: a) The functionality had been outgrown by the increasing user requirements and as such the software processing speed had greatly slowed down and maintenance costs had increased; there were multiple OBT versions in use by different MDAs; the tool was not networked; Comprehensive mechanisms for data security, protection against malware (viruses) and backup were not provided for; the wage module was not included in the software at design; the software captures contract salaries as non-wage expenditure; and, the format of the procurement plan was inconsistent with the PPDA recommended format. The inability by some entities to access the software has deprived them of the numerous benefits that are embodied in the tool (See MoFPED write up on OBT) and the nonapplication of rewards/sanctions has led to limited improvement in the implementation of planned activities by accounting officers. The slow processing speed of the software has led to delays in the production of the mandatory documents and reports while the multiple OBT versions and absence of a networked system have created data integrity problems (errors). This has made data consolidation difficult, time consuming and costly as officers have to physically move with flash/ hard disks to their respective line ministries as well as MoFPED to submit their OBTs for consolidation. The absence of the wage module on the OBT has led to unrealistic budget provisions and wage overruns while lack of data security and back up measures on the system may lead to data loss. Continuous system upgrade is also increasing the tool s operational costs as staffs have to continuously be trained on the use of the new system features. b) The literature reviewed also indicated that despite being piloted in 2009, the software was still undergoing continuous upgrading and, according to the activity plan, this was planned to stretch up to August, The inability of the tool to reach out to all intended users was attributed to the slow progress of the roll out programme by MoFPED; the limited software capacity and the unique needs of different entities. 30 Annual Budget Monitoring Report 2011/12, MoFPED Conclusion Whereas there s a general appreciation for the OBT s rationale and potential towards improving the budget process, the tool is characterized by numerous functionality setbacks, which have constrained effective budget implementation. Management response: When the OBT was introduced MoFPED had trained 3 officers from planning units who were expected to build capacity in their respective 37

53 institutions. MoFPED formed a resource pool of OBT experts comprising of officers from Central Government and some selected Local Government planners who have been conducting training in all Local Government. Auditor s remarks: It was not possible to confirm whether the stated training was undertaken and how many officers were actually trained in the respective institutions as the training work plans and reports were not availed for audit verification. In addition, it was not clear whether MoFPED followed up and ascertained that the initial 3 trained officials (if any) had actually rolled out the training to their counterparts in the respective units. Recommendations: MoFPED should in future undertake a comprehensive requirement analysis / feasibility study of any IT system before its design and introduction in order to avoid system faults, errors and risks. MoFPED should consider reviewing the functionality of the OBT with a view of including all budgeting modules and IT features, such as: connectivity, data security, back up and protection against malware. The tool should also be standardized to suit all user requirements. There is need to build the capacity of the specialized OBT unit at MoFPED in terms of human and other resources in order to provide adequate technical guidance to all OBT users. Besides the planners and procurement officers, MoFPED should train other key staff in MDAs such as programme coordinators, accounting officers, internal auditors accountants, Directors, Heads of departments, among others. These play a very important role in budget execution, hence, should be equipped with skills to use the tool. 4.5 BUDGET MONITORING AND SUPERVISION Article 108A of the 1995 Constitution of the Republic of Uganda (as amended) mandates OPM and other line institutions to monitor and supervise the implementation of government programmes as well as ensure accountability for the use of public resources. This mandate is further amplified by S.908 of the NDP which requires OPM to monitor Government performance and report to cabinet semiannually. Section 3(1)(b) and section 4(1)(a) of the PFAA, 2003 also require the Minister for Finance to supervise and monitor all public finances of Uganda, ensure that systems are established throughout Government for planning, allocating and budgeting for the use of resources in order to improve the economy, efficiency and effectiveness of Government. Section 4(c) (I) further requires the minister to provide a full account to parliament of the use of resources and public moneys. In addition, section 904 of the NDP, 2010/ /15 provides for the establishment of a well-coordinated government wide M&E system for effective tracking, evaluation and feedback on NDP implementation and results. S.905 highlights the institutional framework for M&E while S.906 lays down the roles and responsibilities of the key actors in M&E which include, among others, OPM, MoFPED and line ministries. Further, S.6 of the MoFPED guidelines requires accounting officers to sign Budget Performance Contracts with the PS/ST every financial year. The performance contracts are based on the key outputs, actions and detailed work plans submitted to Parliament by central votes, and councils, for local government votes. S.10 requires rewards and sanctions to be applied to Accounting Officers and votes for satisfactory and un- satisfactory performance, 38

54 respectively. Un-satisfactory performance includes late and/or incomplete submission of performance reports and underperformance in the execution of outputs and actions set out in the Budget Performance Contracts. It was, however, noted that the current M&E arrangements in government are weak and inadequate. Monitoring and supervision is characterized by fragmentation, duplication, weak coordination and lacks a clear results chain. There is inadequate tracking and reporting of performance results as well as feedback and sharing of results. There are no common guidelines and standards hence the use of different formats and approaches. 31 It was also noted that whereas the accounting officers signed performance contracts with the PS/ST and submitted progress reports indicating achieved and un-achieved target outputs, no rewards and/or sanctions had been applied on any accounting officer over the period under review. A review of MoFPED (BMAU) Budget monitoring reports revealed that the monitoring carried out was inadequate in that only seven out of sixteen sectors were being monitored, namely: Agriculture, Education, Health, ICT, Energy, Water & sanitation, and Accountability (industrialization & microfinance). The sample space of activities chosen at each quarterly monitoring was not representative of the MDA activity population. For instance, out of about 37 projects, 10 departments and 4 autonomous agencies in the Agricultural sector only the Agricultural credit facility (ACF), National Genetic Resources Centre and Data bank (NAGRIC&DB) and Uganda Meat Export Programme (UMEDP) were monitored in the in the 2 nd Quarter of 2011/12. It was also established, through interviews, that the OPM mainly focused on monitoring 31 S.897, NDP 2010/ /15 projects, such as: NUSAF and PRDP, which were directly under its jurisdiction and relied on sector progress reports, downloaded from the OBT, to prepare the Government Annual Performance Report. Interviews with BMAU staff also confirmed inadequate monitoring by the unit. The monitoring divisions of the line ministries, such as: Agriculture and Education are not on the ground. Where monitoring has been carried out, feedback is not communicated to implementing entities for corrective action to be taken. Besides, the recommendations on the available monitoring reports are not timely or acted upon. The OPM is just in its initial stages of creating a virtual fund to finance evaluation under the Government Evaluation Facility (GEF) programme. However, in an attempt to address the M&E concerns noted above, the NDP prepared an M&E strategy aimed at establishing a harmonized, robust, comprehensive, fully integrated and well-coordinated system for monitoring the implementation of National development initiatives and evaluating their impact. 32 The strategy provides the institutional framework for M&E and spells out the roles and responsibilities of key players. Capacity constraints in terms of staffing and funding for the monitoring units coupled with the increasing volume of work resulting from the continued split of districts were the major causes of BMAU s and OPM s inability to physically monitor all sectors, programmes and districts. Inadequate monitoring and lack of feedback on monitored activities delays corrective action and impacts on the implementation of budgeted activities as implementation errors and omissions (early warning signals) are not timely identified. 32 Chapter 10, NDP 2010/ /15 39

55 Conclusion The current monitoring and supervision function is not effectively supporting the implementation of government programmes. This may lead to non-attainment of the major budget objective of economic growth and continued failure to deliver critical services to the public. Management response: OPM is the Government institution mandated to oversee the implementation of government programmes and projects. MoFPED established a Budget Monitoring and Accountability Unit (BMAU) to undertake the monitoring function of the ministry. Due to limited resources, the unit currently covers only key sectors of the economy and produces; quarterly, semi-annual and annual budget performance reports. There are other government agencies which provide complementary role, such as: the medicines and drug monitoring unit in the President s Office as well as the road monitoring unit under State House. Recommendations: MoFPED should empower BMAU to carry out regular and comprehensive monitoring of a representative sample of spending entities per quarter. OPM should build the capacity of its monitoring function to ensure adequate monitoring and reporting. MoFPED, OPM and line ministries should provide regular and timely feedback to spending entities for timely corrective action. MoFPED and the key budget monitoring entities should implement the M&E strategy and the institutional arrangements as provided in the NDP and improve coordination amongst themselves in order to ensure better monitoring and effective implementation of key government priorities. In order to improve MDA performance, MoFPED should motivate the Accounting Officers by rewarding satisfactory performance and applying sanctions for unsatisfactory performance as stipulated in the guidelines. 4.6 IMPLEMENTATION OF SELECTED KEY GOVERNMENT SECTOR PRIORITIES This study also sought to assess the extent to which key government priorities were implemented in key selected sectors. For this purpose, key budget priorities were selected from the Accountability and Agriculture sectors and subjected to an assessment of their performance. According to the budget speeches and ministerial policy statements for the period 2009/ /12, the Agriculture and Accountability sectors were to implement the selected key government priorities as shown in Appendix X. In this study, three priority activities from the accountability sector and five from the Agriculture sector were selected and their performance evaluated, as indicated in the table below: 40

56 SECTOR PRIORITY ACTIVITY ACCOUNTABILITY Establishment of Value Addition Soroti Fruit Factory Establishment of a Value Addition- Fruit Drying Factory in Luweero. Agricultural Credit facility AGRICULTURE Vaccination of Cattle Distribution of Cotton seed Establishment of a Commercialization Challenge fund Provision of Rice Hullers and Maize mills Restocking of Northern and North Eastern Uganda The major objective was to assess government commitment towards implementation of the intended priorities and the key budget implementation challenges faced. It was generally observed that the implementation of government priorities was mostly hampered by inadequate planning, monitoring and supervision, limited expertise and failure by government to adhere to its funding obligations towards those activities. There were also cases of diversion of funds released and lack of accurate management information for decision making and control ACCOUNTABILITY SECTOR, MoFPED Value Addition-Soroti Fruit Factory In 2008, H.E the President of the Republic of Uganda pledged to establish a fruit processing factory in Soroti. The factory was to address the post-harvest losses suffered by the fruit growing farmers in Teso region through value addition. It was also intended to increase household incomes through increased productivity, creation of employment opportunities, hence, leading to the socio-economic development of the region. The project was initially implemented by the Uganda Development Corporation (UDC) under MoFPED s Department of Investment and Private Sector Promotion. UDC was revived by cabinet in as an investment arm of government but became operational in 2009/10. It was, however, transferred to the Ministry of Trade, Industry and Cooperatives (MTIC) in 2011/12. The development budget was retained by MoFPED until F/Y 2012/ The project is funded jointly by the GoU and the Government of Korea (GoK) through the Korea International Cooperation Agency (KOICA). GoU allocates Shs 5 billion each F/Y to the project as shown in Table 16 while GoK offered a grant of USD 6.5 million to finance the activities of the project. The construction and operationalization of the factory was to be completed over a five-year period commencing on 1 st July 2009 and ending on 30 th June Table 16: GoU Funding for the Soroti Fruit Factory-UDC figures FINANCIAL YEAR APPROPRIATION UGX 000 RELEASE UGX 000 EXPENDITURE UGX 000 % RELEASE 2009/10 5,000,000 1,062,500 1,062, /11 5,000,000 1,004,966 1,004, /12 5,000,153 2,333,238 2,333, TOTAL 15,000,153 4,400,704 4,400,704 *Source: Uganda Development Corporation (UDC) 33 Cabinet min. 50 of 28 th January, UDC Handover Report October, MoFPED MPS 2011/12 41

57 It was also noted that the project delayed to commence by well over 4 (four) years. Despite GoU funding of UGX 4.4 billion over the three year period as shown in Table 16, all the planned activities had not been achieved by the date of audit inspection on 09/08/2012 as shown in Table 17. Table 17: Planned activities and implementation status for the Soroti Fruit Factory for the period 2009/ /12 FINANCIAL YEAR PLANNED ACTIVITY STATUS 2009/10 NIL 2010/ /12 Complete and operating fruit processing factory Fresh fruit juice, concentrates and other products produced Fine-tuned project implementation activities Feasibility & EIA reports produced Serviced project land with water, electricity and road network Civil works designs and BOQs produced Monitoring report for the fruit project implementation produced Farmers re-constituted as productive units in the value addition process chain. Not Achieved Not Achieved Not Achieved Not Achieved Not Achieved Not Achieved Not Achieved Not Achieved *Source: MoFPED MPS 2009/ /12 In addition, at the time of the audit inspection in August 2012, there was no clear demarcation of the land earmarked for the factory within the Soroti Industrial and Business Park (SIBP). There was also no evidence of on-going construction anywhere at the Park. Picture 1 shows the status of the Soroti Industrial Park as at the time of the audit inspection. Picture 1: Soroti Industrial and Business Park *Source: OAG Photo taken on 09/08/2012 A review of MoFPED document 36 on the status of the factory, however, indicated that by November 2012, 4.8 acres of land had been acquired in the Soroti industrial and business park for the factory; farmers had been mobilised into one regional association (Teso Tropical Fruit Growers Cooperative Society); a company that will own and operate the factory- Soroti Fruits Ltd (SOFTE) had been incorporated; 90% of electricity poles had been erected at the project site; excavation of trenches for supply of water to the site was complete; and civil works construction was anticipated to commence in the second quarter of F/Y 2012/13. Management also stated that 36 MoFPED report on the status of the Soroti Fruit factory received on 13/12/

58 project feasibility studies and environmental impact assessments were carried out. It was further established that MoFPED signed a Memorandum of Understanding (MoU) with KOICA on 9 th August, 2012, 4 years later, for the establishment of the Soroti fruit factory without seeking for the project extension. According to the MoU, the grant receivable from the Government of Korea was in form of a completed factory, procured and installed equipment and Korean trained Ugandan personnel to work in the project. The grant amount was revised from USD 6.5 million to USD 7.4 million and the project was to be implemented over a four year period ( ). As a pre- condition for accessing the grant, Gou was to provide titled land, electricity, water, solid waste disposal site and access roads for the project. It was also noted that the original project site that had been identified at the Soroti Industrial Park was rejected by KOICA. Another site was applied for and 4.8 acres of land were acquired on lease from Uganda Investment Authority (UIA) on 22 nd November, Title to the land had not been obtained as its processing was awaiting the opening of the Land Registry Office. The delayed commencement of the project was attributed to the delayed acquisition of land; delayed procurement of consultants to undertake the project feasibility study and Environmental Impact assessment as well as the pre-conditions for access of the KOICA grant. The inability to implement planned project activities, on the other hand, was a consequence of lack of capacity in UDC in terms of the required expertise (skills and staffing) and the low funds release performance, as the project received a total of only Shs 4.4 billion out of the expected Shs 15 billion, registering a shortfall of Shs10.6 billion representing 71% of the total project funding requirement. Figure 6 illustrates that the project registered the lowest funds release performance in F/Y 37 UIA and UDC Lease Agreement of 22/11/ /11 at 20% from 21% registered in 2009/10 and 47% registered in 2011/12. Figure 6: Funds release performance of Soroti Fruit Factory. *Source: OAG analysis of GoU funding to the project The delayed commencement of the project has delayed the attainment of the intended project objectives and benefits. Conclusion All planned activities had not been achieved by the time of audit despite government expenditure of Shs 4.4 billion towards the project. With only one year and three months left to the original scheduled project closure, it is unlikely that the factory will be constructed and operationalized within the stipulated timeframe. This implies that the intended project objective of addressing post-harvest fruit losses and thereby increasing the incomes of fruit farmers may not be achieved. Budget implementation was hampered by: Failure by government to adhere to funding commitments. The activity registered a shortfall of 70% in government funding. This casts doubt on the ministry s commitment to implement the budgeted priority. Failure by the MOFPED to pass over the role of project implementation to the responsible ministries. Project implementation was not supervised by the mandated responsible ministries. Inadequate planning for the project characterized by lack of feasibility 43

59 studies and release of funds before project conceptualization and detailed planning had been completed. Release the balance of Shs 10.6 billion, being GoU contribution required to support the operationalization of the project. Weaknesses in monitoring and supervision Management response: The Auditors observation is correct. It was originally envisaged that the project would end in the year However, project commencement was announced before feasibility and EIA studies were done. Besides, there was a need to acquire an alternative piece of land within the Soroti Industrial and Business Park. The original land was found not suitable for establishment of a fruit processing facility. All these led to the delay. In the period of audit, Government did not fully provide funding to the above project. Whereas Shs 5.0 billion was planned to be spent annually in the period under review, actual releases were affected by delays in project implementation and resource constraints given that the Government operates a cash budget. However, Government is fully committed to achievement of the project major objective of providing value addition in fruit processing for the promotion of industrial growth, income diversification and increasing household incomes in the Teso region and surrounding areas. Evaluate the first phase (4 years) of project implementation and provide justification for project extension Value Addition-Luweero Fruit Drying Factory According to the Presidential directives of 5th May and 23 rd June, 2008, MoFPED and MAAIF were to support the establishment of a fruit processing facility in Luweero. MoFPED was responsible for financing the project on behalf of GoU while MAAIF was tasked to ensure adequate supply of raw materials to the facility by organising farmers into registered producer groups, providing extension services and assisting them to acquire organic certification. MAAIF was also required to liaise with Luweero District Administration in the identification and acquisition of land for the project. The facility was intended to promote value addition and agro-processing in the region and subsequently provide readily accessible markets, fair pricing for produce and reduce post-harvest losses which would in turn increase household incomes. Auditor s remarks: The Project is far behind schedule. Recommendations: MoFPED should: Restrict its functions to management of the national Treasury, fiscal and economic policy, that is, it should play the project financing or facilitation role. The implementation role should be left to the responsible institutions, such as: MAAIF or MTIC, which are directly responsible for Agriculture and Industry. Fast track and expedite the construction and operationalization of the project; The project was conceived as a fruit drying facility following a proposal prepared by the Natural Uganda Co-operative Society Ltd (NUCSL) based in Kasana, Luweero and the subsequent MoUs signed between NUSCL and MAAIF (May, 2008) and MoFPED (February, 2009). NUCSL was an association of farmers dealing in organic horticultural fruits registered under the Cooperative Societies Act Cap 112 of the laws of Uganda on 29 th April, The project initial cost was 571,429 (approx. UGX 1.6 billion) and this was to be co-funded by GoU and an Austrian private investor in a 70%:30% ratio, respectively. The contributions would 44

60 translate into the individual shareholding of the legal entity at completion. The GoU contribution was 400,000 (approx. Shs 1.12 billion) being the cost of processing equipment and the requisite civil works. This contribution was to be sourced from re-allocations of funds released to NAADS. The investor was to contribute 171,429 (approx. Shs 0.48 billion) and was to provide ready market for all the factory produce. Later, the scope of the project was widened to include farmers in the seven districts of the greater Luweero; production & processing of fresh fruit juice; pulp extraction and marketing, besides, fruit drying 38. By 2011/12 the total project cost had escalated to approximately Shs 25 billion 39. The project was implemented by MoFPED under the department of Investment and Private Sector Development. It was later transferred to Uganda Development Corporation (UDC) in F/Y 2010/11 40 citing delayed commencement. The construction and operationalization of the factory was to be done over a four (4) year period commencing on 13/02/2009 and ending on 14/02/ It was noted that by the time of the audit (March, 2013) the project had delayed to start by well over 4 years and the scheduled project completion date had long passed. Audit was not availed evidence and justification for the project extension. MAAIF did not help the Luweero farmers to register into producer groups; acquire organic certification and land for the project. MoFPED on the other hand financed only 11% of the agreed GoU contribution (Shs 0.12 billion) to the project out of the expected Shs 1.12 billion re-allocated from NAADS. A review of the 2009/ /12 approved estimates of revenue and expenditure as well as the project funding figures provided by UDC revealed that no funds were budgeted and allocated to the project in F/Y 2009/10 as shown in Table 18. Table 18: GoU Funding for the Luweero Fruit Processing Facility- UDC figures FINANCIAL YEAR APPROVED BUDGET UGX 000 RELEASE UGX 000 EXPENDITURE UGX 000 % RELEASE 2009/ /11 500, , , /12 500, , , TOTAL 1,000, , ,977 *Source: UDC funding Schedule Table 18 also shows that, a total of Shs 1.0 billion was appropriated to the project in 2010/11 and 2011/12, only Shs 0.34 billion was released registering a shortfall of Shs 0.66 billion representing 66% of the allocated amount. The project release performance stood at 40% in 2010/11 but sharply dropped by 12% to 28% in 2011/12 as shown in Figure Minutes of the UDC Stakeholders Consultative Workshop October 14, MoFPED MPS 2011/12 40 PS/ST Letter to the Executive Director-UDC August 6 th MoFPED MPS 2011/12 45

61 Figure 7: Funds release performance of the Luweero Fruit processing Factory for the period 2009/ /12. *Source: OAG analysis of UDC funding Schedule The private investor did not contribute any funds to the project as he withdrew his 30% contribution and invested it elsewhere. It was also established that by the time of the audit (March, 2013), the planned project activities as shown in Table 19 had not been undertaken/implemented as the factory had not been set up. The project was faced with challenges of land ownership and lack of a feasibility study. 42 The proposed project land (5 acres) had been purchased by NUCSL with GoU funds at a cost of Shs 60 million on 4 th April, However, NUSCL declined to register it under the project names, UDC or Uganda Land Commission, the custodian of Government land. NUSCL threatened to take legal action on any party claiming ownership of the land in question arguing that the GoU funds used to procure the land were a non-refundable grant to the society and MoFPED had consented to this arrangement in the MoU signed with the society in February, Table 19: Planned activities and implementation status for the Value addition-luweero Fruit Drying Factory for the period 2009/ /12 FINANCIAL YEAR PLANNED ACTIVITY STATUS 2009/10 NIL 2010/11 Fruit drying facility in place Not Achieved Project land registered Not Achieved Consultants procured for feasibility & EIA study Not Achieved Feasibility & EIA reports produced Not Achieved 2011/12 Farmers mobilized into efficient cooperatives Not Achieved Investor/managing partner identified Not Achieved Civil works contractor procured Not Achieved Completed fruit factory Not Achieved *Source: MoFPED Ministerial Policy Statement 42 MoFPED Annual Budget Monitoring Report, 2011/12 43 Mugerwa & Partners (Advocates & Solicitors) Letter to UDC 21/06/

62 MoFPED in its reports indicated that the project had registered some progress stating that the Luweero farmers had organised themselves into a cooperative society, the Natural Uganda Cooperative Society Ltd (NUCSL) to which Shs 115 million had been disbursed for initial preparatory activities. That part of these funds were used to purchase 5 acres of land in April, The MOFPED reports also indicated that the project was also transferred to Uganda Development Corporation (UDC) in 2010/11 and supported with a further Shs 500 million for the establishment of the fruit processing facility. It was, however, noted that NUSCL was registered before the project inception implying that the society was not one of the project outputs. NUSCL acknowledged receipt of Shs 120 million of which Shs 60 million was used to procure 5 acres of land but the balance of Shs 60 million remained unaccounted for. Although it is true that the project was transferred to UDC, the amount of Shs 500 million that was budgeted and/or allocated to the project in 2010/11 was not all released as only Shs 200 million was released that year. It was also observed that MoFPED had released the Shs 120 million to NUSCL on the basis of the signed MoUs without due regard to all the conditionalities for disbursement of Government funds as spelt out in the PS/ST correspondence to NUSCL of 22 nd October, These included proof of ownership of land, evidence of 30% contribution, work plan of the activities and procurement, plan among others. It was further noted that except for the consultative meetings held by UDC after the project was handed over by MoFPED, there was no business case presented to justify the project expansion and escalation of project costs from the original Shs 1.6 billion to UGX 25 billion and the source of funding had not been identified given that the Austrian investor had withdrawn his contribution. Furthermore, it was established that the land that was procured had not been registered as required and the duplicate land title, together with the signed transfer forms, could not be traced from the Lands ministry 44. Farmers from the greater Luweero had rejected to operate under NUSCL which was an umbrella group of a few select farmers in Luweero town. The delayed commencement of the project and inability to implement planned activities is attributed to lack of a feasibility study to determine project risks and sustainability and assignment of project technical tasks to NUSCL which was mostly comprised of ordinary farmers with no technical competence to perform such tasks 45. The delayed project commencement and non-implementation of planned activities has denied the people of Luweero the intended project benefits of value addition to their fruits; ready and accessible regional markets, fair pricing for their produce and reduced postharvest losses and hence increased household incomes. The inability to fund the project budget as approved casts doubt on the commitment by MOFPED towards the implementation of this priority activity. In spite of this apparent lack of commitment, there was an ambitious expansion of the project. Conclusion It is clear that the five year project reached its projected closure date on 14/02/2013 and no tangible projected outputs had been attained. Almost all the key activities had not commenced despite government funding of Shs 0.34 billion into the project. Unless the project is extended and implemented as planned, the people of Luweero may miss out on the intended project benefits. There is also a risk that the Shs 120 million paid to NUCSL as non-refundable grant may be lost. Budget implementation was 44 Loose minute from UDC s Legal dept. to CEO 24 th June, MoU between MoFPED and NUCSL, Feb

63 hampered by: Failure by government to undertake feasibility studies for the project Failure by MOFPED to adhere to funding commitments. There was a shortfall of 60% in government funding for the project resulting into withdrawal of the investor from the project. Lack of proper supervision. The project was implemented by MOFPED, instead of the mandated ministries of MAAIF and MTIC. Recommendation: MoFPED should: For future projects concentrate on facilitation (funding) and monitoring but relinquish the project management (implementation) portfolio to the relevant line MDAs who possess the requisite expertise. This will expedite project implementation as well as improve activity coordination and reporting. For future projects, carry out feasibility studies in order to ascertain project risks and sustainability before implementation. Management response: The Auditor s observation is true. The delay in the implementation was due to: NUSCL s unwillingness to handover the procured project land to UDC; its hostility towards the Luweero fruit farmers and its refusal to work with UDC. The Project was extended because it had not achieved its objectives. The Luwero project encountered a number of problems particularly hostility from NUCSL who have remained uncooperative towards its implementation in line with agreed GOU structures. Currently, the procurement process for the feasibility study has been completed and the contract signed. Auditor s remarks: There were gaps in the MoUs and the disbursement of Shs 120 million to NUSCL, as a non-refundable grant, was rushed. NUSCL is, therefore, not under any obligation to work with UDC. To this end, NUSCL has threatened legal action against UDC for its continued demand of the acquired project land. In addition, a justification paper, together with a clear business plan should have been prepared for MoFPED approval, before the extension of the project life. The findings and recommendations remain valid. Budget for and allocate adequate funds to projects to enable timely implementation of planned activities. Demand and ensure that NUCSL fully accounts for the Shs 120 million non-refundable grant disbursed to it in 2009/10 from the NAADS funds as stipulated in the signed MoU. UDC should: Present a business case to justify the project expansion and commitment of Shs 25 billion and identify the source of funding Agricultural Credit Facility (ACF) According to Sec. 141 of the NDP (2010/ /15), one of the GoU strategic actions for improving public sector financing and mobilizing the required resources to fund the NDP priorities was through the strengthening the Agricultural Credit Facility (ACF). Accordingly, the ACF has been one of the government budget priorities for the period from FY 2009/10 to FY 2011/ GoU established ACF in October, 2009, which is a loan scheme operated in partnership with Participating Financial Institutions (PFIs), namely: commercial banks, credit institutions, Micro Deposit Taking Institutions (MDIs) and Uganda Development Bank Ltd (UDBL). The main objective of the facility was to support agricultural expansion and 46 Minister s budget speeches, 2009/ /12 48

64 modernization(mechanization and value addition) through the provision of subsidized medium and long term financing to projects engaged in agriculture and agro-processing. By the time of the audit, the scheme had undergone three implementation phases, namely: ACF I, ACF II and ACF III. According to the MoUs signed by GoU (MoFPED) and the PFIs, in F/Y 2009/10 (ACF I), GoU was to contribute Shs.30 billion (50% risk cover). The PFIs, on the other hand, were to match the GoU contribution with an equivalent contribution of Shs 30 billion to make up a total capital (revolving fund) of Shs 60 billion for lending to eligible farmers. The interest rate chargeable by PFIs was capped at 10% per annum. The above terms were re-negotiated by MoFPED and the PFIs in F/Y 2010/11 where the structure of the fund was reviewed and an addendum to F/Y 2009/10 MoU was signed creating ACF II. Under ACF II, the PFIs were to contribute Shs 60 billion while GoU maintained its contribution of Shs 30 billion making a total capital of Shs 90 billion for the fund in F/Y 2010/11. In order to cater for the increased risk/exposure of the PFIs portfolio, the interest rate was increased to 12% p.a. The GoU guarantee was subsequently scaled down to 33.3% from 50%. ACF II did not perform as expected and as a result the original ACF I terms were re-instated in ACF III (F/Y 2011/12). The summary of the expected GoU and PFI contributions in the period under review is shown in Table 20 below: Table 20: Expected GoU and PFI contributions to ACF Phase Period PFI s contribution Bn Shs. GoU Contribution Bn Shs. ACF I FY 2009/ ACF II FY 2010/ ACF III FY 2011/ TOTAL Transfers from the GoU Escrow Account to BoU GoU allocation not yet transferred to BoU *Source: BoU Agricultural Credit Facility Progress Report 31st December, 2012 Total Bn Shs. It was noted that although GoU was supposed to contribute Shs 90 billion to the scheme over the period under review, only Shs billion was remitted by MoFPED to Bank of Uganda (BoU) for on lending to eligible projects, creating a shortfall of Shs billion(46.6%) of the agreed upon contribution. Furthermore, out of the Shs billion remitted, only Shs billion (87%) was disbursed to PFIs as at 30 th June, 2012 as shown in Table 21. Table 21: Disbursements to PFIs by GoU. Financial Year Disbursements to PFIs 2009/10 ACF I 29,391,293, /11 ACF II 2,574,346, /12 ACF III 9,915,813,293 TOTAL 41,881,471,145 *Source: BoU Agricultural Credit Facility Progress Report 31st December, 2012 The inability by government to remit its full contribution to BoU for on-lending to eligible beneficiaries puts to doubt its commitment in implementing its budget priorities. It has also limited the scheme s 49

65 loanable funds and ultimately affected the timely attainment of the scheme s objective of boosting agricultural productivity and production. The Scheme is characterized by a number of other challenges, such as: low absorption, for example, Shs 6.2 billion had not been disbursed to PFIs, low loan recovery rates at different PFIs, high transaction costs and limited publicity. The lack of awareness is attributed to MoFPED s failure to disseminate information and sensitize the public about the scheme. This has led to the PFIs lending their own funds to farmers at commercial rates. It was also established that the scope of ACF does not cover the entire Agricultural and agro-processing value chain, which includes provision of: credit facilities for land opening, fertilizers and pesticides, harvesting facilities, storage facilities, infrastructure development, and marketing, among others. The inability of PFIs to adhere to the terms of the MoUs, especially with regard to collateral, discourages potential borrowers and ultimately leads to the poor performance of the facility. Conclusion Government s aims and objectives of creating and allocating funds to the ACF are commendable. However, the scheme is faced with challenges, which, if not addressed, may affect the attainment of its objective of supporting agricultural expansion and modernization through mechanization and value addition. Key Budget implementation challenges include shortfalls in government funding of 46%, low funds absorption and limited publicity. Management response: Auditor s observation is correct. However, the inability to meet the full contribution to B.O.U was due to resource constraints. The low utilization of funds by PFIs was due to the unwillingness by the PFIs to lend at the 10% interest rate offered by the scheme and the risk associated with agricultural lending. Auditor s Comment The scheme is still facing implementation challenges. Recommendations: GoU through MoFPED should: Ensure that the GoU contribution is released to BoU for on lending to eligible borrowers as planned in national budgets. Ensure that adequate awareness is created in the public about the loan facility, terms and conditions of the eligible projects, participating financial institutions and expected benefits. Enforce the terms of the MoUs in order to prevent the PFIs from demanding for collateral and violating other agreed upon terms of the scheme. Widen the ACF scope to cover the entire Agricultural and agro-processing value chain. Carry out a detailed assessment of the scheme, which should consider all stakeholders, to ascertain whether the scheme is on course in achieving the intended objectives AGRICULTURE SECTOR, MAAIF Vaccination of cattle and poultry The main sector goal was to increase household incomes to Shs 20 million per year over the medium term and improve the well-being of farmers while contributing to the overall national economic growth through increasing agricultural production and value addition. 47 In a bid to achieve this goal, the sector budgets have been set out to address the major constraints to agricultural production which included, among others, controlling the spread of animal diseases and vectors countrywide. This was a responsibility of the department of livestock health and entomology in MAAIF. 47 MAAIF MPS 2011/12 50

66 The key outputs of the department were to ensure that animal diseases/ vector outbreaks and prevalence were monitored and controlled; epidemiology data was promptly collected, collated and disseminated; district authorities and MAAIF were advised on animal disease and vector control strategies and research on animal diseases and vector control was collaborated with other organizations nationally, regionally and internationally. A review of the MAAIF IFMS data and the performance report submitted by the department of Livestock Health and Entomology revealed that Shs 9.6 billion was budgeted for vaccination activities during the period 2009/ /12. Out of this, Shs 9.0 billion (94%) was released creating a funding gap of Shs 0.6 billion representing 6% of the total funding requirement. Actual expenditure amounted to Shs 9 billion as shown in Table 22. Table 22: Funding for vaccination activities from MAAIF F/Y APP BUDGET 000 RELEASE 000 EXPENDITURE /10 3,200, ,006, ,006, /11 3,052, ,675, ,675, /12 3,358, ,319, ,319, TOTALS 9,611, ,000, ,000, *Source: Submission by MAAIF It was further noted that with the above funding, MAAIF had planned to vaccinate 4.56 million heads of cattle against Foot and Mouth Disease (FMD); 13 million chicken against New Castle Disease (NCD) and 0.1 million heads of cattle against Lumpy Skin Disease (LSD). However, only 0.88 million heads of cattle were vaccinated against FMD registering a shortfall of 3.68 million cows representing 81% of the target for FMD. No cows were vaccinated against LSD and neither were chicken vaccinated against NCD as shown in Table 23. Table 23: Planned and actual nos. of cows and poultry vaccinated. F/Y PLANNED ACTUAL FMD LSD NCD FMD LSD NCD 2009/10 2,000, ,000 13,000, , /11 2,000, , /12 560, , TOTAL 4,560, ,000 13,000, , *Source: MAAIF Submission However it was observed that there were discrepancies between the data provided by MAAIF and that contained in the budget framework papers, ministerial policy statements, approved estimates of revenue and expenditure and the release and expenditure figures submitted for audit by the directorate of budget for the same period. For instance, Table 24 shows that the approved vaccination budget according to MoFPED was Shs 7.09 billion while Table 23 reflects an approved budget of Shs billion according to MAAIF. This creates a variance of Shs 2.52 billion in the approved budget amounts. The amounts of funds released and actually spent were also not in agreement. 51

67 Table 24: Funding for vaccination activities from MoFPED F/Y APP 000 BUDGET RELEASE 000 EXPENDITURE 000 VARIANCE /10 3,200, ,006, ,006, /11 2,047, ,675, ,675, /12 1,843, ,299, ,302, , TOTALS 7,091, ,980, ,984, , *Source: MoFPED Submission In addition, the planned and actual numbers of animals and chicken vaccinated as per MAAIF submission were also inconsistent with MoFPED data. For instance, whereas the MAAIF submission in Table 24 reflected planned vaccination figures of 4.56 million (FMD), 0.1 million (LSD) and 13 million (NCD) over the three year period, MoFPED data contained in the BFPs and MPS for the same period reflected planned vaccination figures of 2.1 million heads of cattle (FMD), 0.63 million cows LSD and 42 million chicken against NCD as shown in Table 25. Variations were also noted in the numbers of cattle actually vaccinated. Table 25: Planned and actual number of cattle and poultry vaccinated. F/Y PLANNED ACTUAL FMD LSD NCD FMD LSD NCD 2009/10 600, ,000 13,000, ,000 42,000, /11 500,000 30,000 16,000, , ,000 11,800, /12 1,000, ,000 13,000, ,000,000 TOTAL 2,100, ,000 42,000, , ,000 69,800,000 *Source: MoFPED submission, BFPs and MPS. These inconsistencies in the data affect the credibility and reliability of management information. Inadequate vaccination has led to rampant outbreaks (epidemics) of the FMD, LSD and NCD among cattle and poultry. This poses a health hazard to the meat consuming public and has affected incomes of cattle keepers and businessmen engaged in cattle and poultry trading through the wouldbe avoided quarantines and death of animals. For instance, on November 1 st, 2012 MAAIF banned livestock movements in the cattle corridor (14 districts) in western Uganda due to FMD outbreak. The outbreak of disease in animals also affects the country s foreign exchange earnings due to reduced meat exports. Conclusion MAAIF did not vaccinate all the cattle and poultry as planned despite receiving UGX 9.0 billion representing 94% of the budget allocation for the activity. Possible misuse of these funds cannot be ruled out. Failure to vaccinate animals also contravenes the provisions of the 1964 Animal diseases Act which require the FMD disease for instance, to be detected early, reported, investigated within 48 hours and vaccinated immediately. 52

68 Management response: Ideally releases should perform to the level of the planned budget for the financial year. However, given that GoU operates a Cash Budget, in the event of revenue shortfall, expenditure is reduced to match the shortfall. The total number of cattle planned for vaccination against FMD for the three financial years (2009/10, 2010/11 and 2011/12) was 2.1 million. These therefore form the basis upon which the performance of the Department should be assessed. It should be noted that the total planned vaccinations against FMD of 4.56 million i.e. 2,000,000 in FY 2009/10 and 2,000,000 in FY 2010/11 were proposals by the department Livestock Health and Entomology that were not approved. However, the figure of 560,000 for the year 2011/12 was the actual number vaccinated. Variation between the figures in the BFP, MPS and approved estimates usually arises when the MTEF changes. Around November each year, MoFPED issues the First Budget Call Circular (BCC). The BCC communicates the indicative resource envelope to enable MDAs embark on preparation of the Budget Framework Papers (BFPs). The Second BCC is issued between February and early March and this is to facilitate the MDAs to finalise their detailed budget estimates. In case there are further changes in the resource envelope, another BCC is issued communicating these changes. Furthermore, while Parliament is discussing the budget they may make recommendations which either increase or reduce the allocations to a Vote. These changes whenever they occur affect the MTEF allocations. It is true that inadequate vaccination has led to rampant outbreaks (epidemics) of FMD, LSD and NCD among cattle and poultry. This however, is due to budget constraints which limit the quantity of doses of vaccines for the animals and poultry. Further the rise in vaccine prices in the course of budget execution reduces on the quantities of doses of vaccines purchased as well as the number of animals and poultry vaccinated. As indicated earlier, Government operates a cash budget, therefore any shortfalls in the anticipated revenues, coupled with funding of supplementaries, result in reductions in releases to other sectors/ Votes. This therefore explains why the release for the above three financial years was less by Shs million. There are cases where Accounting Officers do not request for release of the entire warrant. This means that funds remain unspent at the end of the financial year. Auditor s Comment There is need to address the inaccuracies in the MAAIF Management information system to facilitate informed decision making and control. Recommendations: MAAIF should: Account for the expenditure of UGX 9.0 billion since planned vaccinations were not conducted. Provide justification for failure to implement planned activities or apply sanctions to the responsible officer(s) for underperformance in the delivery of planned outputs. Explain the discrepancies between its data and that of MoFPED with regard to the vaccination activity. 53

69 Distribution of cotton seed According to the Minister s budget speeches and MPS for the period 2009/ /12, one of the government s short-term objectives for the Agriculture sector was to increase annual cotton production and contribute to poverty reduction through increased household incomes 48. In order to achieve this objective, the Cotton Development Organization (CDO) was to procure 13,000 MT of high quality cotton seed to be distributed to 153 districts over the three year period as shown in Table 26. Table 26: Quantities of cotton seed to be procured and distributed F/YEAR QTY OF FUZZY SEED PLANNED (MT) QTY OF FUZZY SEED PROCURED (MT) QTY OF DELINTED & GRADED SEED DISTRIBUTED (MT) QTY LOST (MT) TARGET DISTRICTS 2009/10 4,000 4,400 3, /11 4,500 4,660 3, /12 4,500 6,410 4,455 1, TOTALS 13,000 15,470 11,799 3, BENEFICIARY DISTRICTS *Source: CDO reports, MPS & Government annual performance reports (2009/ /12). However, a review of the CDO progress reports, MPS and budget framework papers for the same period revealed that the CDO procured 15,470 MT of fuzzy cotton seed instead, registering an excess of 2,470 MT representing 19% of the planned quantity. Out of the 15,470 MT procured, only 11,799 MT were distributed to farmers, a loss of 3,671 MT was registered representing 24% of the procured quantity. The loss is valued at Shs 2.6 billion as shown in Table 27. Table 27: Value of cotton lost in the period 2009/ /12 F/Y Qty. lost (MT) Ruling price/mt (Shs.) Value (Shs.) 2009/ , ,000, / , ,000, /12 1, ,000 1,642,200,000 Totals 3,671 2,665,200,000 *Source: CDO reports 2009/ /12 It was also noted that Shs billion was budgeted and approved for the cotton seed activities over the period 2009/ /12 as shown in Table 28. The activities included procurement of fuzzy seed, chemicals, packaging bags, seed treatment, transport and distribution. MoFPED released 100% of the approved budget amount. Table 28: Funding for Cotton seed procurement and distribution. APP BUDGET UGX 000 RELEASE UGX 000 EXPENDITURE UGX 000 VARIANCE UGX /10 3,200, ,200, ,076, , /11 3,245, ,245, , ,413, /12 3,245, ,245, ,245, TOTALS 9,690, ,690, ,908, ,782, *Source: CDO Funding reports and MPS (2009/ /12). Note: Excess expenditure of Shs 0.87 billion in 2009/10 was a contribution of the private ginners to the cotton seed budget. 48 MAAIF MPS 2011/12 54

70 However, only Shs 4.03 billion representing 42% of the approved and released budget was expended on the planned activities and the balance of Shs 5.66 billion (58%) was reported to have been reallocated to project Cotton production improvement. Audit was availed the PS/ST authority for the reallocation of only Shs 3.24 in 2011/12 leaving Shs 2.41 billion re-allocated in 2010/11 unexplained. It was noted that project 1219 was created in F/Y 2011/12, a year after the stated funds had been re-allocated to it. Further scrutiny of the PS/ST re-allocation instruction dated 25 th October, 2011 for the 2011/12 funds and interviews conducted revealed that with the exception of one piece of land under procurement in Pader District and the on-going processing of its land title, none of the other activities to which the funds were re-allocated had been implemented by the time of the audit (March, 2013). According to the Accountant General s schedule of unspent balances returned to treasury, CDO did not return any funds to treasury in F/Y 2011/12. According to management, the procurement of excess quantities of seed was a result of the private ginners providing the physical seed as well as their financial contribution to the cotton seed budget. The re-allocation of funds was to enable CDO re-locate seed dressing facilities to its own premises in line with the parliamentary (COSASE) recommendation. Management also attributes the loss in quantity and value of the procured cotton seed to inevitable loss in weight of cotton seed during delinting and grading (removing the cotton fuzz/hairs from the seed) as illustrated in Picture 2 below: Picture 2: Showing fuzzy and delinted cotton seeds. Fuzzy cotton seed Delinted and graded cotton seed In addition, the low application of approved budget funds (low absorption) was a consequence of the financial contribution made by the private sector (Ginners) to the cotton seed budget. On the inability to implement planned activities for the re-allocated funds, management blamed the land tenure system in Pader which had slowed down the land procurement process and yet most planned activities were incidental to the acquisition of land. The Shs 2.6 billion lost during de-linting and grading of the cotton seed was a waste which could have been put to better use or minimised. In the absence of a re-allocation warrant for the 2010/11 funds and the lack of accountability for the entire 2011/12 re-allocated funds, there is a possibility that the funds re-allocated were not used for the intended purpose. 55

71 Conclusion: Although the CDO efforts in procuring and distributing the planting cotton seed were commendable, the activity was not carried out according to the initial plan as some of the funds were reallocated to other purposes. Further the activity was not carried out with due regard to economy as a loss of Shs 2.6 billion in value of seed was registered which amounted to wasteful expenditure. It is evident that the creation of project 1219 (upgrading and re-locating of seed processing machinery to CDO own premises) was rushed because of the COSASE recommendation and therefore no adequate preparation was made to sequence the activities well before the request for reallocation of funds was made. Management response: The difference between the quantity of fuzzy seed procured and the quantity of seed distributed to farmers is a normal process loss arising from delinting and grading seed. These activities were done in order to obtain high quality seed fit for planting purposes. CDO is in the process of establishing its own ginnery for ginning cotton for planting purposes. In addition, the delinting and grading machines will also be up-graded to improve efficiency. CDO takes note of the audit recommendations and will endeavour to do as advised. It is however important to understand that cotton is a seasonal crop grown by small-scale farmers and contributions by the private sector (ginners), depend largely on the size of the crop. Requirements for production also vary depending on farmers response to planting. Both these factors are often difficult to forecast in advance. Overtime, CDO has improved planning and budgeting and will continue to fine tune the process. Recommendations: The CDO should: Put in place mechanisms to ensure that loss of funds during de-linting and grading of the cotton seed is minimized as far as possible. For future projects plan well in advance and determine the sequence and risks associated with the activities to be undertaken before requesting for financing in order to avoid keeping funds idle or returning unspent balances to treasury when planned activities are not implemented. Determine well in advance the contribution of the private parties to its budget in order to avoid budgeting and requesting for funds which are later re-allocated to activities which were not originally planned and approved Unfunded priorities Establishment of a Commercialization Challenge fund, Provision of Rice Hullers and Maize mills and Restocking of Northern and North Eastern Uganda. In the F/Ys 2010/11 and 2011/12, Provision of rice hullers and maize mills at every subcounty; re-stocking of Northern and North- Eastern Uganda and the establishment of the Commercialization Challenge Fund (CCF) were some of the government budget priorities. Accordingly, Shs 15 billion was budgeted by the government for the CCF in F/Y 2010/11 and Shs. 0.2 billion was budgeted for the commencement of preparatory work for the restocking programme in F/Y 2011/12. Funds for actual re-stocking were pledged to be availed in the following F/Y (2012/13). The programme was to be executed under National Livestock Productivity Improvement Project phase II (NLPIP II). Funding for NLPIP II was to be sourced by MoFPED from the African Development Bank. The CCF on the other hand was to be implemented by NAADS under the ATAAS 56

72 project by means of two programmes which were to run concurrently, namely: CCF (window 1) executed at the national level and window 2 executed at the district and sub-county level. CCF (Window 1) was aimed at integrating smallholder farmers into value chains by forging partnerships between smallholders and commercial growers, and promoting competitiveness of agribusinesses. CCF Window 2 was to support commercialization, value addition and agro processing opportunities. It was, however, noted that no funds were allocated or appropriated for the said priority activities during the period under review. The activities were, therefore, not funded and their commencement had stalled. Audit also established that a project proposal to kick start NLPIP II had been drawn up/prepared by MAAIF and submitted to MoFPED but the project had not been funded. Furthermore, the Secretariat meant to house the CCF had not yet been put in place. MAAIF management attributed the failure to commence the preparatory work for the restocking of Northern and North Eastern Uganda to MoFPED s failure to secure funding for the NLPIP II project from the African Development Bank as planned. MoFPED s inability to fund budget priorities as specified in the Minister s budget speeches puts to question the integrity and reliability of the budget speeches and partly renders resources injected into the preparation of budget speeches a waste. It also casts doubt on government s commitment to deliver the pledged public services. In addition, the public is denied the intended benefits of the unfunded interventions/projects. Conclusion Whereas the priority activities as spelt out in the Minister s budget speeches are derived from the NDP and the ruling party s manifesto and are supposed to be translated into the National budget, funded and implemented, it is evident that some of the activities were neither funded nor implemented. It is important to note that the budget speeches read out annually raise enormous public expectations, which are shattered when the promised activities are not eventually funded and implemented. Management response: Government is committed to the policy pronouncements (priorities) in the Budget Speeches and has accordingly been providing funding to ensure their implementation. It is only for reasons beyond its control that the project implementation may not commence as planned. The National Livestock Productivity Improvement Project (NLPIP) Phase II, was scheduled to be funded under ADF I, which ended in December 2010 but was however not considered. The donor (ADB) was not satisfied with the performance of the NLPIP Phase I, and hesitated to continue funding the project. Government therefore preferred to channel its portfolio to other priority areas. As regards the implementation of the Commercialization Challenge Fund (CCF) Window I, which is under NAADS Secretariat, this has not yet been operationalized as planned due to changes in the implementation modalities. There are proposals to re-design the Fund and strengthen its governance arrangements so that it can focus on facilitating access to agroprocessing equipment mainly for primary level cooperatives and farmers organizations. The process of procuring services of a consultant to handle the assignment is on-going. Auditor s Comment Government needs to identify sources of funding prior to making public pronouncements in order to avoid raising public expectations unnecessarily. Recommendations are therefore valid. 57

73 Recommendations: MoFPED should: Ensure that government priorities as spelt out in the budget speeches are budgeted for and funded. Release funds to facilitate the fast tracking of the restocking programme; the establishment of the CCF and provision of rice hullers and maize mills. Ensure that the priorities of the implementing entities as reflected in their MPS are harmonized with budget priorities as spelt out in the budget speeches so as to uphold the integrity and reliability of the budget. Ensure timely release of funds to priority areas in order to keep their implementation on course Diversion of funds/mischarge of Expenditures-MAAIF 2011/12 According to Sec 42(4) of the PFAR, 2003, the approved estimates form the basis of the accounts for the year to which they relate and the classification and sub-division of the statements of revenue and expenditure shall accord with those estimates. Sec 34(1&2) of the PFAR requires that the purposes of expenditure under each head and the services to be provided under it be outlined in a preamble to the head, which forms the ambit of the relevant vote. The ambit of a vote sets out a formal description of the services to be financed from the vote, and the wording of the ambit is incorporated in the annual Appropriation Act, which provides the statutory description of the purpose for which the funds sought in the estimate are granted. Furthermore, sub-regulation (3) (a) & (c) of the PFAR stipulates that no expenditure may be charged to a head which does not fall within the ambit of a vote and any expenditure on a new service which is outside the ambit of a vote shall not proceed unless the approval of Parliament is obtained through a Supplementary Estimate which proposes to change the ambit as necessary. Section 39(1) of the PFAR on the other hand gives the Minister discretionary powers to vary the amount allocated within a vote, provided that the total amount authorized by Parliament for that vote in an Appropriation Act is not exceeded; the variation is not so large or important as to represent a change in policy; the changes made are not novel or contentious; and any virements made will from the outset do not involve heavy liabilities in future years. However, subsection (3) requires all virements within a Vote to be applied for to the Secretary to the Treasury and copied to the Accountant General and the Auditor General. It was noted that in F/Y 2011/12, MAAIF expenditures amounting to Shs 19.4 billion were charged to heads outside the ambit of its vote (mischarged) as detailed in Appendix x. There was no evidence of Parliamentary approval sought to change the ambit of the vote and neither was the PS/ST s authority to vire or re-allocate funds within vote functions availed for audit verification. Management explained that the mischarge of expenditure was caused by the unprecedented budget cuts which have led to re-allocations of funds among the different vote items and functions. The delayed release of funds by MoFPED was also blamed for causing hasty expenditure decisions towards the end of the F/Y in a bid to avoid unspent balances. 58

74 Conclusion The mischarge of expenditure is a violation of the provisions of the PFAA and PFAR, 2003 and amounts to abuse of government financial and administrative controls. The charging of expenditures to wrong or inappropriate vote items, outputs or functions amounts to diversion of funds from planned activities. This has in turn led to delays in implementation or non-implementation of critical activities. Management response: No response received. Recommendation: MAAIF (Accounting Officer) should: Ensure that the financial and budgetary procedures established by the PFAA, PFAR, 2003 and any instructions issued under the Act and the Regulations are complied with and the accounting records are maintained as prescribed. Ensure that public funds and other resources under his custody are properly managed and safeguarded. Maintain an effective internal control system and internal audit function over the financial and related operations. MoFPED Should: Ensure timely releases of funds to ministries to avoid hasty financial decisions, especially during the closure of FYs, in the guise of avoiding unspent balances. Practice proper budgetary principles to ensure that budgetary inadequacies resulting from under or over budgeting are kept at reasonable levels. Strengthen its monitoring mechanism to ensure that Accounting Officers do not spend funds on unauthorized vote items without prior authorization. John F. S. Muwanga AUDITOR GENERAL 59

75 GLOSSARY OF TERMS: Mid-term expenditure framework (MTEF): This is a three-five year policy planning and budget formulation tool that provides government and sectors with a framework to formulate medium term plans and expenditure priorities within a budget constraint. Budget framework paper: A document that details the entity s tentative work plans, resource allocation (item budget), procurement plans, and project profiles set in accordance with the available Medium Term Expenditure Framework (MTEF). Output Budgeting Tool (OBT): Automated Ms Access data base software developed in house by MoFPED for use by MDAs in budget formulation, execution and reporting. Supplementary Expenditure: Expenditure over and above an entity s approved budget allocation in a given financial year, or expenditure for purposes for which no funds had initially been appropriated by Parliament. Vote on Account: This is the amount of money equivalent to one third (1/3) of the draft annual national budget which is made available to Government to spend for the first four months of the financial year pending approval of the National Budget by Parliament. Off Budget Spending: Expenditure on items not originally provided for in the Budget. One off Expenditures: Expenditure on budgeted items that take place once in a financial year and are not expected to reoccur for a given period of time. Virements This is the shift of funds within or between votes, as authorized by law. Impoundment This refers to the withholding of funds of the spending entity by the finance ministry. Reprogramming Is the shift of money from one activity to another, usually within the same vote, account, or fund. Rebudgeting Refers to the formal or informal revision to the budget by the government during the fiscal year, usually in response to a change in budget conditions or because the adopted budget was unrealistic. Over obligation This is the commitment of funds in excess of the amount authorized or available. Miscalculation Miscalculation is the systemic coding of expenditure to a wrong account or activity. Front loading Refers to upfront release of funds to MDAs that is, release of funds meant for subsequent quarters in advance to a spending entity in order to finance an emergency. 60

76 APPENDICES APPENDIX I: MoFPED ORGANIZATION STRUCTURE: MINISTER FOR FINANCE, PLANNING & ECONOMIC DEVELOPMENT MINISTER OF STATE GENERAL DUTIES MINISTER OF STATE INVESTMENT MINISTER OF STATE PRIVATISATION MINISTER OF STATE PLANNING MINISTER OF STATE MICRO FINANCE PERMANENT SECRETARY/SECRETARY TO THE TREASURY DEPUTY SECRETARY TO TTHE TREASURY DIRECTOR/BUDGET DIRECTOR/ECONOMIC AFFAIRS ACCOUNTANT GENERAL COMMISSIONER/PAD COMMISSIONER/BPED COMMISSIONER/MEPD COMMISSIONER/EDP&RD COMMISSIONER/FMS COMMISSIONER/IA&I UNDER SECRETARY/ AO COMMISSIONER/TPD COMMISSIONER/TAS 61

77 APPENDIX II: SECTOR FUNDING FOR FY 2009/ /12 Total National budget funding by sector for the period 2009/ /12 ANNUAL APPROVED ESTIMATES S/N SECTOR (BILLION UGX.) 2011/ / / Agriculture Land housing and urban devt Energy and mineral devt 1, Works and transport 1, , , Information and communication tech Tourism trade and industry Education 1, , , Health Water and environment Social devt Security Justice law and order Public sector management Accountability , Public Administration Legislature Interest payments Total 10, , , *Source: Approved budget estimates 2009/ /12 (Excl. Taxes, arrears)

78 APPENDIX III: DOCUMENTS REVIEWED Documents reviewed PURPOSE(S) OF REVIEW To ascertain/obtain:- The Background to The Budget (2009/ /12). Uganda s macroeconomic performance. Ministerial Policy Statements (2009/ /12). An overview of the Ministry, past performance and future plans. National Budget Framework Papers (2010/ /15). Budget Speeches (2009/ /12). Approved Estimates Of Revenue And Expenditure (2009/ /12). Staffing Structures/organograms State Of the Nation Address (2010, 2011, 2012). Budget Act, 2001 The medium term macroeconomic plan, social and economic development programs and indicative revenue and expenditure framework Budget strategies and priorities The recurrent and development expenditure projections for MDAs MDA staffing levels The state of the economy The budget calendar Public Finance And Accountability Act, 2003 Economic and fiscal policy framework and the responsibilities of persons entrusted with financial management. Appropriation Bills/Acts (2009/ /2012) Budget Performance Reports for (2009/10, 2010/11 and 2011/12). Approved budgets The performance of the different sectors in the economy Budget Monitoring Reports (2009/10, 2010/ and 2011/12). (MoFPED, OPM And NPA). The performance of key sectors of the economy Government annual Performance Reports (2010, 2011 and 2012). Approved National Budgets (2009/10, 2010/11,2011/12) District Council Budget Monitoring Reports/ Performance Reports (Selected Districts) District Development Plans (Selected Districts). National Development Plan UBoS Statistical abstracts ( ) MDA performance contracts (selected entities). AFROSAI-E Budget Audit guidelines Zambia s Budget analysis Report (2008) MoFPED report on MDA absorption capacity constraints The performance of the economy or the extent of implementation of government programmes Approved estimates of revenue and expenditure Performance of districts in the implementation of the National Budget The key priorities of selected districts National development priorities Annual GDP figures and related data Agreed upon activities for implementation Guidance on budget audit procedures Key budget processes and findings MDA absorption challenges and way forward 63

79 APPENDIX IV: INTERVIEWS CONDUCTED MoFPED Headquarters To ascertain/obtain:- Unit Designation Purpose of the Interviews 1. Finance and Administration Undersecretary/ Accounting officer MoFPED - Roles and responsibilities of key players in budget implementation. - Challenges faced and their impacts to the implementation of MoFPED planned activities. - Suggested mitigation measures to the challenges 2. Directorate of Budget Director Budget - Roles and responsibilities of the directorate in the budgeting process - Coordination between the directorate and other directorates in MoFPED. - Process of arriving at cash limits - How the cash flow committee works 3. Directorate of Economic Affairs Director Economic affairs - Roles and responsibilities in budget implementation - Revenue forecasting assumptions 4. Budget Monitoring and Accountability Unit Head BMAU - Roles and responsibilities in budget implementation - Monitoring function - Area of focus - Reporting mechanism - Feedback mechanisms - Actions taken on findings and recommendation 5. Accountant General s Department Commissioner/ Financial management services - Roles and responsibilities in budget implementation - Process of funds release and cause of delays 6. MAAIF Headquarters Administration Undersecretary Background information on selected priority activities for study. Departments of Crops &Livestock Programme coordinators Work plans,programme implementation status and challenges. Programme accountants Approved budgets, releases, actual expenditure. MoES Headquarters Administration Under secretary Background information on selected priority activities for study. Secondary Education dept. Commissioner projects, planning & budgeting Activity work plans and budgets. Principal Education Officer-Secondary Implementation progress for the selected activities. 64

80 6. National planning Authority Executive Director - Roles and responsibilities in budget implementation - National development plan and priorities - Budget monitoring and Evaluation 7. Office of the Prime Minister Commissioner -Monitoring and Evaluation - Roles and responsibilities in budget implementation - Monitoring and Evaluation function - Reporting mechanisms - Feedback mechanisms Selected districts: 8. Adjumani, Oyam, Soroti, Bundibugyo, Mubende, Rakai, Wakiso, Kumi, Tororo, Oyam, Kitgum, Bushenyi, Kabale, Lira. Chief Administrative Officers (CAO s),deputy CAO s and ACAO s - Roles and responsibilities in budget implementation - Challenges and possible remedies - Evaluation of sector performance in selected districts District Health Officers (DHOs) - Roles and responsibilities in budget implementation - Monitoring and Evaluation function District Production Coordinators - Roles and responsibilities in budget implementation - Location of implementation sites - Sources of funding for identified activities - Monitoring and Evaluation function District Education Officers (DEOs) - Roles and responsibilities in budget implementation - Level of cooperation with MoES - Monitoring and Evaluation function District Personnel Officers (Human resource managers) - Roles and responsibilities in budget implementation - Staffing level - Qualifications of key staff - Staff training District Planners - Roles and responsibilities in budget implementation - District budgeting Process of reprioritisation Chief Finance Officers (CFOs) - Roles and responsibilities in budget implementation - Timeliness of releases - Alignment of releases to planned activities - Process of reprioritising (management of budget cuts) - Challenges and possible measures to mitigate them. District Engineers - Roles and responsibilities in budget implementation - Implemented activities in their areas of jurisdiction - Monitoring and Evaluation function District Community Development officers - Roles and responsibilities in budget implementation - Community mobilisation function Sub-County chiefs - Roles and responsibilities in budget implementation - Location of implementation sites - Identification of beneficiaries - Evaluation of government programmes 65

81 APPENDIX V: QUARTERLY CASH LIMIT PROCESS 66

82 APPENDIX VI: QUARTERLY CASH RELEASE PROCESS 67