Box 1: Sub-processes, their organisational units and the documents... 5 Box 2: MTBF Process and Output Box 3: Proposed Performance Indicators...

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2 Box 1: Sub-processes, their organisational units and the documents... 5 Box 2: MTBF Process and Output Box 3: Proposed Performance Indicators Table 1: Documents requested... 9 Table 2: Summary of Revenue Performance (Nbn) Table 3: Approved Budget & Expenditure (Nbillion) Table 4: Fiscal Targets for Figure 1: MTBF Process Annex 1 Terms of Reference Annex 2 Persons Met Annex 3 List of Documents Consulted Annex 4 Revenue Budget Performance Annex 5 Expenditure Budget Performance Annex 6 Capital Investment Annex 7 Proposed Kano State Fiscal Statements Annex 8 Draft Kano State Call Circular SLGP Consultants Report Number 312 2

3 API AG Bn CRF CSOs DFID EXCO. FAAC FY IFMIS IGR IT KNSG LGA MoFI MDG MDAs MoF&ED MoP&B N PAYE PEM SAuG SEEDS SLGP ToR TSA Aggregate Performance Indicator Accountant General Billion Consolidated Revenue Fund Civil Society Organisations Department for International Development Executive Council Federation Accounts Allocation Committee Fiscal year Integrated Financial Management Information System Internally Generated Revenues Information Technology Kano State Government Local Government Authority Ministry of Finance Incorporated Millennium Development Goal Ministries, Departments and Agencies Ministry of Finance & Economic Development Ministry of Planning & Budget Naira Pay-as-you-earn Public Expenditure Management State Auditor General State Economic Empowerment and Development Strategy State and Local Government Programme Terms of Reference Treasury Single Account The consultants undertaking this review received support from officials of the Kano State Ministry of Planning & Budget during the assignment; in particular from the Permanent Secretary. The SLGP Programme Manager provided support and office space. Most of all, we are grateful to the SLGP Programme Officer and other administrative staff of SLGP in Kano who rendered assistance during the assignment. Chinedu Eze Patrick Okonji SLGP Consultants Report Number 312 3

4 Kano State Government has produced SEEDS which has begun to be implemented over the past two years. In order to provide effective tool for integrating the multiyear projects and programmes outlined in the SEEDS document, a Medium Term Budget Framework (MTBF) is being proposed for introduction in the 2007 fiscal year. The MTBF is defined as a top-down resource envelope comprising of a transparent, annual, rolling three-year planning framework. The framework when fully introduced would capture Kano State SEEDS programmes and projects in addition to recurrent costs. It would set out the medium-term expenditure priorities of the government and budget constraints against which sector plans can be developed and refined. On the other hand, MTBF would also contain detailed technical specification (e.g. economic, administrative, functional, programme classifications) and outcome criteria for the purpose of performance monitoring. MTBF together with the annual Budget Framework Paper provides the basis for annual budget planning. The MTBF strategically consists of a top-down resource envelope, while more technical MTEF would also contain a bottom-up estimation of the current and medium-term costs of existing policy and, ultimately, the matching of these costs with available resources in the context of the annual budget process. The top-down resource envelope is fundamentally a part of macroeconomic model that indicates fiscal targets and estimates revenues and expenditures, including government financial obligations and high cost government-wide programmes such as civil service reform. To complement the macroeconomic model, the sectors engage in bottom-up reviews that begin by scrutinising sector policies and activities (similar to the zero-based budgeting approach), with an eye toward optimising intrasectoral allocations. The structure and processes of the bottom-up approach is not covered in this assignment. The top-down part of the macroeconomic model is what is called medium term budget framework (MTBF) in this report. The main objectives of the Medium Term Expenditure Framework are: Improved fiscal discipline Better inter- and intra-sectoral resource allocation Greater budgetary predictability for line ministries More efficient use of public monies Greater political accountability for public expenditure outcomes through more legitimate decision making processes Greater credibility of budgetary decision making (political restraint) Under the proposed Medium Term Budget Framework (MTBF), State Government would aim to achieve the first three objectives in addition to transparency and accountability. Fiscal discipline is imperative to ensure that the technical elements of MTBF are put in place and eventually evolve into full Medium Term Expenditure Framework (MTEF) with introduction of new economic, administrative, functional and programme classifications and coding. SLGP Consultants Report Number 312 4

5 There is a natural sequence in designing planning/budgeting reforms. The first principle is to ensure the basics; traditional budget processes are put in place before designing a MTBF. Alternatively, a technically simplified planning model called medium term budget framework (MTBF) is constructed and introduced while the technical specification is being designed and implemented. Implementing a basic MTBF at the centre of Kano State Government is the prerequisite for improving fiscal discipline in the public sector entities. This review separates the basic MTBF and MTEF process into five sub-processes. Three criteria were considered in deciding the sub-processes: Sequencing, organisational units responsible from processes, documents produced at the end of the sub-process. This MTBF assignment covers the first three processes. Economic and Fiscal Environment Update July Fiscal Target July Central Agencies Central Agencies Economic & Fiscal Update Annual Statement Fiscal Budget Policy Statement July EXCO Budget Policy Statement Sector Negotiations July/August EXCO/MDAs Budget Proposals Annual Budget Documentation October/November Monthly Budget Performance Report Central Agencies/MDAs Central Agencies Draft Budget Estimates Budget M/E Report The process of setting fiscal targets consists of two separable sub-processes: the first is the preparation of an economic and fiscal update by central agencies, and the second is the setting of fiscal targets by the EXCO. It appears that the EXCO secretariat may not have the capacity to undertake the task, and the Ministry of Planning & Budget would have to produce the fiscal targets for EXCO. Transparency requires that the results of the first are published in an Economic and Fiscal Update (EFU) Report and results of the second are published in a Fiscal Strategy Report. The other sub-process of MTBF is the production of Budget Policy Statement by the Ministry of Planning & Budget and approved by the EXCO. One appropriate generalisation of MTEF (and MTBF by extension) is that it is a top down strategic allocation guide and a bottom up cost template. The Budget Policy Statement is the strategic allocation guide of the government. In Kano State, It takes its lead from the government SEEDS document. The State SEEDS itself becomes a part of MTBF. For some it may be considered too ambitious for the budget process to house the SEEDS, but it is important to integrate the annual budget process with the medium term planning process in a MTBF. 1 These sub-processes are adopted from World Bank Handbook: the outputs are core requirements in MTEF. SLGP Consultants Report Number 312 5

6 Regardless of its home, budget preparation has to install procedures to encourage the EXCO to determine and evaluate its priorities. The process that is designed in this assignment assumes that the government has already generated its programmes as outlined in the SEEDS document. However, the present SEEDS terminates in 2007 fiscal year. It needs to be rolled over to 2009 during the current fiscal year. The preparation and publication of documents specified in the output column of Box 1 are standard indicators of the progress of the MTBF implementation. The output formats have been specified and provided as Annex 7 and 8 to this report. To embark on the design and implementation of MTBF, the various steps have to be undertaken systematically. The process has several elements: A three year planning framework must develop strong link with the annual budget process. The MTBF captures three annual budgets ensuring that all multi-year projects and programmes are embedded in the medium term budget framework with the recurrent costs implications properly computed and recognised in advance. Accordingly, the present SEEDS document would need to be reviewed during the third quarter of 2006 to ensure that it is up-dated and rolled up to The review should consist of detailed computation of recurrent and capital costs for three fiscal years that form part of the MTBF. The budget planning would need to be improved if the budget outcomes are expected to be achieved. The accurate revenue and expenditure forecasts, computation of aggregate spending limit and sector spending ceilings are very important budget planning process including consultation with legislative branch of government. Following documents are crucial to effective budget planning: Economic and Fiscal Up-dates Fiscal Targets Budget Policy These documents are annual outputs from budget planning process. The first document is expected to summarise the State Government economic performance by sector as well as review the economic prospects for the coming year, while the second document would outline the government s fiscal performance targets with respect to revenue administration and expenditure management. The budget policy would contain government explicit policy directions and targets, aggregate spending limit, sector priorities, sector spending ceiling that would form the basis for annual budget call circular. An effective budget defence should be anchored on the preparation and circulation of Budget Policy Statement in which the sector ceiling is clearly defined and the annual call circular elaborate budget policy and government-wide priorities and economic thrust for the fiscal year. The following issues must be clarified in the budget planning process including appropriate documentation: Well structured budget preparation calendar; Detailed and elaborate Annual Call Circular; Standard Costing Template; SLGP Consultants Report Number 312 6

7 Well defined criteria for sector programme prioritisation; The quality and comprehensiveness of the annual call circular, the quality of costing and project and programme prioritisation in the spending units proposals are absolutely essential for sound budget process. Improved fiscal planning and discipline is required to produce realistic annual budget estimates that are consistent with resource constraint. production of realistic fiscal targets, including expenditure framework and revenue forecasts; budget should be a basis for predicting funding of activities of MDAs, consequently there should be a robust bi-lateral discussions of their proposals within the sector spending ceiling The government might need to consider the advantages of introducing expenditure warrant system. Warrants issued for each specific expenditure approval as a means of effective budget and expenditure control process. Production of Work Plan by the line ministries stating their funding requirements on quarterly basis should be put in place to enhance expenditure planning, projection and cash management. The training of employees deployed in planning and budget should be undertaken before introduction of the MTBF. Basic and tailor-made courses on an accelerated basis should be conducted in the next three to six months. This report documents the consulting input for the review and improvement of medium term planning process in Kano State Government. The Terms of Reference for the assignment are attached (Annex 1). The list persons met during the assignment is Annex 2, and a list of documents consulted is found in Annex 3. Annexes 4 and 5 consist of financial spreadsheets of revenues and expenditures for a period of four years, which formed the basis for computing the average growth rate of revenues and calculating expenditure growth pattern. Annex 6 captures of the State Capital Investment for period of 2004 and The required outputs of this assignment are presented in Annexes 7 and 8. In November 2000 the UK s Department for International Development commissioned the State and Local Government Programme (SLGP) to run for 6 years in 4 selected locations (initially Benue, Ekiti, Jigawa and Enugu, and presently Jigawa, Enugu, Lagos, Kano). The programme was designed to enhance the capacity of State and Local Governments in Nigeria to manage resources and provide improved delivery of services, in the interest of the poor, in a transparent, accountable and responsive manner. SLGP Consultants Report Number 312 7

8 The purpose of SLGP is to enhance the capacity and effectiveness of federal, state and local government in chosen states, and at federal level, to formulate policy, manage resources and support service delivery in the interest of poor people. The programme also intends to further this process in other states by dissemination of lessons learnt and through influence on other donor initiatives. One of the key components of SLGP s support is improve the functioning of States and LGAs and to assist with an analysis of public expenditure management processes and systems, and of the resulting allocation, disbursement and effectiveness of expenditure and cash management. This review focused both on the analysis of budget execution, actual expenditure as well as cash management and the product which results from such these processes. The integration of the MTBF with the on-going Budget Classification and Chart of Accounts work, which addresses the vital issue of expenditure format, provides an opportunity to strengthen the planning process and its link with annual budget process. The main objective of this assignment is to review the planning process in the Kano State Government and support the design and development of Medium Term Budget Framework as a means of improving the overall medium term planning process. The broad objective of this assignment is to improve medium term planning process as well as strengthen the link between planning and annual budget process. The Medium Term Budget Framework when fully implemented along with other related reform programmes would evolve into a complete MTEF. The required outputs of this assignment implicitly indicate that incremental approach to introduction of complete MTEF has been considered. This assignment is limited to the Medium Term Budget Framework, which deals with basic medium term planning structure; the building blocks necessary for developing complete MTEF are being undertaken in parallel assignments. The overall assignment cycle adopted for the design and development of the MTBF comprised four stages: Document review, Meetings with key staff to map out the existing planning process; Confirmation/discussion of findings Proposals In order to obtain data and information for this assignment, a number of financerelated documents were requested by the consultants. It was gratifying that the request for most of these documents were provided at the commencement of the assignment. SLGP Consultants Report Number 312 8

9 Budget for Financial Statements for Summary of Revenue and Expenditure 2002/4 Spreadsheet of revenue budget and actual for Audited Financial Statements 2003/2004 Revenue Administration database Available Partially available Partially available Available Partially available Not available Still in draft form The availability of some documents naturally enhanced the ability of the consultants to perform as thorough a review of the planning process and system that has been desired, and it also means that in many cases it has been possible to substantiate the oral information obtained by reference to documentary evidence. During the assignment, meetings were held with various officers of the Ministry of Planning & Budget to discuss the objectives of the assignment and the overall scope and expected output and to solicit their support in collection of data. Final meeting could not be held with key officials in the Ministry of Planning and Budget during which information obtained during the assignment was to be reviewed and findings and conclusions as well as recommendations were discussed and agreed upon. There might be need for such meeting to be held with combined officials of the two central ministries to discuss recommendations and next steps. The transparent medium term planning methodology called MTEF has been introduced in many African countries in the past two decades and the World Bank has been involved in majority of cases through conditionality and policy dialogue; accordingly the Bank has documented the process and progress made in about half dozen countries in Africa including Ghana, Uganda and South Africa. As a result of the documentation by the Bank, standards and features of the medium term planning in African countries have been widely made available in handbook and other literatures. Specifically, the type of outputs from the MTEF and indicators of progress have been standardised to the extent that other African countries intending to embark on designing and introducing MTEF have had to follow the established methodological framework documented by the World Bank. Consequently, this assignment has borrowed from the materials produced by the Bank with respect to general framework and technical dimension (such as the type of outputs required) as well as achievement indicators. This assignment would attempt to adopt the tested and workable elements of MTEF in other African countries in Kano State planning and budget environment. SLGP Consultants Report Number 312 9

10 The standard approach for introducing MTEF (or MTBF) is to carry out a review of the planning process and environment and document the existence (or absence) of initial conditions that would enhance the introduction of MTEF. The next step would be to undertake the basic design of the framework with recommendations as to the implementation process and sequencing necessary for the success. The implementation plan, management and phasing of MTEF reforms would be considered in the complete MTEF. The Medium Term Expenditure Framework (MTEF) is a transparent annual, rolling three year-expenditure planning linked with budget formulation process. Such a framework would provide the medium-term expenditure priorities on government wide basis as well as specific fiscal constraints against which sector plans can be developed and refined. The MTEF aims at facilitating a number of important outcomes at State Government level: sound fiscal balance; improved inter- and intra-sectoral resource allocation; greater budgetary predictability for spending units; and more efficient use of public fund. Improved economic balance, including fiscal discipline, can be attained through good estimates of the available resource envelope, which are then used to make budgets that fit squarely within the available envelope. In many situations, MTEF would is deployed to improve inter- and intra-sectoral resource allocation by effectively prioritising all expenditures (on the basis of the government's socioeconomic programme) and dedicating resources only to the most important ones. A further objective of the MTEF is greater budgetary predictability, which is expected as a result of commitment to more credible sectoral budget ceilings. What is evident is that MTEF pursues the same objectives with a sound and well functioning PFM system. A complete MTEF reform programme would usually consider and implement the following components of medium term planning methodology: Macroeconomic Framework structure, content and coverage; Length of Planning Period; Type of Expenditures to be included; Development of Sector Plan; Format expenditure presentation by classification: Government Levels to be included: general government operations or all public service. Type of Costing Methods MTEF is detailed and extensive planning process as the preceding paragraphs has indicated. It is usually necessary to introduce MTEF process in an incremental approach. Already in Kano State there are a number of reform activities that are aimed at building a foundation for robust fiscal planning framework, e.g. Budget Classification & Coding, Chart of Accounts, Treasury Modernisation and Integrated Financial Management Information System. The approach being explored by this consulting assignment is to develop and introduce top-end of the MTEF which can be defined as Medium Term Budget Framework (MTBF) as the first step to improving the planning process. The bottom-end of the planning process which would naturally include budget structure and process such as budget re-classification, standard programme budgeting, re-designing of chart of accounts and costing methodology when completed would strengthen the public finance management system and provide the bottom end of the framework. SLGP Consultants Report Number

11 The MTBF is defined as a top-down resource envelope comprising of a transparent, annual, rolling three-year planning framework that is suitable for capturing K-SEEDS capital investment projects and programmes including the recurrent costs implication. The Kano State Government SEEDS document outlines the basic policy goals and targets including the strategies for achievement of the set targets. The strategies in the SEEDS document, when comprehensively reviewed and costed, should drive the annual budget process with a MTBF. The proposed medium term budget framework provides an effective tool for linking the policy goals and the budget thrust within resource constraint. The basic MTBF objectives have been defined to include the following: Improved fiscal discipline Better inter- and intra-sectoral resource allocation Greater budgetary predictability for line ministries Greater credibility of budgetary decision making (political restraint) To achieve the above objectives, MTBF design outlines planning process and various outputs and the responsible agencies for the specific outputs. It is these outputs that form the basis for annual budget planning within the medium term horizon. The four main outputs of MTBF are outlined in Box 2 and Figure 1 depicts the flow process. Sub-processes, their organisational units and the documents they produce are: Economic and Fiscal Environment Update Central Agencies Economic & Fiscal Update Fiscal Framework Central Agencies Fiscal Framework Statement Budget Policy Statement Sector Plans & Cabinet-Sector Negotiations Annual Budget Proposals EXCO/Central Agencies Ministries/EXCO Ministries/Central Agencies Budget Statement Sector Plans Policy Draft Budget Estimates 2 Adopted from World Bank Handbook. SLGP Consultants Report Number

12 Medium Term Budget Framework Setting Fiscal Targets Allocation of Resources to Priorities Economic and Fiscal Update Fiscal Framework Statement Budget Policy Statement Sector Plans Central Cabinet Commissioner Source: Adopted from the World Bank Handbook The annual budget estimates are the most important output from the planning-budget process in the State. The other output is the K-SEEDS document that provides a guide to the intended capital investments over a three-year planning horizon. But unfortunately the link between the K-SEEDS and the annual budget document is very weak. The proposed MTBF is an appropriate tool for linking the planning process and the annual budget process. The four main outputs of the MTBF would effectively link up with the annual budget. The Budget Policy Statement is crucial, given the information it contains. The Budget Policy Statement would provide ample information for crafting the annual call circular that would guide the budget preparation process at the spending units. At this point, it would be appropriate to discuss the nature and contents of the outputs. This would hopefully enable the responsible agencies to understand the fiscal data and economic information required as inputs for the production of the different outputs. Much of the data required are available within the general government operations and others can be obtained through primary and secondary sources. The secondary data, the very good sources would be the National Planning Commission, Central Bank of Nigeria, Federal Ministry of Finance and the National Bureau of Statistics. The Economic and Fiscal Environment Update (EFEU) is a socio-economic document with a lot of fiscal analysis that should be published every year some time in July by the Central Agencies (State Ministry of Finance & Economic Development and the State Ministry of Planning & Budget). It should contain a short review of the current fiscal year and a detailed analysis of the current and future (one year) economic developments. It would explain how the developments would impact on the revenue potential for the next fiscal year. It might be possible to provide some analysis of the sectors and sub-sectors of the State economy. A detailed analysis of the sectoral performance of the State economy would be useful for many outside stakeholders. It might be able to analyse the State Government efforts in achieving MDGs and the sectoral funding. 3 These are four standard MTEF outputs documented by the World Bank MTEF studies in Africa countries. SLGP Consultants Report Number

13 If the data is available, it might be necessary to compute the economic growth of the State by providing annual aggregate output in terms of goods and services produced in Kano State and identifying the main growth sectors and sources of growth for the economy relative to the national economy. This amount and quality of information would provide strong feedback to the policy makers in the State Government. The quality and comprehensiveness of this document would improve with time as the responsible agencies develop statistical database and strengthen their capacities. A Fiscal Framework Statement (FFS) is a document that provides a broad view of the fiscal prospects for the next one year with respect to revenue potential and collections from all sources as well as expected expenditure patterns. One of the highlights of the Statement is ensuring that any funding gap is estimated and conveyed to the appropriate authority. This Statement should be produced by the Central Agencies during the third quarter of the fiscal year. This statement should review each main source of revenue for the State Government particularly the internal revenue sources. There are various variables responsible for revenue performance of the State Government. The exogenous variables with respect to the Federation Accounts receipts are outside the control of the State Government. Internal revenue sources are under the control of the State Government and the analysis would explain that there is connection between efforts and collections of internal revenue. The Budget Policy Statement (BPS) takes its lead from the EFEU and FFS and focuses on the general government policy thrust and directions for the coming year including policy priorities. The BPS should provide the following information: Total Available Resource (TAR) Aggregate Spending Limit (ASL) Recurrent & Capital Allocation and Ratio Sector Spending Ceilings Contingency Reserve Planning Reserve The improvement of the planning and annual budget processes would have to consider the above features in resource forecast, allocation and utilisation. These magnitudes need to be computed and painstakingly adhered to during budget planning, preparation and management. The Sector Plan is a strategic planning document on medium term basis [or operational plan] produced by each sector ministry that takes its lead from BPS. While the BPS indicates policy priorities on government-wide basis, the Sector Plan would focus on detailed intra-sectoral issues and sub-sector priorities, including minimum (or standard) service package, with cost estimates. The Sector Plan should form the basis for reviewing and up-dating of K-SEEDS 2. Sector Plan would be the inputs of each sector ministry to the process of up-dating K- SEEDS. The problems with SEEDS in many States of Federation are that the sector ministries were not carried along during the preparation of SEEDS. Consequently, SEEDS do not reflect realistic policy priorities and they were over-ambitious. In addition, recurrent costs implications of proposed capital investment were not fully taken into account. SLGP Consultants Report Number

14 The Sector Plans when reviewed and integrated with a multi-sectoral fiscal policy and strategy framework including poverty reduction strategy component would serve as K-SEEDS 2, which would be implemented between 2007 and The production of above outputs and their implementation would enable the State Government the following: sound fiscal balance; improved inter- and intra-sectoral resource allocation; greater budgetary predictability for spending units; and Improved fiscal balance, including fiscal discipline, can be attained through good estimates of the available resource envelope, which table 3 aims at achieving if the State Government adopts conservative revenue forecasts for 2007 (see Section 4.6). The approach adopted in this assignment is the common approach used by many reforming African countries in which the basic MTEF processes were separated into sub-processes. The three sub-processes are: Sequencing, organisational units responsible for each process, documents produced at the end of the sub-process. Understanding the administrative structure of the general government operations are keys in designing a MTBF for Kano State. First, the Executive Council (EXCO) and State House of Assembly (SHA) crucial roles and responsibilities need to be understood. Moreover, the delegated power of the Central Agencies (Planning Ministry and the Ministry of Finance) from the EXCO, would determine the authority they have over the rest of the public service organisations. In Kano State with selfaccounting status of the line ministries, the central ministries do not appear to have strong leverage over the spending units in matters of fiscal policy planning and management. Accordingly, when central agencies are weak, the quality of the central planning and decision making would be affected. Some of these issues have been addressed in a related review: Kano State Treasury Operations Review, SLGP Report, April The process of setting fiscal targets consists of two separable sub-processes: the first is the preparation of an economic and fiscal update by central agencies, and the second is the setting of fiscal targets by the EXCO. It appears that the EXCO secretariat may not have the capacity to undertake the task, and the Ministry of Planning & Budget would have to produce the fiscal targets for EXCO. Transparency requires that the results of the first are published in an Economic and Fiscal Update (EFU) Report and results of the second are published in a Fiscal Strategy Report. The other sub-process of MTBF is the production of Budget Policy Statement by the Ministry of Planning & Budget and approved by the EXCO. The proposed Budget Policy Statement would be the strategic allocation guide of the State government. In Kano State, it would take its lead from the government SEEDS document. The State SEEDS itself would become a part of MTBF. It is important to integrate the annual budget process with the medium term planning process in a MTBF along with K- SEEDS. This assignment assumes that the government has already generated its programmes as outlined in the SEEDS document. However, the present SEEDS terminate in 2007 fiscal year. It needs to be rolled over to 2009 during the current fiscal year. SLGP Consultants Report Number

15 The MTBF process depends on fiscal discipline and encourages the development of aggregate fiscal policy to improve efficiency and effectiveness of public resource management. The term aggregate fiscal policy here refers to decisions about the level of Kano State government expenditures, and the way in which the necessary finance is to be derived from different broad categories of government revenues (in particular taxation, federation account, borrowing and grants). These are decisions which the government must necessarily reach in its regular budgetary exercises, and so the term budgetary policy is often used to refer to it at the State government level. In Kano State, fiscal discipline has continued to improve in the past four years as Table 2 indicated. In 2001 the annual budget performance variance was 53.6%, but by 2004 it had improved to 88%. This is an indication of realistic budgeting. Internal Revenue Federation Account Internal Loans External Loans Others Source: Treasury Department, MF&ED Computed and summarised by Consultants. Allocation to strategic priorities requires determination of government wide priorities by the EXCO collectively while the portfolio-wide priorities are to be undertaken by the Ministries individually. Transparency requires that the priorities of the EXCO are explained in a Budget Policy Statement whereas the priorities of individual ministries are explained in their Sector Budget Proposals with explanation. Basic MTBF aims at assisting government to improve prioritisation of programmes within available resources of the State. Once the government-wide priorities have been determined resources would be allocated to each sector or function. Allocation of resources to government functions would be preceded by determination of recurrent costs of general government operations in fiscal year. The personnel and overhead costs are first estimated and deducted from the aggregate resource envelope to arrive at the sum transferable to capital development fund plus capital receipts. The total annual investment fund would then be allocated in accordance with the State strategic priorities with certain amount reserved for planning and contingency. The computation of the capital development fund is shown in Table 4. Table 3 presents the resource allocation by economic inputs during the period SLGP Consultants Report Number

16 Resource allocation by functions is one basic requirement of MTBF. Resource allocation by functions is made after painstaking determination of the government s priorities. A resource projection for fiscal year 2007, 2008 and 2009 is presented in Table 4. It is pertinent to note that resource allocation under recurrent costs is done according to entities (administrative institutions) while capital cost is allocated according to broad sector classifications. The reason is because the recurrent cost is first deducted from the consolidated revenue fund before transferring the balance to the capital development fund. The personnel costs are usually approximately to actual personnel costs of the previous year plus adjustment figures for promotion, salary enhancement, etc. And overhead cost is more or less incremental in computation. A resource allocation by complete administrative classification is produced in Annex 7 (Exhibit 2). These resource allocations are indicative and provided as illustration of the fundamental steps for designing and implementing MTBF. Personnel Cost Overhead Cost Total Recurrent cost Capital Cost Source: Revenue Management, Treasury Department Aggregate Performance Indicator (API): The ability to forecast fiscal targets and monitor fiscal soundness presupposes the existence of indicators that can be used as a basis for analysing the State current fiscal performance. A set of APIs would be put in place that would comprise both aggregate and micro- performance indicators of the health of individual sector. The set of indicators for evaluating the performance of the State fiscal performance in a given year is outlined in Box 3. The budgeted revenues and actual collections are shown including capital receipts such as loan and grants. The budget performance data for 2003 and 2004 fiscal years showed great improvement with respect to variance of budgeted revenue and actual collections. In 2003 the aggregate revenue budget performance was 86% in comparison with 58% in In 2004 the aggregate revenue budget performance was 88%. However, in the proposed MTBF, the standard fiscal performance targets would be 90%. The standard fiscal performance targets would be based on realistic revenue budget supported by robust economic database and statistical materials. In anticipation of 2007 fiscal planning, a medium term budget projection has been produced in Table 4. On the basis of the projections, an indicative sector allocation of resources has been produced in Annex 7. SLGP Consultants Report Number

17 IGR 6,719,506,033 7,391,456,636 8,500,175,131 Federation Account 40,821,494,973 44,903,644,473 49,394,008,920 Capital Receipt 2,576,596,470 2,705,426,294 2,975,968,923 50,117,597,476 55,000,527,403 60,870,152,975 Personnel 9,694,005,756 10,663,406,332 11,196,576,649 Overhead 10,447,953,453 11,492,748,798 12,067,386,238 CRFC 4,581,222,000 4,810,283,100 5,291,311,410 Total Recurrent 24,723,181,209 26,966,438,230 28,555,274,297 Capital 25,394,416,267 28,034,089,173 32,314,878,678 50,117,597,476 55,000,527,403 60,870,152,975 Source: Computed by Consultants + See Annex 7 Resource allocation by functions for recurrent and investment costs is the first steps towards improving fiscal discipline within the public finance management system. This fundamental responsibility of resource allocation if carried out effectively would contribute to the achievement of budget outcomes. The mere resource allocation is not enough, if the government do not strengthen the budget and expenditure control system to ensure that resource utilisation is carried out according to strategic priorities. Among all the functions, Agriculture and Rural Development has attracted large resource allocation in the past fiscal years. Would the function continue to attract high level of funding in the coming fiscal years would depend on the State Government strategic priorities? Agriculture and Rural Development as the main sub-sector attracted the largest share within the sector. In the past, the State Government did not produce a breakdown of recurrent cost by the sub-sectors in the economic sector group. Consequently, there is no estimated (or actual) cost for Livestock, Forestry, Manufacturing, Fishery and Rural Electrification sub-sectors. The transparency conditions of MTBF allow easy measurement of government s commitment to MTBF. Publishing the Economic and Fiscal Update, Fiscal Framework Statement, Budget Policy Statement and Sector Plans of Ministries are measures for government s commitment. This commitment could be formalised by a Public Finance Act. Once the measure is government s reporting requirements, setting progress indicators becomes easy as well. It is the adoption of generally accepted practices, principles and standards governing the form, content and timing of these reports that should be formalised. The government should decide the order it will adopt these outputs and the preparation time necessary for their adoption. It is important to provide a guide and Box 3 below contains suggested schedule and dates. SLGP Consultants Report Number

18 Economic and Fiscal Environment Update Central Agencies Annual and Early- July Fiscal Framework Statement Central Agencies Annual and Mid-July Budget Policy Statement EXCO/Central Agencies Annual and End of August Sector Plans Ministries / EXCO Three Year Plan and up-dated annually in the third quarter. Annual Budget Proposals & Draft Estimates Ministries/Central Agencies Annual and prepared in the third quarter. The two crucial outputs for this assignment are Fiscal Framework Statement and Budget Policy Statement. These outputs are specifically related to outputs for this assignment. Fiscal Framework Statement which contains annual revenue forecasts and expenditure framework are based on some basic plausible assumptions. In studying the time series of the budgeted and actual revenues for the State Government over a four year period (2001 and 2005), we found that average annual revenue growth rate was about 10%. For expenditure the growth was constrained by the revenue collections. However, the growth of expenditure by sector differed greatly. But we were able to establish average percentage allocation of resources by sector over the period under review. This average percentage was used to develop spending ceiling for the sectors. The spending ceiling for the sectors has been translated into spending ceilings for 46 administrative entities. The basic approach is to determine what entities are within a traditional sector and determine their allocation and growth rate over the past four years and then pro-rata the sector allocation among the entities. However, it is expected that the Ministry of Planning & Budget would review this in light of changes in expenditure policy for The draft fiscal framework statements are produced in Annex 7 of this report. To be able to draw up a very comprehensive and informative annual call circular, the State Government would need to prepare a budget policy statement which would provide all the necessary elements for the forthcoming budget process. In the absence of the Budget Policy Statement, but after discussions with senior level officers in the State Ministry of Planning & Budget, a draft call circular has been produced and is attached to this report as Annex 8. It is anticipated that during 2007, introduction of the Budget Classification & Chart of Accounts will lead to a comprehensive Medium Term Fiscal Framework (MTFF) as the basis for government-wide budgeting. One immediate challenge is production of timely and high quality half yearly outturn expenditure for the review of the progress of the medium term budget framework in the coming years. 4 Titles of the MTBFOutputs are adopted from the World Bank Handbook. SLGP Consultants Report Number

19 Improving the quality of the government's information system on expenditures is often essential in evaluating the progress of the achievement of the MBTF, so that the ministries of planning & budget and finance & economic development can develop the capacity to adjust spending in response to fiscal developments, while maintaining expenditure control. At the heart of any fiscal and financial information system is the accounting system, which maintains the basic records of government transactions and, thus, outturn expenditures. How well the accounting system is operating can be judged directly by the quality and speed of the production of management reports and financial statements. The annual budget and planning processes are the primary means by which the MTBF objectives are pursued and achieved since it provides the linkage between political intentions through policy review and formulation and the execution and monitoring of the success of policy achievement. Thus, if a government is actively pursuing a set of poverty-reducing policies, a properly functioning budget/planning system provides a set of tools and information to support the implementation of those policies. Linkages between other reform initiatives such as Budget Classifications & Chart of Accounts, which would provide downstream technical specification, are necessary if the MTBF is to be successfully implemented leading to comprehensive medium term fiscal framework. Political willingness and commitment is considered very important in the introduction of MTBF and Budget Classification & Chart of Accounts. As noted in the preceding section, fiscal discipline is imperative to ensure that the technical elements of MTBF are put in place and eventually evolve into full MTEF with introduction of new economic, administrative, functional and programme classifications and coding. Political will to accept to work within the resource constraint by developing strategic priorities. MTBF is a planning tool that demands high quality statistical data base as well as forecasting and analytical capacity as pre-requisite for successful implementation. Accordingly, it is important that capacity building in the planning unit of line ministries and central ministries would need to be improved simultaneously with the introduction of the MTBF. Specific capacity building has been outlined in the recommendation section of this report. SLGP Consultants Report Number

20 To embark on the design and implementation of MTBF, the various steps have to be undertaken systematically. The first decision is to approach the reform of the planning process piecemeal over a number of years. This would be to enable the PEM conditions to improve in the State. However, there are several basic steps to be followed including the planning and budget processes outlined below. A three year planning framework should develop strong link with the annual budget process. The MTBF is meant to capture three annual budget estimates ensuring that all multi-year projects and programmes are embedded in the medium term budget framework with the recurrent costs implications properly computed and recognised in advance. Accordingly, the present SEEDS document would need to be reviewed during the third quarter of 2006 to ensure that it is up-dated and rolled up to The review should consist of detailed computation of recurrent and capital costs for three fiscal years that form part of the MTBF. The budget planning would need to be improved if the budget outcomes are expected to be achieved. The accurate revenue and expenditure forecasts, computation of aggregate spending limit and sector spending ceilings are very important budget planning process including consultation with legislative branch of government. Following documents are crucial to effective budget planning: Economic and Fiscal Up-dates; Fiscal Targets; Budget Policy. These documents are annual outputs from budget planning process. The first document is expected to summarise the State Government economic performance by sector as well as review the economic prospects for the coming year, while the second document would outline the government s fiscal performance targets with respect to revenue administration and expenditure management. The budget policy would contain government explicit policy directions and targets, aggregate spending limit, sector priorities, sector spending ceiling that would form the basis for annual budget call circular. An effective budget defence should be anchored on the preparation and circulation of Budget Policy Statement in which the sector ceiling is clearly defined and the annual circular call elaborate budget policy and government-wide priorities and economic thrust for the fiscal year. The following issues must be clarified in the budget planning process including appropriate documentation: Well structured budget preparation calendar; Detailed and elaborate Annual Call Circular; Standard Costing Template; Well defined criteria for sector programme prioritisation. 5 Some of the recommendations and next steps in this report are basically similar with those in the SLGP Report on Kano State Treasury Operations by E. Ajimokuola and Patrick Okonji, (April 2006). There is convergence of basic objectives of PEM, MTBF and Treasury Operations. SLGP Consultants Report Number

21 The quality and comprehensiveness of the annual call circular, the quality of costing and project and programme prioritisation in the spending units proposals are absolutely essential for sound budget process. For an effective budget monitoring and evaluation to take place, the government must first ensure that budget planning and preparation processes were carried out properly. An effective budget monitoring and evaluation would require the appropriate department to possess the capacity to collect, process and analyse budget performance data from all spending units as well as from the core treasury department. The Budget Monitoring & Evaluation unit should be strengthened and fully equipped to minimum information technology to collect analysis and publish budget performance on monthly basis. Improved fiscal planning and discipline is required to produce realistic annual budget estimates that are consistent with resource constraint. production of realistic fiscal targets, including expenditure framework and revenue forecasts; budget should be a basis for predicting funding of activities of MDAs, consequently there should be a robust bi-lateral discussions of their proposals within the sector spending ceiling The government might need to consider the advantages of introducing expenditure warrant system. Warrants issued for each specific expenditure approval as a means of effective budget and expenditure control process. Production of Work Plan by the line ministries stating their funding requirements on quarterly basis should be put in place to enhance expenditure planning, projection and cash management. The training of employees deployed in planning and budget functions should be carried out as a first step. Basic and tailor-made courses on an accelerated basis should be conducted in the next three to six months. But for more technical training, a training needs analysis should be carried out to identify all potential trainees (or target population), catalogue their skill deficiencies and knowledge gaps and design the appropriate training programmes and compute cost estimates of the programmes. The introduction of medium term budget framework in Kano State Government requires a series of basic steps which centres on effective planning process and capacity building in the central and line ministries. A sensitisation programme for political office holders, including permanent secretaries and directors which would explain the basic objectives and general dimensions of the medium term budget framework would need to be implemented. SLGP Consultants Report Number