Socialist Republic of Vietnam MINISTRY OF FINANCE VIE/96/028: Public Expenditure Review Phase GUIDELINES FOR CONDUCTING A PROVINCIAL PUBLIC EPENDITURE REVIEW (PPER) OF THE AGRICULTURE SECTOR DECEMBER 2001 Agriculture PPER Guidelines 1
1. OBJECTIVES The primary objectives of Agriculture PPER are to (i) Help the provincial government manage decentralisation and improve planning and budgeting for agriculture. (ii) Improve decision-making capacity so that resources are used more efficiently, effectively and equitably with a special focus on the poor and on women. (iii) Build relationships with stakeholders by involving them in the analysis and implementation of recommendations. (iv) Provide information to assist international donors in determining their strategies for assisting the development of the agricultural sector in the province. (v) Increase capacity and improve information to continue and sustain Agriculture PPER analysis in the future. 2. CONTENT To address the above objectives the Agriculture PPER should involve all stakeholders including the Department of Agriculture and Rural Development (DARD), Department of Finance and Pricing (DFP), Department of Planning and Investment (DPI) and private and public agriculture service providers and users. Agriculture being an important sector for economic development in this country, there are many issues that need to be analysed. These include: (i) building agricultural and rural infrastructure; (ii) strengthening agriculture research and development with appropriate roles for the private and public sectors; (iii) (iv) (v) developing domestic and export markets; analysis of service provision/ subsidies in various sub-sectors such as food grains, seeds, insecticides, forestry, aqua-culture, veterinary services, breeding cows/ poultry, traditional industries/ crafts, land markets, etc.; and others. Since most of these are broad-based issues, it would be useful to focus on two or three issues that are most urgent and useful for the province. It is better to analyse a few important issues intensively and in great detail rather than providing a broad and extensive overview of all issues. The issues selected should be such that the analysis can be backed by sufficient data and the recommendations are implementable. The analysis should try to answer the following basic PER questions: 1. How much GDP does agriculture contribute in this province in relation to other provinces? 2. What is the per capita allocation of agriculture budget in comparison with other provinces? 3. What is the provincial budget envelope for agriculture? 4. How is the budget envelope allocated? How are budget norms for agriculture determined? 5. What are the trends in agricultural expenditure in the province? 6. What are the shares of wages and O & M in total agriculture expenditure? 7. Which agricultural policies do the central, provincial and district governments set? Do they complement one another? Do these policies promote or hinder growth? Agriculture PPER Guidelines 2
8. How do allocation and spending norms affect the resources of province, district and commune level government bodies? 9. What share of provincial agricultural resources comes from the central, district and commune governments? 10. What share of these resources comes from fees, user charges, personal contributions and ODA? 11. How much credit do state and commercial banks provide for the agriculture sector? How much is the recovery of principal and interest on loans given to agriculture by state and commercial banks? 12. What kinds of market intervention exist? What are their budgetary and off-budget costs? 13. What are the different types and magnitudes of agricultural subsidies given in the province? 14. Who gets the subsidies? The rich or the poor? 15. Who pays for the services (irrigation, power etc.)? And how much? 16. In which areas is the private sector providing services? 17. What are the trade, transport and marketing costs of private suppliers vis-à-vis government agencies? 3. METHODOLOGY The agriculture PPER requires an analysis based on available data and interviews of private and public service providers as well as users. This is used to identify directions for reform such as possibilities for reprioritisation of expenditure, areas for privatisation, designing of appropriate cost recovery/ benefit sharing mechanisms like user charges, identification of data gaps etc. The reprioritisation of public spending is based on efficiency and effectiveness of current spending, equity (who gets how much) etc. A broad outline for the analysis would be as follows. 3.1. Overview This section should give an overview of the current agricultural status based on trend analysis of expenditure and incomes of the provincial government vis-à-vis central and other provincial governments. This analysis should also cover sub-sectoral expenditure. For example, the breakup between capital and recurrent expenditures on infrastructure (roads, irrigation, power), subsidies (inputs/ outputs, exports/ imports), agricultural R&D etc. This should be followed by a discussion of the objectives, problems faced by agriculture in the province and the strategies of the provincial government to tackle these problems. These objectives and strategies should be compared and contrasted with those of the central government. 3.2. Policy Formulation This section should describe the process of planning and budgeting and determination of norms for expenditure by central and provincial governments. The MOF provides guidelines for preparing the budget and indicative targets for recurrent expenditure. It would be useful to discuss if the process of budget preparation at the province level is in line with those targets. This should cover the planning and budgeting processes for both capital and recurrent expenditures. The discussion should provide details on the determination of needs of the province and the resources available with districts for capital Agriculture PPER Guidelines 3
investment. There should be an elaboration of how the total available resources to the province are estimated, which Departments and Divisions are involved and consulted and so on. Finally the section should provide information on if and how the allocated expenditures are monitored and provincial accounts audited. 3.3. Reallocating Resources A comparison of expenditure by different administrative levels of government (e.g., central and provincial) would show their existing priorities of spending. Reprioritization requires changing the composition of expenditure to make efficient and more effective use of resources, create conditions and incentives to facilitate reallocation from lower to higher priority areas and from less to more effective programs. a. Expenditure norms and strategic priority setting The norms specified for allocation of funds to districts should be clearly designed and described. They should take into account considerations that are to be used, such as equity and efficiency, in reallocating budgetary resources according to agricultural priorities. For instance, whether the funds are to be inversely related to economic conditions, if the poorest, remote and inaccessible areas are to receive more funds etc. A comparison of the specified norms with the average agricultural expenditures per capita between the poor and rich districts would show the areas that still need higher priority. It is desirable that the norms for provincial spending be set such as to allocate expenditure in the province s focus areas such as minor irrigation, extension services, livestock etc. b. Capital versus recurrent expenditures A given amount of resources available for the agricultural sector implies that there is a trade-off between capital and recurrent expenditures, which should be appropriately balanced. For example, in the irrigation sector it is not sufficient to build canals for distributing water, it is also required that the canals be repaired and maintained as and when needed. New investment projects with under-funding of recurrent costs (e.g., nonwage operations & maintenance) leads to inefficient service provision and premature death of public assets. On the other hand, a perpetually rising wage bill crowds out nonwage O&M, investment spending and reduces effectiveness of public programs. c. Raising resources and off-budget expenditures The reallocation mechanism should take into account total resources deployed to a subsector of agriculture including budget and off-budget expenditure. Ability to raise local resources through user charges and fees etc. (cost recovery) should figure in the provincial budget allocations to the districts. There should also be an explanation of how the off-budget borrowings were raised (e.g., through ODA, not reported on the budget), what is their repayment schedule, maturity period, interest rate and how it will be paid for (say, from the budget). 3.4. Effectiveness of Public Spending The main objective of PPER is to analyse and evaluate the efficiency and equity aspects of public spending with a special focus on gender equity. This analysis should be done thoroughly both extensively and intensively for the selected issues. Based on the results, conclusions can be Agriculture PPER Guidelines 4
drawn for reallocation of resources to achieve the specified objectives within these sub-groups of issues. These can be analysed as explained in the next 2 subsections. There are certain areas that are suitable for public intervention and others for private. For example, for better equity public intervention is more appropriate in commodities with limited markets. In cases of externalities such as contamination of water through drainage of residue of pesticides used by farmers, the government could increase efficiency by imposing a tax on pesticides to regulate their use to optimal use and not overuse. Government also has a role to play in cases where output is of public goods in nature. Public goods have the characteristic of simultaneous consumption, e.g., common property resources like surface water irrigation. Monopolies in these markets would result in under-provision & deadweight loss. A successful case is that of Nepal where a World Bank financed forestry project allowed user communities to take over forest management with long term rights to forest benefits. Similarly, in another project in Kenya, revenue sharing with local communities in a wildlife extension project allowed constructive cooperation. There are several measures to determine the efficiency of public spending in agriculture depending on the issues being analysed. The indicators described below can provide guidance for future strategies/ actions to be taken to make policy more relevant. a. Increasing efficiency and decreasing poverty Market intervention mechanisms Governments in different countries directly intervene in the market for public provision of various agriculture services such as agricultural extension, veterinary services, plant protection, credit distribution, marketing of seeds, agriculture forestry, etc. In the provision of such services, a bias towards larger farmers is seen to occur in general. Often the private sector can provide these services at lower costs. When marketing of inputs and outputs is handled by agricultural parastatal agencies, they often act without a hard budget constraint, have large staff size and receive off-budget subsidies and other credits from government owned banks and other sources which normally results in unpaid debts. If the goods marketed by them are private goods, the government should wind up its role of marketing. This can be justified if the share of wages and salaries in their total costs exceeds that of the private sector operators. And similarly if the trade, transport and marketing margins of these parastatals exceeds those of private agents. Agricultural Price Incentives Outputs: For each commodity that has a price support, price incentives would encourage higher production. A much higher trend in production of goods that have price support than the general trend in agricultural output growth could indicate distorted production structure. If production of such goods is concentrated in certain districts/communes, farmers in those regions would receive larger benefits from price support than those in other regions. This can be verified by comparing the shares of production in different districts/ communes. It is likely that the supply of goods with price support far exceeds the demand from domestic and export markets and enjoys a Agriculture PPER Guidelines 5
price higher than the international market price due to domestic subsidy. The right strategy in such cases would be to dismantle the price support and allow the market to function. The resources saved from this policy action could be used to provide incentives for some other crops that hold a promise of higher yields, face a rising demand or are high value crops specially targeted for exports. To promote better income distribution the farmers could also be encouraged to take up non-crop highvalue activities such as animal husbandry, dairy, fisheries, mushroom cultivation, agro- and food-processing, etc. Inputs: Many developing countries subsidise agriculture inputs such as fertilisers, irrigation and power. As in the case of outputs, input subsidies also distort their consumption and result in overuse, not optimal use. The incentives can be corrected by lowering input subsidies and charging appropriate prices/ fees to recover costs of service provision. Alternatively, the management and asset maintenance can be given to user associations such as farmers organisations for irrigation management. Direct stakeholder involvement normally results in improved use-efficiency, e.g., through sprinkler/ drip irrigation, cost recovery to ensure O&M funding, improved service delivery and better access of the poor to assets. Agricultural R&D It has been shown from international experience that returns to investment in agricultural R&D are very high. If the provincial government is involved in this kind of activities, it should be noted that there are certain areas that are more suitable for public investment and others for private. For example, public investment is justified on equity grounds for commodities with limited markets, such as in developing improved genetic material that is suitable for agro-climatic conditions in marginal lands, dry lands, hill regions and remote areas. Or when externalities are high and output is of public good in nature in, e.g., basic research, agricultural R&D for marginal farmers and seed manufacturing. There is also an increasing recognition of poverty targeting of public agricultural R&D. That is, programs can be especially designed for disadvantaged areas/ commodities produced/ consumed by the poor or commodities grown in areas with high concentration of poor farmers. There are other areas where private sector would have an incentive to invest such as technology for new commercial inputs or machines; research for diversification into export or other high-value crops, post-harvest technology, food processing. The growing private sector focuses worldwide, among others, on herbicides, insecticides, veterinary medicine, food storage, transport, processing technologies, chemical, mechanical and food processing, biotechnology. Examining the areas where the public sector is currently investing and verifying whether they are in the domain of areas appropriate for it can help to carry out an appropriate reallocation of public resources for agricultural R&D in the province. The government should withdraw from inappropriate areas of agriculture R&D, leaving then for the private sector, and explore those that are more relevant to it. The cost effectiveness of agricultural research systems can be increased with the use of "competitive grants" to public sector and through partnerships with the private sector and NGOs. Agriculture PPER Guidelines 6
Infrastructure It has been shown that public and private investments in agriculture are complementary to each other. That is, higher public investment attracts more private investment. Then there is a merit in reducing subsidies and raising public investment in agriculture. However, again there are some areas that are more suitable for public investment and others for private investment. For example, in irrigation, which is a major item of investment at provincial level, the government could focus on major/ medium irrigation leaving minor irrigation for the private sector. Of course, this needs to be demand driven, i.e., the project should be sustainable through adequate user charges to meet the O&M costs. The other relevant areas for public investment to promote efficiency and equity are rural roads, cold storage, establishment of agricultural extension stations in remote, inaccessible, hill and coastal areas and watershed programmes in poverty concentrated rain-fed areas where private sector will not approach. b. Gender Equity Women often have unequal access to land and inputs such as improved seeds/ fertilisers and information. They also have limited mobility and interaction with predominantly male credit officers or moneylenders due to social and cultural barriers, lower educational levels and lack of familiarity with loan procedures. The gender bias against them can be reduced, e.g., by creating equal access to resources and human capital, giving training to women to work as community development/ home economics officers and agricultural extension agents. Making extension agents meet women farmers in groups, developing women specific technology and promoting primary education could also facilitate their activities. Specific agricultural budget for women can create/ expand employment opportunities by, e.g., initiating programs aimed specifically at women. These include programs to promote micro-enterprises among poor women/ those women who raise families on their own. Alternatively, the government could create self-employment and business opportunities in non-farm sector. 4. DATA REQUIREMENTS A major part of the data required for PPER can be obtained from the central and provincial governments (see the Table below). To carry out the analysis of effectiveness of public spending, additional data would be required based on the issues chosen for the analysis. The latter would include data on regional price trends of different agricultural commodities, revenue and expenditure details of public marketing agencies/ parastatals. SUMMARY DATA FOR 1997-2001 : BAC NINH GENERAL INFORMATION National Province Districts Gross Domestic Product (GDP, VND per year) Consumer Price Index (CPI) Population (in million) Agriculture PPER Guidelines 7
Number of Communes/Districts Number of farmers per commune Area cultivated under different crops (ha) Yield of different crops (kg/ ha) Production of different agricultural commodities Prices of different agricultural commodities Export prices of major agricultural commodities Investment in major/medium irrigation: Public Investment in major/medium irrigation : Private Investment in minor irrigation : Public Investment in minor irrigation : Private Number of Extension Service Stations : Public Number of Extension Service Stations : Private FINANCIAL INFORMATION (VND PER YEAR) National Province Districts Total Provincial Budget Total Provincial Budget for Agriculture Total Budget for Cultivation Irrigation, flood control, drainage related services Breeding and animal husbandry Veterinary medicines Forestry and related services Extension services Agricultural R&D Others Capital investment in agriculture Recurrent expenditure in agriculture: Salary/ wages O & M Fees/ charges collected in agricultural sector ODA Subsidy - implicit and off-budget Note: The mark refers to data required for the concerned entry. This table provides a framework for data arrangement. For the private sector operators, at least the share of trade, transport and marketing margins and wages and salaries in their cost would be needed. This can be obtained from previous studies and interviews of private agents. Agriculture PPER Guidelines 8
5. RECOMMENDATIONS The major objectives of a PPER exercise are to increase the efficiency and effectiveness of spending by reallocating expenditures from low to high priority areas, balancing recurrent and capital spending and reorienting the role of the state. In the province of Bac Ninh, another specified objective is to reduce gender bias. The PPER analysis is meant to examine in detail only the financial and budgeting processes and expenditure issues. It is not meant to be a sector review or an investment plan. While political compulsions make budgetary allocation process more a political than an economic decision, an analysis based on equity and efficiency aspects of expenditure decision making within these constraints is the most important outcome of the PPER exercise. The analysis should find and recommend ways to reallocate existing resources for better efficiency and higher equity and ways to raise local resources for cost recovery through user charges, fees etc. There should be separate recommendations for the actions and strategies to be followed in the short, medium and long terms. Public spending should be consistent with longrun financing ability and goals that can be achieved with better planning of budget policy and transparency in budget preparation. 6. CONCLUSIONS As the provincial policy makers may read only the concluding section, it is necessary that the conclusions are clear and focus on the most significant selected issues based on the background, data, analysis, interviews etc. The suggested strategies/ actions/ options should be accompanied by estimates of cost savings and equity generated. The recommended expenditure reallocations should be substantiated with arguments for higher equity, efficiency and effectiveness of spending that they will generate. Agriculture PPER Guidelines 9