Background
The budget preparation process in Mauritius has been subject to certain criticism as it is particularly ill-equipped to engage in good strategic planning. It does not allow Government to effectively evaluate its earlier measures, rethink its key policy objectives and prioritise expenditures in the best possible way. In the Public Expenditure Note of 1999, the World Bank noted that "… the modalities of budget preparation are anachronistic, and not conducive to strategic thinking and consensus building about results and objectives."
The lack of cohesion in expenditure programmes, formulated on an ad hoc basis and on insufficient analytical foundations, makes tradeoffs between different priorities difficult. It only encourages line Ministries, as a convenient short cut, to put forward a shopping list of new projects, not necessarily in line with their genuine needs. There is no hard budget constraint: ministries prepare their estimates without an indication of the available resources ultimately resulting in overestimation by line ministries and arbitrary cuts by the Ministry of Finance. Thus, the present budgetary procedures for the allocation of resources do not allow greater contestability and transparency in the political decision-making process.
The dual budgeting process practised in Mauritius, i.e. preparing separate recurrent and capital budgets, is further seen as a means of fragmenting the decision-making process of sectoral priorities. The recurrent budget is presented on a line item basis showing types of expenditures, while the capital budget is presented in terms of projects. This creates difficulties in managing recurrent expenditure that may lead to increased indebtedness.
Need for reform - a more structured framework
Mauritius needs a more structured framework, a medium term expenditure framework (MTEF), which defines priorities and articulates strategies for the medium term while respecting a notional aggregate expenditure envelope. Thorough understanding of cost implications of existing and proposed expenditure programmes is a key ingredient, as is the definition of expected outputs and outcomes against which to evaluate performance and to base future funding decisions. A uniform budget, within a consistent macroeconomic framework, will give a holistic and comprehensive view of fiscal policy objectives.
The Government of Mauritius is currently undertaking a comprehensive budgetary reform programme to strengthen all aspects of the fiscal management system, particularly budget preparation, monitoring and evaluation. The objective is to ensure aggregate fiscal discipline and promote allocative and technical efficiency. In the Country Assistance Strategy (2002-2004) recently approved by the World Bank, Government has committed itself to introduce the MTEF as one of the elements of its budgetary reforms programme. At the initial stage, around five ministries will be included in the MTEF exercise on a pilot basis. Other Ministries will be integrated into the exercise at a later stage when sufficient experience has been gained in formulating and implementing the MTEF and designing logical frameworks for the Ministries.
The MTEF will bring a fundamental change to the budget preparation process involving:
The MTEF
According to the World Bank’s Public Expenditure Management Handbook(1998a: 46), the MTEF provides the “linking framework” that allows expenditures to be “driven by policy priorities and disciplined by budget realities”.
The MTEF is intended to facilitate a number of important outcomes:
Stages in the MTEF process
“The MTEF consists of a top-down resource envelope, 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 macroeconomic model that indicates fiscal targets and estimates revenues and expenditures, including government financial obligations and high cost government-wide programmes. 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 intra-sectoral allocations.
Core process of an MTEF
Macroeconomic Framework | |
top-down | |
Medium term fiscal targets | |
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Aggregate expenditure limit | |
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Sectoral spending demands | |
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Sectoral spending plans | |
bottom-up | |
Sectoral spending policies | |
Each step involves the following:
Step One: projecting resource availability based on the projections of economic growth and revenues for the medium term, i.e., for a three-year period, which will help improve the macroeconomic balance;
Step Two: developing preliminary sectoral ceilings by allocating total resources between sectors on the basis of government priorities. This provides Ministries with an indication of the likely resource available before they start on their detailed costing and should provide some sense of reality.
Step Three: each Ministry estimating requirements (Sector Expenditure Framework) for the medium term based on government policies and priorities. Determining sectoral priorities involves a process of sector reviews through which sector ministries:
The aim is to indicate trade-offs within sectors by estimating real costs of providing services so that Government can make decisions about the level of services it can afford to provide.
Step Four: revisiting sectoral ceilings: after the sector review exercise the medium term sectoral ceilings are reviewed and reallocations between sectors considered on the basis of additional information gathered in the sector reviews. If these exercises reveal that certain objectives cannot be achieved within the sectoral ceilings, reallocations between sectors may be required. This step is not always necessary and it is possible to undertake these kinds of analysis during the finalisation of the Budget Estimates in Step Six.
Step Five: finalising three year estimates: sector ministries make final adjustment to the three year estimates at an aggregate level, i.e. at the Programme and Sub-programme level, with first year’s estimate shown at a detailed level.
Step Six: review and finalisation of the estimates: once Ministries have completed their Sector Expenditure Frameworks, these are reviewed by the Ministry of Finance, to assess whether the estimates are consistent with the policies, plan and priorities, and whether the estimates are within the ceilings. The estimates are then presented to Cabinet and Parliament for discussion and approval. The first year’s estimates are approved while the second and third year’s estimates are indicative.
Progress in Implementation of MTEF in Mauritius
Major ground works have been completed for the initial stages for implementing the MTEF. These are described below.
STEP ONE: Development of a Macroeconomic Framework.
A medium term macroeconomic framework for the next four years has been developed by the Macroeconomic Coordination Committee, which comprises the Ministry of Finance, the Ministry of Economic Development, FS & CA and the Central Statistics Office. The macroeconomic framework was prepared in collaboration with the International Monetary Fund and the World Bank.
STEP TWO: Setting preliminary ceilings
The Ministry of Finance already sets expenditure ceilings for individual Ministries during the budget preparation exercise. However, these ceilings are not based on policy priorities and are often arbitrarily set.
A fair degree of progress has been made in these two preliminary steps. However, the Macroeconomic Coordination Committee will need to update the macroeconomic framework on a regular basis over the process of formulating and implementing the MTEF. Moreover, ceilings for each Ministry will have to be set based on the macroeconomic framework and reflect better national priorities. Much of the work will have to be done in the third step, which is the review of Ministry/sector priorities. Although some work has been done in this area, the major task will be the costing of activities and the integration of the recurrent and development budgets.
In order to spearhead the whole MTEF exercise, it is proposed to set up an MTEF Council of Ministers, chaired by the Minister of Finance and comprising the Minister of Economic Development, FS & CA and Ministers from the participating Ministries. An MTEF Committee, chaired by the Financial Secretary and including the Director of Economic Development, FS & CA, Permanent Secretaries of participating Ministries and representatives of competent institutions, will be established. An MTEF Unit will be set up as the executive arm of the Committee. The Unit could be based at the Budget Bureau of the Ministry of Finance or a separate entity could be set up. The most favoured option is to set up a separate MTEF Unit so as to limit the demand on already hard-pressed officials at the Ministry of Finance. The MTEF Unit will be chaired by the Director of Budget and comprise Finance Officers from relevant Ministries and representatives from related institutions. Individual MTEF Cells will be established in Ministries to coordinate the formulation and implementation works with the MTEF Unit. [Details of the organisational structure of the Committee, Unit and Cells, and an action plan for the MTEF exercise are given below.]
STEP THREE: Review of sector/ ministry or department priorities.
Defining Objectives, Outputs and Activities
Most of the Ministries, which will be included in the pilot MTEF exercise, have already prepared their Policy documents. For instance, the Ministry of Education has prepared its education reform programme and is currently working with the World Bank to prepare an Education Sector Strategy Note. The Ministry of Health has worked out a Health Sector Master Plan. Significant progress has been made to devise a comprehensive reform programme for the pension system in Mauritius. With appropriate fine-tuning, these Policy documents will be used to develop logical frameworks for each Ministry, thus indicating their goals, objectives, expected outputs, and the activities necessary to achieve the outputs and objectives.
Background work is already available in the Country Assistance Strategy (CAS) Matrix prepared, in consultation with line Ministries, for the formulation of the CAS for Mauritius by the World Bank. The CAS Matrix defines the objectives of each Ministry, the policy envisaged to attain these objectives and also measurable outcomes and indicators against which performance will be evaluated. Projects outlined in the CAS Matrix were subject to a prioritisation process with the aim to retain only the crucial activities/programmes and sub-programmes, and reduce the funds for, or discard low priority programmes/sub-programmes/activities.
Monitoring and Evaluation
It is important, at this stage, to establish a comprehensive monitoring and evaluation (M&E) system to track key performance indicators, see what changes have taken place and evaluate whether these changes are attaining the desired outcomes. M&E will pay more attention to whether the ministry is achieving its objectives than whether funds have been spent. The system should also include reporting on financial and physical implementation of expenditure projects as well as performance of Ministries. A computerised accounting system could be implemented in every Ministry to facilitate prompt reporting. These reports could provide the base to establish early warning systems for any under- or over-expenditure or if the desired outcomes are not attained.
It is proposed to set up a Monitoring and Evaluation Section within the MTEF Unit in order to establish greater coordination. Different institutions, such as the Mauritius Audit Bureau, will be involved in designing an effective monitoring and evaluation system, carrying out monitoring and evaluation activities and using the results to formulate appropriate measures to ensure that the desired outcomes are attained. The PSIP Unit at the Ministry of Economic Development, FS & CA could staff the Monitoring and Evaluation Section.
Costing of Activities
One of the main difficulties encountered in the compilation of the CAS Matrix was the costing of activities/projects. Activity costing is very data intensive. It involves large volumes of data that needs to be aggregated and analysed so as to produce a prioritised and integrated Sectoral Expenditure Framework.
The different ministries have till now followed their own process and methodology and have therefore produced different outputs in terms of the scope, classification and costing of programmes and activities. However, while recognising the concerns about capacity in sector ministries and the need to start slowly with the introduction of activity based budgets, it would make sense to develop a standard approach for all ministries to follow in the preparation of their Budget.
It is thus proposed to have recourse to external expertise to undertake the activity costing exercise, implement a comprehensive capacity building programme for the MTEF Unit and Ministerial Cells and develop a computerised budget preparation programme for Ministries to prepare their costing estimates.
Improvements to the Budget Classification and Integration
In addition to the costing exercise, the Consultant may advise on the integration of the Recurrent and Development budgets. Ministries will be encouraged to plan the recurrent and development budget activities together.
STEP FOUR: Determination of sectoral allocations
The Sectoral Expenditure Frameworks developed from the sector reviews and based on priority activities costing by ministries will be used to revise the annual budget ceilings in the preparation of the budget. This exercise will be undertaken at the level of the MTEF Unit and Committee. Approval from Cabinet will be sought.
STEP FIVE: Prioritisation and Finalisation of Sector Budgets
Once the annual budget ceilings have been approved by Cabinet, line ministries will prepare their annual estimates for the next three years. Since the budget is based on activities which have been costed, the finalisation of the budget should involve decisions on which activities will have to be dropped or scaled down in order to fit into the allocation or ceiling.
STEP SIX: Finalisation of the Budget
The revised Sector Expenditure Frameworks are reviewed by the Ministry of Finance and integrated in the national expenditure framework. This framework, which is approved by Cabinet, will form part of the Budget and presented to Parliament for discussion and approval.
Extending the MTEF to all sectors
The MTEF exercise will be extended to cover all Ministries. The work undertaken under the Sector Reviews of identifying and agreeing on Ministries’ objectives and activities will be used as the starting point in other ministries that will be called to follow the MTEF process in preparation of their budgets. However, the timing will depend on the experience gained and the skills developed in the pilot exercise. It will also depend on the degree of success achieve in the pilot exercise.
The Public Sector Investment Programme (PSIP) adds a medium-term perspective to the budget. The PSIP, not being presently part of the budgetary process and management, tends to provide partial investment solutions to national policy making. But a greater integration of the PSIP into the budget and a better co-ordination of its programmes in line with the main policy guidelines will reinforce both policy making and implementation and provide a more structured approach to strategic decision making in the use of public resources.
