A. Approaches to Policymaking

Policy formulation represents by far the most important segment of expenditure management in government. It sets the tone for process control, and in general, compensates for the shortcomings of the process controls. The controls in the implementation or the process mostly relate to ensuring compliance of rules and regulations that aim at maintaining financial discipline. In some situations, the controls may seek procurement of economies in expenditure. These economies, however, are not comparable to the savings that might be inherent in the very choice of policies and associated programs. What is lost in the policy can hardly be compensated by the effective application of process controls.

Policymaking in many developing countries is best viewed as an area of shared decision making in which international financial institutions and donors that provide bilateral aid tend to have a role that is proportionate to their contribution. Where such foreign aid is sizeable, there the area of shared decision making could be correspondingly large. Over the years, this shared decision making has contributed to a functional dyarchy in expenditure management in that there are areas that are under the direct control of the government and areas that are shared. The shared areas tend to have their own priorities and more frequently, supporting systems of expenditure management. Apart from the fragmentation in the exercise of controls, this shared decision making would appear to stand in the way of having a total policy perspective to expenditure management. Further, frequent stop and go approaches in aid disbursements have added an additional degree of uncertainty to policymaking.

Policymaking is also adversely affected by the supply driven approaches of plan expenditures. Plan projects and programs have their own norms and yardsticks that are not even remotely related to the availability of resources. Once included in the development plan, the programs acquire a new legitimacy that keeps contributing to the inexorable growth of expenditures. Moreover, the estimation of costs of most of the projects leaves a good deal to be desired as is evident from the fact that the actual outlay is often double, if not more, the initial estimate. As more projects gain entry into the plan through underestimated costs, allocation of resources becomes thinly spread on all the included projects. While this may keep the lobbies of vested interests at bay provisionally, it has the effect of staggering the implementation schedules and deferral of expected benefits.

The portfolio of expenditures has also been changing during recent years. A greater part of the outlays is now devoted to interest payments and transfer payments to individuals, enterprises owned by the government and in the private sector, as well as to other levels of government. Most of these transfers are prescribed in law, and some are supply driven. In either event, there is little annual flexibility without changing the law, or the design of the program of transfers. But the requisite policy analysis of these aspects, in particular, the implications of the transfer programs for expenditure management have not received the attention due.

Many central agencies do not have information on the profiles of expenditures and therefore tend to have an incomplete understanding of the factors contributing to expenditure growth. Further, they also lack information on the cost aspects of the programs. Here again, the redesign of the delivery of services is rendered difficult owing to the absence of focus.

Most important, however, are the identification, measurement, and dissemination of data on the needs and affordability. The spending agencies are not given adequate guidance about the resource availability. Consequently, they do not focus on the revision of priorities necessary in the context of reduced availability of resources. In the tight time squeeze of the budget calendar, some cuts are imposed and a budget is prepared some how or other. Inasmuch as the need is really to address a continuing problem, the short-termist approach of arriving at acceptable budget totals tends to be less of a solution and more of a problem. Inevitably then, the expenditure management process becomes a scramble for resources that in turn perpetuates the spending culture.

B. Myth of Control

The general impression is that the central agencies have monolithic powers of control to meet every situation and contingency. In reality, however, these powers are widely shared, and, in many cases, circumvented. Personnel determination is made by the civil service departments on the basis of norms (and not on resource availability). Supply of inputs may be managed by central procurement organizations, subsidies by quasi-independent commissions, development outlays by the donors and some areas such as defense may have overriding considerations as well as procedures different from others. In the absence of an information system that makes the approaches of these organizations clear to the other participants, each party tends to work in isolation of others. Such an approach is frequently considered to be an appropriate part of the turf protection of each agency. When the totality of these approaches implies a higher level of expenditures than could be afforded, then arbitrary cuts are imposed on the individual allocations to agencies.

These reductions are perceived by spending agencies as temporary and as such, no adjustments in the programs are made. On the other hand, to overcome the centrally imposed cutbacks, agencies resort to the employment of consultants to overcome staff shortages, lease equipment rather than purchasing, underfund operations in expectation of supplemental appropriations, exploit inflation estimates, protect previous allocations in the name of “truly needy” and to avoid disastrous consequences, pile up unpaid bills, or lobby for extrabudgetary funds that could be financed by direct donor transfers. The cumulative effect of all these factors is that in the end, the control structure appears, like the emperor’s nonexistent clothes, ineffective.

C. Institutionalized Distrust

The central and spending agencies have a symbiotic relationship and intertwined destinies. Inevitably, such relationships are dominated, depending on the situation, by love or hate or adversarial politics. Traditionally, finance ministries had dominated all the stages of expenditure management from budget formulation to payment, to the compilation and consolidation of accounts. It reflected, at one stage, a kind of internal financial colonialism. This colonialism remained distant and frequently adversarial and the colonizing of the mind of the spending agencies has never taken place. These approaches have gradually been eroded over the years, by at least four factors. First, the growth of development planning and related formulation of annual and medium term plans contributed to the establishment of new power centers in the government. These new power centers gained at the expense of the traditional functions of the finance ministries. Second, there was a perceived failure of central controls. Most controls had a one size fits all approach about them, and in the absence of an expenditure management philosophy, the exercise of controls came to be trivialized and vulgarized. The emphasis on economy became an ideology in itself. But, there were frequently no instruments aimed at achieving economy other than a routine incantation of the slogan. Slogans lead to weariness when they are not supported by finely honed instruments. Further, the control followed an assumed paradigm to the effect that there is no financial consciousness in the spending agencies and that the finance ministry alone was the repository of financial consciousness in the government. The central agencies, pursuing this belief, built up several layers of control and in the context of fiscal stress sought even more of a concentration of power. Inevitably, this contributed to regular battles for relaxation of the components of the centralized approach and when that failed, to the pursuit of circumvention. Centralization too has its limits and the efforts at greater centralization in the name of macroeconomic stability did not match with the requirements of governments that have grown too big with too diverse a portfolio of tasks and expenditures. Many finance ministries did not succeed in managing the fiscal stress for so long as their efforts concentrated on smothering small fires rather than addressing the major themes. This too eroded the intellectual capital of the central agencies. Third, the emergence of new management approaches implied a new message that stressed the importance of decentralization and greater congruence between tasks, responsibilities and financial powers. This contributed to the view that the days of centralized financial controls have receded into the past. Fourth, the approaches of the donors and their frequent insistence on the establishment of extrabudgetary funds that are more in conformity with the donor’s ethnocentric designs of development have also eroded the role of the finance ministries.

But the emergence of new ministries of finance that fit in with the changing landscape has yet to become a reality. Meanwhile, the previous regimes of control, with all their systemic and operational failures continue. As a result, distrust continues to be the dominant feature of expenditure management. The absence of trust also means that an important lubricating element of the administrative system is missing. As a consequence, transactions costs have grown, decision making processes became cumbersome, and more important, finance ministries could not perform the role of a change agent. Indeed, their inability to be successful change agents came from within their organizations rather than from outside.

D. Contract Management

The growth in developmental outlays has also brought with it an enormous growth in the contracts awarded each year for goods and services. The items procured include food grains, POL products, and defense items ranging from the inexpensive to the most expensive equipment. Notwithstanding the growth in the contracts, experience shows that financial controls in this area are extremely vulnerable to manipulation and that on balance, there is much to be improved upon. The problems encountered in this area include the following:

• Procedures for procurement are often centralized. While detailed procedures are specified about the tendering process, experience shows that they are too elaborate, and take enormous time. This has contributed to a separation of responsibilities in that the user’s interests may diverge from those reflected in centralized procurement.

• The information on costs available to the governments is weak both in terms of coverage and timeliness. Further, in regard to certain proprietary items, more expenditure may be incurred.

• Design of public works is frequently changed after the award of the contract. This could be due to real needs, technological change, political interference or poor choices in the initial stages.

• Vast amounts are committed in the budget but these remain unspent in the initial years due to substantial lags in the acquisition of sites.

• Project costs tend to be different from the original estimates partly due to price factors and partly because of design changes.

• Compensation for price fluctuations is usually adjusted in favor of the contractor, particularly in those contracts that are based on a cost-plus basis. Where government contracts are based on cost-plus or where purchases are based on a net rate of return to the producer, there is little incentive for the contractor to be economical.

• Contractors are usually provided with cash advances by governments that are then recoverable, after a grace period, from the payments due to them. As however budget allocations tend to be smaller than required, the life cycle of the project gets extended and the initial advances get immobilized.

• After a stage, the implementation rate of the project tends to be contractor driven, and frequently may be higher than implied in the budgetary allocations for the year. This contributes to the accumulation of unpaid bills and the link between annual allocations and the amount of work done becomes tenuous. The allocations are utilized to pay the spillover of bills from the previous year, while leaving a legacy of unpaid bills to be settled in the following year.

• There are substantial “user costs” incurred when schedule or quality cuts are made in order to be within the annual budgetary allocations. These user costs are never given explicit consideration, let alone an estimation of the magnitudes involved.

• Budget severity is met through the stretching of project schedules, which, in the final analysis tends to be far more expensive than being economical.

The above built-in features suggest that there is little congruence between the economic and organizational agenda of a government in expenditure management. On the other hand, the systems reveal an unspecified and therefore implicit agenda that may be contrary to the economic agenda. Put another way, the pursuit of economic agenda requires changes in the supporting administrative structures.

A. Changing the Management Cultures

Administrative cultures that have grown over the years are not susceptible to quick and programmed changes. Rather, they will evolve themselves when changes are made in the systems and the procedural and operational changes made as a part of that overhaul become ingrained habits and the individual responses reflect the new requirements. The management culture that is sought to be promoted is rooted in trust, and specification of management responsibility. This implies that the principle of expenditure management hereafter would be based on trust where individuals or organizations would be assigned both tasks and responsibilities. They would be responsible for outputs while scrupulously avoiding incurring additional liabilities.

The generation of trust involves a shift in emphasis from enforcement of compliance to improved policymaking, from management of appropriations to management of resources, from consolidation of accounts to evaluation of results and from an administrative neglect to a growing partnership in management. Trust is a two way street in that it has to be earned even as it is being delegated. There is an inherent need for an improved dialogue and communication between the central and information agencies. These, in turn, emphasize the need for investment in information technology. Experience elsewhere has conclusively shown that when there is simultaneous access to information through on-line systems, exercise of even the traditional controls becomes routine than a hierarchical process. Development of trust requires changes in the way policy formulation and budgetary processes are organized.

B. Policy Formulation

Policy formulation is a vast area.³ The concerns here are limited to expenditure management and therefore focus on four elements: corporate plans and proactive expenditure strategy; cost-output nexus; methodology for looking into the future financial implications of current policies; and, the areas of shared decision making.

Whether by intent or design, whether as a part of the development plan or through other means, it is now generally accepted that all spending agencies have to prepare corporate plans so that the goals to be pursued and the services to be provided could be determined. Although the practice of this goal indicates that more needs to be done, it is quite probable, indeed desirable, that agencies would be engaged hereafter in the preparation of forward looking corporate plans. The preparation of these plans imply a proactive expenditure management approach so that the tools associated with expenditure management could be fully utilized toward the implementation of the corporate plans. They also imply a total corporate vision for the government as a whole, which then has to be translated into a proactive expenditure management strategy for the government and this task is expected to be performed by the central agencies. It enables them to anticipate situations and to be prepared for them rather than reacting to events after they have emerged. Such a proactive expenditure management strategy would involve the formulation of a diversified control framework reflecting the portfolio of expenditures, of contingent plans for restructuring government goals when mandated by unexpected revenue shortages, revised priorities through abandonment or scaling down of selected activities, and identification of major leakage centers where expenditure controls have tended to be less than effective. These proactive expenditure management strategies could even be announced in advance of the fiscal year so that the participants in the process have a firm idea of what to expect and what to comply. The only way of restoring credibility to public expenditure management is through the formulation and implementation of credible approaches.

As noted previously, controls that do not address the basic issue of costs in government would not have much impact on moderating the growth rate of expenditures. In general however, cost data are notably deficient in governments. The pursuit of cost reduction requires as a step precedent, the formulation of properly estimated costs for programs and construction projects. As programs are contracted out, or as a major part of social sector outlays are incurred through nongovernmental organizations or other levels of government, it becomes progressively more necessary to formulate precise cost estimates. The continued practice of institutional deceit needs to be curbed from any point of view, and generally accepted accounting standards need to be applied for formulation of costs. More specifically, costs need to be formulated for medical, educational and other programs that tend to grow faster than other sectors. Insofar as construction is concerned, traditionally a distinction is made between pre-design stage and the construction stage. It is appropriate that the predesign stage should explore in detail the numerous alternatives and thus minimize the frequent changes during the construction stage. As a corollary, contracts have to be based on completed cost or full price basis rather than cost-plus basis. These approaches add more empiricism and provide a meaningful application of controls based on measurement.

The policy analysis and associated controls utilized during the budget formulation stage hitherto consisted of increase/decrease analysis, verification of legislative mandate for the program and other legal aspects. This approach would, however, be clearly inadequate in addressing the broader issue of what the government should do, what it should fund and what it should leave to the competitive private sector. Also important is the feasibility of an explicit strategy aimed at moderating the expenditure growth. This in turn would require the consideration of personnel buyouts, administrative reorganization, greenfield privatization, improved sectoral controls, cost recovery through fees, savings through closure of programs and projects. This exercise has to become an integral part of the policy analysis undertaken during the annual budget formulation stage.

Government programs have become so complex that any major adjustment in their design and delivery could take more than one year. Thus, governments are expected to estimate the continuing financial requirements of existing policies so that the draft on the future resources could be ascertained. Toward this end, medium term expenditure planning has come to be introduced in some governments. This exercise became later a full rolling expenditure planning under which the continuing financial implications of existing policies are estimated each year for the next two or three years. It is expected that this exercise would illustrate the components of various programs, the demand and supply factors at work, and thus become a useful fiscal guide both for administrators and the public. As an extension of this approach, a continuation level budget has also come to be prepared. This is a budget in which the base for the coming fiscal year is not just the amount spent in the current year but where the base is adjusted to cover the effects of inflation, allowances for caseload growth, cost of living adjustments, and any other amounts required to continue the current level of services.

The above approaches remain, in most cases, to be commonly practiced in countries. In some countries, the exercise is restricted to investment outlays or plan expenditures. Experience also shows that where these systemic improvements were implemented, spending agencies tend to view the future estimates as minimum levels of funding, while the central agencies tend to view them as closer to global ceilings. Continuation budget costs tended to absorb the revenue growth and where that growth was less than the expenditure growth, it was viewed as a case of revenue shortfall. For this reason, it becomes essential to formulate the methodology of expenditure forecasting with care and specify the nature of the base and the nature of any adjustments. The success in policy formulation is dependent on the skills deployed in the specification of these aspects and in making them fully operational.

Two factors have contributed to the emergence of shared decision making in the fiscal area. One is the role of foreign aid--determination of its size, projects to be funded, local expenditure--and the other is the growing role of international investors in the purchase of domestic securities. The latter feature and its related globalization restricts the range of options of policy makers in the event of any sharp change in the fiscal parameters that helped shape the budget for a year. When confronted with revenue shortfalls, or expenditures, expeditious action needs to be taken to control the deficit. In the absence of such efforts, there may be capital flight, exchange rate depreciation, and increase in the interest rates that in turn tend to add to the fiscal pressures. These actions imply that policy formulation has to be acutely aware of the economic environment in which it is operating, anticipate the changes and be adaptable to those changes. In turn, this requires provision of margins to accommodate later day developments, and expeditious decision making in areas that require coordination with donors. As an integral part of this approach, governments would be required to focus on the yellow zone (which suggests a slow down to stop) so that the stop-go policies that hitherto dominated the fiscal landscape could be minimized. The hitherto neglected dimension of expenditure planning needs to be restored.

C. Process Factors

The budgetary process needs to be revitalized to address the following major tasks:

• search for economies in expenditure;

• development of an output orientation;

• explicit recognition of revenue constraints; and

• enforcing budget discipline and securing performance.

D. Control Factors

Expenditure control system has grown over the years. To adapt Tawney’s language, the system is neither white magic nor black, neither a formula for easy salvation nor a sanctimonious fraud. It is a tool which, like any other tool, is to be judged by its results, which like any other tool can be blunted or mishandled till it is flung aside in disgust, but which can be used, with adaptation and re-engineering to correct imbalances, if there is a will to correct them. The generally shared view, as the preceding discussion has demonstrated, is that the traditional system has become blunted and, in the process, has become inadequate, to address the new tasks. It is for this reason that there has been a demand for, and in some cases, real change in the expenditure control system. The control system is, of course, like a portmanteau with each of its contents revealing a different technique at work, and different experiences. Thus a problem observed in defense and a remedy evolved there may not be applicable to, say, medical services and vice versa. While these differences in application from one sector to another arise, a few common principles have governed the approaches and the context of the expenditure control system.

These principles have been largely adapted from the private sector and revolve around the establishment of small agencies with specific tasks, resources, managerial flexibility, and a framework of accountability. The principles and the associated management philosophy have, however, become controversial even in their application to the private sector. Indeed, some consider that the new approaches have tended to treat management as an end in itself instead of as a service to organizations and their customers and believe that they have had the impact of eroding the organizations and the society itself.⁵ Management as a discipline has a long pedigree in controversy and a general approval is a difficult goal to achieve. While discussion of principles is essential, it is even more important to consider the issues and their application, in particular whether the uniqueness of government has been recognized and modifications made. Rituals should not be mistaken for efficiency but need to be analyzed.

In applying the principles to the government, four areas: (i) control culture vs. management culture; (ii) creation of agencies - a shadow government; (iii) provider-purchaser link; and (iv) control and third party government, need to be considered.

E. Public-private Partnerships

A less explicit but generally recognized element of the new expenditure management systems is the growing emphasis on public-private partnerships as a way of providing services to the community. Although there have been, and continue to be various forms of cooperation between the public and private sectors (after all much of what is consumed or utilized by the government including its defense requirements is produced by the private sector) the new emphasis has its origins in four factors.

First, it is suggested that in order for governments to be more responsive to citizens and be more effective, they needed to be restructured and focus more on management and coordination while the actual delivery of services would be in the realm of private profit and nonprofit organizations. Essentially, this view allots the production function to the private sector and the distribution and stabilization functions to the government. While there would be obvious problems of lack of compatibility between the objectives associated with the functions, it is expected that government would address them through other available policy instruments. Second, it is suggested that the provision of civic services cannot entirely be left to the market forces or to the imperatives of the state and that participation of voluntary associations, self-help groups, social movements and other organizations was vital for the successful functioning of modern society. This expands the concept of the private sector to include forms of organization other than commercial enterprises. Indeed, the proponents of this view argue that the association of voluntary private groups provides an important alternative to the state provision of services while providing a crucial empowering role to the citizens. But critics of this approach observe that citizen participation in policy making as well as in the actual provision of services could contribute to too much democracy with inevitable legislative gridlock and associated policy paralysis. They also believe that decentralization, while a desirable goal, could have the effect of empowering the wrong organizations and wrong people. Third, persistent fiscal deficits and associated underfunding of social services, on the one hand, and the need for providing those services in response to growing demands has contributed to a new quest for financial partnerships with the private sector through build, operate and transfer and related arrangements.⁷ Fourth, it is suggested that partnership type of arrangements are needed to forge a new type of collaboration between customers and suppliers so that improved quality services, while achieving a cost reduction, could be provided. The impetus for this approach arises from a desire to avoid many of the problems that are inherent in an arm’s length relationship with the private sector contractor. It is pointed out that small contracts have high transaction costs in terms of detailed specifications, which, given the difficulty, lead to more bureaucratic contract management. The partnership, on the other hand when forged, would have the effect of the partners sharing the strategic goal of making it a success while imparting the dimension of private sector management practices to government operations.

Thus, the scope of public-private partnerships envisaged is rather large. In practice, however, it has been limited to a few major capital projects. The experience, however, has generated few balanced judgements. Some consider it as an important reform, while others take the view that it has not been free from fraud and that indeed, what the private sector is doing under these arrangements, is exploiting the opportunity of providing services while leaving the risk of ownership and operation of assets to the government. It is also pointed out that the approach has created new problems for governments in terms of their maintaining control and coordination. Moreover, the difficulty of detailed specification continues to cloud the relationships between the public and the private parties, leading to frequent interventions by the former, thus undermining the very basis of a common approach. The partnerships, it is pointed out, also contribute to issues in terms of transparency and accountability.

The above types of criticisms are likely to be intensified in the future as more partnerships are developed. These in turn, have implications for expenditure management in that it needs to be far more diversified than before and there is a clear need for strengthening the capacities of the finance ministries in this regard.⁸ The control machinery has the additional task of demonstrating that the private provision is indeed a better alternative to the direct provision of services by the State; that there is no unethical behavior in the selection and management of projects and that these partnerships have not become surrogates to government as domains of patronage created at public expense but maintained outside the realm of institutional scrutiny, and that the public is getting value for money. These tasks require modifications in the existing legislation in most cases, installation of monitoring and evaluation systems, and effective audit.

F. Micro Aspects