Budgeting of investments Eivind Tandberg Brasilia April 25, 2005.
-
Upload
stephen-buckle -
Category
Documents
-
view
221 -
download
0
Transcript of Budgeting of investments Eivind Tandberg Brasilia April 25, 2005.
Budgeting of investments
Eivind TandbergBrasilia
April 25, 2005
April 25, 2005
Overview Why is it difficult to budget
government investments? Common problems Objectives and priorities Budget process and timetable Roles of different institutions Key budget process issues Summary of recommendations
April 25, 2005
Why is it difficult to budget government investments?
Time consistency problems Budgets have short-term focus
Valuation of benefits No market prices Demand side uncertain
High preparation costs Trade-off quality and cost
Complex process and organization
April 25, 2005
Common problems I Budget management focuses on crises and short
term decisions. Imbalances between current and capital costs in the budget.
Timing of investment planning is poorly matched with the budget process
Separate budgets for current and capital spending Sometimes managed by different ministries
Investment proposals inadequately developed Difficult to ensure that most productive projects are realized
No clear decision process Decision process does not reward good project design.
April 25, 2005
Common problems II Decisions mainly based on first-year budget
impacts Incentives to adjust implementation plans
Cost estimates change as project progresses Incentives to under-estimate initial costs Incentives to over-estimate initial costs
Operating costs are under-budgeted Maintenance costs for existing capital are
under-budgeted Investment projects disproportionately targeted
for budget cuts Yield significant cuts through single decisions
April 25, 2005
Budget management objectives
Objective Short term focus Medium-term focus
Cost-effective service delivery
Cost minimization Modernization
Efficient allocation Static efficiency Dynamic efficiency
Fiscal control Ex-ante controlsTransaction controls
Ex-post accountabilityAggregate controls
April 25, 2005
Budget time perspective General agreement (?):
Medium-term perspective most appropriate Budget system should not only promote fiscal control, but
also efficient resource allocation and cost-effective service delivery
This agreement is often not reflected in practices! Continued overwhelming focus on annual budgets Medium-term budgets often ritualistic
Often result of difficult economic circumstances Countries in fiscal crisis must handle immediate problems Attempts to introduce advanced reforms can be counter-
productive More stable countries are in better position to
introduce medium-term budgets and emphasize performance
April 25, 2005
Medium-term budget frameworksKey elements
Clear fiscal policy statement Medium-term macroeconomic forecast Realistic revenue estimates for the plan period Estimates of expenditures beyond the budget
year All multi-year projects reflected Formal status to “forward” estimates Basis for preparation of following year’s
budget Figures for individual ministries become hard
budget constraints in cash terms
April 25, 2005
Budget management process Investment planning process
Budget year – 2
Develop new projects
Budget year – 1
January Roll over MTBF for existing policies, projects
Update capital estimates
February Macroeconomic framework Screening of new proposals
March Update MTBF
April Cabinet budget meeting I:Decisions on MTBF, room fornew initiatives and projects,ministry spending envelopes
Decide on which projects to putforward to Cabinet
May External quality assurance
Budget timetable I
April 25, 2005
Budget management process Investment planning process
June Cabinet budget meeting II:Decisions on new initiatives and investment projects
July Update estimates:- Capital and operating costs for new investments- Capital and operating costs for ongoing investments- Maintenance costs
August Detailed budget proposals
September Cabinet budget meeting III:Decisions on detailed budgetsDecisions on guarantees
October Budget to Parliament
December Budget approved Detailed implementation plans
Budget timetable II
April 25, 2005
Budget management process Investment planning process
Budget year
January - Execute budget Implement investment projects
July Mid-year budget review Update estimates:- Capital and operating costs for new investments- Capital and operating costs for ongoing investments- Maintenance costs for other capital
December Year-end technical adjustments
Determine carry-over to next budget year
Budget timetable III
April 25, 2005
Institutional responsibilities
MOF and planning ministries Separate current and capital budgets? Fragmentation, coordination problems Largely abandoned in OECD countries
The role of the Cabinet Separate technical and political considerations MOF manages the technical process Cabinet takes political decisions Increases the legitimacy and credibility of the
budget
April 25, 2005
Analysis of proposals Investment proposals are inadequately analyzed
Missing or inadequate standards Standards not properly enforced. Political pressure, “urgency”
First-best: refuse to consider non-compliant projects
Enforceable? May be legitimate need for exceptional procedures
Clear exceptional procedures Limit as much as possible Same decision-making mechanism as other projects Covered by same budget allocation
April 25, 2005
Partly user-financed projects
Full user financing, no state guarantee or other fiscal risk – outside budget
Partially funded off-budget - subject to same requirements for development, costing and analysis as other projects (Most PPPs)
Decisions should follow same procedures and timetable as other projects
Budget decisions based on budget impacts over project life-time
Budget documents should also disclose total costs, financing modalities and fiscal risks
Explicit or implicit guarantees related to project subject to same decision-making and disclosure requirements as other state guarantees.
April 25, 2005
Decision criteria for investments
As part of the MTBF, cabinet decides on aggregate allocations for new policy initiatives and investments
Covers whole MTBF period Line ministries put forward proposals to be
financed within this allocation Pre-screening to ensure quality and realistic volume Disclose budget impacts beyond MTBF period
Following cabinet decision on which projects to finance, line ministries incorporate the detailed cost estimates in their draft budgets
Multi-year appropriation for major projects Competition improves quality of decisions
April 25, 2005
Cost estimates Cost increases absorbed in annual budget
updates Incentives to under-estimate initial costs Make line ministries responsible for cost overruns Real reduction in other costs not extension of
investment period. Cost reductions reallocated to other activities
Incentives for efficient project implementation Also incentives to over-estimate initial costs Allow ministries to retain part of cost reductions
Changes in rational implementation pace Allow limited carry-over/”borrowing” between years
April 25, 2005
Operating and maintenance costs
Operating costs for new projects under-budgeted
Required detailed disclosure of expected operating costs Indicate how accommodated or financed Condition for consideration of project
Under-budgeting of maintenance costs for existing capital also persistent
Limited incentives to maintain “political” projects Ensure that all projects have clear net value Require plan for financing long-term maintenance costs
at the time of approval Sufficient maintenance financing for existing capital
could be condition for new investment proposals
April 25, 2005
Budget amendments Investment projects highly susceptible to budget
cuts Large, discrete budget components Significant budget reductions through single decisions
Can seem reasonable in the short-term Over time: under-funding of investment and maintenance Given very real needs for budget adjustments, no simple
solutions MTBF provides basis for realistic assessment of
implications Cut in maintenance costs or delay in investments
provides temporary respite Other budget cuts may yield permanent improvement
April 25, 2005
Conclusions I Medium- to long-term time perspective Medium-term budget framework (MTBF) Credible annual budget process requires time Budget timetable with clear phasing MOF full responsibility for managing budget
preparation Cabinet responsible for political decisions Clear standards for investment planning Exceptional procedures close to general
standards MTBF should include allocations for new policy
initiatives and investments
April 25, 2005
Conclusions II Mechanisms for pre-screening and prioritization of
proposals to balance proposals and available funds Partially funded projects subject to same
requirements as other projects. Decisions based on net impacts over life-time Full disclosure of total costs and risks
Costs and benefits of approved projects disclosed in budget material
Incentives to prepare realistic cost estimates and implement projects efficiently
Cost overruns covered by real reductions in existing budgets
Cost reductions can be (partly) reallocated to other activities.
April 25, 2005
Conclusions III Multi-year appropriations for major investments
Full costs reflected in MTBF and the budget Hold ministries accountable for implementation
Mechanisms for carry-over and “borrowing” Can improve the quality of investment budget
management Investment project proposals should include a detailed
disclosure of expected operating costs and indicate how these will be financed.
MTBF specification of maintenance of existing capital
Condition for making new investment proposals. MTBF basis for assessment of budget cuts