Public finance reform in South Sudan: What needs to be done?

By Asha Abdel Rahim (South Sudan Economic Association)

April 15, 2013 (SSNA) — An effective state is a state that is able to mobilize resources and to spend it on infrastructure, services and public goods that both enhance well-being of its citizens and their human capital. With its management of public finance it ensures that macro-economic balance is maintained: Its policy is neither too accommodative to generate high inflation and to crowd out private investment, nor is it too restrictive to discourage private investment. Fiscal issues are thus at the heart of the state’s role in the development process. Policy failures in taxation, public expenditure or management of fiscal deficit and public debt can easily undermine growth and poverty reduction.

The importance of establishing a fiscal policy in Southern Sudan was identified as key both in the first development plan under the CPA – the Joint Assessment Mission (JAM) of 2005) and in the Development Plan of 2011. No public policy can be implemented without public resources. Donors supported this process strongly. Based on the immense task of rebuilding the institutions, and considering the length of the preceding conflict and the very low level of development, a chance was seen to make a clean sweep and to establish a modern public sector and a fiscal policy structure by using international ‘best practices’ of fiscal management, including new instruments such as a Medium-Term Expenditure Framework (MTEF), the establishment of an Autonomous Revenue Agency and an Integrated Financial Management Information System (IFMIS). The JAM (2005) recommended that core fiduciary services such as auditing, accounting and procurement be contracted out to international firms.

These instruments are part of a new approach to public management that has been strongly pushed by IMF and World Bank and implemented in a number of African countries. These are inspired by successful reforms in countries such as New Zealand and basically are guided by the introduction of private sector management principles to public management:

  • privatization of public enterprises,
  • separation of policy and implementation functions by creating executive agencies and decentralizing responsibility for service delivery,
  • giving public managers greater autonomy in the use of resources and in staffing by liberating them from bureaucratic controls,
  • aligning incentives for agencies and personnel with policy goals by using personal performance contracts and performance related pay,
  • mechanisms to ensure feedback from and accountability to the public by creating opportunities for exit (by access to alternative private and public providers) and voice (through e. g. client surveys and participation of representatives on management boards), and
  • competitive pressures through compulsory tendering, internal markets and benchmarking of performance between service delivery units

All of these principles involve major, sophisticated, wide-ranging, and costly, reforms. While they promise major gains, they also incur substantial risks. These approaches and practices have been developed in industrial countries and are advocated on a major scale in developing countries, also for South Sudan.

MTEFs are increasingly common within Eastern and Southern Africa. By encompassing all expenditures they provide a linking framework and facilitate the management of policies and budget realities to reduce expenditure pressure throughout the budget cycle. The result is supposed to be a generally better control of expenditure and a better value for money within a hard budget constraint.

An IFMIS is a common computerized financial system used in government offices. It often includes government ministries, departments and agencies and may be extended to regional and local governments. It has a single database in which the financial transactions are recorded, a uniform coding structure for the analysis of the transactions, and the possibility of entering each transaction only once. It usually comprises the core modules of budgeting, cash and debt management and accounting, and in some cases ancillary components such as payroll and procurement.

The traditional way of organizing central government revenue collection is to let it be handled by units within the Ministry of Finance. However, over the past decade several countries in the region and beyond have implemented comprehensive reforms of their tax administrations by introducing semi-autonomous revenue authorities. The choice of a revenue authority model aims partly to limit direct political interference by the Ministry of Finance, and partly to free the revenue administration from the constraints of the civil service system.

As argued above, these modern approaches are sophisticated and have high demands on finance and manpower. They have been developed in industrial countries over a longer term and typically in a piecemeal and learning by doing manner. These modern approaches and computer packages are now available to developing countries and offer them, at least theoretically, a chance to ‘leapfrog’ decades of costly learning and slow change. However, they also imply serious risks. They may be overly complex, not sustainable, and they create dependence on imported skills. They may also undermine local ownership that is vital for sustainable development and for effective learning.

Their success has therefore, not surprisingly, been quite mixed in the context of developing countries. Many countries have implemented some of these concepts, but overall successful public expenditure management reform cannot be dissociated from more fundamental institutional reforms within government. Such reforms serving the need for transparent and clean financial management are especially pertinent in post-conflict as in mineral-resource based economies such as South Sudan. These two contexts are discussed in the following paragraphs.

History shows that the risk for post-conflict countries to fall back into conflict is very high. To reduce this risk, policy reform, aid for development, and improved access to global markets are important. As mentioned above, because of the low level of administrative competence, it is not sensible to attempt reform across a broad front. Nevertheless, practice tends to result in exactly this, due to the combination of a very weak capacity to manage, coordinate and lead policy processes by government and the diverse interests of international cooperation partners that limit the scope for donor coordination, despite all the rhetoric. South Sudan is a textbook example.

What is the experience of public finance reform in Africa? A recent analysis of 31 public finance management reform efforts has three key findings:

  • Budgets are made better than they are executed (budget preparation processes are comparatively stronger than budget execution and oversight processes) – a fact that seriously questions the success of PFM reforms;
  • Practice in budgets execution lags behind the creation of processes and laws (laws and processes may be in place but seldom affect actual behavior); and
  • Actor concentration pays off (processes are stronger when narrower, concentrated sets of actors are involved in implementation):

Countries were – according to these studies – significantly different. However, they have alarmingly similar reform packages in place. ‘Best practice’ has been applied in a largely non-contextual manner. This creates new problems in administrations.

Critiques point out that instruments such as MTEFs act as a huge distraction to good basic budgeting, with questionable results and much wasted resources. Instead of the risky approach of major reforms and fundamental change an organic and incremental change is advised. Tried and tested reforms should be applied and the use of local experts rather than of international consultants should be preferred, because only they really understand their systems. Critics also point to stringent conditions being necessary for the successful application of MTEFs, but these conditions are often absent – all the more in post-conflict countries: they need to be diagnostic rather than formulaic, to be based on clear, affordable and consistent national and sectoral policies (OPM 2010, Wynne 2010).

How is the experience in South Sudan? A first-hand experience in building up and assisting planning and budgeting systems in Southern Sudan is reported by Davies and Smith (2010). The World Bank has done a PFM assessment, covering the Interim-CPA period (GoSS 2011). The report points out that on a positive side, the budget is now prepared with due regard to government policy: The budget classification indicates the purpose of spending, the budget documents are comprehensive and of high quality, and these are publicly available. First steps have been taken to strengthen tax administration and to establish an electronic payroll system, and the Audit Chamber is being strengthened.

Well-targeted technical assistance is said to have played a strong role. Rising skills capacity at the MoFEP is said to enable a decreasing reliance on foreign technical assistance. However, there are no indications for this in the underlying analysis. The entire report does not focus at all on means and progress of capacity building.

However, many challenges remain: Aggregate and spending agency expenditure outturns tend to be significantly different from the approved budgets. Constitutional and legal controls regarding changes in relation to the approved budget appear not to be fully adhered to. In-year predictability in regard of availability of funds is low. Payment arrears are building up because the MoFEP felt obliged to make payments as contracts had been signed and procured goods and services were received, although these positions were not yet included in the budget – most obvious grain and dura for food reserves in 2007 were contracted and procured outside the approved budget. Public procurement systems tend to lack transparency: despite of regulations emphasizing the use of competitive procurement methods in practice single source procurement is the norm. Some internal control systems appear less than robust – control procedures either are not in place or are not complied with.

Generally speaking, downstream PFM areas as budget execution, budget accounting and some internal budgetary control systems are still weak, resulting in budgets that are not credible (i.e. not realistic nor implemented as intended). The overriding issues are capacity constraints: improvements in systems can only take place at the pace that capacity and capability constraints permit.

The JAM (2005) recommendation to contract out core fiduciary services as audit, accounting and procurement to international firms was implemented. However, GoSS’ experience in contracting out has been varied. While government had supported the process of contracting out key services, it had very limited capacity to design and manage the contracts: even with World Bank administered contracts, government had limited capacity to ensure that the contract design and performance met its own needs. Lengthy World Bank procurement procedures and limited government capacity to follow them led to significant delays. Costs were not only lost service delivery, but also diminished incentives for government to build its own capacity and structures. Capacity development was generally inadequately addressed: It was not at the center of design, and no exit strategy was formulated. This shows that inappropriate design can undermine effectiveness of contracting out. Furthermore, contracting outsiders proved not to be heap. As a better alternative, contracting the diaspora in temporary capacity has been recommended (Davies 2009).

The overall situation and progress in procurement has been evaluated in the recent South Sudan Procurement Assessment Report. The legal framework for public procurement is the Interim Public Procurement and Disposal Regulation (IPPDR), approved by the Council of Ministers in 2006. However, it has not been passed by Parliament, which creates some doubts on its legality. Further, it has some legal shortcomings. More importantly, a high amount of public entities fails to use the IPPDR – some even do not know about it.

The Procurement Policy Unit (PPU) of the MoFEP has limited capacity to exercise its statutory role to guide and supervise the process. There is a clear lack of unambiguous legislative and regulatory framework establishing and assigning normative/regulatory functions and defining clear procedures. Monitoring and information tools are also lacking, as are resources and an adequate level of independence and authority to exercise these functions. There are major weaknesses in all steps of the procurement process. There is no established practice for quality control, and cases of mismanagement are frequent. Although capability in processing procurement has been increasing since 2005, it still does not meet the required level. At the state level, a number of targeted states have established procurement units. However, these are not operational and staffs have little if any experience.

On a broader note, the World Bank report states that the private sector is still dominated by traders with a short term profit orientation and a lacking business and management expertise. The legal framework is not satisfactory and legislation that has been passed is far from being implemented. Infrastructure is poor and complex and unclear import regulation and customs systems result in high and non-transparent transport costs and long transport duration.

Budgetary control is another weak point as yet. The Audit Chamber does not yet have its full capacity. Parliament members do not yet have capacity and competence to critically assess the budget and its execution.

An important first step to systematize the budget process has been done by fixing a budget cycle. However, it is worrying that the time window for discussions in parliament in the resp. committee and then in the full parliament is limited to only a maximum of 6 weeks (February – mid March). In such a short period parliament will not be able to give as comprehensive an attention to the budget as its role requires.

The results suggest that instead of wholesale reforms prioritization and sequencing of reforms would be beneficial. Most importantly, such reasoning should be based on the local context. There are limits to the use of international ‘best practice’, and each of these practices have been successful only in a specific local context. For most of the economic policy reforms, ‘best practices’ cannot be applied in a general, non-contextual manner.

A major way to improve the quality of macroeconomic policy formation and of a responsible, long term oriented and sustainable fiscal management process will be the creation of higher transparency and the more systematic involvement of the major stakeholders – the private sector, professionals, and the wider civil society. These are partly vocal, but at an infant stage and largely limited to the capital city of Juba.

Supporting this process will need a strengthening of the research function, both in government, but also outside in academic institutions and in independent think tanks. These should underpin the policy making process. Unfortunately, the importance of higher education for both building a home grown educated labor force and a domestic research capability is currently not on focus of either the GRSS or its international partners, as emphasis is mainly on primary education.

The author is Assistant Professor and Head of Economics Department, University of Juba, an executive member of South Sudan Economic Association. This article is based on the academic article Macroeconomic policy formation in South Sudan: Building fiscal management jointly published with Dirk Hansohm, forthcoming in the African Development Perspectives Yearbook. Email: [email protected].

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