Methodology for the Introduction of Budget Norms

and Equalization Norms in the Education Sector

Jean-Marc Lepain Intergovernmental Fiscal Advisor

Manilay Thiphalansy Research Consultant

Part I.

Defining the Budget Norm

Policy Framework

Definition

“A budget norm system is methodology for allocating budgetary funds based on expenditure needs in a fair and transparent manner with the objective of avoiding political bargaining and correcting horizontal imbalance. Budget norms are usually integrated in the design of grant transfer formulae.”

Objectives

• correcting horizontal budgetary imbalance;

• Ensuring that all provincial basic needs are covered;

• Balancing operational cost and investment;

• Ensuring maintenance of all infrastructures;

• Ensuring a linkage between national and provincial budgeting and the national development strategy;

• Ensuring budget predictability

• Multi-year budget programming

PRESENT BUDGETING SYSTEM NEW BUDGETING SYSTEM

Principles:

• System based on revenue

assignment

• Allocations based on historical

trends

• One year budgeting

Principles:

• System based on expenditure

needs

• Allocations based on objective

criteria

• Multi-year budgeting

Consequence:

• Horizontal imbalance

• Lack of equity and transparency

• Lack of predictability

• Insufficient funding for

maintenance and operation

• Poor linkage with planning and

national strategy

• Lack of control of the Ministry

over provincial spending

Consequence:

• Equalization of expenditures

• Equity and transparency

• Predictability

• Better funding for maintenance and

operation

• Better linkage with planning and national

strategy

• Better control of the Ministry over

provincial spending

Horizontal Imbalance

Definition: “Horizontal imbalance measures the disparity in revenue assignment between provinces based on their respective expenditure needs.”

Horizontal Imbalance in Laos Poverty Domestic Exp. Operating Exp. Capital Exp.

Index /Population /Population /Population

Vientiane Capital 1,17 0,45 0,24 0,27

Savannakhet 1,43 0,25 0,22 0,06

Champasak 1,18 0,34 0,26 0,10

Khammoune 1,34 0,32 0,31 0,07

Luangphrabang 1,23 0,36 0,34 0,07

Bolikhamxay 1,29 0,39 0,36 0,09

Houphan 1,52 0,48 0,32 0,21

Oudomxai 1,45 0,72 0,31 0,46

Xayabury 1,25 0,49 0,31 0,23

Xiengkhuang 1,42 0,48 0,42 0,12

Vientiane Pro. 1,19 0,43 0,34 0,13

Bokeo 1,21 0,53 0,38 0,25

Phongsaly 1,51 0,40 0,34 0,15

Luangnamtha 1,23 0,74 0,46 0,38

Saravanh 1,54 0,28 0,23 0,09

Attapeur 1,44 0,76 0,50 0,37

Xekong 1,42 0,60 0,54 0,20

Two Types of Norms

• Grant transfer norms

• Budget formulation norms

Maintenance

Other goods and services

Small investments

Sectors to be covered

• Education

• Health

• Transport

• Agriculture

• General Administration (5 ministries)

• Provincial Administration

Grant System

+ Shared Revenue

+ Equalization Grant

+ Investment Grant

+ Other conditional grants

+ Ad hoc Grants to other organizations

=--------------------------------------------------

=Total transfer to provinces

Equalization Grant

+ Provincial Fiscal Envelope

- Targeted Local Revenue

- Shared revenue

-----------------------------------------

= Equalization Grant

Fiscal Strategy

• Fiscal envelope for Budget Norm: 5% of FY2007/08 (Fiscal Envelope for Education: 1,02% )

• Implementation in three phases (Education and

Health: Phase 1starting in FY2010/11)

• Implementation Plan 6 years (Education

Implementation Plan 4 years for recurrent expenditures and 3 years for investments)

Part II

Methodology

General Methodology

• Policy framework and strategy

• Calculation of the fiscal envelope available for budget norms

• Budget Norm planning

• Macro-fiscal modeling and consolidation

• Budget norm implementation strategy

• Transfer system design

Sectoral Budget Norm Calculation

• Sector Profile and Policy Review

• Expenditure Need Assessment

• Macro-fiscal modeling

• Consolidation and reporting

• Validation

Sector Profile

• Sector long term objectives in relation to MDG, NGPES and NSEDP

• Program structure and objectives

• Collection of relevant statistical data

• Analysis of budget data

• Indicators

Sector Policy Review

• Review of performance

• Analysis of budgetary and non budgetary issues

• Analysis of budget alignment with objectives

• Preparation of budget projection for the next three years

• Recommendations

Expenditure Need Assessment

• Analysis of cost drivers

• Need assessment by economic categories

• Balance between recurrent expenditures and

Investment

• Sizing of investments in relation to objectives

• Identification of budget norm indicators

Macro-Fiscal Modeling

• Analysis of budgetary trends

• Development of sectoral fiscal model for the next three years

• Testing of budget norm formula

• Consolidation of all sectoral model in one macro-fiscal model

Implementation Strategy

• Selection of indicative budget norms and budget norms for the intergovernmental transfer system.

• Assessment of the number of years required to correct horizontal imbalance

• Recommendation for multi-year implementation

Part III

Budget Norm Selection

Education Budget Norms

The transfer should be based on:

• number of children in age to go to school

• Number of children registered

• Literacy rate

• Programmes

• Cost factor (salaries including bonuses, training needs, etc.)

• Maintenance needs and other non-wage expenditures

Equalization Norm

• FY2007/08 Recurrent Budget = 85,000 kips per capita

• FY2008/09 Recurrent Budget = 102,000 kips per capita

• Minimum Investment Budget = 7% of Recurrent Budget

The equalization norm based on minimum spending per capita must be replaced by a budget norm based on spending per children of different school programmes.

Structure of the Transfer Formula

A possible formula could be:

• T = Transfer

• Sp.I. = Spending Norm

• N = Need Indicator

• C = Cost Indicator

T = (Sp.I. x N) + (Sp.I. x C)

Selection of a spending indicator

Possible spending indicator:

• Spending per capital

• Spending per child under age of 15

• Spending per age class (1 to 5, 6 to 9, 9 to 15, etc.)

• Spending per child by programme

• Other indicators ?

Selection of Need Indicators

• Literacy rate

• Children Registered / Total Children Population

• Girls registered/ Total number of children

• Territory covered by school network

• Number of teacher required (number of teachers/number of students)

Selection of Cost Indicators

Cost indicators should record variations in cost for similar services by province and by district.

• Salary Indicators

• Maintenance Cost

• Management Cost

THANKS