Mt Ef Process

7/24/2019 Mt Ef Process

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What is MTEF?

MTEF is a transparent planning and budget formulation process within which theCabinet and central agencies establish credible contracts for allocating publicresources to their strategic priorities while ensuring overall fiscal discipline. The

process entails two main objectives: the first aims at setting fiscal targets, thesecond aims at allocating resources to strategic priorities within these targets.

“llocation to strategic priorities! re"uires determination of government widepriorities b# the Cabinet collectivel# and portfolio$wide priorities b# Ministriesindividuall#. Transparenc# re"uires that the priorities of the Cabinet are e%plainedin a &udget 'olic# (tatement whereas the priorities of individual ministries aree%plained in their Corporate 'lans.

E%hibit ). *eneral loo+ at MTEF

The process of setting fiscal targets consists of two separable sub$processes: thefirst is the preparation of an economic and fiscal update b# central agencies, andthe second is the setting of fiscal targets b# the Cabinet. Transparenc# re"uiresthat the results of the first are published in an Economic and Fiscal pdate -EF/eport and results of the second are published in a Fiscal (trateg# /eport.

This stud# separates the complete MTEF process into four sub$processes.Three criteria were considered in deciding the sub$processes: (e"uencing,organi0ational units responsible from processes, documents produced at the endof the sub$process.

(ub$processes, their organi0ational units and the documents the# produce are:

Economic and Fiscal Environment pdate Central gencies Economic 1 Fiscal pdate&udget 'olic# (tatement Cabinet &udget 'olic# (tatementCorporate 'lans 1 Cabinet$(ector 2egotiations Ministries 3 Cabinet Corporate 'lans&udget 4ocumentation Central gencies &udget

Central

genciesCabinet Minister

Medium Term E%penditure Framewor+

(etting Fiscal Targets llocation of /esources to (trategic 'riorities

Economic andFiscal pdate

Fiscal Framewor+

(tatement /eport

&udget 'olic#(tatement

Corporate 'lans



pdating economic and fiscal environment can be considered as the beginningof the budget preparation c#cle. EF guides the budget deliberations betweenCabinet and Ministries. 5n general Central *overnment gencies are responsiblefrom this document, namel# 'lanning 6ffice, &udget 6ffice and the Treasur#.The main activities of this sub$process are the determination of economic outloo+

and fiscal outloo+. -E%hibit 7. Prepare Economic and Fiscal Update – Level 1

The time hori0on for the outloo+ is a +e# issue that needs to be determined. 5t ise%pected that as the countr# gets more e%perienced in MTEF, the time hori0onstretches further into the future. lthough the involved agencies need to focus onthe reliabilit# and the precision of the economic and fiscal outloo+, the uncertaint#that is involved in an# forecast has to be recogni0ed. The economic and fiscaloutloo+ can be used as an e%cuse b# the s+eptics for discrediting MTEF and thee%perience ma# justif# their concern especiall# during the earl# #ears itsimplementation. s in an# forecasting or future focused planning, theorgani0ations, the bureaucrac# and the government will ma+e both judgmental

and predictive errors but will perform better at this tas+ as e%perienceaccumulates. The recognition of the uncertainties and their impact on financialposition and other fiscal ris+s should be considered and communicated to therelated parties in advance. -(outh frican labor negotiations was hampered duethe union8s disappointment over unsuccessful forecast of the inflation rate-E%hibit 9 Determine Impact of Government Policy Changes – Level 3 The&udget 6ffice should be encouraged to provide detailed financial statements for the upcoming #ears under different scenarios. -E%hibit UpdateProd!ceFinancial "tatement #a$les – Level 3The document is e%pected to provide information on fiscal impacts of governmentpolic# changes. The detail of this impact can be as specific as "uantifiable and

un"uantifiable contingent liabilities. -E%hibit ; UpdateDetermine Contingent

Lia$ilities – Level 3

Economic and Fiscal pdate /eport should also provide advise and re"uest for further studies on areas that re"uire more information. Future focused studiesdepend on man# assumptions and sometimes simplifications. More studies caneliminate the need for simplifications and help to justif# the assumptions. <hilethe economic and fiscal outloo+ can be considered as a forecasting attempt inman# aspects it also serves as a planning function which will benefit from thesestudies. This information can be provided both b# local institutions or international organi0ations. 6ne possible area that most EF reports suffer fromits lac+ing is the private sector data. The non e%istence of information should berecogni0ed and considered for the future reports.

The approval of the document b# the uditor *eneral significantl# adds to itscredibilit#. 5t also brings a health# "uestioning mechanism to the process andestablishes a transparenc# and accountabilit# culture. MTEF considers thetransparenc# and accountabilit# as +e# elements for the success of the process.



The document should be made public as it is submitted to the Cabinet and theMinistries.

'roviding economic and fiscal outloo+ of a nation is a than+less tas+. 5t does notplease man# people or organi0ations. 5t re"uires constant judgment in balancing

the trade$offs between specificit# and accurac#, optimism and realit#. 5t consistsof man# components that are specific to a countr# and the organi0ation. Thereare man# activities and man# levels of sub$processes that need to be performedto complete the EF. The reference model provided in this stud# is to be used asa general outline and to be modified according to the realities and capabilities of the specific governments. E%hibit = Update Presentation provides all thefunctions that were considered in this stud#. more thorough stud# shouldintegrate all the functions with organi0ational and informational views as well.

The second sub$process of MTEF is the production of Fiscal (trateg# /eport and

&udget 'olic# (tatement, both b# the Cabinet. 6ne appropriate generali0ation of MTEF is that it is a top down strategic allocation guide and a bottom up costtemplate. The &udget 'olic# (tatement is the strategic allocation guide of thegovernment. 5t ta+es its lead from the government program. The program itself becomes a part of MTEF. For some it ma# be considered too ambitious for thebudget process to house the *overnment 'rogram. /egardless of its home,budget preparation has to install procedures to encourage the Cabinet todetermine and evaluate its priorities. The process that is designed in this stud#assumes that the government has alread# generated the *overnment 'rogram.-E%hibit > %!dget Policy "tatement &'

fter reviewing the EF and the *overnment 'rogram, Cabinet sets long termobjectives for macroeconomic polic# and fiscal polic#. These objectives aredetailed through short$term intentions. <ith the help of the Finance Ministr#,Cabinet sets targets for macroeconomic determinants such as growth, inflationinterest rate, e%change rate and public debt. This data is published in Fiscal(trateg# /eport. 'ublication of the report helps to establish the transparenc# andaccountabilit# culture.

5n countries where MTEF is being implemented for some time, most of theadjustment are marginal and rather straight forward. ?owever it is critical for asuccessful MTEF that review of new initiatives has to be integrated periodicall#and the changing scenarios has to be updated as new data become available.This allows the Cabinet to review and reconsider budget priorities with the latestinformation. -ustralia8s new database s#stem allows continuous update.

The setting of the fiscal targets is followed b# allocation of resources. Cabinettries to integrate the new e%penditure pressures to EF. The# set budgetpriorities. These are strategic negotiations among the sectors for resourceallocation. The outcome of these negotiations defines the &udget 'olic#



(tatement. 'ublication of the &udget 'olic# (tatement formali0es sectoralactivit#. 2ow the ministries have their map to wor+ on their portfolios. Thepublication and distribution of &udget 'olic# (tatement initiates the budget callcircular. The burden is on the sectors and the Cabinet assumes its monitoringrole until the sectors present their 'ortfolio &udget (tatements.

2ow that the sectors have their mandates from the Cabinet, the# can startfinali0ing and documenting their sectoral budget for final baseline negotiations. 5tshould be noted that the efforts of the sectors of their review process -both theprevious #ear review and fundamental review and Cabinet deliberations for &udget 'olic# (tatement occur simultaneousl#. The details of the fundamentalreview is given in E%hibit @. Part of developing "ector Level (#EF – Level 1 Thecommunication between the two organi0ations -Cabinet and Ministries is animportant determinant for the success of the whole budget process. 5t is hard tooffer a generic process design to encourage and formali0e this communication. 5tdepends on the organi0ational cultures and even personalities of the political

appointees. Ever# specific organi0ation should consider establishing thisinformation flow with the objective of providing the Cabinet with the latestchanges in their portfolios and the receiving updated information on potentialfunds from the Cabinet.

There is an important decision that needs to be made at this stage in terms of setting the baselines. The trade$off between Cabinet8s hard ceiling versusnegotiable baseline dictates the culture of planning within the ministries. 5f theCabinet imposes hard ceilings earl# in the process, it ma# lead the sectors tomone# management rather than strategic resource allocation. lthough both arenecessar#, establishing a strategic prioriti0ation culture within ministries brings

man# desirable assets to the organi0ation such as planning, performancemeasurement, accountabilit#, and transparenc#. 5f part of MTEF8s objective is toencourage the sectors to adopt a culture of strategic management and creating acompetitive platform for resource allocation, the hard ceilings ma# be postponedin favor of soft baseline figures to guide and frame the portfolio budgetstatements.

*oing bac+ to the fundamental review, it should be noted that whole sub$processis an important one in budget preparation c#cle. 5t is a strategic planning e%ercisefor the sectors from setting the mission to providing performance measures informs of cost templates. (pecification of outcomes and outputs, costing outoutputs is a solid attempt to formali0e corporate plans with accountabilit# andincentives for efficienc#. (ince the sector still contemplates on negotiating ontheir baseline, there is an inherent incentive to ma+e these plans credible,consistent, efficient and effective. s the sector uses these plans to negotiate for more resources, These plans also bind them as a set performance measures.

The sectors submit their budget initiatives to the Cabinet and start a negotiationc#cle for resource envelopes. t the Cabinet level these negotiations are



e%tended to include all sectors and a competitive platform is created for limitedresources based on the government priorities and the credibilit# of the corporateplans of sectors. E%hibit A. "econd part of Developing sector level (#EF) Thisstud# believes the impact of letting the sectors compete for funds on the merit of their corporate plans before the hard ceilings are established. (ome ma# argue

that without the hard ceilings which were set earl# in the budget preparation c#clewill cause over commitment. 5t is arguable whether that outcome is unavoidable. lthough it increases the chances of over commitment, with a structured processand a decisive Cabinet it can be avoided along with the benefits of strategicplanning.

The last sub$process of MTEF is producing the &udget 4ocuments. Theconsolidation of all corporate budgets b# the sectors, preparation of theappropriation bill and fiscal strateg# report completes the budget preparationc#cle before the documents &udget Estimates are submitted to the 'arliament.E%hibit )B. Prod!ce %!dget Doc!ments* Level 1

E%hibit )). (ummar# flow of ?igh evel 'rocesses.

Medium Term E%penditure Framewor+

(etting Fiscal Targets llocation of /esources to (trategic 'riorities

Economic andFiscal pdate

Fiscal Framewor+(tatement

&udget 'olic#(tatement

Fundamental/eviews

&udget CallCircular

'reparation of'ortfolio &udget

(tatements

&udget 2egotiation

Compilation of'ortfolio &udget

(tatements

*overnment&udget

/econciliation(tatement

Central gencies 'rime Minister $ Cabinet Ministries



E%hibit )7 %!dget Form!lation +(#EF, – -igh Level provides the d#namic flow of the activities which were covered in the previous sections. 5t also includes theorgani0ational units that are responsible for the activities. 5nformationre"uirements and flows are integrated to the process flow as well.

The complete MTEF process, the wa# it is considered in this stud# is divided in tofour major groups as mentioned earlier. Following EF strategic guidance isprovided b# the Cabinet for the sectors. s the sectors provide information for structuring of this guidance, the# also build their own corporate plans. Thissubprocess is the initial stages of group 9. 5n the later phases of group 9, thesectors negotiate the baselines with the Cabinet b# supporting their claims withtheir 'ortfolio budget statements. The last group is the clerical sub$process of putting together the documents to be submitted to the 'arliament.

Each of these sub$groups end up with an important document that feed the ne%tsub$process. The first group is the production of the EF. EF initiates the

budget polic# statement process which generates that document. The third sub$process generates 'ortfolio &udget (tatements for the sectors and the last sub$process is the produces the &udget.

Designing a MTEF

There is a natural se"uence in designing budgeting reforms. Ensure the basicsDtraditional budget processes -green area must be in place before designing aMTEF -gra# area. 5mplementing a basic MTEF at the Center of *overnment isthe prere"uisite of designing reforms to regulate performance of the rest of the

public sector entities -beige area.

nderstanding the political econom# of the Center of *overnment is +e# indesigning a MTEF. First, the Cabinet matters. Tenure of the Cabinet mattersDshort tenured cabinets ma# not need to form medium term commitments. Form of the cabinet mattersD strategic allocation process will be more comple% in acoalition cabinet than in an uni$part# one. Moreover, the form and the tenure of cabinet have an impact on the power of the 'rime Minister and the Minister of Finance over the rest of the cabinet. <hen 'M is wea+, the capabilit# of thecabinet ma+ing collective decisions lessens.

2e%t the central agencies matter. Their organi0ation matterD the# ma# be dividedas a separate planning office, budget office and treasur#, reporting to differentministers. 6r the# ma# be under one roof, reporting to the Minister of Finance.Their culture matter: having a senior e%ecutive service occup#ing the positions incentral agencies ma# help in creating a culture of accountabilit#. 4eep politicalappointments ma# prevent them to have the capacit# to provide politicalinsulation with their regulations.



6nce these issues are understood, the first step is getting the Center of *overnment want to ma+e credible commitments among them. The &an+ shouldbe able to demonstrate “what happens! cases when there is such a commitmentand when there is not. This presentation should aim at getting the Center of *overnment to understand the necessit# of ma+ing credible commitments among

them. Message is simple: if the center is not able to craft credible commitmentswithin itself its abilit# to regulate the rest of the public sector will also be ver# low.?ence, it can not underta+e reforms to improve the performance of other publicentities. 'ublic sector performance will continuall# decline. This is a pre$re"uirement.

<hen the Center of *overnment reali0es the need and wants to establishcredible commitments among them, the &an+ should be able to demonstrategenerall# accepted practices, principles and standards governing the process of shaping credible commitments at the Center of *overnment. That is MTEF.

Measuring a Government’s Commitment to MTEF

The transparenc# conditions of MTEF allow eas# measurement of government8scommitment to MTEF. 'ublishing the Economic and Fiscal pdate, FiscalFramewor+ (tatement, &udget 'olic# (tatement and Corporate 'lans of Ministries are measures for government8s commitment. This commitment couldbe formali0ed b# a 'ublic 5nformation ct or b# a 'ublic Finance ct.

The 5MF8s Manual for Fiscal Transparenc# la#s out the generall# acceptedpractices, principles and standards governing the form, content and timing of these reports.

Measuring a Government’s Progress towards MTEF

6nce the measure is government8s reporting re"uirements, setting progressindicators becomes eas# as well. 5t is the adoption of generall# acceptedpractices, principles and standards governing the form, content and timing of these reports. The government should decide the order it will adopt theseinstitutions and the preparation time necessar# for their adoption.

Mt Ef Process

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