Lesotho 2017

Purpose and Management of the Assessment
 
This Public Expenditure and Financial Accountability (PEFA) Performance Assessment Report evaluates the seven core pillars of the Public Financial Management (PFM) system of the Government of Lesotho (GoL) as set out in the summary assessment below. It evaluates how effectively the PFM system achieves the desirable budget outcomes of aggregate fiscal discipline, strategic allocation of resources, and efficient service delivery. The assessment was conducted in consultation with officials of the GoL and a team of international consultants. An oversight team with representatives of GoL managed the project. 
 
Prior to this current assessment, two previous PEFA assessments have been conducted in Lesotho at central government level; the first in 2009 covering FY2005/2006 to FY2007/2008 and the second in 2012 covering FY2009/2010 to FY2011/2012 
 
This assessment uses the revised 2016 PEFA framework.
 
The main report has the following structure:  • Chapter 1 is an introduction explaining the context, purpose and process of preparing the report, specifying the institutional coverage; • Chapter 2 provides an overview of relevant country-related information that provides the context underpinning the indicator results and the overall PFM performance;  • Chapter 3 provides the detailed assessment of performance in terms of the seven pillars of the PFM system. It provides analysis and measurement of results in terms of the 31 performance indicators (PIs) of PFM performance;  • Chapter 4 includes an integrated crosscutting analysis on performance of the PFM systems and how it impacts on the Government’s ability to deliver on the intended fiscal and budgetary outcomes, and to identify the most important systems weaknesses in that respect;  • Chapter 5 provides an overview of government´s PFM reform programmes including the institutional factors that are likely to impact the planning and implementation of reforms; • Annexes 1-6 provide supporting data and information to the assessment.
 
Assessment Coverage and Timing 
 
The assessment covers budgetary Central Government (including deconcentrated government; education and health operations), the Auditor General and Parliament. Subnational Government has been included insofar as the government’s oversight of fiscal risks arising from Local Government Units are concerned. Local Government Units per se, were covered in this assessment, as they are not separate budget heads. However, they are included in the expenditure of Ministry of Local Government. Public Corporations/ Enterprises (primarily concerned with water and electricity) form an important part of the economy, and the government has shareholdings in a number of commercial or semicommercial enterprises and more recently has engagements in Public Private Partnerships (PPP). The coverage also includes the governments monitoring of government-owned or controlled corporations, concerning fiscal risks and possibly contingent liabilities related to their operations.
 
Data gathering for the assessment, took place primarily between October and November 2016. 
 
Completed Fiscal Years are 2013/14, 2014/15, and 2015/16; the latest three years for which completed budget data is available. The last completed Fiscal Year is 2016, and the latest budget submitted to legislature and enacted is for the Fiscal Year 2016/17. As of the time of drafting this report, external audit of central government consolidated financial statements for FY2014/2015 and FY2015/2016 have not been completed. The analysis of the performance indicators in Chapter 3 is based on the latest data available in each case, following the guidelines for each indicator. 
 
At the level of Government institutional entities, the focus is on PFM practices as evidence of Government performance rather than a review of specific entities.
 
Impact of PFM Systems on the three main budgetary outcomes
 
Fiscal Discipline

Aggregate fiscal discipline requires that the budget be delivered as planned, with effective systems for ensuring financial compliance by all staff engaged in PFM activities. The PFM compliance functions must work well, as measured by relevant PFM Performance Indicators. The most relevant of these indicators and their assessment indicate that fiscal discipline (aggregate and at the component level) is undermined by weak budget credibility, compliance, accounting and reporting: • Controls of spending are deficient and reporting on budget outturns is late.  • Timely accounting and reporting is not working well and both in-year reporting as well as annual financial statements are late and with unsure quality. The Auditor General has for several years given qualified opinions on annual financial statements.  • Central control over cash is not working well, making the planning of government spending difficult. • Inadequate internal controls for both payroll and procurement.  • External controls are hampered by late submission of financial statements and the fact that MoF unnecessarily delays the Auditor General´s reports. 
 
Strategic Allocation of Resources

Strategic allocation of resources requires planning and executing the budget to be in line with government priorities aimed at achieving policy objectives. Some of the relevant indicators and their ratings show that the upstream processes of budget formulation and budget process perform fairly well. However, there are weaknesses in terms of downstream implementation of policies because of deficient upstream budget decisions and allocations. Whereas a strong framework exists for objectively analysing and selecting public investments, the medium to long-term ramifications of forward linked recurrent expenditures are not fully considered during appraisal stages; this has implication on subsequent annual budget estimates in terms of available fiscal space. Processes have also been hampered severely by delays and deficient transparency and control:

 
• The Macro department is developing useful analysis but they are not yet implemented in the budget process and the budget documentation, as the forward estimates in the budgets so far seem to be derived from incremental calculation processes.  • The budget preparation process, including legislative scrutiny of budgets, shows that these processes are in place and working fairly well.   • Expenditure composition outturn is showing that the final year-end result did not deliver the resource allocation intended at the beginning of the year. • Predictability and control of the budget is showing disappointing results demonstrating the difficulty for budget managers to monitor and manage their budgets. • Fiscal risks, assets and liabilities are areas of great concern. There are obvious and systematic weaknesses in the systems for monitoring different risks leading to potentially considerable government losses.
 
Efficient Use of Resources for Service Delivery

Non-compliance with the budget may lead to a shift across expenditure categories; this potentially has a negative effect on efficient service delivery. 
 
The current PFM system in Lesotho hampers efficient service delivery. The budget process does not have a strong policy or strategic focus and controls are deficient. Currently, there is no applied medium-term fiscal strategy to guide the budget process.
 
The most relevant indicators and their ratings show an appropriate budget development process but inadequate performance in budget execution:  • Budget (expenditure composition outturn) is a major concern for service delivery. This means that the original intentions of the budget as approved by parliament to meet service delivery is derailed by in-year decisions to reallocate these estimates across sectors  • Budget information is not transparent and comprehensive; this defeats citizens' ability to follow through and track resource allocations for service delivery. .  • Policy-based budgeting with a multi-year perspective is lacking. The budget process is able to deliver such a perspective but does not currently have the tools to do so. • The procurement and tendering processes need an urgent total rehabilitation of the government procurement system as both performance and controls are deficient. 
 
In summary, there is significant fiscal indiscipline resulting in wasteful government expenditure because of very weak linkages to policy priorities and initiatives as originally intended, thereby contributing to misallocation of scarce government resources, resulting in poor service delivery. The fiscal risk exposure to government is huge but still unknown in nominal terms; the existence of PPPs that are currently running and government's intention to fund other investment projects through PPP arrangements significantly poses a threat to government finances especially so when there are neither guidelines nor legislation on PPP. Again, government capacity on PPP arrangement is very limited.  

Performance Changes since Last Assessment
 
In line with tracking performance changes in accordance with the PEFA methodology, the tables below provide performance changes both at the level of indicators and dimensions. As indicated in the two tables below, scores have deteriorated significantly at both indicator and dimension levels since 2012. For instance, whereas there were 9 'Bs' and 16 'Ds' in 2012 at performance indicator level, 2016 recorded only 4 'Bs' but with an increase number of 'Ds' to 20. At dimension level, 2012 recorded 12 'As' and 27 'Ds'; but this deteriorated to 7 'As' and 33 'Ds'. Annex 7.2 provides detailed ratings and performance changes per dimension according to the old (2011) PEFA methodology. Overall, scores and performance have deteriorated. 
 
The analysis of the results points to deterioration of aggregate fiscal discipline when compared with 2012 assessment, principally due to significant budget overruns even though revenue outturns were close to targets. Unbudgeted increases in civil servants emoluments during the years 2014/2015 and 2015/2016 were the main contributing factor, coupled with expenditures relating to staff capacity building initiatives. Again, huge backlogs and delays in accounts reconciliations as a basis for monitoring budget execution contribute to fiscal indiscipline   
 
Whiles expenditures out of contingency vote has been consistently maintained within set limits, which is impressive, composition variances have been extremely high, the impact of which is poor and ineffective resource allocation according to original short and medium term strategic plans; this therefore defeats policy-based budgeting intents. Comprehensiveness and transparency of fiscal information required for proper social accountability appear to be fallen short of expectations.  The existence of IFMIS has had very limited positive impact on good financial management practices. Procurement management has remained stagnant since 2012; nonetheless, the establishment of independent procurement tribunal is seen as a positive step towards transparency  
 
Service delivery across the entire government machinery has been disappointing; there are no signs of improvement. This has been compounded by poor resource allocation described above. Internal controls for both salary and non-salary expenditures has not improved, especially so with payroll controls. The general external oversight functions of both the supreme audit institution and parliament have seen very little or no improvements.