Ethiopia Oromia Region 2019

Executive summary

  1. The objective of the Public Expenditure and Financial Accountability (PEFA) assessment is to review the current performance of the public financial management (PFM) systems, processes, and institutions of the Oromia regional government since the last assessment in 2015. The assessment is aimed at assisting the government in identifying PFM weaknesses that may inhibit effective delivery of services to its citizens and the realization of its development objectives in general. Furthermore, the findings of the PEFA assessment will assist the government to develop a PFM reform strategy and provide the basis for a coherent PFM reform program that can be supported by development partners as well as through the government’s own initiatives.
  2. The Oromia assessment covered regional government budgeted units, extra-budgetary units, the Office of Regional Auditor General (ORAG), the regional council, and public enterprises. The team was unable to meet the Oromia Chamber of Commerce, as the relevant officials were not available. Annexes 3A and 3B provide a comprehensive list of information used and people met (interviewed), respectively, during the assessment. There were no other related surveys consulted or used in drafting this report.
  3. The fiscal years for the assessments are Ethiopian calendar (EC) 2008, 2009, 2010 (Gregorian calendar [GC] FY2015/2016, 2016/2017, 2017/2018). The period covered for each of the 94 dimensions (summarized into 31 performance indicators [PIs]) depends on the dimension and is in accordance with the PEFA measurement framework. Some dimensions were assessed at the time of assessment (March 2019 was the cut-off date). Other dimensions were assessed at the relevant time period, which is the last completed fiscal year, FY2017/2018, or FY2018/2019 for the last budget submitted to parliament.
  4. The assessment shows the current state of PFM performance of the region at the time of the fieldwork (March 2019 was the cut-off date).
  5. The assessment management framework, oversight, and quality assurance are summarized in Box 1.1. The assessment was funded by the World Bank, Irish Aid, U.K. Department for International Development, European Union, United Nations Children’s Fund, and United Nations Entity for Gender Equality and the Empowerment of Women (UN Women). It was managed by the World Bank.

Impact of PFM systems on the main budgetary and fiscal outcomes

PFM strengths

  1. The PFM laws (proclamations) for the regional government are derived directly from the federal government structure; these proclamations are quite strong for providing a solid basis for strengthening both PFM institutions and activities. For instance, the laws clearly provide for segregation of duties, the financial administration practices, financial accounting and reporting structure, and the external oversight functions of the regional supreme audit institution and the regional council on external audit scrutiny and budget reviews, respectively. The enactment of laws alone does not guarantee strong PFM systems; this should be supported by strong political and public service systems. Leaders at the regional government level have shown such commitments to ensuring improvement in PFM systems, a prerequisite for improved service delivery.
  2. Other PFM performances that have been identified as strong areas with positive impact on the three budgetary outcomes include the preparation of a credible budget at the aggregate level for both revenues and expenditures, indicating commitment for fiscal discipline. Budget classification is good; this allows citizens to see how much has been committed to improving their socioeconomic status. Another strength is that there are no revenues and expenditures from extra-budgetary units outside regional government financial reports and budgets. Reliable and timely information on allocation to service delivery units is a key element for efficient service delivery; while this is relatively good, delays in actual transfers negatively affect payment for goods and services, thereby affecting primary service delivery. The internal control framework has been strengthened by the revision of most PFM proclamations (procurement, budget, and cash management); the enforcement of rules and regulations has reduced (even though some still exist) the incidence of waste of public resources, so that scarce resources are strategically allocated to the right sectors for economic prosperity.

PFM weaknesses

Budget reliability

  1. The main weakness is expenditure composition outturn by economic classification, with variances above 15 percent in two of the three years (PI-2.2 with a score of D). While aggregate expenditure and revenue budgets are credible, the continuous reallocation of the approved budget both at the functional and economic levels defeats the purpose of original government policy. This means that planned service delivery activities will no longer receive the necessary funding and/or resources will no longer be strategically allocated, thereby negatively affecting the quality of primary service delivery. Furthermore, there are significant deviations referencing earmarked grants (Sustainable Development Goal [SDG]) with variances between 15 percent and 40 percent (HLG[1]-1.2). While this does not affect the overall regional government revenue budget, resource allocation for earmarked programs is affected, resulting in deficiencies in planned service delivery funded by SDGs.

Transparency of fiscal data

  1. The current year’s budget (either the revised budget or the estimated outturn) is presented in the same format as the budget proposal but previous year’s outturns at both aggregate and detailed levels are not part of the budget documentation, which does not facilitate budget analysis and comparison (PI-5). Also, public access to fiscal information is poor; most information is not published, and if published at all, it is late (PI-9). Information on resources (cash and kind) received by primary schools and health care facilities is available but not published (PI-8).

Asset and public investment management and fiscal risk monitoring and reporting

  1. At present, the government has limited information on total fiscal risks (PI-10). One major risk is in the housing sector, with the provision of housing for its citizens; funding for the housing projects is done through the issuance of bonds to the Commercial Bank of Ethiopia, which is guaranteed by the Oromia regional government. The total outstanding bond loan is unknown. This has a negative implication on strategic allocation of resources as the government will have to divert funds to pay for unplanned losses where necessary.

Budget preparation and approval process

  1. Clear rules exist for in-year budget amendments by the executive and are adhered to. That said, they allow for extensive administrative allocations. Three supplementary budgets have been approved in each of the last completed fiscal years, but with ex post approval except that of FY2015/2016 (EFY 2008) (PI-18.4). This has a negative implication on fiscal discipline as it allows the government to spend above its budget.

Revenue administration and accounting and expenditure arrears

  1. Three key PFM performances have been identified as weak areas:
  • The frequency of transfer of revenues (taxes) from the Oromia Revenue Authority (ORA) to the Treasury, done once a month (PI-20.2). The impact of this is that the government may be lacking the needed resources to pay for goods and services on time, thereby affecting the quality of service delivery.
  • Stock of revenue arrears is high (PI-19.4). Poor tax collection affects the government’s overall resources needed to fund its budget, also negatively affecting service delivery.
  • Stock of expenditure arrears (excluding retentions) is also high (PI-22.1). Huge expenditure arrears negatively affect budget credibility, a prerequisite for fiscal discipline. Where suppliers of goods and services become aware of payment delays from the government, they intend to increase the prices of their supplies to compensate for these payment delays. This, therefore, increases the unit cost of primary service delivery.

Procurement management

  1. A fundamental weakness observed relates to procurement management; while each budgetary unit prepares an annual procurement plan, these plans are not submitted to the procurement regulatory authority at Bureau of Finance and Economic Development (BoFED). To this end, there are no database and/or statistics on actual procurement either by open competition, restricted tender, sole sourcing, or request for quotation. This is compounded by the fact that the procurement complaints mechanism is less independent, with a majority of members involved in actual procurement activities. Very little procurement information is available to the public; significant elements not available to the public include contract awards, government procurement plans, and data on resolution of procurement complaints (PI-24). The poor procurement management framework affects efficient service delivery.

Accounting and reporting

  1. The annual financial statements are comparable with approved budgets and contain information on revenue, expenditure, some liabilities, and some financial assets; however, significant financial disclosures such as guarantees and contingent liabilities are omitted (PI-29).

External audit and scrutiny

  1. PI-30 shows that external audit coverage is quite low, currently at 63 percent by value mainly due to both financial and human capacity constraints; therefore, presently, the Office of Regional Auditor General (ORAG) does not cover state-owned enterprises (SoEs). This means that the fiscal risks posed by these SoEs are unknown. Consequently, the regional government may have to fund the activities of these SoEs using scarce resources (poor resource allocation) at the expense of primary service delivery sectors such as education and health.

Performance changes since last assessment in 2015

  1. According to the guidance issued by the PEFA Secretariat in October 2016, only 14 dimensions are directly comparable with the 2011 PEFA framework which was used in the last regional assessment in 2015. Table 0.1 shows changes in scores since 2015 assessment; only 1 has improved with 5 deteriorations and 23 unchanged. 3 were not directly comparable. As shown in Table 0.2, there has been no improvement since 2015 referencing these 14 directly comparable dimensions. Three dimensions have deteriorated (PI-11.1, PI-16.1, and PI-27.4 from the 2011 framework which correspond to PI-17.1, PI-21.2, and PI-18.4 from the 2016 framework respectively). Two dimensions (PI-11.2 and PI-18.4 from the 2011 framework which correspond to PI-17.2 and PI-23.4 from the 2016 framework respectively) appear to be overrated; therefore, no real change. Nine dimensions have remained unchanged.

Table 0.1: Changes in the ratings since 2015 using the 2011 framework

Deteriorations in ratings and performance

No change

Improvements in ratings and performance

Indicators

Number

Indicators

Number

Indicators

Number

HLG-1, PI-2, PI-4, PI-11, PI-27

5

PI-1, PI-5, PI-6, PI-7, PI-8, PI-9, PI-10, PI-13, PI-14, PI-15, PI-16, PI-17, PI-18, PI-19, PI-20, PI-21, PI-22, PI-23, PI-24, PI-25, PI-26, PI-28, D-1

23

PI-3

1

Not comparable

       

Indicators

Number

       

PI-12, D-2, D-3

3

       

 

Table 0.2: Changes in the ratings for directly comparable dimensions since 2015 assessment

Old indicator/ dimension (2015)

New indicator/ dimension (2018)

2015 score

2018

score

Performance change since 2015

2.2

The average amount of expenditure actually charged to the contingency vote over the last three years

2.3

Expenditure from contingency reserves

A

A

 

5

Classification of the budget

4

Budget classification

B

B

 

17.1

Quality of debt data recording and reporting

13.1

Reporting of debt and guarantees

NA

D

 

11.1

Existence of and adherence to a fixed budget calendar

17.1

Budget calendar

C

D

 

11.2

Guidance on the preparation of budget submission

17.2

Guidance on budget preparation

A

B

 

27.1

Scope of the legislature’s scrutiny

18.1

Scope of budget scrutiny

B

B

 

27.4

Rules for in-year amendments to the budget without ex ante approval by the legislature

18.4

Rules for budget adjustments by the executive

B

C

 

17.2

Extent of consolidation of the government’s cash balances

21.1

Consolidation of cash balances

C

C

 

16.1

Extent to which cash flows are forecasted and monitored

21.2

Cash forecasting and monitoring

A

B

 

16.2

Reliability and horizon of periodic in-year information to MDAs on ceilings for expenditure commitment

21.3

Information on commitment ceilings

C

C

 

16.3

Frequency and transparency of adjustments to budget allocations  above the level of management of MDAs

21.4

Significance of in-year budget adjustments

C

C

 

18.3

Internal controls of changes to personnel records and the payroll

23.3

Internal control of payroll

A

A

 

18.4

Existence of payroll audits to identify control weaknesses and/or ghost workers

23.4

Payroll audit

B

C

 

20.1

Effectiveness of expenditure commitment controls

25.2

Effectiveness of expenditure commitment controls

B

B

 

 

Legend

Improved

Slipped

No change

Overrated

       

Note: MDAs = Ministries, Departments, and Agencies,

  1. Tables 0.3 and 0.4 show analysis of changes in scores since 2015 based on the 2011 PEFA framework. Overall, there has been no improvement. PIs with ‘A’ scores have improved from 1 to 2; ‘B"’ scores have deteriorated from 14 to 7; ‘C’ scores have improved from 11 to 16; and ‘D’ scores have improved from 4 to 3. From a dimensional perspective, ‘A’ scores have deteriorated from 21 to 17; ‘B’ scores have deteriorated from 27 to 23; ‘C’ scores have improved from 20 to 23; and ‘D’ scores have deteriorated from 6 to 10.

Table 0.3: Comparison of PEFA scores by indicator (according to 2011 methodology)

Key PFM PIs

2015 scores

2018 scores

Total indicators

A

B/

B+

C/

C+

D/

D+

NR/NA

A

B/

B+

C/

C+

D/

D+

NR/NA

Credibility of the budget (plus HLG)

0

4

0

1

0

0

1

3

1

0

5

Comprehensiveness and transparency

0

2

3

1

0

1

1

3

0

1

6

Policy-based budgeting

0

1

0

0

1

0

0

2

0

0

2

Predictability and control in budget execution

1

3

4

1

0

1

2

4

2

0

9

Accounting, recording, and reporting

0

2

2

0

0

0

2

2

0

0

4

External scrutiny and audit

0

2

1

0

0

0

1

2

0

0

3

Donor practices

0

0

1

1

1

0

0

0

0

3

3

Total

1

14

11

4

2

2

7

16

3

4

32

Table 0.4: Comparison of PEFA scores by dimension (according to 2011 methodology)

Key PFM PIs

2015 scores

2018 scores

Total indicators

A

B/

B+

C/

C+

D/

D+

NR/NA

A

B/

B+

C/

C+

D/

D+

NR/NA

Credibility of the budget (plus HLG)

4

4

0

1

0

4

1

3

1

0

9

Comprehensiveness and transparency

2

4

3

1

0

4

2

3

1

0

10

Policy-based budgeting

1

0

4

0

2

0

2

3

1

1

7

Predictability and control in budget execution

9

10

6

3

1

4

10

8

7

0

29

Accounting, recording, and reporting

1

5

3

0

0

2

4

3

0

0

9

External scrutiny and audit

4

4

2

0

0

3

4

3

0

0

10

Donor practices

0

0

2

1

2

0

0

0

0

5

5

Total

21

27

20

6

5

17

23

23

10

6

79

Annex 4 provides a detailed analysis of changes in performance since the 2015 assessment according to the 2011 PEFA methodology.

Fiscal discipline

  1. There is deterioration in the transfers from higher level of government (HLG-1) to the regional government (B+ in 2015 to D+ in 2018) mainly due to deviations in SDGs. Though this did not significantly affect the overall revenue budget credibility, it negatively affected the credibility of the earmarked budget. While there has not been a change in aggregate expenditure outturn (B score for both 2015 and 2018), revenue budget at the aggregate level has seen an improvement from D in 2015 to C in 2018, implying a more credible revenue budget. Also, the government has tightened the monitoring and reporting framework of expenditure arrears, resulting in performance improvement (PI-4.2 from B in 2015 to A score in 2018); however, the actual stock of expenditure arrears (PI-4.1) has increased sharply from below 2 percent of total government expenditure in 2015 to more than 10 percent in two of the last three completed fiscal years, raising budget credibility issues.

Strategic allocation of resources

  1. Strategic allocation of resources has been negatively affected by the poor performance in expenditure composition variance (PI-2.1 from B in 2015 to C in 2018) and the rules for budget adjustment by the executive, where the government spends above its original budget before seeking legislative approval (ex post approval) through a supplementary budget (PI-27.4 from B in 2015 to C in 2018). While a clear and fixed budget calendar exists, all budget institutions (BIs[2]) failed to adhere to deadlines for budget preparation and submission mainly because they did not receive budget call circulars from BoFED on time, which will allow sufficient period for budget preparation. This could lead to weak links between budgets and plans as BIs will be in a rush to formulate and prepare their budgets.

Efficient service delivery

  1. Transfers from higher level of government (HLG-1) has deteriorated from an overall score of B+ in 2015 to D+ in 2018 mainly as a result of significant deviations of earmarked grants (SDG) between budgets and outturns. PI-2.1, which assesses the extent of expenditure composition variance, has also deteriorated with a score of C in 2018 against B in 2015. These slippages have negatively affected service delivery outcomes in the sense that required resources may not be available to deliver on planned service delivery activities. Also, the reallocation of budgets to other votes meant that planned service delivery initiatives will have to be suspended or discontinued entirely. Furthermore, there was a sharp deterioration of collection of revenue arrears (A score in 2015 to D score in 2018) with a collection ratio of 21.3 percent in 2018 compared to about 90 percent in 2015, in addition to revenue arrears currently at 12.5 percent in 2018 compared to below 2 percent in 2015. Poor tax collection ratio and huge revenue arrears meant limited resources to pay suppliers of goods and services, thereby negatively affecting efficient service delivery.

Overview of ongoing and planned PFM reforms and main weaknesses identified

  1. The regional government’s PFM reform strategy largely depends on the federal government’s policy direction; there is no specific strategy for the region. That said, the regional government has, therefore, decided to adopt the federal government's PFM reform strategy 2018–2022 which is anchored on Pillar 2.6 - fiscal policy of the federal government’s Growth and Transformation Plan (GTP) II.
  2. Regional officers from BoFED have been trained on the Integrated Financial Management Information System in 2018, even though the financial management software is yet to be rolled out to the regional administration. Additionally, periodic training and capacity-building programs have been conducted for regional, zones, and woreda PFM officials, especially in the area of accounting and financial reporting, procurement management, asset management, planning and budgeting, and cash and treasury management, among others, with support from development partners. Also, the regional government is improving the professional and academic qualifications of its workforce in collaboration with the Oromia Regional University. Furthermore, the regional administration has adopted the federal benchmarking framework which is aimed at rating the woredas; additional training is then provided for weaker woredas. Public Accounts Committee and finance committee members at the woreda levels have also been trained on the review of external audit reports and budget scrutiny, respectively.
       

      [1] HLG = Higher-level government.

      [2] Ministries, agencies, institutions, and other budgetary units.