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Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No 53731-UG

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT FOR A PROPOSED CREDIT

IN THE AMOUNT OF SDR65.9 MILLION (US$100MILLION EQUIVALENT),INCLUDING SDR26.4 MILLION IN PILOT CRISIS RESPONSE WINDOW RESOURCES

(US$40MILLION EQUIVALENT)

TO

REPUBLIC OF UGANDA

FOR THE

EIGHTH POVERTY REDUCTION SUPPORT CREDIT

August 30, 2010

Poverty Reduction and Economic Management 2Country Department AFCE1

Africa Region

This document has a restricted distribution and may be used by recipients only in the performance of their officialduties. Its contents may not otherwise be disclosed without World Bank authorization.


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UGANDA-GOVERNMENT FISCAL YEARJuly 1June 30

CURRENCY EQUIVALENTS(Exchange Rate Effective as of August 25, 2010)

Currency Unit Uganda Shillings (Ush)

US$1.00 2,260

ABBREVIATION AND ACRONYMS

AfDB African Development Bank MTEF Medium Term Expenditure FrameworkAG Auditor General NAADS National Agricultural Advisory ServicesBFP Budget Framework Paper NAPE National Assessment of Progress in EducationBoU Bank of Uganda NDP National Development PlanCAS Country Assistance Strategy NGO Non-Governmental OrganizationCBMS Community-Based Maintenance System NEMA National Environmental Management AgencyCHOGM Commonwealth Heads of Government Meeting NIMES National Integrated M&E StrategyCPIA Country Policy and Institutional Assessment NPV Net-Present-ValueDFID Department for International Development NSDS National Service Delivery SurveyEIA Environmental Impact Assessment NSSF National Social Security FundEMIS Education Management Information Systems NWSC National Water and Sewerage CorporationEPI Expanded Program for Immunization OAG Office of Auditor GeneralESW Economic Sector Work OPM Office of the Prime MinisterGDP Gross Domestic Product OOB Output Oriented BudgetingGNI Gross National Income PAC Public Accounts CommitteeGoU Government of Uganda PAF Poverty Action FundGPOBA Global Partnership on Output-Based Aid PEAP Poverty Eradication Action PlanHIPC Heavily Indebted Poor Countries PCC Policy Coordination CommitteeHSSP Health Sector Strategic Plan PER Public Expenditure ReviewHIV/AIDS Human Immunodeficiency Virus/Acquired

Immune Deficiency SyndromePEMCOM Public Expenditure Management Committee

IDA International Development Association PFM Public Financial ManagementIFMS Integrated Financial Management Systems PNFP Private Not-For-ProfitIGG Inspector General of Government PPA Participatory Poverty AssessmentIMF International Monetary Fund PPDA Public Procurement and Disposal of Asset

IPPS Integrated Pay and Personnel System PRGF Poverty Reduction and Growth FacilityJBSF Joint Budget Support Framework PRSC Poverty Reduction Support CreditJSAN Joint Staff Assessment Note PSIA Poverty and Social Impact AssessmentKfW Kreditanstalt fr Wiederaufbau PRSP Poverty Reduction Strategy PaperLG Local Government ROM Results-Oriented ManagementLGFC Local Government Finance Commission SDR Special Drawing RightsM&E Monitoring and Evaluation SWG Sector Working GroupMDG Millennium Development Goals TASU Technical and Administrative Support UnitMoES Ministry of Education and Sports UBOS Uganda Bureau of StatisticsMoFPED Ministry of Finance, Planning and Economic

DevelopmentUNDP United Nations Development Program

MoH Ministry of Health UPE Universal Primary EducationMoLG Ministry of Local Government URA Uganda Revenue AuthorityMoPS Ministry of Public Service VAT Value Added TaxMoWT Ministry of Works and Transport WSS Water Supply and Sanitation

MoWLE Ministry of Water, Lands and Environment

Vice President:Country Director:Country ManagerSector Manager:

Task Team Leader:Co-TTL:

Obiageli Katryn EzekwesiliJohn Murray McIntireKundhavi KadiresanKathie KrummPaul WadeSuleiman Namara


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ANNEX 5. Country at a Glance ................................................................................................. 71ANNEX 6. Summary of PEFA Indicator Scores, 2005 and 2008............................................. 74ANNEX 7. Map of Uganda ....................................................................................................... 75

BOXES

Box 1. Good Practice Principles on Conditionality.................................................................... 21

The Bank task team includes the following: Paul Wade (Task Team Leader, AFTP2), Suleiman Namara(Co-TTL, AFTSP), Sukhdeep Brar, Innocent Mulindwa (AFTED); Peter Okwero, Dominic Haazen(AFTHE); Parminder Brar, Paul Kamuchwezi (AFTFM); Jonas Parby (AFCTZ); Dino Merotto, RachelSebudde, Rebecca Simson, Obert Pimhidzai, Asumani Guloba (AFTP2); Tony Verheijen, Barbara Magezi(AFTPR); Grace Munanura, Howard Centenary (AFTPC); Sam Mutono, Martin Onyach-Olaa (AFTUW);Victor Ocaya (AFTTR); Martin Fodor (AFTEN); Nathalie Weier Johnson (AFTEN); Phillip Beauregard,Evarist Baimu (LEGAF).Task Team Assistants: Arlette Sourou (AFTP2); Rosemary Mugasha and Clare Busingye (AFMUG).Kathie Krumm and Kundhavi Kadiresan provided overall guidance and assistance.

Quality reviewers and advisors includedRobert Blake, Wolfgang Fengler and Iradj Alikhani.


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CREDIT AND PROGRAM SUMMARY

Republic of UgandaEIGHTH UGANDA POVERTY REDUCTION SUPPORT CREDIT

Borrower Republic of UgandaImplementingAgency

The Office of the Prime Minister (OPM) and Ministry of Finance,Planning and Economic Development (MoFPED)

Financing Data IDA credit, standard IDA terms. 40 years maturity and 10 year graceperiod.Amount: SDR65.9 million (US$100 million equivalent), includingSDR26.4 million (US$40 million equivalent) in Pilot Crisis ResponseWindow (CRW) resources.

Operation Type Programmatic, (1st of 3), single tranche.

Main Policy

Areas

Policy Cluster 1:Reforms in Public Expenditure Management, Public

Financial Management and Public Service Management that ImproveService Delivery. Strategic objectives supported by the PRSC are: (i)improved budget credibility, (ii) transparent and efficient public financialmanagement and public procurement; (iii) strengthened public sectormanagement and accountability; and (iv) strengthened local governmentsystem for service delivery.

Policy Cluster 2: Improving Value for Money in Public Service Delivery

Sectors. Strategic objectives supported by the PRSC are: (i) wider accessto and better quality of primary and secondary education; (ii) wideraccess to and better quality of health services; (iii) improved sexual andreproductive health care services and control of major communicable

diseases; (iv) improved water and sanitation system; and (v) improvednational road network to lower transport cost, raise competitiveness andfacilitate economic activity.

Key OutcomeIndicators Public Expenditure Management, Public Financial Management and PublicService Management

Percentage budget variance between allocations and releases of JBSsectors (by sector and front line service delivery levels)Baseline: 5 percent; Target: 5 percent

Percentage clean audit reports (Central, Local and Statutory bodies)Baseline: CG: 35 percent; SB: 49 percent; LG: 9 percentTarget: CG: 45 percent; SB: 59 percent; LG : 29 percent

Public Service Delivery SectorsIncrease in primary pupils passing PLE with grades I-III at publicprimary schools by sex and districtBaseline: 262,337 (girls 45.2 percent); Target: 280,000 (girls 46 percent)

Number and proportion of children immunized with DPT3Baseline: 82 percent; Target: 90 percent


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Percentage of improved water sources that are functional at the time ofspot check (disaggregated by (i) rural, and (ii) valley tanks and dams)Baseline: 82 percent, 23 percent; Target: 84 percent, 30 percentPercentage of paved national roads in fair to good conditionBaseline: 65 percent; Target: 80 percent

ProgramDevelopmentObjective(s) andContribution toCAS

The program development objective for the operation is improved accessto and greater value for money in public services.

The Uganda Country Assistance Strategy was discussed by the Board onMay 25, 2010. The proposed operation is a core component of the CASand will contribute to strategic objectives two, three and four: enhancepublic infrastructure; promote human capital development; and supportgood governance and accountability. It will complement a range ofinvestment lending operations.

Risks and Risk

Mitigation

Fiscal risks and debt sustainability. In the short term, fiscal pressures

could increase, which could pose a challenge to fiscal sustainability andwould compound the stress on the public service delivery system. ThePRSC mitigates these effects by supporting efforts to improveexpenditure efficiency and value for money. Furthermore, a permanentreduction in GDP growth could result in a high public debt ratio,highlighting the risks should the growth dividend from investmentsundertaken be lower than expected. Prudent investment and debtmanagement will mitigate this risk.

Governance and fiduciary risk. Commitment to better governance mayweaken before the 2011 elections. Corruption has increasingly become asource of public discontent. Three major corruption scandals - NSSF,

CHOGM and Global Fundhave in the past three years have revealedweaknesses in procurement, financial management, and control systems.The Bank and government continue the dialogue on governance issues tomitigate this risk.

Risks associated with oil revenue. In the medium term, the use of oilrevenue could raise new challenges such as real exchange rateappreciation and loosened fiscal rigor. The Bank and other developmentpartners are providing analytic support and policy advice to strengthenthe institutional base for managing future resource revenue. Policysupport under this operation for procurement and PFM reform isexpected to improve institutional capacity for future management of oil

revenue. Consideration will also be given to include policy reformsspecific to the oil sector in future PRSCs in this series.

Exogenous risks arising from bad weather or the world economy canadversely affect Uganda. As a landlocked country, Ugandasdevelopment may be threatened by insecurity in neighboring countries.This could disrupt trade routes or raise the risk of conflict in borderregions.


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Aid effectiveness. The proposed operation has been designed and will beimplemented through the Joint Budget Support Framework. While theJBSF has reduced transaction costs for government, this could lead todonor coordination costs that slow implementation and impede flexibleresponse to new policy problems. The Bank has signaled to its partners

the importance of flexibility during implementation. To minimizecoordination costs, partners have agreed to a clear coordination structureand dispute resolution mechanisms for the JBSF.

Operation ID No P101232


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IDA PROGRAM DOCUMENT FOR A

PROPOSED EIGHTH POVERTY REDUCTION SUPPORT CREDIT (PRSC8)

TO THE REPUBLIC OF UGANDA

I. INTRODUCTION1. This program document presents a proposed credit to the Republic of Uganda forSDR 65.9 million or US$100 million equivalent, including SDR 26.4 million or US$40million equivalent in Pilot Crisis Response Window (CRW) resources, to finance the EighthPoverty Reduction Support Credit (PRSC 8).

2. The proposed PRSC 8 is the first in a series of operations prepared in a JointBudget Support Framework (JBSF) with development partners. It is the first of threedevelopment policy lending (DPL) operations to support Ugandas poverty reductionstrategy.1 The proposed operations cover the period 2010-13.

3. The governments previous poverty reduction strategies reduced the share of

households living in poverty from 44 percent in 1997, to 38 percent in 2001/02, and to 31percent in 2005/06.2 Economic growth has remained high, with annual real GDP growthaveraging 8.2 percent over the 5 years ending in 2009/10, despite exogenous shocks,including the global financial, food and energy crises.

4. The Government of Uganda (GoU) recognizes that Ugandas growth record andpoverty reduction cannot be sustained without a transformation of the economy. Thisreorientation, which is consistent with the findings of the Banks 2007 Country EconomicMemorandum, is embodied in the five-year National Development Plan (NDP) - Growth, Employment and Prosperity. GoU will increasingly address infrastructure constraints togrowth because without substantial public infrastructure investments - in roads, electricity,railways and water for production - growth will slow.

5. Fiscal space is needed for investments in infrastructure and human capital for agrowing population, such as universal primary and secondary education and free basichealth care. The best way to increase fiscal space is through efficiency gains in publicspending, especially service delivery. Recognizing this and building on the gains achievedunder previous PRSCs, the government is promoting a set of reforms to improve publicsector management and the quality of public administration. These reforms emphasizeplanning and accountability measures such as output oriented budgeting and monitoring.These prioritized reform areas are also areas of relative weakness in Uganda as indicated byits CPIA ratings relative to other IDA countries (Figure 1). Uganda performs considerablybetter than average for IDA countries (and the African region) on economic management

(with high macroeconomic, fiscal, budget, and structural CPIA scores) but is average or

1Ugandas poverty reduction strategy has been contained in three Poverty Eradication Action Plans over 12years. The first PEAP was prepared in 1997 and provided the model for the PRSP. It was revised in 2000and again in 2004. The third and latest revision expired in June 2010, and has been succeeded by a five-year National Development Plan.2 These estimates are based on the Uganda national poverty line. When measured at a poverty line ofUS$1.25 per day, the estimated poverty headcount dropped from 64 percent in 1995 to 52 percent in 2005.


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below on public sector management, efficiency of revenue mobilization, quality of publicadministration, and transparency, accountability and corruption.

Figure 1: Uganda: Relative CPIA Rating Compared with IDA

Source: World Bank, IDA Countries Resource Allocation Index, 2009.

6.

The NDP similarly places strong emphasis on improved value for money inpublic service delivery. The PRSC contributes to four out of the eight NDP objectives:Objectives 3 and 5, human capital development and access to social services , which aims toimprove access to- and quality of public services; Objective 4, economic infrastructure, withan emphasis on energy, roads and water for production facilities, and Objective 7, goodgovernance, defense and security, which aims to strengthen public sector coordination,planning and accountability. The PRSC uses Public Expenditure Reviews (PERs) inEducation (2007), Health (2008) and Roads (2010) as analytic bases (Section IV). Theoperation identifies complementary reforms in service delivery and public administration(procurement, public financial management and staff management) that can lift criticalconstraints to service delivery.

7. The proposed operation has important growth aspects. Deficient transport andenergy infrastructure are the key constraints to Ugandas growth. The roads sector, whichconstitutes 90 percent of Ugandas transport infrastructure, is directly supported under thePRSC series. The proposed operation will also indirectly support growth, as increased valuefor money in public spending creates fiscal space for other much needed public investmentsto facilitate growth without crowding out private sector access to resources. Closely linked tothe PRSC series are significant IDA investments in roads (Roads Development 3 (FY05);

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2


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Transport Sector Development Project (FY10)) and energy (Power Sector DevelopmentProject (FY07); Energy Rural Transformation 2 (FY09); East Africa Regional Power Project(FY10); Electricity Sector Development Project (FY11)).

8. The proposed operation takes into account the impact of the global slump on the

Ugandan economy, which became more evident in 2009/10. In 2008/09, the globaleconomic slowdown resulted in an underperformance in GDP growth of 1.5 percentagepoints and a shortfall in fiscal revenues equivalent to 0.5 percent of GDP. This wasunderpinned by slowdown in exports and lower foreign direct investment, which constrainedprivate investment and threatened to reduce the pace of poverty reduction. Preliminaryestimates suggest the impact was worse than anticipated in 2009/10 as domestic demand isfeared to have slumped. The fiscal stimuli envisaged through governments earlier strategyfor public investment through infrastructure spending in the 2008/09 and 2009/10 has beenconstrained by implementation and absorption capacity issues. To ensure that the economyremains robust and to be able to address any vulnerability to growth and poverty reduction,fiscal policy will have to remain accommodative. To this end, supplementary resourcesprovided under the Crisis Response Window will help the government maintain investment

and counteract the global crisis, while the PRSC support for efficiency gains in publicspending can in turn help to address implementation and absorptive capacity issues.

9. Reforms in governance and economic management are critical for effective useof Ugandas future oil revenue. Reserves in the Albertine Graben of at least 800 millionbarrels have been confirmed with significant revenue expected in 6-10 years. Total depositsare estimated to contain as many as 2 billion barrels. The NDP is an opportunity to providegeneral budget support as a foundation for efficient management of oil resources. Thepolicies supported under the PRSC, with an emphasis on value for money and publicfinancial accountability, are important steps in managing the projected oil revenue.

II. COUNTRY CONTEXTPOVERTY,INEQUALITY, AND QUALITY OF LIFE INDICATORS

10. Poverty in Uganda has declined over 20 years, though inequality persists. Thepoverty head count fell from 44 percent in 1997 to 31 percent by 2005/06 (Uganda NationalHousehold Survey). The decline, especially between 2002/03 and 2005/06, came from bettercrop prices (particularly coffee), agricultural diversification, growth in non-wage, non-farmemployment (primarily household enterprises), and the creation of new wage and salary jobsin urban areas, mainly Kampala. However, inequality persists among regions, between ruraland urban areas, and within cities. The Gini coefficient of expenditure was 0.41 in 2005/63.War in the North until recently prevented it from developing with the rest of Uganda.

11. Population growth hampers Ugandas economic progress. Uganda has the thirdhighest fertility rate in the world, with 6.8 children per woman. The population has doubledsince 1986. At the current growth rate of 3.4 percent, the population will grow from 32million today to 68 million in 2035 and 100 million in 2050. Ugandas dependency ratio of1.12 is high, which decreases household ability to save and invest productively and puts

3 Ugandas level of inequality is about average for Sub-Saharan African non-mineral exporting economies.


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pressure on public services. Ugandas demographic transition is a key theme in the 2010CAS.

12. Ugandas progress toward the MDGs is fast in some areas (see Annex 5). Ugandahas registered strong progress and is likely to achieve MDG 1, poverty reduction and hunger

eradication; MDG 2, universal primary education; and MDG 3, gender equality andempowerment of women. Poverty has fallen steadily since the late 1990s, and with theintroduction of universal primary education, primary enrollment has increased to 92 percent,with near gender parity. Access to safe water in both rural and urban areas is on target; 65percent of rural households and 71 percent of urban households have access, compared withMDG targets of 62 and 77 percent, respectively. Access to sanitation facilities is 68 percent,compared with the MDG target of 72 percent.

13. Uganda will not reach some MDGs. Child and maternal mortality are still too highand unlikely to be met, with under five mortality of 137/1,000 and maternal mortality of 435per 100,000 births. MDG 6, combating HIV/AIDS and malaria, and MDG 7, environmentalsustainability, could still be met if given sufficient attention. The HIV/AIDS prevalence fell

from 15 percent in 1990 to 6.2 percent in 2000, although it appears to be rising once more.Malaria continues to be a main cause of mortality. The Bank has recently approved a newhealth sector operation that will improve national capacity to deliver the Uganda NationalMinimum Health Care Package, with special emphasis on maternal and newborn care.

14. Infrastructure investments have not matched growth in demand. The absence ofadequate infrastructure in particular in transport and electricity throughout urban andrural areas is the greatest obstacle to shared economic growth because it raises productioncosts. Improving transport connectivity between farmers and markets would induce astronger supply response in agriculture and raise household incomes among the rural poor.The Bank is supporting GoUs efforts to close this infrastructure gap, primarily throughinvestment lending. The previous CAS had committed over US$600 million to infrastructure,

mainly roads and energy, and similar amounts have been committed under the new CASdiscussed at the Board on May 25, 2010.

15. Households in poorer areas have fewer services and have worse health andeducation outcomes. Infant mortality in Kampala was 54/1000, but it is twice as high in theneighboring districts of the central region and in the north. Student-teacher ratios andclassroom sizes are much larger in poorer areas, especially in the north, resulting in lowerprimary completion rates and gender disparities. In 2007, government started implementationof universal post-primary education and training to increase access to secondary education.


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Figure 2: Poverty by location and demographic characteristics

Source: UBOS, Uganda National Household Survey, 2005/06

GOVERNANCE

16. Public sector governance has serious weaknesses which harm developmentoutcomes and threaten service delivery. These include weak staff management, pooraccountability of public officials, and lack of attention to demand for better governance. AHuman Resource Management review using the Actionable Governance Indicators

highlighted deficiencies in the way public servants are recruited, deployed and rewarded.4This explains the high vacancy ratios in public services (49 percent in health alone) and thehigh absenteeism in public institutions.

17. Accountability is weak - there are few, if any, consequences of inadequateperformance by officials. The Inspectorate of Government report to Parliament indicates aninvestigation rate of only 38 percent of cases brought forward regarding abuse of office,fraud, and loss of public funds. The National Integrity Survey (2008) found that 43 percent ofhouseholds regard health workers as corrupt and that 51 percent do not know how to reportcorruption. The public perception is that corruption is high and worsening, as shown byTransparency Internationals Corruption Perception Index which fell from 2.8 in 2007 to 2.6

in 2008 and 2.5 in 2009, out of a maximum score of 10.

18. Structural changes in government have affected performance. The creation ofnew districts in Uganda5 has raised administration costs and stretched scarce humanresources. At the same time the share of government expenditure at the local government

4 Republic of Uganda, Ministry of Public Service, Pilot Study on Human Resource Management, 2009.5 The number of districts in Uganda has increased from 34 in 1990 to 112 in 2010.


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level is falling. Low budget outturns suggest challenges in complying with Public FinancialManagement (PFM) regulations, and reports of misuse of public funds are common.

19. Although PFM institutions have been strengthened over the past years, serioussystemic weaknesses remain. The 2008 Public Expenditure and Financial Accountability

(PEFA) indicators register some improvements since 2005 but point to weaknesses in thepublic financial management system, particularly with regard to transparency andaccountability in the use of public resources (see Annex 6). Whereas there has been progressin some areas of public procurement reform, legislative reforms in this area remain slow andsuffer occasional setbacks, such as the recent amendments to the Public Procurement andDisposal of Assets Act proposed by Cabinet, now in Parliament.

20. While legislation prescribes decentralized public services, public resources areconcentrated at the center. Transfers to local governments have not been commensurate tothe governments stated decentralization by devolution process. While LGs are formallyresponsible for ensuring the quality of service delivery, public resource allocation remainshighly centralized6. This is compounded by a rapidly increasing number of districts which

increases local administration costs and reduces resources for frontline service delivery.Furthermore, the accountability link between local governments and citizens deterioratedafter the abolition of the graduated tax, user fees and parent contributions to Parents TeachersAssociation.7

RECENT ECONOMIC PERFORMANCE AND OUTLOOK

21. Ugandas economy grew rapidly over the past 20 years, propelled by consistentpolicy reforms. Annual growth in real GDP averaged 7.4 percent over the 10 years ending in2009/10,8 compared with 6.5 percent recorded in the 1990s. This acceleration was in spite ofconsecutive exogenous shocks including: the oil price shock; prolonged drought conditionswith adverse effects on energy generation and agricultural production; and volatile food

prices.

22. More recently, the global economic slowdown decelerated GDP growth, butUgandas medium-term growth prospects remain solid. In 2009/10, as demand forUgandas traditional exports reduced, liquidity conditions tightened, and real activity mainly

in the construction sector slowed, GDP growth fell to 5.8 percent, impressive by worldstandards, but falling short of projected performance. Gross domestic investment in 2009/10amounted to 23 percent of GDP, almost three percentage points below the level recorded in2008/09. Exports and remittances remained strong at 22 percent and 4 percent of GDP

6

More than 75% of the government budget is still executed at the centre with transfers to localgovernments declining from 28% of the total budget in 1997/98 (the start of the decentralization process) to22% in 2009/10. Even when netting out the effect of government priorities in centrally led infrastructureand energy investments in recent years, budget transfers to local governments at 26% of total budget (net ofinfrastructure and energy) in 2009/10 still fall below the 1997/98 budget share.7 Ibid; World Bank, Fiscal Policy for Growth, 2007, volume 2.8 Ugandan authorities revised their National Accounts back to 2000/01 by rebasing to FY 2002/03 andreweighting the various components to better capture economic activity. This raised the GDP growth ratesover the 5 years ending in FY 2007/08 by about 2 percentage points and has affected historical aggregatesthat are based on GDP.


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respectively through 2009/10, but foreign direct investment was low at about 5 percent ofGDP in 2009/10 (compared to a peak level of 11.8 percent of GDP in 2007/08), and othershort-term foreign inflows remained weak. The Uganda shilling depreciated by over 17percent against the US dollar in 2008/09, and more moderately, by 4.6 percent in 2009/10.GDP growth is expected to recover in 2010/11 and remain robust, averaging about 7 percent

in the next few years on a base of strong services growth, regional trade and agriculturalcomparative advantage.

23. The economic slowdown stemming from the global financial crisis has led tofiscal revenue shortfalls in 2008/09 and 2009/10. There was a shortfall in fiscal revenuecollection in 2008/09 (at Ushs.151 billion or about US$75 million, equal to 0.5 percent ofGDP) , and in 2009/10 (Ushs.159 billion or about US$80 million, equal to 0.5 percent ofGDP), largely reflecting slower economic growth and the impact of the global financialcrisis. Strengthening revenue performance is central to fiscal performance going forward.

24. Implementation and absorptive capacity have constrained the intended fiscalstimuli in 2008/09 and 2009/10 through under-execution of domestically funded

government projects. Whereas the revenue shortfall resulted in modest expenditure cuts innon-essential areas, significant under-spending was recorded on the development budget(compared to the ambitious increases in its budget allocation). However, while there wereabsorption challenges also within the 2009/10 development budget, the actual outturn indevelopment spending in 2009/10 was still 1.6 percentage point of GDP higher than thepreceding 2008/09 budget outturn.

25. The 2010/11 budget presented to parliament continues on a trend of modestfiscal expansion to counter the impact of the global financial crisis on the domesticeconomy. The overall fiscal deficit (including grants) increased from 1.9 percent of GDP in2008/09 to 3.0 percent of GDP in 2009/10 and is projected to reach 3.2 percent of GDP in thecurrent fiscal year. The development budget continues on a rising trend, increasing by 0.5

percentage point from 7.2 percent of GDP in 2009/10 budget outturn to 7.7 percent in the2010/11 budget. However, implementation and absorptive capacity will need to improvealong with better governance in order to effectively increase public investment, achieve theintended fiscal stimulus and raise value for money in public spending.

26. Inflationary pressures, which continued through the first half of 2009/10 on accountof pass-through of the sharp nominal depreciation of the shilling witnessed in the last quarterof 2008 and higher food prices reflecting regional demand for Ugandan food exports, havesubsided in line with declining aggregate demand and reflecting bumper harvests. Inflation isnow under control, declining from 12.3 percent in 2008/09 (end of period) to about 5 percentin 2009/10.Monetary policy was gradually eased in 2008/09 in response to the fall in private

external financing, and continues to be managed cautiously to preserve the delicate balancebetween stability and real sector recovery prospects.

27. Ugandas banking sector remains sound and well-capitalized despite the crisis.At the outset of the financial crisis, Uganda had a solid banking system and macroeconomicfooting, with substantial amounts of reserves. Banks have generally improved their liquiditybuffers and tightened lending standards, in addition to the high capital adequacy ratios (Tier 1ratio at 19.4 percent compared with the Basel II requirement of 12 percent) and a low ratio of


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non-performing loans to gross loans at 4.0 percent. More recently, the decline in banksprofitability suggest that operational risks may have increased.

28. Ugandas riskof debt distress is low as a result of international debt relief andprudent macro management. Following entrance into the Multilateral Debt Reduction

Initiative in 2006, GoU adopted a new debt strategy that sets annual limits on borrowing anda preference for loans with high returns. The results of the 2010 Joint Debt SustainabilityAnalysis9 suggest that all parameters for sustainability are within the prescribed thresholdsand the risk of debt distress is low. The authorities plan to only gradually increase the use ofnon-concessional borrowing to finance their ambitious public investment program afterbuilding requisite implementation capacity. Debt service ratios remain robust under most ofthe standard stress tests. The Debt Sustainability Analysis shows, however, that a permanentshock to real GDP growth10 results in a marked deterioration in the public debt ratio. Asfiscal spending increases in the face of limited revenue, additional financing throughnonconcessional sources may raise the risk of debt distress. This highlights the risk shouldthe growth dividend from investments undertaken be lower than expected.

29.

GoU will require external loans to finance the fiscal deficit and maintain itsfiscal expansion policy. It is expected that the fiscal deficit (including grants), projected at3.0 percent of GDP in 2009/10 and 3.2 percent in 2010/11, will be largely funded throughconcessional loans. These investments will be productive only if government addressesimplementation problems, particularly in roads. The proposed PRSC 8 operation helps toalleviate Ugandas fiscal constraint by financing the governments investment program,including supplementary financing through the Crisis Response Window. It also aims tostrengthen absorptive capacity through support for reforms in public financial management,procurement and public service management.

30. Ugandas oil discoveries promise significant increases in GDP and in fiscalrevenue. With confirmed oil reserves of 800 million barrels and potential reserves of up to 2

billion barrels, Ugandas reserves are similar to those of the Republic of Congo (1.9 billion),Equatorial Guinea (1.7 billion) and Gabon (3.2 billion), but far short of Nigeria (36.2 billion)and Angola (13.5 billion). Although price volatility makes it difficult to predict the revenuestream, public revenues are projected to double in about 6-10 years time. Peak production isprojected to be 150,000 barrels per day, a rate that could be sustained for 10-20 years. Basedon the current fiscal system and an oil price of US$75 per barrel, government revenue at peakproduction is estimated at over US$2 billion per year. Large investments will be needed toproduce, transport, export and refine the oil so there remains uncertainty regarding the time toreach peak oil production and income.

9 Uganda: Joint IMF/World Bank Debt Sustainability Analysis, 2010.10 The permanent shock is defined to be one under which GDP growth is on average smaller by roughly 1percentage point compared with the baseline scenario and the path of nominal fiscal expenditure leftunadjusted.


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Table 1: Selected Macroeconomic Indicators, 2007/08-2013/14

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14

Indicators

(Annual percentage change)

Domestic pricesAverage overall (headline inflation) 7.3 14.2 9.5 4.1 5.2 5.3 5.2Average underlying inflation (exc. Food crops)2 8.0 12.5 7.3 4.5 4.9 5.1 4.9GDP deflator 5.0 14.6 8.6 3.9 5.1 5.1 5

Exchange rateNominal effective exchange rate -1.6 -- -- -- -- -- --Real effective exchange rate -1.3 -- 0.3 -- -- -- --Terms of trade (based on all exports ) -1.1 11.6 7.8 -4.0 1.1 1.8 1.8

National income accountsAgriculture 1.3 3.5 2.1 2.7 -1.1 34 3.6Manufacturing 7.3 9.4 5.9 5.4 5.4 7.0 7.0Services 9.7 7.5 5.8 7.5 7.9 22.5 10.3

Total GDP at market prices 8.7 7.1 5.8 6.4 7.0 7.2 7.4GDP per capita 5.4 3.8 2.4 3.1 3.7 3.9 4.1

(As percentage of GDP at market prices)Real Sector

Gross domestic investment 25.3 25.9 23.2 23.4 25.2 25.6 26.2

Public investment 4.9 5.4 5.1 6.4 7.7 7.8 8.1Private investment 20.4 20.5 18.1 16.9 17.5 17.8 18.2

Gross national savings (i.e. excl grants) 19.7 19.4 16.8 18.5 20.0 20.5 21.0Public 2.1 4.3 2.1 3.5 4.3 4.7 5.1Private 17.7 15.1 14.7 15.0 15.6 15.9 16.0

External SectorCurrent account balance (incl grants) -3.2 -4.8 -6.4 -6.2 -6.1 -5.7 -5.6

Exports of goods & nonfactor services 21.9 21.2 21.8 21.6 21.1 20.7 20.1Imports of goods & nonfactor services -32.0 -31.4 -34.1 -31.5 -30.9 -29.7 -28.8Trade balance -6.3 -6.4 -8.3 -5.5 -5.5 -4.9 -4.7

External Debt to GDP ratio 17.7 19.6 20.1 23.3 25.7 26.3 26.4o/w Public &Publically guaranteed 11.8 13.8 13.6 15.9 18.1 19.6 20.7

Debt service to exports ratio 6.0 3.5 4.4 6.1 6.6 7.6 8.2Public debt service to exports ratio 2.4 0.7 1.6 1.5 1.7 2.0 2.1

Foreign reserves (in months of imports) 5.8 5.9 5.2 5.6 5.7 5.9 5.9

Government FinanceDomestic Revenue 12.8 12.5 12.7 13.1 13.5 14 14.4Total expenditure and net lending 17.9 17.8 18.6 18.1 18.8 18.7 18.9Overall balance (excluding grants) -5.1 -5.3 -5.7 -5.0 -5.4 -4.8 -4.5Overall balance (including grants) -2.4 -1.9 -3.0 -3.2 -3.6 -3.2 -3.1Domestic borrowing -0.3 -0.2 -1.2 0.6 0.4 0.3 0.4Net Foreign financing 2.5 2.0 1.8 2.6 3.2 2.9 2.6

(As percentage of total expenditures)

Sectoral Expenditure (includes donor financing)Roads and Works 13.2 18.5 17.2 23.6 23.7 22.3 21.3Agriculture 4.3 3.8 4.4 6.6 6.0 5.3 4.6Education 16.1 15.4 15.3 14.6 13.1 11.4 10.1Health 9.0 10.7 10.4 14.5 13.6 12.5 11.6Energy and Mineral Development 4.0 4.1 9.9 5.4 11.8 12.0 13.2Security 9.3 8.1 6.9 6.2 6.1 5.6 5.0

Water 3.3 2.6 2.4 4.6 4.4 4.0 3.8Law and Order 4.9 4.8 5.1 4.6 4.4 4.6 4.6Public Sector Management 6.0 9.6 10.0 7.0 6.2 5.3 4.7Public Administration 7.2 2.8 3.1 2.1 1.8 1.6 1.4Interest payments 6.1 6.5 5.2 5.3 5.3 5.3 5.3

Sources: Ugandan Authorities; and IMF staff estimates and projections

1.Fiscal year covers July 1-June 30

2.Core inflation


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III.THE GOVERNMENTS PROGRAM AND PARTICIPATORY PROCESSES31. GoU approved a new five-year National Development Plan (FY2011-2015) in March2010. The NDPbroadens the focus from poverty reduction to structural transformation for thepurposes of economic growth and improved living standards. It is the first in a series of six plansintended to transform Uganda over thirty years into a modern and prosperous country.

32. The NDP has eight objectives. These are: (i) increase household income and promoteequity; (ii) enhance the availability and quality of gainful employment; (iii) enhance humancapital development; (iv) improve the stock and quality of economic infrastructure; (v) increaseaccess to quality social services, (vi) promote science, technology, innovation, and ICT toenhance competitiveness; (vii) strengthen good governance, defense, and security; and (viii)promote sustainable population and use of the environment and natural resources. The NDP alsoidentifies fourteen national flagship projects intended to address binding constraints to growth.

Furthermore, the NDP identifies a set of strategies for unlocking the binding constraints todevelopment which are well aligned with PRSC priorities. These include a focus on improvingpublic sector management and administration, and improving public sector financing andfinancial services. In addition, the PRSC contributes directly to the four objectives describedbelow.

33. NDP Objective 4: Economic Infrastructure. The NDP emphasizes that sustaining highgrowth and transformation requires industrialization, value addition in agriculture, and largermarkets both internally and externally and that these objectives all depend on infrastructureinvestments, particularly in energy and transport, but also water for production facilities. TheNDP also identifies supporting reforms required to improve the overall business climate (seeObjectives 1 and 2), including the need to strengthen the domestic financial sector, and improve

policy and regulatory frameworks.

34. NDP Objectives 3 and 5: Human Capital Development and Access to SocialServices. The NDP maintains a strong focus on improving and expanding social servicedelivery. Key priorities are improving quality of education, expanding universal secondaryeducation, and implementing business, technical and vocational education and training. Healthsector priorities include improving management of health units, reducing waste, andrehabilitating and equipping hospitals, while continuing to focus immunization, communicabledisease control, reproductive health and nutrition and hygiene. These ambitious programs forservice delivery are feasible only in the context of improving efficiency in public spending, a keypillar of governments fiscal strategy.

35. NDP Objective 7: Good Governance. The NDP identifies a weak public sector as amajor constraint to development and aims to address this challenge by building performance-based management systems and improving policy coordination. Priorities include theintroduction of institutional performance contracts at all levels, improved human resourcemanagement of public servants, and increased transparency and accountability by introducingvalue for money performance standards and performance budgeting in all sectors.


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IV.BANK SUPPORT TO THE GOVERNMENTS PROGRAM36. The new Uganda Country Assistance Strategy was discussed by the Board in May2010. The CAS supports the GoU in reaching its medium-term goals of accelerating economicgrowth, transforming the structure of the economy, raising employment and ensuring prosperity

for all. Like the NDP, the CAS focuses on infrastructure development, agriculture, human capitaldevelopment, and improving efficiency and value for money in public spending through bettergovernance. The CAS will cover the period 20112015. The PRSC operations will continue tobe an important component of the Banks support for Uganda in the CAS, constitutingapproximately one quarter of IDA lending, and contributing to strategic objective two, enhancedpublic infrastructure; objective three, promote human capital development; and objective four,good governance and accountability.

PARTNERSHIPS

37. The proposed operation was prepared jointly with ten other Joint Budget Supportdonors and government. The Joint Budget Support Development Partners (JBS-DPs) consists

of Austria, Belgium, Denmark, European Union (EU), Germany, Ireland, the Netherlands,Norway, Sweden, and the United Kingdom, in addition to the Bank. Over US$300 million isexpected to be disbursed under the JBSF annually, of which the Bank contribution is projected tobe roughly one-third in the CAS. The Joint Budget Support Framework is aligned with thegovernment cycle and embedded in national coordination structures. The governance structure istwo tiered and includes a high level Development Partner JBSF Policy Advisory Committee,which meets regularly with government at a semi-annual high level forum. At the working level,the JBSF Technical and Policy Dialogue Taskforce meets frequently to coordinate the design andimplementation of the JBSF and conduct an annual assessment of performance. Sector WorkingGroups coordinate dialogue with government at sector level. All missions and assessments areconducted jointly by the participating development partners. The final appraisal report isproduced jointly by the JBS development partners, and strong efforts will be made to reach aconsensus on how to assess government performance although each partner makes anindependent decision about disbursements based on the appraisal results. The joint approachreduces government transaction costs, increases the predictability of disbursements, and createsmutual accountability, in line with the Paris Declaration on Aid Effectiveness and subsequentAccra Agenda for Action.

38. The JBS partners have also agreed to finance a multi donor trust fund, managed by theBank, to establish a Technical and Administrative Support Unit (TASU) for the JBSF. TheTASU will have a dual role in providing administrative support as well as generating high-quality technical and analytical work that will form the evidence base for future policy design,assessment of results, and policy dialogue.

39. The IMF has recently approved a new 3-year Policy Support Instrument forUganda. Collaboration between the Bank and the Fund remains strong, with the IMFconcentrating on macroeconomic issues while broader issues of public financial management,sectoral policies and structural and governance reforms are supported by the PRSC. Fiscal andfinancial sector issues are supported jointly.


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RELATIONSHIP WITH OTHERBANKOPERATIONS

40. The PRSC complements a large World Bank portfolio of sectoral operations. In linewith governments increased focus on growth enhancing infrastructure and human capital, Banksupport has a strong emphasis on transport, energy, complemented by continued support to social

sectors and public sector reform.

41. CAS Strategic Objective 1, Promote Sustainable and Shared Economic Growth:This objective is supported by a range of investment projects and technical assistance focused onthe business environment, financial sector development, regional integration, agriculture andnatural resource management.

42. CAS Strategic Objective 2 and 3, Enhance Public Infrastructure and StrengthenHuman Capital Development: Complementing PRSC Policy Cluster 2, improving value formoney in public service delivery, the CAS includes investment programs in the service sectorsthat provide resources for specific programs or targeted technical assistance. These programsfocus on intra-sectoral resource constraints or management challenges and are complemented by

the PRSCs cross sectoral approach (see CAS Objective 4), which helps to lift broader servicedelivery level constraints.

(a) Education: Financing for the education sector focuses on post primary education and aims tosupport the rollout of governments Universal Secondary Education policy (Post PrimaryEducation and Training Program, FY09). It also supports strengthened science educationunder the Millennium Science Initiative (FY06).

(b)Health: The Bank is supporting the health sector through the Health Systems StrengtheningProject, which reinforces the PRSCs focus on efficiency in service delivery by providing

assistance to strengthen human resource management and other essential management

systems for health care service delivery. The Bank-administered Global Partnership onOutput-Based Aid (GPOBA) and KfW are together piloting output-based aid (a form ofresults-based financing) for safe child delivery and treatment of sexually transmitted diseases.

(c) Water and Sanitation: Grant support to the water and sanitation sector has been providedthrough the water and sanitation program partnership and includes a focus on water sectorgovernance, which has helped to inform the PRSC. A proposed Water Sector Developmentand Management Project (to be delivered in FY13) will finance investments in productioncapacity, inter alia. Grant support has also been provided through the Bank-administeredGPOBA for both rural/small towns and urban/National Water and Sewerage Corporationschemes whereby results-based financing in the form of output-based aid is used to increase

access for the poor, and in some cases has also leveraged private sector finance and expertise.

(d)Transport/Infrastructure:The Banks portfolio is increasingly oriented toward transport andenergy, in line with the governments priorities. Support is provided under the Third RoadsDevelopment Project (FY05), and the recently approved Transport Sector DevelopmentProject (FY10), for governance and management of the roads sector.


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43. CAS Cross-Cutting Objective 4, Good Governance and Value for Money: Thisobjective, which corresponds to Policy Cluster 1 of the PRSC, is further supported by a range ofESW, technical assistance and investment projects. To strengthen expenditure management theBank has been providing extensive Economic Sector Work (ESW) throughout the last CASperiod focused on sector specific expenditure allocations and management. The design of the

PRSC was also informed by the Public Service Performance Enhancement Project, approved inFY06, which aims to enhance the policy, institutional, and regulatory environment for sustainableservice delivery. The Local Government Management and Service Delivery Project (FY08) andNorthern Uganda Social Action Fund 2 (FY09) further help to strengthen public financialmanagement and accountability at local levels. In addition, targeted ESW and technicalassistance aim to inform national level public financial management and public procurementreforms. While these projects provide direct financing for program implementation and capacitybuilding within particular ministries or agencies, the PRSC helps to build stronger momentum forchallenging reforms and has secured broader inter ministerial commitment for reforms thatrequire joint action.

ASSESSMENT OF ACHIEVEMENTS AND LESSONS UNDERPRSC17

44. The PRSC achievements and lessons described here are drawn from the 2009 IEGCountry Assessment Evaluation, Implementation Completion Reports, and ImplementationStatus Reports.

45. There was greater focus on public investment priorities for growth and povertyreduction. The PEAP and PRSC processes have led to improved focus on the developmentchallenges faced by Uganda and on the public investment needs to meet those challenges. Thisfacilitated the allocation of resources, helped increase the efficiency of basic service delivery, andcontributed to improving the coordination of the type of cross sectoral efforts needed for povertyreduction in its various dimensions.

46.

High transaction costs are necessary to ensure a strong PRSC program.Government, while raising concerns about the size of PRSC missions and a reform agenda thatleaves little room for down time, made it clear that the budget support approach was by far thepreferable way of proceeding. With respect to the World Bank, the available evidence suggestedthat resource cost for program preparation was considerably higher for the PRSCs than forregular IDA investment projects. The report recommended that follow up PRSC attention shouldfocus on improving the impact of the transferred resources rather than worrying too much aboutthe costs of program preparation.

47. While broad, complex policy operations are valuable at capturing a wide variety ofneeded initiatives, they do come at a cost. PRSC 5-7 were clearly this type of complex

program, and one disadvantage thereof is that the lagging parts of the program tend to get aninordinate amount of attention and may hold up and even damage other activities that mightotherwise perform better and move faster. The entire operation lost resources because of weakimplementation in a few areas. Accordingly, a narrower focus may lead to more meaningful anddeeper implementation and greater reform sustainability.

48. Donor coordination improved. The PRSCs helped to streamline and coordinate donorsupport, and this led to increased resource flows from donors as aid shifted progressively into


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direct budget support. The PRSC series also improve the predictability of concessional resources.The locus for PRSC donor activities has been the Sector Working Groups, supplemented byspecial meetings arranged during PRSC missions. Improved coordination was evident in theexchanges of donor assistance strategies and key reports, feedback to the World Bank, andcontinuous informal exchanges, especially important when they involved government

representatives to reinforce the sense of partnership and transparency. Donor coordination isbeing further strengthened through the Joint Budget Support Framework (JBSF) arrangement.

49. The quality of national M&E frameworks supporting poverty reduction efforts (andby extension, PRSCs), tends to be very weak. Yet the Bank chooses to evaluate the success ofits programs in accordance with those frameworks. In order to reconcile the objective ofownership with the objective of measurement, the Bank must provide more effective assistanceto governments to support the design, implementation, and utilization of findings from thoseM&E efforts, and in the interim be selective and realistic in its choice of PRSC indicators.

50. Sequencing of reforms. The joint ICR for PRSCs 1-3 and that for PRSC 4 highlightedthe issues of capacity and the PRSCs tendency to set ambitious long term goals. In response to

this, the Bank took steps during the second series (PRSC 5-7) to include detailed descriptions ofthe rationale, content, and policy expectation for each prior action. In some cases it wasimpossible to link prior actions to the long term objectives, partly because they were presented inannual PRSCs. Prior actions for the PRSC series 8-10 therefore will be sequenced over theMTEF.

51. Alignment with the national budget cycle. There are advantages to aligning the PRSCwith the GoU budget cycle. Typically, though project documents acknowledged that thisalignment was an objective, the PRSCs lagged months behind the governments call forindividual ministerial programs. This often posed challenges for the government to fit the PRSCconditions into the already developed Ministerial programs. In addition, if budget support waslate, the GoU would also have to move resources to adjust to the shortfall in budget support.

52. Cross-cutting reforms. Another lesson is the need to strengthen the link between thecross-cutting reform agenda in the PRSC and sectoral reforms. In most instances, service deliveryreforms cannot be done without appropriate measures taken across the public sector as a whole,including key ministries such as Ministry of Finance, Planning, and Economic Development(MoFPED), Public Procurement and Disposal of Asset (PPDA), Ministry of Local Government(MoLG), Ministry of Public Service (MoPS), and Ministry of Gender, Labor and SocialDevelopment. Often these crosscutting measures would need a tailor-made application to theparticular service delivery sector to be truly effective (for example, in the area of procurement ofdrugs, one would need a tailor made improvement in procurement procedures beyond the generalmeasure). Previous PRSCs have worked at both sectoral and national levels but have been less

successful at engaging government across sectors.

53. Procurement reforms. Previous PRSCs have supported procurement reforms in Uganda.They focused on establishing the Public Procurement and Disposal of Assets Act (2003) and oncreating operational procurement units and tender committees in ministries and localgovernments. Under PRSC 7, the government established that compliance with the procurementlaw was low and that it is necessary to strengthen compliance mechanisms. This enforcementmechanism includes the proposed amendments under PRSC 7 (which will be concluded under


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PRSC 8). There were some setbacks as the proposed draft amendments sometimes differed frominternational best practice. The outcome of PRSC 7 in this area was not satisfactory, andimprovement in the Procurement Law is being pursued under PRSC 8.

54. Legal reforms require time for wide stakeholder engagement. A key lesson

emanating from the experience in PRSC 7 is that reforming a law that involves multiplestakeholder interests and possible rent seeking requires not only reasonable lead time but alsoextensive time for dialogue. The dialogue is necessary to deal appropriately with pervasiveincentives that may arise during the process of negotiating a second round of reforms. Forexample, in the process of amending the procurement law under PRSC 7, additional proposalsemerged that were likely to restrict open competition in procurement and would thereforeweaken, rather than strengthen, the law. Following extensive consultations with stakeholders,most of these weaknesses have been corrected in the version of the Bill currently beforeParliament.

ANALYTICAL BASE

55.

The analytical base of the new PRSC series, focusing on efficiency of service deliveryand increasing value for money, is the Country Economic Memorandum (CEM, 2007), the PublicExpenditure Reviews (PERs) for 2007, 2008, and 2010 and sector analytical work.11

56. The CEM has helped government to develop a prioritized, time-bound, and consistent setof policy actions, investments, and interventions to accelerate economic growth. As a result ofthe CEM and other work, growth and economic transformation became more prominent in thethird PEAP and NDP than had previously been the case.

57. The sectoral PERs that followed the CEM have been critical inputs into governmentsbudget reforms, which aim to generate value for public money. The PER 2007 underscored that ashift in budget composition toward infrastructure spending was urgently needed to support

growth, but that this shift would require deep public administration reforms to increase theefficiency of public expenditures. Evidence from the education sector showed that as much as 20percent of recurrent expenditure was estimated to be waste owing to staff absenteeism, ghostworkers on the payroll and inappropriate use of capitation grants. This suggested that Ugandawould greatly improve efficiency across all sectors by reducing such leakages.12 The PER 2008explored budget composition trends and resource performance in the health sector. It concludesthat better value for money in public services will result from appropriate funding at the level ofservice delivery, controlling employee related costs in central government budgets, andpreserving allocations to the development budget. Within the health sector, reducing healthworker absenteeism, reducing drug leakages and waste in clinics and stores, and improving theintegration of off budget donor funds into the planning and resource framework of the public

health sector are identified as the most important first steps to increase efficiency.

11 World Bank, Uganda: Fiscal Policy for Growth, Public Expenditure Review, 2007; World Bank, Uganda:Health Efficiency and Future Expenditure Challenges, Public Expenditure Review, 2008; World Bank, Uganda:Strengthening the Impact of the Roads Budget (DRAFT), Public Expenditure Review, 2010.12 World Bank, Fiscal Policy for Growth, 2007, Volume 2, p. 32


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58. Ongoing sector work also continues to inform the PRSC process. A report on publicfinancial management,13 including an assessment of the fiscal decentralization, and the PEFA(2009) report have advanced PFM reform. A pilot study using actionable governance indicatorsto analyze human resource management has informed the design of public service reforms.Several studies undertaken and ongoing on education,14 health,15 and water and sanitation16

inform the human development component of PRSC support. The 2010 PER focuses on technicaland allocative efficiency in road construction and maintenance.

13P. Brooke and J. Brumby PFM reform in Uganda a platform approach, July 2008.14Annual Sector Review Report 2007/08; Studies on learning assessment, teacher recruitment/retention, fundingof and public/private partnership for post primary education; USAID expenditure tracking study on schoolcapitation grants.15Uganda Health Work Force Turnover Study, capacity project (USAID) and MoH (2009), Assessments onHIV/AIDS sector spending and on procurement system in the National Medical Stores.16 Cost Variation Study (2008); Addressing Institutional and Financial Challenges of Environmental Sanitationin Uganda (2009) Value for money and tracking studies to investigate high costs of deep boreholes and pipedwater schemes.


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V.THE EIGHTH POVERTY REDUCTION SUPPORT CREDITOPERATION DESCRIPTION

59. The proposed Eighth Poverty Reduction Support Credit would be the first in a planned

series of three operations (PRSC 8-10). Building on the lessons from the last seven annualoperations, the new series will support the implementation of Ugandas Poverty ReductionStrategy, the recently completed National Development Plan. The Banks PRSC support toUganda is provided within a harmonized framework for budget support.

60. The objective of the proposed PRSC 8 is to support governments reforms to improvedaccess to, and greater value for money in, public services. The operation supports reforms undertwo policy clusters:

(a) Policy Cluster 1: Reforms in public expenditure management, public financial managementand public service management that improve service delivery.

(b)

Policy Cluster 2: Improving value for money in the four core service delivery sectors: health,education, water supply and sanitation, and road construction and maintenance.

61. The PRSC and Joint Assessment Framework (JAF) permit flexibility in programcoverage and design. If necessary, the PRSC/JAF could be modified to address emerging policyissues or exogenous shocks. It will also allow for the incorporation of additional sectors oncethey have developed adequate policy frameworks for reforms. Future operations in the series mayaddress growth (including in agriculture), governance of the oil sector, and crosscuttingenvironmental management issues. This will be determined as the changing policy frameworkbecomes clearer.

RESULTS FRAMEWORK AND FINANCING

62. The PRSC uses a subset of the authorities policy and outcomes matrices as itsresults framework. This is also a subset of the JAF jointly developed and agreed by governmentand JBSF development partners; hence, agreed prior actions in PRSC 8 are the same as in JAF 1and similarly between PRSC 9 and JAF 2. For the four service delivery sectors covered by thePRSC (and JBSF), the result frameworks have evolved since the PEAP and are fully consistentwith those agreed between MoFPED and line ministries for the output based budget for FY2009/10.

63. Prior actions and triggers. Tenprior actions are detailed for PRSC 8 and ten proposedtriggers are presented for PRSC 9. In addition a set of potential triggers are presented for PRSC10.

64. PRSC 8 Financing. The amount of PRSC 8 budget support is US$100 million,comprising US$60 million country IDA and US$40 million from the Crisis Response Window tohelp GoU mitigate the impact of the global economic crisis. The total credit amount is areduction from the planned amount of US$140 million as a result of inadequate strengthening ofthe legal framework for public procurement and slow progress in public service reform. The draftAmendment to the Procurement Law presented to Parliament meets international best practice inmost areas, with the exception of the amendment to allow unrestricted use of force account. This


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originally agreed prior action has therefore been dropped. It is given high weight in theassessment of government performance under the program since achieving efficiency in public procurement is critical to Ugandas reforms to achieve value for money in public spending,especially given that at least 55 percent of the government budget is expended through publicprocurement. Unrestricted use of force account could compromise value for money in public

works as well as stifle development of the local construction sector. Furthermore, progressagainst key reform actions has been slow in public service reform also a central aspect forachieving higher value for money in public spending. The government has not yet finalized asingle framework for performance management by linking results oriented management andoutput oriented budgeting, and its implementation must now be accelerated to achieve programobjectives of the series. Government is expected to finalize this framework under PRSC 9.

65. PRSC appraisal. Progress against the PRSC 8 prior actions was assessed in the course ofa joint review by JBSF DPs of government performance against JAF 1, which was conductedduring December 7-14, 2009. Further appraisal and policy dialogue on pending prior actions wasundertaken until August 2010. The joint review concluded that government had met the two prioractions under public expenditure management and public financial management and all the prior

actions in the service delivery sectors (health, education, water and sanitation, and transport). Thegovernment initially faced some challenges with the implementation of public service reforms.The originally agreed prior action on results oriented management (Single framework forResults Oriented Management (ROM), Output Oriented Budgeting (OOB) and budget monitoring

agreed by MoPS and MoFPED and modality for attaching performance agreements to letters of

appointment agreed with the Service Commissions) could not be met. This prior action washence dropped with a corresponding reduction in the proposed credit amount. Furthermore, therehave been setbacks in the governments efforts to develop a procurement amendment bill that isconsistent with international best practice. This originally agreed prior action was hence dropped;also with a corresponding reduction in the proposed credit amount.

66. The use of PRSC as an effective instrument in the outer years and in the new CAS periodwill depend on performance early in the series. There will be careful and regular assessment ofrelevance and effectiveness of this instrument.


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Table 2: Prior Actions under PRSC 8 Progress to Date

Area PRSC 8 Prior Actions Status of PRSC 8 Prior Actions

Budget

Credibility

(a) Actual annual budget releases for thesum of conditional grants to each of the

four JBSF sectors (health, education,water and sanitation, and roads) were atleast 95% of the corresponding approvedbudget allocations for the Fiscal Year2008/2009; (b) budget releases for thesum of recurrent wage expenditureacross the four sectors, the sum ofrecurrent non-wage expenditure acrossthese sectors, and the sum ofdevelopment expenditures across thesesectors were in each case at least 95% ofthe corresponding approved budgetallocations for the Fiscal Year 2008/2009

Releases from the treasury to spendingagencies are made on a quarterly insteadof monthly basis, through the end of thefirst quarter of Fiscal Year 2009/10

Prior action met. At sector level, performanceaveraged 99.7% in 2008/09 budget execution.

Prior action met. Quarterly releases have beeninstituted against submission of work plans.

PFM

Compliance

Develop format for performanceagreements for accounting officers(including Chief AdministrativeOfficers) with an incentive and penaltysystem for non compliance with PFMregulations 17

Prior action met. Formats completed andissued.

Procurement

Compliance

Procurement performance indicator

framework agreed and baseline dataavailablePrior action met. Procurement performance

indicator framework agreed and piloted in 15MDAs. Baseline indicator data collected andreport completed.

Performance

of Public

Servants

Adoption by Government of theframework for attracting and retainingpublic officers in Hard-to-Reach Areas

Prior action met. The framework has beencompleted and adopted.

Health Establish Human Resources for HealthManagement Information System toprovide information on levels anddistribution of the health workforce

Prior action met. The system has beenestablished.

Education Sign performance contracts with at least90 percent of all head teachers in the 12districts with the weakest educationsector indicators (covering customized

Prior action met. The contracts withcustomized performance targets have beenagreed and signed in the respective districts.Training in the new practice as the first step in

17 The enforcement of this penalty system is key for compliance and accountability. It will be crucial to followup on the coherence between performance contract A, the ROM system, and any new measures coming fromMoPS.


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Box 1. Good Practice Principles on Conditionality

Principle 1Ownership

Uganda has been a pioneer in country ownership of its development strategy. In 1997, Ugandas firstPoverty Eradication Action Plan (PEAP) provided the model for PRSPs worldwide, and it has sincebeen revised twice. The current government program is contained in the third PEAP, which was

approved by the Cabinet in November 2004 following broad consultations. The PEAP, which hasbeen transformed into a five year National Development Plan, has been important in shaping sectorwide approaches to investment and reform, and the Bank has played a supporting role in this process,including via its analytical work.

Principle 2Accountability

Donor harmonization and alignment with government priorities is advanced in Uganda. Governmentdeveloped an annualized policy action matrix for the third PEAP and requested that developmentpartners use the PEAP matrix and the findings of the Annual PEAP Implementation Review todetermine their assistance. In addition, the PEAP matrix was used by sectors to develop the sectorinvestment plans and the budget framework papers (BFPs). The budget support donors, including theBank, have developed a Joint Assessment Framework (JAF) anchored on the PEAP and BFPs. TheJAF, which was endorsed by the government on October 5, 2009, formalizes and builds on theexisting collaborative arrangement under the PRSC.

Principle 3Country circumstances

Policies supported by the PRSC represent actions that the government believes will lead to thedesired NDP outcomes, and thus reflect country preferences. They are selected from the NDP, thesector strategies, and annual budget framework papers. The 2009 Country Assistance Strategycompletion review concluded that the PRSC is the single best vehicle for helping Uganda advance itssystem-wide reform process, and for making progress on service delivery and crosscutting issues. Thegovernment has said that it would like PRSC operations to be structured so that financing is approvedbefore the national budget is submitted to Parliament. The Bank and other development partners haveadjusted the JBSF and the PRSC timetable to further enhance funding predictability for budgetingpurposes and to feed PRSC discussions into the Joint Assessment Framework.

Principle 4Choose only actions critical to achieve results as conditions for disbursement

Prior actions for PRSC8 are drawn from the JAF 1, and form the foundation for a three-yearprogrammatic cycle of budget support. Subsquent prior actions have been carefully aligned to thosein PRSC 8 to allow for a reasonable policy reform period. The PRSC triggers represent actions andoutputs that government considers critical to the success of its reforms. Several of the PRSC prioractions are based on satisfactory completion of undertakings agreed to in existing sectoral reviewprocesses (such as in education), thus avoiding creation of new and overlapping review structures andindicators. However, the Bank, jointly with other development partners under the JBSF arrangement,continues to provide important input to the sector review process to improve prioritization andoutcome-orientation.

Principle 5Conduct transparent progress reviews conducive to predictable and performance

based financial support

The PEAP policy matrix served as the basis for the first Annual PEAP Implementation Review,conducted in February 2007, and guided policy analysis, budget prioritization, work planning,

performance assessment, and development partner dialogue. The development of the NDP benefittedfrom these assessments. Furthermore, the Joint Assessment Framework under the JBSF, is assessedon an annual basis drawing on GoUs own performance reports, and the assessment findings arediscussed with government. The findings inform the design of governments budget frameworkpapers and future JAFs.


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POLICY AREAS

POLICY CLUSTER 1. REFORMS IN PUBLIC EXPENDITURE MANAGEMENT,PUBLIC

FINANCIAL MANAGEMENT AND PUBLIC SERVICE MANAGEMENT THAT IMPROVE SERVICE

DELIVERY

67. Weaknesses in Ugandas administrative and economic governance system arewidely recognized as one of the key binding constraints to improving service deliveryquality. To address these weaknesses the PRSC series works at two levels: transversal measuresaddress constraints deriving from systemic governance issues (Policy Cluster 1). Such measurescover six areas: budget credibility, financing at service delivery level, public financialmanagement, public procurement, performance of public servants, and anti-corruption measures,with performance management as a common strategy. Sector specific reform measures ineducation, health, water and sanitation, and transport address constraints in individual policyareas (Policy Cluster 2).

68. The government has been working toward a performance based public management

system. The Result Oriented Management (ROM) initiative is being led by MoPS and providesan enhanced performance appraisal system. A complimentary initiative, the Output OrientedBudgeting (OOB) initiative, introduced by MoFPED, is putting in place output level performanceindicators for institutions, linking output targets to budget allocations. These two systems need tobe linked. Transforming a public sector that operates through input controls (whether it is onhuman resources or budget) into a performance-based system that combines managerialflexibility with accountability for results is a complex process that will take time.

69. Performance management is a central theme of the proposed PRSC and requirescareful phasing. Therefore, Uganda is using the platform approach that structures theimplementation of performance management reforms, with an emphasis on removing bindingconstraints to performance. Progression to the second and third phases (including moremanagerial flexibility and changing reporting modalities) will proceed only when the actionsunder the first platform are completed.

Component 1.1. Budget Credibility

70. There were three prior actions in the past PRSC series: (i) a ceiling on public spending inline with the budget; (ii) a floor on Poverty Action Fund (PAF) implementation (within95 percent of budget); and (iii) an anticipated decline in the share of public administration. Thenew PRSC series shifts focus to value for money in sector programs.

71. Poor budget predictability has been preventing managers from adhering to workplans.

Late release of funds from MoFPED to line ministries means that budgets cannot be fullyspent by district governments and service providers. Cuts to the development budget and thepossibility of cuts to priority areas during the budget year also undermine predictability.Supplementary budget reallocations (and in some areas, budget augmentations) change prioritiesduring the year and undermine service delivery. The PRSC is in support of government efforts toimprove budget predictability by reducing the frequency of releases from the treasury to spendingagencies from a monthly to a quarterly basis, on the basis of submitted work plans andprocurement plans.


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72. Transfers to local governments have not matched the growth in demand for services- in particular, the non-wage allocations are inadequate. The 2007 PER18 showed that nonwage budgets for schools, hospitals and clinics have been constant in nominal terms, implying adrop in real per capita funding and presumably a drop in service quality. Total district educationand health budgets have been rising because Uganda has been hiring more teachers and health

workers and, in effect, indexing their pay rises to nominal GDP growth. While the PAF may havering fenced sector allocations, PAF targets were met through increased health worker and teacherstaff unit costs. To begin addressing the under-funding of district non-salary budgets andfacilitating more effective frontline service delivery, the PRSC includes a prior action aimed tosafeguard non-wage recurrent and development expenditure in the four target sectors.

73. There is scope to enhance efficiency in district services. The PRSC series proposesnew efficiency measures based on analytical work supported by the Bank. They are as follows.

(a)Shift the budget in favor of service provision by: reversing underfunding of district nonsalary budgets; controlling employee costs in central ministries and agencies relative tofront line service delivery, while ensuring adequate capacity at the center to support front

line services; reduce overheads; examine the use of grants to semi-autonomousinstitutions; to stop the rise in recurrent spending hidden in the development budget; andimprove predictability of the sector ceilings in the MTEF and reduce reliance onsupplementary budgets;

(b) Analyze the affordability of new policy commitments by: keeping pay raises selective forcertain grades in order to retain good performers;

(c)Limit pay raises until there is reform of the government pension scheme; and

(d)Realize efficiency savings by improving inter- and intra-sectoral allocations, which can thenbe channeled into core sectors19 (specific sector efficiency savings are discussed underPolicy Cluster 2).

74. The PRSC therefore supports reforms to reduce the variance between approved andexecuted budgets. It emphasizes budget preparation and coordination between central and localgovernment levels. To this end, MoFPED has begun to release funds quarterly instead ofmonthly, on the basis of submitted work and procurement plans.

Prior actions for PRSC 8:

(a) Actual annual budget releases for the sum of conditional grants to each of the fourJBSF sectors (health, education, water and sanitation, and roads) were at least 95percent

of the corresponding approved budget allocations for 2008/09; (b) budget releases for thesum of recurrent wage expenditure across the four sectors, the sum of recurrent non-wage

18 Uganda: Fiscal Policy for Growth, 2007.19Relative to many countries, Ugandas budget has quite a high share of core sector spending. Including donorfunded projects, about 60 percent of Ugandas non statutory public expenditure in 2008/09 set out in the MTEFgoes to Roads, Health, Education, Agriculture, Energy and Water. Despite increases in Defense and PublicAdministration spending in recent years, other sector allocations still account for less than one fifth of thespending in priority sectors.


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expenditure across these sectors, and the sum of development expenditures across thesesectors were in each case at least 95percent of the corresponding approved budgetallocations for 2008/09.

Status:Prior action met. At sector level, performance averaged 99.7 percent in 2008/09 budgetexecution.

Releases from the treasury to spending agencies are made on a quarterly instead ofmonthly basis, through the end of the first quarter of 2009/10.

Status: Prior action met. Quarterly releases have been instituted against submission of workplans.

Proposed trigger for PRSC 9:

Pilot alignment of work plans with cash flow and procurement plans in four JBS sectorsfor 2010/11 budget.

Component 1.2. Funding at Service Delivery Level

75. The Local Government Act enacted in 1997 transferred the responsibility for basicservice delivery functions to local governments,20 but progress toward fiscaldecentralization has remained slow. Although LGs execute a considerable share of therespective sector budgets for provision of these services, a number of recent policy shifts areraising concerns about governments broader commitment to fiscal decentralization. These

reforms include the abolition of a major source of local governments own revenue, i.e., thegraduated tax; payment of political leaders from the consolidated fund; centralization of the ChiefAdministrative Officers and Town Clerks; high conditionality on the use of transfers from centralgovernments; and creation of more districts. These reforms indicate a reorientation towarddeconcentration and have presented challenges to the governments policy of decentralization by

devolution. A review is needed, with a view to arriving at a clearer policy framework.

76. However, efforts to strengthen local government capacity to deliver public servicesare underway. The block grant transfers, which provide un-earmarked funds for LGs, werepiloted under the first Local Government Development Program (LGDP) with funds from theBank. They were subsequently rolled-out nationally under LGDP II with financial support fromthe Bank and other bilateral donors.21 These grants have now been mainstreamed in thegovernment national budget. Today the block grants, which are Ushs.63 billion and projected togrow to about Ushs.112 billion by 2013/14, accounts for about 5% of central governmenttransfers to LGs. Under the Local Government Management and Service Delivery Project(LGMSD) funded by the Bank, the capacities of the administrative cadres of LGs are beingstrengthened through professional training in the areas of public administration, procurement,

accounting and auditing. Strengthening the LG system for improved service delivery willcontinue to be a priority under the PRSCs given the LG mandates under decentralization bydevolution, unless government significantly changes its service delivery policy in coming years.It is also hoped that the proposed introduction of Regional Tiers above district level (bill is

20 Local governments are responsible for services including primary education, primary health care, feederroads, water and sanitation and agriculture extension.21 DANIDA, Government of Netherlands, Government of Ireland, and Government of Austria.


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currently before the Parliament), can help to stem the service delivery challenges created by theproliferation of districts. The Bank will continue its policy dialogue with government in thisregard, and support government to articulate a clearer policy regarding inter-governmental fiscalflows and decentralization.

77.

At local government level, five performance issues have been identified that affectservice delivery.These include improvements in local governments (i) budget cycle credibility(see Component 1), (ii) own source revenue (supported under the broader JAF), (iii) coordinationof collection and processing of data on revenue and expenditures (addressed under PRSC 9), (iv)inter-governmental fiscal transfers covering composition of the transfers and horizontalallocation to reduce inequality amongst LGs (supported under the broader JAF), and (v)coordination of inspection, monitoring and supervision (see Component 1.5). These issues wereidentified within the context of the broader PFM and PSR dialogue and are intended to eliminatethe constraint to service delivery in LGs. Furthermore, with support under the JAF, governmenthas committed to conducting a study on financing of LGs. Its findings will provide triggers forsubsequent PRSC operations.

Proposed Trigger for PRSC 9:

MoFPED to develop and implement a system for the consolidation and analysis ofquarterly Form B reports, in order to provide aggregate and in-year information about LGexpenditures and outputs.

Component 1.3. Compliance with Public Financial Management Regulations

78. While Uganda has an elaborate system of PFM rules and regulations, a majorchallenge has been weak compliance with these rules. A key to improved compliance isholding senior officials accountable for PFM performance. To this end, PRSC 8 supports effortsby MoFPED to put in place a penalty and rewards system for ensuring improved compliance with

PFM systems in performance contracts with accounting officers. PRSC 9 will roll-out theexisting performance contract (prior action), while simultaneously working to strengthen thecurrent PFM regulations and then incorporate the revised regulations into the performancecontracts to ensure that accounting officers can be held to account for poor PFM compliance.PRSC 10 will then focus on updating the performance agreements and ensure their enforcementin case of breach of PFM regulations (trigger).

79. Strengthening internal and external audit capacity can also improve compliance.The Internal Audit Department in MoFPED currently reports to the Accountant General, whichundermines its independence. Under PRSC 8 and 9, MoFPED has undertaken to achievefunctional independence for the internal audit department by ensuring that it reports directly tothe Permanent Secretary. Subsequent PRSCs will support the internal audit department to achieve

independence under the public finance law. The Internal Audit Department is also beingsupported to pilot risk-based auditing. Subsequent PRSC periods would see the roll out of thissystem across the central government and local governments. In parallel, the PRSC 10 supportsthe National Audit Office to shift to risk-based auditing, initially on a pilot basis, andsubsequently rolled out across government.

80. The Inspection Unit of MoLG is effective in enforcing improved compliance withregulations and has agreed to provide details on administrative action taken against local


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government officials on an annual basis at Public Expenditure Management Committee(PEMCOM) meetings. Parliamentary accountability committees such as the Public AccountsCommittee (PAC), the Local Authorities' Accounts Committee and the Committee on StatutoryAuthorities and State Enterprises have been strengthened and are now more effective. Thesechanges are expected to impact the overall compliance environment in a positive way in the

country.

Prior action for PRSC 8:

Develop format for performance agreements for accounting officers (including ChiefAdministrative Officers) with an incentive and penalty system for non compliance withPFM regulations

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Status: Prior action met. The formats have been developed, agreed and issued.

Proposed Trigger for PRSC 9:

Sign performance agreements with all Permanent Secretaries and Chief AdministrativeOfficers 23and monitor performance

Component 1.4. Compliance with Public Procurement Regulations

81. Strengthened compliance with the public procurement law is central to improvingvalue for money and budget absorption and lies at the core of the fight against corruption.24

Ugandas procurement reforms, implemented since 2001, culminated in the enactment of thePublic Procurement and Disposal Act of 2003. The Act decentralized procurement to thespending agencies through Procurement and Disposal Units (PDUs) and established the PublicProcurement and Disposal of Public Assets Authority (PPDA) as the procurement oversightbody. Implementation of the 2003 Act exposed inadequate mechanisms for its enforcement.

82. PRSC 7 and 8 support government efforts to amend the Procurement Act to makepublic procurement more efficient and to strengthen enforcement mechanisms. UnderPRSC 7 a set of principles were submitted to Cabinet that addressed the defects in the 2003Procurement Act and laid the basis for the development of a Procurement Amendment Bill.Subsequently, the originally agreed PRSC 8 prior action aimed to support the government tosubmit this Procurement Amendment Bill to Parliament and ensure that it would meetinternational best practice in promoting transparency and value for money. However, in thecourse of the discussion of the Bill, government incl

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