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Costings - Comments

By Larry Payne,2014-12-03 17:02
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Costings - Comments

    PRS Monitoring & Synthesis Project

    1Briefing Note 4

    May 2002

    Costing Poverty Reduction Strategies Early Experience

Summary

    A review of approaches to costing in 10 full PRSPs and 4 Progress Reports reveals that:

     All the PRSs provide some estimate of the cost of implementing PRS objectives and the

    size of the subsequent financing gap. In most cases costings cover priority actions and

    core sectors for a 3 to 5 year period. Costing exercises focus mainly on the cost of

    achieving intermediate indicators rather than final outcome targets.

     A few PRSs attempt a comprehensive costing of priority actions (Malawi, Rwanda) but a

    number also only cost the „additional‟ activities to be financed by HIPC funds and include

    only HIPC resources in funding estimates (Burkina Faso). Some provide a breakdown of

    recurrent and capital costs (Uganda, Malawi, Rwanda); others give basic unit cost

    information (Uganda. Mozambique).

     Most costing is carried out „bottom-up‟ using activity-based unit cost estimates. Problems in

    coming up with credible estimates stem from generally weak prioritisation, limited unit cost

    data, inadequate links between programmes and indicators/targets (including in sector

    programmes) and over-ambitious medium term targets.

     Credible costing depends on clear links between individual programmes and intermediate

    indicators/targets, realistic medium term targets based on past performance rather than

    politically determined aspirations and a closer integration of PRS objectives with an MTEF

    (or similar forward budgeting framework).

     Some confusion exists over whether the role of costing is to work within financial

    constraints imposed by the available resource envelope (as in the MTEF) or to estimate

    the full extent of the fiscal gap between a country‟s poverty reduction needs set out in the

    PRS and available resources.

Coverage

    Ten full PRSs (Burkina Faso, Mauritania, Mozambique, Malawi, Uganda, Tanzania, Rwanda, Honduras, Nicaragua, Bolivia) and 4 Annual Progress Reports (Burkina Faso, Uganda, Tanzania & Mauritania) were reviewed. Main Questions: How many PRSs contain costings? How complete are they? Any good examples of method? Any examples of best practice? What is useful/what is the required level of detail? What would be useful for Governments to know in order to cost PRSs?

Caveats

    The level of detail on costing found in most PRS documents is modest. Much relevant important information remains outside of the document and is hard to get hold of within the confines of a short review exercise. Limited information is provided on method. Cost estimates are only briefly commented on by JSAs. Costing issues are also hard to treat

     1 Other Briefing Notes in 2001: Briefing Note 1 - PRSC - Vietnam and Uganda ;

    Briefing Note 2 - Experience with the PRS process in South and South East Asia;

    Briefing Note 3 Board Responses to PRSPs.

    separately from how targets are set, how indicators are chosen and the current state of PEM/MTEF reforms.

Background

    A crucial element of the PRS approach is assessing the fiscal implications of reaching medium and long-term poverty reduction targets. This is important in at least three ways:

    (i) At the macro level, evaluating proposed poverty reduction measures in the light of

    the expected resource envelope, including increments provided by HIPC;

    (ii) Evaluating the fiscal viability of long run PRS targets and hence the fiscal

    sustainability of the overall strategy;

    (iii) At sector level, assessing the „relative‟ cost effectiveness of alternative

    interventions in contributing towards a specific policy outcome (or target), and aiding

    prioritisation between them (although not in isolation from an analysis of demand and

    supply conditions/market failures etc), including making the case for extra funds

    where appropriate.

Three alternative approaches to costing PRS goals are:

    (i) Average Costs: The cost of achieving a subset of goals using estimated average

    costs of service and estimated population lacking access to priority services. Data

    sources include: activity based budgeting and census/DHS/LSMS data for unserved

    populations.

    (ii) Multivariate Analysis/Determinants Analysis: Determinants of key poverty

    outcomes (e.g. infant mortality) are used for sensitivity analysis with respect to

    different policies. Alternative policies can be translated into unit costs, with total costs

    calculated for attaining certain goals.

    (iii) Cost Effectiveness: Ranking of existing projects and programmes according to the

    relevance of their objectives to the PRS. Priority services and target groups identified.

    Information obtained from sectors and donors about the most cost effective designs

    for priority social services, including the costing of main and complementary inputs

    required.

    Most of the PRSs reviewed rely on a simplified variant of the cost effectiveness approach. None have attempted the more complex determinants analysis, presumably because of the 2considerable data requirements and technical complexity.

    Developing realistic and comprehensive cost estimates presents a number of methodological challenges for national authorities. The information requirements are substantial and often complex (especially in the social sectors where inputs and outputs are hard to measure), made more so by the fact that few of the parameters determining the cost of public actions are constant over time i.e. input prices change as do delivery systems making estimating the costs of reaching medium to long run targets complicated. Wage costs also tend to loom large in recurrent costs especially in priority sectors such as education and health, hence the need to be explicit about assumptions made regarding public sector wages and pay reform (see Uganda). Other reform processes, such as decentralisation, can also affect the cost of reaching a target, often during the life of the PRS itself.

     2 It is not clear how much more value-added such an approach would provide to policymakers in the short run, although it is an approach that can offer more in terms of the identification of trade-offs and key inter-linkages within the overall strategy i.e. that the cost of reaching a target in health may lie equally with interventions in water as with those directly in health.

    These challenges are not insurmountable. As this review finds a number of countries already have reasonable cost estimates for priority programmes because of existing SWAp arrangements and/or sectoral PER/MTEF processes. However there is still some way to go before all PRSs contain a complete estimate of the fiscal cost of medium and long-term development targets.

Experience

    Table 1 (Annex 1) summarises the information available on costing from 9 full PRSs, 1 draft PRS (Rwanda) and 4 PRS Progress Reports (PPRs) (Burkina Faso, Uganda, Mauritania and Tanzania). This section summarises some of the main points.

    How many PRSs contain costings? All of the 10 PRSs include some cost estimates. Of the 4 PPRs, two (Uganda and Tanzania) include quite detailed costing exercises that add important information over and above what was initially available in the full PRS.

How complete and detailed are they? Coverage varies.

     Most give broad cost estimates for selected poverty reduction measures or

    programmes in priority sectors that are to be financed, at least in part, from HIPC

    resources (Mauritania, Burkina Faso, Bolivia).

     Some attempt an overall estimate of the cost of the PRS covering existing and new

    programmes (Uganda PPR, Honduras, Malawi, Rwanda), or priority/selected sectors

    (Tanzania PPR, Burkina Faso, Nicaragua, Bolivia). Annex 1 Table 2.

     In a number of cases, cost estimates are disaggregated into recurrent and capital

    costs for key sectors (Mauritania, Bolivia) or individual programmes/activities

    (Uganda PRS & PPR, Malawi, Rwanda).

     Basic unit cost information is provided mainly for sectors with SWAps or SWAp-like

    mechanisms (Mozambique, Uganda). In Tanzania the cost of health and education

    programmes is based on an estimate of the ‟basic unit of service‟.

     None of the current round of PRSs makes a direct link between the cost of

    programmes and the cost of directly achieving PRS targets. Most specify programme

    costs relating to broad PRS themes or objectives such as “opportunities” or

    “protection and security” (Bolivia, Malawi). Some PRSs limit the presentation of

    public expenditure to „incremental activities‟ to be financed by HIPC debt relief and

    external financing (Burkina Faso, Honduras). This „new project‟ approach precludes

    consideration of how the existing expenditure programme might be reshaped, even at

    the margin, to improve its cost effectiveness and impact on poverty reduction.

What information is provided on method? Only a few PRSs provide a description of the

    method used to arrive at cost estimates:

     In Uganda, costings are based on ongoing work by the MFPED and line Ministries to

    develop medium term poverty reduction targets, costings and priorities based on

    sector plans. Final prioritisation is by Cabinet through the annual budgeting process.

    Making fiscal costs fit within the available resource envelope calls for prioritisation

    and revision of targets on an iterative basis. In the PPR the total cost of the PEAP is

    considered unrealistic (resulting in a 37% financing gap!”, largely because of the cost

    of the proposed pay reform. The PEAP programme is therefore under further revision

    and reprioritisation to bring the estimated fiscal cost more in line with budget

    constraints.

     In Tanzania the costing of priority interventions is based partly on the analysis of

    recurrent cost implications of sector programmes, and inputs from the PER and

    MTEF. Technical studies defined „basic units of service‟ in health, education, water

    and transport and their estimated costs. From these financing requirements were

    derived for the medium term, subject to the available resource envelope. Special

    attention was given to non-wage current outlays and development expenditure for key

    interventions needed to attain PRS objectives.

     In Mozambique the JSA notes that cost data are not centralised, not uniform and not

    easy to obtain outside of multi-donor funded sector programs (SWAps). In this

    context the proposals for financing the PARPA have mainly relied on the

    establishment of budget targets for the priority areas, based on a projected budget

    envelope for 2001-5. Unit costs are provided for those sectors that have them

    (education, health and infrastructure) as an illustration of future work to be

    undertaken rather than as underpinnings of the expenditure programme.

     In Bolivia estimates of the financing required by the BPRS were performed on the

    basi